THE EPA SPEAKS OUT:
The Clean
Air
Interstate
Rule
Explained
May 2005
By Misha Adamantiades,
Linda Chappell, and
Sam Napolitano
The Environmental Protection Agency reviews how the multi-pollutant control concept is
to work.
On March 10, 2005, the Environmental Protection Agency (EPA) finalized the Clean Air Interstate Rule (CAIR) to reduce air pollution that moves across state boundaries in 28 Eastern states and the District of Columbia. When fully implemented, CAIR will reduce sulfur dioxide (SO2) emissions in these states by more than 70 percent and nitrogen oxide (NOX) emissions by more than 60 percent from 2003 levels, resulting in more than $100 billion in health and visibility benefits per year by 2015.1 EPA expects these air pollution reductions to be achieved largely through a proven emissions cap-and-trade program.
CAIR-one of the largest EPA initiatives ever undertaken-will go a long way in helping localities meet federal air quality standards. The rule, based on multi-pollutant control concepts that EPA first introduced nearly a decade ago,2 is not without costs, benefits, and other impacts.3
The Environmental Problem
Currently 132 areas do not meet the new National Ambient Air Quality Standards (NAAQS) for fine particles or ozone, that affect some 160 million people, or 57 percent of the U.S. population (see Figure 1, p. 52).4 SO2 emissions contribute to the formation of fine particles and acid rain. NOX emissions contribute to ground-level ozone, the formation of fine particles, and acid rain. These air pollutants are linked to serious health consequences including premature death and heart attacks, as well as illnesses such as chronic bronchitis, asthma, and other respiratory problems. Sulfur and nitrogen deposition contribute to significant environmental problems including damage to sensitive ecosystems and impaired visibility in parks and residential areas.
The Clean Air Act (CAA) requires states to take action to address this environmental problem. However, because air pollution can travel long distances, one state's pollution often affects a downwind state's nonattainment areas. Consequently, an individual state significantly may reduce emissions from within its borders, but may not necessarily meet air quality standards (see Figure 2, p. 52). To address this "transport" problem, EPA developed a regional approach to the transport of emissions across state borders.
From its extensive consideration of the power industry's emissions and pollution control options over the last 15 years, the agency recognized that the power sector, which emits roughly 69 percent of nationwide SO2 emissions and 22 percent of nationwide NOX emissions annually, is a source of cost-effective emission reductions (see Figure 3, p. 52). While the power sector has made meaningful reductions of SO2, NOX, and direct particulate emissions over the past 25 years, and EPA has already set stricter standards for other major sources of emissions such as cars, trucks, buses, and construction vehicles, EPA has determined that much more is needed to bring many areas into attainment with the NAAQS by CAA deadlines.
Market-Based Approach
for CAIR
Since the advent of the acid rain SO2 cap-and-trade program, the market-based regulatory approach for reducing air emissions has shown remarkable environmental results at costs far below original projections. The cap-and-trade approach establishes an emissions cap and then distributes "allowances" to emit equal to the cap, granting sources the opportunity to find the most efficient way to meet the environmental goal. Some sources over-comply and either bank allowances for future use or sell them to sources that do not find it cost-effective to make emission reductions. The ability to sell allowances creates financial incentives for electricity generators to look for new and low-cost ways to reduce emissions, to improve the effectiveness of pollution control equipment, and to find other low-cost compliance strategies such as fuel switching and dispatch changes.
In 2002, President Bush proposed the Clear Skies Initiative, a national cap-and-trade legislative proposal to reduce emissions of SO2, NOX, and mercury by roughly 70 percent from the power sector. Unfortunately, the legislation has not moved beyond committee hearings. Legislation would be the most effective and efficient approach to meeting environmental goals, and the administration remains committed to working with Congress to pass such a bill. Absent legislation, EPA has finalized CAIR, lowering emissions of SO2 and NOX in the East at levels similar to those envisioned with Clear Skies, using the authority granted under the Clean Air Act. EPA believes this is the best action it can take now to help bring states into attainment with the air quality standards.
CAIR Framework
Air quality modeling completed by EPA has found that SO2 and NOX emissions from 23 states and the District of Columbia contribute to the nonattainment of the fine particle (PM2.5) standard in downwind states and that emissions of NOX in 25 Eastern states and the District of Columbia contribute to the nonattainment of the ozone standard in other downwind states (see Figure 4). EPA also proposed on March 10 that Delaware and New Jersey be added to the list of states contributing to fine particle nonattainment.
Using the NOX Budget Trading Program as a model, CAIR grants states the option of participating in a market-based cap-and-trade program to reduce both SO2 and NOX emissions. As part of the program, EPA set emission caps for SO2 and NOX for the affected region based upon what can be achieved in a highly cost-effective manner. The emission allowances then were apportioned to the states. States must achieve their required emission reductions by either participating in the EPA-administered interstate cap-and-trade system for the power sector, or by choosing an alternate approach that is subject to EPA approval. Under the regional NOX Budget Trading Program, all states affected by the rule joined the optional cap-and-trade program to lower ozone season NOX emissions.
The emission reductions set forth by CAIR come into effect in two phases. If all states choose to participate in the region-wide cap-and-trade program for the power sector, the first phase begins in 2009 for NOX and 2010 for SO2 at levels of 1.5 million tons and 3.6 million tons per year, respectively. The second phase begins in 2015 for both pollutants and sets caps of 1.3 million tons and 2.5 million tons per year for NOX and SO2, respectively. In addition to the annual cap for NOX, a five-month ozone season cap is established for certain states at roughly 580,000 tons in 2009 and 480,000 tons in 2015. State implementation plans that commit a state to the cap-and-trade program or an alternative EPA-approved reduction program are required to be in place by September 2006 to give ample time for affected sources to begin installing the necessary pollution controls.
EPA is responsible for establishing the trading program and market procedures, as well as administering the allowance tracking system. States are responsible for adopting new rules to conform
to CAIR and for allocating NOX allowances to power plants.
For SO2, CAIR relies upon the existing framework of the acid rain program's SO2 trading program, and requires use of these allowances for CAIR. In order to meet CAIR's objective of implementing a system of allowances representing a 50 percent reduction from the 2010 Title IV emissions cap from 2010 to 2014, and then 35 percent from the 2010 Title IV emissions cap in 2015 and thereafter, EPA has set up requirements for turning in allowances at a ratio of greater than one-to-one. This discount of allowances is applied to the vintage year (the first year that the allowance can be used). In other words, allowances with a vintage year 2010 to 2014 must be used at a ratio of two-to-one (two allowances for every ton of emissions, representing a 50 percent reduction), and allowances with a vintage year of 2015 or beyond must be used at a ratio of 2.86-to-one (representing a 65 percent reduction). Banked SO2 allowances carried into CAIR in 2010 from the existing acid rain program are allowed at a one-to-one ratio indefinitely.
Power Sector Impacts
When the second phase of the program begins in 2015, the annualized cost of CAIR is predicted to be about $3.6 billion per year. The present value of the capital investment in pollution controls for CAIR, beginning with the first phase of the program through 2020, is estimated to be approximately $16.8 billion (see Figure 5). Much of these costs will be passed along to consumers in cost-of-service power regions, which represent roughly 63 percent of the market for electricity generation in 2004.5 For the region affected by the rule, EPA expects retail electricity prices to increase roughly by 1.8 to 2.7 percent (see Figure 6).
CAIR recognizes the need for environmental improvement and emission reductions from the power sector while maintaining energy diversity and reliability. The reductions achieved under CAIR will be met largely through the installation of pollution controls on coal-fired units and not through shifting to other fuel sources. This ensures a continued reliance on our abundant coal resources to produce electricity, but it will be in a cleaner and more efficient way. Coal-fired generation is projected to decrease about 1 percent by 2020 with CAIR, relative to what it would have been without further regulatory controls (see Figure 7). EPA modeling of the power sector shows that increased electricity demand in the future will lead to the construction of roughly 15 GW of new coal-fired capacity with CAIR.
The emission reduction requirements of CAIR are anticipated to result in roughly 61 GW of additional FGD and 32 GW of SCR by 2015. By 2020, about 80 percent of all the electricity generated by burning coal in this country will come from sources with installed advanced pollution control equipment-scrubbers, SCRs, or both. These controls will be installed where it is cost-effective. However, other compliance options include switching coal types, shifting generation to more efficient and cleaner units, and buying excess allowances from other sources.
Looking at critical fossil-fuel markets for power generation, CAIR will not have significant negative effects. CAIR will not lead to natural gas price increases greater than 1.6 percent from 2010 to 2020. Furthermore, although coal-fired generation is slightly lower than it would have been without further regulatory controls, coal production for power sector use in all three major supply regions-Appalachia, Interior, and the West-is expected to increase from today's levels.
While the costs and impacts are significant, analysis showed that the economic strength of the nation is preserved while maintaining both low electricity prices and fuel diversity. On a macroeconomic level, the nation's GDP is affected by less than 0.04 percent by 2015. On a sector-by-sector basis, excluding primary fuels, the impact of CAIR ranges from 0.01 percent (chemical and allied products) to 0.09 percent (primary metals). These impacts are partially offset by growth in non-energy intensive sectors, such as retail trade.
Air Quality, Health, and
Environmental Benefits
The Acid Rain Program, established as part of the 1990 Clean Air Act Amendments, is the most significant air program affecting the power sector to date. In 2003, emissions of SO2 were reduced by 38 percent compared with 1980 levels. This program, in conjunction with the OTC NOX Budget and Federal NOX Budget Trading Programs and various state actions has reduced emissions of NOX by about 40 percent from 1980 levels. CAIR builds upon this success and will achieve significant additional reductions of SO2 and NOX (see Figure 8).
By 2015, CAIR will reduce SO2 emissions by 5.4 million tons, or 57 percent, from 2003 levels in states affected by the rule. At full implementation occurring post-2015, CAIR will reduce power plant SO2 emissions in affected states to just 2.5 million tons-73 percent below 2003 emissions levels. CAIR also will achieve significant NOX reductions across states covered by the rule. By 2015, CAIR will reduce power plant NOX emissions by 2 million tons, achieving a regional emissions level of 1.3 million tons (61 percent reduction from 2003 levels). These emission reductions are substantial and will provide much of the reductions necessary for states to meet fine particle and ozone air quality standards.
The emission reductions required by CAIR will translate into major improvements in air quality in the CAIR region. The rule will help cities and states in the East meet the new, more stringent National Ambient Air Quality Standards for ozone and fine particles. CAIR, in conjunction with recent mobile source and state regulatory actions already undertaken, will reduce the number of ozone nonattainment areas in the east from 104 in 2005 to 5 by 2015. For fine particles, attainment gains also will be impressive, with the nonattainment in the east dropping from 43 areas in 2005 to 14 areas in 2015 (see Figure 9, p. 55). In addition, CAIR will help those remaining areas move closer to attainment. State efforts to address any residual nonattainment issues will become much easier as a result of CAIR.
The public benefits derived from the emission reductions are huge. EPA estimates the monetary value of the annual
benefits for human health and welfare
to be $86 billion to $101 billion in 2015. These monetized benefits include the prevention of 17,000 premature deaths, 22,000 non-fatal heart attacks, 12,300 hospital admissions, 1.7 million lost workdays, and 500,000 lost school days annually. Benefits to the public that EPA is unable to quantify in monetary terms include reductions of mercury emissions, acid rain, coastal and estuarine water eutrophication, and impaired visibility outside of the selected national parks used in the analysis. For instance, CAIR is expected to result in 11 tons of additional mercury reductions in 2015. Because of additional emission reductions post-2015 from CAIR, EPA anticipates even greater annual health and environmental benefits thereafter.
The Clean Air Interstate Rule represents a significant step forward toward the attainment of air quality standards in the eastern United States. The impacts on electricity prices and fuel markets are reasonable, and energy diversity and reliability will be maintained, with more than $25 of benefits to every dollar of increased electricity generating costs.6 EPA looks forward to working with states and the power industry to implement CAIR and to reap the rewards of putting this multi-pollutant emission reduction concept to work.
Mr. Adamantiades managed the Integrated Planning Model (IPM) analyses, evaluating the emission reductions, pollution controls, costs, and other impacts of CAIR. Ms. Chappell managed the Regulatory Impact Analysis for CAIR that not only included the IPM results, but the air quality and benefits analysis results as well. Mr. Napolitano, director of EPA's Clean Air Markets Division, was part of a group of senior air staff that managed the development of CAIR.
Acknowledgements: The authors would like to acknowledge EPA review of this paper by Prudence Goforth, Maura Cantor, Melanie LaCount, Gabrielle Stevens, Kevin Culligan, and Roman Kramarchuk, and technical work presented in this paper on air quality by Norm Possiel, Brian Timin, and Pat Dolwick, and benefits analysis by Bryan Hubbell. CAIR was developed by EPA's Offices of Air Quality Planning and Standards and Atmospheric Programs directed by Steve Page and Brian Mclean under the direction of Assistant Administrator Jeff Holmstead. Other key managers of the effort include John Bachmann, Peter Tsirigotis, Lydia Wegman, and Kevin McLean.
Endnotes
- All values are real 1999 dollars.
- In 1996, EPA began evaluating multi-pollutant control strategies with various stakeholders in the Clean Air Power Initiative (CAPI), which considered ways to lower power plant air emissions through phased-in cap and trade programs that lowered compliance costs and provided certainty on future controls while providing substantial emissions reductions.
- This paper is based upon analyses done in support of the Final CAIR, and in particular, relies upon information in the Final CAIR Regulatory Impact Analysis, March 2005. This study and other technical information on the rule can be found at www.epa.gov/cleanairinterstaterule.
- All nonattainment designations are of March 2005.
- From Table ES1.B of EIA's Electric Power Monthly.
- This number is derived by comparing the midpoint estimate of the 2015 benefits calculation with the private compliance costs in 2015.
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