Compliance Options:
Freedom to Choose

Tr Acid Rain Program allows
sources to select their own
compliance strategy. For example,
to reduce SO2 and NOx emissions,
an affeeted source may repower
its units, use cleaner burning fuel,
or reassign some of its energy
production capacity from dirtier
units to cleaner ones.

Asource may also elect to install
scrubber equipment at one or more
units that reduces emissions by 90
percent or more, and possibly
receive extra allowances and an ex-
tension on Phase I compliance
deadlines. Still other sources may
decide to reduce electricity genera-
tion and compensate for reduced
output in one of several ways, in-
cluding the adoption of conserva-
tion or efficiency measures. Some
of the options will afford the unit
special treatment, such as a
compliance extension or extra
allowances. Others, like fuel
switching, require no special prior
approval.

In either case, the Acid Rain
Program allows affected utilities
to combine these and other op-
tions in any way they see fit in
order to tailor their compliance
plan to the unique needs of each
unit or system.

Continuous Emission
Monitoring

Tx Acid Rain Program man-
dates that each unit be
equipped with a continuous
emission monitoring (CEM) sys-
tem that measures and records
emissions hourly. The CEM sys-
tem will be required to monitor
emissions of SO2 and NOx, as well
as measure volumetric flow,
opacity, and diluent gas. The CEM
system is critical to the Acid Rain
Program. It will instill confidence
in allowance transactions by cer-
tifying the existence and quantity
of the commodity being traded.

Monitoring will also ensure,
through accurate accounting, that
the emissions reduction goals are
met. Unlike traditional regulatory
programs, which measure specific
emissions rates, the Acid Rain
Program will focus attention on
total emissions.

The proposed rule also contains
provisions for initial equipment
certification procedures, periodic
quality assurance and quality con-
trol procedures, and recordkeep-
ing and reporting. Units will
electronically report emissions
data to EPA on a quarterly basis.
The proposed rule also contains
procedures for filling in for miss-
ing data periods.

A Model Program

A established the Acid Rain
Advisory Committee (ARAC)
to gain broad input into the
development of the Acid Rain
Program, to promote collabora-
tion, and to build consensus.
ARAC consisted of repre-
sentatives from various
stakeholder groups, including
utilities, emissions control equip-
ment vendors, academia, Public
Utility Commissions, state pollu-
tion control agencies, and en-
vironmental groups. Prior to the
proposal of these rules, ARAC
convened six public meetings
with hundreds of participants.
The input received through this
process was critical to the
development of the core rules of
the Acid Rain Program.

EPA will maintain this open door
policy as it implements the
program, and will continue to
solicit input from the different par-
ties involved. In addition, EPA will
evaluate the benefits and effects of
the program through economicand
environmental studies.

The Acid Rain Program is al-
ready being viewed around the
world as the prototype for tack-
ling emerging environmental is-

Rie aad Dadtnsinn

Annis O49 INDO

sues. The allowance trading sys-
tem capitalizes on the power of the
marketplace to reduce SO2
emissions in the most cost-effec-
tive manner possible. The permit-
ting program allows sources the
flexibility to tailor and update
their compliance strategy based
on their individual circum-
stances.

The ‘continuous emission
monitoring system provides the ac-
curate accounting of emissions
necessary to make the program
work, and the excess emissions
penalties provide strong incentives
for self-enforcement. Each of these
separate components contributes
to the effective working of an in-
tegrated program that lets market
incentives do the work to achieve
cost-effective emissions reduc-
tions.

For More information
FE more information, write to:

U.S. EPA Office of Air and
Radiation

Acid Rain Division
(ANR-445)

Washington, DC 20460

‘If you would like to receive other
fact sheets in this series, call the
Acid Rain Hotline at (617) 641-5377
or the EPA Public Information
Center (PIC) at 202-260-2080.

Fact sheets are available on the
following subjects:
e Allowance System

e Continuous Emission
Monitoring

oe Environmental Benefits
o Excess Emissions
o Permits

o Auctions and Sales, and IPP
Written Guarantee

Regulations


400/1-91/038
December 1991

Air and Radiation
(ANR-445)

United States
Environmental Protection

Agency

Proposed Acid Rain Rules
Overview

EPA

The U.S. Environmental Protection Agency (EPA) has
proposed four rules containing the core acid rain require-
ments: the Permits Rule (40_ CFR Part 72), the Allowance
System Rule (40 CFR Part 73), the Continuous Emission

Monitoring Rule (40 CFR Part 75), and the Excess Emissions
Rule (40 CFR Part 77). EPA will also propose additional rules

at a future date. These rules will include requirements for
facilities that elect to opt in to the Acid Rain Program (40 CFR
Part 74) and for the nitrogen oxide (NOx) control program (40
CFR Part 76). This fact sheet discusses the interdependence of
the core acid rain rules.

nder Title IV of the Clean Air

Act Amendments of 1990,
Congress authorized the U.S. En-
vironmental Protection Agency
(EPA) to establish the Acid Rain
Program. The principal goal of this

program is to achieve significant
environmental benefits through
reductions in sulfur dioxide (SO2)
and nitrogen oxide (NOx) emis-
sions, the primary components of
acid rain. To achieve this goal at the

Acid Rain Formation

Prevailing Winds Emissions are mixed with oxygen,

ozone, and waler to form sulfuric and
nitric aids in he presence of suntght

oe

Acidic Precipitation

Dry Deposition of Acidic
Compounds

Coal-ired electric utilities and

other sources that bun fossil

fuels emit sulfur dioxide and
nitrogen oxides

Vehicles emit nitrogen oxides
and hydrocarbons

Sulfur dioxide and nitrogen oxide emissions react with water vapor and oxidants

in the atmosphere and are chemically transformed into acidic compounds. These
compounds are deposited in rain or snow; the compounds also may join airborne
particles and fall to earth as dry deposition.

lowest cost to society, the program
will employ both traditional and
innovative market-based ap-
proaches for controlling air pollu-
tion. In addition, the program will
encourage energy conservation
and promote pollution prevention.

The legislation sets as its primary
goal the reduction of annual SO2
emissions by 10 million tons below
1980 levels. To achieve these SO2
reductions, the law requires a two-
phase approach, involving the
trading of annual SO2 emission
allowances, that gradually tightens
the restrictions placed on fossil
fuel-fired power plants.

Phase I begins in 1995 and affects
110 mostly coal-burning electric
utility plants located in 21 eastern
and midwestern states. Phase I,
which begins in the year 2000,
tightens the annual emissions
limits imposed on these large
higher emitting plants and also sets
restrictions on smaller cleaner
plants fired by coal, oil, and gas. All
existing utility units with an output
capacity of 25 megawatts or greater
and all new utility units will be
affected by Phase II

o Printed on Recycled Paper.


U.S. SO2 Emissions Distribution-By Source

Other Combustion-2.6%

Industrial Combustion-11.6%

Transportation-3.7%

Industria
Manufacturing
Processing-12.7% |

Other-0.0%

Source: U.S. EPA. November 1989. The NAPAP Emissions Inventory (Version 2 - 1985 Data).

Other Combustion-3.8%

Utilities-69.4%

U.S. NOx Emissions Distribution-By Source

Industrial/Manufacturing Processing-4.6%
Industrial Combustion-15.6%_

Transportation-43,0%

Utilities-32.4%

Other 0.6%

The Acid Rain Program
Operating Principles:
Workable, Flexible,
Accountable

he four core acid rain
rules propose an integrated,
well-orchestrated system for ac-
complishing the three primary ob-
jectives of the Acid Rain Program:
e Achieve environmental
benefits through reductions

in SO2 and NOx emissions.

+ Facilitate active trading of
allowances and use of other
compliance options to mini-
mize compliance costs, max-
imize economic efficiency,
and permit strong economic
growth.

¢ Promote pollution preven-
tion and energy efficient
strategies and technologies.

Each individual rule fulfills a
vital function in the larger
program. The allowance trading
system creates low cost rules of ex-
change that minimize government
intrusion and make allowance
trading a viable compliance
strategy; the permitting process af-
fords sources maximum flexibility
in selecting the most cost-effective
approach to reducing emissions;
the continuous emissions monitor-
ing system (CEM) provides

credible accounting of emissions to
ensure the integrity of the market-
based allowance system and the
achievement of the reduction goals;
and finally, the excess emissions
tule provides the incentives to en-
sure self-enforcement, greatly
reducing the need for govern-
ment action.

Allowance Trading

"Te proposed Acid Rain
Program represents a dramatic
departure from traditional com-
mand and control regulatory
methods that establish specific in-
flexible emissions limitations with
which all affected sources must
comply. Instead, the program intro-
duces an allowance trading system
that harnesses the incentives of the
free market to reduce pollution.
Under this system, affected
utility units will be allocated
allowances annually based on their
historic fuel consumption and a
specific emissions rate. Each
allowance permits a unit to emit 1
ton of SO2 during or after a
specified year. For each ton of SO2
discharged in a given year, one
allowance is retired, that is, it can
no longer be used. During Phase II
of the Acid Rain Program, the Act
will set a permanent ceiling (or
cap) on total yearly allowance al-
locations to utilities at 8.95 million
allowances. This cap firmly
restricts emissions and ensures that

2

the mandated emissions reduc-
tions will be achieved and environ-
mental benefits maintained.
Allowances may be bought,
sold, or banked. Any person may
acquire allowances and par-
ticipate in the trading system. At
the end of the year, utilities are
granted a 30-day true-up or grace
period, during which SO2
allowances may be purchased, if
necessary, to cover each unit’s
emissions for the year. At the end
of the grace period, the
allowances a unit holds in its com-
pliance account must equal or ex-
ceed the annual SO2 emissions
recorded by the monitoring sys-
tem. Extra allowances may be sold
or banked for use in future years.

Excess Emissions

f compliance is not achieved, the

owners or operators of delin-
quent units must pay a penalty of
$2,000 per excess ton of emissions.
In addition, violating utilities must
offset the excess SO2 emissions
with allowances in an amount
equivalent to the excess. In essence,
by giving up allowances to cover
excess emissions, delinquent units
will be compelled to reduce emis-
sions of SOQ2 . These utilities must
submit an excess emissions offset
plan to EPA that outlines how these
cutbacks will be achieved.


Auctions, Sales, and IPP
Contingency Guarantee

ER will hold allowance auctions
and sales annually. The auctions
will help to send the market an
allowance price signal, as well as
furnish utilities with an additional
avenue for purchasing needed
allowances. The sales will offer
allowances at a fixed price of
$1,500. Anyone can_ buy
allowances in the direct sale, but
independent power producers
(IPPs) can obtain written guaran-
tees from EPA stating that they
will have first priority. These
guarantees, which will be
awarded on a first-come, first-
served basis, secure the option for
qualified IPPs to purchase a year-
ly amount of allowances over a
30-year span. This provision
enables IPPs to assure lenders that
they will have access to the
allowances they need to build and
operate new units.

Impetus to Conserve

ee allowance trading system
contains an inherent incentive
for utilities to undertake conser-
vation measures since for each ton
of SQ? that a utility avoids emit-

ting, onelessallowanceneedsto be
retired. Energy-efficient utilities
will be able to sell their surplus
allowances at a profit. As
provided in the Act, EPA has also
set aside an allowance reserve to
stimulate energy conservation.
Those utilities that either imple-
ment demand-side energy conser-
vation programs to curtail
emissions or install renewable
energy generation facilities may
be eligible to receive bonus
aliowances from this reserve.

The Allowance Tracking
System

PA will institute an electronic

recordkeeping and notification
system, called the Allowance
Tracking System (ATS) to keep
track of allowance transactions and
the status of allowance accounts.
ATS will be the official tally of
allowances by which EPA will
determine compliance with the
emissions limitations. Any party
interested in participating in the
trading system may open an ATS
account by submitting an applica-
tion to EPA. Accounts will contain
information on unit account balan-
ces, emissions, account repre-
sentatives (which must be

Phase | Sources

During Phase I, 268 units at 110 sources, located primarily in the Midwest and North-
east, will be affected by acid rain regulations. During Phase Il, the number of affected
units will increase to 2,200, as smaller cleaner power plants are included in the

regulatory network.

appointed by each trading party),
and serial numbers for each
allowance. ATS will be com-
puterized to expedite the flow of
data and assist in the development
of a viable market for allowances.

Designated
Representatives

Ft source must appoint one
individual to represent the
owners and operators of the
source in all matters relating to
the holding and disposal of
allowances ‘, its affected units.
The designated representative
also will be responsible for all sub-
missions pertaining to permits,
compliance plans, emissions
monitoring reports, offset plans,
compliance certification, and other
necessary information.

Permitting

“Te designated representative
for each source is required to
file a permit application for the
source and a compliance plan for
each affected unit at the source.
The permits and compliance
plans feature the same flexibility
that characterizes the Acid Rain
Program as a whole; indeed, they
complement the market-oriented
allowance system and foster trad-
ing. For example, they allow
sources to make real-time
allowance trading decisions
through the use of automatic per-
mit amendments. The permits
and compliance plans also let
sources fashion a compliance
strategy that is tailored to their
individual needs.

The permit stipulates the basic
allowance allocation for each af-
fected unit at a source. The permit
application must certify that each
unit account will hold a sufficient
number of allowances to cover the
unit’s SO2 emissions for the year
and will comply with the ap-
plicable NOx limit. In addition,
the compliance plans may specify
alternative measures that will be
taken to ensure compliance. Per-
mits will be subject to public com-
ment before approval.