CAIR Revised Regulatory Impact Statement
6 NYCRR Part 243, CAIR NOx Ozone Season Trading Program, 6 NYCRR Part 244, CAIR NOx Annual Trading Program, 6 NYCRR Part 245, CAIR SO2 Trading Program
Statutory Authority
On April 25, 2005, the United States Environmental Protection Agency (EPA) issued a final administrative action in which it made findings that numerous states, including New York State, had failed to submit State Implementation Plan (SIP) provisions that EPA determined are required under federal Clean Air Act (CAA) Section 110(a)(2)(D) to address interstate pollutant transport with respect to the national ambient air quality standards (NAAQS) for ozone, and particulate matter with an aerodynamic diameter less than or equal to a nominal 2.5 micrometers (PM2.5). 'Finding of Failure To Submit Section 110 State Implementation Plans for Interstate Transport for the National Ambient Air Quality Standards for 8-Hour Ozone and PM2.5', 70 FR 21147-151 (April 25, 2005) (the Finding). CAA Section 110(a)(1) requires states to submit new SIP provisions to account for a new or revised NAAQS within three years after the promulgation of such standard, or any shorter period that EPA might mandate. The Finding started a two-year clock for the promulgation of a Federal Implementation Plan (FIP) under CAA Section 110(c)(1). For any state, including New York State, that fails to receive EPA approval for submitted SIP provisions within the two-year period, EPA will impose a FIP to implement adequate pollutant transport measures.
In a final administrative action announced on May 12, 2005, EPA identified 23 states and the District of Columbia as containing sources of ozone season1 emissions of nitrogen oxides (NOx) that contribute to attainment or maintenance problems in downwind states with respect to the ozone NAAQS. In addition, EPA identified 25 States and the District of Columbia as containing sources of annual NOx and sulfur dioxide (SO2) emissions that cause attainment or maintenance difficulties in downwind states with respect to the PM2.5 NAAQS. 'Rule To Reduce Interstate Transport of Fine Particulate Matter and Ozone (Clean Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the NOx SIP Call; Final Rule', 70 FR 25162-405 (May 12, 2005) (CAIR). New York State was listed as a state that must address emissions of NOx and SO2 because it contributes to nonattainment of both the ozone and PM2.5 NAAQS in downwind states. CAIR specified exact tonnages of NOx and SO2 that New York State must reduce in order to satisfy its obligations under CAA Section 110(a)(2)(D). CAIR established budgets for electricity generating units (EGUs) in New York State and other CAIR states for emissions of NOx and SO2.
EPA determined the level of emissions reductions in CAIR based on an assumed imposition of highly cost-effective emissions controls on EGUs in the states subject to CAIR. For a State such as New York that contributes to downwind nonattainment of both the ozone and PM2.5 NAAQS, CAIR provides three model rules that the State may adopt so that it can participate in interstate emissions cap-and-trade programs. As a general matter, these cap-and-trade programs were designed by EPA to apply to EGUs. The model rules, codified at 40 CFR Part 96, place State-wide caps on the annual and ozone season emissions of NOx and annual emissions of SO2 from EGUs collectively. The ozone season NOx program, found at 40 CFR 96 Sections 301-388, addresses EGU emissions reductions needed for attainment of the ozone NAAQS. The annual NOx program and the annual SO2 program, found at 40 CFR 96 Sections 101-188 and 40 CFR 96 Sections 201-288, respectively, address EGU emissions reductions needed for attainment of the PM2.5 NAAQS. While a subject state retains the discretion to reduce emissions by the requisite amounts in any manner that it sees fit, adoption of the model rules would produce SIP revisions that EPA will find readily approvable to address the SIP deficiencies identified in the Finding.
Following the issuance of CAIR, EPA received and evaluated several administrative petitions for reconsideration.2 In a final administrative action issued on April 28, 2006, EPA addressed all outstanding petitions by promulgating the provisions of the CAIR FIP (codified at 40 CFR Part 97) as well as further amendments to the text of the three model rules under CAIR.3
The proposed rules constitute New York State's adoption of the three emissions cap-and-trade rules of CAIR. Part 243 establishes the CAIR NOx Ozone Season Trading Program; Part 244 establishes the CAIR NOx Annual Trading Program; and Part 245 establishes the CAIR SO2 Trading Program. Certain revisions to Part 200 are necessary in order to facilitate the administration of these programs. These include the addition of references to Table 1 of Section 200.9 Referenced Material.
As with the proposed Part 243, Subpart 227-3 "Pre-2003 Nitrogen Oxides Emissions Budget and Allowance Program" established the New York State component of a region-wide ozone season cap-and-trade program covering large stationary sources of NOx emissions. Part 204 "NOx Budget Trading Program" supplanted Subpart 227-3 and established the currently effective ozone season NOx emissions cap-and-trade program. Part 243 will supplant Part 204 when it becomes operative and Part 204 will be repealed in the future. Subpart 227-3 applied to largely the same sources of ozone season NOx emissions that will be subject to Part 243. The last ozone season to which the Subpart 227-3 program applied was during 2002. Subpart 227-3 will be repealed in a separate rulemaking.
Part 237 established the Acid Deposition Reduction (ADR) NOx Budget Trading Program and Part 238 established the ADR SO2 Budget Trading Program. These programs are designed to reduce acid deposition in New York State by limiting emissions of NOx during the non-ozone season and SO2 year-round from fossil-fuel fired electricity generating units. Part 244 will supplant Part 237 and Part 245 will supplant Part 238 when they become operative. Parts 237 and 238 will be repealed in the future.
The New York State Legislature has accorded the New York State Department of Environmental Conservation (Department) with the primary authority to formulate and implement the SIP. The provisions of State law treated below, taken together, clearly empower the Department to promulgate and implement the proposed rules as SIP provisions. Environmental Conservation Law (ECL) Section 1-0101 declares it to be the policy of New York State to conserve, improve and protect its natural resources and environment and control air pollution in order to enhance the health, safety and welfare of the people of New York State and their overall economic and social well being. Section 1-0101 further expresses, among other things, that it is the policy of New York State to coordinate the State's environmental plans, functions, powers and programs with those of the federal government and other regions and manage air resources to the end that the State may fulfill its responsibility as trustee of the environment for present and future generations. This section also provides that it is the policy of New York State to foster, promote, create and maintain conditions by which man and nature can thrive in harmony by, among other things, providing that care is taken for the air resources that are shared with other states in the manner of a good neighbor. ECL Section 19-0103 declares that it is the policy of New York State to maintain a reasonable degree of purity of air resources, which shall be consistent with the public health and welfare and the public enjoyment thereof, the industrial development of the State, and to that end to require the use of all available practical and reasonable methods to prevent and control air pollution in the State. ECL Section 19-0105 declares that it is the purpose of Article 19 of the ECL to safeguard the air resources of New York State under a program which is consistent with the policy expressed in Section 19-0103 and in accordance with other provisions of Article 19.
ECL Section 19-0301 declares that the Department has the power to promulgate regulations for preventing, controlling or prohibiting air pollution and shall include in such regulations provisions prescribing the degree of air pollution that may be emitted to the air by any source in any area of the State. ECL Section 19-0303 provides that the terms of any air pollution control regulation promulgated by the Department may differentiate between particular types and conditions of air pollution and air contamination sources. Section 19-0303 also provides that the Department, in adopting any regulation which contains a requirement that is more stringent than the CAA or its implementing regulations, must include in the Regulatory Impact Statement, among other things, an evaluation of the cost-effectiveness of the proposed regulation in comparison to the cost-effectiveness of reasonably available alternatives and a review of the reasonable available alternative measures along with an explanation of the reasons for rejecting such alternatives. ECL Section 19-0305 authorizes the Department to enforce the codes, rules and regulations established in accordance with Article 19. Section 19-0905 also empowers the Department to conduct or cause to be conducted studies and research with respect to air pollution control, abatement or prevention. ECL Section 19-0311 directs the Department to establish an operating permit program for sources subject to Title V of the CAA. Section 19-0311 specifically requires that complete permit applications must include, among other things, compliance plans and schedules of compliance. This section further expresses that any permits issued must include, among other things, terms setting emissions limitations or standards, terms for detailed monitoring, record keeping and reporting, and terms allowing Department inspection, entry, and monitoring to assure compliance with the terms and conditions of the permit.
The provisions of State law treated below, taken together, clearly empower the Department and NYSERDA to establish and administer the EERET Account allocation under proposed Parts 243 and 244.
The EERET Account is defined in proposed Parts 243 and 244 as follows:
'Energy efficiency and renewable energy technology account'. A general account that may be opened by the New York State Energy Research and Development Authority (NYSERDA) from which allowances will be sold or distributed in order to provide funds to be used to support programs that encourage and foster energy efficiency measures and renewable energy technologies and cover the reasonable costs associated with the administration and evaluation of these programs by NYSERDA.
Proposed Sections 243-1.2(b)(40) and 244-1.2(b)(36).
Should NYSERDA establish the EERET account, the Department anticipates that NYSERDA, acting pursuant to its own enabling statutes, would sell or distribute emissions allowances to support programs as described in the EERET Account definition. The programs to be funded by the sale of allowances are related to the reduction of air pollution and are in furtherance of the statutory purposes and mandates of the Department and NYSERDA.
Energy Law Section 3-103 provides that every agency of the State must conduct its affairs so as to conform to the State's energy policy that is set forth in Energy Law Section 3-101.
Energy Law Section 3-101 provides that it is the energy policy of the State to obtain and maintain an adequate and continuous supply of safe, dependable and economical energy for the people of the State and to accelerate development and use within the State of renewable energy sources, in order to, among other things, protect its environmental values and husband its resources for future generations.
ECL Section 3-0301 empowers the Department to coordinate and develop programs to carry out the environmental policy of New York State set forth in ECL Section 1-0101 which includes the prevention of air pollution and promoting technology that minimizes adverse impacts to the environment. Section 3-0301 also specifically empowers the Department to provide for the prevention and abatement of air pollution; encourage and undertake scientific investigation and research on pollution prevention and abatement; and assess new and changing technology to identify long-range implications for the environment and encourage alternatives that minimize adverse impact.
ECL Section 3-0301 also provides that the Department is to consult and cooperate with officials of other State agencies having duties and responsibilities concerning the environment as well as officials and representatives of any public benefit corporation.
The inclusion of the EERET Account allocation in the proposed rules is not a mandate for NYSERDA action. The allocation is contingent upon NYSERDA's affirmative act of establishing the EERET Account. Should NYSERDA establish the EERET Account, it would do so pursuant to its own statutory authority.
NYSERDA's statutory authority springs from Title 9 of the Public Authorities Law (PAL). In enacting Title 9, the legislature declared, in relevant part, that the purpose of NYSERDA is, among other things, to promote the development and utilization of safe, dependable, renewable and economic energy sources and the conservation of energy and energy resources. PAL Section 1850-a.
PAL Sections 1851(10) and (11); and 1854 empower NYSERDA to develop and implement new energy technologies and energy conservation technologies in a manner consistent with economic, social and environmental objectives.
PAL Section 1854(2) specifically provides that NYSERDA is to cooperate and act in conjunction with various entities, including State agencies, in exercising its powers, and is authorized to provide services to State agencies in furtherance of its corporate purposes.
PAL Section 1855(14) empowers NYSERDA to accept from any State agency the grant of any aid in any form and to comply, subject to the relevant provisions of NYSERDA's enabling legislation, with the terms and conditions of the grant of the aid. PAL Section 1855(5) and (10) provide that NYSERDA may receive, acquire, sell, and dispose of any personal property, and may enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes. PAL Section 1855(17) empowers NYSERDA to do all things necessary or convenient to carry out its corporate purposes and exercise the powers given and granted to it under Title 9 of the PAL.
Legislative Objectives
New York State contains nonattainment areas for primary and secondary ozone and PM2.5 NAAQS.4 As such, the air quality in these areas is not, allowing for an adequate margin of safety, sufficient to protect public health, and is not sufficient to protect the public welfare from any known or anticipated adverse effects associated with the presence of the relevant air pollutants.5
In issuing the Finding and CAIR, EPA relied on its authority under CAA Section 110 to require the creation and revision of SIPs that will achieve attainment of the ozone and PM2.5 NAAQS.
The legislative objectives underlying the above-referenced statutory authority are essentially directed toward protecting the environment and public health while assuring a safe, dependable, and economical supply of energy to the people of the State. By promulgating and implementing the proposed regulations, the Department will control emissions of NOx and SO2 that contribute to local and regional nonattainment of the ozone and PM2.5 NAAQS and will remedy the SIP deficiencies identified in the Finding.
Needs and Benefits
CAIR and its supporting record, including the rule making records generated during the 1997 promulgations of the ozone and PM2.5 NAAQS, contain ample descriptions of the health and environmental rationales for controlling emissions of NOx and SO2 from EGUs. (70 FR 25170, 25306-08).
Currently the New York City metropolitan area is designated as non-attainment for PM2.5. The CAA requires that the State of New York develop a SIP to bring the area into attainment by 2010. The emission reductions from CAIR (both in New York State and from New York's neighboring states) will help bring this area closer to attainment by reducing emissions of NOx and SO2, that contribute to fine particle concentrations. New York is also developing additional rules that will be part of a SIP modification that will bring this area into attainment by 2010.
Particulate Matter
By action dated July 18, 1997, EPA revised the NAAQS for particulate matter to add new standards for fine particles (particles with aerodynamic diameters smaller than a nominal 2.5 micrometers) termed PM2.5 (62 FR 38652). EPA established health- and welfare-based (primary and secondary) annual and 24-hour standards for PM2.5. The annual standard is 15 micrograms per cubic meter, based on the three-year average of annual mean PM2.5 concentrations. The 24-hour standard was recently revised to 35 micrograms per cubic meter, based on the three-year average of the annual 98th percentile of 24-hour concentrations (71 FR 61144). The annual standard is generally considered the most limiting. Fine particles are associated with a number of serious health effects including premature mortality, aggravation of respiratory and cardiovascular disease (as indicated by increased hospital admissions, emergency room visits, absences from school or work, and restricted activity days), lung disease, decreased lung function, asthma attacks, and certain cardiovascular problems such as heart attacks and cardiac arrhythmia. EPA has estimated that attainment of the PM2.5 standards would prolong tens of thousands of lives and would prevent, each year, tens of thousands of hospital admissions, as well as hundreds of thousands of doctor visits, absences from work and school, and respiratory illnesses in children. Individuals particularly sensitive to fine particle exposure include older adults, people with heart and lung disease, and children. More detailed information on the health effects of fine particles can be found on EPA's web site at: http://www.epa.gov/ttn/naaqs/standards/pm/s_pm_index.html.
At the time EPA established the PM2.5 primary NAAQS in 1997, EPA also established welfare-based (secondary) NAAQS identical to the primary standards. The secondary standards are designed to protect against major environmental effects caused by PM such as visibility impairment-including Class I areas which contain national parks and wilderness areas across the country-soiling, and materials damage.
As discussed in other sections, SO2 and NOx emissions both contribute to fine particle concentrations. In addition, NOx emissions contribute to ozone problems. CAIR programs are estimated to significantly reduce SO2 and NOx emissions that contribute to the PM2.5 and 8-hour ozone problems described here.
Ozone
By action dated July 18, 1997, EPA promulgated identical revised primary and secondary ozone standards that specified an eight-hour ozone standard of 0.08 parts per million (ppm) (62 FR 38652). Specifically, under the standards, the three-year average of the fourth highest daily maximum eight-hour average ozone concentration may not exceed 0.08 ppm. In general, the revised eight-hour standards are more protective of public health and the environment and more stringent than the pre-existing one-hour ozone standards that they replaced. All areas that were violating the one-hour ozone standard at the time of the eight-hour ozone designations were designated as nonattainment for the eight-hour ozone standard. More areas do not meet the eight-hour standard than did not meet the one-hour standard. EPA published the eight-hour ozone attainment and nonattainment designations in the Federal Register on April 30, 2004 (69 FR 23858). The designations were effective on June 15, 2004. On December 22, 2006, the United States Circuit Court of Appeals for the District of Columbia vacated EPA's eight-hour ozone NAAQS Implementation Rule. Accordingly, the schedule for demonstrating attainment with the eight-hour Ozone NAAQS will change, although the standard remains in effect and the State will have to demonstrate compliance with it. Based upon that Court decision, New York State is still obligated to meet the requirements related to the one-hour ozone NAAQS. Federal regulations require New York State to develop and implement enforceable strategies to bring nonattainment areas into attainment with the one-hour standard by November 15, 2007. Implementation of the CAIR programs remain an essential component of New York State's SIP to achieve attainment of the eight-hour ozone NAAQS.
Short-term (one- to three-hour) and prolonged (six- to eight-hour) exposures to ambient ozone have been linked to a number of adverse health effects. Short-term exposure to ozone can irritate the respiratory system, causing coughing, throat irritation, and chest pain. Ozone can reduce lung function and make it more difficult to breathe deeply. Breathing may become more rapid and shallow than normal, thereby limiting a person's normal activity. Ozone also can aggravate asthma, leading to more asthma attacks that require a doctor's attention and the use of additional medication. Increased hospital admissions and emergency room visits for respiratory problems have been associated with ambient ozone exposures. Longer-term ozone exposure can inflame and damage the lining of the lungs, which may lead to permanent changes in lung tissue and irreversible reductions in lung function. A lower quality of life may result if the inflammation occurs repeatedly over a long time period (such as months, years, a lifetime). Two recent studies have shown a definitive link between short-term exposure to ozone and human mortality.6 Even exercising healthy adults can experience a 15 to 20 percent reduction in lung function from exposure to low levels of ozone over several hours.
People who are particularly susceptible to the effects of ozone include children and adults who are active outdoors, people with respiratory diseases, such as asthma, and people with unusual sensitivity to ozone. In addition to causing adverse health effects, ozone affects vegetation and ecosystems, leading to reductions in agricultural crop and commercial forest yields; reduced growth and survivability of tree seedlings; and increased plant susceptibility to disease, pests, and other environmental stresses (e.g., harsh weather). In long-lived species, these effects may become evident only after several years or even decades and have the potential for long-term adverse impacts on forest ecosystems. Ozone damage to the foliage of trees and other plants can also decrease the aesthetic value of ornamental species used in residential landscaping, as well as the natural beauty of our national parks and recreation areas. The economic value of some welfare losses due to ozone can be calculated, such as crop yield loss from both reduced seed production (e.g., soybean) and visible injury to some leaf crops (e.g., lettuce, spinach, tobacco), as well as visible injury to ornamental plants (i.e., grass, flowers, shrubs). Other types of welfare loss may not be quantifiable (e.g., reduced aesthetic value of trees growing in heavily visited national parks). More detailed information on health effects of ozone can be found at the following EPA web site: http://www.epa.gov/ttn/naaqs/standards/ozone/s_o3_index.html.
EPA undertook extensive computer modeling of the effects of the establishment of CAIR in the subject States. This modeling shows that CAIR will assist New York State's efforts towards reaching attainment of the eight-hour ozone and PM2.5 NAAQS.7 Measured from 2003 levels in New York State, EPA estimates that CAIR will result in SO2 emission reductions of about 213,000 tons or 84 percent and NOx emission reductions of about 32,000 tons or 48 percent.
At the end of 2004, EPA had designated 30 New York counties as being components of ozone nonattainment areas. EPA's CAIR modeling shows that CAIR, in conjunction with existing CAA programs as well as New York State's clean air programs, are predicted to bring 19 of these counties into attainment by 2010.
EPA's modeling also shows that even after the full implementation of CAIR in 2015, nine counties would remain in nonattainment of the ozone NAAQS. However, EPA expects that CAIR will further reduce ground-level ozone levels in these nine counties.
The Department is currently working to establish or revise additional SIP programs to bring all areas into attainment. In addition to the CAIR programs, the Department is currently pursuing efforts to develop or modify a number of rules to further limit NOx and VOC emissions in order to reduce ozone levels. The rules would cover at least NOx RACT for ICI boilers (including small boilers), Asphalt Production NOx controls, Cement Kilns NOx RACT, Glass Manufacturing NOx RACT, Adhesives and Sealants, Consumer Products, Portable Fuel Containers, Graphic Arts, VOC RACT, Asphalt Paving, and Distributed Generation.
Other Air Quality Implications
In addition to the enumerated human health and welfare benefits resulting from reductions in ambient levels of PM2.5 and ozone, reductions in NOx and SO2 will contribute to substantial visibility improvements in many parts of the eastern United States. Reductions in these pollutants will also reduce acidification and eutrophication of water bodies in the region. In addition, reducing emissions of NOx and SO2 from EGUs can be expected to reduce emissions of mercury. Reduced mercury emissions in turn may reduce mercury loadings in lakes and thereby potentially decrease both human and wildlife exposure to fish containing mercury. It should be noted that the Department recently promulgated Part 246, Mercury Reduction Program for Coal-Fired Electric Utility Steam Generating Units. This regulation requires coal-fired EGUs to reduce mercury emissions substantially by 2015. More information on this regulation can be found at: www.dec.state.ny.us.
CAIR marks the latest in a series of actions undertaken by New York State to control emissions of acid rain precursors, NOx and SO2, to protect the acid sensitive ecosystems within New York State. Acid deposition is formed as a result of NOx and SO2 emissions and causes acidification of lakes and streams and has resulted in damage to plant species at high elevations (for example, red spruce trees above 2,000 feet in elevation). It also attacks buildings, statues, and sculptures including irreplaceable pieces of our nation's cultural heritage by contributing to and accelerating the decay of the materials used in the construction of these structures. Prior to falling to earth as dry or wet deposition, SO2 and NOx gases, as well as their particulate forms, sulfates and nitrates contribute to visibility degradation and impact public health.
Acid deposition primarily impacts bodies of water that have soils with limited buffering capacity (ability to neutralize acidic compounds). Several areas in the United States have been identified as containing waters that are sensitive to acidification: the Adirondacks, the Catskill region, the Rensselaer Plateau, the Hudson Highlands, parts of Long Island, and higher elevations in the western United States are among the most sensitive areas in the country. One of the areas most affected by acid deposition is New York's Adirondack Park. This park consists of over six million acres of forests, lakes, streams and mountains, and represents the largest wilderness area east of the Mississippi River. The thin calcium-poor soils and igneous rocks of the Adirondacks make this area particularly sensitive to acid deposition. In addition, many of the Adirondack's lakes have an acid neutralizing capacity of less than zero, which means that they are no longer able to neutralize any acid entering the lake. Some of these lakes have been found to suffer from chronic acidity (constant levels of low pH). In some cases, the acidification has completely eliminated certain fish species and extreme levels of acidification have rendered the waterways lifeless. This problem is amplified when brief periods of low pH from snowmelt and/or heavy downpours (episodic acidification) are factored into the equation. These events, sometimes short in duration, have been known to cause large scale fish kills because of the high levels of acidity and the rapid rate at which the waterway reaches peak acidity. Approximately 26 percent of the lakes surveyed in the Adirondacks have completely lost their ability to neutralize acid entering the lakes and over 70 percent of the sensitive lakes in the Adirondacks are at risk of episodic acidification.
Acid deposition does not only affect waterways. It has been identified as a contributing cause of forest degradation, especially among high-elevation spruce throughout the Appalachian Mountains. Acid deposition also impairs tree growth in several ways. Acidic cloud water in higher elevations may increase the susceptibility of the red spruce to winter injury, while acid deposition has been stripping forest soils of vital nutrients necessary for forest productivity. Inputs to soils of sulfates from SO2 and nitrates from NOx cause a depletion of base cations such as, calcium, magnesium, potassium and sodium that naturally exist in soils. These metals are components of soil which originate from rocks and minerals and are essential for healthy growth forests. The depletion of base cations from soils has been linked to increased mortality and reduced growth of red spruce. Acid deposition, in combination with natural stress factors has resulted in reduced growth and viability of red spruce across the high-elevation part of the Appalachian Mountain range. The same forest areas directly impacted by the effects of acid deposition are also some of the nation's most pristine wilderness areas (such as the Adirondack Park) and national parks.
These national wilderness areas, visited by hundreds of thousands of people each year for their scenic vistas and natural beauty, are impacted by sulfates and nitrates in the atmosphere. NOx and SO2 emissions are precursors to small particles that are formed in the atmosphere through chemical reactions with ammonia to form ammonium sulfate and ammonium nitrate. Under certain conditions sulfate and nitrate particles in the atmosphere reduce visibility. These particles absorb some light and scatter other light away before it reaches an observer reducing the clarity and color of what one can see. This visibility phenomenon, also known as "haze" has been marring public enjoyment of national parks such as Shenandoah, the Great Smoky Mountains, and the Grand Canyon. New York State sources are thought to contribute to a reduction in visibility in Class I areas, such as the Lye Brook Wilderness area in southwest Vermont and the White Mountains in New Hampshire.
These CAIR rules will also satisfy the regional haze requirements to implement best available retrofit technology (BART) on EGUs constructed between August 15, 1962 and August 15, 1977 and will assist States in meeting goals for reasonable progress to return federal Class I areas to natural visibility conditions by 2064. CAA section 169A declares a national goal of "prevention of any future, and the remedying of any existing impairment of visibility in mandatory Class I federal areas which impairment results from manmade air pollution." CAA Section 169B requires that EPA conduct studies on the sources and impacts of visibility impairment for Class I areas and using that information carry out the regulatory responsibilities of Section 169A related BART and reasonable progress toward the national goal. As a result EPA promulgated 40 CFR 51.308 that details the regional haze SIP requirements, including BART and reasonable progress.
The Department is required to submit a revision to its SIP by December 17, 2007 that includes the implementation of best available retrofit technology (BART) at all BART-affected sources that impact Class I areas by 2013 and establish goals that provide for reasonable progress towards achieving natural visibility conditions. The reasonable progress goals must provide for an improvement in visibility for the most impaired days over the period of the implementation plan and ensure no degradation in visibility for the least impaired days over the same period. On June 15, 2005 EPA finalized the BART facility-by-facility requirements of the regional haze rule for the 26 affected source categories, including EGUs. On October 5, 2006 EPA finalized requirements for an emissions trading program as part of its regional haze rule. As part of the 2006 rule, EPA found that EGUs covered by CAIR would meet the requirements to install BART. (71 FR 60612). Though the Department has not yet completed its analysis related to the reasonable progress goal, the reductions from CAIR are predicted (based on currently available air quality modeling) to assist the State in meeting its target related to the goal.
CAIR NOx Ozone Season Trading Program
EPA allows states to add the portion of the NOx SIP Call trading budget attributed to non-EGUs and small EGUs to the State's CAIR NOx Ozone Season Trading Budget. New York State has chosen to include all of the affected sources currently covered by Part 204, NOx Budget Trading Program in the CAIR NOx Ozone Season Trading Program (Part 243). The NOx budgets for small EGUs, non-EGUs, and Portland cement kilns will be added to New York's ozone season EGU budget established under CAIR to form the sector budgets under Part 243, CAIR NOx Ozone Season Trading Program. Small EGUs include fossil fuel-fired units serving a generator with a nameplate capacity of 15 MWe to 25 MWe. Non-EGUs include fossil fuel-fired large non-EGUs with a heat input rating of 250 MMBtu/hr or greater. Portland cement kilns consist of fossil fuel-fired cement kilns with heat input rating of 250 MMBtu/hr or greater.
Portland Cement Kiln Budget
The original Portland cement kiln unit sector ozone season NOx budget established under Part 204 in 2000 included four plants in the baseline. After the Portland cement kiln unit sector ozone season NOx budget had been established and finalized under the current Part 204 NOx Budget Trading Program, one facility discontinued operations, never participated in the trading program and was never allocated allowances. These allowances however, have remained in the NOx Budget Trading Program and have been distributed annually to the three remaining cement plants participating in that program. Over time, the Department has been able to collect actual operating parameters and emissions data through the use of continuous emission monitors (CEMs) from these three cement plants and has gained a better understanding of NOx emissions from these facilities. Advanced monitoring technology (CEMs) allows more accurate, representative data to be available, reflecting ongoing operations at these cement plants. The three cement plants participating in the current NOx Budget Trading Program have met with the Department multiple times and subsequently provided calculations along with Portland Cement Association forecast data to revise the baseline and future year budgets for the units at their facilities. These calculations helped establish a budget for the Part 243 CAIR NOx Ozone Season Trading Program and will provide a significant reduction in the total tons of NOx emitted during future ozone seasons. The current Part 204 Portland Cement Kiln Unit Sector Budget is 8,085 tons per ozone season. The budget for these units under Part 243 is 6,271 tons per ozone season, representing a reduction of 1,814 tons of NOx per ozone season or an average reduction of nearly 12 tons per day starting in 2009.
Allocating Allowances to Energy Efficiency and Renewable Energy Technologies
The CAIR NOx Trading Program budgets are designed to allocate 10 percent of the emissions allowances to the Energy Efficiency and Renewable Energy Technology Account (the EERET Account). The EERET Account will be administered by the New York State Energy Research and Development Authority (NYSERDA) and the allowances in the account will be sold in order to help achieve the emissions reduction goals of the CAIR NOx Trading Programs by promoting or rewarding investments in energy efficiency and renewable technologies, and/or innovative abatement technologies.
In New York's deregulated electricity market, the value of emissions allowances are passed on as operating costs to the consumers of electricity whether the generators receive the allowances for free or pay for them.8 This is true because each emissions allowance represents a commodity of value that must be consumed in order to operate the power plant. A plant operator will include in its electricity price the value of the allowances necessary for operation because the value of the allowances represents the opportunity cost of using the allowances for compliance rather than selling the allowances on the market. The inclusion of the EERET Account allocation will not cause the retail price of electricity to increase because generators incorporate the same dollar value of the allowances in their bids to supply electricity whether the allowances are obtained at no cost or purchased on the open market.
NYSERDA would be required to promptly sell or distribute the allowances as part of a fair, open and transparent process. The proceeds of the allowance sales will be used to fund energy efficiency projects, renewable energy, or clean energy technology. NYSERDA currently administers similar energy efficiency and renewable energy technology programs, and the addition of programs funded by the sale of allowances from the EERET Account allocation should be easily accomplished. If for any reason the allowances allocated to the EERET Account are not sold or distributed by NYSERDA, the allowances would flow back to the Department and be redistributed to the affected units (similar to the flowback method for the new unit set-aside allocations).
The EERET Account allocation represents a change from the current practice under Parts 204, 237 and 238 of awarding allowances for avoided emissions attributable to the implementation of energy efficiency/renewable energy (EE/RE) projects. The Department's experience is that few sponsors of EE/RE projects have sought the award of EE/RE allowances. This is due to the difficulty in demonstrating enough avoided emissions, even when aggregating projects, to qualify for a single EE/RE allowance. It requires a savings of approximately 1,333 MWh of electricity (at the current 1.5 lbs/MWh reward rate) to yield one NOx allowance. The value of one NOx allowance is approximately $2,000. The EE/RE allowances have not served as an incentive to undertake EE/RE projects to the extent originally anticipated by the Department. As the nominal NOx rate decreases with this regulation, the reward rate would likely also be decreased. This will make applying for these allowances even less desirable.
In addition, providers of renewable and other clean energy technologies have been somewhat reluctant to apply for NOx allowances under the structure of Parts 204, 237 and 238. This is largely because the crediting of NOx allowances for low or zero emissions technologies would effectively assign the avoided NOx allowances to this generation and, if these allowances are sold and used for compliance, this could reduce or eliminate the ability to sell the "green attributes" of this power. In order to more effectively provide economic incentives for energy efficiency and renewable energy technologies, the Department believes that using the receipts of the allowance sales to provide financial incentives could result in an expansion in these types of projects.
Costs
ICF International conducted an electricity system modeling analysis to estimate the incremental cost of implementing CAIR and the Clean Air Mercury Rule (CAMR) in New York. The analysis compared a reference or business-as-usual case (absent either CAIR or CAMR) to each of three policy cases: New York's proposed approach for implementing both CAIR and CAMR, CAIR only, and CAMR only.
CAIR and CAMR policies (implemented together) could increase wholesale electricity prices by an average of 1.7 percent or $1.14 per MWh over the 2010 to 2020 timeframe. For a typical residential customer (using 750 Kwh per month9), this translates into a monthly retail bill increase of $0.86.
Model runs assuming CAIR only (i.e., without CAMR) and CAMR only (i.e., without CAIR) indicate that virtually the entire incremental electricity price impact of implementing CAIR and CAMR together is due to CAIR. There is virtually no incremental electricity price impact due to CAMR.10 Separating the price impacts of the CAIR and CAMR policies is extremely complex, due to the interaction and co-benefits between the policies, both in terms of economics and technologies. While this analysis estimated price impacts for the two policies separately, it is important to recognize that the price impacts estimated separately are not additive, because each policy has effects on the other. It is generally believed that the reason the price impacts for the two programs is seen only in CAIR is that the mercury program includes only coal-fired EGUs and coal-fired EGUs rarely set the wholesale price for electricity in New York State. The CAIR program impacts EGUs greater than 25 MWe output for the annual program and 15 MWe output for the ozone season program. EGUs that set the wholesale price of electricity are often CAIR units and the additional costs of these programs can be found in their bid prices.
It is also important to recognize that the estimated impacts on wholesale electricity prices do not directly reflect the implementation costs incurred by the affected generator owners, because coal generators have the largest emissions reduction responsibility, but generally do not set the marginal market price of electricity. The on-site cost of implementing compliance technologies, however, directly reduces the operating margin (similar in concept to profit) of these affected units.
EPA used the Technology Retrofitting Updating Model (TRUM), a spreadsheet model based on the Integrated Planning Model (IPM), to analyze the marginal cost versus the tons of NOx emitted in the CAIR region. EPA considered the cost effectiveness of alternative stringency levels for NOx control for CAIR by examining changes in the marginal cost curve at varying levels of emissions reductions.11 The TRUM model selects investment options and dispatches generation to meet electricity demand. TRUM was developed as a steady-state, single-region spreadsheet model supported by Visual Basic for Applications code. The TRUM consists of a set of sample generating units with varying characteristics. The mix of generation types and sizes was chosen to mirror, in general terms, the nationwide mix of capacities. The TRUM relies on the same underlying data as IPM.
The cost curve shows that the "bend" in the 2010 marginal cost effectiveness curve for EGUs-the point where the cost of controlling a ton of NOx begins to increase at a noticeably higher rate-appears to occur at over $1,700 per ton of NOx. Although EPA conducted this marginal cost curve analysis based on an initial NOx start date in 2010, the results would be very similar for 2009, which is the initial NOx start date in the final CAIR. The "bend" in the 2015 marginal cost effectiveness curve for EGUs appears to occur at over $1,700 per ton of NOx as well (EPA based these marginal NOx cost effectiveness curves on the electricity growth and natural gas price assumptions in the main CAIR IPM modeling run. Marginal cost effectiveness curves based on other electric growth and natural gas price assumptions would look different, therefore it would not be appropriate to compare the curves here to the marginal costs based on the IPM modeling sensitivity run that used Energy Information Administration assumptions). EPA states that the cost curve results indicate that the CAIR program is cost effective based on the premise that the control level is below the point at which the cost begins to increase at a significantly higher rate.
EPA used IPM to model average and marginal costs of the ozone season reductions assuming Selective Catalytic Reduction EGU controls. In this modeling case, EPA modeled an ozone season NOx cap for the region affected by CAIR for downwind ozone nonattainment, but did not include the CAIR annual SO2 or NOx caps. Based on that modeling, average and marginal cost estimates of region wide ozone season NOx reductions are predicted.
EPA believes that selecting highly cost-effective levels at the lower end of the average and marginal cost ranges is appropriate. In the NOx SIP Call, EPA identified average costs of $2,500 (in 1999 dollars) as highly cost effective. The estimated average costs of region wide ozone season NOx control under CAIR are $900 per ton in 2009 and $1,800 per ton in 2015. With respect to average costs, the controls for the second phase (2015) cap, which are below the $2,500 identified in the NOx SIP Call, are also considered to be highly cost-effective by EPA, as are those for the 2009 cap. In addition, the estimated average costs of CAIR ozone season NOx control are at the lower end of the reference range of average annual NOx control costs. Similarly, the estimated marginal costs of ozone season CAIR NOx controls are within EPA's reference range of marginal costs, at the lower end of the range.
When taking into consideration both average and marginal costs, EPA considers the CAIR ozone season control level to be highly cost-effective. For purposes of estimating costs of ozone season control under CAIR, EPA modelled CAIR ozone season NOx requirements without overlaying the annual NOx requirements. EPA believes that the cost of the ozone season CAIR requirements will actually be lower than the costs presented here because interactions will occur between the annual and ozone season CAIR NOx programs.
Considering only this rulemaking and none of the other requirements that are resulting in reductions in NOx and SO2 emissions at these facilities (NSR/PSD settlements, mercury control and BART and other potential haze requirements), the annual NOx program will cost the EGUs $17.2 million a year from 2009 to 2014 and $30.2 million in 2015 and beyond. This is estimated by using the average cost of NOx control that EPA identified in the CAIR regulatory support documents multiplied by the total emission reductions required under CAIR (sum of allowances under Parts 204 and 237 minus the CAIR annual NOx allowances). Using the same formula to estimate the cost of control, the ozone season NOx program will cost the EGUs $9.2 million starting in 2009 and $24.6 million starting in 2015. It should be noted that no additional costs are expected for the non-EGU owners since there is no change to the number of allowances to be distributed to them under Part 243. In addition, the Portland cement kiln owners will not experience an increase in cost as a result of Part 243 because, as noted above, the reduction in allowances distributed to this sector under Part 243 is reflective of actual emissions of these units plus a margin for growth. The costs to EGUs associated with SO2 control under Part 245 is expected to be $0 in 2009 and $25.7 million in 2015 (sum of allowances Part 238 minus the CAIR SO2 budget multiplied by the average cost of control estimated by EPA).
Costs to State and Local Governments
The Jamestown Board of Public Utilities (JBPU), a municipally owned public utility, owns and operates the S. A. Carlson Generating Station (SACGS). The emissions monitoring at SACGS currently meets the monitoring provisions of CAIR, 40 CFR Part 75. Therefore, no additional monitoring costs will be incurred as a result of this program.
The JBPU will need to either limit emissions at the SACGS to no more than its allowance allocations under Parts 243, 244, and 245 or purchase allowances equal to the number of tons emitted in excess of the number of allowances initially allocated to it. Given the highly variable nature of control equipment cost, the Department limited the analysis of control costs to the purchase of allowances to comply with the program and assumed that costs of allowances will be the sum of the EPA estimated marginal cost for the ozone season NOx program ($2,400 per ton of NOx in 2009 and $3,000 per ton of NOx in 2015) multiplied by the difference in allocation from Part 204 to Part 243; the EPA estimated marginal costs for the annual NOx program in the non-ozone season ($1,400 per ton of NOx in 2009 and $1,600 per ton in 2015), multiplied by the difference in allocation for Part 237 and Part 244 minus the difference in allocation for ozone season program; and the EPA estimated marginal cost for the annual SO2 program ($700 per ton SO2 in 2010 and $1,000 per ton in 2015) multiplied by the sum of the Title IV allowances allocated minus the product of the number of tons emitted times the CAIR SO2 retirement ratio (2 in 2010 and 2.85 in 2015). The cost of purchasing allowances to comply with the program is the maximum cost to the facility. Installing controls to reduce emissions may be a less expensive alternative. The Department estimated allocations for SACGS and subtracted those allocations from 2006 facility emissions. The estimated cost for purchasing allowances was determined to be approximately $1.4 million annually for the period from 2010 through 2014 and $2.4 million in 2015 and beyond. It should be noted that these costs will occur at this facility even if this rule is not adopted because EPA would implement this program through the FIP if New York State does not adopt these rules.
Costs to the Regulating Agency
There will be costs associated with the administration of CAIR. The Department will need to review monitoring plans submitted to comply with the requirements of Parts 243, 244, and 245. However, since these plans have been used to comply with current Parts 204, 237, and 238 these costs will not amount to an increase above what is already encumbered.
The Department will need to analyze data submitted to EPA and determine the appropriate allocation to sources and flowbacks that result from unused set-aside allowances. The Department will also need to review requests for allowances from set-aside accounts established for each control period to distribute allowances from the new unit set-aside allocations. The Department will need to review opt-in applications. The Department will also need to modify permits and inspect the program sources, including the continuous emission monitors, and analyze the program to determine its efficacy.
It is estimated that between 10 and 15 people will be required to permit, inspect and administer the requirements of these programs across the state. All of the facilities impacted by the regulation are already required to obtain Title V permits pursuant to Part 201. The promulgation of Parts 243, 244, and 245 will require modifications to these existing permits, but it is not anticipated that staff time will increase significantly. All Title V facilities are currently required to have facility evaluations to determine compliance with all of the requirements in the permit. These annual evaluations currently look at compliance with reporting and monitoring requirements of Title IV and the requirements of Parts 204, 237, and 238. The administrative aspects of the regulation and central office support for permitting and compliance activities will need to increase beyond what is currently required to implement existing regulations, but not significantly. The Department estimates that three to four additional person years will be required to implement these programs at a cost of $110,000 per person year or $440,000 annually.
Local Government Mandates
There are four boilers and one combined cycle turbine at the SACGS which are subject to CAIR. These units will need to comply with the provisions of the CAIR regulations.
No additional record keeping, reporting, or other requirements will be imposed on local governments under this rulemaking.
Paperwork
The owners and operators of each source subject to CAIR and each unit at the source shall keep each of the following documents for a period of five years from the date the document is created.
(i) The account certificate of representation form.
(ii) All emissions monitoring information, unless a three year period is specified. CAIR sources will be required to report emissions and allowance transfers via electronic means. This will minimize the paperwork burden on sources.
(iii) Copies of all reports and other submissions and all records made or required under CAIR.
(iv) Copies of all documents used to complete a permit application and any other submission under CAIR or to demonstrate compliance with CAIR.
Duplication
The emissions monitoring and reporting requirements of Part 243 are similar to those of Part 204. This allows the sources to utilize the emissions monitoring and reporting done for compliance with Part 204 to comply with the corresponding requirements of Part 243. The emissions monitoring and reporting requirements of Part 244 are similar to those of Part 237 and the emissions monitoring and reporting requirements of Part 245 are similar to those of the Title IV program. This allows sources that must currently comply with Title IV, Parts 204, 237, and 238 to utilize existing emissions monitoring and reporting protocols to comply with the monitoring and reporting requirements of Parts 243, 244, and 245.
Alternatives
No action
On April 28, 2006, EPA finalized a rule that included a Federal Implementation Plan (FIP) as a backstop to ensure that EGUs affected by CAIR reduce emissions on schedule.12 The FIP rule would apply in states where EPA has not approved a CAIR SIP. The FIP rule, which establishes federal emissions cap-and-trade programs under 40 CFR Part 97, applies to the District of Columbia and all states subject to CAIR. The trading programs established under the FIP rule will cover SO2 emissions, annual NOx emissions, and ozone season NOx emissions from EGUs. The FIP cap-and-trade programs will regulate EGUs in the subject States and achieve the emission reductions required by CAIR until each subject State has an approved CAIR SIP to achieve the reductions. The imposition of a FIP rule would not prevent New York from developing its own program in the future that would supplant the FIP. EPA will withdraw the FIP cap-and-trade programs in a State in coordination with approval of a SIP implementing the requirements of CAIR. While the FIP cap-and-trade programs are an effective option, New York would not be able to utilize any alternative implementation options allowed under CAIR, including a state specific allocation plan, and the inclusion of small EGUs, non-EGUs, and Portland cement kilns in the ozone season program. If the FIP rule is imposed in New York State, the Department would be obligated to assure that emissions attributable to small EGUs, non-EGUs, and Portland cement kilns are controlled during the ozone season to the same level as budgeted under Part 204. The Department rejected the no action option and is promulgating Parts 243, 244, and 245 to meet its CAIR obligations.
Control Other Sources
Nearly 70 percent of New York State's SO2 emission inventory is from EGUs. Controlling other sources cannot achieve the reductions necessary to meet the requirements of CAIR in New York State. EGUs are the second largest source category of NOx emissions after the transportation sector. New York State has already controlled and reduced NOx emissions from motor vehicles to the maximum extent allowed by the federal CAA. Very large stationary combustion units (greater than 250 million Btu heat input per hour) also contribute a significant amount of NOx to the atmosphere. New York State is required by the federal government to control these very large stationary combustion units under the NOx SIP Call and continues to regulate them under Part 243. Controlling emissions from large sources is generally less costly than controlling emissions from many smaller sources. The Department has, therefore, determined that it would be more expensive to achieve commensurate reductions from other sources of NOx emissions and has opted to control emissions in the most cost effective manner possible.
Command-and-control
The following passage succinctly and accurately describes the basic distinctions between a market-based regulatory program like that proposed for CAIR and command-and-control programs.
Market-based instruments are regulations that encourage behavior through market signals rather than through explicit directives regarding pollution control levels or methods. These policy instruments, such as tradable permits or pollution charges, are often described as "harnessing market forces" because if they are well designed and implemented, they encourage firms (and/or individuals) to undertake pollution control efforts that are in their own interests and that collectively meet policy goals.
By way of contrast, conventional approaches to regulating the environment are often referred to as "command-and-control" regulations, since they allow relatively little flexibility in the means of achieving goals. Such regulations tend to force firms to take on similar shares of the pollution-control burden, regardless of the cost. Command-and-control regulations do this by setting uniform standards for firms, the most prevalent of which are technology- and performance-based standards. Technology-based standards specify the method, and sometimes the actual equipment, that firms must use to comply with a particular regulation. A performance standard sets a uniform control target for firms, while allowing some latitude in how this target is met.
Holding all firms to the same target can be expensive and, in some circumstances, counterproductive. While standards may effectively limit emissions of pollutants, they typically exact relatively high costs in the process, by forcing some firms to resort to unduly expensive means of controlling pollution. Because the costs of controlling emissions may vary greatly among firms, and even among sources within the same firm, the appropriate technology in one situation may not be appropriate (cost-effective) in another. Thus, control costs can vary enormously due to a firm's production design, physical configuration, age of its assets, or other factors.
Furthermore, command-and-control regulations tend to freeze the development of technologies that might otherwise result in greater levels of control. Little or no financial incentive exists for businesses to exceed their control targets, and both technology-based and performance-based standards discourage adoption of new technologies. A business that adopts a new technology may be "rewarded" by being held to a higher standard of performance and not given the opportunity to benefit financially for its investment, except to the extent that its competitors have even more difficulty reaching the new standard.
'Experience with Market-Based Environmental Policy Instruments', Robert N. Stavins, Resources for the Future, November 2001 (footnotes omitted), pp.1-2. See also 'Air Pollution: Overview and Issues on Emissions Allowance Trading Programs', U.S. General Accounting Office, GAO/T-RCED-97-183, July 9, 1997, p. 2.
Auction v. Free Allocation
There are two ways in which the Department may allocate allowances: Sell them through an auction or give them away as has been done in the past. Either way, the government would receive at least some of the value of the allowances in the form of state revenue. If the allowances are auctioned, the government would receive their total value. If the allowances were given away at no charge, the companies that received them would have higher profits than if they did not receive them for free. In that situation, the rise in profits would reflect the value of the allowances. The government would receive approximately 45 percent of that value through taxes on the profits. The other 55 percent would ultimately benefit the shareholders of those companies.13
Economists widely believe that auctions are the most efficient method for distributing allowances, thereby reducing overall compliance costs.14 Auctioning allowances may be more efficient than free allocations with the assumption that auction revenues are effectively directed. The benefits can be long-term and spread out across the economy. The revenue from an auction could be funneled back to the sources through a mechanism based on generation, distributed to a related public benefit program or some combination of the two. In an unrestricted auction, anyone is allowed to bid on any amount of allowances with the allowances going to those who bid the highest prices. A restricted auction could limit the bidders to those covered by the regulation, limit the number of allowances available to any one bidder or place only a limited number of allowances up for bid. These options could alleviate concerns about someone garnering control of the market. While the Department recognizes the potential benefits of an auction, the Department has opted to continue to allocate the majority of allowances to affected sources based on historical operation. A precedent from other proven allowance trading programs has been established for this type of allowance allocation.15
The Department chose this option in order to meet the Federal deadlines of CAIR and to avoid FIP implications. Based on the Department's experience with the EERET account under this program, the Department will consider expanding this type of approach in CAIR at some point in the future.
SO2 Allocations
SO2 allowances have already been allocated and received by sources under title IV of CAA Section 403. Pre-2010 Title IV SO2 allowances can be used for compliance with CAIR. SO2 reductions are achieved by requiring sources to retire more than one allowance for each ton of SO2 emitted. The emission value of an SO2 allowance is independent of the year in which it is used, but is based upon its vintage. Each sulfur dioxide allowance of vintage 2009 and earlier offsets one ton of SO2 emissions. Vintages 2010 through 2014 offset 0.5 tons of emissions, this equates to a 50 percent emission reduction. Vintages 2015 and beyond offset 0.35 tons of emissions, this equates to a 65 percent emission reduction. The Department is proposing to adopt the Federal model rule for SO2 at this time. However, the Department may, in the future, adopt an alternative approach. In the interim, Part 238 will remain in place.
NOx Allocations
Allocating allowances based on historical operational activity does not create any economic incentive to change current operating behavior. The literature generally indicates that this type of grandfathered allocation system has certain advantages to some updating allocation systems.16 However, this literature ignores the fact that updating with a Control Period Potential to Emit (CPPTE) input based methodology, that limits the amount of allowances an affected facility can receive based on the maximum capacity of a unit to emit, has less of an influence on operating behavior than the literature assumes and accommodates industry changes, as well as enhances general power supply reliability. The CPPTE component has been shown to enhance the updating allocation methodology and make it a more favorable option.
In developing the NOx SIP Call rule, EPA evaluated alternative allocation methodologies in a report prepared by ICF Consulting.17 The analysis concludes that an allocation based on fuel input results in higher fuel use relative to an allocation system based on electricity output. In addition, the analysis found that an updating system will result in lower emissions and greater electric generation, which in turn mitigates increases in electricity prices.
Based on the paragraphs above, the Department has chosen an updating allocation methodology.
The Department considered utilizing an electricity output based allocation methodology. Advocates for use of an output based methodology agree that this type of approach rewards the most efficient generation. The Department agrees with that assertion, but has not chosen to allocate on an output basis because of the lack of available generation data, as well as deficiencies in the standardization of generation data. First, generation data is not reported to EPA, so it would take an additional effort for a source to report this information to the Department. The Department does not have sufficient time to request the output data, collect, process and use it to allocate allowances to affected sources within the timeframe allowed to complete the CAIR regulations and have allocations in place for the first phase of CAIR. Second, the Department would need to set standards for the measurement and reporting of this data. Measures for a heat input allocation methodology exist and have been proven under 40 CFR Part 75. Third, the Department would need to establish a standardized mechanism to recognize an equivalent electrical output for those generators which also produce thermal energy (usually steam) for heating, cooling and/or industrial processes. It is not likely that the required data will become available in time to finalize New York State's CAIR regulations.
Useful steam data collection has not been available and may be difficult to collect from cogeneration units. Combined heat and power sources would not receive credit for their thermal output if only electrical output is counted in an allocation methodology.
The theory that output-based allocations encourage greater energy efficiency and reliance on cleaner sources of energy appears to generally be true. However, the Department includes a CPPTE component in its allowance allocation methodology, which limits the amount of allowances an affected facility can receive based on the maximum capacity of a unit to emit under its physical and operational design during a control period. If the CPPTE is used in an output based allocation system, there is likely little difference in the actual allowances distributed to facilities.
Because of the additional burden the output based methodology would place on the Department and on the affected sources, the Department has chosen not to allocate allowances in this manner at this time.
The cap and trade system itself, regardless of how the allowances are distributed, provides the primary incentive for more efficient, cleaner generation of electricity. Ultimately, the NOx emission caps in New York State will remain the same regardless of how the tons in the overall budget are distributed to sources in the program. The amount of allowances will be distributed somewhat differently to affected sources depending on a heat input or energy output based methodology, but the same level of reduction in emissions will be achieved regardless.
Given the fact that combustion sources may have a wide spectrum of sizes and useful outputs, they share a single, common input: fuel. Fuel input may be easily quantified in terms of quantity and equivalent heat content. Thus, the easiest way for environmental agencies to regulate emissions across this diverse spectrum of combustion sources was to establish limits on the basis of pounds emitted per unit of fuel (or heat) input.
The Department chose a fuel neutral approach in the allocation methodology for NOx allowances. The Department substantially adopted the methodology used in allocating NOx allowances under Parts 204 and 237. As with Parts 204 and 237, the Department believes that a fuel neutral allocation methodology is appropriate because of the relatively small differences in uncontrolled NOx emission rates (as compared to SO2) resulting from use of different types of fossil fuel.
The Department considered and rejected an energy efficiency and renewable energy generator set-aside under the program. Instead, the Department is proposing to create the EERET Account. The inclusion of the EERET Account will not cause the retail price of electricity to increase because generators incorporate the same dollar value of the allowances in their bids to supply electricity whether the allowances are obtained at no cost or purchased on the open market.
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1 Ozone season, for the purpose of this rulemaking, is defined as the time period from May 1 through September 30.
2 Rule To Reduce Interstate Transport of Fine Particulate Matter and Ozone (Clean Air Interstate Rule): Reconsideration, 70 FR 72268-82 (December 2, 2005) and Rule To Reduce Interstate Transport of Fine Particulate Matter and Ozone (Clean Air Interstate Rule): Supplemental Notice of Reconsideration, 70 FR 77101-13 (December 29, 2005).
3 Part 96 - NOx Budget Trading Program and CAIR NOx and SO2 Trading Programs for State Implementation Plans, 71 FR 25380-96 (April 28, 2006).
4 The classifications for the ozone and PM2.5 nonattainment areas may be found at 40 CFR Section 81.333. A graphical representation of the ozone nonattainment areas may be found at http://www.epa.gov/oar/oaqps/greenbk/ny8.html. A graphical representation of the PM2.5 nonattainment areas may be found at http://www.epa.gov/oar/oaqps/greenbk/mappm25.html.
5 CAA Section 109(b); 40 CFR Section 50.2(b).
6 292 Journal of the American Medical Asssn. 2372-78 (Nov. 17, 2004); 170 Am. J. Respir. Crit. Care Med. 1080-87 (July 28, 2004) (observing significant ozone-related deaths in the New York City Metropolitan Area).
7 http://www.epa.gov/interstateairquality/ny.html.
8 "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Initiative Cap-and-Trade Program", Dallas Burtraw, Karen L. Palmer and Danny Kahn, June 2005.
9 Typical customer usage numbers from the Energy Information Administration (EIA). Electricity rates from December 2005 Patterns & Trends report.
10 NYSDEC, NYSERDA, and ICF International, Modeling Results for CAIR and Mercury. May 18, 2006
11 EPA described the use of TRUM in a Technical Support Document (TSD) for the final CAIR entitled "Modeling of Control Costs, Emissions, and Control Retrofits for Cost Effectiveness and Feasibility Analyses," March 2005, as well as in a memorandum entitled "Analysis of the Marginal Cost of SO2 and NOx Reductions," January 28, 2004 (the TSD and memorandum are both available in the CAIR docket (EPA-HQ-OAR-2003-0053).
12 Rulemaking on Section 126 Petition From North Carolina To Reduce Interstate Transport of Fine Particulate Matter and Ozone; Federal Implementation Plans To Reduce Interstate Transport of Fine Particulate Matter and Ozone; Revisions to the Clean Air Interstate Rule; Revisions to the Acid Rain Program, 71 FR.25328-469 (April 28, 2006).
13 Congressional Budget Office. "Who Gains and Who Pays Under Carbon-Allowance Trading? The Distributional Effects of Alternative Policy Designs." June 2000, p. 1.
14 'Experience with Market-Based Environmental Policy Instruments', Robert N. Stavins, Resources for the Future, November 2001.
15 MIT Joint Program on the Science and Policy of Global Change. "Emissions Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal." Sergy Paltsev, John M. Reilly, Henry D. Jacoby, A. Denny Ellerman and Kok Hou Tay. Report No. 97, June 2003.
16 Climate Policy Center. "Allowance Allocation Under a Carbon Cap-and-Trade Policy." Lee Lane, Americans for Equitable Climate Solutions. September, 2003.
17 "Economic Analysis of Alternate Methods of Allocating NOx Emission Allowances", ICF Consulting, October 19, 1999.
