State-Level Air Emissions Trading: The Michigan and Illinois Models

Since passage of the 1990 Amendments to the U.S. Clean Air Act, there has been growing interest in the use of economic incentives for air pollution control. This trend is epitomized by the federal Acid Rain Program and the RECLAIM program for smog control in the Los Angeles basin. The adoption of these programs for attainment of the ozone standard is problematic, because of vexing issues of geography, atmospheric chemistry, source coverage, and monitoring and enforcement. These issues are especially salient in the use of emission reduction credit (ERC) trading systems. Cap and trade programs circumvent some of these difficulties by limiting total emissions and increasing source coverage but may still face monitoring challenges. Finally, the U.S. Environmental Protection Agency (EPA) is currently proposing that states use another incentive program, known as Open Market Trading. Michigan and Illinois have both developed new market incentive programs for ozone compliance. Michigan adopted an ERC model for NO_x and VOCs, while Illinois opted for a cap and trade program to reduce VOCs in the Chicago area. Though these programs are fairly young, their strengths and weaknesses can be identified. Problems with the Michigan program are so serious that it has been initially disapproved by the EPA out of concern that down-state areas could backslide into non-attainment status. Among the concerns are pre-enactment ERCs and counting ERC generation from facility shutdowns and curtailments. Although the Illinois program is more promising, it has problems of its own, such as low emission source coverage. Nonetheless, it is only through experimentation with market programs that their ultimate utility for ozone compliance can be determined.