1. INTRODUCTION 1.1 Background and Motivation Controlling ground level ozone is one of the most significant environmental challenges facing the United States. Ozone is a major component of photochemical air pollution, or smog, and causes harm to both human health and the environment. Ozone is formed by atmospheric reactions of volatile organic compounds (VOCs) and nitrogen oxides (NOx) in the presence of sunlight. For more than two decades, emission controls on VOCs and NOx have been applied, yet ozone concentrations remain at unhealthy levels throughout much of the United States. There are many reasons why the ozone problem remains relatively intractable, but a critical element is the fact that not all VOC and NOx emission reductions lead to equivalent reductions in ozone formation. When and where the emissions of VOCs and NOx occur play a critical role in determining ozone formation rates. Economic instruments for controlling emissions of air pollutants have received increasing attention during the past decade. Emission cap and trade programs, in particular, have come to be viewed as innovative and economically efficient mechanisms for reducing ozone precursor emissions. In an emission cap and trade program, facilities are provided emission allowances; facilities that reduce their emissions below their allowances can trade or sell allowances in a market, and total emissions are reduced by lowering the number of allowances (the cap) over time. Emission trading programs offer flexibility by allowing facilities and markets to determine the most cost-effective way to meet emission control standards and promote technology transfer by providing a means for cost and risk-sharing. 1Encouraged by the success of sulfur dioxide emission trading (i.e., the Acid Rain Program), a number of regions are currently developing emission trading programs for emissions of nitrogen oxides. Successful NOx cap and trade programs have been established on regional and multi-state levels, including California’s South Coast Air Quality Management District’s (SCAQMD) Regional Clean Air Incentives Market (RECLAIM), implemented in 1994, and the Ozone Transport Region (OTR) NOx Budget program, implemented in 1999. Emissions cap and trade programs have also become an essential strategy for emission reductions in Texas as part of the State Implementation Plan (SIP) for attaining the National Ambient Air Quality Standard for ozone in the Houston-Galveston area and Senate Bill No. 7 (SB 7) of the 76th Texas State Legislature. SB 7 established the Emission Banking and Trading of Allowances program to provide flexibility to the electric generation facilities required to reduce NOx emissions 50% from 1997 emission levels by May, 2003. Few studies have examined the environmental effects of NOx emissions trading, yet changes in the spatial distribution of NOx emissions associated with trading may be especially important to ozone formation because ozone formation is a strong, non-linear function of the local concentrations of volatile organic compounds (VOC) and NOx. Since local concentrations of VOCs can vary greatly among facilities participating in a trading program, a ton of NOx emitted at one time and location may not have the same ozone productivity as a ton of NOx emitted at a different time and location. "Wrong-way trades” (i.e., where allocations are sold from a facility with low ozone productivity to a facility with high ozone productivity) have the potential to significantly reduce or eliminate the benefits of the NOx emission trading. This study builds on previous analyses of NOx emission trading by examining the environmental impacts of trading between individual facilities in a source region. As demonstrated in this research, the ozone productivity associated 2with NOx emissions in a source region, such as Eastern Texas, can vary considerably due to differences in local VOC and NOx concentrations. Therefore, even within a relatively small source region, trading may have positive or negative environmental impacts. This research applies a photochemical air quality model to quantify facility ozone productivity, establishes a flexible framework for evaluating NOx emission trading programs, and applies the framework to a case study of NOx sources in eastern Texas to quantify the impacts of potential trading scenarios in the region. 1.2 Research Hypothesis Where and when emissions of ozone precursors occur is critical for determining ozone productivity. In Texas, NOx to VOC ratios vary greatly. In some regions, ozone levels are controlled by VOC emissions, and NOx emissions reductions have less of an impact on ozone productivity than in other regions in which ozone levels are NOx limited. Photochemical grid models are necessary to account for the complex spatial and temporal dependence of ozone formation, and these models are used in this research. Given that a ton of NOx emitted at one time and location may produce more ozone than a ton of NOx emitted at a different time and location, if emissions are moved around, the same NOx emissions could result in either higher or lower ozone concentrations— i.e., potentially “good” and “bad” emission trading strategies exist. If the potential impacts are quantified by developing relative impact indices from photochemical air quality modeling results, trading programs can be evaluated in different regions, and potential “wrong-way” trades between facilities can be identified. Strategies can be developed to ensure that trading scenarios are equal to, or potentially more effective than, equivalent across the board emission reductions. 341.3 Research Objectives The overall objectives of this study were to develop a computational framework to evaluate NOBxB trades in a region of interest, and to apply this framework to a case study in eastern Texas to examine the spatial variability of ozone productivity associated with elevated NOBxB point sources. The specific objectives were to: • Apply a photochemical air quality model (the Comprehensive Air Quality Model with Extensions (CAMx)) to calculate the ozone productivity of NOBxB emissions from more than 50 facilities in the eastern half of Texas. • Develop impact indices to quantify the air-quality benefits of NOBxB emission reductions. • Develop a Visual Basic Application tool with GIS-based input data to systematically determine a variety of ozone impact