# Presentation: 027734

## An Emissions Cap Alternative to New Source Review

- September 27, 1999

## Overview

- EPA is embracing cap and trade programs for many pollutants.
- NSR is duplicative and counterproductive on top of a cap.
- Replacing NSR with a cap provides the same environmental protection with lower cost and greater environmental benefit.

## Cap and Trade Use is Growing

- EPA is supporting expanded use of cap and trade programs.
- The cap provides more secure protection of the environment.
- Variation in production, growth, other   variability all must come under the cap.
- Accurate measurement verifies the results.
- All units affected - no grandfathering.

## Cap and Trade Flexibility is Attractive to Sources

- Allows choice of compliance options -  new technology, alternate fuels, improved efficiency and pollution prevention, or reduced utilization.
- Accommodates fluctuation in production, changes in operation.
- Allows for better planning and cost containment.

## Cap and Trade Reduces Cost of Administration and of Control

- Regulators do not have to determine where cuts should be made.
- Tradable allowance market finds the lowest cost reductions - typically at older high emitting plants.
- Automatically addresses “grandfathering” by creating an economic incentive to clean up old high-emitting plants.

## Cap and Trade Supports Broad EPA Policy Goals

- Explicitly recognizes efficiency improvements and other similar actions taken by sources as pollution prevention - any type of reduction is valuable under the approach.
- Output-based approach forces sources to balance the costs of pollution (emissions) vs. the value of the useful product (output).

## Cap and Trade Provides Technology-Forcing Driver

- There is an economic incentive to create cost-effective reductions at every plant.
- With growth, there is even stronger pressure to find more effective control technology.  SCAQMD shows this clearly.
- Private sector support for technology innovation is clearly a benefit of cap and trade.

## The Cap Paradox

- Emissions cannot exceed the cap.
- Emissions won’t be below the cap either -  allowances not used at one source will be emitted somewhere else.
- If you still apply NSR to sources under the cap, other sources will produce the pollution avoided by the source subject to NSR.  This will all occur at a higher cost.

## NSR is the Opposite of Cap and Trade

- No flexibility - technology and emissions are specifically determined on a case-by-case basis.
- No cost minimization - sources required to apply the newest (most expensive and often unreliable) technology.
- No environmental certainty - actual emissions depend on production rate - no absolute cap.
- No support for pollution prevention or efficiency - rates are typically input-based, focus on add-on control.

## NSR Negates Many Benefits of Cap and Trade

- NSR forces higher cost reductions from new sources rather than low cost reductions from old sources.
- Marginal reductions squeezed out of new sources are simply emitted by other sources.
- NSR slows capital turnover and efficiency improvement.
- Offsets already handled by cap.

## If NSR Were Removed for a Capped Sector:

- Program emissions would not change.
- Compliance, administration and consumer costs would go down.
- Capital turnover would accelerate.
- Non-capped emissions would decrease.
- Costs would go down, environment would be cleaner.

## Specific Proposal

- NSR offset and technology (BACT/LAER) requirements are replaced by an emission cap and trade program covering a particular source category and geographic area.
- Local attainment issues still must be addressed separately.
- WEPCO-type protection still required for non-capped criteria pollutants.

## Outcome 

- Relief from NSR allows the cap and trade program to work effectively and provides incentives for clean growth and capital turnover.
- The cap ensures that emissions do not increase regardless of new construction or modifications.

## Outcome (2)

- Technology forcing effects maintained.
- Local attainment issues still addressed
- Costs are lower and the environment is cleaner.

## Policy Benefits

- Allows efficient, proper operation of the cap and trade program.
- Provides incentives instead of mandates:
- to states and sources to adopt cap and trade programs
- to sources to update or turn over capital stock
- Guarantees environmental safeguards, since emission levels will be capped at levels that appropriately mitigate demonstrated health and environmental risks.

## Implementation

- Source type - Would apply to an entire source category within the affected geographic area.  Alternative would be company-wide limit.
- Geographic - At least at the state level but much more effective if implemented at regional and national levels.

## Implementation

- Size - Start at existing levels (15-25 MW and 250 MMBtu).  Might need to go smaller to minimize leakage for new smaller generation technologies.  Allow Opt-in for smaller sources as well.
- Timing/seasonality - Based on appropriate mitigation requirements.
- Cap Size - Based on needed mitigation for appropriate health and environmental goals.

## Legal Basis

- Offsets - Base on EPA communications related to RECLAIM and OTR cap.
- BACT/LAER applicability
- Build on PAL concepts.
- Work from definition of “emissions increase” for a capped source, company or sector.

## Conclusions

- Cap and trade programs are proliferating.
- Within a cap, NSR is duplicative and counterproductive.
- With proper design, cap can provide the same environmental benefits as NSR at lower administrative and financial cost.
- Industry would like to work with EPA to find the proper implementation mechanism.