# Final Transport Rule

Interagency Briefing

EPA May 23, 2011

# Outline
• Core Methods

– Responding to major public comment

– Updating inventories and modeling

– Determining final geography

– Determining final state budgets 

## • Additional Notable Features of Final Transport Rule

– Allowance allocation approaches (new and existing units)

– State Implementation Plan (SIP) submittal provisions

– Variability limits and assurance provisions

– Compliance deadlines

– No carryover of CAIR allowance programs

– Opt- ins removed 05/23/201 1 2 Deliberative – Do Not Cite or Quote

# Core Methods

0 6/28/201 1 U.S. Environmental Protection Agency 3

# Responding to Major Public Comments (I) • Remedy structure

– Public comment broadly supportive of “preferred remedy” that maintains market- based trading flexibilities to achieve substantial emission reductions and health benefits at very low costs

– Commenters generally believed that the Transport Rule was responsive to the Court’s remand of CAIR in developing a state -specific solution addressing interstate transport of air pollution 

## • Pollutants regulated

– SO 2 

## and ozone -season NO X 

## widely accepted

– Some southern states questioned benefits of annual NO X 

## control in warmer climates with lower nitrate contributions

– Many state commenters disappointed that EPA did not use the tighter 2008 ozone standard (ozone NAAQS is currently under reconsideration) Deliberative - Do Not Cite or Quote 4 05/23/201 1

# Responding to Major Public Comments (II) • Interstate contribution thresholds

– 1% of NAAQS threshold described as too tight by industry and some states, not tight enough by environmental groups and public health organizations

– Many states supported the 1% threshold 

## • Timing of control

– Parts of industry questioned the feasibility of Transport Rule emission reductions in 2012 and 2014 

## • Allowance allocation was of major interest to industry and many states • Other concerns: opt- ins, carryover of CAIR NO X

## , cogeneration, applicability, etc. Deliberative - Do Not Cite or Quote 5 05/23/201 1

# Updates to Inventories and Modeling (I) • Power sector modeling assumptions and unit- level representation of the fleet

– Incorporated new unconventional (e.g., shale) gas supply

– Adopted AEO 2010 electricity demand forecast

– Updated base case pollution controls, legal emission constraints (e.g., settlements), and retirements

– Added dry sorbent injection (DSI) SO 2 

## control technology

– Imposed coal -switching constraints based on comments

– Adjusted cogeneration unit dispatch

– Revised pollution control retrofit cost and performance assumptions 05/23/201 1 Deliberative - Do Not Cite or Quote 6

# Updates to Inventories and Modeling (II) • Emission inventories used for air quality modeling

– Updated EGU projections from updated power sector modeling • Yielded important decreases in base case SO 2 and NO X projections in many states



### – Used MOVES 2010 NO X

### , SO 2

### , and PM for all vehicles (including diesel) • Yielded important increases in NO X projections in some urban areas



### – Incorporated newly supplied fuel combustion emission projections from states

– Updated plant closures for non - EGU point sources and removed duplicates based on comments

– Included additional consent decrees

– Updated projections for cement plants using Industrial Sector Integrated Solutions (ISIS) model

– Included emission reductions from reciprocating internal combustion engines (RICE)

– Revised “close to coast” allocation to states of category 3 (C3) commercial marine vessel emissions and incorporated Int’l Maritime Org. (ECA- IMO) controls 05/23/201 1 Deliberative - Do Not Cite or Quote 7

# Determining Geographic Coverage (I)
• Identified downwind air quality problems

– Identified receptors modeled to have nonattainment and/or maintenance problems in 2012 

## • CAMx modeling results for 2005 and 2012 were coupled with 2003 - 2007 modeling results for 2005 and 2012 were coupled with 2003 PM 2.5 

## and ozone measurements to project “design values” in 2012.

– Monitoring sites with 2012 average design values exceeding the NAAQS are projected to be nonattainment in 2012. • Projection of the average of 2003 - 2005, 2004- 2006, and 2005 - 2007 ambient design values



### – Monitoring sites with 2012 maximum design values exceeding the NAAQS are projected to have maintenance problems in 2012. • Projection of the maximum of 2003 - 2005, 2004- 2006, and 2005 - 2007 ambient design values Deliberative - Do Not Cite or Quote 8 05/23/201 1

# Determining Geographic Coverage (II) • Identified upwind linkages to downwind air quality problems

– Quantify the air quality contributions from emissions in upwind states to downwind nonattainment and maintenance receptors 

### • CAMx Source Apportionment modeling was performed for the 2012 base case to quantify the contributions of SO 2 

### and NO X 

### emissions in each state to annual and daily quantify the contributions of 2 

### and NO X 

### emissions in each state to annual and daily PM 2.5 

### and ozone at each nonattainment and/or maintenance receptor site. 

### • Each upwind -to- downwind contribution (i.e., “linkage”) was evaluated against thresholds based on 1 percent of the NAAQS.

– Annual PM 2.5 : contributions >= 0.15 μg/m 3 [NAAQS = 15.0 ug/m 3 ]

– Daily PM 2.5 : contributions >= 0.35 μg/m 3 [NAAQS = 35 ug/m 3 ]

– 8- Hour Ozone: contributions >= 0.8 ppb [NAAQS = 0.08 ppm ] 

### • States that contribute amounts that meet or exceed the thresholds at a downwind receptor are considered “linked” to those downwind areas and are considered for inclusion in the Transport Rule programs. Deliberative - Do Not Cite or Quote 9 05/23/201 1

# States Covered in the Final Rule Final Transport Rule* Proposed Transport Rule

Deliberative – Do Not Cite or Quote 10 Drop Out Come In Annual and/or 24- hr PM CT, DC, DE, FL,

LA, MA TX Ozone CT, DC, DE IA, MO, WI *Map includes six states whose coverage in the ozone-season NOX program is subject to an SNPR

# Determining State Budgets

• Quantify and eliminate emissions in each “linked” state which constitute that state’s “significant contribution and interference with maintenance” • Consider both control costs and air quality improvements (multifactor analysis) to identify appropriate cost thresholds

– Used Integrated Planning Model (IPM) to estimate emissions reductions at various cost thresholds

– Used Air Quality Assessment Tool (AQAT) calibrated with CAMx model to estimate downwind air quality impacts associated with the reductions at each cost threshold 

### • Calculated state-specific budgets by quantifying emissions remaining after all reductions available at the appropriate cost threshold are achieved.

– Upwind states linked for ozone • Ozone -season NO X budgets based on a $500/ton cost threshold

– Upwind states linked for PM 2.5 • Annual NO X budgets based on a $500/ton cost threshold • Annual SO 2 budgets in Group 1 states based on a $2300/ton threshold • Annual SO 2 budgets in Group 2 states based on a $500/ton threshold Deliberative - Do Not Cite or Quote 11 05/23/201 1

# Air Quality-Assured Trading Programs Group 1 versus Group 2 SO 2 

### States Total Program Coverage*

Deliberative – Do Not Cite or Quote 12 SO 2 Control Group 1 IL, IN, IA, KY, MD, MI,

MO, NJ, NY, NC, OH, PA, TN, VA, WV, WI Group 2 AL, GA, KS, MN, NE,

SC, TX *Map includes six states whose coverage in the ozone-season NOX program is subject to an SNPR

# Additional Notable Features of

Final Transport Rule

6/28/201 1 U.S. Environmental Protection Agency 13

# Allocation to New Units
• “New unit” is any unit not online by January 1, 2010 • Each state’s new unit set-aside has two parts:

– Basic amount of 2% of total state budget • EPA reserves 5% of this amount for new units in Indian country within that state

– Projected amount of emissions from committed units in that state (for example, committed units in Illinois are projected to emit 3% of the state’s SO 2 budget and 6% of the state’s annual NO X and ozone -season NO X budgets) 

## • New units may receive allocations during their first year of operation • Retiring units’ allocations are redistributed to the new unit set-asides • If unallocated, set-asides are redistributed to unretired existing units before the compliance deadline Deliberative - Do Not Cite or Quote 14 05/23/201 1

# Allocation to Existing Units
• EPA proposed an emissions- based approach and also solicited comments on historic heat input- based alternatives • Commenters noted the following advantages of the historic heat inputbased approaches:

– Superior data that is quality-assured Superior that is quality assured

– Less complex and more transparent than proposal’s approach

– Does not penalize units for choosing cleaner fuels or installing pollution controls 

## • The final rule allocates allowances to existing units based on share of state’s heat input constrained not to exceed a unit’s maximum historic emissions

– Uses highest three of the last five years for each unit to establish heat input baseline

– Constrains unit- level allocations not to exceed maximum emissions from 2003 - 2010 

## • States can establish allocations to existing units from 2013 onward Deliberative - Do Not Cite or Quote 15 05/23/201 1

# SIP Submittal Provisions
• States may replace existing unit FIP allocations as early as 2013 by submitting a simple table of units and allocations • States may submit SIPs to determine allocations for 2014 and later with a lot of flexibility while respecting certain bounds aimed at sound program structure

– Total allocations for a year cannot exceed state budget (without variability) minus the Indian country new unit set-aside, which EPA continues to administer

– Existing and new unit allocations must be submitted by specified deadlines to EPA for recording in allowance accounts

– No other changes can be made to trading program provisions

– States may choose to SIP solely for allocation purposes for one or more Transport Rule programs, and they are free to allocate how they see fit (i.e., including set-asides and auctions) Deliberative - Do Not Cite or Quote 16 05/23/201 1

# Variability Limits
• Transport Rule budgets reflect EGU operations in an “average year”

– Interconnected nature of power sector creates inherent year-to-year variability in state - level EGU operations 

## • EPA analyzed historic state - level heat input variability from 2002 - 2008 (as a EPA analyzed historic state heat input variability from 2002 proxy for emissions variability assuming constant emission rates)

– Most states’ historic variability levels were within 10%; a few approached 15% and three approached 20%

– Final rule establishes annual variability limits on each state budget at whichever level (10%, 15%, 20%) minimizes variability while covering historical level in that state 

## • State’s budget plus variability limit equals state’s “assurance level” • Assurance provisions go into effect in 2012 Deliberative - Do Not Cite or Quote 17 05/23/201 1

# Assurance Provisions

• If a state exceeds its “assurance level” in a given year, an assurance penalty is assessed on the excess tons

– Final rule imposes a 2:1 assurance penalty; for each excess ton, owners and operators must hold 1 allowance for normal compliance plus 2 allowances for the penalty 

### • Excess tons at the state level must be apportioned to the source level to assess penalties

– Proposed rule apportioned by ownership; final rule apportions to groups of sources with a common designated representative

– A group of sources’ share of state’s excess tons is based on group’s emissions exceeding group’s allocations plus its share of the state variability limit. • Assuming a 10% variability limit, a group’s emissions beyond 110% of its allocations would be used to calculate its share of state’s excess emissions if state assurance level is exceeded 

### • EPA analysis shows that state exceedances of assurance levels would be uneconomic (and thus exceedingly unlikely to occur) • Penalty is designed to deter state - level emissions from exceeding assurance levels; there is no limit to the degree of interstate trading of allowances Deliberative - Do Not Cite or Quote 18 05/23/201 1

# Transport Rule Compliance Deadlines
• January 2012 for annual NO X

## /SO 2 

## and May 2012 for ozone -season NO X

## ; deeper reductions from January 2014 for SO 2 

## in Group 1 states

– The 2012/2014 compliance dates are responsive to Court’s direction to align emissions reductions with the NAAQS attainment deadlines. 

## • Basis for reductions in each compliance period

– 2012: operation of planned/existing controls; fuel -switching; cleaner dispatch; and installation or upgrade of combustion controls

– 2014: installation of less than 6 GW of scrubbers and 3 GW of dry sorbent injection (DSI) • Significant decrease in retrofit effort compared to proposal’s modeling projections of 14 GW of scrubber installations by 2014, due to updated gas supply assumptions and the inclusion of DSI technology in the final rule’s modeling Deliberative - Do Not Cite or Quote 19 05/23/201 1

# No Carryover of CAIR Allowance Programs

• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances 2012 Allowance Po ols Anticipated Remaining CAIR Allowances Transport Rule

Budgets Remaining CAIR Allowances as

Pe rcent of Transport Rule Budgets Annual NOX 460,000 1,245,869 37% Ozo ne-Season NOX 440,000 580,172 76%
• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances

– “EPA's continued recording of CAIR NO X allowances does not guarantee or imply that any allowances will continue to be usable for compliance after a replacement rule is finalized or that they will continue to have value in the future.” • Proposed Transport Rule further underscored Court- imposed challenges to carryover • Carryover preserves beneficial or adverse effects on sources of EPA’s use of “fuel factors”, which were rejected by Court with regard to state budgets • Not all remaining CAIR NO X allowances represent overcompliance ; many are due to “compliance supplement pools” and subsequent NSR actions that freed up allowances • Conversion of CAIR allowances into TR allowances would introduce new complexities and delay sizable portions of allowance allocations beyond the start of the programs

– CAIR compliance for 2011 will not be completed until mid - 2012

– CAIR allowances may be held by sources or parties not covered by the Transport Rule
• EPA does not see a legal way to use title IV SO 2 allowances in the Transport Rule programs. Deliberative - Do Not Cite or Quote 20 05/23/201 1

# Opt- in Provisions Removed

• Opt- in provision from the proposal was designed to reduce overall program costs • Opt- ins would receive allocations for 70% of prior emissions; these allowances are on top of the state budgets • Future allocations reduced if more stringent state/federal emission limitation becomes applicable • Public comments identified a series of drawbacks to the proposal’s opt- in provisions

comments identified a series of drawbacks to the proposal’s in provisions

– Increasing the Transport Rule’s budgets for opt- ins undermines goal of 110(a)(2)(D) to eliminate a state’s significant contribution (CATF; DE; MO; OTC; Exelon; MDE)

– No cheap tons are available from non - EGUs (API; 8- Hour Ozone SIP Coalition; American Chemistry Council)

– Opt- in participation is unattractive due to operational and monitoring requirements; also, there is no basis for the 70% allocation factor (AFPA, PPL; Class of 85; CEG; CIBO; Exelon; PSEG; RRI) • EPA cannot prevent with certainty an opt- in unit from receiving credit for SO 2 or NO X reductions it would have made for other reasons (“anyway tons”).

– For example, non - EGUs covered by boiler MACT might receive allowances for “anyway” SO 2 reductions incidental to their legally required HCl reductions. • Each “anyway ton” awarded to an opt- in unit inflates the budget and is thus a ton of significant contribution that the Transport Rule would fail to eliminate. Deliberative - Do Not Cite or Quote 21 05/23/201 1

# APPENDIX

Deliberative - Do Not Cite or Quote 22 05/23/201 1

# 2012 Base Case Annual PM 2.5 

# Nonattainment and

Maintenance Receptors Proposal Final

23 Deliberative - Do not cite of quote

# 2012 Base Case 24 - hour PM 2.5 

# Nonattainment

and Maintenance Receptors Proposal Final

24 Deliberative - Do not cite of quote

# 2012 Base Case Ozone Nonattainment

and Maintenance Receptors Proposal Final

25 Deliberative - Do not cite of quote

# Projected Transport Rule Budgets from EGUs

Compared to Proposal* (Thousand tons) Proposed 2012 TR Budget Final 2012

TR Budget Proposed

2014 TR Budget Final 2014 TR

Budget

Deliberative - Do Not Cite or Quote 26 *For comparability, only includes states in both proposal, final, and supplemental proposal (for ozone): • 23 for OS NOX : AL, AR, FL, GA, IL, IN, KS, KY, LA, MD, MI, MS, NJ, NY, NC, OH, OK, PA, SC, TN, TX, VA, WV •22 for annual NOX and SO 2 : AL, GA, IL, IN, IA, KS, KY, MD, MI, MN, MO, NE, NJ, NY, NC, OH, PA, SC, TN, VA, WV, WI Budget TR Budget Budget Budget SO 2 3,623 1,197 638 3,057

1,1 12 556 2,229

1,197 638 1,884

1,031 524 An nual NOX Ozone -Season NOX

05/23/201 1

# Assurance Provision Penalty Examples Number of Allowances Allocated Allocation plus share

of variability limit (“Penalty Position”) Total

Emitted Number of Allowances

above Penalty Position Share of Exceedance (%) Penalty

(Allowances ) DR1 60 66 75 9 35% 17 DR2 20 22 35 13 50% 25

Deliberative - Do Not Cite or Quote 27 05/23/201 1 • DR1, DR2, DR3, and DR4 are all in the same state. • State budget plus 10% variability limit is 110 tons (100 + 10 = 110). • State exceeded its assurance level by 25 tons (135 - 110 = 25). • Penalty is 50 allowances (2 x 25 = 50). • Some numbers may not add up due to rounding • If state had not exceeded its assurance level (i.e., if DR1 had emitted 50 tons rather than 75 tons), no penalties would have been incurred by any source. DR3 10 11 15 4 15% 8 DR4 10 11 10 - - 0 TOTAL 100 110 135 25 100% 50

# Transport Rule Air Quality Results 1997 An nual PM 2006 24-Hour PM 1997 Ozone

2012 Base Case Non -attainment 7 areas Atlanta Birmingham Cincinnati Cleveland -Akron Detroit Liberty- Clairton (Allegheny) St. Louis 11 areas Birmingham Chicago- Gary- Lake 1 Cleveland -Akron Detroit Indianapolis Lancaster Liberty- Clairton (Allegheny) Milwaukee 2 areas Baton Rouge Houston

Deliberative - Do Not Cite or Quote 28 1 The Chicago- Gary- Lake and Dayton areas are not officially classified for 24 - hour PM non -attainment. For the purposes of this exercise we assumed that these areas would be similar to their annual PM non -attainment areas. Therefore, the Lake, IN and Cook, IL receptors were included in the Chicago- Gary- Lake area. 2012 Base Case Milwaukee Pittsburgh St. Louis Steubenville Maintenance 1 area Indianapolis 3 areas Cincinnati Dayton Harrisburg 3 areas Allegan Baltimore New York 2014 1 Transport Rule Non -attainment No areas 1 area Liberty- Clairton (Allegheny) 1 area Houston Maintenance No areas 3 areas Chicago- Gary- Lake 1 Detroit Lancaster 1 area Baton Rouge

05/23/201 1

# Final TR Annual Reductions, Costs, and Benefits

(reductions in thousands of tons) 2012 2014 

### SO 2 

### Reductions 4,010 3,866 

### Annual NOX 

### Reductions 120 155

Deliberative - Do Not Cite or Quote 29 

### Ozo ne-Season NOX 

### Reductions 60 75 

### Incremental Costs (Billion 2007$) 1.4 0.8 

### Annual estimated benefits (Billion 2007$, 3% discount rate ) A 

### -- 120- 280 

### Annual estimated deaths avoided (Thousands) -- 13 - 34

A Sum of PM2.5 and ozone- related health benefits, value of visibility improvements in Class I areas and CO2 - related benefits 05/23/201 1

# Supplemental Proposal for Notice and Comment
• Analysis conducted with updated inventories/modeling platforms results in new ozone receptors and states not included at proposal

– Two new ozone maintenance receptors (Allegan, MI and Harford, MD) • Five states are only linked to these new receptors: IA, KS, MI, OK, and WI



### – Three new upwind states in ozone program not included at proposal • IA, MO, and WI 

## • EPA is issuing a narrow supplemental proposal to provide opportunity for comment • Would accept comment only on whether these six states satisfy the test for inclusion in the TR ozone -season NO X program • Would not re -open methodological issues finalized in the TR • EPA is seeking to finalize this supplemental by no later than October 31 30 Deliberative – Do Not Cite or Quote 05/23/201 1