E. Approach to Power Sector Emission Variability

1. Introduction to Power Sector Variability

Variability is an inherent aspect of the production and 

delivery of electricity. It follows that variations in state 

emissions are not only a result of variations in the level of 

emission control, but also are caused by the inherent 

variability in power generation. In particular, emission 

variability is built into the design of power systems, which use 

a wide mix of power generation sources with varying use and 

emissions patterns to ensure reliability in electric power 

generation. Variations in weather, demand due to changes in the 

level of economic activity, the portion of electric generation 

that is fossil-fuel-fired, the length and number of outages at 

power generation units, and other factors can lead to 

significant variations in the load levels of different power 

generation sources. Variations in the load levels of sources in 

any given state cause variations in the level of emissions in 

that state. Thus, EPA believes it is appropriate, in this rule, 

to take into account the variations that are caused by inherent 

variability in power generation. More specifically, variations 

in these external variables can cause significant fluctuations

in state emissions, even when action has been taken to prohibit 

all emissions within a state that significantly contribute to 
nonattainment or interfere with maintenance in another state. 

For this reason, EPA considers variability when determining the

state specific requirements in this rule. EPA does so by 

developing variability limits and assurance levels for each 

state, as described in this section, that are consistent with 

the statutory mandate of CAA section 110(a)(2)(D)(i)(I). 

Loads on a power system, and thus on power generation sources in 

a given state that are on the power system, vary over every time 

interval, changing not only in the short term and seasonally, 

but also annually. As noted above, load patterns and levels are 

determined by a multiplicity of factors, including weather, 

economic activity, the portion of electric generation that is 

fossil-fuel-fired, and the length and number of outages at power 

generation units, which vary over time. In particular, weather 

obviously varies not just from season-to-season but also from 

year-to-year, and even small changes in annual weather patterns 

can affect how the power system and power generation sources on 

the power system operate during a year. For example, load, and 

the resulting use of generation sources on an interconnected 

grid to meet load, depend not only on how hot a summer day is, 

but also on where a heat wave occurs and how long it lasts. 

Similarly, a relatively cold winter that drives up winter load 

may also change what generation sources are used to address the 
increased demand for heat. Thus, the pattern of generation may 

shift geographically as a weather pattern moves across the 

country. Because weather and other factors affecting loads, and 

the patterns of generation used to meet loads, vary over time 

and from state to state, the resulting level of emissions also 

varies over time and from state to state. This variability in 

emissions is not a result of variation in emission rates, 

emission controls, or emission control strategies, but instead 

is a result of the inherent variability in power generation. 

Patterns of generation change to ensure demand for electricity 

is met and to ensure continued reliability of the power system. 

This results in temporal and geographic fluctuations in 

emissions. In the final Transport Rule, like the proposed rule, 

EPA explicitly takes account of these changing patterns of 

generation and the resultant variability in power sector

emissions. As discussed previously, EPA identified a specific 

amount of emissions that must be prohibited by each state to 

meet the requirements of CAA section 110(a)(2)(D)(i)(I). EPA 

also developed state baseline emissions for power generation 

sources based on projections of state emissions in an average 

year before the elimination of prohibited emissions, and state 

budgets for power generation sources based on projections of 

state emissions in an average year after the elimination of such 

emissions. However, because of the inherent variability in 
state-level baseline emissions –- resulting from the inherent 

variability in loads and power system and power generation 

source operations -- state-level emissions will fluctuate from 

year to year even after all significant contribution to 

nonattainment and interference with maintenance that EPA 

identified in this final rule are eliminated. In an above 

average year, emissions may exceed state budgets based on an 

analysis of projected emissions in an average year. EPA 

believes that, because baseline emissions are variable for 

reasons unrelated to the degree of emission control in a state 

and emissions after the elimination of all significant 

contribution to nonattainment and interference with maintenance 

are therefore also variable, it is appropriate to take this 

variability into account in developing the remedy for meeting 

the requirements of CAA section 110(a)(2)(D)(i)(I). The 

variability limits and assurance levels in the final rule 

account for this inherent variability, while ensuring that 

emissions within each state that significantly contribute to 

nonattainment or interfere with maintenance in another state are 

prohibited. EPA believes this approach is both reasonable in 

that it reflects the operation of the power system generation in 

order to maintain electric reliability and consistent with the 

statutory mandate of CAA section 110(a)(2)(D)(i)(I). For these

reasons, EPA is finalizing variability limits for each state 
budget to identify the range of emissions that EPA believes is 

likely to occur in each state following the elimination of all 

the state’s significant contribution to nonattainment and 

interference with maintenance. 

As discussed above, the air quality-assured trading 

remedy’s state-specific budgets represent each state’s emissions 

in an average year after elimination of significant contribution 

to nonattainment and interference with maintenance. Because 

actual base case emissions are likely to vary from projected 

base case emissions, this remedy incorporates provisions that 

account for such variability. While the primary purpose of this 

remedy is to address variability resulting from factors external 

to emissions controls, EPA believes variability limits also 

satisfy several other objectives. The remedy provides the 

flexibility to deal with real-world variability in the operation 

of the power system through limited interstate trading and 

reduces costs of compliance with emission reduction 

requirements, while still providing assurance for downwind 

states that significant contribution to nonattainment and 

interference with maintenance by upwind states will be 

eliminated. EPA believes the limited fluctuation in state level 

emissions that this approach permits is consistent with the 

statutory mandate of section 110(a)(2)(D)(i)(I) because some 

geographic and temporal shifting of emissions necessarily 
results from the inherent variability in power generation and is 

caused by factors unrelated to the degree of emission control 

such as weather, economic activity, and unit availability. Far 

from excusing any state from addressing emissions within the 

state that significantly contribute to nonattainment or 

interfere with maintenance in other states, these variability 

limits ensure that the system can accommodate the inherent 

variability in the power sector while ensuring that each state 

eliminates the amount of emissions within the state, in a given 

year, that must be eliminated to meet the statutory mandate of 

section 110(a)(2)(D)(i)(I).

Moreover, the structure of the program, which ensures that 

there is no overall increase in emissions through state-specific 

assurance limits as well as a penalty mechanism, ensures that 

the variability limits only allow the temporal and geographic 

shifting of emissions that is a result of the inherent 

variability in power generation, and not decisions to avoid or 

delay the installation of necessary controls. Under the remedy, 

an individual state can have emissions up to its budget plus the 

variability limit. However, the requirement that all sources 

hold allowances covering emissions, and the fact that those 

allowances are allocated based on state-specific budgets without

variability, ensure that the total emissions from the states do 

not exceed the sum of the state budgets. The remedy, therefore, 
ensures both that total emissions do not exceed the total of the 

state budgets and that the required emission reductions occur in 

each state.

This section describes how EPA calculated variability 

limits for each state to achieve this goal.

2. Transport Rule Variability Limits

EPA performed analyses using historical data to demonstrate 

that there is year-to-year variability in base case emissions 

(even when emission rates for all units are held constant) and 

to quantify the magnitude of this variability. 

The focus of the analysis is on quantifying the magnitude 

of the inherent year-to-year variability in state-level EGU 

emissions independent of measures taken to control those 

emissions (and thus due only to changes in electricity 

generation within each state). EPA used this analysis to set 

variability limits as part of the remedy to ensure that states 

are eliminating their significant contribution to nonattainment 

and interference with maintenance to protect air quality.

As discussed in detail below, EPA is finalizing the 

Transport Rule with 1-year variability limits calculated using a 

modified approach from the one described in the proposal. EPA 

is not including the proposal’s 3-year variability limits in the 

final Transport Rule. EPA received comments that the 3-year 

variability limits increased program costs and diminished 
compliance flexibility without delivering any additional air 

quality benefits. EGU owners and operators expressed concern 

that 3-year variability limits would be impracticable to 

implement and that the 1-year variability limits themselves 

would be adequately stringent to ensure elimination of 

significant contribution to nonattainment and interference with 

maintenance in each state.

After further consideration, EPA has concluded that 3-year 

variability limits would be unnecessary, would be difficult to 

anticipate, and would not have a measurable impact on air 

quality benefits. EPA has determined that annual limits are 

sufficient to eliminate significant contribution to

nonattainment and interference with maintenance in all upwind 

states while accommodating the historically observed year-toyear fluctuation in state-level EGU emissions even at the same 

rate of emissions control in a given state.

In the proposal, EPA used statistical methods to derive the 

3-year variability limit directly from the 1-year variability 

limit, meaning that the two are statistically equivalent in the 

long run under certain statistical assumptions. Primarily, 

these assumptions were that the variation in electric demand 

around the budget is random from year-to-year and that, when the 

annual emissions are averaged over a multi-year time period, the 

average emissions per year will equal the state’s budget. The 
first assumption was also made in the assessment of the 

historical year-to-year variation in heat input in developing 

the 1-year limit (see section 2 of the “Power Sector Variability 

Final Rule TSD” for more details). Regarding the second 

assumption, since the state-by-state emission budgets are based 

on the availability of emission reductions at an equal marginal 

cost level, EPA expects the sources in each of the upwind states 

to make these cost-effective reductions and to meet the emission 

budgets each year, on average. 

Since the 3-year variability limit was based on average 

year-to-year variability over a longer time horizon, EPA notes 

that a random ordering of those years could yield 2 aboveaverage years in a row. If, by chance, a third above-average 

year were to follow, the state could face violation of the 3-

year limit, even if over a time period longer than 3 years, that 

state would never have exceeded the statistically-equivalent 1-

year variability limit and its annual emissions would have 

averaged to the level of its budget. Effectively, this means 

that imposing a multi-year variability limit would erode the 1-

year variability limit’s ability to accommodate historically 

observed year-to-year variability in state-level EGU emissions 

(due only to generation changes), and it would do so without 

providing any additional air quality benefits or protection for 
downwind areas (since the average emissions over the long time 

horizon equal the level of the budget).

For more details about the relationship between the 1- and 

3-year limits, see the discussions in section 3 of the “Power 

Sector Variability” TSD from the proposed Transport Rule, which 

describes the derivation of the 3-year limit from the 1-year 

variability and section 3 of the “Power Sector Variability Final 

Rule TSD”, which describes the results of a numerical simulation 

showing that the 1- and 3-year limits are statistically 

indistinguishable and, thus, redundant over the course of the 

program to accommodate year-to-year variability. 

While EPA expects the yearly emissions in each state, on 

average, to equal the level of the budgets, EPA also estimated 

the air quality impacts of 5, 10, 15, and 20 percent emission 

variability using the air quality assessment tool (see section 4 

of the “Power Sector Variability Final Rule TSD” for more 

details). This analysis shows that year-to-year fluctuations of 

up to 20 percent in SO2 emissions from upwind states linked to a 

given downwind receptor do not undermine the ability of the 

Transport Rule programs to resolve nonattainment or maintenance

concerns at that receptor. This analysis was designed to 

examine the sensitivity of downwind air quality to upwind EGU 

emission levels. The share of total SO2 emitted by EGUs is 

significantly larger than the share of total NOX emitted by EGUs. 
For example, in the states for which EPA modeled base case 

contributions of these pollutants, EGUs accounted for 74 percent 

of total SO2, 14 percent of total annual NOX, and 15 percent of 

total ozone-season NOX emissions. Therefore, when varying EGU 

emissions only, downwind air quality would be most sensitive to 

upwind variations in SO2, because relative variations in EGU SO2

emissions have a greater impact on total SO2 emissions than the 

same relative variation in EGU NOX emissions would have on total 

NOX emissions affecting downwind air quality. 

Furthermore, because the state budgets are based directly 

on IPM modeling of electric generation when cost-effective 

emission reductions have been achieved, sources within each 

state should have the same incentive to meet that budget, on 

average, in any given year. Additional EPA analysis supports 

the claim that states would be no more likely to exceed 1-year 

variability limits without the 3-year limits than with the 3-

year limits. See the “Power Sector Variability Final Rule TSD” 

for more details on this statistical analysis. Finally, because 

the state budgets (and thus the total amount of allowances 

available) are fixed and every covered source must hold 

allowances covering its emissions, it is not feasible for all, 

or even many, states to repeatedly exceed their budgets. 

The approach calculated the standard deviation in statelevel heat input from units expected to be covered by the final 
Transport Rule over an 11-year time period (2000 through 2010),

from which the 95th percent confidence level was calculated. 

EPA divided this value by the mean to get the percentage 

variation in heat input. The two-tailed 95th percent confidence 

level is the equivalent of the 97.5 percent upper (singletailed) confidence level. This approach yielded an average 

year-to-year heat input variability for each state, as a proxy 

for historic year-to-year variability in state-level EGU 

emissions while holding emission rates constant. The result, 

expressed as a percentage, conveys the maximum degree to which 

EGU emissions at the state level may be expected with 95th 

percent confidence to vary around a given target (i.e., budget) 

from year-to-year, on average, based on the statistical analysis 

of historic heat input over the 2000 through 2010 time period.

From the state-by-state variability calculations, EPA 

identified a single variability level (percentage) for each of 

the annual and ozone-season programs based on the historic 

variability measured at units in covered states on an annual 

basis and an ozone-season basis, respectively. In the proposal, 

EPA “identified a single set of variability levels . . . to 

apply to all states in order to make the application of the 

variability limits straightforward rather than developing stateby-state percentage variability values” (75 FR 45293). In the 

final rule, EPA is taking the straightforward approach of 
identifying a single set of variability levels to apply to all 

states because EPA has determined that it is reasonable to 

afford all states under the Transport Rule programs the extent 

of measured historic variability experienced by any Transport 

Rule state during 2000 through 2010. In the variability 

analysis for the final rule, EPA identified Tennessee as having 

the highest measured historic variability of annual heat input 

of 18 percent, and Virginia as having the highest measured 

historic variability of ozone-season heat input of 21 percent. 

Because the percentage of variability in Tennessee on an annual 

basis and in Virginia on an ozone-season basis are reasonably 

likely to occur in each of the other states in the future, EPA 

believes it is appropriate to apply an 18 percent annual 

variability limit to all states covered by the annual SO2 and NOX

programs and a 21 percent ozone-season variability limit to all 

states covered by the ozone-season NOX program.

1

EPA’s analysis of historic heat input variability in 

multiple states over the 2000 to 2010 baseline yields a range of 

potential year-to-year variability values for state-level EGU

emissions. As discussed above, any one state’s measured 

 

1 The six states in the supplemental proposal for inclusion in 

the Transport Rule’s ozone-season NOX program have measured 

historic ozone-season variability that would be adequately 

covered by this final rule’s ozone-season NOX variability level 

(21 percent). Please see the “Power Sector Variability Final 

Rule TSD” for more details. 
variability (in this case, from 2000 to 2010) is due to a 

multiplicity of factors. These factors include, but are not 

limited to, variation in weather, variation in demand due to 

increased or decreased level of economic activity, variation in 

the portion of electric generation that is fossil-fuel-fired, 

and variation in the length and number of outages at power

generation units, and these individual factors may sometimes act 

in concert and may other times be offsetting. 

The mix and levels of factors present in a state from yearto-year can lead to variation of state-level emissions above and 

below the level for the state under average conditions. Because 

the levels of the various factors are difficult to predict on a 

year-to-year basis for an individual state, the resulting 

variability in state-level emissions is difficult to predict. 

Moreover, because the electric generation, transmission, and 

distribution system in the eastern half of the U.S. is highly 

integrated, year-to-year variation in these factors in one state 

can cause year-to-year variability in state-level emissions both 

in that state and in other states on the system. For example, 

increased demand due to extreme weather or increased economic 

activity in one state can be met through increased generation 

and emissions a number of states away?/in a number of other 

states?. 
Because these factors can vary year-to-year in every state 

in ways that are difficult to predict and can affect other 

states, EPA maintains that the maximum variability measured in 

one state for a discrete period (2000-2010) is reasonably likely 

to occur in the future in any of the states in the region. 

Consequently, EPA believes that it is reasonable to use the 

maximum historic percentage variability figure as a proxy for 

the percentage variability that any of the states is likely to 

experience in the future. Although EPA is therefore using a 

uniform percentage figure for variability, EPA applies that 

percentage figure to each state-specific budget so that 

variability in tons of emissions is determined on a statespecific basis. That state-specific number is used in 

determining whether the assurance provisions and penalty are 

triggered in the specific state. EPA also believes that it is 

appropriate to accommodate this potential future variability at 

the state level if and only if it can be accommodated without 

undermining the programs’ beneficial impacts on downwind air 

quality that eliminate significant contribution to nonattainment 

or interference with maintenance of the NAAQS assessed in this 

rulemaking (see the “Power Sector Variability Final Rule TSD” 

for more information on this analysis). The Transport Rule 

identifies and quantifies, on a state-by-state basis, the 

emissions in each state that significantly contribute to 
nonattainment or interfere with maintenance in another state. 

This is done by analyzing specific air pollution linkages 

between each upwind state and each downwind maintenance or 

nonattainment receptor. Nonetheless, it is clear from the air 

quality analyses that the air quality outcome at a given 

downwind receptor is a function of the cumulative emissions from 

all upwind states and the receptor’s home state. Once the 

Transport Rule emission reduction requirements are implemented 

in all states subject to the programs, EPA’s analysis shows that 

the impact on a downwind receptor of any single upwind state’s 

year-to-year fluctuation of up to 20 percent in SO2 emissions 

would be so limited as to not disturb that receptor’s ability to 

maintain or attain the NAAQS analyzed in this rulemaking. 

Therefore, to the extent that such variability has been measured 

in historic data in any state subject to the Transport Rule 

programs, it is reasonable to provide for potential future 

variability in Transport Rule states within the scope of what 

EPA’s analysis shows to preserve downwind air quality gains 

achieved by the Transport Rule programs.

The approach to establishing variability limits in the 

final rule modifies the approach from the proposed rule in two 

ways. First, EPA is applying only a percentage variability 

limit to each budget in the final rule, whereas the proposed 

rule applied the greater of a percentage or an absolute tonnage 
variability limit to each budget. EPA explained in the proposal 

that it was necessary to impose both a percentage and a tonnage 

limit due to the inclusion of “states with small numbers of 

units where expected variability would be more pronounced in 

percentage terms” (75 FR 45293). However, the states with the 

smallest numbers of units included at proposal (such as 

Connecticut and the District of Columbia) are not covered by any 

of the final Transport Rule’s programs. In the final rule’s 

variability analysis, Tennessee has the highest measured annual 

variability percentage and Virginia has the highest measured 

ozone-season variability percentage. Both of these states have 

a sufficient number of units for the percentage variability 

findings to be representative of variability in all of the 

Transport Rule states; therefore, it is not necessary to impose 

a tonnage limitation in the final rule.

Second, EPA has expanded the historic baseline of the 

variability analysis to consider heat input data from 2000 

through 2010, as compared to 2002 through 2008 at proposal, and 

EPA has also expanded the dataset to include all units expected 

to be covered by the final Transport Rule’s programs. EPA 

received a number of comments that the proposal’s variability 

limits were too stringent in part because they relied on too 

short a historical baseline that failed to capture the full 

extent of long-run year-to-year variability. EPA agrees with 
these comments and believes that the historic baseline 

modification described above supports variability limits in the 

final rule that are a better approximation of future potential 

year-to-year variability in state-level EGU emissions around the 

budgets as a function of inherent variability in baseline statelevel EGU operations. EPA believes the 2000 through 2010 

historic baseline supports a more accurate approximation of 

year-to-year variability in state-level EGU operations than 

previously measured on a 2002 through 2008 baseline.

Some commenters expressed the view that allowing variability 

limits in addition to state budgets undermines the requirements 

of CAA section 110(a)(2)(D)(i)(I) to eliminate significant 

contribution to nonattainment and interference with maintenance 

of the NAAQS in downwind states. EPA disagrees with these 

comments. As explained above, EPA finds that year-to-year 

variability is an inherent characteristic of power sector 

emissions whether or not such emissions are controlled by state 

budgets; the future year-to-year variability is a component of 

the sector’s emissions baseline before emission reductions are 

required. As done for proposal, EPA has analyzed the impact of 

allowing emissions from upwind states in a given year to rise 

above the budgets but within the variability limits allowed in 

the final rule. This analysis shows that emission fluctuations 

around the budgets but within the variability limits will not 
undermine the downwind air quality gains achieved by the 

implementation of the Transport Rule budgets, and therefore the 

variability limits cannot be said to undermine the elimination 

of significant contribution to nonattainment or interference 

with maintenance achieved under the Transport Rule programs. 

Based on historical data and projected air quality impacts, the 

Agency believes that states will have sufficient flexibility and 

room to operate within the final rule’s variability limits while 

addressing all emissions identified as significantly 

contributing to nonattainment or interfering with maintenance in 

other states.