Improving NO_<i>x</i> Cap-and-Trade System with Adjoint-Based Emission Exchange Rates

Abstract

Cap-and-trade programs have proven to be effective instruments for achieving environmental goals while incurring minimum cost. The nature of the pollutant, however, affects the design of these programs. NO_<i>x</i>, an ozone precursor, is a nonuniformly mixed pollutant with a short atmospheric lifetime. NO_<i>x</i> cap-and-trade programs in the U.S. are successful in reducing total NO_<i>x</i> emissions but may result in suboptimal environmental performance because location-specific ozone formation potentials are neglected. In this paper, the current NO_<i>x</i> cap-and-trade system is contrasted to a hypothetical NO_<i>x</i> trading policy with sensitivity-based exchange rates. Location-specific exchange rates, calculated through adjoint sensitivity analysis, are combined with constrained optimization for prediction of NO_<i>x</i> emissions trading behavior and post-trade ozone concentrations. The current and proposed policies are examined in a case study for 218 coal-fired power plants that participated in the NO_<i>x</i> Budget Trading Program in 2007. We find that better environmental performance at negligibly higher system-wide abatement cost can be achieved through inclusion of emission exchange rates. Exposure-based exchange rates result in better environmental performance than those based on concentrations