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A number of U.S. states are considering market-based policies to reduce emissions of greenhouse gases (GHGs). The experience gained from emissions trading for sulfur dioxide (SO2) and oxides of nitrogen (NOx) offers a useful body of information and data to draw on to design a GHG emissions trading system. This report examines NOx trading under the Ozone Transport Commission (OTC) NOx Budget Program, which resulted principally from the leadership, decisions, and actions by a group of states, ultimately becoming the first multilateral cap-and-trade system for emissions of air pollutants.

The OTC NOx Budget Program proved to be effective on economic, environmental, and administrative grounds. From 1999 to 2002, annual emissions were significantly reduced, and the program had no discernable effect on the region’s economic vitality. Beginning in 2003, the OTC NOx Budget Program was incorporated into a larger federal system with similar features. That is, the successful state-based program facilitated the adoption of broader emissions control. Critical to this development was the leadership and innovation by the states, which provided valuable information, data, and a set of committed stakeholders.

For GHG emissions, various aspects of the problem make it well suited to a market-based approach that can spur innovation among a wide variety of sources and sectors. Though there is presently little federal prompting for GHG emissions reductions, the experience with NOx trading should provide confidence for states to take the initiative. States can start with GHG emissions controls, gain experience, and lead the near-term innovation in emissions control technologies and strategies. Over time, this may facilitate broader control at a national scale commensurate with the reductions required in global emissions.