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IPM is a more sophisticated model of the power sector developed by ICF that EPA uses

for much of its analysis of the power sector.

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MEMORANDUM

TO: Docket

FROM: EPA, Clean Air Markets Division

SUBJECT: Analysis of the Marginal Cost of SO2 and NOx Reductions 

DATE: January 28, 2004

Figures VI-1 and VI-2 in the Rule to Reduce Interstate Transport of Fine Particulate

Matter and Ozone depict marginal cost curves that graph the marginal cost of the last ton of

emission reductions needed to achieve various emission caps. Figure VI-1 includes marginal

costs of SO2 reductions for caps from 10 million tons down to 1.5 million tons. Figure VI-2

includes marginal costs of NOx reductions for caps from 5 million tons down to 0.75 million

tons. This memo provides detail explaining how these curves were developed.

The curves were developed using the Technology Retrofit and Updating Model (TRUM).

TRUM is a model that selects investment options and dispatches generation to meet electricity

demand. For simplicity this model was developed as a steady-state, single-region spreadsheet

model supported by Visual Basic for Applications (VBA) code. The model consists of a set of

about six hundred “sample” generating units with varying characteristics. The mix of generation

types and sizes was chosen to mirror, in general terms, the nationwide mix of capacities. The

starting point for developing these sample generating units was the configuration of the

Integrated Planning Model (IPM)1 used by EPA. Therefore, it relies on the same underlying data. 

Each unit is assumed to choose emission control retrofits, fuels, and generation levels so as to

maximize its own net profit in response to fuel prices, emission allowance prices, and prices of

electricity for various demand segments. Most of the assumptions used in TRUM for retrofit

costs and removal efficiencies, fuel prices, and costs for new units are also based on IPM inputs

or outputs to the extent possible in a simplified model.

Prices of fuels can be adjusted in the model in response to demand; price of electricity by

demand segment is set in the model so as to meet demand; and allowance prices can be adjusted

to cause the industry to meet given emission caps. The model allows each unit to make choices

that maximize its net profit, taking prices and the actions of other units as unchanging

parameters. Because the choices made by the sample units will, in fact, have various effects on

prices (and thus on the decisions made by other units) the model is run interactively until the

interacting choices made by the units converge to a stable solution.
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In order to make the model run quickly, it was not designed to recognize the distinctions

among electricity demand regions and the transmission constraints that can keep them separate. 

Thus, only one price of electricity is determined for each demand segment for the entire set of

sample plants. EPA and ICF have tested TRUM against, the IPM and have found TRUM to be

sufficiently accurate to analyze many environmental policies at a “macro-level.”

In order to develop the marginal cost curve for SO2, the model was run interactively to

determine the marginal cost of SO2 reductions at various SO2 emission levels. Because the NOx

level can affect decisions about dispatch and fuel use, which can in turn impact the marginal cost

of SO2 reductions, the model was run holding Nox emissions at a cap level of 2.3 million tons. 

This cap was chosen because it was within the range of policy options for NOx being considered,

therefore it reasonably approximated the affects that NOx regulations would have on dispatch

and fuel choice. Because decisions made to control SO2 (e.g. dispatch, fuel switching) can also

affect NOx emissions, a constant NOx emissions cap does not represent a constant marginal cost

for NOx reductions across the entire curve. The first point on the curve, at ten million tons of

SO2 emitted, results in a marginal cost for SO2 of about $500 per ton. The marginal NOx curve

was developed the same way, holding SO2 emissions constant at just over 5 million tons. Similar

to the way that the NOx cap was chosen for the SO2 analysis, this cap was chosen to reasonably

approximate dispatch and fuel choices that could be expected due to SO2 regulation. The first

point of the NOx curve, at five million tons of Nox emitted, results in a marginal costs for NOx

of $500 per ton. Figure VI-1 and Figure VI-2 are included below. Just as the marginal cost of

SO2 control to meet a constant cap of 5.26 million tons changes as the NOx cap is changed, the

marginal cost of NOx to meet a constant cap of 2.3 million tons also changes as the SO2 cap

varies. All costs are in 1999$.

Figure VI-1
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Figure VI-2