Efforts to attain the national ambient air quality standard for ground level ozone have been complicated by the high number of non-attainment areas throughout the Mid-Atlantic and Northeast. Air quality improvements in one state are undermined as ground level ozone and its precursors generated in other regions blow across state lines. To address the problem of ground level ozone and its transport, congress established the Ozone Transport Region (OTR) which included twelve state from Virginia to Maine and the District of Columbia as part of the Clean Air Act Amendment of 1990.

Eleven of the twelve states and the District of Columbia signed a memorandum of understanding (MOU) on September 17, 1994. That agreement committed them to developing and adopting regulations that would reduce NOx emissions on a regional basis. The MOU called for two stages of reductions above and beyond the RACT reductions already being required by the states. The first stage began in 1999 and called for between 55% and 65% reductions in NOx emissions below a 1990 baseline. The second stage, scheduled for 2003, will require an 75% reduction against a 1990 baseline, though this may be superceeded by EPA’s 0.15lb/mmbtu limit.

To achieve these reductions in the most cost-effective manner, the Ozone Transport Commission (OTC) developed a model rule for a cap and trade program to take advantage of market efficiencies. The model rule was based on the successful SO2 Acid Rain program and outlined the basic components of the NOx Budget Program, but each state ultimately developed their own final regulation.

The NOx cap and trade program allocated NOx allowances to each state based on 1990 statewide emissions. The states then allocated their budget of allowances to all of the affected sources in their state. Affected sources include all fossil fuel fired boilers or indirect heat exchangers with a rated capacity of 250 mmbtu/hour or more; and all electric generating facilities with an output of 15 megawatts or more.
Each allowance permits the owner to emit one ton of NOx during the ozone season. At the end of the year, each source must have an allowance in its NOx Allowance Tracking System (NATS) to account for each ton of NOx discharged during the ozone season. Allowances dedicated to actual emissions are retired each year. Unused allowances may be banked for use in future years. However, banked allowances may be discounted due to Progressive Flow Control restrictions. (For a complete explanation of the banking restrictions, please contact the Natsource NOx brokerage desk at (212) 232-5305).

The NOx Budget Program establishes a market for allowances. It enables market participants, both affected sources and any other person or entity that establishes a NATS account, to buy and sell allowances. The trading component of the NOx Budget Program can result in substantial savings over the "command and control" model of environmental regulation that is traditionally used. Trading enables each affected source to compare the costs of the full spectrum of NOx control options. Each emitter has an opportunity to choose the least-cost solution for each facility or system. Some affected sources will choose to generate surlpus allowances by retrofitting equipment with control technology, fuel switching or decreasing throughput to sell them on the open market. Other facilities with higher marginal cost of NOx emission reductions will purchase these allowances because it is the most cost-effective alternative.