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

CONTENTS FOR THIS SECTION

Trading Program

EPA's Revised NAAQS for Ozone
Ozone Transport Rule

Trading Program. Part of the controversy over utility source control involved proposed market-based approaches to implementing such controls. OTAG did considerable work on market mechanisms and found several benefits to these implementation approaches, including: (1) lower compliance costs, (2) incentive for early reductions, (3) incentive for over-control of sources, (4) incentive for innovation, and (5) administrative flexibility.

However, OTAG was unable to agree on a basic structure for a market mechanism. Some states, particularly those in the northeast, advocated a "cap and trade" program. A cap and trade program places a total emission limit (i.e., cap), expressed in tons of pollutants, on specific emission sources within an area. The allowable amount of pollution is then allocated to these sources according to an agreed upon formula. Sources that emit less pollution than their allocation may trade the unused portion of their allocation to sources that exceed their allocation, or bank those unused pollution "credits" for use in a future year. A system like this has been successfully implemented to reduce sulfur dioxide (SO₂) emissions under Title IV of the CAA and is being implemented in the Ozone Transport Region (OTR) to reduce NOx emissions.

Under a cap and trade system, emissions are not permitted to increase over time. Thus, new emissions from new sources (or expanded production at existing sources) have to be offset with reduced emissions at existing sources. Industry groups have objected to this fixed limit on emissions and argued for an alternative that controls the rate of pollution emitted, but not the total amount emitted (i.e., no cap). Under a "rate only" approach, a source could emit as much of a pollutant as it wished, as long as it did not emit the pollutant at a rate greater than stipulated. If a source emitted at below the stipulated rate, it would receive credits amounting to the difference between its actual rate and the stipulated rate times its production for a given year. It could trade or bank the resulting credits. If a source exceeded the rate, it could purchase emission credits for the excess amount (based on its total production for a year) from a source that had accumulated credits. Currently, no trading program is based on this approach.

As was the case with the utility control recommendations, OTAG's final recommendation with respect to a trading program encompassed both views. The cap and trade program, called "Track 1," and the rate only program, called "Track 2," were both identified by OTAG as options for states to adopt in implementing utility (and possibly other) control measures. OTAG acknowledged several uncertainties with respect to this recommendation including (1) the need for further work on rate only approaches to implement them with the same level of confidence and certainty as the cap and trade system; and (2) how any "cross-track" trading could occur between cap and trade states and rate only states. OTAG did note that EPA would have an integral part in overseeing the implementation and integrity of these approaches.

For its part, OTAG recommended a joint state/EPA workgroup address the issues of implementation of Track 1 and Track 2, along with identifying key design features that states could select in developing a NOx trading program. OTAG believed its work in this area would provide a sound basis for the workgroup's task. In addition OTAG suggested the workgroup address other concerns with respect to modeling, market systems, and local control requirements.

EPA's Revised NAAQS for Ozone

On July 16, 1997, the Administrator of the Environmental Protection Agency (EPA) finalized a new National Ambient Air Quality Standard (NAAQS) for ozone. Accompanying the NAAQS was a White House memorandum discussing the general approach EPA was to take in implementing the new NAAQS.⁽⁶⁾ Recognizing ozone as a regional pollution problem, the memorandum focused on regional compliance strategies for the new NAAQS. In particular, the memorandum cited the work of OTAG as the basis of this approach. As stated therein:

For the past 2 years the EPA has been working with the 37 most eastern states through the Ozone Transport Assessment Group (OTAG) in the belief that reducing interstate pollution will help all areas in the OTAG region attain the NAAQS.... The OTAG completed its work in June 1997 and forwarded recommendations to the EPA. Based on these recommendations, in September 1997, the EPA will propose a rule [on ozone transport] requiring states in the OTAG region that are significantly contributing to nonattainment or interfering with maintenance of attainment in downwind states to submit SIPs [State Implementation Plans] to reduce their interstate pollution. The EPA will issue the final rule by September 1998.

The revised ozone NAAQS was not the trigger for the Ozone Transport Rule finalized in October 1998, and discussed in the next section. Existing nonattainment in the Northeast corridor with the previous, less stringent ozone NAAQS was the genesis of the OTAG effort and the resulting rule by EPA. However, EPA drew on the OTAG findings and recommendations as it developed a flexible implementation strategy for attainment of the new ozone NAAQS, and, where EPA considered it appropriate, this strategy is integrated with the requirements of the Ozone Transport Rule.

In particular, the regional NOx control strategy advanced by EPA in the Ozone Transport Rule as a response to ozone transport under section 110(k)(5) is also an integral part of the new ozone NAAQS implementation strategy under section 110(a)(1)). In particular, EPA believes that implementation of a regional NOx control strategy will permit many areas that are (or would be by the year 2000) in attainment with the previous ozone NAAQS but in non-compliance with the new ozone NAAQS, to come into compliance with the new standard with little or no additional new local emission reductions. EPA says that participation by these "transitional areas" in the regional NOx control program would permit EPA to eliminate unnecessary local planning requirements for such areas, and to revise its new source review (NSR) and conformity rules so such transitional areas could comply with only minor revisions to their existing programs.

Ozone Transport Rule

On October 27, 1998, the EPA finalized its Ozone Transport Rule.⁽⁷⁾ The rule requires 22 eastern states and the District of Columbia to submit state implementation plans (SIPs) to address regional transport of ozone.⁽⁸⁾ In particular, the rule calls for increased controls on NOx, focusing particularly on emissions from electric utilities and large combustion sources. To achieve the necessary reductions, EPA has stipulated emission budgets for each of the affected states, with each state free to decide on what controls to use to maintain emissions within those budgets. As discussed in the next section, EPA is also encouraging the formation of a regional cap and trade program to implement the NOx reductions through a model program.⁽⁹⁾ As finalized, the rule requires the affected states to submit SIP revisions to EPA by September 1999 and to implement controls to achieve their state emission budgets by May 1, 2003. By September 30, 2007, states are expected to be in compliance with their NOx budgets.

Under section 110(k) of the Clean Air Act, EPA is mandated to require SIP revisions for states whose current SIPs are substantially inadequate to mitigate adequately interstate pollutant transport such as that described under section 176A (under which OTAG was established). Adequate provisions are defined by section 110(a)(2)(D) as those that prohibit state emissions "which will contribute significantly to nonattainment in, or interfere with maintenance by, any other state with respect to any such national primary or secondary ambient air quality standard...." In the final rule, EPA identified four criteria for determining whether an upwind state's contribution to a downwind state's nonattainment status was "significant."⁽¹⁰⁾ Three of the four criteria identified by EPA related to air quality: (1) collective contribution of regional emissions to the problem; (2) extent of downwind nonattainment problems, including ambient impact of required controls; and, (3) ambient impact of emissions from upwind sources. The fourth criterion was economic -- the availability of cost effective control measures for upwind emissions.⁽¹¹⁾

Applying the three air quality related criteria to findings from the OTAG modeling process and other modeling efforts, EPA determined that the "weight of evidence" indicated that 22 of OTAG's 37 member states made significant contributions to downwind nonattainment--the 22 plus D.C. that are addressed by the rule.⁽¹²⁾ For the other 15 states, EPA took no action in the final rule, and is not requiring that they submit SIP revisions at this time.⁽¹³⁾ This "no action" determination by EPA is a change from its proposed rule that found that these states did not meet EPA's weight of evidence threshold for finding a contribution significant.⁽¹⁴⁾

As originally proposed, EPA used OTAG and other modeling efforts to determine state complicity with respect to ozone transport, but did not use such modeling to determine its proposed emissions budgets for affected states.⁽¹⁵⁾ Instead, EPA used a cost-effectiveness criterion based on NOx control costs to determine allocations. Budget components were calculated for five sectors: electric utility sources, nonutility stationary sources, area sources, nonroad engines, and highway vehicles.⁽¹⁶⁾ In focusing on cost-effective controls, EPA argued that it was following the recommendations of OTAG. The effect of such an allocation scheme would be to tilt emission reductions toward states with large stationary NOx sources with relatively modest controls, and away from states with relatively higher emissions from other sources. In particular, states with coal-fired electric power plants would generally have higher percentage reductions required on a statewide basis than states without such plants.

This focus on regional reductions in NOx emissions, rather than attempting to target reductions based on air modeling, was further defended by EPA in the final rule. As stated by EPA, EPA:

...acknowledges air quality modeling makes clear that reductions in emissions closer to the air quality problem have a greater ambient impact. However, EPA has not been presented with, nor been able to develop, an accurate comparison of the downwind costs of emission reductions that would achieve the same ambient impact as the regional reductions required by today's action. The EPA does not have comprehensive information concerning available local measure or their costs or ambient impacts.

However, as a qualitative matter, EPA believes that available evidence indicates that the upwind costs are reasonable not only in light of cost-effectiveness per ton removed, but also in light of the downwind ambient impact of the emissions reductions. Under the 1-hour NAAQS, emissions from each upwind State generally affect several downwind nonattainment urban areas. Thus, matching the total ambient impact of the emissions reductions from the upwind State would require emission reductions in several downwind areas. [footnote omitted]

Although presently available information does not permit a useful quantitative comparison of total upwind and downwind costs in terms of their ambient impact, EPA believes that upwind reductions replace local reductions that, on a cost-per-ton removed basis, may be expected to be more expensive.⁽¹⁷⁾

As a final argument for its budget allocations based on regional cost-effectiveness criteria, EPA states that modeling various regional variations in upwind emission reductions indicated no subregional variations in upwind emission reductions that were either more cost-effective or more beneficial to air quality than the approach it chose to take.

The budget allocations resulting from this approach were revised by EPA in its final rule from the revisions contained in its April 1998 proposed supplemental rulemaking.⁽¹⁸⁾ At first glance, it would appear that the 1.16 million ton (28%) reduction under the final rule is less stringent than the 1.59 million tons (35%) originally proposed. However, the apparent lessening of the reduction requirement is primarily due to downward revisions in the base inventory, not because of an increase in permitted emissions. In particular, the final rule lowers the base case to account for various mobile source controls anticipated to occur by year 2007, and to account for EPA's decision to remove more than 11,000 smaller industrial boilers from its budget calculations. The actual difference between the budget proposed and the budget as finalized is only 77,000 tons.

The budget allocations were revised again by EPA in a technical amendment issued in May 1999.⁽¹⁹⁾ These revisions result mostly from a recent settlement on NOx emissions from heavy-duty diesel engines. The changes lower the anticipated reduction from 1.16 million tons (28%) under the final rule to 1.14 million tons (25%). The amended final emissions budget for each state is provided in Table 1. All the states with reduction requirements at 30% or above are from the Midwest. In contrast, states in the Northeast have budget allocations generally well below the nationwide average of 25%. This disparity reflects EPA's focus on electric utilities as the most cost effective source of NOx reductions. Of the 1.14 million ton reduction estimated by EPA to occur under the rule, 0.96 million is estimated to come from electric utilities. As a whole, this would be a 64% reduction from EPA's baseline for electric utilities emissions. For some Midwestern states, the reduction is over 70%.

Table 1. Seasonal NOx Emissions Budget for States Making a Significant Contribution to Downwind Ozone Nonattainment
(Tons of NOx per Ozone Season)

Source: U.S. EPA.

In addition to the emission budget identified above, the rule contains an additional feature that could affect a state's budget in specific circumstances. Because of concerns raised about the possible effects of the rule on electricity reliability, EPA established a compliance supplement pool of 200,000 tons that are allocated to the individual states in proportion to the size of reduction they must achieve under the rule. The states may use their pool to allocate emission tons to sources that reduce emissions prior to May 2003 (early reductions) or to sources that demonstrate need for relief from the compliance deadline. For this latter allocation, sources requesting such treatment would have to demonstrate that the compliance deadline creates "undue risk" for the source or its associated industry (e.g., the electric utility industry). Any tons not distributed by a state prior to May 1, 2003 will be retired by EPA.

Footnotes

6. ^(back)President Clinton. "Implementation of Revised Air Quality Standards for Ozone and Particulate Matter," Memorandum for the Administrator of the Environmental Protection Agency, July 16, 1997.

7. ^(back)Environmental Protection Agency. Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone. Rule. 63 Federal Register 57356-57538, October 27, 1998.

For the rule as proposed, see: Environmental Protection Agency. Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone. Notice of proposed rulemaking. 62 Federal Register 60317-60421, November 7, 1997

8. ^(back)The 22 states included are: Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana, Kentucky, Massachusetts, Maryland, Michigan, Missouri, North Carolina, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Wisconsin, and West Virginia.

9. ^(back)On April 29, 1998, EPA proposed a supplemental rulemaking that detailed a model cap and trade program for states to consider in implementing the Ozone Transport Rule. Those details are incorporated in the final rule. Environmental Protection Agency. Supplemental Notice for the Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone; Proposed Rule. 63 Federal Register 25902-25994, May 11, 1998.

10. ^(back) These were modifications of four criteria listed in its November 1997 proposal: (1) the emissions level of the upwind area; (2) the upwind area's contribution to the downwind nonattainment area; (3) the transport distance between the two areas; and (4) the geographic extent of the contribution downwind. 62 Federal Register 60335, November 7, 1997.

11. ^(back)63 Federal Register 57376-7, October 27, 1998.

12. ^(back) The 23 jurisdiction were found to"make a significant contribution to nonattainment of the 1-hour and 8-hour NAAQS in, or interfere with maintenance of the 8-hour NAAQS..." 63 Federal Register 57398, October 27, 1998

13. ^(back) The 15 states not included are: Arkansas, Florida, Iowa, Kansas, Louisiana, Maine, Minnesota, Mississippi, Nebraska, North Dakota, New Hampshire, Oklahoma, South Dakota, Texas, and Vermont.

14. ^(back) In the proposed rule, EPA found that the 15 states: (1) made at most a relatively small contribution to downwind nonattainment areas; (2) most are relatively distant from many of the downwind nonattainment areas; and (3) most have a relatively low amount of manmade NOx emission and/or NOx emissions density. Thus, these states did not meet EPA's weight of evidence threshold for finding a significant contribution.

15. ^(back)"The statewide emissions budgets proposed in this rulemaking were not modeled directly to determine their air quality benefits." 62 Federal Register 60327. In its April proposed supplemental rulemaking, EPA included a modeling analysis to show how these proposed NOx budgets would improve air quality in the eastern U.S. See 63 Federal Register 25953-25967, May 11, 1998.

16. ^(back)For utility sources, EPA used a NOx emission rate of 0.15 lb/MMBtu to determine budget allocations. However, EPA used different growth factors than those developed by OTAG in making the necessary 2007 calculations. For area sources, EPA assumed no new controls, in line with OTAG. For nonutility sources, EPA used a 70% reduction requirement for large and RACT controls (generally 25%-50% reduction) for smaller sources. This is approximately what OTAG had recommended. EPA calculated the highway vehicle budget by assuming implementation of existing SIPs, along with the following federal measures: national low emission vehicle standards, 2004 heavy-duty engine standards, and revisions to emissions test procedures. EPA's method of calculating budgets for this sector differs somewhat from OTAG's recommendations. Finally, EPA calculated budgets for nonroad engines assuming implementation of existing SIPs, along with the following federal measures: federal small engine standards (Phase II), federal marine Engine standards (diesels >50 hp), federal locomotive standards, and 1997 proposed nonroad diesel engine standards. EPA used OTAG growth projections in calculating the budgets for this component. See proposed Ozone Transport Rule and Appendix B (OTAG Recommendations), 62 Federal Register 60318-60420, November 7, 1997.

17. ^(back)63 Federal Register 57405, October 27, 1998.

18. ^(back) See 63 Federal Register 25904-25911 (May 11, 1998) for further detail on revisions.

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