Appendix X to Part 51 - Examples of Economic Incentive Programs
40:2.0.1.1.2.25.11.20.39 : Appendix X
Appendix X to Part 51 - Examples of Economic Incentive Programs I.
Introduction and Purpose
This appendix contains examples of EIP's which are covered by
the EIP rules. Program descriptions identify key provisions which
distinguish the different model program types. The examples provide
additional information and guidance on various types of regulatory
programs collectively referred to as EIP's. The examples include
programs involving stationary, area, and mobile sources. The
definition section at 40 CFR 51.491 defines an EIP as a program
which may include State established emission fees or a system of
marketable permits, or a system of State fees on sale or
manufacture of products the use of which contributes to O3
formation, or any combination of the foregoing or other similar
measures, as well as incentives and requirements to reduce vehicle
emissions and vehicle miles traveled in the area, including any of
the transportation control measures identified in section 108(f).
Such programs span a wide spectrum of program designs.
The EIP's are comprised of several elements that, in combination
with each other, must insure that the fundamental principles of any
regulatory program (including accountability, enforceability and
noninterference with other requirements of the Act) are met. There
are many possible combinations of program elements that would be
acceptable. Also, it is important to emphasize that the
effectiveness of an EIP is dependent upon the particular area in
which it is implemented. No two areas face the same air quality
circumstances and, therefore, effective strategies and programs
will differ among areas.
Because of these considerations, the EPA is not specifying one
particular design or type of strategy as acceptable for any given
EIP. Such specific guidance would potentially discourage States (or
other entities with delegated authority to administer parts of an
implementation plan) from utilizing other equally viable program
designs that may be more appropriate for their situation. Thus, the
examples given in this Appendix are general in nature so as to
avoid limiting innovation on the part of the States in developing
programs tailored to individual State needs.
Another important consideration in designing effective EIP's is
the extent to which different strategies, or programs targeted at
different types of sources, can complement one another when
implemented together as an EIP “package.” The EPA encourages States
to consider packaging different measures together when such a
strategy is likely to increase the overall benefits from the
program as a whole. Furthermore, some activities, such as
information distribution or public awareness programs, while not
EIP's in and of themselves, are often critical to the success of
other measures and, therefore, would be appropriate complementary
components of a program package. All SIP emissions reductions
credits should reflect a consideration of the effectiveness of the
entire package.
II. Examples of Stationary and Mobile Source Economic Incentive
Strategies
There is a wide variety of programs that fall under the general
heading of EIP's. Further, within each general type of program are
several different basic program designs. This section describes
common types of EIP's that have been implemented, designed, or
discussed in the literature for stationary and mobile sources. The
program types discussed below do not include all of the possible
types of EIP's. Innovative approaches incorporating new ideas in
existing programs, different combinations of existing program
elements, or wholly new incentive systems provide additional
opportunities for States to find ways to meet environmental goals
at lower total cost.
A. Emissions Trading Markets
One prominent class of EIP's is based upon the creation of a
market in which trading of source-specific emissions requirements
may occur. Such programs may include traditional rate-based
emissions limits (generally referred to as emissions averaging) or
overall limits on a source's total mass emissions per unit of time
(generally referred to as an emissions cap). The emissions limits,
which may be placed on individual emitting units or on facilities
as a whole, may decline over time. The common feature of such
programs is that sources have an ongoing incentive to reduce
pollution and increased flexibility in meeting their regulatory
requirements. A source may meet its own requirements either by
directly preventing or controlling emissions or by trading or
averaging with another source. Trading or averaging may occur
within the same facility, within the same firm, or between
different firms. Sources with lower cost abatement alternatives may
provide the necessary emissions reductions to sources facing more
expensive alternatives. These programs can lower the overall cost
of meeting a given total level of abatement. All sources eligible
to trade in an emissions market are faced with continuing
incentives to find better ways of reducing emissions at the lowest
possible cost, even if they are already meeting their own emissions
requirements.
Stationary, area, and mobile sources could be allowed to
participate in a common emissions trading market. Programs
involving emissions trading markets are particularly effective at
reducing overall costs when individual affected sources face
significantly different emissions control costs. A wider range in
control costs among affected sources creates greater opportunities
for cost-reducing trades. Thus, for example, areas which face
relatively high stationary source control costs relative to mobile
source control costs benefit most by including both stationary and
mobile sources in a single emissions trading market.
Programs involving emissions trading markets have generally been
designated as either emission allowance or emission reduction
credit (ERC) trading programs. The Federal Acid Rain Program is an
example of an emission allowance trading program, while “bubbles”
and “generic bubbles” created under the EPA's 1986 Emission Trading
Policy Statement are examples of ERC trading. Allowance trading
programs can establish emission allocations to be effective at the
start of a program, at some specific time in the future, or at
varying levels over time. An ERC trading program requires ERC's to
be measured against a pre-established emission baseline. Allowance
allocations or emission baselines can be established either
directly by the EIP rules or by reference to traditional
regulations (e.g., RACT requirements). In either type of program,
sources can either meet their EIP requirements by maintaining their
own emissions within the limits established by the program, or by
buying surplus allowances or ERC's from other sources. In any case,
the State will need to establish adequate enforceable procedures
for certifying and tracking trades, and for monitoring and
enforcing compliance with the EIP.
The definition of the commodity to be traded and the design of
the administrative procedures the buyer and seller must follow to
complete a trade are obvious elements that must be carefully
selected to help ensure a successful trading market that achieves
the desired environmental goal at the lowest cost. An emissions
market is defined as efficient if it achieves the environmental
goal at the lowest possible total cost. Any feature of a program
that unnecessarily increases the total cost without helping achieve
the environmental goals causes market inefficiency. Thus, the
design of an emission trading program should be evaluated not only
in terms of the likelihood that the program design will ensure that
the environmental goals of the program will be met, but also in
terms of the costs that the design imposes upon market transactions
and the impact of those costs on market efficiency.
Transaction costs are the investment in time and resources to
acquire information about the price and availability of allowances
or ERC's, to negotiate a trade, and to assure the trade is properly
recorded and legally enforceable. All trading markets impose some
level of transaction costs. The level of transaction costs in an
emissions trading market are affected by various aspects of the
design of the market, such as the nature of the procedures for
reviewing, approving, and recording trades, the timing of such
procedures (i.e., before or after the trade is made),
uncertainties in the value of the allowance or credit being traded,
the legitimacy of the allowance or credit being offered for sale,
and the long-term integrity of the market itself. Emissions trading
programs in which every transaction is different, such as programs
requiring significant consideration of the differences in the
chemical properties or geographic location of the emissions, can
result in higher transaction costs than programs with a
standardized trading commodity and well-defined rules for
acceptable trades. Transaction costs are also affected by the
relative ease with which information can be obtained about the
availability and price of allowances or credits.
While the market considerations discussed above are clearly
important in designing an efficient market to minimize the
transaction costs of such a program, other considerations, such as
regulatory certainty, enforcement issues, and public acceptance,
also clearly need to be factored into the design of any emissions
trading program.
B. Fee Programs
A fee on each unit of emissions is a strategy that can provide a
direct incentive for sources to reduce emissions. Ideally, fees
should be set so as to result in emissions being reduced to the
socially optimal level considering the costs of control and the
benefits of the emissions reductions. In order to motivate a change
in emissions, the fees must be high enough that sources will
actively seek to reduce emissions. It is important to note that not
all emission fee programs are designed to motivate sources to lower
emissions. Fee programs using small fees are designed primarily to
generate revenue, often to cover some of the administrative costs
of a regulatory program.
There can be significant variations in emission fee programs.
For example, potential emissions could be targeted by placing a fee
on an input (e.g., a fee on the quantity and BTU content of fuel
used in an industrial boiler) rather than on actual emissions.
Sources paying a fee on potential emissions could be eligible for a
fee waiver or rebate by demonstrating that potential emissions are
not actually emitted, such as through a carbon absorber system on a
coating operation.
Some fee program variations are designed to mitigate the
potentially large amount of revenue that a fee program could
generate. Although more complex than a simple fee program, programs
that reduce or eliminate the total revenues may be more readily
adopted in a SIP than a simple emission fee. Some programs lower
the amount of total revenues generated by waiving the fee on some
emissions. These programs reduce the total amount of revenue
generated, while providing an incentive to decrease emissions.
Alternatively, a program may impose higher per-unit fees on a
portion of the emissions stream, providing a more powerful but
targeted incentive at the same revenue levels. For example, fees
could be collected on all emissions in excess of some fixed level.
The level could be set as a percentage of a baseline (e.g., fees on
emissions above some percentage of historical emissions), or as the
lowest emissions possible (e.g., fees on emissions in excess of the
lowest demonstrated emissions from the source category).
Other fee programs are “revenue neutral,” meaning that the
pollution control agency does not receive any net revenues. One way
to design a revenue-neutral program is to have both a fee provision
and a rebate provision. Rebates must be carefully designed to avoid
lessening the incentive provided by the emission fee. For example,
a rebate based on comparing a source's actual emissions and the
average emissions for the source category can be designed to be
revenue neutral and not diminish the incentive.
Other types of fee programs collect a fee in relation to
particular activities or types of products to encourage the use of
alternatives. While these fees are not necessarily directly linked
to the total amount of emissions from the activity or product, the
relative simplicity of a usage fee may make such programs an
effective way to lower emissions. An area source example is a
construction permit fee for wood stoves. Such a permit fee is
directly related to the potential to emit inherent in a wood stove,
and not to the actual emissions from each wood stove in use. Fees
on raw materials to a manufacturing process can encourage product
reformulation (e.g., fees on solvent sold to makers of
architectural coatings) or changes in work practices (e.g., fees on
specialty solvents and degreasing compounds used in
manufacturing).
Road pricing mechanisms are fee programs that are available to
curtail low occupancy vehicle use, fund transportation system
improvements and control measures, spatially and temporally shift
driving patterns, and attempt to effect land usage changes. Primary
examples include increased peak period roadway, bridge, or tunnel
tolls (this could also be accomplished with automated vehicle
identification systems as well), and toll discounts for pooling
arrangements and zero-emitting/low-emitting vehicles.
C. Tax Code and Zoning Provisions
Modifications to existing State or local tax codes, zoning
provisions, and land use planning can provide effective economic
incentives. Possible modifications to encourage emissions
reductions cover a broad span of programs, such as accelerated
depreciation of capital equipment used for emissions reductions,
corporate income tax deductions or credits for emission abatement
costs, property tax waivers based on decreasing emissions,
exempting low-emitting products from sales tax, and limitations on
parking spaces for office facilities. Mobile source strategies
include waiving or lowering any of the following for zero- or
low-emitting vehicles: vehicle registration fees, vehicle property
tax, sales tax, taxicab license fees, and parking taxes.
D. Subsidies
A State may create incentives for reducing emissions by offering
direct subsidies, grants or low-interest loans to encourage the
purchase of lower-emitting capital equipment, or a switch to less
polluting operating practices. Examples of such programs include
clean vehicle conversions, starting shuttle bus or van pool
programs, and mass transit fare subsidies. Subsidy programs often
suffer from a variety of “free rider” problems. For instance,
subsidies for people or firms who were going to switch to the
cleaner alternative anyway lower the effectiveness of the subsidy
program, or drive up the cost of achieving a targeted level of
emissions reductions.
E. Transportation Control Measures
The following measures are the TCM's listed in section
108(f):
(i) Programs for improved public transit;
(ii) Restriction of certain roads or lanes to, or construction
of such roads or lanes for use by, passenger buses or high
occupancy vehicles;
(iii) Employer-based transportation management plans, including
incentives;
(iv) Trip-reduction ordinances;
(v) Traffic flow improvement programs that achieve emission
reductions;
(vi) Fringe and transportation corridor parking facilities
serving multiple-occupancy vehicle programs or transit service;
(vii) Programs to limit or restrict vehicle use in downtown
areas or other areas of emission concentration particularly during
periods of peak use;
(viii) Programs for the provision of all forms of
high-occupancy, shared-ride services;
(ix) Programs to limit portions of road surfaces or certain
sections of the metropolitan area to the use of non-motorized
vehicles or pedestrian use, both as to time and place;
(x) Programs for secure bicycle storage facilities and other
facilities, including bicycle lanes, for the convenience and
protection of bicyclists, in both public and private areas;
(xi) Programs to control extended idling of vehicles;
(xii) Programs to reduce motor vehicle emissions, consistent
with title II, which are caused by extreme cold start
conditions;
(xiii) Employer-sponsored programs to permit flexible work
schedules;
(xiv) Programs and ordinances to facilitate non-automobile
travel, provision and utilization of mass transit, and to generally
reduce the need for single-occupant vehicle travel, as part of
transportation planning and development efforts of a locality,
including programs and ordinances applicable to new shopping
centers, special events, and other centers of vehicle activity;
(xv) Programs for new construction and major reconstruction of
paths, tracks or areas solely for the use by pedestrian or other
non-motorized means of transportation when economically feasible
and in the public interest. For purposes of this clause, the
Administrator shall also consult with the Secretary of the
Interior; and
(xvi) Programs to encourage the voluntary removal from use and
the marketplace of pre-1980 model year light-duty vehicles and
pre-1980 model light-duty trucks.
[59 FR 16715, Apr. 7, 1994]