***E.O. 12866 Review– Draft– Do Not Cite, Quote, Or Release During Review ***

1 - 1 **CHAPTER 1 INTRODUCTION AND BAC**  **KGROUND 1**  **.1 Introduction**  In this action, EPA seeks to address the climate and health effects of GHGs, specifically CO 2, emitted from fossil fuel -fired electricity generating units. This document presents the expected economic impacts of the proposed EGU GHG NSPS rule through 20 20 . Based on the analysis presented in Chapter 5 , expected and anticipated economic conditions will lead electricity generators to choose technologies that mee t the standard . As a result, this proposed rule is expected to have no, or negligible, costs or monetized benefits associated with it. This chapter contains background information on the rule and an outline of the chapters of the report. **1 .2**  **Background** Se ction 111 of the CAA requires performance standards for air pollutant emissions from categories of stationary sources that may reasonably contribute to endangerment of public health or welfare. In April 2007, the Supreme Court rule d that GHGs meet the defi nition of an “air pollutant” under the CAA . This ruling clarified that the authorities and requirements of the Act apply to GHGs. As a result, EPA must make decisions about whether to regulat e GHGs under certain provisions of the Act, based on relevant statutory criteria . EPA issued a final determination that GHG emissions endanger public health and welfare in the Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act (74 FR 66,496; Dec. 15, 2009) . Because fossil fuel -fired EGUs contribute significantly to domestic CO 2 emissions, EPA is proposing to regulate these emissions from EGU sources under section 111 of the CAA . This action responds to a proposed settlement agreement EPA entered into in December 2010 to issue rules that will address greenhouse gas emissions from fossil fuel -fired power plants. Details of the settlement agreement can be found on the EPA website. 1 This action addresses standards for new sources but does not address existing sources at this time. Existing sources will be addressed in a separate action at a later date by the EPA. **1 .**  **3 Regulatory Analysis**  In accordance wi th Executive Order 12866, Executive Order 13563, and EPA’s Guidelines for Preparing Economic Analyses, EPA prepared this RIA for this “significant regulatory action . ”

1 http://www.epa.gov/airquality/ghgsettlement.html***E.O. 12866 Review– Draft– Do Not Cite, Quote, Or Release During Review ***

1 - 2 T h is proposal is not anticipated to have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities and is therefore not an “economical ly significant rule . ” However, u nder EO 12866 (58 FR 51,735, October 4, 1993), this action is a “significant regulatory action” because it “raises novel legal or policy issues arising out of legal mandates . ” As a matter of policy, however, EPA has attempt ed to provide a thorough analysis of the potential impacts of this rule, consistent with requirements of the Executive Orders, and will continue to analyze the potential impacts of this rule between the proposed and final rule. This RIA addresses the poten tial costs and benefits of the new source guidelines that are the focus of the proposed action. The proposed rule regulates new sources. EPA does not anticipate that any costs or quantified benefits will result from those parts of the standards. For new sources, EPA (and other energy modeling groups such as EIA 2 ) do not project that any new coal capacity without federally- supported CCS will be built in the analysis period . T his is due in part to the low cost of base load NGCC capacity relative to coal capacity, relatively low growth in electricity demand, and use of energy efficiency and renewable energy resources . This conclusion holds under a range of sensitivity analyses as well as in EPA’s baseline scenario. Furthermore, absent this rule, any new NGCC that may be built is expected to have an annual emission rate in compliance with the standard. Because the proposal does not change these projections, it is expected to have no, or negligible, costs 3 or quantified benefits associated with it. Chapter 5 of this RIA also provides an illustrative analysis of the levelized cost of electricity and environmental damages associated with representative new conventional coal and natural gas combined cycle units, under a range of natural gas price assumptions. That analysis, along with information on historical 4 and projected 5 g as prices, indicates that this standard is highly likely to have no costs or benefits; that there is some small probability that the standard

2 AEO 2009 - 2012. 3 Because of existing and anticipated trends in the marketplace, EPA does not project that any generators expected to be built within the time frame of our analysis will have to install additional controls to meet the proposed standard. Additionally, because new generators wou ld already be required to monitor and report their CO 2 emissions under the information collection requirements contained in the existing part 75 and 98 regulations (40 CFR part 75 and 40 CFR part 98), any additional monitoring or reporting costs from this proposal should be negligible. Costs are only incurred if there has been a violation and a source chooses to take advantage of the affirmative defense, in which the source can show that the violation was caused by a malfunction and the source took necessary actions to minimize emissions. See Chapter 6 for more details on monitoring and reporting costs. 4 EIA. U.S. Natural Gas Prices . Available online at: http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_a.htm . 5AEO 2009 - 2012.***E.O. 12866 Review– Draft– Do Not Cite, Quote, Or Release During Review ***

1 - 3 produces net benefits; and that the probability that the standard results in net costs to society is exceedingly l ow. **1 .**  **4 Regulated Entities**  This action will directly regulate CO 2 emissions from EGUs with capacity greater than 25 MW th at commence construction after the issuance of this proposal. 6 As described in the preamble, EPA does not have e nough information on potential reconstructions in order to issue a standard at this time . As a result, in today’s action, the EPA is not including a proposal for reconstructions. Instead, we solicit comment on how we should approach reconstructions and, depending on the information we receive, we may propose and finalize a standard for reconstructions at a later time. Additionally, EPA does not have information indicating that affected EGUs would undertake modifications, and is thus not proposing any stan dards for modifications. EPA is taking comment on this and in the future may choose to set a standard for modifications that is different than that for existing sources. Finally, EPA is not proposing a standard of performance for transitional sources as long as they commence construction within 12 months from the date of this proposal. **1.5 Regulated Pollutant**  This rule proposes to limit CO 2 emissions from affected sources. EPA is proposing these requirements because CO 2 is a GHG and power plants are the country’s largest stati onary source emitters of GHGs. I n 2009 , EPA found that by causing or contributing to climate change, GHGs endanger both the public health and the public welfare of current and future generations. EPA is aware that other GHGs such as nitrous oxide ( N 2 O ) (an d to a lesser extent, methane ( CH 4 ) ) may be emitted from fossil -fuel -fired EGUs, especially from coal -fired circulating fluidized bed combustors and from units with selective catalytic reduction and selective non - catalytic reduction systems installed for n itrogen oxide ( NO X ) control. EPA is not proposing separate N 2 O or CH 4 emission limits or an equivalent CO 2 emission limit because of a lack of available data for these affected sources. Additional information on the quantity and significance of emissions a nd on the availability of cost effective controls would be needed before proposing standards for these pollutants.

6 F or purposes of this rule, covered EGUs do not include simple cycle combustion turbines. In addition, units subject to emission requirements under CAA section 129 would not be subject to requirements under this proposed rule.***E.O. 12866 Review– Draft– Do Not Cite, Quote, Or Release During Review ***

1 -4 **1 .**  **6 Baseline and Years of Analysis**  The rule on which this analysis is based proposes the requirement for new EGUs to achieve lower levels of GHG emissions. The baseline for this analysis , which us es the Integrated Planning Model (IPM) , includ es state rules that have been finalized and/or approved by a state’s legislature or environmental agenc ies . Additional legally binding and enforceable commitments for GHG reductions considered in the baseline are discussed in Chapter 5 of this RIA . All analysis is presented for a compliance through the year 2020 and all estimates are presented in 2007$. Becau se we expect similar economic conditions leading up to the year of analysis, we also would not anticipate costs or benefits in any year prior to 2020. A ny estimates presented in this report represent annualized estimates of the benefits and costs of the proposed EGU GHG NSPS rather than the net present value of a stream of benefits and costs in these particular years of analysis . **1 .**  **7 Organization of the Regulatory Impact Analysis**  This report presents EPA’s analysis of the potential benefits, costs, and other economic effects of the proposed EGU GHG NSPS to fulfill the requirements of a Regulatory Impact Analysis. This RIA includes the following chapters:

 Chapter 2 , Control Strategi es, defines the source categories affected by the proposal and describes the control strategies and regulatory alternatives for these source categories .

 Chapter 3 , Defining the Climate Change Problem and Rationale for the Rulemaking, describes the effects of GHG emissions on climate and offers support for EPA undertaking this rulemaking .

 Chapter 4, Electric Power Sector Profile, describes the industry affected by the rule.

 Chapter 5 , Costs, Benefits, Economic and Energy Impacts describes i mpacts of the proposal .

 Chapter 6 , Statutory and Executive Order Impact Analyses, describes the small business, unfunded mandates, paperwork reduction act, environmental justice, and other analyses conducted for the rule to meet statutory and Executive Order requirement s.