Document ID: EPA-HQ-OAR-2009-0491-4551
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2011-07-15T04:00Z

B. Baseline for Pollution Transport Analysis
      Implementing the mandate of CAA section 110(a)(2)(D)(i)(I) requires EPA to determine which states significantly contribute to nonattainment and interfere with maintenance of the NAAQS in other states, as well as to quantify the emissions in each state that must be eliminated.  This process begins with an analysis of baseline emissions.  Baseline emissions are the emissions that would occur in each state if EPA did not promulgate the Transport Rule.  To conduct such analysis, EPA generally takes into account emission limitations that are currently, and will continue to be, in place.  From that baseline, EPA analyzes whether additional reductions are necessary beyond those already mandated by existing emission limitation requirements.  For example, the base case used in CAIR reflected the reductions already required by the NOX SIP Call, which remained in effect even after the CAIR emission reduction requirements took effect.
      The unique legal situation addressed by the Transport Rule necessarily affects the quantification of baseline emissions.  Specifically, because the Transport Rule will replace CAIR, EPA cannot consider reductions associated with CAIR in the "base case" (i.e., analytical baseline emissions scenario).  If EPA were to consider all reductions associated with CAIR in the "base case," the baseline emissions would not adequately reflect the true 2012 baseline in each state (i.e., the emissions that would occur in each state in 2012 if the Transport Rule did not require any reductions in that state).  Similarly, if EPA were to treat the capital investments that have already been made to meet the requirements of CAIR as new costs rather than treating them as "sunk" capital costs, EPA's analysis would not accurately reflect the cost of emission reductions required by the Transport Rule.  As explained below, EPA's analysis both properly considered all capital investments made in response to CAIR and properly recognized that, after CAIR is terminated, the emission limitations imposed by CAIR will cease to exist.
      In 2005 EPA promulgated CAIR, which required large electric generating units in 29 states to make phase I emission reductions in NOX emissions starting in 2009, phase I emission reductions in SO2 starting in 2010 and phase II reductions in emissions of both pollutants starting in 2015.  On July 11, 2008, the D.C. Court of Appeals held that CAIR had "more than several fatal flaws," North Carolina, 531 F.3d at 901, and remanded and vacated the rule, id. at 930.  The Court subsequently granted EPA's petition for rehearing in part and remanded CAIR without vacatur "for EPA to conduct further proceedings consistent with" the Court's July 11, 2008 opinion.  North Carolina, 550 F.3d 1176.  The Court explained that it was "allowing CAIR to remain in effect until it is replaced by a rule consistent with [the July 11, 2008] opinion" because this "would at least temporarily preserve the environmental values covered by CAIR." Id. at 1178.  Moreover, the Court stated that it did not "intend to grant an indefinite stay of the effectiveness of" the July 11, 2008 order vacating CAIR.  Id.  In summary, the Court determined that CAIR was fatally flawed and could remain in effect only as a stopgap measure until EPA could act to replace it. 
      Thus, unlike most other regulatory requirements (such as the Acid Rain Program under CAA Title IV, the NOX Budget Trading Program under the NOX SIP Call, New Source Performance Standards, and state laws and consent orders requiring emission reductions), the emission limitations contained in CAIR are only temporary.  Moreover, the duration of these limitations is directly tied to the Transport Rule.  The Transport Rule replaces CAIR.  Thus, CAIR itself will be terminated for the SO2, annual NOX, and ozone-season NOX control periods starting in 2012 when the emission limitations established in the final Transport Rule for those control periods take effect (January 1, 2012 for the annual control periods and May 1, 2012 for the ozone-season control period).  For this reason, emission reductions made to comply with CAIR cannot be treated as if they were emission reductions achieved to comply with statutory provisions, rules, consent decrees, and other enforceable requirements that establish permanent emission limitations.  EPA takes reductions made to comply with permanent limitations into consideration when quantifying each state's baseline emissions for the purpose of analyzing whether its emissions significantly contribute to nonattainment or interfere with maintenance in another state.  However, the unique legal status of CAIR and its replacement with the Transport Rule distinguish the emission reductions required by CAIR from those of other regulatory requirements.  Since the limitations and emission reduction requirements in CAIR are temporary and will be terminated by the Transport Rule, they must be excluded from the Transport Rule's base case analysis.
      Some comments on the Transport Rule proposal claim that EPA's treatment of CAIR is inconsistent with the treatment, in prior rulemakings, of the Acid Rain Program and the NOX SIP Call.  Such comments ignore the unique legal status of CAIR, and EPA therefore rejects these claims.
      A simple example illustrates this point.  Assume state Z's emissions before CAIR were 2,000 tons and that state Z was required by CAIR to reduce its emissions to 1,000 tons.  If EPA were to determine that state Z's baseline emissions were 1,000 tons and then conclude, based on that assumption, that no additional reductions in state Z are necessary because state Z does not significantly contribute to downwind nonattainment unless its emissions exceed 1,500 tons, then state Z would not be covered by the Transport Rule.  However, the Transport Rule will terminate all CAIR requirements in all CAIR states regardless of whether they are covered by the Transport Rule.  Thus, after promulgation of the Transport Rule, state Z would again be allowed, and would be projected in this example, to emit 2,000 tons.  In other words, state Z would be allowed to significantly contribute to nonattainment and/or interfere with maintenance in other states -- a result that would be inconsistent with the statutory mandate of CAA section 110(a)(2)(D)(i)(I).  On the other hand, if EPA assumes state Z's baseline emissions are 2,000 tons as projected without CAIR in place, EPA can properly determine whether, if state Z were allowed to emit that amount (i.e., the amount state Z would be projected to emit if excluded from the Transport Rule), the state would significantly contribute to nonattainment or interfere with maintenance in any other state.  In other words, EPA can determine the stringency of emission limitations needed (if any) to replace those that were established by CAIR in order to ensure that state Z prohibits all emissions that significantly contribute to nonattainment or interfere with maintenance in other states.   
      In fact, commenters' suggestion that the Transport Rule base case should include CAIR would cause the anomalous result of excluding sources in a state from the Transport Rule because of their CAIR - required emission reductions while simultaneously eliminating those CAIR emission reduction requirements.  If EPA's base case analysis were to assume erroneously that reductions from CAIR would continue indefinitely, a state currently covered by CAIR, but not covered by the Transport Rule, would have no CAIR requirements once the Transport Rule programs began and so could increase emissions beyond the CAIR limitations.  Downwind areas that are in attainment (and are not experiencing interference with maintenance of such attainment) solely because of emission reductions required by CAIR could again face nonattainment or interference with maintenance problems because the current protection from upwind pollution from such an upwind state would not be replaced.  In short, the analysis of whether a state should be included in a rule eliminating and replacing CAIR cannot logically assume that CAIR remains in place.  For these reasons, EPA believes it is reasonable to use a base case that does not assume that the CAIR reduction requirements will continue to be achieved and so does not include CAIR-specific emission reductions. 
      As a result, EPA's 2012 base case shows emissions higher than current levels in some states.  In the absence of the CAIR SO2 and NOX programs that EPA has been directed to eliminate and replace, utility emissions in CAIR states will be limited only by non-CAIR constraints including the Acid Rain Program, the NOX SIP Call, New Source Performance Standards, any state laws and consent order requiring emission reductions, and any other permanent and enforceable binding reduction commitments.  This will lead to increased emissions in some states in the 2012 base case relative to current emissions.  For example, efforts to comply with the Acid Rain Program at the least cost may occur, in some cases, without the operation of existing scrubbers through use of readily available, inexpensive Title IV allowances. 
      It is important to note that, to the extent that emission reductions currently required by CAIR are also reflected in emission reduction requirements under the Acid Rain Program, the NOX SIP Call, New Source Performance Standards, any state laws and consent orders requiring emission reductions, and any other enforceable binding reduction commitments, such reductions are accounted for in EPA's 2012 base case.  Some Commenter claimed that in excluding CAIR-specific emission reductions from the base case, EPA ignores non-CAIR legal requirements (e.g., in Title V permits) that may prevent sources from increasing emissions above CAIR levels.  Such allegations are incorrect.  As discussed elsewhere in this preamble, EPA accounted for any Title V permits, consent decrees, state rules, and other enforceable limitations on sources' emissions; if these non-CAIR limitations effectively restrain a state's emissions to not exceed the state's CAIR limitations, EPA's base case modeling would reflect this outcome.  Commenters also assert that utilities are unlikely to dismantle or discontinue running the installed controls to the point of returning to pre-CAIR emission levels.  EPA agrees that installed controls are not likely to be physically dismantled, and as discussed elsewhere in this preamble, EPA's analysis properly treats the capital investments made in emission controls attribute to CAIR as "sunk" capital costs (i.e., capital costs already obligated in the past) that are not included as costs of meeting Transport Rule requirements.
      Our cost analysis for significant contribution reflects on-the-ground realities.  Investments in pollution control equipment were made in response to CAIR requirements.  Those expenditures are "sunk" capital costs, meaning that those investments were committed in the past, prior to the Transport Rule.  Adding the capital costs of that equipment into the costs of Transport Rule emission reduction options would be incorrect; those capital investments are represented in place in the base case.  
      However, given ongoing costs associated with operating these controls, EPA believes sources would have an economic incentive to discontinue operating installed controls, or to operate those controls less effectively, except to the extent non-CAIR legal requirements mandate emission reductions or to the extent that sources would find it economic to operate the controls for non-CAIR market-based emission control programs.  EPA properly treats the costs of operating controls installed to meet CAIR requirements as costs of meeting Transport Rule requirements.  EPA's base case accounts for non-CAIR requirements and does not make the unreasonable assumption that installed controls would be operated to achieve emission reductions that are not necessary to meet non-CAIR requirements.  For all of these reasons, EPA rejects commenters' claims that the base case is "unrepresentative" or lacks "a rational relationship to the real world."