1

Deliberative – Do not cite or quote

Technical Support Document (TSD)

for the final Transport Rule

Docket ID No. EPA-HQ-OAR-2009-0491

Assurance Penalty Level Analysis Final Rule TSD

U.S. Environmental Protection Agency

Office of Air and Radiation

June 2011
2

Deliberative – Do not cite or quote

Assurance Penalty Level Analysis Final Rule TSD

This Technical Support Document (TSD) supports EPA’s determination that the final 

Transport Rule’s assurance provision penalty requirement provides sufficient deterrence against 

a state exceeding its assurance level. Section VII.E in the final Transport Rule preamble 

discusses the assurance provisions, including the allowance surrender penalty analyzed in this 

TSD. This TSD is organized as follows:

1. Background

2. Approach

3. Results

1. Background

The final Transport Rule’s limited interstate trading programs include assurance 

provisions to ensure that the necessary reductions will occur within each covered state. The 

assurance provisions limit emissions from covered units in a state to the state’s emissions budget 

plus variability limit, i.e., the state’s assurance level. 

As described in preamble section VI.D, EPA used a multi-factor analysis to determine 

each state’s emissions budget. Subsequently, as described in VI.F, EPA determined variability

limits for each state that reflect a percentage of the state’s budget (e.g., 10%). This variability

limit is then added to the state budget to yield the state’s assurance level. If emissions from 

covered sources in a state in a compliance period exceed the state’s assurance level, then EPA 

applies additional criteria to determine which owners and operators of units in the state will be 

subject to an allowance surrender penalty of two allowances per ton for their share of the 

emissions over the assurance level.1 This penalty is in addition to the standard program 

requirement that owners and operators of covered units hold one allowance for each ton emitted; 

therefore, for any emissions identified by EPA as being over the state’s assurance level, the 

relevant owners and operators must submit a total of three allowances per ton – one of which is 

for standard compliance for emitting under the program, and two of which are for the assurance 

provision penalty.

As discussed in preamble section VI.F, EPA does not find reason to expect that emissions 

from covered sources in any state will exceed that state’s assurance level. The description and 

tables below describe a sensitivity analysis EPA conducted to determine whether the two-for-one 

 

1

 The assurance provision allowance surrender penalty addressed in this TSD is distinct from the 

penalties, discussed in preamble section VII.F, that apply to the trading program requirement to 

hold allowances sufficient to cover emissions for each compliance period.
3

Deliberative – Do not cite or quote

allowance surrender penalty provides a sufficient deterrent to keep emissions from covered 

sources in each state from exceeding the assurance levels.

2. Approach

To determine if a penalty of two allowances for every ton of excess emissions would be 

sufficient, EPA used the Integrated Planning Model (IPM) to assess a “TR_Penalty_Scenario” 

whose results, along with the results of other IPM model runs for the Transport Rule, can be 

found in the docket. More information on IPM can be found in the Documentation Supplement 

for EPA Base Case v.4.10_FTransport – Updates for Final Transport Rule, which is also in the 

docket. This penalty scenario offered covered sources in each state the choice to emit beyond the 

state’s assurance level and incur a fine for each excess ton worth twice the value of an allowance 

(in addition to having to submit one allowance for emitting each ton, per standard compliance 

procedures). In this analysis, the “state assurance level” is the state’s emissions budget plus the 

state’s variability limit and corresponds to the “state emissions assurance level” in tables VI.F-1 

and VI.F-2 of the preamble. The size of the penalty was calculated as twice the allowance price

for the relevant pollutant taken from the IPM analysis of the final rule’s remedy

(TR_Limited_Trading_Final), as shown in Table 1.

Table 1. Allowance prices (2007$) in the final remedy (TR_Limited_Trading Final) and 

Penalty Costs in the “assurance penalty sensitivity” run (TR_Penalty_Scenario)

Emission Allowance 

Prices ($/Ton) from

final remedy run

Emission Penalty Costs 

($/Ton) in the assurance 

penalty sensitivity run

2012 2014 2012 2014

SO2 Region 1 (TR) 971 1,127 1,942 2,254

SO2 Region 2 (TR) 576 663 1,152 1,327

NOx Annual (TR) 497 577 994 1,153

NOx Ozone Season (TR) 1,321 1,532 2,642 3,064

It is important to consider that while the effective fine in this scenario (twice the value of 

the relevant pollutant’s allowance price) is a technically valid representation of the final rule’s 

penalty structure, it is an analytic understatement of the actual deterrence value of this penalty in 

practice. The penalty in practice will have more of a deterrent effect than what this scenario 

models it to have for two reasons. First, the penalty cost as modeled is fixed at twice the 

allowance price in the final remedy scenario (TR_Limited_Trading_Final) for every ton of 

emissions in excess of a state’s assurance level. In reality, excess emissions would increase the 

allowance price (and therefore the cost of the penalty itself) since allowances would have to be 
4

Deliberative – Do not cite or quote

bought and surrendered for the penalty, raising allowance demand and thus making them more 

valuable. The modeling imposed a fine and did not adjust the allowance pool to account for 

penalty surrenders, and so it understates the cost of the penalty incurred. Second, the model has 

perfect foresight of all future emitting behavior and thus does not take any “risk” into account 

when determining whether excess emissions are “worth it” at the penalty cost modeled. In 

reality, owners and operators of covered units will assign a risk premium to the nominal penalty

consequence because they do not have perfect foresight and cannot be sure of their precise 

emissions until the compliance period is complete. Therefore, program participants can be 

expected to act more “conservatively” than the modeling would suggest when determining 

whether excess emissions are “worth it” at the penalty cost modeled, which suggests again that 

this analysis understates the deterrence value of the penalty in practice.

3. Results

EPA compared the state-level emissions in 2012 and 2014 in this analysis to the state 

assurance levels to determine whether the penalty level deterred excess emissions. Tables 2 

through 5 show the state assurance levels and modeled emissions from covered sources in each

state. The modeled allowance prices in 2012 and 2014 for each pollutant are shown at the 

bottom of each table. The penalty for exceeding the assurance level would be equal to twice the 

allowance price.

In no case do the covered emissions in a state exceed that state’s assurance level in 2012 

or 2014. This result indicates that the penalty offers a sufficient deterrent to ensure emissions do 

not exceed assurance levels in 2012 and 2014. Even though the modeling of this scenario 

understated the actual value of the deterrent in practice, in no state did the covered sources find it 

economic to exceed the states’ assurance levels in 2012 and 2014. 

In some states, the covered sources in a state are modeled to have collective emissions 

that are exactly equal to the state’s assurance level. These projections occur because the model 

operates under perfect foresight and perfect information, and it therefore allows sources in the 

modeling to emit up to the state’s assurance level with full certainty that emissions will respect 

that constraint to the last ton emitted, successfully avoiding additional emissions which are 

shown to be uneconomic under the assurance penalty. In reality, the deterrence value of the 

penalty would likely lead a state’s covered sources to act conservatively by emitting below a 

state’s assurance level (rather than exactly up to it) to ensure that unexpected fluctuations in 

emissions do not result in a penalty. 

In some cases, notably SO2 Group 1 states, the covered emissions are projected to be 

significantly lower than the states’ assurance levels in 2012. This would occur if covered 

sources decide to reduce their emissions beyond what is required so they can bank the excess 

allowances. These banked allowances could then used to cover emissions in future years. 
5

Deliberative – Do not cite or quote

Specifically, the SO2 Group 1 state budgets were determined by the feasible emission reductions 

at $500/ton SO2 in 2012 and $2300/ton SO2 in 2014 (see Significant Contribution and State 

Emissions Budgets Final Rule TSD). Covered sources in these states may decide to reduce their 

emissions further than required in 2012 and 2013 and bank the unused allowances for use in 

2014 and later years. This pattern effectively smooths their emission reductions over time to 

minimize total compliance costs in those states. The modeled allowance prices in those states 

also reflect this smoothing of emission reduction patterns. For example, as seen in Table 2, the 

2012 and 2014 projected allowance prices for Group 1 SO2 states are closer to each other than 

the marginal cost thresholds used to formulate their budgets in those years ($500 per ton in 2012 

and $2,300 per ton in 2014). This banking behavior to smooth emission reductions over time is 

shown in this analysis to be entirely consistent with each state’s assurance levels in both 2012 

and 2014.

As noted above, EPA’s modeling of this scenario projects no instance in which covered 

sources would find it economic to exceed a state’s assurance level in any of the programs in 

2012 or 2014. This analysis also projects that the penalty provides sufficient deterrence for 

virtually all states in these programs over the 2020-2030 timeframe as well. However, the 

projections appear to suggest small exceedances in two states in 2020 and in three states in 2030. 

In most of these cases, the projected exceedances are marginal – on the order of two hundred

tons of pollutant. EPA does not believe that these longer-run results actually indicate a 

likelihood of these exceedances occurring. It is important to note that this modeling assumes

perfect foresight and perfect information, even into the 2020-2030 timeframe, and that under 

those assumptions, unit owners and operators would be willing to expend banked allowances in 

those years even to the point of paying assurance penalties on them. In reality, operators of 

covered units do not have perfect foresight or perfect information and will therefore act more 

conservatively than “optimal” banking patterns from IPM modeling would indicate.

As a result, EPA expects sources will collectively continue to respect their states’

assurance levels in those instances by sustaining the Transport Rule emission reductions into the 

2020-2030 timeframe and banking allowances further into the future to guard against 

unanticipated developments that the model does not capture. Consequently, EPA does not 

believe that these limited small instances of projected exceedances in 2020 or 2030 are likely to 

occur in the actual operation of these programs. However, EPA will monitor the pattern of 

compliance with these programs over the long-run and will be prepared to adjust the penalty

accordingly if evidence suggests that increased deterrence would be necessary at those later 

stages to encourage states to respect their assurance levels. At this point, EPA believes that it is 

best to be sure in the initial years that the assurance penalty is effective in keeping emissions 

within variability limits, while encouraging trading to lower costs and increase flexibility and 

avoiding actions that have a chilling effect on activities. While doing this, EPA believe it is 

important to remain mindful that we do want assurance of meeting emission reductions over 

time. 
6

Deliberative – Do not cite or quote

EPA believes these findings support a determination that the penalty requirement of 

surrendering two additional allowances for each ton of excess emissions provides a sufficient 

deterrent in the final Transport Rule such that EPA does not expect the covered sources in any 

state to exceed the state’s assurance levels under these programs. 
7

Deliberative – Do not cite or quote

Table 2. Annual SO2 Group 1 State Assurance Levels and Emissions in 2012 and 2014 

(TR_Penalty_Scenario)

2012 2014

State Assurance 

Level 

Penalty Case 

Emissions

State Assurance 

Level 

Penalty Case 

Emissions

(thousand tons) (thousand tons) (thousand tons) (thousand tons)

Illinois 258 210 137 128

Indiana 314 241 177 177

Iowa 118 75 83 78

Kentucky 208 146 117 117

Maryland 33 27 31 30

Michigan 214 190 158 158

Missouri 228 182 183 177

New Jersey 7 6 7 7

New York 23 20 13 13

North 

Carolina 151 117 63 63

Ohio 341 229 151 151

Pennsylvania 307 250 123 123

Tennessee 163 97 65 65

Virginia 78 67 39 39

West 

Virginia 161 119 83 83

Wisconsin 87 77 44 44

Table 3. Annual SO2 Group 2 State Assurance Levels and Emissions in 2012 and 2014 

(TR_Penalty_Scenario)

2012 2014

State Assurance 

Level 

Penalty Case 

Emissions

State Assurance 

Level 

Penalty Case 

Emissions

(thousand tons) (thousand tons) (thousand tons) (thousand tons)

Alabama 238 219 235 173

Georgia 174 159 105 93

Kansas 46 41 46 46

Minnesota 46 43 46 45

Nebraska 72 65 72 70

South 

Carolina 97 85 97 97

Texas 268 244 268 266
8

Deliberative – Do not cite or quote

Table 4. Annual NOX State Assurance Levels and Emissions in 2012 and 2014 

(TR_Penalty_Scenario)

2012 2014

State Assurance 

Level 

Penalty Case 

Emissions

State Assurance 

Level 

Penalty Case 

Emissions

(thousand tons) (thousand tons) (thousand tons) (thousand tons)

Alabama 80 74 79 68

Georgia 68 61 45 40

Illinois 53 48 53 49

Indiana 121 110 119 110

Iowa 42 37 41 38

Kansas 34 31 28 24

Kentucky 94 84 85 76

Maryland 18 16 18 17

Michigan 66 59 64 57

Minnesota 33 31 33 31

Missouri 58 52 54 49

Nebraska 29 26 29 27

New Jersey 8 7 8 8

New York 20 18 20 17

North 

Carolina 56 48 46 42

Ohio 102 85 96 84

Pennsylvania 132 118 131 117

South 

Carolina 36 33 36 36

Tennessee 39 33 21 20

Texas 147 133 147 137

Virginia 37 33 37 35

West 

Virginia 65 56 60 53

Wisconsin 35 31 33 30

Table 5. Ozone Season NOX State Assurance Levels and Emissions in 2012 and 2014 

(TR_Penalty_Scenario)* 

2012 2014

State Assurance 

Level 

Penalty Case 

Emissions

State Assurance 

Level 

Penalty Case 

Emissions

(thousand tons) (thousand tons) (thousand tons) (thousand tons)

Alabama 35 32 35 30

Arkansas 18 15 18 17

Florida 31 28 31 29
9

Deliberative – Do not cite or quote

Georgia 32 27 21 18

Illinois 23 21 23 21

Indiana 52 47 51 47

Iowa 18 16 18 16

Kansas 15 13 12 10

Kentucky 40 35 36 32

Louisiana 16 14 16 14

Maryland 8 7 8 7

Michigan 28 25 27 24

Mississippi 12 11 12 11

Missouri 25 22 23 21

New Jersey 4 3 4 4

New York 10 8 10 8

North 

Carolina 24 21 20 18

Ohio 44 35 42 36

Oklahoma 24 21 24 21

Pennsylvania 57 50 57 50

South 

Carolina 15 14 15 15

Tennessee 17 14 9 8

Texas 69 63 69 64

Virginia 17 14 17 15

West 

Virginia 28 23 26 22

Wisconsin 16 13 15 13

*As discussed in section III of the Transport Rule preamble, the final rule does not include the states of Iowa, 

Kansas, Michigan, Missouri, Oklahoma, or Wisconsin in the ozone season program. EPA issued a supplemental 

proposal to include these six states in the Transport Rule ozone season program.