Air Quality: EPA's Ozone Transport Rule, OTAG,
and Section 126 Petitions -- A Hazy Situation? III

CONTENTS FOR THIS SECTION

• • Model NOx Cap and Trade Program
  • Proposed Federal Implementation Plans (FIPs)
  • Section 126 Petitions
  • Implementation Schedules and Challenges
  • Conclusion
• Footnotes

Model NOx Cap and Trade Program

As expected, EPA intends to work with states to implement the above NOx budgets through an interstate cap and trade program. The details of that program were first provided in the supplemental notice of proposed rulemaking issued in April 1998 and refined in the final rule.⁽²⁰⁾

Following the example set by the acid rain trading program, the EPA model NOx program is an allowance-based cap and trade program (OTAG's "Track 1" recommendation). One allowance equals one ton of NOx, with each participating state receiving allowances equal to the emission budgets of those sources participating in the program.⁽²¹⁾ Unlike the acid rain program where participation and individual allowance allocations are mandated by federal law, state participation in the NOx program is voluntary, and the allowance allocations to the individual emissions sources is determined by the state, not the federal government. The states also approve monitoring systems based on federal regulations and enforce compliance. Beyond approving and overseeing the SIPs, EPA's role is primarily administrative in terms of collecting data, allocating allowances as prescribed by states, recording trades, and reconciling emissions and allowance data every year. In particular, EPA will track allowances to facilitate interstate trading and enforcement.

Although EPA's model rule permits states to determine individual source allowance allocations, it requires certain elements of the individual state programs to be consistent in order for them to participate in interstate transactions. These elements include the timing of allowance allocations, monitoring requirements, and noncompliance penalties. In particular, the program must be a tonnage cap-based program (i.e., no rate-based program -- OTAG's "Track 2" recommendation) to be included in the regional trading system. Indeed, the SIP approvability criteria virtually ensure that, with respect to large combustion sources, states will have to submit a tonnage based program to get the necessary approval from EPA.⁽²²⁾ Besides the cap requirement, EPA requires states, if they choose to participate in the program, to submit allowance allocation for participating sources by September 30, 1999 for the control periods in the years 2003, 2004, and 2005. Afterwards, states must submit allocations annually for the control period three years hence. Such allocations may not exceed the state's emission budget. At a minimum, the program must include any electric generating unit greater than 25 Mw that sells power and any steam unit with a maximum design heat input greater than 250 mmBtu/hr (such as industrial boilers). In addition, the state must agree to the emission banking and monitoring provisions contained in the model rule.⁽²³⁾ States choosing to use the federally sponsored program will receive "streamlined" approval from EPA.

States have some flexibility with respect to the model rule in terms of who they include, the allocation scheme employed, and how they determine any early reduction credits. States may expand the applicability of the trading program to smaller sources or other sources not included in the model rule. Although EPA proposes an allocation scheme to states, states are free to allocate allowance in any manner that seems appropriate to them. Likewise, states have flexibility in determining early reduction credits. However, if a state chooses to exercise these opportunities, the approval of the resulting SIP by EPA may be slowed.

Compared with a traditional command and control implementation strategy, EPA originally projected a regional cap and trade program that would reduce compliance costs to the electric utility industry by about one-fourth -- from about $2.1 billion to $1.6 billion annually. In its proposed supplemental rulemaking, EPA revised the cost estimate for electric utilities from $1.6 billion to $1.4 billion annually. In addition, EPA estimated that a regional cap and trade program would reduce compliance costs to non-electric generating sources from $1.2 billion to $456 million annually.⁽²⁴⁾ Comparative estimates for other sectors were not available. In the final rule, EPA refers to the Regulatory Impact Assessment (RIA) conducted for the rule with costs estimates of $1.7 billion annually (1990 dollars) and quantifiable benefits of between $1.1 billion and $4.2 billion.⁽²⁵⁾

Proposed Federal Implementation Plans (FIPs)

In conjunction with its final rule on the ozone transport SIP call, EPA proposed a Federal Implementation Plan (FIP) for any state that fails to respond adequately to the SIP call.⁽²⁶⁾ Basically, the purpose of a FIP is to correct, supplement, or replace a SIP determined by EPA to be inadequate.⁽²⁷⁾ Under a FIP, EPA may exercise the authority granted to the state under the Clean Air Act. The EPA is required to promulgate a FIP at any time within 2 years of finding a state SIP submittal either inadequate or non-existent, or disapproving a SIP submittal in whole or in part -- unless the state corrects the deficiency to EPA's satisfaction before such promulgation.

Historically, EPA has been reluctant to impose FIPs on states that submit inadequate SIPs or no SIP at all. This is not the case with the ozone transport rule. Under the final ozone transport rule, states are required to submit SIPs by September 1999. With this proposed FIP rule, EPA would initiate a FIP for each of the 23 jurisdictions covered by the SIP call. Thus, EPA would be able to move quickly with a FIP if a state fails to submit a SIP by September 1999, or if subsequent to the deadline, EPA finds a SIP submittal inadequate. The timing of this FIP proposal suggests that EPA intends to aggressively assert its authority under the CAA to ensure compliance with the new ozone transport rule. As stated by EPA in the proposed rule:

Thus, although the CAA allows EPA up to 2 years to promulgate a FIP after a finding of a State's failure to submit a complete, approvable plan, EPA intends to expedite the FIP promulgation to help assure that the downwind States realize the air quality benefits of regional NOx reductions as soon as practicable.

Another possible reason for EPA's aggressive attitude with respect to FIP may be the model trading scheme EPA is hoping states will choose to implement the ozone transport rule. As noted previously, under the SIP process EPA does not have the authority to impose a trading scheme on the states as it does under Title IV. However, under the FIP process, EPA does. The implementation plan imposed under the proposed FIP rule is largely based on the model trading program suggested to states under the SIP call. In addition, the proposed FIP rule provides that all state trading schemes covered under it are identical, an important condition to ensure maximum efficiency in the operation of the scheme.⁽²⁸⁾ This federal allocation of allowances and federal accounting of trading brings the potential operation of the NOx trading program closer to the system EPA developed under Title IV. Also, the proposed FIP rule may reinforce on the states the kind of trading program they would adopt under a SIP in order to be coordinated with any FIP program, along with ensuring easier EPA approval of their SIP. As hinted by EPA: "EPA does not have the statutory authority under Title I to promulgate a Federal cap-and-trade program to achieve a State's SIP call budget unless the State fails to respond adequately to the SIP call [emphasis added]."⁽²⁹⁾

Substantively, the implementation scheme under the proposed FIP rule covers electric utilities and large non-utility stationary sources (including large industrial boilers, industrial turbines, internal combustion engines, and cement manufacturing). The electric utilities and large industrial sources (boilers, turbines and combined cycle) would be covered under a mandatory federal emission trading program. The FIP would use the same source cutoff levels, categories, and control levels as used to develop the SIP call's emission budget, and would require compliance by the same May 1, 2003 deadline.⁽³⁰⁾

Section 126 Petitions

On May 25, 1999, the EPA finalized its finding with respect to petitions submitted by eight northeastern states.⁽³¹⁾ Submitted in August 1997 by Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island, Pennsylvania, and Vermont, the petitioners asked EPA to make a finding that utilities and/or major sources of NOx in the Midwest contribute significantly to the ozone nonattainment problem in their states.⁽³²⁾ All eight states directed their petitions to the statutory 1-hour ozone standard; only three states -- Massachusetts, Pennsylvania, and Vermont -- also directed their petitions to the new 8-hour standard. In November 1998, two of the other states -- Maine and New Hampshire -- requested EPA to evaluate their petitions under the 8-hour standard in addition to the 1-hour standard. In April 1999, New Jersey and Maryland became the ninth and tenth states to submit a Section 126 petition to EPA seeking relief from out-of-state sources of ozone precursors. EPA has 60 days to respond to these new petitions (with a 6-month extension possible, if EPA determines it necessary).

As noted earlier, if EPA found any of the petitions technically meritorious, it would have to establish federal emission limits for the sources affected by the petitions. In its final rule, EPA determined that portions of six of the eight petitions initially submitted were technically meritorious under Section 126 and deemed granted at future dates depending on how affected states respond to the ozone transport rule discussed above. ⁽³³⁾ Determinations were not made on the two recently submitted petitions from New Jersey and Maryland.⁽³⁴⁾

The final rule finds portions of six of the eight petitions technically meritorious under Section 126 under the 8-hour standard, and four petitions (Connecticut, Massachusetts, New York, and Pennsylvania) under the 1-hour standard. Based on the same methodology and data sources used for the Ozone Transport Rule, EPA found 19 states and the District of Columbia as significantly contributing to the nonattainment of either the 1-hour or 8-hour ozone NAAQS, or in the maintenance of attainment within at least one of the petitioning states. The 20 entities are: Alabama, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Virginia, and West Virginia.⁽³⁵⁾

To implement the finding, EPA's rule rests heavily on the analysis and trading program contained in the SIP call. Adjustments to the SIP call analysis were necessary because of constraints rendered by Section 126; for example, Section 126 only affects stationary sources. In addition, the removal of three states from the reduction pool meant reallocation of state budgets. Administration of the program would be similar to EPA's proposed FIP rule. Allocation of emission budgets to individual sources will be based on a 0.15 lb/mmBtu emission rate for electric generating units over 25Mw, and a 60 percentage reduction requirement for industrial boilers and turbines greater than 250 mmBtu/hr. No controls are required for smaller sources. As with the proposed FIP rule (but unlike the SIP call), participation in the trading program would be mandatory. Banking provisions, a set-aside program for new sources, and compliance supplement pools would also be included as mandatory provisions under EPA's implementation plan. Details on the source NOx allocations and trading program are to be finalized by EPA in July 1999

Implementation Schedules and Challenges

The parallel actions of the Section 126 petitions and the Section 110 SIP call presents difficulties for EPA as the two provisions are implemented differently. The Ozone Transport Rule is a SIP call under section 110(k)(5) for revised SIP provisions meeting the requirements of section 110(a)(2)(D) for the statutory 1-hour ozone NAAQS. Because of the new ozone NAAQS, this SIP call is coupled with a proposal under section 110(a)(1) for SIP submissions to meet the requirements of section 110(a)(2)(D) for the new 8-hour ozone NAAQS. Because EPA has found that individual states contribute significantly to ozone nonattainment downwind, it requires those states to submit SIP provisions to limit NOx emissions to levels specified by EPA; the specific means and sources affected will be determined by the state. Only if a state does not make the required submission would EPA take enforcement actions, including promulgation of a federal implementation plan (FIP) for the state.

Section 126 does not work this way. Under Section 126, if a petition is granted, EPA is responsible for devising and implementing control strategies for the affected sources. Thus, unlike the SIP process where states determine control strategies to achieve mandated reductions, Section 126 requires EPA to select and impose appropriate controls on a state's affected emission sources. In effect, Section 126 implementation is more like a FIP than a SIP. Also, unlike the SIP process, which can coordinate strategy across all emitting sectors, Section 126 only addresses major stationary sources.

To reconcile these differences, EPA and the eight petitioning states entered into a Memorandum of Agreement for EPA action on the Section 126 petitions.⁽³⁶⁾ The December 1997 agreement harmonizes the time frame for EPA action on the Section 126 petitions with EPA's schedule for action on the Ozone Transport Rule.⁽³⁷⁾ In line with that schedule, EPA issued an Advance Notice of Proposed Rulemaking for the Section 126 petitions in April 1998, a proposed rule in October 1998, and a final rule in April, 1999.⁽³⁸⁾ Highlights of the schedule as currently proposed by EPA are presented table 2.

Table 2. Proposed Schedule for Section 126 and Section 110 Actions

Source: EPA, September 24, 1998

This attempt to harmonize and coordinate EPA action on the 1-hour and 8-hour standards and on the SIP call and the Section 126 findings has been challenged by a recent U.S. Court of Appeals decision on the 8-hour standard.⁽³⁹⁾ Essentially, the Court ruled that deficiencies in EPA's promulgation of the 8-hour ozone standard (along with the particulate standards) required its return to EPA for further consideration. As a direct result of this decision, the Court has also suspended the SIP call, pending a full review.⁽⁴⁰⁾ This decision, which will almost certainly be appealed by EPA, raises questions about EPA's compliance schedule and its attempt to harmonize its ozone transport rulings.

For the Ozone Transport Rule, a sustaining of the Court's decision on appeal could require EPA to revise the rule to focus exclusively on the 1-hour standard (which was the original trigger for the rule and was not challenged by the Court decision). Such a move seems unlikely to have any major effect on the substance of the Ozone Transport Rule. As indicated by Figure 1, the 22 states and the District of Columbia are affected by EPA's analysis of both the 1-hour standard and the 8-hour standard. If EPA were forced to revise the rule to affect only states that contributed to non-attainment of the 1-hour standards, the same 22 states (plus D.C.) would be affected. Obviously, the schedule for compliance might have to be revised to reflect the current suspension the rule, but the actual substance of the rule, in terms of who would have to reduce emissions, might not be much changed.

For the Section 126 petitions, the situation would be more complicated, if the decision is sustained on appeal. In many ways, the petitions submitted under Section 126 were designed to ensure the ozone reduction process in the eastern United States just in case the Ozone Transport Rule was stopped. As indicated previously by Table 2, if affected states do not respond to the transport rule by specified dates, EPA's findings with respect to the Section 126 petitions would kick in. With the suspension of the ozone transport rule, that situation becomes more possible.

This possibility is complicated by two factors. First, like the transport rule, EPA's findings under Section 126 couples nonattainment of the 1-hour standard with nonattainment of the 8-hour standard. However, unlike the ozone transport rule, the number of states affected under the 1-hour and the 8-hour standards differs. As indicated by Figure 2, while 19 states and the District of Columbia are affected under the 8-hour standard, only 12 states and the District of Columbia are affected under the 1-hour standard. If the decision is sustained on appeal, not only would states face uncertainty as to their mandate, but also the allocations may be affected.

A further complication is the existence and future possibility of more Section 126 petitions. As noted earlier, New Jersey and Maryland have already submitted petitions to EPA; petitions not reflected in the above discussion. If EPA's ozone transport analysis is any indication, the addition of New Jersey to the petitioning states would add Illinois to the states affected by the 1-hour standard. If other states follow New Jersey and Maryland, more additions are possible.

In short, the Court decision on the 8-hour standard may delay implementation of the Ozone Transport Rule and possibly EPA's findings with respect to the Section 126 petitions. The decision would appear to have little effect on the Ozone Transport Rule in terms of who is affected. However, depending on whether new Section 126 petition arise, the decision could result in fewer states being affected by EPA's Section 126 findings.

On June 11, 1999, EPA issued an interim final rule with respect to the Section 126 petitions, announcing its approach to the court decision.⁽⁴¹⁾ The rule temporarily stays until November 30, 1999, the effectiveness of the final rule on the Section 126 petitions published April 30, 1999. In response to the court decision on the 8-hour standard, EPA will decouple the Ozone Transport Rule from the Section 126 process and decouple implementation of the 1-hour standard from the challenged 8-hour standard. As a result, EPA will move forward with the Section 126 petitions based on the statutory 1-hour standard while it is appealing the court's decision with respect to the 8-hour standard and the resulting suspension of the transport rule. This would mean that Section 126 implementation would involve the 12 states and the District of Columbia as outlined above, at least until the situation with the 8-hour standard and the transport rule are clarified. EPA intends to take final action on these proposed changes to the Section 126 implementation process by November 30, 1999.

Conclusion

Ozone transport is a complex phenomenon; efforts to alleviate the effects of transport on downwind states will result in a mix of winners and losers, both in terms of states having to impose controls and in terms of states complying with ozone NAAQS. With major stakes involved, it is not surprising that some characterized OTAG's final recommendations as vague and ambiguous, where others saw needed flexibility. In any event, OTAG's work assessing ozone transport moved the debate along and clarified an issue made more important because of the new 8-hour ozone standard.

Overall, OTAG sanctioned flexibility, both for the states and for EPA in deciding on how to respond to the ozone transport issue and how to make necessary reductions. Although EPA often took the most stringent interpretation of OTAG's recommendations in its Ozone Transport Rule, it also has attempted to include flexibility for states in implementing proposed NOx reductions. In particular, the sanctioning and encouragement of a regional NOx cap and trade program for electric utilities and other major stationary sources could significantly reduce the cost of compliance with the rule. EPA does not have the authority to make participation in a regional trading program mandatory, unlike the current acid rain SO₂ program, unless a state fails to submit an adequate SIP and EPA proceeds to impose a FIP. Instead, it is up to the states to decide whether the benefits of reducing emissions across the enlarged trading area that the model trading program promises are worth the requirements EPA has imposed.

Implementation is also complicated by Section 126 petitions submitted by eight northeastern states. Implementation of controls under Section 126 is an EPA-directed affair, in contrast with the state strategies required under section 110. In addition, a Section 126 action could raise questions with respect to the Regulatory Flexibility Act as the controls imposed would clearly come from EPA and not the states (as is the case with section 110). In short, it is unclear whether the petitions under Section 126 will expedite NOx control actions by affected states, or merely increase litigation on an already litigious issue. This litigiousness was most recently illustrated by the Court decision with respect to the 8-hour standard and suspension of the transport rule. More examples are likely as the rulemaking proceeds.

Footnotes

19. ^(back) See 63 Federal Register 25918-25950, May 11, 1998

20. ^(back) EPA will initially require that participating sources include existing fossil fuel fired electric generating plants greater than 25 megawatts and other existing boilers and turbines with a heat input greater than 250 mmBtu/hr. These core sources represent 80% of the 2007 baseline emissions inventory, 65% of the 2007 emissions cap inventory, and 90% of the required reductions under the proposed rule. Participation by sources outside these core groups would be determined by the individual states. 63 Federal Register 57518, October 27, 1998.

21. ^(back) As explained in the proposed notice of supplemental rulemaking, states may choose one of three ways for requiring large combustion sources to meet their limitations under the transport rule: (1) a tonnage limit for each source that adds up to the allowed budget; (2) an emission rate limit that when multiplied by the maximum capacity for each source adds up to the allowed budget; and, (3) using alternative method providing equivalent assurance that the allowed budget will not be exceeded. 63 Federal Register 25912, May 11, 1998

22. ^(back) The model rule includes banking of unused allowance in a given year to use in a future year. However, there is a "flow" restriction on the use of banked allowances -- the total number of banked allowances used in a given year may not exceed 10% of a state's emissions budget. Any banked allowance used above that amount is subject to a 2-for-1 penalty (must use 2 allowances to offset 1 ton of emissions). The model rule's monitoring and tracking system is based on the current system used for the SO₂ program under Title IV. See 63 Federal Register 57529-57535, October 27, 1998.

23. ^(back)63 Federal Register 25911, May 11, 1998. Estimates are in 1990 dollars.

24. ^(back) Environmental Protection Agency. Regulatory Impact Analysis for the Regional NOx SIP Call. Office of Air Quality Planning and Standards, September 1998.

25. ^(back)Environmental Protection Agency. Federal Implementation Plans to Reduce the Regional Transport of Ozone. Proposed Rule. 63 Federal Register 56394-56427, October 21, 1998.

26. ^(back)See CAA, section 110(c)(1).

27. ^(back)63 Federal Register 56399, October 21, 1998.

28. ^(back)63 Federal Register 57458, October 21, 1998.

29. ^(back)63 Federal Register 56401, October 21, 1998.

30. ^(back) All the petitions targeted the Midwest; however, some included other sources in the South, Southeast, and Northeast. A discussion of the petitions are provided in the Ozone Transport Rule. A copy of the Memorandum of Agreement Concerning Schedule for EPA Action on Section 126 Petitions is available from EPA's web site: http://www.epa.gov/airlinks/

31. ^(back) Midwestern states, which would bear the brunt of any reductions imposed if EPA takes action under the Section 126 petitions, have objected to the agreement. They claim that the northeastern states have not themselves taken adequate actions to address ozone pollution, that reductions imposed on the Midwest would not solve the petitioning states' problems, and that the costs to the Midwestern states in reducing emissions would not be commensurate with benefits. An attempt to block EPA from acting on the petitions was filed by Midwestern utilities in the U.S. Court of Appeals for the D.C. Circuit. This lawsuit was dismissed by the court on April 28, 1998, since EPA's actions "do not constitute final appealable orders." (Midwest Ozone Group v. EPA, D.C. Cir., No. 97-1627, 4/28/98)

32. ^(back)On February 25, 1998, the eight petitioning Northeast states asked a federal court to make the agreement and schedule binding (Connecticut v. Browner, D.C. SNY, No 98CIV.1376, 2/25/98).

33. ^(back) Environmental Protection Agency. Findings of Significant Contribution and Rulemaking on Section 126 Petitions for Purposes of Reducing Interstate Ozone Transport. Advance Notice of Proposed Rulemaking. 63 Federal Register 24058-24061; EPA. Findings of Significant Contribution and Rulemaking on Section 126 Petitions for Purposes of Reducing Interstate Ozone Transport. Proposed Rule. 63 Federal Register, 56292-56391, October 21, 1998

34. ^(back) The petition from Vermont would be denied under the proposed rule because Vermont does not have, nor is it projected to have, any areas out of attainment with either the 1-hour Ozone NAAQS, or the new 8-hour Ozone NAAQS.

35. ^(back) Three states -- Georgia, South Carolina, Wisconsin -- are covered under the SIP call but not the proposed Section 126 finding because modeling indicates that they did not have a significant effect on nonattainment in the seven petitioning states.

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