BEFORE THE ILLINOIS POLLUTION CONTROL BOARD

IN THE MATTER OF:

)

1

PROPOSED NEW 35 1LL.ADM.CODE PART 225

)

PCB R06-25

CONTROL OF EMISSIONS FROM

)

Rulemaking

-

NOTICE OF FILING

Dorothy Gunn, Clerk

Illinois Pollution Control Board

James R. Thompson Center

Suite 11-500

100 West Randolph

Chicago, Illinois 60601

Persons included on the

ATTACHED SERVICE LIST

PLEASE TAKE NOTICE that we have today filed with the Office of the Clerk of the

Pollution Control Board

ADDITIONAL INFORMATION.

ISI

~

h

6'

&3&

h

Kathleen C. Bassi

Dated: September 15,2006

Sheldon

A. Zahel

Kathleen C. Bassi

Stephen

J. Bonebrake

Joshua

R. More

Glenna Gilbert

SCHIFF

HARDIN, LLP

6600 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

3 12-258-5500

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

BEFORE THE ILLINOIS POLLUTION CONTROL BOARD

IN THE MATTER OF:

1

)

PROPOSED NEW 35 1LL.ADM.CODE PART 225

)

PCB R06-25

CONTROL OF EMISSIONS FROM

1

LARGE COMBUSTION SOURCES

)

ADDITIONAL INFORMATION

NOW COMES Participant MIDWEST GENERATION, LLC. by and through its

attorneys, SCHIFF

HARDIN, LLP, pursuant to 35 I11.Adm.Code

5

102.108, and offers the

following information as requested at hearing as comments for the Record of the

above-

captioned proposed rule:

1.

Mr. William DePriest was asked to provide information specific to Illinois

regarding the number of upgrade projects for electrostatic precipitators

("ESPs") involving

Sargent

&

Lundy as further response to pre-filed Question 29 from the Illinois Environmental

Protection Agency ("Agency"). Chicago Transcript

("C Tr."), p. 1216 (August 18,2006, a.m.)

Mr. DePriest reports that Sargent

&

Lundy has been involved in 21 retrofits of whole

precipitators to existing units, 20 precipitator performance improvement projects, and five

structural examinations and modifications at Illinois companies.

2.

Mr. James Marehetti was asked to provide a breakdown of the categories included

in his conclusion that the Illinois mercury rule would cost companies $200 million per year,

annualized costs as further response to Question

7 of the pre-filed questions submitted by the

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Agency. C Tr., p. 1302 (August 18,2006, p.m.) Appended hereto as Attachment 1 is a table

breaking

down those costs.

3.

Mr. Marchetti has also provided additional information relative to Exhibits 119

and 120, appended hereto as Attachments 2 and

3; respectively.

4.

Dr. Peter Chapman was asked for the internet address of the Metropolitan Water

Reclamation District's information that served as the basis for his calculations of the amounts of

mercury in stormwater runoff as further response to the Agency's pre-filed Question 5. C Tr., p.

27 (August 22,2006, a.m.) That address is

~www.mwrd.org/RD/iepa-reports.htm#Water

Quality Data Reports>.

5.

Dr. Gail Charnley was asked to provide articles regarding emissions trading. C

Tr., p. 1679 (August 22,2006, p.m.) Appended hereto as Attachment 4 is Byron Swift,

Emissions Trading and Hot Spots: A Review ofthe Major Programs,

BNA (May 7,2004).

Appended hereto as Attachment

5 is Byron Swift,

Command Without Control: Why Cap-und-

Trade Should Replace Rate Standards for Regional Pollutants:

3 1 ELR 10330.

6.

Mr. Ayres asked Mr.

Krish Vijayaraghavan to provide a calculation of a 90

percentile confidence levels for the point estimates.

See

C Tr., pp. 1500-1502. Mr.

Vijayaraghavan indicated that he would have to look into whether that could be done. C Tr., p.

1502. Mr. Vijayaraghavan has examined that question further and determined that the type of

analysis that Mr. Ayres appears to have requested is not applicable to the type of information that

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Mr. Vijayaraghavan provided at hearing. Therefore, we have no additional information on this

point.

Respectfully submitted,

MIDWEST GENERATION,

LLC

by:

One of Its Attorneys

Dated: September 15,2006

Sheldon A.

Zabel

Kathleen C. Bassi

Stephen J. Bonebrake

Joshua R. More

Glenna L. Gilbert

SCI-IIFF HARDN, LLP

6600 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

3 12-258-5500

Fax: 3 12-258-5600

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Follow-UP information for Question

Dosed t@ Mr. Marchletti

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

FOLLOW-UP INFORMATION

ON

QUESTION

7

CUMULATIVE ANNUALIZED COMPLIANCE COSTS FOR

SO2,

NOx

AND MERCURY BY COST COMPONENTS: 2009

-

2018

(billions

of

2006

$)

Rule

Ann

Cap-Tech

Ann-Fuel

Ann-fixed

Ann-var

Allow

Pur

Allow

Sales

Total

Cost

CAlR

SO2

1.03

-0.06

0.12

0.25

0.77

-0.20

1.91

NOx

0.38

0.00

0.01

0.17

0.30

-0.21

0.65

CAMR

0.05

0.00

0.01

0.11

0.41

-0.04

0.54

TOTAL

1.46

-0.06

0.14

0.53

1.48

-0.45

3.10

IL-CAIR

SO2

1.01

-0.03

0.12

0.25

0.73

-0.22

1.85

NOx

0.36

0.00

0.01

0.16

0.30

-0.21

0.62

IL-Hg

2.08

0.00

0.11

0.44

0

0

2.63

TOTAL

3.45

-0.03

0.24

0.85

1.03

-0.43

5.10

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Attachment

Additiarral details for Exhibit 119

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

CAIR-CAMR Tech (Ex

-

119)

Lookup

384#7

384#8

6016#1

6017#1

85W1

85W2

85W3

861#1

861#2

864#3

867#8

87Wl

876#2

879#5

87W

8838

884#4

889#3

891%

898#5

9631

963#2

9633

976#4

SYSTEM

UNIT-NAME

so2-tech

Midwest Generations EME LLC

JOLIET

7

Midwest Generations EME LLC

JOLIET

8

Ameren Energy Resources

Generating

Co

DUCK CREEK

1

Ameren Energy

Generating

Co

NEWrON

1

DFGD

Ameren Energy Resources

Generating

Co

ED

EDWARDS

1

Ameren Energy Resources

Generating

Co

ED

EDWARDS 2

Ameren Energy Resources

Generating

Co

ED

EDWARDS 3

Ameren

Energy

Generating Co

COFFEEN 1

WFGDIFS

Ameren Energy

Generating Co

COFFEEN 2

WFGDIFS

Ameren Energy

Generating Co

MEREDOSIA

3

Midwest Generations EME

LLC

CRAWFORD

8

Kincaid

(Dominion)

KINCAID 1

Kincaid (Dominion)

KlNCAlD

2

M

awest

Generat

ons

tME

LLC

POWERTON

5

M

dwesl General

ons

EME

LLC

POWtHlON

6

Midwest Generations EME

LLC

Midwest Generations EME

LLC

Dynegy Midwest

Generation Inc

Dynegy Midwest Generation

Inc

Dynegy Midwest Generation

Inc

Springfield

City

of

Springfield City

of

Springfield

City

of

Southern

Illinois

Power

Coop

WAUKEGAN 8

WILL

COUNTY 4

BALDWIN

3

HAVANA 6

WOOD RIVER

(IL)

5

DALLMAN 1

DALLMAN 2

DALLMAN 3

MARION

(IL)

4

so2tech-year

nox-tech

nox-tech-year

S7MO

2010

SNCR

SNCR

S7MO

2010

S7MO

2010

S7MO

SNCR

SNCR

S7MO

S7MO

SCR

SCR

SNCR

SNCR

SNCR

2009

S7MO

2009

S7MO

2009

S7MO

2009

S7MO

2009

hg-tech

hg-tech-year

Namplate

ACI

201 1

660

ACI

2010

660

441

ACI

2010

617.4

363.8

388.9

616.5

ACI

2010

239.3

358.1

659.5

659.5

892.8

HACI

2017

.

892.8

355.3

598.4

ACI

2016

634.5

HACl

2010

488

387.6

90

90

207

173

Note:

1. The

Nevdon

1

and

Coffeen

1

8

2 FGD

systems

are planned

for

CAIR

compliance

and

are not

projected

by our

modeling, but

their compliance costs have been included

in

our

CAIR costs,

as well

as

their emissions.

2.

Baldwin

1

-

3

and Havana 6 DFGD

systems have

been

included

in

our modeling of

emissions,

but

no CAIR

costs

have been assigned

because

they are a

result

of

Dynegy's

co

decree. These four FGD ystesms

will

be

installed

between 2009 and 2012.

The

3

existing

SCRs

at

Baldwin

1

8

2

and Havana

6

are to

operate year-round

due to

the

consent

I

They

have been

included

in

our

modeling of emissions

but no

CAlR costs have been

assigned.

3.

The existing

FGDs

at

Duck

Creek, Marion

4 and

Dallman

1-3

are

not

listed

above but

have been included

in

our modeling of

emissions.

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Attachment

Additional information for Exhibit

12Ci

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

CAIR-IL

Rule Tech

(Ex

-

120)

Lookup

384#7

384#8

6016#1

6017#1

6017#2

85W1

85W2

856#3

861#1

861#2

8633

863#4

864#1

864#2

864#3

867#7

867#8

874#6

876#1

876#2

879#5

879#6

8836

8837

883#8

884#1

884#2

884#3

884#4

88W19

887#1

887#2

887#3

687#4

887#5

887%

889#3

891#6

892#1

892#2

897#2

897#ST1

898#4

SYSTEM

UNIT-NAME

Midwest

Generations EME LLC

JOLIET

7

Midwest

Generations

EME

LLC

JOLIET

8

Ameren Energy Resources

Generating

Co.

DUCK

CREEK

I

Ameren

Energy

Generating

Co

NEWTON

1

Ameren

Energy

Generating

Co

NEWTON

2

Ameren Energy Resources

Generating

Co.

ED EDWARDS

1

Amerer

Energy

Resources

Genera!

ng Co

CD

EDWARDS

7

Amerel

Flerov

Keso~rces

Generbl

no

Co

Fl)

FDWARDS

3

",

-

Ameren Energy

Generating Co

COFFEEN

1

Ameren

tnergy

Gcnerai~ng

Co

COFFCEN

2

Ailelen

Enerav

Generat

no

Co

HUTSONVIL

1

F

3

Ameien

~ner;;

ene era tin;

Co

HUTSONVILLE

4

A~neren

~nerrj~

~enera1,nG

Co

MEREDOSIA

'

Ameren

Encrov

Generatina

Co

MERCDOSIA

2

-.

-

Ameren

Energy

Generating

Co

MEREDOSIA

3

M~dwesr

Generat4ons

CMC

LLC

CRAWFORD

7

Mdwesl

General

ons

FMt

L

.C

CRAWFOHO

8

Midwest

Generations EME

LLC

Kincaid (Dominion)

Kincaid

(Dominion)

Midwest Generations EME LLC

Midwest

Generations

EME

LLC

Midwest

Generations

EME

LLC

Midwest

Generations EME LLC

Midwest Generations

EME LLC

M~dwesr

Generar

ons

FMC LLC

Mldwesl

Generar

ons

EME LLC

Midwest

Generations EME

LLC

Midwest

Generations

EME

LLC

Midwest

Generations EME LLC

EEI

EEI

EEI

EEI

EEI

EEI

Dynegy Midwest

Generation

Inc

Dynegy Midwest

Generation

Inc

Dynegy Midwest

Generation

Inc

Dynegy

Midwest Generation

Inc

Dynegy

Midwest Generation Inc

Dynegy

Midwest Generation Inc

Dynegy

Midwest Generation

Inc

JOLIET

6

KlNCAlD

1

KlNCAlD

2

POWERTON

5

POWERTON

6

WAUKEGAN

6

WAUKEGAN

7

WAUKEGAN

8

WlLL

COUNlY

1

WlLL

COUNTY

2

WlLL

COUNTY

3

WlLL

COUNTY

4

FISK

19

JOPPA

1

JOPPA

2

JOPPA

3

JOPPA

4

JOPPA

5

JOPPA

6

BALDWIN

3

HAVANA

6

HENNEPIN

1

HENNEPIN

2

VERMILION

2

VERMILION

1

WOOD

RIVER

(IL)

4

S7MO

2009

DFGD

2010

SNCR

2009

SNCR

2009

S7MO

2009

WFGDIFS

2010

S7MO

2009

WFGDIFS

2010

S7MO

2009

SNCR

2009

S7MO

2009

S7MO

2009

SCR

2009

SCR

2009

SNCR

2009

hgfech

hgtech-year

COHP

2009

COHP

2009

HACl

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

COHP

2009

FF

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

FF

2009

HCOHP

2009

HACI

2009

HCOHP

2009

COHP

2009

HACl

2009

HCOHP

2009

FF

2009

COHP

2009

HACl

2009

HACI

2009

HCOHP

2009

HACl

2009

HACl

2009

HCOHP

2009

HCOHP

2009

COHP

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

HCOHP

2009

HACl

2009

HACl

2009

HACI

2009

HCOHP

2009

HACl

2013

HACl

2013

ACI

2009

Namplate

660

660

441

617.4

617.4

136

280.5

363.8

388.9

616.5

75

75

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

CAIR-IL

Rule

Tech (Ex

-

120)

Lookup

SYSTEM

UNIT-NAME

so2-tech

so2fech-year

nox-tech

nox-tech-year

hg-tech

hg-tech-year

Namplate

898#5

Dynegy

Midwest

Generation

lnc

WOOD

RIVER

(IL)

5

SNCR

2009

COHP

2009

387.6

963#1

Springfield City

of

DALLMAN

1

S7MO

2009

90.2

963#2

Springfield

City

of

DALLMAN 2

S7MO

2009

90.2

963#3

Springfield City of

DALLMAN 3

S7MO

2009

207.3

976#4

Southern

Illinois

Power Coop

MARION

(IL)

4

S7MO

2009

173

Note:

1. The Newton 1

and

Coffeen

1

8

2 FGD systems are

planned for

CAlR

compliance

and

are

not

projected

by

our

modeling,

but their compliance costs have been included

in

our

CAlR costs,

as well

as

their

emissions.

2.

Baldwin

1

-

3 and Havana

6

DFGD svstems

have been included

in

our

modelino

of emissions, but

no CAlR

costs have

been

assianed

because

thev

are a

result of

Dvneav's consent

.

-.

decree. These four FGD ystesms

ill

be

installed between

2009 and

2012.

he

3

existing

SCRS

at

Baldwin

1

8

2

and

Havana

6-are

to

operate

year-round

due

to

the

consent decree.

They

have been

included

in

our

modeling

of emissions

but

no

CAlR costs have been

assigned.

3.

The

existing

FGDs

at

Duck

Creek,

Marion

4

and

Dallman

1-3

are not

listed

above

but have been

included in

our

modeling

of emissions.

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

the Major

Proerams

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

REPORTER*

I)

4,.

I

I

Reproduced with permission from Environment Re-

porter,

Vol. 35, No. 19, 05!07!2004. Copyright

0

2004

by The Bureau of National Affairs, Inc. (800-372-1033)

http:!/www.bna.oorn

EMISSIONS TRADING

This report examines whether the major U.S. emissions trading programs for air pollut-

ants have contributed to elevated emissions concentrations in specific geographic areas, or

pollution "hot spots." Assessment of the actual performance of these programs shows that

none has resulted in a regional shift of emissions, and all trading programs examined have

led to proportionately greater emissions reductions from the larger sources. Overall, the

data from the programs reviewed indicate that trading has not created geographic hot spots

and, in promoting reductions at the largest plants, has smoothed out pollutant emissions in-

stead of concentrating them.

Emissions Trading and Hot Spots: A Review of the Major Programs

I. Introduction

T

his report examines whether the major U.S. emis-

sions trading programs for air pollutants have

cnn-

tributed to elevated emissions concentrations in

specific areas, also known as pollution "hot spots." En-

vironmentalists have been concerned about the poten-

tial for emissions trading programs to create such con-

centrations or hot spots, as have advocates of environ-

mental justice, who have voiced such concerns as a

basis for opposing emissions trading programs.'

This report is the first to comprehensively examine

the actual emissions data from the major emissions

'See,

e.g.,

Moore,

Cuitis,

Marketing Failure: Tke Experi-

ence with Air Pollution Trading in

the United States 34

ELR

10,281

(March 2004); Johnson, Stephen:

Economics

us.

Equity

Do Market-based Environmental Reforms Exacerbate Envi-

ronmental Justice?

56

Wash.

&

Lee L. Rev. I I1 (1999).

COPYRIGHT" 2004 BY THE BUREAU OF NATIONAL AFFAIRS. INC., WASHINGTON, D.C. 20037

ISSN 0013-9211

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

trading programs, which primarily affect emissions of

sulfur dioxide and nitrogen oxides from power plants:

8

Phase I of the SO, Acid Rain Program (1995-

1999);

Phase

I1

of the SO, Acid Rain Program (start-

ing in 2000); and

rn

Ozone Transport Commission (OTC) NOx

Budget Program (1999-2002).

In addition to these three major emissions cap and al-

lowance trading programs, we also examine

NOx credit

trading programs inseveral states.

This report first examines the

hot spot issue from a

regional perspective, addressing the chief concern

voiced at

the initiation of the acid rain SO, trading pro-

.

eram:

,

whether the increased flexibility allowed by trad-

In); \v,,uld re.:ilt

In

di-proponionorel\ greater emis>ion

riom \I~d\ves:ern ?uurrc.>, aiiec:rln:: hc-nslli\,e ecosy\-

rein, In C,)\vnwlllu dren, tc, the enit. For the

01C

SOX

program we examine the data by state to determine

whether

. . . . . . . .

there

.

were in fact reeional

"

shifts of emissions

with trading.

Secondly, we attempt to determine the effects of trad-

ins

~-~-

on

-~~

a

-

more

~~

local level bv examining ~lant-level data

to see whether the trading"programs Gsed reductions

homogeneously with regard to plant size, or caused

dis-

~ro~ohionate

emissions reductions at plants with rela-

iiveiv hieh or low emissions

TL~ ~Ybjective evaluation of the hot spot issue is im-

portant because emissions trading programs create the

bpportunity to attain poilution reduction goals at lower

cost through a market-based implementation

mecha-

ni~m.~

The cap-and-trade programs combine a strin-

gent environmental standard-the

capwith a very

high-integrity trading system that increases compliance

options. This creates efficiency, and the major cap-and-

trade programs have been credited with substantially

lowering compliance costs in comparison to traditional

rate-based

standard^.^ By lowering costs, the programs

can benefit the environment hv ailowine ~oliticiins to

trade

nrograms create a fundamentally better regula-

vation,

tom

"

sheik

"

creates

for

continuois

reeional

-

nollutants

drivers

thai~romotes

for cleaner produc-

Cnno-

tion, and are easily enforced

'

These benefits could he

See,

e.g., Tietenberg, T.H., Emissions Doding: An Exer-

cise in Reforming Pollution Policy (Resources for the

Future,

Washington, D.C., 1985); Harrison, David, Tradable Permits

for Air

Pollution Control, in 1~renx.moti~~

Ymoox

or EWI~ON-

MENTAL NUU RLSOURCE

ECONOMICS

2001 (2001).

"

See, A. Denny Elleiman et al., Wis

Fan

CLW

AIR:

THE

U.S.

Aciu bin Pnoc-

(2000); Cu& Carlson, Dallas Burlraw,

Maureen Cropper, and Karen L. Palmer, Sulfur Dioxide Con-

trol by Eiectric Utilities: What Are the Gains from Trade7108

Journal of Political Economy 1292 (2000).

'

Authors point out that cap-and-trade programs guarantee

emissions reductions, permanently cap emissions, create zero

growth in emissions from new sources, allow greater scope for

compliance through cleaner fuels and clean production tech-

nologies, increase compliance levels to virtually 100 percent,

and greatly lower compliance costs. See generally,

Elleman,

Denny, Paul Joskow and David Harrison, Emissions Trading in

the

U.S.:

Experience, Lessons, and Considerations

for

Green-

house Gases, Pew Center on Global Climate Change, Arling-

ton,

Va. (May, 2003) [available at http:/lwww.pewclimate.orgj;

Swift, Byron, How Environmental

Laws

Work: An Analysis of

5-7-04

COPYRIGHT

"

2004 BY THE BUREAU OF

lost if inaccurate perceptions about trading systems dis-

courage their use where appropriate.

II.

Emissions Trading

-

Systems

-

Emissions trading programs provide flexibility to

regulated sources that must meet a common environ-

mental standard. Trading systems allow sources that

emit pollution below an allocation level or an environ-

mental standard to sell or transfer their reductions to

other sources, which may then emit above the level or

standard. The flexibility afforded

by trading reduces

comnliance costs hv allowine sources that can reduce

regards to

eniissions concentrations or h'bt spots.

No assessment of emissions trading can be done

without understanding its three fundamentally different

forms-emissions

can and allowance trading

~,

(can-and-

. .

lrnde) program, rlili\lonb awrdging plugrnn~>. and

project bahed emlrions rred~l program\ \!"\I

oi (,ur

analysis deals with the major cap-and-trade systems,

which both reduce emissions and create a fundamen-

tally

difieren~ compliance ;q,lem iur \vurccs than lrn

ditiunal recl~i~r,log?.l,itsed r.ilc sr:~ndard~ l'l>cx! al%~

have a very higGintegrity allowance trading system

that. because of the can.

. .

assures a decline in total

emis-

\ion; ir,,m aifccted ouncs :\\.crJglng and cl-cdlr

\ys-

rem. however.

drc

gr~rred unro cxlhr~ng compliance

systems and differ from cap-and-trade programs in

manv

wavs. These three oroerams

. .,

differ so simificantlv

in rhcir &n\.ironrnenral .ind ecutlunlic eifeL.l..'!h:il

ihc?

illould be conbidered distinct r\.pci of regularor\ pro

grams and not lumped together as trading~programs.

A. Emissions Gau and Allowance Trading

-

Promams

-

\losr vl our analysis rilnrcrn\ the Acid l(;iin I'rogr.in1

2nd rhe So~lhcasrcrn

0

I

C'

SOX I'rocmnl. I~urh

cxp-

and-trade programs. Under this approach, an overall

emissions cap is established over a large region, creat-

ing a strict regulatory standard that permanently re-

duces emissions. All affected sources are then allocated

allowance^.^ which renresent their share of the total

cap, and can trade

allobances with each other for com-

pliance purposes. New sources are typically not pro-

the Utility Sector's Response to Regulation of Nitrogen Oxides

and Sulfur Dioxide Under the Clean

Air Act, 14 Tulane Envtl.

L.J. 309 (Summer 2001) [available at http:/lwww.epa.gov/

aimarkets/aniclesAndex.htmlj

See generally, U.S. EPA, Clearing the Air: Re Truth

About Capping and Trading Emissions. EPA

430F-02-009

may 2002); Ellerrnan, A. Denny, David Hamson, Emissions

Trading in the US.: Experience, Lessons, and Considerations

for Greenhouse Gases. Pew Center for Global Climate Change

(Arlington,

Va., May 2003); Haites, Erik, An Emerging Market

for the Environment:

A Guide to Emissions Trading

(L.N.

En-

vironment Program,

2002)

[see

http://~.uccee.orgETguidei

GuideEmissiansTrading.pdfj.

This article refers to trading in this spatial sense of a

transfer of emissions tons between different sources and ex-

amines its effects with regards to emissions concentrations.

The spatial trading of allowances or credits is to he distin-

guished from temporal trading, such

as

banking, which has the

effect of moving a ton of emissions from one year to another.

See generally, EPA,

mree Forms of Emissions Trading.

Clean

Air Markets Update, Winter 2002.

'Each allowance typically represents one ton of a pollutant

that may be emitted in

a given year.

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---

vided with any allowances, hut must obtain them from

existing sources, leading

to essentially a zero new

source standard.'

The cap-and-trade approach fundamentally changes

the

~,ltc-!~';\ed

reeulatorv

~r;ind;~rd\

.

svstem

.

awav

nnd'lnti,

from

an

traditional

u\.ernlI pe~~iorrnirncc

end-of-nioe

. .

I

.

' I h~lc 1)rugr~m\ h1t.e been 5ho\vn to reduce

Illc co\r, or cuml~lionce ro itall or less ~,f the COAI 01 !ra-

ditional rate-based standards. Thev can also transform

bu>i!~es, ~r,n~pli:~ntc

behavior tu\?ardr n pollution pre-

\cnrl~,u rcs1,on.e 2nd a\\.ay irom ~nsrnlling end-(11-pipe

controls, broaden and strenfihen the context for inno-

vation. ereatlv

.,

,

reduce administrative costs. and create

hlrnort I(

(J

percent r~,mpliancu.'

'

Cap-:ind-rradc pru-

grm,

31>tt

eital~lrrh an errcmcly cr~!dihle furm ui al-

lowance trading based on rigorous monitoring that has

high integrity because the cap prevents trading from

ever leading to excess emissions.

B. Emissions Credit Trading Programs

At the other end of the spectrum are credit trading

programs, which are grafted onto existing regulatory

programs, such as traditional emissions rate regula-

tions

grimi

under

in \\.hich

the Clean

suurcei

Air

unden'fike

Act. These

projerr

are

voluntarv

that ci-exrc

.

oro-

.

qu.$~~t~rr:~l~le

pi,llu!ron rcd~:rlions uvcr and uhu\.e their

CXI,IL!I/: permilred luvcls vr pas1 cnli~iions le\'elr. I'hc

sources receive credits for these reductions. which thev

may then sell or transfer to other

sourcesfor cnmpll-

ance purposes.

to other trading programs. Some of the reasons are that

there is no change in the underlying compliance sys-

tem, fewer tons are available to he traded, and more

regulatory procedures are needed, generating fewer

economic gains. Also, because credit programs are used

with

existine

..

~ermittine

.

...

Droerams

..

that tvuicallv

. .

do not

rvqulrc cui:ritr:rc~u~ ~rnisaicrn n~~~niror\,

rhcy als~ have

I?% relr~ble repolilng and rnnniroring or emisston, than

cap-and-trade programs since firms can select which

projects to present, credit trading systems have an in-

herent weakness in allowing firms to derive credit for

ant m end-of-oine

-

emissions See for examnle ax standards

such as

~easdnibly Available ~oitrol ~echiolo'gy

(RACT)

for

existing sources, Best Available Control Technology

(BACT)

for new sources, and Maximum Achievable Control Technol-

ogy

WC1) for hazardous pollutants. 42 U.S.C. 88 7SOZ(c)(l),

7475(a)(4), 7412(g)(2)(A) (1994). Rate standards have been

~

~

~~

~~~

~ - ~~ - - -~ ~~~~~

MEN+&

TEC~SNOLOCY

I~INOYA'~~ON

39 (1991): Swift. Bwn. Environ.

mental Law institute, How ~n;iron&ntal icws

hrk:

An

Analysis

of

the Utility

Sector's

Response to Regulation of h'i-

trogen Oxides and Sulfur Dioxide Under the Clean Air Act, 14

Tulane Envtl. L.J. 309 (Summer 2001) [available at http:!l

www.epa.gov/airmarkets/articles/index,html].

"For evaluations of the SO, program,

see

supra notes

3

and 4.

projects that they might have done anyway, potentially

increasing overall emissions. However, credit trading

systems may he useful when system-wide approaches,

such as cap-and-trade or averaging, are infeasible. A re-

cent analysis provides

best practices for credit pro-

grams, while noting they have lower integrity than

cap-

and-trade programs.'2

C. Emissions Averaging Programs

In between these two systems are emissions averag-

ing programs, in which a rate-based "average," or stan-

dard, is established for a group of sources. Individual

sources that emit

below the average emissions rate can

earn credits that can then he sold or

transferred to

sources that emit above the average rate. Averaging

svstems can be used either with a uniform rate standard

or

rechnulogy-habed rare standardr, nlrhough the u>e ui

ii uniform standard may promore clei~ner rechnolo-

pies.'"

A\,erdging system, ;lllo\r rradin~ ro tak~: pla,~! ;lure-

rnarlcllly bcrwt.cn covered rource~, \\.hll.h dIlo\v.~ fur

greater rrading and rhui cconornic $:din.. ,\ltll~,ugl~

ru-

tal emissions may grow over time, unlike cap-andTtrade

nroerams.

. -

all sources are included in the oroeram.

. ~,

\r

hich elitninarc\ rhe danger oi "ymin~" [he ,>ten1

rhn~ugh di-\elecr~un

01

prujcrrs rhar eulirs wirh credit

trading programs. Also, credits in averaging systems

are

..

generated throueh standard

~rotocols that do not

requrre guvernmt:nr approml 01 rndiv~du:il prujccrh.

greatly retluc~ng rnninctinrl COT\ :in11 hence r,nh;incing

economic gains.

111. Limitations and Context of an Evaluation of

Emissions Concentrations,

or Hot Spots

This naDer

. .

reviews the effect of existing. emissions

trading prugrAms ru determine ii rl~ey ha\

v

incrcas~~d

or

decreased the

c<~nccnrrariun ui pulluli~,n eml~rlun.,

Such a study essentially evaluates and compares trad-

ing

proache2

-

Dromams

. ..

rhar ach~c\.e

with other

cqui\nlenr

oossible

reductrc,nr

remiaton,

over

.

rhc

an-

.

same source>, and a> such ha> 3 number oi lirriit;iti~,n~.

discussed below. In particular, such a review should not

he confused with one of the stringency of regulation,

nor of differing needs of national versus local

reguia-

tory programs.

A. Assessing Regulatory Stringency vs. Method

The first caveat to our studv is that it does not deal

!virh rhc lc\,cl oi rringency oirvgular~vn. bvhlch ih :!pi

c;illy legialativcly dcrrrmined. k:lnlssiun.r conc.cnrrd-

tiun, or h~11 sporc ori#in~te In real-\\.~~rld

s~ruarion,,

such as the sitkg of coal-fired Dower nlants or the use

"See Environmental law institute, Emission Reduction

Credit

lkading Systems: An Overview of Recent Results and

an Assessment of Best Practices, Environmental Law Institute

(October 2002); see also Dudek, Daniel

&

John Palmisano,

Emissions Trading: Why

Is

This Thoroughbred Hobbled?, 13

Colum.

J. Envtl. L. 217 (1988).

'Wniform standards do so because they allow firms to

meet the standard by using

a cleaner technology. Technology-

based rate standards on the other hand require controls re-

gardless of how clean the technology is and

so

provide no in-

centives to install cleaner technologies.

An

example of a uni-

form standard is the fuel-neutral New Source Performance

Standard for

NOx.

40 C.F.R.

8

60.44b.

EWIRONMENT REPORTER

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---

qulrlllg ~llc~qultf

pullutsnl rc'llurrlons \\,!I1 en11 ...l8,n lev-

?I, in such arcas ~t(.ru:~lly

dc,~l~ne.

:\

gu(~d cx.inlplc i rhc cue oi SO.

..

a\

[he t,ulld,ng oi

pG,hcr pl.inrr in rhc \II~\\.LcI

IO uw the rclnr~vel! high-

~Iiur

(.0:1I> (~f the rt,gion lcd 10 ele\.ared emission5 le\.-

els in that region andualso affected downwind (Eastern)

states. Initial efforts to regulate these plants under Title

I of the Clean Air

Act1* resulted primarily in the disper-

sion of pollution through tall stacks;'' SO, emissions

barely declined, falling from 17 million to 16 million

tons between 1970 and

1990.'6

The Acid Rain Program was passed in 1990 to ad-

dress this situation and mandates a 50 percent reduc-

tion in SO, emissions from 1980 baseline levels to ap-

proximately 9 million

tons.17 While EPA data shows

that the Acid Rain Program has significantly reduced

sulfur deposition and sulfate concentrations in the at-

mosphere, it also indicates that additional reductions in

sulfate deposition are still needed to assure the

recov-

erv of acidic waters and forest soils. and enhance health

henrl~r

.'

I hebe ttnding, have led 10 the inrn~ducr~on

c,i b~ll~

ln C.on$,rc~s, a> w?ll

a,

a propc~s~tl

I)? I:!':\,

rhdr

I! r lor din ucn I SO ernl.,sion\ 10

the 2 million to 3 million ton level.'Y

-

Our examination instead is of the reeulatorv method.

13

hqu~rs

a,

IO wlicth(,r, ar :I g~vg~~

le\,<l oi htriri-

Acncv. rht u5e oi ih~. cni1~s1011~

trdding methr~d ha, Ird

'o

d~al~ropc~tliun;Ij

incrcasc,s

decreawb in emi,bions

in certain areas that cause or exacerbate emissions con-

centrations.

In the SO, example above, the issue would not be

whether the reductions mandated in the Acid Rain Pro-

"

The federal Clean Air Act of 1970 established the first Na-

tional Ambient Air Quality Standards, designed to protect

health and welfare, and required states to develop "state

implementation plans"

(SIPS) to achieve these standards. 42

U.S.C.

8

7401 et seq.

'"For SO,, for example, an unintended consequence of

these new ambient standards was the dispersion of SO,

through

tall stacks. The EPA permitted over a dozen states to

adopt

SIPS allowing sources to meet the new standard by

building tali stacks to disperse the SO, instead of reducing

emissions. This practice injected SO, into the higher atmo-

sphere where it remained longer, facilitating the chemical re-

actions that produce sulfuric acid and aggravating acid pre-

cipitation. See Vickie L.

Patton,

Re

New Air Quality Stan-

dards, Regional

Haze,

and Interstate Air Pollution Transpori,

28 ENVIL..

L. REP. 10,155 (1998).

'"

EPA,

NA~ONL

An

QvAUI?

AND

EMISSIONS

TRENDS

REPORT,

1999 EPA-454lE-01-004 (March 2001).

"

42 U.S.C. $7651 et seq. (imposing a 8.95 million ton cap

to be achieved by 2010).

IS

U.S. Environmental Protection Agency, Acio

RA~N

PKO-

GRAM: 2002 PROGRESS

REPORT at pp. 7-11, EPA-430-R-03-011

(NO-

"ember 2003). See also, U.S. Environmental Protection

Agency, Acio RAN PROGPUIM:

2001 PROGWSS

RLiiorr at pp. 35-37.

EPA-430-R-02-009 (November 2002).

"Congress has acted to advance several cap-and-trade

proposals for electric utilities, such

as the Clear Skies Act

(H.R. 999) introduced by Reps. Joe Barton @-Texas) and Billy

Tauzin

@.La.);

the Clean Power Act (S. 366) introduced by

Sen. Jim Jeffords @-Vt.): and the Clean Air Planning Act of

2003

(S. 843) introduced by Sens. Tom Carper (D-Del.), Lin-

coln Chafee

(R.R.I.), and Judd Gregg (3-N.H.). EPA an-

nounced the signing of proposed rules to reduce SO, emis-

sions in

a 28-state region to 2.7 million tons by 2015. U.S. EPA,

Air Quality Proposal to Deeply Cut

Power Plant Emissions is

Signed,

EPA Press Release

(Dec.

17, 2003; 34 ER 2742,

12il9i033.

gram were enough, but whether the program led to an

uneven allocation of the tons of reduction in a way that

exacerbated areas of concentration. such as the

Mid-

\vesr Ihe pwnr 1s >ln!ply char

\ye

mu>! diiierenri;fiic:

dn

3nalys1. ui rhe eifects oi regularol~ merhod rradlng-

trom rhe Ishue oi ,rrinjienc\, .~nd aa.3c.b~ !t.hcrht:r ~hc

method itself led to po1l;tant concentrations

6.

All Regulatory Systems Create Differentiated

Emissions Levels in

Plants

At similar levels of overall reductions, regionalor na-

tional source-soecific rate standards or

other remla-

,,

lions du nut mt:aningiully addrc% loc.~l emissions lev-

el, any

betrer rhan rr~dlng >).tern..

;\

plln(:lpal rchon

Is lhal rate-b:lsed re#ulatlon, dr~ ntrr cuntrul ihe o\,erall

amount of pollutio<, which depends on plant siting,

plant size, and utilization-whether a plant is operated

100 percent, 50 percent or

1 percent of the time. There-

fore rate systems do not guarantee per-plant reduc-

tions.

In addition, rate-based standards allow emissions

to increase due to economic growth, and so over time

may lead to greater overall emissions than cap-and-

trade systems.

allucste

For

manv

<$!,en

Plants.

number'

the cap-and-trade

oi ~llu\r,ance$

aDDroach.

. .

tr, rhe

which

pl.~nr.

may

be mure likely ru lead to cc~n~isrcnr

pc,llurant rc-

ductlunr than rhe rRre based appruach. kigure I >ho\r,

how rate-based systems can lead to greatly increased

pollution at the plant level with differences in plant uti-

lization, comparing a plant utilized at a 10 percent level

to one utilized at a 100 percent level. Although the al-

lowance allocation does not change, a rate-based regu-

latory system allows pollution emissions to increase

greatly as plant utilization increases.

Figure 1

r

-7

Plant Utilization Differences Chart:

How Rate-Based Systems Can Cause Hot Spots

I

I

Raie-based Emissions

C3

Allowances

120

I

L

10% Utilization

100% Utilization

.. J

I

A SNA

Giapbic/en425g01

C. Context of Existing Regulatory Standards

A further limitation of this study is that trading pro-

grams for

NOx and SO, exist simultaneously with other

regulatoly programs for criteria pollutants. Although

important, these standards would not be expected to

5-7-04

COPYRIGHT

"

2004

BY

THE

BUREAU

OF NAT IONAL AFFAIRS, INC., WASHINGTON. O.C.

ER

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---

set on a case-bv-case hasi~.~'

These standards have

principally

affectkd new sources and have had relatively

little effect on compliance behavior of existing power

plants in the programs studied."'

D. NationaVRegional

-

vs.

Local Regulation

\

i~ri,~l

,.:i\.c.ii 13 1h.11 our srudy I3rgely concerns pro-

g,r.t!n, dc.,tgr.ed I<) ;,c.!i~c\e nartunal or rcg~oii~~l

level> oi

rcducttuns. :tnd i1<,1 local lcvel~. The chilice between

trading systems and rate-based standards is distinct

from a choice between national and local regulation.

Regardless of the type of regulation used to achieve na-

tional reductions, only local regulation can achieve lo-

cal pollution reductions over and above national stan-

dards.

--. . .

Our inquiry as to the method of regulation is however

relevant to hoth the national or local level, as trading

programs may be used to achieve these local goals as

well. For example in Houston, a local cap-and-trade

program was initiated in 2002 that will ultimately

achieve a 90 percent reduction in

NOx in the Houston-

Galveston area." Clearly, a national program aimed at

achieving a 50 percent reduction will only partially as-

sist Houston in this effort and added

local regulation is

needed. However, our study would he relevant to hoth

situations. in

clarifvine whether trading would he ex-

pected to iead to

e&is$ons concentrations within what-

ever area is defined as the area subject to regulation.

IV. Results of Trading Programs

This paper now examines the actual emission data

from four major emissions trading programs to deter-

mine whether thev resulted in shifts in emissions

;nnun< regiun, ot plrjnts I~LI Icd ru concenlr3rtng 10~31

enl!,,ivn-. .c\.elb \Ye ev~~ludre

iour rn:i]or progrdmh.

9

Phase I of the SO, Acid Rain Program (1995-1999);

I

Phase 11 of the SO, Acid Rain Program (2000 and

2001);

m

Ozone Transport Commission NOx Budget Program

(1999.2002); and

9

NOx Discrete Emission Reduction credit trading pro-

grams in several states.

"

New

Source Review establishes an emissions rate stan-

dard set by regulators on

a case-by-case basis based on the

specific

.. .

plant and power-generation

technology. 42 U.S.C.

!

..I.

,I

-

:\t,~r l',.',

,,<.,,

,,,urce sl:,!,,l>r<!>

1,,r SCl. c>.<~"I,~II>

re-

qt~.r~\

,cr-,khl~$?~

P~.L

;.,

C

P I<

:

ti,

I'h

:ind

~hc da::d:xr<ls

!n

I

,

2

A

4

,uprit, but

,,nI\.

'i:)

trntr,

~-

il~lhcr

\~~ ~

rh:in

ncs.

unl1.n

installed scrubbers from

197.

'8

to

~~

1994.

~ ~ ~ ,

when olants started to

install scrubbers for compliance with the Title IV cap-and-

trade

.......r

nromam.

~~"~~

I1.S.

- ~

ENEKGY

INFORMAXON

AGENCY,

PUB. NO. EIA-

0348(99)12.

Fi.ue

GAS DESULNRIIAIION

(TGD) C~ACITY

i~

OPSKA-

.T~ON AT

US. ELECTRIC

Unuri P~A~~Ts

e

OF

DECEMBER

1999, 2 Em.

Powin

ANNUAL.

table 30 (October 2000). This failure of existing

sources to reduce

poilGion promoted a series of lawsuits by

states and EPA in 1999 azainst a number of major utility com-

panies, only some of which have been settled.

"'The Mass Emissions Cap and Trade Program

(MECTP)

has been established by the Texas Commission an Environ-

mental Quality for certain stationary sources of nitrogen ox-

ides

(NOx) emissions in the Houston-Galveston nonattainment

area (HGA). The initial cap was implemented Jan. 1, 2002, with

mandatory reductions increasing over time until achieving the

final cap by Jan.

1, 2007. 30 Tex. Admin. Code

B

101.351. See

htt~:l~.emissionstradine.com/tx

facts.htm on the World

Wide Web

-

5704

COPYRIGHT

"

2004

BY THE BUREAU OF

V. SO, Acid Rain Program

The nation's largest emissions cap and allowance

trading program is the SO, cap-and-trade program un-

der Title

IV of the Clean Air

The program was de-

signed to reduce SO, emissions from electric utilities

by

10 million tons from 1980 levels. Its passage in 1990

broke a 10-year legislative impasse to address the pri-

mary cause of acid rain." The program combines an

SO, emissions cap set to reach 8.95 million tons by 2010

with a flexible implementation mechanism that lets

sources trade emissions allowances to achieve

eff-

ciencv

- ~

'l'hts

in

progratl~

reaching

h.b

.,

the

hecn

cap.

~n~plernc~nicd

iii

t\ro

phahcs

I'hasc I cunimencecl in 1!J!t5 and required rhc LI,:, I;jrg-

est, highest-emitting power units to make significant

initial emissions

reduction^.^" Starting in 2000, Phase

I1

requires all plants above 25 megawatts in capacity

(2,300 units in all) to comply with a nationwide emis-

sions cap set at 8.95 million tons of SO,." These reduc-

tion levels were achieved, although the opportunity for

banking allowances meant that many sources achieved

early reductions by emitting below their allocated levels

during Phase

I, and have used the stored allowances to

emit slightly above their allocated levels during the ini-

tial years of Phase

TI

(see Figure 2).

The Title

IV

program has been called one of the most

effective emissions reduction

Dromams,

. ..

principally he-

cauhe it achieves signit'icant and l~ern,nn>nt reducitc~n~

;it ven. lunr rompltance co\rs (.'<nnpli.lnce cohls lor lull

I'hit.,e II imr,lcmcnrnrion arc ehi~mared ar ,512 hill~un

per year, well below initial estimates that ranged from

$3 billion to

7

billion.38 The low cost is attributed to the

flexibility afforded by both the cap approach and trad-

ing mechanism. However, the program has achieved a

number of other notable results as well: virtually 100

percent compliance; high monitoring quality; low trans-

action cost to business; and very low administrative

costs to

gn~ernment.~~

A. Lack of Regional Emissions Shifts

Possibly the most important concern in the hot spot

debate has been whether trading programs would lead

to regional shifts in emissions. This concern was espe-

cially acute for the SO, Acid Rain Program, where it

"'This title was promulgated in the Clean

Air Act Amend-

ments of

1990,42 U.S.C.

$

7651 et seq. See generally A. Denny

Elleman et al., Mnm ion CLGW

AIR:

Tii~ U.S. ACID RNN PRO-

G-

(2000) and Byron Swift, Environmental Law Institute,

How Environmental Laws Work: An Analysis of the Utility

Sector's Response to Regulation

of

Nitrogen Oxides and Sul-

fur

Dioxide Under the Clean Air Act, 14 TGME ENVII. L.J. 309

(Summer 2001) [available at

hrrp:llwww.epa.govlairmarketsl

artic1eslindex.html an the Web]

3'

Richard Cohen, Wnskii~cior.

AT

WORK,

BACK ROOMS

;WD

Ci.w

Ain

(1990) (discussing congressional debates); Ian M.

Torrens et al.,

The

1990 Clean Air Act Amendments: Oven,iew,

Utility Industry Responses, and Strategic Implications, 17 ANN.

REV. Enrncu

& ENV'I

211, 213 (1992).

"

42 U.S.C.

$

7651~.

7

42

U.S.C.

$

7651d.

.'"

Ellerman, Denny, Lessons

from

Phase

2

Compliance

with the

US. Acid Rain Program, MIT CEEPR Working Paper

W-2003-009 at 4 (Cambridge, MA, May 2003) [see http:ll

mit.edulceeprIwwwlworkingpapers.htm

on the Web].

3s

See EPA, Acid Rain Program Compliance Reports 1995-

2002; references in note 34, supra; Brian Mclean, Evolution of

Marketable Permits: The

U.S. Experience with Sulfur Dioxide

Allowance Trading,

8 INT'L J. EMI.

&

POLL~ION

19 (1997).

ITIONAL AFFAIRS. INC.. WASHINGTON, O.C.

ER

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---

-

Figure 2

Results of the SO2 Acid Rain Program (1995

-

2002)

!

............

[7

Allowances Allocated

C

Phase 1 Sources

..............

.................................................................

J

Source:

fPA,Acld Rain Pmgiam: Compliance RepoN

11995-20021:

and EPA,Acld

Rain

Program: hisslons Scorecard

11995-20021.

A BNA

Gmphiclen425g02

Bath

senes

are

aval!able

at

h~p://ww.epa.gov/aima~keii/em~s~~~~/~nde.html#le~oN

on the

Web.

was feared that trading could increase emissions from

and Northeast (14

states).*' The data show that during

Midwestern sources, whose emissions had traditionally

Phase 1, sources collectively emitted well below the

caused significant harm in sensitive

ecosvstems in the

baseline levels, as required by the cap, but also below

Northeastustates and Canada.4o This secgon examines

their allocation levels..

the data to see whether regional shifts have in fact

oc-

Note that there are two ways of determining the ef-

curred.

fect of the cap-and-trade program on shifts in emissions

levels. The most important is the comparison of

base-

1. Results of Phase I of the Acid Rain Program

Figure

3

shows the actual results from Phase I of the

Acid

Rain Program by region, for all units that partici-

pated in all five years of Phase

L4'

Three numbers are

illustrated for each region: the first

bar shows 1980

baseline emissions levels;4z the second, the allowances

allocated on an annualized basis; and the last, actual

emissions on an annualized basis. The regions are com-

posed of the Midwest

(8 states), Southeast (8 states),

40Acid precipitation damage has been most pronounced in

the northern tier and northeastern United States and Canada

because the forests and lakes in these areas

are more sensitive

......., .................

........

sation units. that ~artici~ated

in all

ti\

ie

vears of Phase I htle

N allowed hrms'to select wh~ch olants would uartlcmate ~n

Phase I as substitution units each'yzar, and so ihe daia does

not include emissions

for those substitution units that partici-

pated in fewer than

5 years.

'"

The intent of Congress in creating Title

IV

was to effect a

l0-million-ton reduction in SO, from 1980 levels. However,

scaled to equal

1980 emissions.

line emissions levels (the left bar) with actual emissions

levels during the program (the right

bar). This incorpo-

rates

both elements of a cap-and-trade program-the

reductions caused by the cap itself and any changes

caused by the trading program. A second view of only

the effect of trading would compare the allowance allo-

cation (the middle bar) with actual emissions. However,

it is important to view cap-and-trade systems as a com-

plete system, as the imposition of the cap also strongly

affects emissions results.

a. Greatest Reduction

In

the Midwest.

The nlosr ilnpor-

rant iinding in rhh I'hasc I dara is cxrrernely good

nev.r

by far the-greatest reductions from baseline emissions

in

terns of both tonnage and percentage reductions

took place in the Midwest, the region with the highest

emissions. Midwestern sources reduced SO, emissions

by

55

percent from baseline levels, compared to only 45

percent in other regions (see Figure 4).

Two factors may help to explain this result.

The first

is that the formula for allocating allowances was itself a

13

The Midwestern states are Illinois, Ohio, Indiana, Iowa,

Michigan, Minnesota, Missouri, and Wisconsin; the

Southeast-

em states are Alabama, Kentuce, Georgia, Florida, Missis-

sippi, North Carolina, South Carolina and Tennessee: and the

Northeastern states are Connecticut, the District of Columbia,

Delaware, Maine,

Maiyland, Massachusetts, New Hampshire,

New Jersey, New

Yark, Pennsylvania, Rhode Island, Vermont,

Virginia, and West Virginia. All sources participating in Phase

I are covered within these regions except for one unit in Kan-

sas.

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---

Figure 3

Figure

4

I---

Baseline Emissions, With Phase I Allocations

and Emissions of

SO2 by Reglon

1

SO2

(tons)

;

3

Phase I Ailowances Annuaiized

.....

i

U

Phase I Emissions Annualized

.

,

i

Midwest

Southeast

Northeast

i

hnp://&.epa.gov/airmahea/emisionsl

indexhtmiiiiepoits on

the

Web.

factor in reducing emissions concentrations proportion-

ately greater in high emissions areas such as the Mid-

west.

In Phase 1, allowances were allocated to units on

the

basis of 2.5 lh. SO, per million Btu (mmBtu) multi-

plied by their 1980 baseline utilization. This meant that

the dirtier olants with hieh baseline emissions rates had

10 reducc emi,siuns signiiic~lnrly more ro rexch thclr ai-

Io\\.,tncc :ilic,c.ttiun rhan cleaner source$ dld 'She nlloc;l-

tion method disproportionately affected sources burn-

ing the high-sulfur coals in the Midwest, leading to

greater incentives to reduce emissions in this region.

The second reason is that large plants reduced emis-

sions the

most,44 which also led to greater reductions in

the Midwest, as that region has relatively more large

plants. The result is that by far the greatest reduction

occurred in the region

with the greatest emissions,

thereby contributing to cooling rather than creating hot

spots.

b.

Consistency Among Regions

in

the

Use of

Trading. The

second evident feature of the Phase 1 data is that the

three major regions are quite similar in

terms of the use

of trading mechanisms: sources in each region reduced

emissions by a roughly similar percent below alloca-

tions and banked most of these saved

allowance^.^^

Since emissions in each region were consistently be-

low the total amount allocated, there is also little to no

44

See Part N.B infra.

45

Banking refers to emitting below allowance allocations in

order to save allowances to use in future

yean.

As

shown,

mast firms in Phase I chose to bank allowances to use in Phase

11, when they would face a much lower emissions cap. In all,

nearly

three-quatiers of the allowances freed up for emissions

trading in the

fint three years of Phase I were banked for later

use. Ellerman 2000 at Section 6.6. Although the banked allow-

ances

are expected to he used in the future, banking causes

early reductions, which has positive environmental conse-

quences in reducing sulfur deposition earlier.

Title IV Phase I Emissions Reductions

From

1980 Baseline*

Region

From Baseline

Midwest

3,079,034

-55%

Southeast

'

1,168,720

-46%

Northeast

1

854,173

1

-43%

Total

5,101,927

-50%

...

--

~-

'Unia panicipatinr ail

five

yean only.

A

8NA @aphic/en425@4

discernible effect regarding the spatial shift of emis-

sions due to

tradinz. The oniv thine that can be said is

rhnr sources in the Sourhensi banked siighriy more AI-

lo\vnncc, Than t,rher rcg10115 (35 percenr,

II

oppu,cd

lo

LLJ

r)ercerlr in the So~nheasr ;ind

2:i

Dcn't.nt in

ihc

\lid-

west). A contributing factor to this result was the

"BUBA" strategy of the major utility in the region, the

Southern Company, to "Bank, Use and Buy

Allow-

ances:" the comoanv banked almost 2 million tons of al-

lowances

4~o&ev~r,

an examinat~on of the Phase I1

results shows that the extra allowances banked

m the

Southeast were not traded to other

reeions. but orima-

rily were used to allow sources in the Southeast to emit

slightly above their allowance allocations in Phase

11.

2. Results of Phase ll of the Acid Rain Program

Phase 11 of the Acid Rain Program commenced in

2000 and covers all 2,300 units above 25

IMW, not just

the "big dirty" plants included in Phase I.

In Phase 11,

allowance allocations were lowered to reach the final

cap level of 8.95 million

tons.47 Figure 5 shows the re-

sults for 2001, the second year of implementation of

Phase

II.*'The regions comprise the Midwest (8 states),

Southeast (10 states), Northeast (14 states), and West

(17

state^).'^ Note that sources are emitting slightly

46

See Gary R. Hart, Southern Company's BUBA Strategy

in

the

SO, Allowance Market, in

Eu~ss~ovs

Tioioi~c 204, 205 @i-

chard F. Kosobud ed., 2000);

see

generally, Swift, 2001 at 335

and

--~~~

Fie.

- ~- -

2-5

-.

''

42 U.S.C.

9

7651d.

4R

2001 was selected because it is the intermediate year of

implementation of Phase

11 (all three years of which are very

similar in their emissions characteristics), and also lacked the

400,000 bonus allowances allocated in 2000.

**The Midwestem states

are

Illinois, Ohio, Indiana, lowa,

Michigan, Minnesota, Missouri, and Wisconsin: the

Southeast-

em states are Alabama, Arkansas, Kentucky, Georgia, Florida,

Louisiana, Mississippi, North Carolina, South Carolina, and

Tennessee; the Northeastern states are Connecticut, the

Dls-

trict of Columbia, Delaware, Maine, Maryland, Massachusetts,

New Hampshire, New Jersey, New

York, Pennsylvania, Rhode

Island, Vermont, Virginia, and West Virginia; and the Western

5-7-04

COPYRIGHT

a

2004 BY THE BUREAU OF NAT IONAL AFFAIRS, INC.. WASHINGTON, D.C.

ER

ISSN 0013-9211

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---

above their allocation levels as they use up the hank of

greater emissions in Phase

I1

in the Southeast therefore

allowances saved through early reductions in Phase I.

reflect banking behavior by these same sources, and not

Figure 5

.......

.......

......

....

........

-7

Baseline Inventory,Allocations, and Emissions of SO2 by Region in 2001 (Phase 11)

I

I

West

Midwest

Again, the news for hot spots is very good. In Phase

11,

as in Phase I, by far the greatest reductions occurred

in

the Midwest, the most polluted region, and all three

major regions-Midwest,

Southeast, and

Northeast-

behaved similarly in the use of trading.

Note that the relatively few plants in the West be-

haved quite differently from eastern plants. Western

plants tend to he newer and cleaner than Eastern

plants, with ready access to low-sulfur Powder River

Basin coal, and so had low baseline emissions levels.

As

a consequence, the allowance allocation to Western

plants was actually above their baseline emission levels.

Their actual emissions in 2001 were slightly below their

allocation level, but above their baseline

level.50

a. Consistency Among Regions in Use of Trading.

The

first major point with regard to hot spots is that all three

major regions achieved similar results in the use of

trading mechanisms, if one compares the level of 2001

allowance allocations with the level of 2001 emissions.

However, because sources are using up the hank of al-

lowances accumulated by early reductions made in

Phase

I, sources in each of these regions emitted

slightly over their allocated level in 2001 (although well

below their baseline emissions level).

Again, the only slight difference in regions is in the

Southeast, where sources bad slightly more emissions

in Phase

.

11

~~

in

~~

com~arison

~

to their allocation level than

thr orncr rep~lrlj lio\ve\.el-. rhi I> s~mply rhe r~~n\.crse

(,!

their bctid\!ur in

Pli.~~c

1.

lien S~ulhcast

bouwes

had the greatest amount of early reductions (see Figure

3).

The slightly greater reduction in Phase I and slightly

states are all those west of and including the Great Plains,

ex-

cept Texas.

"O

Since the allocation methodology assigned plants allow-

ances based on baseline emissions

of 1.2 lb SO, per million Btu

(mmBtu),

very

low-emitting plants such as many in the West

received more allowances than baseline emissions, leading to

the emissions characteristics

shown in Figure 5.

Southeast

Northeast

j

....

-.

...

..

2002);

A

BNA GaphicJen425gOS

any spatial flow of allowances to or from other regions.

b.

Significantly Greater Total Reductions Occurred in the

Midwest.

The second point relevant to hot spots is very

significant: if one looks at the environmental result, in

comparing 1980 baseline levels with 2001 emissions,

considerably greater reductions occurred in the Mid-

west than in other regions. Sources in the eight-state

Midwest region achieved a

55 percent reduction from

baseline levels and contributed

60 percent of the total

tons of abatement, far exceeding other regions, as

shown in Figure

6.

The reasons for the greater reductions in the Midwest

appear to be the same as in Phase

I. A significant cause

is that disproportionately large emissions reductions

are made at the largest plants, as described in part B

he-

low. Many Midwestern plants are among the dirtiest

sources (those with the highest baseline emissions),

in-

cludins 10 out of the highest 17 olants and 15 out of the

next

3-1

higlicsr planls. 'lh15 over-re)~resenlnti~~~~

ui Iilrgr.

plant, accounts ior

17

percent oi the grearcr rhan a\,cr-

age reductions in the Midwest."'

"

The discussion in subpart B shows that higher-polluiing

plants tend lo reduce emissions more than others in the SO,

trading program, which would help to explain the greater

ie-

ductions in the Midwest, as many Midwestern plants are over-

represented in the third and fourth

quartiles, the plants with

the highest baseline emissions shown in Figure 9.

A detailed

analysis shows that Midwestern plants constitute

42 percent of

total baseline emissions, but constitute 59 percent of the larg-

est plants in the fourth quartile

(10 out of the 17 largest plants,

representing 2,574,681 out of the 4,394,151 tons of 1980 base-

line emissions in this quartile), and 44 percent

of the third

quartile (15 of the

next largest 34 plants, representing

1,911,019 out of 4,359,691 tons of 1980 baseline emissions in

the next quartile); however Midwestern plants are under-

represented in the

smalier plants, making up only

37

percent

of

the third quartile and 29 percent of the quartile with the low-

est emitters. if Midwestern sources were to have behaved

ac-

cording to the national average, their baseline emissions of

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-

Figure 6

--

Figure 7

.............

Phase II SO2 Emissions Reductions From

I

Baseline Levels, by Region in 2001

1

Region

IotalTons

Reduced

Percent

From

Baseline

Change

West (17 states)

1

(+239,430)

123%

Midwest

(8

states)

1

4,046,904

-55%

Southeast

(

10 states)

1,466,343

1

30%

Northeast (13 states)

1,404,920

1

37%

A second factor is that Title

IV's allowance allocation

method disproportionately reduced allowance alloca-

tions to the dirtiest sources-shown

by the difference

between baseline emissions and allocation levels in Fig-

ure

5. Both of these factors indicate that the larae re-

duction made in the Midwest is not a

coincidence,-but a

predictable aspect of the SO2 allowance trading pro-

gram.

C. Reductions Even Greater in an Expanded Midwest Re-

gion.

The finding of a disproportionately large amount

of emissions reduction in the Midwest is reinforced if

one slightly expands the Midwest to include

Kentuce,

Tennessee, and West Virginia. These states behaved

quite similarly to Midwestern ones and altogether

achieved a

54 percent reduction-compared to only a 16

percent reduction in the rest of the United States. To-

gether, the 11 states in this expanded Midwest region

constitute 60 percent of baseline emissions, but

contnh-

uted a very high

80

percent of all tons of abatement

from

1980 emissions levels. Again, this is extremely

good news for hot spots-a disproportionately high por-

tion of reductions came

fmm the most polluted region

(see Figure

7).

d. Counterfactual Emissions Also Show Greater Midwest-

ern Reductions.

In the above analysis, we compare ac-

tual Phase

I1 emissions with baseline emissions to de-

termine the contribution of Midwestern sources. We

note that a similar conclusion is reached if one com-

pares baseline emissions to an estimate of the

"counter-

factual emissions" that would have occurred in 2001

without Title

N.

The Center for Energy and Environ-

mental Policy Research of the Massachusetts Institute

of Technology (MIT) calculated such counterfactual

emissions and determined that the great majority,

77

7,326,537 tons should have been reduced by only 44 percent to

4.1 million tons; this over-representation among large sources

alone would predict that Midwest sources should reduce emis-

sions

tr~ approximately 3.7 million tons. Actually, Midwestern

sources emitted 3.28 million tans in 2001, so the over-

representation of large sources explains almost half (47 per-

cent) of this difference

behveen predicted (4.1 million) and ac-

tual (3.28 million) emissions. The lower allowance allocation

likely also played

a causative role.

5-7-04

COPYRIGHT @ 2004 BY THE BUREAU OF NF

1

to

Cornoaring

tl;e ~e;

Exnanded

of'the United

Midwest

States:

Region

-

dase

inr

[PI

$suns 2071

A ohdnces

apa 2001 En

n

bns

(all Phase II Plants)

.....

C

2001 Emissions

I

Expanded Midwest

Rest of the U.S.

percent, of abatement has been achieved at the older,

high-emitting plants located in Midwestern

states.52

We conclude therefore that the Phase I1 cap-and-

trade program led to emissions reduction exactly where

they are needed most to address health and environ-

mental

vroblems-in

the Midwest-where

sources

achle\.cd three rime, rhe reduct~ons from I!liu h:<rclin~

n~ns

1 SOUICES in the rest (,t the cuuntl?

B. Analysis of Plant-Level Emissions

A d~iicrenr

wn!

ru e\ralu:~rc rhe ell\.ironrncnial concc-

qucnc:~:s oi a cap-and-rrilde ippro.icli is ti, :~rst.s \vhc.rc

emissions reductions have taken place on a plant level.

acrlh.

Did

can-and-trade

pli~nts, or

\\,on:

oroaams

. -

there

reduce

disprupvrri<,n.ile

emissions evenlv

recluc-

:luns in plan13 \r.~th reldr~\.ely high or Iou, emi,s~rrna le\

el>'? Ileducr~ons ar higher-emirt~ng pl.111ti wuuld hs\c

n

beneficial tendency to cool, and

create, hot spots.

The results from all the examined trading programs

show strongly that disproportionately greater reduc-

tions

lf,\,el bnal\,,ir

were made

rhc,reior~!

at the

shoa.,

hieher-emittine

rhd trading

~,

~lants.

.

[)rogr.irn>

A olant-

re-

iulr in rhe d~,pcr\~un,

nor the ',oncenrr:rriun id C:III,-

sions.

Figures

8 and 9 show emission data by size of the

source (unit or plant) for Phases I and I1 of the Acid

Rain Program. Sources are grouped into four quartiles

according

...

to

~lant size. with each auartile renresentine

zourccs wnh 25 percent

01

hawline ernlbslr,ns. 'lhc

ic~unh quan~lc on the I-~ghr hide reprcscnr3 II ie\v i.trpr-

(hlphest-cm~rrinyr s,,urres. \rhel-c,a, thc i~rd qilartilc ,,n

the far left represents a large number -of small

"

Elleman, Denny,

Lessons

from

Phase

11

Compliance

with the Acid Rain

Program at 4. MET CEEPR Working Paper

2003-009

(Cambridge, MA 2003) [available at http:jj

web.rnit.edulceepr~l2003-009.pdf on the Web].

iTlONAL AFFAIRS. iNC., WASHINGTON. DC.

ER

ISSN 0013-9211

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

Figure

8

-.

..

.

....

.......... .~

~.

.

r

I

1

!

Phase I SO2 Allowance Allocations and Emissions

by

Unit Size

(by

Quartiles)*

1

1980 Emissions

C

Phase I Allowances Annualized

C

Phase I Emissions Annualized

3,000,000

-..

....

i

_1

i

1st

Quartile

2nd Quartile

3rd

Quartile

4th

Quartile

.....

..

.-.........

............

4

'This table war aoned by units based on the

amount

ai their basline emissions; with each quanile iepiesentingsoiirces iesponsible far

A

BNA

Graphlc/en425%08

appmnimateiy 2.5 miliion tons of

SO2

in

1980me

24 units (at approximately

11

plants) with the iaigest baseline

emisions

comprise

the

'Izige

dim"

units

in theiouith quanile; the next iaigest 42

mils

campke the third quaniie; there

are

69

"nib in the third quamie: and the

remziping 235

units

are in the founh quaitile repiesenting the units with the smallest baseline emissions level.

Source:

WA,ACid

Rain

Piogmm: Campiiance Repons

11995-19991:

and

EPA.Acld Rain Program: Emissions Scoiecad

11995-19991.

Both sen= are

avaiabie

at hdp://w.epa.gou/atmaiRets/em~~~ian~/~nde~~htmi#iep~on

tkiYeb

Figure 9

-

Phase II SO2 Allowance Allocations and Emissions

by

Plant Size

(by

Quartiles)

1

1980 Emissions

Ci

2001 Allowances

J

2001

Emissions

5,000,000

-.

I-

I

1st Quartile

2nd Quartile

3rd Quartile

4th

Quartile

I

.. ..................

A

BNA

Giaph1c/eo425@9

'

sources.53 The data reveals that the larger sources

achieved significantly greater emissions reductions in

both Phase

I and

11,

and especially in Phase

11.

53

We choose to sort by size of baseline emissions (as op-

posed to another factor such as capacity) because the most sig-

nificant environmental goal is the total reduction of pollution

the fourth

quartile, the next largest in terms of their baseline

from baseline emissions to present emissions. The quartiles

emissions make

u~

the third quartile, and many sources with

sort sources by sire into four groups with roughly equivalent

relatively low baseline emissions levels comprise the first quar-

sources

total hareline

(with

........................

emissions.

the highest

such

baseline

that the

emissions

reiativeiv

~~ ~

~"

levels)

"large

-

make

dim"

;p

tile.

at the

This

few

allows

"large

us

dirty.'

to determine

source

whether

in the fourth

reductions

qua&,

are

or

made

the

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Figure 10

Results of the OTC NOI: Cap-and-Trade Program (1999-2002)

Ll"","""

,

......

--x;-i,;;;";;A,C,,

1

;---- --- - 1

.............

..................

r;i

Emissions

t

~

i

~

'

I

I

..

...........

.......

---

.........

-

- -

"

-

6

:::

1:.

...

:.:

3

2

..,-

- -

5.

.'.'

1990 Baseline 1995

.......

kt.

I.. I

......

I 1-1

Emissions

[Post-RACn

1999

Source:

EPA,

OTC

NOx Budget Program Cornpilance Repom

11999

-

20023;

availableat http://w

For Phase I, Figure 8 shows that the largest units in

the fourth quartile reduced emissions the most, by 67

percent

below 1980 baseline levels, compared to 59 per-

cent for the third quartile, 35 percent for the second,

and 40 percent for the fourth quartile containing the

smallest sources.

I'he lind~ng

(31 d~cprop<~~?~oni~teIy

gre:lrcr reducrluns

iruln tli~ lirge>l wurres

I

even more ,lrik~ng in IJh;lse

I

.

I

i I

!

I he dara shu\v 1h3r \IEIIIII-

cantlv exeater redGctions have been achieved as aver-

baseline levels, compared to a 48

peicent>eduction by

the next 34 plants in the second quartile, 41 percent

from 71 plants in the third, and only 10 percent from the

remaining 887 smallest

These data confirm a general prediction about

cap-

and-trade programs, which is that they will tend to cre-

ate incentives for the dirtiest plants to clean up the

most. where the economies of scale are the

createst.

2000

2001

I

2002

2003 OTC Budget

.............

-

i.epa.gov/a~rmaiueW~mpmt/~nde~~htn!

on

the

Web.

A

BNR Giaphlc/en425glO

program to reduce NOx emissions from electricity gen-

erators and industrial sources during the summer

ozone season." Phase

I commenced in 1994 and im-

posed

rtlrc-b:~sed 5land;lrd. h1rn11:ir ro rhc SOX ralc

srnnd:irds iniportd under 'l'lrle I\'

'

I'hsic II <I! I~L.

prc,-

gram imposed a seasonal emissions cap and allowance

trading program for

NOx to achieve additional reduc-

tions, which covered nine of the 12 stares from 1999 to

2002. In 2003, Phase

I11 reduced the emissions cap level

further, as the OTC program becomes part of a

larfer

NOx "SIP call" trading program for Eastern states.'

Althoueh the OTC budget

.....

Droeram is a ca~-and-trade

progr:irn alrnildr ru rhc 'l'11Ie I\' SO. prugr:,m, Ir has

;i

number ~,f d~fierenr itarurc>. 11iaredd oi aIloc?i!~ng :,I-

lowances to each source, it allocated allowances to each

state in accordance with that state's share of the re-

gional budget. The states in-turn allocated the allow-

ances to sources within the state. Another feature was

that the OTC states established an Inner, Outer, and

Northern zone for the purpose of setting reduction tar-

-.

eets. but because tradine

~~

was allowed on a 1:l basis be-

('JIJII:~~ inve~IIncnl In lhc iorl~i oi pruceis cqulprncnl or

rwecn all zuncs, roughly rquivall-nr eniission, reduc-

cuilrtoi equlpnienl, urh

ar

scrubber<. \vould bc pre-

rlons were achic\.ed in ;ill 7one

'^

,\lrhough bunk~ng is

cl~cleu 1<, l~c- ~iixde dl lilrxc plants \vhcrc the niclsl rcdur-

~lluwed.

;I mech;in~sm r;~llcd rlun. conrl.ol ~orcnr~dllv

r~.-

tions can be achieve forthe investment, and where the

per-ton cost of reductions will be cheapest. The actual

evidence confirms this theory, and shows convincingly

that, if anything, trading may be expected to cool hot

spots and not create them.

VI. OTC NOx

Budget

-

Program

-

I hc ,ec<rnd major

I'S

c.1~-:lnd-lrdde program har

1)ei.n ~nil)lunic:n:ed I)? rhe

Ozcsnr.

'l'ran,pc~ti Cumrnli-

bun.

.I

co.111tiun ui 12 Sonhc.;~srcrn >tares with u un~ficd

oroeressivelv larger number of smaller sources in the follow-

Inglquartilei

"

Note that the

-

analysis for Phase I is for units, and that for

Phase

I1 is for plants (which may contain several units), al-

though the Rndings are expected to be similar in either case.

Since Phase

11

has many more sources, we show data at the

plant level,

as we find the most environmentally relevant con-

cern is the level of emissions at the site or plant level.

duces the amount of banked allowances that

cat; be

used in future

years.59

''

See Memorandum of Understanding Among the States of

the Ozone Transport Commission on Development of a Re-

gional Strategy Concerning the Control of Stationary Source

Nitrogen Oxide Emissions

(Sept. 27, 1994), available at http:/i

www.otcair.org on the Web.

56

In Phase I of the OTC program, states required sources

to install Reasonably Available Control Technology

(RACT)

by

1994, a standard roughly equivalent to the Title

N NOx stan-

dards based on

low-NOx burner technolow. 42 U.S.C.

B

7651f.

otcreport.pdf on the Web.

56

111

. -. -

at

.

7

. ,

''

See generally EPA, OTC NOn

BUDGET

PROGRAM:

2002

COM-

PUN~CF

REPORT 2 (20031, available at htrp://wu?.epa.gov/

aimaiketsicmprpt/otc02/inde~.htrnl an the Web.

5-7-04

COPYRIGHT

a

2004 BY THE BUREAU OF NATIONAL AFFAIRS, INC., WASHINGTON. D.C.

ER

ISSN 0013-9211

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

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Te-11 -.....

~-.

I

Allowances Allocated and Emissions of NOx Under

~ -.. . ..

OTC Program

~-- . . .. .. .....

7

..

...

1

1

1999

-

2002 Allocations Annualized

'

tZ

1999

-

2002 Emissions Annualized

Maryland

Delaware

Pennsylvania

New Jersey

& D.C.'

'Note that most Mawland and

DC

wuns dld not paiticipate in the program untll2001, and ai

2002,due ioa law suitmedata

in

thetzbleshow

only

2002 aiiocationsand emissions.

Source:

Em

OrC Budget Pmgram Cornpilalee Repom;

(Mawland

data for2002

only).

The OTC NOx cap-and-trade program, which re-

duced emissions by 60 percent from

1990 baseline lev-

els, and by

35 percent from estimated RACT levels

achieved under Phase

I."'

Surprisingly, sources have

lowered overall emissions by more than the allowance

allocation in each of the four ozone seasons

(1999-

2002).

crnl,>,<,lis

.

as

~

shown

were belt,\\.

in Fimre

-

allo\tanc~,

10. Also.

a~lucariun

as discussed

level:.

below.

In all

,laits hur \lx?land. \vhosr enrn intu the program

\\'3,

J~~1:tvcii

due to a lau,iuit ;\I%). .~lial\.>~'s

by

El':\

and In-

dependent researchers show

that the cap-and-trade

program has been effective in reducing both average

and peak emissions levels by a similar proportion, alle-

viating a concern that the OTC program might not re-

duce short-term peak

NOx emissions."'

We examine the emissions data to

determine the ef-

fect of trading on emissions concentrations in two dif-

ferent ways. First, we look at the data by state to deter-

mine if shifts in emissions occurred

reeionallv,

..

and then

b\ Inner ,find Ou!tr zonc to ~ee

ti rhcrc mere :In) C3\1-

rc,-\rc.l emls,lc,rt, ihllr.

.I5

wilh rhe

SO,

pmgrani, rile

d.iti

.t.,,>v

\.c:n.

l~rtle reglotidl ,hiirtng ui cmi\sti~ns.

A. Analysis of Emissions Shifting by State

Viewed on a state-by-state basis, very little emissions

shiftina

. .

can be observed, as emissions reductions in

mmr

.!Ate, rh;ic.c:.~l:! the large unes. \\.ere quite c(rn-

>t,rent .~\ei.:lg~ng

11 pcricnr belt,\\. rhe~r .tllo~.nrcd IL.\.-

I

Il(,~ve\.er. ~ligliriy grc.iter rh:jn 3\.er.~gf. enihrioi~>

"'

EPA, NOx

BUDGET

PRUGWM:

1999-2002 PROGRESS

REPORT

at

6-7 (2003). Sources received allowance allocations represent-

ing either

a 55 percent or 65 percent reduction fmm 1990 base-

line levels, depending on whether they were located in the

Outer or lnner

zones, In addition, 24,635 bonus allowances

were provided, which slightly increased allocations.

"'

Id. at 8. See also Farrell, Alexander E., Temporal

Hotspots in Emissions Trading Programs: Evidence from the

Ozone Transport Commission

NOx Budget. Presented at an

EPA conference, Market Mechanisms and Incentives: Applica-

tions to Environmental Policy

(Washington, D.C., May 1-2,

2003).

-

ENVIRONMENT REPORTER

ISSN 00139211

New York

Connecticut

Rhode Island Masschusetts

New

Hampshire

I source$ did not hI!y panicipate until

h

BNh

Graphic/en425gll

reductions occurred in New England (due in part to an

unplanned outage of a New Hampshire unit) and

slightly less than average in Maryland. The result in

Maryland, however, was affected

by a lawsuit that de-

layed the entry

of most sources, which created uncer-

tainty and may have allowed sources to take advantage

of the

lower-than-expected price of allowances. This

situation. thoueh anomalous. created a small emissions

matically neutral

north-to-south direction, and so

should not affect transport or hot spots (see Figure

11)

B. Viewing Emissions by lnner and Outer Zones

Another way to judge whether spatial emission shifts

occurred under the OTC

NOx program is to view

whether there were

"wrong-way" shifts in emissions

that moved emissions upwind, or in an east-to-west di-

rection. This can he readily determined because the

OTC program was divided into an Inner Zone compris-

ing the heavily populated

conidor from Washington,

D.C., to Boston, almost all of which is classified as an

ozone

nonattainment area, and a more westerly Outer

Zone."

62

DUB to the lawsuit, Maryland sources did not participate

fully in the program until 200'2, when they emitted 6,290 tons

over their allocation level.

In contrast, sources in New England

emitted an average of 9,000 tons below their allocated levels.

Data

froni EPA, 2002 NOx Budget Program Cofnpiianm

Re-

port st

2

(June 25,2003). Therefore, if one compares the lower

emissions in New England

and the higher emissions in Mary-

land to the average emissions rate achieved in all states, the

re-

sult is that 7,500 tons of emissions were "shifted" annually

from New England states to

Maiyland due to the flexibility ai-

lowed by trading. Note however that a portion of these net re-

ductions will never be emitted, due to flow control that reduces

the value of banked tons.

CJSee Ozone Transport Commission, NOx Budget Pro-

gram: 1999-2002 Progress Report at 5 (EPA, Washington, D.C.,

2003)

[available at

http:/hYu?u.epa.gov/ainnarkets/otc/

BNA

5-7-04

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

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The data show that from implementation of the pro-

gram resulted in

comparable reductions in both

zones-a 59 oercent reduction in the Outer Zone and a

.)h

~>~.r~enr

reduct1111> in rhc! Iilrier Zone (hec Figure 12)

"'

Alrhough rht ruduction le\.els \verc. alinost idc!niical

to the extent there was a one-percent shift in emissions,

in terms of wind direction it was a

"rieht-wav"

.,

shift in

cniis,itmb iron1 \\e,rern to ea,rcrn ,ources, reducing

!r:~nsp~Jn

of ZOx

:I

cl~ntrel-\

15 1ha1 reductlun~ in

nonanainment areas are 1 percent less than reduction

in more westerly attainment areas, which is not desir-

able. Either way, the shift in emissions was slight,

showing again that trading programs have achieved

consistency in emissions results.

C. Daily Emissions Levels

An even more unusual findine

.,

concerns the lack of

~,.rri,~c,r(il

shiii~ng

ui

emiiiion.,, even on a dally ba4 in

rke

0

I

(: ?Ox

c;ip-and-rradc program l'hc rejiuldiiun <rt

NOx presents a problem for any regulatory system he-

cause NOx formation is episodic and occurs principally

on hot summer days. More power is also generated on

hot days due to increased demand, potentially causing

the most pollution on precisely the worst days. How-

ever, it is hard to regulate daily pollutant releases, ei-

ther through a cap-and-trade program that caps total

seasonal tons, or via rate standards, which allow more

pollution to occur whenever generation increases.

Notwithstandinn these issues. the

NOx cau-and-trade

program resulted-in lowering tons of NO; emissions

both in total and on high.-emissions days. Both average

and peak emissions during the ozone season declined

by roughly the same amount after imposition of the

Phase

I1 cap."" EPA noted that this finding "shows that

the seasonal budget is reducing daily emissions, even

on the days with the highest

emis~ions."~~his

finding

\ugge\t\ -that c:ap-~nd:rr,ldt. programs ;are po55ihl\.

niorc eiiecriv~ rli~tl rate-h:lst.d srandards in c~,nsisrcrirly

rediaclng crnrh~io!i, rcg:irdiea5

-hen-tenn changes.

VII. Discrete Emission Reduction Credit Trading

-

I hc (,idr.,r lurm ur enn\\iuns trsdirlg ii credil trading

prour:jm,. I:I'.\ hs, ill10\l'ed mlirkct-intt>nri\.u pollcle,.

incLding open-market emissions or credit trading pro-

erams. to be used for criteria ~ollutants"~

under the

Clean .\IT :\<.I in order r,, reduce the corr5 oi compliilnce

\vl!lluur 5:icrlitcing ;ill. quality

"'

Ofi~et prnl(r:lni\ \r,erc

h

d I I! and discrere emi,sion rcductiunh

otcreport.pdf on the Web]; there was also a Northern Zone, but

this had little relevance during Phase

11, as Maine and Vermont

did not

DarticiDate, and New York and New HamDshire in-

cluded their

nkhern

areas

in the Phase I1 program..

""

Note that equivalent emissions reductions were made in

both zones despite differing allocation

of allowances. Sources

L",

67

Criteria pollutants are carbon monoxide, lead, NOx, SO,,

volatile organic compounds, and particulate matter.

6R

EPA has established midelines for the use of such pro-

Figure 12

i

Comparison of Outer and lnner Zone

NOx Emissions From 1990 to 2002

I

1

1990 Baseline

C

2002AllowancesAllocated

! !

I

Outer Zone

Inner Zone

.......

A

Source:

EPA.

NOx Budget Piagiam:

A BNA GiaphIclen425g12

1999

-

2002 Progress Report (2W3)

PER) credit tradingprograms have been adopted in six

states since 1995. DER programs provide flexibility for

sources complying with federal emissions standards

that do not involve new sources or hazardous pollutants

(such as "reasonably achievable control

technology" or

RACT

state emissions

standards)

standards.

and with sources comnlvinn

." -

with

These "open-market" systems are established

through a certification process in which sources

cany

out specific projects to create emissions reductions, and

then obtain regulatory approval of the tons of reduc-

tions created, which can then be traded in the

form of

quently

emission

used,

credits.

the DER

Althoueh

credit

"

trading

offset

.

oroerams

promams

-

have

are

fre-

re-

siltedin relatively few trades, due in p& to the trans-

action costs involved and regulatory

un~ertainty.'~

A. Largest Plants Reduced the Most

A review of the results of six state DER programs and

the state procedures involved was recently published by

Incentive Rules: 59 Fed. Reg. 16,690 (April 7, 1994); U.S. Envi-

ronmental

Protection Agency, Proposed Model Open Market

Trading Rule for Ozone Smog Precursors, 60 Fed. Reg. 39,668

(Aug. 3, 1995); EPA, Emissions Trading Policy Statement, 51

Fed. Reg. 43,814

@ec. 4, 1986) (pt. I).

"'These programs are reviewed in Environmental Law in-

stitute, Emission Reduction Credit Trading Systems: An Over-

view

of

Recent Results and an Assessment

of

Best Practices.

Environmental Law Institute (October

2002), available at

http:l~.elistore.org/reportsSdetail.asp?1D=10694

on the

Web. In general, open market credit trading programs have

not generated significant trading opportunities

or cost reduc-

tions. See generally, Dudek, Daniel

&

John Palmisano, Emis-

sions

Trading: Why Is

This

TnorougkbredHobbied?, 13 Colum.

J. Envtl. L. 217 (1988); Hahn, Robert

&

Gordon Hester, Where

Did All the Markets Go? An Analysis

of

EPA's Emissions Trad-

ing Program, 6 Yale J. on Reg. 109 (1989).

5-7-04

COPYRIGHT" 2004 BY THE BUREAU OF NP \TIONAL AFFAIRS, INC.. WASHINGTON, D.C.

ER

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ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

* * * * * PC 6293 * * * * *

---

New Jersey B Generation and Use of NOx DERs by

I

County Ozone Attainment Status (1992-2000)

Generated

(99%)

1

(1%)

1

Used

I

172%)

1,056

I

(28%)

403

1

O

I

I

Severe

NOx

emission;

ddta.

Moderate

Marginal

the Environmental Law ~nstitute.'~

The most concrete

conclusion that can he made about emission shifting in

DER credit trading programs for

NOx is that the gen-

eration of credits (equivalent to emission reductions)

occurred at the largest plants. The study found that in

four of the six states, over

90 percent of credits were

generated

by fewer than five sources that were typically

the largest emitters in the state: 94 percent in Texas,

96

percent in New Jersey and Massachusetts, and 99 per-

cent in New Hampshire. On the other hand, actual

credit use. while much less than credit

eeneration. was

DERs

1

1

32.908

1181

295

121

i

1

Bl

0

1

i

"

di,pcriud

dmung

il

large

numbcr ui sm~llcr

source,,

\\II~ tyr~icaliy IO-'<I)

tonr

bwng uwd b\

a

wurce in on?

year.

These data

confirm a general expectation about trad-

ing programs-that they will lead to emission reduc-

tions at the largest sources, where the capital cost of

pollution abatement strategies or controls can he

spread over the largest number of tons and hence lower

the per-ion cost of generating a credit.

B. Emissions Shiiing at the Area Level

The available regional data for DER programs only

allow a limited assessment of emission shifting at the

which give some indication of where emissions were

generated and used, and hence allows some assessment

of emission shifts." Figures

13

and 14 show that DER

programs have tended to reduce emissions in the most

polluted counties. To the extent they have shifted emis-

sions at all, the shift has been towards less polluted

counties. This pattern indicates that DER programs

have cooled hot spots to a limited extent, and led to

more evenly dispersed pollution in

hoth states.

New Jersey.

Figure 13 shows that 99 percent of DERs

in New Jersey were generated in counties with "severe"

status for ozone attainment, but 28 percent of the mod-

est DER use was in counties with "moderate" status.

This represents a small but slightly beneficial shift of

emissions from heavily polluted counties to less pol-

-

l.!..,

,,u,,,,,vn,.,I

l.<>,% l,,,t.l"rv

I~.'~~~!>SC<.I

l<k,.l

.< .!< ,,

cr<~:lt!

!..I

I,*!<,

.~,h,L~t,!<

.!

1

!

>u,,r2 ,,,,1e

I,',

.\n A>.%

uvr~ved

<!<,n>

:d

JI

12-15

luted counties, reducing rather than increasing emis-

sions concentrations.

Another indication in New Jersey that credit trading

did not contribute to hot spots was the simple element

of dispersion. Ninety-eight percent of credits were gen-

erated in two counties with severe

nonattainment

status-Hudson

and Mercer-whereas

credits were

used in

10 counties, none of which used more than 28

percent of the total credits

used.72

Figure 14

Texas B Generation and Use of NOx OERs

by County Ozone Attainment Status

I

i

DERs

i

38,527

'

0

1

2,241

i

Generated

1

(95%)

(5%)

Texas.

In Texas, while 38,527 DER credits were gen-

erated from 1997 to 2000, only

736

credits were used,

makine anv conclusions tentative. Aeain. DER eenera-

DERs

368

I

368

Used

(50%) I

(50%)

tion, e;iui;alent

to emissions reductrons; is disi;ropor-

tionately higher in severe nonattainment counties

0

where the environmental benefits are greatest: the lim-

ited use occurred in

hoth severe and moderate nonat-

tainment counties. Again, DER trading appears to have

slightly reduced emissions disproportionately more in

severely polluted regions than in less polluted ones (see

Figure 14).

VIII.

Conclusions

A review of the actual performance of trading pro-

grams shows that none of the programs evaluated has

resulted in regional shifts of emissions, and all trading

programs led to proportionately greater reductions

from the larger sources. Overall, the data from the pro-

grams reviewed in this report indicate that the effects of

trading have been slieht hut beneficial with reeards to

geographic hot spot; in the sense of smoothg out

emissions concentrations instead of concentrating

them, and cooling and not creating hot spots

A. Trading Has Not Led to Regional Concentrations

At the area level, the principal conclusion that

emerges from a review of the data is that trading

pro-

crams have eenerallv led to consistent behavior in the

;se of tradi2 mechanisms among regions. In the

SO,

program, the three large regions (Midwest, Northeast

and Southeast) behaved very similarly in both phases of

7'

Id.

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* * * * * PC 6293 * * * * *

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the program, with sources banking allowances to a

roughly equal extent during Phase

I and emitting

slightly over their allowance allocation in the initial

years of Phase

11. There was also a high degree of con-

sistency among states in the OTC NOx program, even

though

.

some states have only a handful of major

sources.

In particular, the concern that trading in the SO, pro-

gram could result in "upwind" sources in the Midwest-

ern region, disproportionately increasing emissions

that affect "downwind areas in the Northeast, did not

occur. In fact, due to the number of large plants in the

Midwest as well as Title N's allocation method, there

was a disproportionate decrease in emissions in the

Midwest, as Midwest sources contributed a dispropor-

tionate

60

percent to

80

percent of emissions reduc-

tion~.'~

The working of the trading program helped to

actually reduce emissions in this region with histori-

cally high SO, levels.

po\ver

An

aooronriate

>error,

.. .

\ignihc:tnt

conclusion

group

seems

uf

to

source,

be that

\r,ould

in the

bc

r-xpetir-d 11, ljehave s~n~~larly

in

a

cap-and trade pro-

gram

:~nd s~, ncg.lre the ~dca rhar thcre will be cmls-

;ions shifting. ~ui-ther research is needed on how many

sources need to be included in a trading program in or-

der for it to exhibit such consistency; the evidence from

the OTC program at a state level suggests that even a

few sources may be enough.

0.

Allocation Systems May Help Cut Concentrations

I ht d~sproponion;ite SO, emissl~rns !-educriuns In rhc

\1111\~~~1

ilppC31. 10 be 1.3~ltd /drg~I\. b,V Ille dl5pI'l>pl>r-

tionate reductions at larger plants, but also in part by

the method bv which allowances were allocated. The

>?

pi.ogr.lm allocared allowoncei to wurcer based

on

ihcli pa,! U~I~I/~I~IOJI

(11)

f'hils~.

II, baseline mmljtu rnul.

tlpl~ed by I

2

puunds oi

50.1

fhi5 method result\ in

dirty plaits receiving far fewer allowances in compari-

son to their past emissions than cleaner plants

of a simi-

lar size, since allowances are allocated based on past

heat input and not on past emissions. This method,

therefore, provides a positive incentive for plants with

the highest baseline emissions

(i.e. those using high-

sulfur Midwestern coal) to reduce pollution in areas

where it is most

'"

Sources in the eight state Midwestern region (see Figure

6) consticuted 42 ilercent of baseline emissions, hut contrib-

uted 60 percent of emissions reductions in Phase

11:

in an ex-

panded

ll-state Midwest region (Figure

8),

sources comprised

60 percent of baseline emissions and contributed 80 percent of

ell

redllrtinnc

...~. -- ~~~ ~ ~~

perfectly fluid markets, allocat~&s"~hould not m:ke a differ-

C. in Trading Programs, Largest Sources Reduce

Emissions Most

Another striking finding of the results is that emis-

sions trading programs have consistently led to signifi-

cantly greater emissions reductions at the

highest-

emitting plants.

In the SO, program's Phase

11,

the largest plants re-

duced emissions by

73

percent from baseline levels,

compared to a

48

percent reduction by the next largest

auartile.

41

uercent from the third auartile. and only

10

percent irom the smdle\r planri. 'l'his is hculusc ~hc

~!~.c~nonlic?

ui ~nstalllng capltal equipment lor pr<)ce,<

changes or controls provides the meatest financial re-

turnswhen installed-in the lareesi sources, leading to

disproportionate emissions

redhions at those souces.

This attribute of cap-and-trade programs is significant

in dispersing and not concentrating emissions, or cool-

ing and not creating hot spots.

-

D. Summary

Although trading programs do not guarantee reduc-

tions at each source, the above data show that they have

achieved consistent results between regions, and have

also led to proportionately greater reductions at

higher-

emitting plants. The SO, trading program in particular

significantly reduced existing hot spots by causing dis-

proportionate reductions in the Midwest. This finding is

attributable both to

the allocation method used in Title

IV and for the tendency in trading programs for the

largest sources to reduce emission the most. These

find-

ines indicate that can-and-trade orozrams similar to

thgse evaluated would not be expeke& to lead to emis-

sions concentrations or hot spots.

ence, as emissions reductions should he made where it is most

cost-effective to do so.

A possible explanation for the discrep-

ancy between the two programs is that the disparity in allo-

cated amounts was simply greater in the SO, program, leading

to a positive, albeit modest, response. Midwestern sources

re-

ceived 20 percent fewer allowances than those in other states

(a 60 percent versus a

40 percent reduction from baseline

emissions), twice the difference than in the

OTC

program. An-

other possible factor that requires further research is that,

given the autarkic response of firms

to regulation, allowance

allocation systems that differentiate the allocation to sources

by region may affect emissions results more

if the trading re-

gions segregate

firm territories instead of split them. There-

fore, allocation systems that split a state in two like the

OTC

program's Inner and Outer zones may make little difference in

firm behavior, as power companies that have plants through-

out the state would tend to create a system-wide compliance

strategy that would

not depend on the allowance allocations to

particular sources. Given that

firms behave autarkicly, we

might expect a more pronounced difference in emissions result

if trading programs make different allocations to different

states or regions that include all of a

firms territory, such

as

occurred in the SO, program.

57-04

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2004 BY THE BUREAU OF NATIONAL AFFAIRS. INC., WASHINGTON,

DC.

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COPYRIGHT " 2004 BY THE BUREAU OF NATIONAL AFFAIRS. INC.. WASHINGTON, O.C.

ER

ISSN 0013-9211

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Command Without Cmtrol:

Standards for

Reeional Pollu~tS

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31 ELR 10330

/

Environmental Law Reporter

/

copyright

O

2001

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All rights reserved

Command Without Control: Why Cap-and-Trade Should Replace Rate

Standards for Regional Pollutants

Byron Swift

Byron Swift is a Senior Attorney and Director of the Energy and Innovation Center at the Environmental Law Institute.

His work addresses issues in designing environmental law to achieve high environmental quality while promoting

innovation and lowering costs.

He can be contacted by e-mail at swift@,eli.org. An overview of nitrogen oxides and

sulfur dioxide regulation of power plants in the 1990s will be published in

I4 TUL. ENVTL. L.J. I (2000). Background

research for this Article was supported in part by The Joyce Foundation and

A.W. Mellon Foundation. The author

thanks these foundations, and the many others who generously provided advice and data, with particular thanks to the

Clean Air Markets Division of the U.S. Environmental Protection Agency, Joel Bluestein, Dallas Burtraw. Denny

Ellennan, and Debra Knopman. The views expressed are of the author, and not necessarily those of the Environmental

Law Institute, The Joyce Foundation, or the

A.W. Mellon Foundation.

131 ELR 103301

I. Introduction

While current environmental laws provide us with an adequate environmental protection system, they must be reformed

if we hope to achieve an excellent one. This Dialogue examines regulation of nitrogen oxides (NO,) and sulfur dioxide

(SOz) in the power sector over the past years, and provides a direct comparison of the rate-based methods used in both

the Title

JV and neul source review (NSR) programs of the Clean Air Act (CAA)~ with cap-and-trade programs that

have been established for both pollutants. This examination reveals the need to move away from the use of end-of-pipe

rate standards and the

old sourcelnew source distinction in order to create an efficient and effective regulatory system

that embraces the principles of pollution prevention and sustainable development.

11.

An Overview of SO2 and NO, Regulation in the Power Generation Sector

A. Reguiufion of Existing Sources: Tiile IVand Ozone Transport Commission (OTC) Standards

Emissions of N4, and SO- from most existing power generation sources are regulated under Title IV of the

CAA

established in the

CAA

Amendments of 1990.2 Title IV creates two very different systems to achieve major reductions

in

SOz and NO, emission from utility sources: a national emissions cap and allowance trading approach for S@, and

rate-based standards for NO,. Northeastern states comprising the Ozone Transportation Region also initiated

NQ,

regulation in 1995 and instituted an emissions cap and allowance trading system for NO, in 1999. The results of these

programs are described below.

I. Emissions Cap and Allowance Trading Program for SQ

Electric utilities are responsible for 60% of national SO2 emissions,i and Title IV imposes a permanent cap on utility

SO2 emissions at 8.95 million tons, roughly one-half the 1980 baseline.* Title IV, unlike traditional regulation that

imposes source-specific rate limits, implements an industrywide mass standard known

as an emissions cap. The

emissions cap and allowance trading program for the

SQ program is divided in two phases. Phase I began in 1995 and

required the 263 dirtiest coal-fired electric-generating units (referred to as Table A units) to reduce their emissions to a

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base level of 5.7 million tons of ~02.' Phase 11 implements a stricter standard in the year 2000, and requires all

generating units larger than 25 megawatts to reduce their emissions to the final cap amount.6

To implement the cap, allowances equivalent to a ton of

S@ are assigned to each affected generating unit based on

their generation rates from the historic base period of 1985-1987, scaled down so that the aggregate emissions equaled

the target emissions

cap.? Although the annual and the bonus allowances are allocated without charge to existing

sources, a limited number of allowances also are available for purchase through an annual U.S. Environmental

Protection Agency (EPA) auction.! Title IV, therefore, implements a zero new source standard, as any new generating

source must purchase all its needed

allowances.~ In another

131 ELR 103311

departure from traditional regulation. Title

1V allows individual sources to trade their unused allowances to other sources or bank them for future use.0

Finally, Title IV incorporates an extremely strict monitoring and compliance system. Monitoring is required by

continuous emissions monitoring

-

devices (CEMS) that collect data every 15 minutes, with consolidated data reported

hourly.fi The monitors must also regularly transmit data that indicates that the monitor is functioning properly. CEMS

are expensive, costing almost

$

1 million per stack.'" Compliance procedures are also strict and include an automatic

$

2,000 fine per ton and forfeiture of an additional ton of reductions.~

Utilities responded to the Title IV program by reducing SO2 emissions by eight million tons, almost 50% below their

1990

emissions level and30% below the cap in Phase I.' The most significant use of the flexibility mechanisms of

Title

1V was banking, or emitting below the standards and saving the allowances for later use. About 75% of total

allowances created were

banked,D as a more stringent cap on all units would be imposed in 2000. Another major use of

a flexibility provision was trading. which was used by 30 of the 51 firms for

intra-firm averaging.'6 Although trading

volume increased throughout the

program^ as firms became more comfortable with trading and some began to trade

for arbitrage purposes, only 3 of the 51 firms used inter-firm trading to emit over their allowance

allocation.^

Figure 1:1990-1999 SO2 Allocated Allowances and ~missionsB

[SEE ILLUSTRATlON IN ORIGINAL]

131 ELR 103321

A major story of Phase 1 compliance under the SO2 program was the low cost of compliance. This was due to the

flexibility of Title

IV, derived primarily from the cap approach, which allows greater flexibility than the rate-based

standards, and also the ability to trade

allowances.'o Initial expectations by industry in 1991 were for allowance prices

of $300 to

$

1,000 during Phase 1.2' In 1992 and 1993, the earliest signals began to show that prices would be

substantially

lower,a and EPA's first auction of allowances in March 1993, revealed prices at

$

131. Allowance prices

then continued in the

$

100 range until they began to climb toward $200 as Phase 11 approachedg

The lower cost of compliance was driven by cost reductions and innovation in both of the principal means of

compliance-the

use of low-sulfur coal and scrubbing, The widespread use of low-sulfur coal has been a major

component of compliance strategy for Phase I, resulting in over seven million tons of net reductions (over one-half of

net

reductions)."j This use was catalyzed by the flexibility afforded by Title IV, which allowed low-sulfur coal to

compete with scrubbing as a compliance method. This led to experimentation and innovation in fuel blending

techniques that allowed greater than expected use of low-sulfur western coals, and greater incentives to use eastern

low- and medium-sulfur coals. These innovations, together with reduction in rail costs due to competition among

railroads, lowered the cost premium for low-sulfur coal and

dra~natically increased their use, which has been a major

driving force in lowering the cost of compliance in Phase

I of Title IV.~

Scrubbing was the second principal strategy to reduce SO2 in Phase I, and accounts for 3.5 million tons of emissions

reductions (rising to 5.5 million tons if bonus allowances allocated to scrubbed units are

counted).% Scrubbers were

installed for 27 Table A

units,z promoted in part by the bonus allowances, although several firms canceled scrubber

contracts when the low prices for low-sulfur coal became apparent in the early 1990s. The cost of scrubbing also fell

significantly during the compliance period, due to innovation in design and materials as well as the significantly lower

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need for redundancy to comply with Title 1V's annual standard, in comparison to previous scrubbers that had been built

to meet the new source standard.

Although the Phase

1 cap required only a moderate SO2 reduction of around 30%," the cap-and-trade approach exerted

continuous pressure to innovate and create lower cost reductions. The cap has prompted continuing innovation in fuel

blending techniques and rail infrastructure relating to low-sulfur coal, and also in scrubbing, the cost of which has

declined steadily since competition was created with low-sulfur

coa1.z me ability to trade allowances has led to a fully

integrated cost of sulfur in the coal market, integrating an environmental parameter into the price of coal. Finally, the

inonetization of environmental costs and benefits under the cap-and-trade approach has allowed the fuller integration of

environmental considerations into the regular financially based decisionmaking throughout a company.

Overall. the shift in Title

IV away from scrubber use and toward low-sulfur coal had economic, environmental, and

political consequences. The investment in rail infrastructure, innovation in fuel blending and rail transport, and

competition among railroads led to low compliance costs that benefitted both the industry and ratepayers. The principal

environmental benefit is the reduction and permanent cap on

SQ emissions, together with the greater political

possibility of further reductions given the low cost of compliance. Other environmental benefits of the move to cleaner

fuels include the benefits of pollution prevention, in avoiding the direct 1.5% energy loss and significant resource use

and waste disposal consequences of scrubbing. Political consequences were also significant, and include

the move from

unionized coal-mining jobs in midwestern stales with high-sulfur coal to western and Appalachian states with

low-sulfur coal. Notwithstanding these shifts, the success of the Title

IV SO2 cap-and-trade program in overachieving a

strict standard at low cost has led

some to include it among the most successful programs under the CAA.3

2. Title IV's Rate-Based Standards for NO,

Title

IV was also designed to reduce NO, emissions from utility boilers by two million tons below 1980 levels by the

year

2000.i'Title 1V established the first regulation of NO, faced by many existing power plants, as previously only

certain states had established NO, standards for older sources in order to meet ambient standards established under

Title 1 of the

CAA.~' However, instead of using an emissions

131

ELR

103331

cap and allowance trading system,

Congress required EPA to establish annual average emission limits in pounds per million British thermal unit

(IbtmmBtu) for coal-fired electric utility units based on the use of "low NO, burner technology."B The law further

contained flexibility provisions, including an annualized emissions rate period and the ability of firms to average the

emissions rates of units under their

control.2

Phase I ofthe NO, program applied to the 265 wall-fired and tangentially fired boilers included in Table A or

substitution units active on January

1,

1995, and lasted from 1996 to 1999.~

Phase I1 of the program started in 2000,

and includes all other affected

units.% The chart below shows the emissions limits applicable to different boiler types in

Phase

I and Phase 11 of the program. For wall-fired and tangentially fired boilers, the Phase 1 limits represent reductions

from their respective uncontrolled emissions levels of 0.95 and 0.65

lb/mm~tu.~

*5*Table 1. Title 1V NO, Standards by Boiler Type (lblmm~tu)"

Boiler Type

*2*Phase l *2*Phase 11

ii

Units

Standard

?i

Units Standard

Tangentially fired

135

0.45

308

0.40

Dry Bottom Wall-fired

130

0.50

299

0.46

Cell burners

36

0.63

Cyclones

(>I55 MW)

55

0.86

Vertically fired

28

0.84

Wet-bottom

(>65 MW)

26

0.84

Following a lawsuit on the meaning of

"low-NQ, burner technology" that delayed implementation for one year,Z the

NO, program proceeded smoothly with all 265 of the coal-fired units

affected under Phase I meeting the legal

requirements in each

year5 Most of the units-178

of 265--met the emissions rate limits specified in the regulations

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through the installation of low-NO, burners, which, for many sources, was the least-cost method of meeting the

standard^.^ However, 10 units were granted less stringent alternative emissions limits because they could not meet the

emissions rate standard even after installing low-NO,

burners.42 Of the remainder, 23 met the emissions limit without

the need for burner modifications, and the rest

ofthe units continue to emit above the standards and were able to

comply through the law's averaging

provisions~ Overall, the flexibility provisions in the law, including the annual rate

standard and the ability to average emissions among a firm's units, allowed a relatively

low cost economic compliance,

with NOx reductions averaging $412 per ton in Phase 1.1'3

The reductions resulting from Phase I are shown graphically below. Overall, units lowered their average NO, emissions

rates to 0.40

IbImmBtu during Phase I, 43% below the 1990 average of 0.70 lb/mm~tu."5 This bas resulted in NO,

reductions of approximately 400,000 tons per year or 32% below 1990 levels, with reductions projected to rise to

2,060,000 tons per year during Phase

I1

that starts in 2000.B There is less ofa reduction in tons than in rates because

economic growth leading to higher

fiiel use by both Table A and substitution units. Unlike the capped

SOz

program,

NO, emissions would be expected to rise with increased

utilization!J

131 ELR 103341

Figure 2. Title N NO, Emission Rates for Phase I Units (1990-1999p

[SEE ILLUSTRATION IN ORIGINAL]

Co~npliance with the NO, program can be characterized in several ways. First, the program led primarily to the simple

retrofit of a known technology onto most boilers. Innovation led to cost reductions in low-NO, burner technology for

two kinds of boilers, but not a third, and did not lead to continuous drivers for improvement beyond the compliance

date. Second, firms made heavy use of the flexibility provisions, especially averaging-204 of the 265 affected units

were included in an averaging

plan.g A third characteristic was slight overcompliance with the standard, as Table A

firms emitted 11% below the standard to ensure a margin of

safety.50

3. OTC Cap-and-Trade in 1999 Forced Further Reductions at Existing Plants

In the

12 northeastern and Mid-Atlantic state$ NO, emissions from large power plants have been controlled not by

Title

IV, but by more stringent state regulations coordinated under the OTC. The OTC was created under the CAA

Amendments of 1990 to coordinate planning at a regional level to facilitate each state's efforts to reduce NO, in order

to attain the national ambient air quality standard for ground level ozone. In September 1994, every northeastern and

Mid-Atlantic state, except Virginia adopted a memorandum of understanding to achieve regional reductions of NO,

from power generators in three phases starting in

1995.52

In Phase I of the OTC program, states required sources to install reasonably available control lechnology (RACT), a

standard roughly equivalent to the Title IV standards but applying one year earlier.2 Pennsylvania required sources to

install low-NO, burners with separate

overfire air, and other states, such as New York and New Jersey, defined rate

standards that were slightly more stringent than the Title

IV standardsx Most states also allowed averaging among a

firm's facilities, creating standards slightly more stringent than but similar to Title

IV. In response, most sources added

combustion controls such

as low NO, burners andlor overfire air to their units.

131 ELR 103351

Phase 11 of the OTC program started in 1999, and nine OTC states established a NO, Budget Program involving an

emissions cap and allowance trading system similar to

EPA's SOz Acid Rain ~rogram.z The emissions cap required

912 electricity-generating units to reduce emissions by 55-65%

from their 1990 baseline of 417,444 tons.% Despite the

stringency of the standard, sources overcomplied by reducing emissions 20% below the cap

level.2 Compliance levels

were also very high, with only one source failing to meet its standard by one ton and, therefore, subjecting itself to an

automatic fine and two-ton penalty-

58

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Despite initial expectations that many sources would need to use expensive end-of-pipe controls such as selective

catalytic reduction (SCR) to achieve these deep reductions, the flexibility afforded by the cap-and-trade approach led to

unexpected results. One such result was that 126 of the 142 affected coal-fired units achieved NO, reductions up to

30% through operational changes alone, without significant capital

additions.2 The cap approach allowed compliance

through a number of technologies, including gas

reburn and selective noncatalytic reduction, and not only SCR. As a

consequence, allowance prices, after initial volatility at the start of the program in which prices ranged from $3,000 to

$

7.000 per ton, have settled down to less than the $500 to

$

1,000 range, significantly lower than estimated.@

B. New Source Standards

New plants or significant modification of existing plants are subject to a stringent federal NSR process, which requires

at a

minimum compliance with new source performance standards @~SPS)?~

Traditional NSPS establish emissions rate

standards for each power generation technology, such that more lenient standards are applied to dirtier technologies.

NSPS for NO, allow coal-fired boilers to emit twice the

NQ, as oil-fired ones, and three times that of gas-fired 0nes.G

In 1998, EPA established a new, fuel-neutral NSPS of 0.15 IbImmBtu for major modifications of existing sources, and

1.6

iblmegawatt hour (MWh) of electricity generated for new sources, the latter an innovative output-based standard

that provides a benefit to efficient

producers,~ However, this fuel-neutral NSPS rarely applies, as the case-by-case

oriented NSR process is more stringent and, therefore, controls new plant standards.

Under the

NSR process, regulators establish an emissions rate standard on a case-by-case basis, again based on the

power generation technology, such that more lenient standards are applied to dirtier technologies. The standard also

varies geographically: sources built in areas that have attained the ambient ozone standard set by EPA must prevent

significant deterioration of air quality, and install the best available control technology (BACT) for the type of plant

proposed considering "energy, environmental, and economic impacts and other

costs."g New plants in nonattainment

areas must meet the even more stringent lowest achievable emissions reduction (LAER) standard, which excludes

consideration of

cost.@ These strict standards are motivated both as a means to achieve ambient standards, and as a

mechanism to spur the development and application of new technologies.

I. New Source Standards for SO2

The 1970 CAA also established a stringent NSPS for new plants, limiting

SO2 emission rates to 1.2 IbImmBtu fol

coal-fired plants.% This had a dramatic effect on the industry, as emission rates from older plants were far higher, and

electric utilities began to focus research and operational efforts to extending the operating life of the old

"grandfathered" facilities. In the CAA Amendments of 1977, Congress created stricter NSPS by requiring new sources

to meet both the 1.2 pound standard

and

remove either 90% of SOz emissions from high-sulfur coal or 70% of the S@

emissions from low-sulfur coal.h7 This new standard requires utilities to install scrubbers at all new generating units,

removing much of the incentive to use low-sulfur coal and favoring political interests in using eastern high-sulfur coal.

I-lowever, by increasing the cost of new coal-fired plants, this requirement added to the incentives to extend the life of

the older and dirtier plants, and may have further aggravated the conditions that led to acid precipitation.

There are several aspects of the NSPS for SO2 that significantly restrict technology use and increase costs. First, it

requires sources to make a percentage reduction in potential emissions of

SO2 precluding compliance through

switching to low-sulfur fuel, as no matter how low the sulfur, the standard requires a further 70-90% reduction,

necessitating the

131

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103361

use of an end-of-pipe technology such as scrubbing.68 Second, the standard

significantly increases the cost of the scrubber, which must be overbuilt to achieve a 90% (or 70%) reduction on a

continuous basis. As a consequence, the cost of an NSPS scrubber is far higher than needed to reduce sulfur, requiring

significant redundancy and typically a backup scrubber module in case the first one fails.

Ironically, the environment also does not benefit from the inflexible NSPS standard. Despite the costs imposed

by the

NSPS standard, it creates no net environmental benefits as total emissions are now governed by the emissions cap

under Title IV. Nor are there significant local benefits, as sources must already comply with

SO2 standards pursuant to

Title

I of the CAA that protect against local ambient concentrations. The continued use of the inflexible rate-based

methodology under the

SO? NSPS therefore makes little sense today when there is a national emissions cap on SOz.

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2. New Source Kate Standards for NO, Have Created an Uneven Regulatory Framework and Differential Business

Drivers

A major problem with NO, new source standards is that by differentiating between old and new plants. they create a

significant bias toward old sources that only need to meet a relatively weak standard, while new clean sources face a

very stringent one. This problem is exacerbated in the power sector due to long capital life and the great differences in

generating technologies. Older largely coal-fired plants emit NO, at levels of

100 to over 1,000 parts per million (ppm)

of exhaust volume, even though some could reduce NO, at prices as low as $300 a

ton.@ However, new plants are

virtually ail gas-fired10 and

far cleaner than coal plants, and the stringent NSR standards require them to reduce their

already low NO, emissions to 9 ppm, or in some states

2 ppm.2 This requires investments in end-of-pipe controls that

cost from $2,500 to over

$

10,000 per ton of NO, reductions and that can discourage investment in newer clean

As shown in the table below, NO, regulation of power plants in the 1990s created a highly uneven regulatory

framework. Because rate standards were set at differing levels for the different base technologies, they create a perverse

situation in which the greater the amount of

NO, emitted by a power technology, the more lenient the rate standard.

The table also reveals the great disparity between the standards for old and new sources, and also how

technology-by-technology standards have imposed the highest costs on the cleanest sources.

*4*Table 2. Differential Effects of Current Law on NO,

Reductions From

*4*Generating Technologies (1996-1999p

*4*Differential Standards for NO, Reductions From Generating

*4*Technologies (1 996- 1999):

*3*01d Sources (Title 1V

RACT)

Cyclone

Wall-Fired T-Fired

Coal

Coal

Coal

Uncontrolled

NOY

1.50

0.95

0.65

(IbimmBtu)

Legal Standard

none

0.50

0.45

(IblmmBtu)

Cost Per Ton

none

$150

$400

*4*Table 2. Differential Effects of Current Law on NO,

Reductions From

*4*Generating Technologies (1996-199912

*4*Differential Standards for NO, Reductions From Generating

*4*Technologies (1996-1999):

*3*New Sources

(BACTILAER)

New Coal

Uncontrolled NO,

(IblmmBtu)

Legal Standard

New

Gas New Gas

Large

Small

0.05

0.10

(IblmmBtu)

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Cost Per Ton

$565 (SCR)

$

10,000

$2,500

+

131 ELR 103371

NSR also applies when plants undergo significant modifications, and EPA has filed lawsuits against eight companies

asserting that their older plants should be subject lo NSR because they have made major modifications. However, even

if a source has undergone NSR, years or decades may elapse before the plant is subject to the standards again, during

which time there is no incentive to improve. Another problem is that these standards divert research attention away

from identifying and developing new, cleaner power sources, to how to achieve pollutant reductions and extend the life

of older sources without triggering NSR. This leads to a fundamental lack of alignment of the objectives promoted by

CAA and objectives of a sound clean energy policy.

111.

Findings

A. Problems With the Methodology of Using Rate Standards

There are several key problems with the rate standards for NO, and SO;. used under Title IV and new source

standards.These problems preclude their efficient or effective operation and are especially pronounced in sectors, such

as power generation, with long capital life.

1. Emissions Rate Standards Do Not Force a Move Toward Cleaner Technologies

One of the chief problems with emissions rate standards for NO, under both Title

IV and new source standard is that

they are individually set for each specific generation technology. Different standards are set depending on the kind of

fuel used, and specific boiler or turbine technology used. Therefore, Title

IV's Phase I NO, standards were 0.50

IbimmBtu for wall-fired boilers, 0.45 IbimmBtu for tangentially fired boilers, and various other boilers were completely

exempt; under Phase

I1 NO, standards V~IY from 0.86 to 0.40 1bimm~tu.E Under NSR, new gas technologies face

standards at or lower than 0.05

lb/mmBty an order of magnitude lower than the standards for old coal plantsz Such

standards create no incentive to move from dirtier to cleaner technologies. Yet in the power sector, the fundamental

answer to solving pollution problems is precisely to move to cleaner, less polluting technologies.

2. Rate Standards Apply Only at a Discrete Point in Time, Limiting Compliance Methods

Another key problem with the current rate standard approach is that they require reductions only once: for new plants,

at the time the plant is built or undergoes a major modification, and for existing plants, at the date Title

IV applied.z

This limits compliance options to those capital or process equipment choices made at the time the plant is built or

modified, and eliminates the possibility of compliance through changes in management practices, fuels, or any other

operational decisions after a plant is built. This harkens back to an older view of pollution, that there is a single known

technology "fix"

tliat can be implemented once. The reality is that technology is ever-evolving, and there are numerous

technologies and management practices that can reduce pollution; a good regulatory system needs to provide firms with

the incentives to implement them.

There are three major negative consequences of applying a rate standard at only one time, such as when a plant is built

or at a certain date. The first is

tliat such a standard provides firms with no incentive to take advantage of future

technology advances. A firm does not have to implement anything more after the date it is permitted, even if

a

technological breakthrough means that it could inexpensively reduce pollution an additional amount. This is precisely

what has happened with cyclone boilers. as after the regulatory standard was issued, the industry discovered how to

cheaply reduce NO, emissions in cyclones far below the standard, However, firms had no incentive to do so, thereby

allowing

high-emittingboilers to continue to pour pollution into the air.

The second negative consequence is that the

CARS new source standards only promote compliance through decisions

about capital equipment, and not through ongoing operational or management decisions. Many

N4 reduction

technologies, such as gas

reburn and overfire air, are incremental, and can be adjusted to achieve various rates of NO,

control depending on the cost of inputs and other parameters. Indeed, the first year of application of the OTC

cap-and-trade for NO, in northeastern states revealed that once a rnarket incentive was created to reduce NO,

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emissions, firms found ways to lower NO, by up to 30%

at

existing units, and without significant capital addition^.'^

Achieving NO, reductions through operational changes can be highly effective, and may be essential in order to reduce

NO, to very low levels. Promoting such changes requires that regulatory systems move beyond the current rate-based

approach, which provide no incentives to go beyond initially established limits.

A third major but longer term consequence of requiring compliance only through periodic changes in rates is its chilling

effect on research and development. Since the rate standard creates no continuous driver to lower emissions, firms do

not invest continuously in research and development to enhance environmental quality, because there is no compliance

benefit in doing so. Instead, the periodic effort to lower the rate standards becomes a political issue, with industry

battling through its lawyers to make sure the rate standard is as lenient as possible, and then to use existing

technologies for compliance. As demonstrated best by the cyclone boiler

situation,x when the rate standard is then

announced,

131

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103381

there is a flurry of research activity on how to reach the standard at least cost, after which

the research effort subsides again.

3. Emissions Rate Standards Restrict Compliance Technologies and Promote End-of-Pipe Solutions Instead of

Pollution Prevention and Cleaner Processes

A fundamental problem with rate standards is that by focusing on end-of-pipe rate reductions, they may restrict

technology choice, and inherently favor compliance practices through end-of-pipe pollution controls instead of the

other two compliance methods--cleaner inputs or fuels and cleaner processes. Both of the latter are more aligned with

pollution prevention principles.

The following table compares the technologies permitted under various

S@ standards, and the estimates of compliance

cost

using those standards. It shows that for identical pollutant reductions. more inflexible regulatory standards can

significantly increase costs. A technology prescription, such as one mandating that scrubbers gain a 10 million ton

reduction, is the least flexible and was estimated to cost $7 million? Equally inflexible was the 1978 NSPS because it

required a rate reduction in potential emissions of

70-90%, which meant that one had to scrub no matter how clean the

coal.@ Somewhat more flexible was the 1971 NSPS, with a percentage concentration rate standard that allowed the use

of either a scrubber or compliance coal." Title

IV's cap-and-trade program-passed

in 1990-allows any compliance

method.

*4*Table 3. Technologies Permitted Under Different SOz

*4*Regulatory Systems"

Regulatory

Method

Technology

Emissions Limit Emissions Limit

Prescription

Using Percentage Using Percentage

Reduction

Concentration

Technologies

.

scrubbers

.

scrubbers

.

scrubbers

Permitted

Estimated

Compliance

Cost in Billions

Per Year

*3*Table 3. Technologies Permitted Under Different SOz

*3*Regulatory Systems8:

Regulatory

Method

Technologies

Permitted

.

limited use

low-sulfur

coal

$7

$

4.5

Emissions Cap Emissions Cap

Without Trading With Trading

.

scrubbers

.

scrubbers

.

major use low-

.

major use low-

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Estimated

Compliance

Cost in Billions

sulfur coal

sulfur coal

.

fuel blending

.

fuel blending

,

no backup

.

no backup

necessary

necessary

,

demand side

.

demand side

management

management

.

power shifting

.trading

$

2.5

$

1.2

Per Yeas

J31

ELR

103391

The regulatory agency applying a rate standard may add to the inflexibility inherent in rate standards by favoring

pollutant reductions gains through end-of-pipe controls over those achieved through pollution prevention. Over the past

decade, major technological advances in natural gas turbines have reduced their uncontrolled NO, emissions from over

100 ppm to the very

Low 9-15 ppm range.8' This has achieved a 90% pollution reduction, yet this may not count when a

regulatosy body applies a standard like BACT or LAER. Some states applying these standards only recognize a 90%

reduction achieved though end-of-pipe control equipment such as

SCRs. and do not count what has been achieved

through pollution prevention or process change

@

4. Emissions Rate Standards Create High Transaction Costs and a Culture of Conflict Between Regulators and the

Regulated Industry

Typical permitting processes applying new source rate-based standards under the

CAA typically takes one and one-half

years or longer, creating high administrative costs to

governments and major opportunity costs for fisms that may be

siting new clean plants. Under this process, a government regulator must make a specific determination of

what specific

technology meets the regulatory standards or is the "best available," pitting regulators against the applicant in a series

of factual issues

85

Title IV's NO, standards resulted in litigation that delayed the program one year due to a conflict

between industry and regulators on the applicable technology, and the NSR process is time- and resource-intensive.

However, the gain to the environment may be zero or slight if the plant is a modem gas plant, as

NO, and SOz

emissions are minimal, and they would be expected to create benefits by displacing power from dirtier sources. In

addition, in nonattainment areas, any resulting emissions must be offset anyway, creating no net environmental benefit

from these lengthy procedures.

Regulations do not have to be this way. Major environmental benefits can be achieved without transaction costs under

technology-neutral approaches such as the emissions cap and allowance trading system. Both the Acid Rain Program's

SO2 cap and the OTC NO, cap create major emissions reductions and a zero new source standard without any lengthy

permitting procedures (transactions take less than 24 hours) or conflict between regulator and regulated. These

approaches redirect business efforts away from contesting regulatory authority toward competing in the marketplace.

D.

Problems Relating to ihe Disparig in Standards Between Old and New Plants

A fundamental strategy in our CAA has been to impose strict standards on new plants, while old plants are exempted or

subject to lenient

requireinents. These new source standards are designed both to reduce ambient pollution levels, on

the assumption it

will be cheaper to achieve reductions at new plants instead of old plants, and as a technology-forcing

mechanism to encourage the development of cleaner processes. The effectiveness of these standards is assessed below

for

NO, reductions. as the lack of construction of new coal plants means there are few new SO2 sources.

1, New Source Standards I-lave Failed to Efficiently Reduce Ambient Pollution Levels

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A basic assumption behind new source standards is that it will be less expensive to attain the emissions reductions

needed to achieve ambient levels through new source standards. This assumption appears fundamentally flawed in the

NO, case, and based on a static concept of technology change. Due to fundamental technology changes in power

generation, the disparity in rate standards between old and new plants now results in perverse incentives for attaining

clean energy. Today, virtually all new power plants use gas-fired turbine technology@ and are

both more efficient and

far cleaner than coal-fired units---even without controls. Modern gas combined cycle plants emit virtually no

SDL,

particulates or air toxics, and NO, emission levels are around 0.05 IbImmBtu, well below the NSPS and 10 to 40 times

lower than that of coal

units.= Therefore, as shown in the above Figure 3. there is actually an inverse relationship

between the age and cleanliness of plants and the costs of added NO, reductions. Contrary to the initial supposition that

it would be cheaper to achieve significant reductions at new plants versus older ones, technology change has meant

that

significant reductions are available only at old plants and are also far cheaper there.

2.

New Source Standards Force Only Limited Kinds of Innovation

The record of new source standard and forcing innovation is more complex. New source standards have led to

development of new technologies, including improvements in SCR technology and innovative control technologies.

such as

SCONOX~

131

ELR

103401

and XONON.E

They have also contributed to a collaborative federal-industry

effort to develop cleaner and more efficient gas turbines, to which federal research also played a large

role.% However,

it has also suppressed innovation. The distinction between old and new plants has led firms to continue to use highly

polluting old plants, and has restrained upgrades or efficiency investments because they might trigger NSR. As a

consequence, virtually all research funds spent by the principle utility research coalition, EPRI (formerly the Electric

Power Research Institute), is to improve the performance of existing units, whereas most federal research funds are to

develop new and cleaner

technologies.~ Secondly. the process of governmental approval of specific firm technology

choices has led to a situation that has virtually eliminated venture capital from the environmental technology

field.%

3. NSR Creates No Net Benefits in Nonattainment Areas or Under an Emissions Cap Approach

A final irony is that in a cap-and-trade situation, or in nonattainrnent areas where the CAA requires any new source to

fully offset its emissions with matching reductions from existing sources, there are no actual environmental benefits

as

there are no net NO, reductions even after the very high costs imposed by NSR.~~

C. Cap-and-Trade Puo~ams Achieve a Results-Oriented Approach

Fortunately, there are solutions for each of the significant problems created by NO, and SDL rate regulations. The best

and most comprehensive solution would be to replace existing standards with a stringent emission cap and allowance

trading system, created on a national or regional basis, that includes all

sources.~ This solution would not only be

extremely effective environmentally, but also would eliminate virtually all of the problems mentioned above that are

caused by the use of rate standards, because cap-and-trade programs:

*

create a consistent standard applicable to both old and new plants;

*

do not discriminate by creating different standards for different technologies;

*

create continuous drivers for improvement and innovation;

*

allow business flexibility to choose differing compliance approaches:

*

have effective monitoring of emissions;

*

achieve hi* levels or 100% compliance; and

*

minimize transaction costs and conflict

Steps are being taken to implement cap-and-trade approaches, including existing programs such as the Acid Rain

Program, the OTC NO, cap-and-trade system in the

h'ortheast, and the pending EPA state implementation plan call that

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would extend an NO, cap-and-trade system to at least 19 eastern states.% In addition, "4-pollutant" bills proposed in

Congress would establish stringent national cap-and-trade standards for

SOz. NO,, and carbon dioxide, and address

mercury

reductions.% These would eliminate the grandfathering problem and create a uniform standard applied to all

covered units. while promoting compliance through pollution prevention.

The major benefits of a good cap-and-trade system are that it enacts a stringent and pennanent limit, which serves

society's interest in pollution reductions, while allowing the widest possible breadth of compliance options, hence

reducing costs. It removes government from case-by-case decisionmaking about technologies, freeing business to

experiment without liability. Cap-and-trade systems eliminate all discrimination between old and new plants and

between technologies because

all face equal incentives to reduce.z It performs far better than a rate-based system in

regards to

131

ELR

103411

both cost and innovation, principally because government no longer needs to predict where

innovation may occur as they do in a rate system. The cap-and-trade system places this burden on the regulated entities.

A cap-and-trade approach also encourages greater innovation for several reasons. Perhaps the most important is that the

uniform standard exerts pressure on all to innovate, as all sources are equally covered under the standard. There are no

exceptions, waivers, or lower standards for certain technologies that characterize most rate systems, such as the Title

IV

NO, program, in contrast to the S@ program. This maximizes the breadth of innovation and allows unexpected

innovation. Second, the pressure to innovate is continuous, driven both by the lack of growth in the cap and the

opportunity to market allowances. Both give firms reasons to continuously seek lower emissions, unlike rate systems

where there is no incentive to go beyond the rate limit. Third, the opportunity to use allowances softens the risk of

failure in experimentation, while the cap assures achievement of environmental goals.

Another key benefit of cap-and-trade programs is their record of effective monitoring and near 100% compliance. In

five years, the Acid Rain Program for

S@ has achieved 100% compliance every year, and in the first year of the O'TC

NO, cap-and-trade program, there was only one exceedance of one ton, leading to a swift and automatic penalty%

Yet another benefit is that cap-and-trade programs minimize transaction costs. Instead of a protracted dispute between

firms and government about what technology is most appropriate, firms must simply comply and be able to show the

government that at year-end they have enough allowances to cover emissions. The government role changes

appropriately and dramatically from choosing technologies to assuring compliance. The environmental integrity of the

program is assured by the reductions made through the emissions cap, which never grows.

A negative aspect that some believe may occur with cap-and-trade programs is that the trading may shift the locus of

emissions, potentially causing areas of higher localized pollution levels. In reality, it is difficult to see why

cap-and-trade systems should have any greater effect in this regard than rate standards, which themselves

ailow great

local variability as they do not control plant size, siting, or utilization. In particular, this should not be of concern with a

regional pollutant, or if the total reductions are sufficiently great that everyone benefits. In addition, an analysis of the

first four years of the Acid Rain Program's

S@ cap-and-trade program showed that regional movements of allowances

were minimal

(3% of all allowances used), and that trading may even have helped cool hot spots.2

IV. Conclusion

Experience with rate-based approaches for NO, and SO2 regulation in the power generation sector reveals inflexibility

in their application that does not help to reach environmental benefits. Key problems include the disparities created for

different technologies and between old and new plants, which creates strong economic incentives to use dirtier

technologies and against the installation of new plants; their restriction of technology choice; and tendency to limit

innovation to end-of-pipe controls. Emissions cap and allowance trading systems now in place for both

SOz and NO,

have been able to effect a strict environmental standard while avoiding the inflexibility of rate standards, and are

more

aligned with pollution prevention goals. Moving from rates standards toward cap-and-trade programs appears essential

to meet the goals of a clean energy policy and to attaining the

rnultipollutant reductions benefits from switching to

cleaner new power sources.

-

1.42 U.S.C.

$3

7401-7671q. ELRSTAT. CAA

$3

101-618.

-

2.

Title IV of the CAA Amendments of 1990, Pub. L. No. 101-549, tit. IV, 104 Stat. 2399 (codified at 42 U.S.C.

5s

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7651-76510, ELR STAT. CAA

$5

401-416), was designed to address the problem of acidification of lands and water

bodies caused by acid deposition from emissions of

SQ and NO,. Emissions of these substances also cause significant

health problems in the formation of fine particulates and urban ozone, which although recognized at the time of passage

of the

I990 Amendments were not emphasized.

3. U.S. EPA, NATIONAL AIR POLLUTANT EMISSION TRENDS

1990-1998 3-10 (1999) [hereinafter EMISSION

TRENDS].

-

4.

U.S. EPA, 1999 COMPLIANCE REPORT. ACID RAIN PROGRAM 5 (2000) (EPA-430-R-00-007) [hereinafter

EPA 1999 COMPLIANCE REPORTJ; EMISSION TRENDS.

supra

note 3, at 3-12 (utility SO2 emissions recorded at

17.5 million tons in 1980).

-

5. The level of the Phase I cap was reached by multiplying an emission rate of 2.5 pounds of

SO2 per million British

thermal unit (IbImmBtu) times utilization in the baseline years.

-

6. The level

ofthe Phase 11 cap of 8.95 million tons was reached by multiplying an emissions rate of 1.2 IbImmBtu S@

times baseline utilization. The 1.2 IbImmBtu emission rate has historical significance, as it is the rate standard that has

been required for new coal-fired power plants since 1970. Because bonus allowances of 530,000 tons per year will be

issued from 2000 to 2009, the cap in those years will equal 9.48 million tons.

7. In addition to these basic allowance allocations, Title

IV also allocates 3.5 million bonus allowances over the first

Gars of the program to encourage the use of scrubbers, and 300,000 bonus allowances to reward efforts to develop

alternative energy sources. 42 U.S.C.

5

7651c(g), ELR STAT. CAA 5 404(g).

-

8.

Id 5

765 1, ELR STAT. CAA

5

401.

-

9. Id 5

7651 b(e), ELR STAT. CAA

5

403(e).

-

10.

Id.

-

1 I. EPA 1999 COMPLIANCE REPORT,

supra

note 4, at 17-18;

see also

40 C.F.R. pt. 75 (2000)

-

12. A. DENNY ELLERMAN ET AL.. MARKETS FOR CLEAN AIR: THE U.S. ACID RAlN PROGRAM 250 (2000)

[hereinafter ELLERMAN 20001.

-

13.42 U.S.C.

5

7651j, ELR STAT. CAA

5

41 1.

-

14. EPA 1999 COMPLIANCE REPORT,

supra

note 4. In addition to the actual reductions of almost 8 million tons, 3.5

million extension allowances were allocated as bonus allowances, which together with other bonus programs created an

11.6 million allowance bank at the end of 1999.

Id

-

15. ENVIRONMENTAL LAW INST., ANALYSIS OF EPA 1995-1999 COMPLIANCE REPORTS (on file with

author) [hereinafter ELI 1995-1999 COMPLIANCE REPORT ANALYSIS].

-

17. EPA 1999 COMPLIANCE REPORT,

supra

note 4, at 1 l

-

18. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15.

-

19. U.S. EPA. ACID RAlN COMPLIANCE REPORTS 1995-1997; EPA 1999 COMPLIANCE REPORT,

supra

note

4.

-

20. ELLERMAN 2000,

supra

note 12; Dallas Burtraw

&

Byron Swift,

A New Standard ofPerjormance: An Analysis of

the Clean Air Act's Acid

Rain

Program,

26 ELR 1041 I (Aug. 1996).

-

21. An industry poll showed widespread expectations of allowance prices on the order of $300 to $735 for Phase

I and

$

500 to

$

1,000 for Phase 11 in June-July 1991, falling to $200 to $550 for Phase I and $300 to

$

700 for Phase I1 by

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October-November 1991. Ian M. Torrens et al.,

The 1990 Clean Air Act Amendments: Overview, Utilil)) Industry

Responses,

andStrategic Implications,

17 ANNUAL REV. OF ENERGY

&

THE ENV'T 220 (1992);

see also

ELLERMAN 2000,

supra

note 12, at 232.

-

22. The first was a trade of 10,000 allowances from Wisconsin Power

&

Light to the Tennessee Valley Authority at

$

265. Matthew L. Wald,

T. KA. Buys Allowance to Emit a Chemical in Acid Rain,

N.Y. TIMES, May 12, 1992,at Al;

Frank Edward Allen,

Tennessee Valley Authority Is Buying Pollution Riglzts From Wisconsin Power,

WALL ST. J.,

May

11. 1992. The second was a trade of 25,000 allowances from ALCOA to Ohio Edison for $300 per allowance.

Joan E.

Rigdon,

ALCOA Unit Arranges

S

7.5

Million Sale ofPoNufion Allowances to Ohio Edison,

WALL ST. J.. July

1, 1992.

-

23. EPA 1999 COMPLIANCE REPORT,

supra

note 4, at 10.

-

24. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15.

-

25. ELLERMAN 2000,

supra

note 12.

-

26. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15.

27. U.S. DOE, ENERGY INFORMATION ADMIN., ELECTRIC POWER ANNUAL vol. 11, tbl. 30 (detailing flue gas

zulfurization capacity in operation at U.S. electric utility plants as of December 1999).

28,

The 1985-1987 baseline level of Phase I units is about 10 million tons, and the average Phase I cap was

approximately 6.8 million tons (not counting bonus allowances), for a

33% reduction. EPA 1999 COMPLIANCE

REPORT,

~upra

note 4, at 7.

-

29. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15

30. Id.;

Burtraw

&

Swift, supranote 20.

-

31. Acid Rain Program; Nitrogen Oxides Emission Reduction Program-Phase

11 Final Rule, 61 Fed. Reg. 671 11 (Dec.

19, 1996) [hereinafter Phase I1 Final Rule].

-

32. Although

some states established these as early as 1972, most states did not emphasize NO, reductions until

scientific evidence began to indicate reducing NO, would be the most effective way to reduce urban ozone.

NATIONAL RESEARCH

COCWCIL, RETHINKING THE OZONE PROBLEM IN URBAN AND REGIONAL AIR

POLLUTION (1991).

-

33.42 U.S.C.

5

7651. ELR STAT. CAA

5

401

Id. 5

7651f, ELR STAT. CAA

§

407.

-

35. These units, known as Group 2 boilers, include cell, cyclone, and wet-bottom boilers.

Id

-

36. Phase I1 includes both wall-fired and tangentially fired (Group I) boilers not covered in Phase 1 and other types of

boilers (Group 2 boilers),

See

Phase I1 Final Rule,

supra

note 31. Since the units included in Phase 1 have already made

their boiler modifications, they are permanently grandfathered at the lower Phase

I standards and not the more stringent

Phase

I1 standards. 42 U.S.C.

5

7651f, ELR STAT. CAA

§

407.

-

37. U.S. EPA, COMPILATION OF AIR POLLUTANT EMISSION FACTORS AP-42 (1990).

3X.

42 U.S.C.

5

7651f, ELR STAT. CAA

5

407

-

39.

Alabama Power Co. v. EPA, 40 F.3d 450, 25 ELR 20166 (D.C. Cir. 1994) (vacating Phase I NO, final rule)

-

40. EPA1999 COMPLIANCE REPORT,

supra

note 4, at 10.

-

41. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,supra note 15.

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-

42. EPA 1999 COMPLIANCE REPORT,

supra

note 4, at 10. The process for approving these alternative emissions

limits is still not complete for any unit.

-

43. ELI

1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15

3

See Phase I1 Final Rule,

supra

note 31.

5

EPA 1999 COMPLIANCE REPORT,

supra

note 4, at app. C-2. The range of emissions rates for the affected

boilers has also been reduced, from 1990 baseline emissions ranging from 0.26 to 1.21

lb/mmBtu to a range from 0.13

to 0.81

lb/mmH1u in 1999.

Id

45. ELI 1995-1999 COMPLIANCE REPORT ANALYSIS,

supra

note 15.

49. EPA 1999 COMPLIANCE REPORT.

supra

note 4, at app. C-1

50,

Id

at 14. For Table A units, average emissions were 0.43 1bIminBtu during the 4 years of the program, 11% below

the

average limitation of 0.49 lb per mmBtu. Emissions rates of Table A units gradually moved lower during the Phase

I, from 0 45

IbImmBtu in 1996, to 0.42 IbImmBtu in 1999. Id

51. The OTC comprises the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New

Sk;sey, New York. Pennsylvania, Rhode Island, and Vermont; the northern counties of Virginia; and the District of

Columbia.

-

52. Memorandum of Understanding Among the States of the Ozone Transport Coinmission on Development of a

Regional Strategy Concerning the Control of Stationary Source Nitrogen Oxide Emission (signed Sept. 27. 1994),

available at

http-

[hereinafter OTC MEMORANDUM OF UNDERSTANDING]. Phase I included

the installation of reasonably available control technology

(RACII).

a

id.

-

54. Pennsylvania law defines RACT for large coal-fired units as "the installation of low NO, burners with separate

overfire air." 25 PA. CODE 8 129.93 (b)(l) (2000). New Jersey requires utility boilers to meet the following standards:

tangentially fired: .38

IbImmBtu; wall-fired; .45 IblmmBtu; and cyclone .55 IblmmBtu. 7 N.J. ADMN. CODE

$

27-19.4 (2000). New York State RACT regulations set standards for wet-bottom coal-fired tangential plants at 0.42

Ibs./mmBtu. and for wall-fired at 0.45 lbs./mmBtu. N.Y. COMP. CODES R. &REGS. tit. 6, 5 227-2.4 (2000).

-

55. OTC Memorandum of Understanding,

supra

note 52. Under this program, budget sources were allocated

allowances by their state government. Each allowance permits a source to emit one ton of NO, during the summer

period (May through September). Allowances may be bought, sold. or banked. Any person may acquire allowances and

partic~pate in the trading system. Each budget source must comply with the program by demonstrating at the end of

each control period that actual emissions do not exceed the amount of allowances held for that period. However.

regardless of

the number of allowances a source holds, it cannot emit at levels that would violate other federal or state

limits,

e.g., new source performance standards (NSPS), Title IV, or NO, RACT.

-

56. U.S. EPA, 1999 OTC NO, BUDGETPROGRAM COMPLIANCE REPORT (Mar. 27,2000).

-

59. Joel Bluestein, Energy and Environmental Analysis. Inc., OTR NO, Market: Lessons Learned (1999) (unpublished

report presented at Emissions Marketing Associates in October 1999) (on file with author); GAS RESEARCI-I INST.,

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

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LOW COST OPTIONS FOR ACHIEVING DEEP NO, REDUCTIONS (2000),

available at

http://www.gri.org.

60. Alternative technologies are described in the Gas Research institute's report on

Low Cost Options for Achieving

&I

NOx Reductions

See GAS RESEARCH INST.

supya

note 59. Compliance cost is described in U.S. EPA, 1999

OTC NO, BUDGET PROGRAM COMPLIANCE REPORT,

slpa

note 56.

-

61.42 U.S.C.

5

7479(3), ELR STAT. CAA

5

169

62. The initial NSPS for power plant boilers established NO, emissions limits of 0.50 to 0.80 IbImmBtu for coal-fired

bailers, 0.30 lb/mmBtu fir oil-fired boilers. and 0.20 IbI~nmBtu for gas-fired boilers. 40 C.F.R. pts. 60.44, 60.44a

(2000).

-

63.

Id

pt. 60.44a(d); Revision of Standards of Performance for Nitrogen Oxide Emissions From New Fossil-Fuel Fired

Steam Generating Units; Revisions to Reporting Requirements for Standards of Performance for New Fossil-Fuel Fired

Steam Generating Units. 61 Fed. Reg. 49442 (Sept. 16, 1998) (final rule).

-

64.42 U.S.C.

$5

7475,7479(3), E1.R STAT. CAA

$5

165, 166(3)

-

6.5. Id

$

7503(a)(2), ELR STAT.

CAA

5

173(a)(2)

66.40 C.F.R. pt. 60.44 (2000).

67.

Id.

pt. 60.44a.

fiIL

In Sierra Club v. Costle, 657 F.2d 298, 1 I ELR 20455 (D.C. Cir. 1981), the court affirmed that a utility could not

use low-sulfur coal to create equivalent reductions. It interpreted the rate-based standard and held that:

In no instance, however, can a plant reduce emissions by less than

70 percent of potential uncontrolled

emissions.

. . .

There is no dispute that the 70 percent floor in the standard necessarily means that, given

the present state of pollution control technology, utilities will have to employ some form of flue gas

desulfurization

("FGD" or "scrubbing") technology.

Id

at 3 16

&

n.38, 11 ELR Digest at 20455.

-

69.

See

Table 2

infa

70. U.S. DOE, ANNUAL ENERGY OUTLOOK 2000 (1999) [hereinafter DOE ANNUAL ENERGY OUTLOOK

zo00].

-

71. U.S. EPA, RACTIBACTiLAER CLEARlNGHOUSE ANNUAL REPORT FOR 1998: A COMPILATION OF

CONTROL TECHNOLOGY DETERMINATIONS (June 1998) (EPA 4561R-98-004) [hereinafter U.S. EPA

CLEARINGHOUSE REPORT FOR

19981.

72.

See

Table 2

infia

73. U S. EPA, COMPILATION OF AIR POLLUTANT EMISSION FACTORS AP-42 (1998); Phase I1 Final Rule,

supra

note 31; Joel Chalfin, General Electric Power Plant Systems, Gas Turbine Emissions (1999) (unpublished

presentation) (notes on file with author); Leslie Witherspoon &Ken Smith, NO, Control Technology Options and

Development Activity for Mid-Range Natural Gas Fired Turbines

(1999) (unpublished presentation) (notes on file with

author).

-

74.40 C.F.R. pts. 76.5-76.7 (2000).

-

75. U.S. EPA CLEARINGHOUSE REPORT FOR 1998,supra note 71

-

76. Title IV required sources affected by Phase I to make reductions by Januay 1,1995, and for all other sources must

make reductions by January I, 2000. 42 U.S.C.

$5

7651c(a). 7651d(a), ELR STAT. CAA

$5

404(a), 405(a). NSK

Sof 18

12/29:2005 11:49

AM

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applies when a plant is built or undergoes a major modification.

Id 5

7479(1)-(2), ELR STAT. CAA

$

l69(1)-(2).

77-

GAS RESEARCH INST.,

supra

note 59; Bluestein,

supra

note 59.

-

78.

See

Dave O'Connor et al., Electric Power Research Inst., The State of the Art in Cyclone Boiler NO, Reduction

(1 999) (unpublished presentation at EPRI-EPA-DOE Combined Utility Air Pollutant Control Symposium in Atlanta)

(notes on file with author); ELECTRIC POWER RESEARCH INSTITUTE, FIRST DEMONSTRATION OF

OVEWIRE AIR ON CYCLONE STEAM GENERATOR REDUCES COSTS OF NO, COMPLIANCE (1998). "The

results have clearly demonstrated the technical and operational feasibility of

overfire air as a commercially viable NO,

control approach for cyclones. The application of the technology on five cyclone furnaces

. . . .

showed no substantial

impacts from slagging, fouling, or corrosion of

waterwall tubes when fueled by western coal." ELECTRIC POWER

RESEARCH

INST., NO, CONTROL FIELD TEST RESULTS ON COAL-FIRED CYCLONE BOILERS---CNCIG

PROGRAMS (1

999):

available at

http://www.epri.com (EPR Report No. TR-I 13643).

79. H.R.

3400,98th Cong. (1983). H.R. 3400, which was known as the Waxman-Sikorski Bill and which was

cosponsored by over 80 House members, would have mandated scrubbing on the 50 largest utility plants. and was

estimated to cost as

much as $7 billion annually. Paul R. Portney,

Economics and the Clean Air Act,

4

J.

ECON.

PERSP. 173-81 (1990).

See generally

Dallas Burtraw,

Appraisal of the SO2 Cap-and-Trade Market, in

EMISSIONS

TRADING

133-89 (Richard F. Kosobud ed., 2000).

80. If the law requires a percentage rate reduction in potential emissions, cleaner fuels cannot be used for compliance,

gthe standard requires an additional percent reduction via end-of-pipe control devices no matter how clean the fuel.

See

note 68

supra.

This perversely may even lead businesses to use dirtier fuels, as it may be cheaper to reduce

pollution by the given percentage with a dirtier fuel compared to the cleaner fuel.

81. A standard such as the 1.2

IbImmBtu rate standard enacted in the 1971 NSPS would have permitted the use of

compliance coal within this defined sulfur limit as an alternative to scrubbing: but would not have prompted the

experimentation with fuel blending that led to the significantly increased use of western and mid-sulfur coals that was

observed under Title IV.

-

82. Byron Swift,

Barriers to Environmental Technology Innovation and Use,

28 ELR 10202 (Apr. 1998); Burtraw

&

Swift,

supra

note 20; 1CF RESOURCES, COMPARISON OF THE ECONOMIC IMPACTS OF THE ACID RAIN

PROVISIONS OF THE SENATE BILL (S. 1630) AND THE HOUSE BILL (S. 1630 [sic]) (1990); U.S. GENERAL

ACCOUNTING OFFICE, AIR POLLUTION: ALLOWANCE TRADING OFFERS

AN OPPORTUNITY TO

REDUCE EMISSIONS AT LESS COST (1994).

83. Marvin Schorr

&

Joel Chalfin, General Electric Power Systems, Gas Turbine NQ, Emissions Approaching

%&Is

It Worth the Price? (1999) (unpublished presentation at Air

&

Waste Management Association's 92d Annual

Meeting. June 1999, St. Louis.

Mo.) (notes on file with author): STATE &TERRITORIAL AIR POLLUTION

PROGRAM ADMINISTRATORS ASSN OF LOCAL AIR POLLUTION OFFICIALS (STAPPNALAPCO),

CONTROLLING NITROGEN OXIDES UNDER THE CLEAN AIR ACT: A MENU OF OPTIONS (1994).

-

84. MASS. REGS. CODE tit. 310,

$5

7.00,7.02 (1999);see MASSACHUSETTS DEPARTMENT OF

ENVIRONMENTAL REGULATION, CONDITIONAL COMPREHENSIVE PLAN APPROVAL OF MYSTIC

STATION (2000) (requiring end-of-pipe SCR technology to reach 2 ppm in addition to dry low-NO,

burner). EPA has

recognized this

problem and proposed a guideline that would presume BACT requirements are met if a source adopts

very clean gas turbine technology without using SCR. Notice of Availability for Draft Guidance on BACT for NO,

Control at Combined Cycle Turbines, 65 Fed. Reg. 50202 (Aug. 17,2000).

-

85.

U.S. EPA CLEARINGHOUSE REPORT FOR 1998,

supra

note 71

-

86. Modern gas plants are cheaper to build than coal plants, and achieve 55% efficiency instead of the 34% average for

coal plants. This offsets the relatively more expensive fuel cost for natural gas, and the U.S. Department of Energy

(DOE) estimates that 90% of new generation between 2000 and 2020 will be gas-fired. DOE ANNUAL ENERGY

OUTLOOK 2000,

supra

note 70, at 65,67.

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87. Because thev are more efficient than coal olants, thev also emit rouehlv

-.

one-half the carbon dioxide iC07). See

@eruliy

STATE

&

TERRITORIAL AIR P~LUTION

PROGRAM ADM~NISTRATORS ASSN OF LOCAL

AIR POLLUTION OFFICIALS, REDUCING GREENHOUSE GASES AND AIR POLLUTION. A MENU OF

HARMONIZED OPTIONS 49 (1999).

-

88. SCONOX is available for use with gas-fired turbines, and uses post-combustion catalysts to remove both NO, and

CO from the turbine exhaust, and reduces particulates as well. SCONOX is more expensive than SCR, and entails the

loss of about

1% of plant efficiency. For large units, the combined capital and operating costs add about 2 mills (0.2

cents) to the cost of a kilowatt hour, twice that of SCR. For small industrial 7 MW gas turbines, the capital cost of a

SCOXOX unit at over $2 million may exceed the cost of the turbine itself, and annual costs are $3 10,000. Together

these yield an annualized cost of $590,000 to reduce 25 tons

ofNO, emissions to 2 tons, or $25.000 a ton (note the

cost of reducing the marginal

1 ton from SCR is

$

1 million).

-

89. XONON is a system that

combusts fuel through a chemical process that prevents the formation of NQ.

-

90. DOE'S Advanced Turbine Systems program has the objective of developing ultra high-efficiency gas turbine

systems for utilities, with an appropriation of approximately $30million in recent years. U.S. DOE. ENERGY

INFORMATION ADMINISTRATION, FEDERAL ENERGY MARKET INTERVENTIONS: PRIMARY ENERGY

33, app. B (1999) (Report

#SNOIAF/1999-03).

-

91. ELECTRIC POWER RESEARCH INST., 1999 AWUAL REPORT (2000); U.S. DOE, FISCAL YEAR 2000

BUDGET,

at

http://www.doe,i~ov.

-

92. According to Environmental Business International, private venture funding, which reached $200 million in 1990,

has now sunk to less than $60 million in an era of major technology funding.

See

PROGRESSIVE POLICY INST.,

HOW ENVIRONMENTAL LAWS CAN DISCOURAGE POLLUTION PREVENTION: CASE STUDIES OF

BARRIERS TO INNOVATION 3-4

(2000),

available at

http://www.dlcppi.org;

see also

ENVIRONMENTAL LAW

INST., BARRIERS TO ENVIRONMENTAL TECHNOLOGY INNOVATION 9 (1 998) (reasons include the double

approval barrier to environmental technologies-governmental

and firm-and the fractioning of market size into

individual permitting jurisdictions).

93.

This is particularly true for COz, the principal greenhouse gas. Since CO2 is a long-lived gas that lasts for centuries

once emitted, it is critical to achieve major carbon reductions in the next decade or two. The only practical way to do so

is to invest heavily in efficiency and in modem gas-fired generation, which is needed to substitute for the older

coal-fired power plants. Yet our NO, policies make such new investment considerably more difficult, especially for

smaller units that are precisely the ones that

arc used for co-generation at industrial sites or to convert methane gas to

power. and are counted on to achieve efficiency gains and major greenhouse gas reductions.

-

94. Although a system of pollution charges or fees may also provide similar benefits if the charges are set high enough,

such systems have rarely been implemented in the United States.

-

95 Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group

Region for Purposes of Reducing Regional Transport of Ozone; Final Rule, 63 Fed. Reg. 57356 (Oct. 27, 1998)

(covering 22 states and achieving similar reductions

as a 0.15 IbImmBtu rate standard). Although initially proposed for

a group of 22 states, challenges to

EPA's authority resulted in court orders that restricted application of the final rule to

19 states. Appalachian Power Co. v EPA, 208

F.3d 101

5,

30 ELR 20560 (D.C. Cir. 2000) (limiting application to 19

states) (deadline for states to file state implementation plans extended to Oct. 31, 2000).

96.

See, s

g

,

H.R. 25, 106th Cong. (1999) (sponsored by Rep. Sherwood Boehlert (R-N.Y.)); H.R. 2569, 106th Cong.

$99) (sponsored by Rep. Frank Pallone (D-N.J.)); and S. 1369, 106th Cong. (1999) (sponsored by Sen. James

Jeffords (R-Vt.)).

-

97. A related aspect is that cap-and-trade systems allow for efficient and smooth reductions in pollutant levels. Title

IV

provides a good example, as the allowable limit Mas lowered between Phase I and Phase 11 of both programs. However,

under the rate-based approach for NO,, all boilers that had complied with Phase I limits were grandfathered without

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having to meet the Phase I1 limits, whereas in the cap-and-trade approach for S@, the cap was simply lowered,

requiring all units to comply.

-

98. EPA 1999 COMPLIANCE REPORT,

supra

note 4; U.S. EPA, 1999 OTC NO, BUIX;ET PROGRAM

COMPLIANCE REPORT,

supra

note 56.

99.

U.S. GENERAL ACCOUNTING OFFICE, ACID RAIN: EMISSIONS TRENDS AND EFFECTS IN THE

EASTERN UNITED STATES (Mar. 2000)

(GAO/RCEDOO-47); Byron Swift,

Allowance Trading undSO2 Hot

Spots-Good News From the Acid Rain Program,

3

1 Env't Rep. (BNA) 954 (May 12; 2000),

mailable at

http:l/www.epa.govlacidrain/papers.

31 ELR 10330

/

Environmental Law Reporter

/

copyright

0

2001

/

All rights resewed

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CERTIFICATE OF SERVICE

I, the undersigned, certify that on this 1 jth day of September, 2006,I have served

electronically the attached

MIDWEST GENERATION'S POST-HEARING COMMENTS:

ADDITIONAL INFORMATION

upon the following persons:

Dorothy

Gunn, Clerk

Illinois Pollution Control Board

James R. Thompson Center

Suite

1 1-500

100 West Randolph

Chicago, Illinois 60601

and electronically and by first-class mail with postage thereon fully prepaid and affixed to the

persons listed on the

ATTACHED SERVICE LIST.

/s/

W&

8

mAwl

Kathleen C. Bassi

Sheldon

A. Zabel

Kathleen C. Bassi

Stephen J. Bonebrake

Joshua

R. More

Glenna Gilbert

SCHIFF

HARDIN. LLP

6600 Sears Tower

233 South Wacker Drive

Chicago, Illinois 60606

312-258-5500

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

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(R06-25)

Marie Tipsord

Hearing Office

Illinois Pollution Control Board

James

R. Thompson Center

100 W. Randolph

Suite

1 1-500

Chicago, Illinois 60601

ti~sorm@,ipcb.state.il.us

-

William A. Murray

Special Assistant Corporation Counsel

Office of Public Utilities

800 East Monroe

Springfield, Illinois 62757

bmurrav@,cwl~.com

Christopher W. Newcomb

Karaganis, White

&

Mage., Ltd.

414 North Orleans Street, Suite 8 10

Chicago, Illinois 6061 0

cnewcomb@k-w.com

Faith E. Bugel

Howard A. Learner

Meleah Geertsma

Environmental Law and Policy Center

35 East Wacker Drive, Suite 1300

Chicago, Illinois 60601

fbu~el@,elvc.org

Gina Roccaforte, Assistant Counsel

Charles Matoesian, Assistant Counsel

John J. Kim, Managing Attorney

Air Regulatory Unit

Division of Legal Counsel

Illinois Environmental Protection Agency

102

1 North Grand Avenue, East

P.O. Box 19276

Springfield, Illinois 62794-9276

john.kim@e~a.state.il.us

-

charles.matoesian@,epa.state.il.us

yina.roccaforte@e~a.state.il.us

N. LaDonna Driver

Katherine D. Hodge

Hodge Dwyer Zeman

3150 Roland Avenue, P.O. Box 5776

Springfield, Illinois 62705-5776

tildriver@hdzlaw.com

Bill S. Forcade

Katherine

M. Rahill

Jenner

&

Block

One IBM Plaza,

4oth Floor

Chicago, Illinois 6061

1

Keith I. Harley

Chicago Legal Clinic

205 West Monroe Street,

4th Floor

Chicago, Illinois 60606

kharlev@,kentlaw.edu

-

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David Rieser

James

T. Warrington

Jeremy R. Hojnicki

McGuireWoods LLP

77 West Wacker, Suite 4100

Chicago,

Illinois 60601

Bruce

Nilles

Sierra Club

122 West Washington Avenue, Suite 830

Madison, Wisconsin 53703

bruce.nilles@sienaclub.org

Mary Frontczak

Dianna Tickner

Prairie State Generating Company, LLC

701 Market Street, Suite 781

St. Louis. Missouri 63 101

Daniel

McDevitt

General Counsel

MIDWEST GENERATION. LLC

440 South

LaSalle Street, Suite 3500

Chicago, Illinois 60605

dmcdevitt@mwaen.com

S. David Farris

Manager, Environmental, Health and Safety

Office of Public Utilities, City of Springfield

201 East Lake Shore Drive

Springfield, Illinois 62757

dfarris@,c,cwlo.com

-

James

U'.

Ingram

Senior Corporate Counsel

Dynegy Midwest Generation. Inc

1000 Louisiana, Suite 5800

Houston, Texas 77002

Jim.Ingram@,dyneev.com

Sheldon

A. Zabel

Kathleen C. Bassi

Stephen J.

Bonebrake

Joshua R. More

Glenna L. Gilbert

SCHIFF

HARDIN, LLP

6600 Sears Tower

233 South Wacker Drive

Chicago. Illinois 60606

312-258-5500

Fax: 312-258-5600

szabel@schiffhardin.com

kbassi@,schiffiardin.com

sbonebrake@schiffhardin.com

jmore@,scliiffiardin.com

ggilbert@schiffiardin.com

ELECTRONIC FILING, RECEIVED, CLERK'S OFFICE, SEPTEMBER 15, 2006

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