Document ID: EPA-HQ-OAR-2003-0053-0259
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2004-01-30T05:00Z

This
material
is
copyrighted
by
the
Tulane
Environmental
Law
Journal
(
2001).
The
Journal
has
given
EPA
limited
permission
to
post
this
material
on
its
web
site,
but
does
not
allow
further
duplication
without
permission
unless
for
not­
for­
profit
educational
purposes
(
www.
law.
tulane.
edu/
resources/
journals/
enviro/
index.
htm).

309
How
Environmental
Laws
Work:
An
Analysis
of
the
Utility
Sector's
Response
to
Regulation
of
Nitrogen
Oxides
and
Sulfur
Dioxide
Under
the
Clean
Air
Act
Published
at
14
Tulane
Environmental
Law
Journal
309
(
Summer
2001)

Byron
Swift
Environmental
Law
Institute*

I.
INTRODUCTION..............................................................................
312
A.
Methodology.........................................................................
313
B.
Background
of
Title
IV..........................................................
314
II.
REGULATORY
PROGRAM
FOR
SULFUR
DIOXIDE
(
SO2)
...................
315
A.
Background
and
History
of
SO2
Regulation:
Traditional
Rate­
Based
Standards........................................
316
B.
Title
IV..................................................................................
319
C.
Industry
Response.................................................................
322
1.
Price
Signals,
Coupled
with
the
Flexibility
of
Title
IV,
Drove
Major
Shifts
in
Businesses'
Compliance
Strategy....................................................
323
2.
Over­
Compliance
and
Banking....................................
325
3.
Autarkic
Compliance
...................................................
327
4.
Strategies
for
Compliance
............................................
328
5.
The
Scrubbing
Story:
Fewer
Scrubbers
than
Expected
but
Lower
Costs
Due
to
Economics,
Innovation,
and
Regulatory
Design..............................
330
6.
The
Low­
Sulfur
Coal
Story
 
Regulatory
Design
and
Economic
Choices.................................................
335
7.
Retirement....................................................................
339
8.
Substitution
Units.........................................................
340
*
The
Environmental
Law
Institute
gratefully
acknowledges
the
support
of
the
Andrew
W.
Mellon
Foundation
for
this
study.
The
research
and
analysis
for
this
study
benefited
considerably
from
the
assistance
of
LeRoy
Paddock,
together
with
Susan
Bass,
Linda
Breggin,
Shi­
ling
Hsu,
Gary
Ganoung,
Beverly
Grossman,
Kelly
Mott,
Jay
Pendergrass,
and
Brian
Rohan.
ELI
also
gratefully
acknowledges
the
assistance
of
the
EPA's
Clean
Air
Markets
Division,
Denny
Ellerman
of
MIT,
and
Dallas
Burtraw
of
Resources
for
the
Future,
the
individuals
who
provided
comments
on
this
Article,
and
the
many
individuals,
firms,
and
organizations
interviewed
during
the
research.
The
author
can
be
reached
by
e­
mail
at
swift@
eli.
org.
310
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
9.
Trading.........................................................................
341
10.
Phased
Structure
Caused
Problems..............................
349
11.
Environmental
Effects
or
"
Hot
Spots"
from
Trading.........................................................................
350
III.
REGULATORY
PROGRAMS
FOR
NOX...............................................
351
A.
Background
..........................................................................
353
B.
Title
IV
NOX
Standard
and
Its
Legislative
History................
354
C.
Results
of
Title
IV..................................................................
357
1.
Initial
Litigation
and
Delay
..........................................
357
2.
Implementation............................................................
358
D.
Business
Behavior
and
Title
IV.............................................
359
1.
Rate
Standards
Led
to
One­
Time
Compliance
Using
the
Expected
Technology...................................
360
2.
In
Making
Pollutant
Reductions,
Firms
Sought
First
to
Optimize
Their
Process
Efficiency,
as
Regulations
Were
Sufficiently
Flexible
to
Create
Benefits
Through
Doing
So
.........................................
360
3.
Firms
Heavily
Used
Flexibility
Mechanisms
with
Low
Transaction
Costs,
Such
as
Averaging
.................
361
4.
Businesses
Faced
with
Rate
Standards
Can
Be
Expected
to
Over­
Comply
by
10%
..............................
365
5.
Innovation
under
Title
IV's
Moderate
Rate
Standards
Was
Limited
in
Scope
and
Extent................
366
E.
Other
NOX
Regulation
in
the
1990s......................................
370
1.
OTC
Cap­
and­
Trade
in
1999
Forced
Further
Reductions
at
Existing
Plants.......................................
370
2.
New
Source
Standards
.................................................
374
3.
Technology­
Based
Rate
Standards
for
NOX
in
the
1990s
Created
an
Uneven
Regulatory
Framework
and
Varied
Economic
Signals
for
Most
Business
Units.............................................................................
375
IV.
GENERAL
FINDINGS.......................................................................
376
A.
Environmental
Standards
Have
Been
Essential
to
Drive
Businesses
to
Reduce
NOX
and
SO2
Emissions.....................
377
B.
It
Has
Proven
Difficult
to
Set
Standards
That
Properly
Align
Private
with
Social
Costs,
and
Both
NOX
and
SO2
Standards
Were
in
Retrospect
Too
Lenient............................
378
C.
Standards
Based
on
Rates
or
an
Old
Source/
New
Source
Distinction
May
Create
Conflict
Rather
Than
Alignment
Between
Regulatory
and
Economic
Drivers
for
Environmental
Quality....................................................
380
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
311
D.
Different
Regulatory
Designs
Greatly
Affect
the
Cost
of
Compliance
for
Achieving
Equivalent
Environmental
Results
..................................................................................
381
E.
Rate
Standards
Were
Inflexible,
Limiting
Businesses'
Ability
to
Develop
and
Implement
Compliance
Methods
and
Technologies
..................................................................
383
1.
Emissions
Rate
Standards
Limited
Technology
Choice
..........................................................................
384
2.
Emissions
Rate
Standards
Did
Not
Force
a
Move
Toward
Cleaner
Technologies......................................
387
3.
Rate
Standards
Promote
One­
Time
Compliance
Without
Incentives
for
Further
Progress
......................
387
4.
Rate
Standards
Created
High
Transaction
Costs..........
388
5.
The
Design
of
Rate­
Based
Standards
Can
Be
Marginally
Improved
...................................................
388
F.
Emissions
Cap
and
Allowance­
Trading
Programs
Allow
Greater
Integration
of
Environmental
Issues
into
Business
Decision­
Making
Processes,
Providing
Greater
Flexibility
and
Lowering
Costs
Without
Sacrificing
Environmental
Integrity......................................
391
G.
Innovation,
Investment,
and
Cleaner
Production
.................
392
1.
Cap­
and­
Trade
Programs
Promote
Broader
Technology
Use
and
Innovation...................................
393
2.
Rate­
Based
Systems
Were
Unfriendly
to
Innovation....................................................................
394
3.
While
Innovation
Can
Be
Expected
to
Occur
Broadly,
It
Is
Not
Guaranteed
for
Any
Specific
Technology...................................................................
394
4.
Traditional
Regulatory
Approaches
Have
Discouraged
and
Distorted
Private
Investment
in
Research
and
Development,
and
Capital
Markets
for
Innovation...............................................................
395
H.
Imposing
Stricter
Standards
on
New
Sources
Has
Proven
Ineffective
in
the
Power
Sector,
and
Has
Led
to
Neither
Cheaper
Compliance
Nor
Better
Environmental
Results..........................................................
396
1.
New
Source
Standards
Have
Not
Effectively
Reduced
Ambient
Pollution
Levels..............................
397
2.
New
Source
Standards
Force
Only
Limited
Kinds
of
Innovation................................................................
397
312
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
3.
NSR
Rate
Standards
Create
Few
Net
Benefits
When
Combined
with
Offsets
or
in
Conjunction
with
an
Emissions
Cap.................................................
398
I.
Transaction
Costs
in
Cap­
and­
Trade
and
Rate­
Based
Programs..............................................................................
399
1.
Transaction
Costs
in
Establishing
Legislation..............
399
2.
Transaction
Costs
in
Establishing
Regulations.............
400
3.
Transaction
Costs
in
Implementing
the
Programs........
402
4.
Transaction
Costs
in
Incrementally
Lowering
Standards......................................................................
403
J.
Monitoring
and
Compliance.................................................
404
1.
Strict
Monitoring
and
High
Penalties...........................
404
2.
Design
of
Cap­
and­
Trade
Programs.............................
404
3.
Inclusiveness
of
Cap­
and­
Trade
Programs...................
405
K.
Over­
Compliance
and
Other
Conservative
Compliance
Strategies
by
Firms
...............................................................
405
L.
Flexibility
Mechanisms
with
Low
Transaction
Costs
Were
Widely
Used
.................................................................
406
M.
Retirement
and/
or
Switching
to
Cleaner
Power
Sources......
407
V.
CONCLUSION.................................................................................
408
A.
Stringency.............................................................................
408
B.
Regulatory
Design................................................................
408
I.
INTRODUCTION
Many
people
have
voiced
concerns
about
our
environmental
regulatory
system.
Businesses
express
concern
about
the
cost
and
complexity
of
regulation
and
slow
governmental
approvals.
These
concerns
have
added
to
industry
resistance
to
efforts
to
tighten
environmental
standards
or
to
address
new
problems
such
as
global
climate
change.
Environmental
advocates
are
concerned
about
the
effectiveness
of
regulations,
their
enforcement,
and
the
need
to
tighten
standards
to
increase
social
benefits.
Policy
analysts
have
drawn
attention
to
the
lack
of
common
sense
results
and
the
inflexibility
in
many
current
regulatory
systems,
together
with
the
lack
of
appropriate
incentives
for
continuous
improvement
and
innovation.
This
study
is
designed
to
examine
the
actual
performance
of
environmental
regulations
and
the
compliance
behavior
of
regulated
businesses
in
a
real­
world
setting.
It
focuses
on
business
compliance
with
regulatory
standards
for
nitrogen
oxides
(
NOX)
and
sulfur
dioxide
(
SO2)
in
the
electric
power
industry
from
1995
through
1999.
The
selected
time
period
permits
evaluation
of
Phase
I
of
Title
IV
of
the
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
313
federal
Clean
Air
Act
(
CAA),
enacted
in
1990
to
regulate
utility
emissions
of
SO2
and
NOX.
This
allows
comparison
of
the
two
contrasting
regulatory
approaches
Title
IV
imposed
on
electricitygenerating
facilities:
an
emissions
cap
and
allowance
trading
program
for
SO2,
the
most
ambitious
such
program
operating
in
the
United
States,
and
a
more
traditional
technology­
based
emission
rate
standard
to
control
NOX
emissions.
The
study
also
compares
these
standards
to
the
new
source
standards
for
NOX
and
SO2
in
effect
during
the
1995­
1999
period,
providing
findings
about
business
behavior
in
the
face
of
varied
regulatory
standards.

A.
Methodology
A
principal
methodological
approach
of
the
study
was
the
analysis
of
applicable
environmental
laws
and
polices,
together
with
the
extensive
data
compiled
by
governmental
and
private
sources
on
the
power
generation
industry.
Particular
use
was
made
of
the
emissions
and
generation
data
compiled
by
the
United
States
Environmental
Protection
Agency
(
EPA)
and
the
Department
of
Energy's
Energy
Information
Administration
(
EIA),
1
together
with
private
sources
such
as
the
Center
for
Energy
and
Environmental
Policy
Research
of
the
Massachusetts
Institute
of
Technology
(
MIT)
and
Resources
for
the
Future.
A
second
major
methodological
approach
of
the
study
was
to
conduct
confidential
interviews
with
representatives
of
power­
generating
firms,
federal
and
state
regulators,
public
interest
and
citizen
organizations,
and
technology
manufacturers
and
consulting
organizations
providing
equipment
and
advice
to
the
electricity
generating
industry.
This
included
detailed,
often
on­
site
interviews
with
environmental
program
managers
for
most
of
the
electricity­
generating
firms
affected
under
Phase
I.
2
1.
Prominent
among
these
are
the
annual
publications
EPA,
PUB.
NO.
EPA­
430/
R­
00­
007,
ACID
RAIN
PROGRAM:
1999
COMPLIANCE
REPORT
(
2000),
available
at
http://
www.
epa.
gov/
airmarkets/
cmprpt/
arp99
(
last
updated
Dec.
11,
2000)
[
hereinafter
EPA
1999
COMPLIANCE
REPORT];
EPA,
ACID
RAIN
PROGRAM:
1999
EMISSIONS
SCORECARD
(
2000),
available
at
http://
www.
epa.
gov/
airmarkets/
emissions/
score99
(
last
updated
Dec.
11,
2000)
[
hereinafter
EPA
1999
EMISSIONS
SCORECARD];
U.
S.
ENERGY
INFORMATION
ADMINISTRATION
(
EIA),
U.
S.
DEP'T
OF
ENERGY,
PUB.
NO.
DOE/
EIA­
0383,
ANNUAL
ENERGY
OUTLOOK
2001:
WITH
PROJECTIONS
TO
2020
(
2000),
available
at
http://
www.
eia.
doe.
gov/
oiaf/
aeo/
index.
html
(
last
modified
Jan.
30,
2001)
[
hereinafter
DOE
ANNUAL
ENERGY
OUTLOOK].
2.
The
interviews
were
confidential,
and
covered
a
wide
range
of
topics
about
the
effect
of
the
regulations
and
firms'
compliance
strategies
and
behavior.
314
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
B.
Background
of
Title
IV
Acid
precipitation,
which
forms
as
a
result
of
SO2
emissions
and
to
a
lesser
extent
NOX
emissions,
emerged
as
a
significant
environmental
and
political
issue
in
the
late
1970s.
The
problem
was
caused
primarily
by
electricity­
generating
plants
in
the
east­
central
part
of
the
United
States,
extending
from
Missouri
east
to
West
Virginia
and
south
to
Georgia,
which
burned
the
high­
sulfur
coal
from
this
region.
3
The
issue
pitted
these
midwestern
states
and
coal
interests
against
environmentalists
and
the
downwind
northeastern
states,
and
the
acrimonious
debate
produced
a
ten­
year
stalemate
in
Congress
during
the
1980s.
4
Title
IV
of
the
Clean
Air
Act
Amendments
of
1990,
which
enacted
the
Acid
Rain
Program
to
address
both
SO2
and
NOX
emissions,
ultimately
broke
this
stalemate.
5
Title
IV's
emissions
cap
and
allowance
trading
system
for
SO2
was
designed
to
reduce
1980
SO2
emission
levels
by
10
million
tons,
while
promising
lower
costs
than
typically
associated
with
traditional
ratebased
standards.
6
The
law
also
imposed
rate­
based
standards
designed
to
lower
NOX
emissions
by
about
2
million
tons
from
baseline
levels.
7
Both
programs
required
significant
reductions
from
the
larger,
dirtier
utility
units
during
Phase
I,
which
lasted
from
1995
until
1999.8
Phase
3.
Acid
precipitation
occurs
when
sulfur
dioxide
and
nitrogen
oxides
react
in
the
upper
atmosphere
with
water,
oxygen,
and
other
chemicals
to
form
sulfuric
acid
and
nitric
acid.
These
acids
adhere
to
rain
drops
or
snow,
damaging
forests
and
acidifying
lakes
and
limiting
their
ability
to
support
aquatic
life.
Acid
precipitation
damage
has
been
most
pronounced
in
the
northern
tier
and
northeastern
United
States
and
Canada
because
the
forests
and
lakes
in
these
areas
are
more
sensitive
to
acidic
deposition.
NATIONAL
ACID
PRECIPITATION
ASSESSMENT
PROGRAM,
1990
INTEGRATED
ASSESSMENT
REPORT
(
1991)
[
hereinafter
NAPAP
INTEGRATED
ASSESSMENT];
JAMES
L.
REGENS
&
ROBERT
RYCROFT,
THE
ACID
RAIN
CONTROVERSY
35­
58
(
1989).
4.
See
generally
RICHARD
COHEN,
WASHINGTON
AT
WORK,
BACK
ROOMS
AND
CLEAN
AIR
(
1990)
(
discussing
congressional
debates);
BRUCE
A.
ACKERMAN
&
WILLIAM
T.
HASSLER,
CLEAN
COAL
AND
DIRTY
AIR
(
1981)
(
discussing
competing
interests
regarding
coal
industry,
environmentalists,
CAA
regulation,
and
various
states).
5.
Clean
Air
Act
Amendments
of
1990,
Pub.
L.
No.
101­
549,
104
Stat.
2399
(
1990)
(
codified
at
42
U.
S.
C.
§
§
7401­
7700
(
1994)).
6.
Ian
M.
Torrens
et
al.,
The
1990
Clean
Air
Act
Amendments:
Overview,
Utility
Industry
Responses,
and
Strategic
Implications,
17
ANN.
REV.
ENERGY
&
ENV'T
211,
213
(
1992).
Today,
it
is
understood
that
the
reductions
required
by
Title
IV
benefit
not
only
acid
deposition,
but
also
human
health
in
reducing
the
formation
of
fine
particulates
and
of
urban
ozone.
7.
42
U.
S.
C.
§
4651(
b)
(
1994).
Because
the
standards
were
rate­
based,
they
never
achieved
the
reduction
from
the
1980
baseline,
but
did
slow
the
growth
of
NOX
emissions
to
3%
between
1990
and
1999,
compared
to
a
28%
increase
in
plant
utilization.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2.
8.
Title
IV
only
covers
electric
generation
units
that
sell
electricity,
loosely
termed
"
utility
units,"
although
in
today's
deregulated
environment,
independent
power
providers
may
sell
power
without
being
a
regulated
utility.
See
42
U.
S.
C.
§
7651a(
17)
(
1994).
Title
IV
excludes
from
its
coverage
industrial
producers
of
electricity,
even
though
in
1990
they
emitted
3.6
million
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
315
II
commenced
in
2000,
and
imposed
stricter
standards
on
virtually
all
utility
units.
9
II.
REGULATORY
PROGRAM
FOR
SULFUR
DIOXIDE
(
SO2)

The
centerpiece
of
Title
IV
was
the
emissions
cap
and
allowance
trading
program
for
SO2,
designed
to
reduce
utility
emissions
by
10
million
tons,
or
roughly
50%
from
1980
levels.
The
program's
record
of
over­
achieving
this
goal
at
very
low
compliance
cost
has
prompted
many
to
regard
it
as
one
of
the
most
successful
environmental
regulatory
programs.
10
The
emissions
cap
sets
a
mass
performance
standard
very
unlike
traditional
rate
standards.
The
cap
is
the
most
important
element
of
Title
IV
because
it
establishes
the
program's
environmental
integrity
and
much
of
its
economic
efficiency
by
allowing
regulated
firms
to
choose
any
effective
compliance
method,
leading
to
significant
cost
savings.
11
The
emissions
trading
system
also
helped
to
lower
compliance
costs
by
allowing
firms
to
reduce
emissions
at
the
generating
units
where
their
costs
were
lowest,
and
resulted
in
establishing
a
market
price
per
ton
of
emission
reductions.
The
combination
of
a
cap­
and­
trade
system
makes
every
ton
of
reductions
count
and
exerts
continuous
economic
pressure
on
firms
to
improve
performance,
transforming
business
compliance
behavior
as
compared
to
a
traditional
rate­
based
approach.
12
Overall,
this
unique
tons
of
SO2
compared
to
utility
emissions
of
15.9
million,
and
3.0
million
tons
of
NOX
compared
to
utility
emissions
of
6.7
million.
EPA,
NATIONAL
AIR
POLLUTANT
EMISSION
TRENDS
1900­
1998,
PUB.
NO.
EPA­
454/
R­
00­
002,
at
3­
10,
3­
12
(
Mar.
2000),
available
at
http://
www.
epa.
gov/
ttnchie1/
trends/
index.
html
[
hereinafter
EPA
EMISSIONS
TRENDS].
Note
that
industrial
sources
may
voluntarily
opt
into
the
SO2
program.
42
U.
S.
C.
§
7651i(
a)
(
1994).
9.
Phase
I
of
the
program
includes
only
larger
units
with
emissions
greater
than
2.5
pounds
per
million
Btu
of
fuel
burned
(
lb/
mmBtu)
during
the
baseline
period
of
1985­
1987
(
known
as
"
Table
A"
units,
as
they
are
listed
in
Table
A
in
the
statute),
together
with
any
substitution
or
compensating
units
that
were
voluntarily
entered
into
Phase
I.
See
42
U.
S.
C.
§
7651c
(
1994).
The
265
units
included
in
Phase
I
of
the
SO2
program
as
of
January
1,
1995,
also
are
affected
by
the
Phase
I
NOX
program.
See
id.
§
7651f.
All
utility
units
larger
than
25
MW
in
size
are
included
in
Phase
II
of
the
program,
which
began
in
2000.
See
id.
§
§
7651d(
a),
7651f(
a).
10.
See
generally
EMISSIONS
TRADING
(
Richard
F.
Kosobud
et
al.
eds.,
2000)
(
discussing
economic,
environmental,
and
regulatory
issues
surrounding
emissions
trading);
A.
DENNY
ELLERMAN
ET
AL.,
MARKETS
FOR
CLEAN
AIR:
THE
U.
S.
ACID
RAIN
PROGRAM
(
2000)
(
evaluating
the
impact
of
Title
IV
on
SO2
emissions).
11.
42
U.
S.
C.
§
7651a­
c
(
1994).
12.
Emission
rate
systems,
especially
if
differentiated
by
technologies,
exert
few
incentives
to
use
cleaner
base
technologies,
and
promote
an
"
equal
effort"
approach
based
on
reasonable
or
best
efforts.
They
also
create
no
incentives
to
go
beyond
the
standard.
In
contrast,
emissions
cap
and
allowance
trading
approaches,
together
with
other
potential
market
mechanisms,
create
an
equal
"
cost
per
ton"
approach
that
allows
greater
flexibility
in
compliance
316
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
regulatory
design
resulted
in
major
emissions
reductions,
industry
compliance
costs
below
the
lowest
predictions,
significant
and
unexpected
innovation,
relatively
little
litigation
during
program
implementation,
very
low
ongoing
transaction
costs,
and
100%
compliance.
The
environmental
effects
of
the
sulfur
reductions
have
also
been
significant.
Compliance
with
Title
IV
has
already
reduced
acid
deposition
in
northeastern
states.
13
The
EPA
has
also
estimated
the
health
benefits
from
reduced
SO2
emissions
at
over
$
10
billion.
14
A.
Background
and
History
of
SO2
Regulation:
Traditional
Rate­
Based
Standards
Prior
to
Title
IV,
existing
power
plants
were
primarily
affected
by
state­
based
legislation
aimed
at
attaining
national
ambient
environmental
standards.
15
The
federal
Clean
Air
Act
of
1970
established
the
first
national
ambient
air
standards
for
SO2,
designed
to
protect
health
and
welfare,
16
and
required
states
to
develop
"
state
implementation
plans"

choices
and
exerts
continuous
pressure
on
businesses
to
reduce
tons
of
pollution.
These
issues
are
discussed
infra
Part
V.
13.
James
A.
Lynch
et
al.,
Changes
in
Sulfate
Deposition
in
Eastern
USA
Following
Implementation
of
Phase
I
of
Title
IV
of
the
Clean
Air
Act
Amendments
of
1990,
34
ATMOSPHERIC
ENV'T
1665
(
2000)
(
finding
a
25%
reduction
by
1998).
14.
EPA,
PUB.
NO.
EPA­
430/
R­
95­
010,
HUMAN
HEALTH
BENEFITS
FROM
SULFATE
REDUCTIONS
UNDER
TITLE
IV
OF
THE
1990
CLEAN
AIR
ACT
AMENDMENTS
6­
4
(
1995)
(
calculating
annual
benefits
for
sulfate
aerosol
reductions
at
$
10
billion
in
Phase
I,
rising
to
$
40
billion
by
2010,
with
88%
of
benefits
from
reduced
premature
mortality).
The
EPA
also
estimates
the
benefits
of
additional
NOX
reductions
at
$
1262
to
$
4786
per
ton
in
1999.
EPA,
PUB.
NO.
EPA­
452/
R­
98­
003B,
2
REGULATORY
IMPACT
ANALYSIS
FOR
THE
NO
X
SIP
CALL,
FIP,
AND
SECTION
126
PETITIONS
ES­
6
(
1998)
[
hereinafter
EPA
1998
RIA];
see
generally
ENVTL.
LAW
INST.,
CLEANER
POWER:
THE
BENEFITS
AND
COSTS
OF
MOVING
AWAY
FROM
COAL
TO
NATURAL
GAS
POWER
GENERATION
(
Nov.
2000)
(
calculating
NOX,
SO2
and
CO2
benefits
from
reduced
coal
generation)
[
hereinafter
ELI
CLEANER
POWER];
CLEAN
AIR
TASK
FORCE,
DEATH,
DISEASE
&
DIRTY
POWER:
MORTALITY
AND
HEALTH
DAMAGE
DUE
TO
AIR
POLLUTION
FROM
POWER
PLANTS
4­
5
(
2000)
[
hereinafter
CLEAN
AIR
TASK
FORCE]
(
calculating
annual
benefits
of
bringing
power
plants
into
compliance
with
modern
pollution
standards
for
SO2
and
NOX
at
over
$
100
billion).
15.
National
legislation
affecting
SO2
dates
back
to
the
Clean
Air
Act
of
1963,
which
restricted
interstate
air
pollution.
Clean
Air
Act
of
1963,
Pub.
L.
No.
88­
206,
77
Stat.
392
(
1963).
This
law
failed
to
have
great
effect,
as
its
cumbersome
procedures
required
intergovernmental
conferences
to
address
specific
instances
of
interstate
pollution,
as
well
as
multiple
requests
for
remedial
action.
Several
cases
did,
however,
result
in
reductions
of
SO2
and
particulate
deposition.
See
SENATE
COMM.
ON
PUBLIC
WORKS,
93D
CONG.,
2D
SESS.,
A
LEGISLATIVE
HISTORY
OF
THE
CLEAN
AIR
ACT
AMENDMENTS
OF
1970,
at
1346
(
COMM.
PRINT
1974).
The
Air
Quality
Act
of
1967
later
initiated
a
system
for
air­
quality
planning
based
on
ambient
air­
quality
standards
to
supplement
these
abatement
procedures,
a
precursor
to
the
1970
legislation.
See
Air
Quality
Act
of
1967,
Pub.
L.
No.
90­
148,
81
Stat.
485
(
1967);
Vickie
L.
Patton,
The
New
Air
Quality
Standards,
Regional
Haze,
and
Interstate
Air
Pollution
Transport,
28
ENVTL.
L.
REP.
10,155
(
1998).
16.
Clean
Air
Act,
40
C.
F.
R.
50.2(
b)
(
2000).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
317
(
SIPs)
to
achieve
these
standards.
17
The
primary
standard
for
SO2
was
set
at
0.030
parts
per
million
(
ppm),
to
be
achieved
on
a
calendar­
year
basis,
and
the
secondary
standard
was
0.5
ppm,
set
on
a
three­
hour
basis.
18
An
unintended
consequence
of
these
new
ambient
standards
was
the
dispersion
of
SO2
through
tall
stacks.
The
EPA
permitted
over
a
dozen
states
to
adopt
SIPs
allowing
sources
to
meet
the
new
standard
by
building
tall
stacks
to
disperse
the
SO2
instead
of
reducing
emissions.
19
This
practice
injected
SO2
into
the
higher
atmosphere
where
it
remained
longer,
facilitating
the
chemical
reactions
that
produce
sulfuric
acid
and
aggravating
acid
precipitation.
In
the
1977
CAA
Amendments
Congress
subsequently
prohibited
the
use
of
tall
stacks
to
achieve
ambient
standards.
20
It
is
important
to
note
that
these
ambient
standards
still
exist
and
protect
against
plants
emitting
SO2
at
levels
that
would
exceed
local
health­
based
limits.
In
contrast
to
the
lenient
standards
and
relative
lack
of
regulation
of
existing
plants,
the
CAA
established
stringent
standards
for
new
sources
or
major
modifications
of
existing
sources,
based
on
"
new
source
performance
standards"
(
NSPS).
21
The
first
NSPS
established
in
1971
limited
emission
rates
to
1.2
pounds
of
SO2
per
million
BTU
of
fuel
burned
(
lb/
mmBtu)
for
coal­
fired
plants.
22
To
meet
this
standard,
new
sources
either
had
to
use
scrubbers
to
reduce
emissions
or
use
so­
called
"
compliance
coal"
with
a
sulfur
content
equivalent
to
the
NSPS
rate.
The
effect
on
the
industry
was
dramatic
because
emission
rates
from
existing
sources
were
far
higher.
Because
of
the
disparity
between
standards
for
existing
and
new
plants,
electric
utilities
began
to
focus
their
research
and
operational
efforts
on
extending
the
operating
life
of
the
older,
"
grandfathered"
facilities.
23
In
the
Clean
Air
Act
Amendments
of
1977,
Congress
created
the
New
Source
Review
process
and
a
stricter
new
source
performance
17.
42
U.
S.
C.
§
7410
(
1994).
18.
Clean
Air
Act,
40
C.
F.
R.
§
§
50.4,
50.5
(
2000).
See
National
Ambient
Air
Quality
Standards
for
Sulfur
Oxides
(
Sulfur
Dioxide)
 
Final
Decision,
66
Fed.
Reg.
1665­
01
(
May
22,
1996).
19.
See
Patton,
supra
note
15,
at
10,162;
Richard
L.
Revesz,
Federalism
and
Interstate
Environmental
Externalities,
144
U.
PA.
L.
REV.
2341,
2351­
52
(
1996);
see
generally
REGENS
&
RYCROFT,
supra
note
3
(
discussing
history
of
efforts
to
control
acid
rain).
20.
The
1977
Amendments
added
section
123
to
the
Act,
which
states
that
the
"
control
of
any
air
pollutant
under
an
applicable
implementation
plan
under
this
title
shall
not
be
affected
in
any
manner
by
 
(
1)
so
much
of
the
stack
height
of
any
source
as
exceeds
good
engineering
practice
.
.
.
or
(
2)
any
other
dispersion
technique."
42
U.
S.
C.
§
7423
(
1994).
21.
Id.
§
7411.
22.
Clean
Air
Act,
40
C.
F.
R.
§
60.43
(
2000)
(
applying
the
standard
to
plants
built
between
1971
and
1978).
23.
See
infra
Part
III.
D.
3.
a.
318
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
standard
that
retained
the
former
1.2
lb/
mmBtu
standard
but
also
required
new
sources
to
reduce
potential
stack
SO2
emissions
by
70%
or
90%,
depending
on
the
coal
quality.
24
This
standard
required
utilities
to
install
scrubbers
at
all
new
generating
units,
removing
much
of
the
incentive
to
use
low­
sulfur
coal
and
favoring
powerful
eastern
highsulfur
coal
interests.
25
By
thus
increasing
the
cost
of
new
coal­
fired
plants,
the
scrubbing
requirement
added
incentives
to
extend
the
life
of
the
older,
dirtier
plants.
Both
the
ambient
and
new
source
SO2
standards
were
based
principally
on
human
health
concerns,
and
proved
inadequate
to
address
the
broader
regional
effects
of
acid
deposition
on
ecosystems.
By
the
late
1970s,
Canada,
several
states,
and
national
and
state
environmental
organizations
were
raising
serious
concerns
about
acid
precipitation.
In
1980,
Congress
created
the
National
Acid
Precipitation
Assessment
Program
to
address
disagreements
over
the
cause
of
acid
precipitation.
26
Throughout
the
1980s,
legislators
introduced
bills
in
Congress
to
reduce
acid
precipitation.
27
These
typically
focused
on
requiring
the
older,
dirtier
coal
plants
to
meet
the
1.2
lb/
mmBtu
standard
used
for
new
sources
since
1970,
or
to
require
scrubbing,
with
annual
costs
estimated
at
$
4
to
$
7
billion.
28
Eastern
coal
interests
and
electric
utilities
blocked
24.
42
U.
S.
C.
§
7411;
Clean
Air
Act,
40
C.
F.
R.
§
60.43a
(
2000).
25.
In
Sierra
Club
v.
Costle,
the
court
held
that
a
utility
could
not
use
low­
sulfur
coal
to
create
equivalent
reductions.
657
F.
2d
298,
320­
21
(
D.
C.
Cir.
1981).
It
interpreted
the
rate­
based
standard
and
held
that
"[
i]
n
no
instance,
however,
can
a
plant
reduce
emissions
less
than
70%
of
potential
uncontrolled
emissions
.
.
.
.
There
is
no
dispute
that
the
70%
floor
in
the
standard
necessarily
means
that,
given
the
present
state
of
pollution
control
technology,
utilities
will
have
to
employ
some
form
of
flue
gas
desulfurization
(`
FGD'
or
`
scrubbing')
technology."
Id.
at
316
&
n.
38.
Later,
in
Wisconsin
Electric
Power
v.
Reilly,
the
court
held
that
use
of
low­
sulfur
coal
was
also
not
permissible
to
avoid
the
threshold
for
imposition
of
strict
New
Source
Performance
Standards.
893
F.
2d
901,
919
(
7th
Cir.
1990).
26.
42
U.
S.
C.
§
§
8901­
8912
(
1994).
27.
See
generally
COHEN,
supra
note
4
(
discussing
congressional
debates).
28.
For
instance,
the
Mitchell
Compromise
negotiated
between
Senator
Mitchell,
then­
Chairman
of
the
Environment
Subcommittee
of
the
Senate
Environment
and
Public
Works
Committee,
and
Majority
Leader
Senator
Byrd,
would
have
initially
required
scrubbing
at
33
MW
of
"
cost­
effective"
plants,
and
required
all
utility
coal­
fired
plants
not
already
meeting
a
1.2
lb/
mmBtu
emissions
rate
standard
to
meet
a
1.0
lb/
mmBtu
standard
beginning
in
2003.
The
annualized
costs
of
fully
implementing
this
were
estimated
at
$
4.4
to
$
6.1
billion.
The
Waxman­
Sikorski
bill
of
the
98th
Congress,
co­
sponsored
by
over
80
House
members,
would
have
mandated
scrubbing
on
the
50
largest
utility
plants
with
an
estimated
cost
of
as
much
as
$
7
billion
annually.
Paul
R.
Portney,
Policy
Watch:
Economics
and
the
Clean
Air
Act,
4
J.
ECON.
PERSP.
173,
175
(
1990);
see
also
H.
R.
3400,
98th
Cong.
(
2d
Sess.
1984).
See
generally
Dallas
Burtraw,
Appraisal
of
the
SO2
Cap­
and­
Trade
Market,
in
EMISSIONS
TRADING
133
(
Richard
F.
Kosobud
et
al.
eds.,
2000)
(
discussing
costs
and
benefits
of
alternative
regulatory
methods).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
319
these
efforts,
arguing
that
they
were
too
costly
and
would
cause
dramatic
increases
in
electricity
rates
in
many
states.
29
In
mid­
1989,
the
Bush
Administration
broke
the
deadlock
on
acid
precipitation
with
a
proposal
to
cap
emissions
at
a
level
10
million
tons
below
1980
levels
and
to
allow
emissions
trading
under
the
cap.
30
This
proposal,
which
became
Title
IV,
was
designed
to
achieve
significant
emissions
reductions
at
substantially
lower
cost
than
earlier
proposals.

B.
Title
IV
Title
IV
was
passed
in
1990
to
substantially
reduce
the
SO2
emissions
of
electric
utilities,
which
were
then
responsible
for
70%
of
national
emissions.
31
Title
IV
is
unlike
traditional
regulations
that
impose
source­
specific
rate
limits,
and
instead
implements
an
industrywide
mass
standard
 
a
permanent
cap
on
utility
SO2
emissions
at
8.95
million
tons
per
year,
or
roughly
half
their
1980
baseline
emissions.
32
Phase
I
of
the
program
began
in
1995,
and
required
the
263
dirtiest
coalfired
electricity­
generating
units
(
referred
to
as
"
Table
A"
units)
to
reduce
their
SO2
emissions
to
a
base
level
of
5.7
million
tons
per
year.
33
Phase
II
commenced
in
2000,
and
requires
all
generating
units
larger
than
25
megawatts
to
reduce
their
emissions
to
reach
the
final
cap
amount
of
8.95
million
tons.
34
29.
Paul
L.
Joskow
&
Richard
Schmalensee,
The
Political
Economy
of
Market­
Based
Environmental
Policy:
The
U.
S.
Acid
Rain
Program,
41
J.
L.
&
ECON.
37,
47
(
Apr.
1998);
Arnold
W.
Reitze,
Jr.,
The
Legislative
History
of
U.
S.
Air
Pollution
Control,
36
HOUS.
L.
REV.
679,
715
(
1999).
30.
The
Bush
Administration
bill
as
originally
presented
on
June
15,
1989,
would
have
created
a
two­
pronged
regulatory
approach:
power
generation
units
that
emitted
over
1.2
lb/
mmBtu
of
SO2
in
the
baseline
year
(
1985)
would
be
subject
to
an
emissions
cap
of
5.1
million
tons,
combined
with
an
allowance
trading
system;
those
emitting
less
than
1.2
lb/
mmBtu
would
be
required
to
maintain
that
emissions
rate.
The
latter
group,
known
as
"
the
class
of
'
85,"
came
to
perceive
inclusion
in
the
allowance
system
as
preferable,
and
the
debate
began
to
center
on
how
many
allowances
to
provide
to
these
"
clean"
utilities
and
to
various
sub­
groups
within
this
group.
The
overall
choice
of
a
10
million
ton
reduction
was
slightly
in
excess
of
the
estimated
reductions
required
by
other
bills
recently
proposed
in
Congress,
and
was
based
in
part
on
a
perceived
"
knee"
in
the
cost
of
compliance
curve
at
the
10
million
ton
reduction
level.
See,
e.
g.,
Nancy
Kete,
The
Politics
of
Markets:
The
Acid
Rain
Control
Policy
in
the
1990
Clean
Air
Act
Amendments
182­
3,
251­
2
(
1993)
(
unpublished
Ph.
D.
dissertation,
Johns
Hopkins
University)
(
on
file
with
author)
(
outlining
costs
of
four
bills
as
presented
to
the
Bush
Administration).
31.
EPA
EMISSIONS
TRENDS,
supra
note
8,
§
2.2,
at
3­
4.
32.
42
U.
S.
C.
§
7651c
(
1994);
see
also
Torrens
et
al.,
supra
note
6,
at
213.
33.
42
U.
S.
C.
§
7651c.
The
level
of
the
Phase
I
cap
was
reached
by
multiplying
an
emissions
rate
of
2.5
lb/
mmBtu
SO2
(
about
double
the
Phase
II
standard)
times
utilization
in
the
baseline
years.
Id.;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
39­
41
(
detailing
precise
Phase
I
allocation
rules).
34.
The
level
of
the
Phase
II
cap
is
reached
by
multiplying
an
emissions
rate
of
1.2
lb/
mmBtu
SO2
times
baseline
utilization.
The
1.2
lb/
mmBtu
emission
rate
has
historical
320
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
To
implement
the
cap,
the
law
assigned
allowances,
each
equivalent
to
one
ton
of
SO2
emissions,
to
each
affected
generating
unit
based
on
its
historic
base
period
(
1985­
1987)
generation
rates,
but
scaled
down
so
that
the
aggregate
emissions
equaled
the
target
emissions
cap.
35
Title
IV
therefore
effectively
implements
a
new
source
standard
of
zero
because
any
new
generating
source
must
purchase
all
its
needed
allowances
from
other
sources,
and
total
emissions
do
not
grow.
36
In
addition
to
these
baseline
allowance
allocations,
Title
IV
provided
almost
4
million
bonus
allowances
over
the
first
years
of
the
program,
primarily
to
encourage
the
use
of
scrubbers;
37
together
with
a
small
number
for
renewable
energy
and
small
diesel
refineries
producing
desulfurized
fuel.
38
Both
the
annual
allowances
and
the
bonus
allowances
were
allocated
without
charge
to
existing
sources.
Finally,
to
help
establish
a
market
and
to
counter
fears
of
allowance
hoarding,
the
law
requires
the
EPA
to
hold
back
and
auction
roughly
3%
of
the
allowances
allocated
to
units
each
year,
and
to
make
available
a
limited
amount
of
allowances
at
$
1500
through
a
Direct
Sales
Reserve.
39
In
another
departure
from
traditional
regulation,
Title
IV
allows
individual
sources
to
trade
their
unused
allowances
to
other
sources,
or
bank
them
for
future
use.
40
The
design
of
Title
IV
therefore
creates
several
compliance
options
for
a
generating
source:

significance,
as
it
is
the
rate
standard
which
has
been
required
for
new
coal­
fired
power
plants
since
1970.
35.
Congress
was
trying
to
achieve
a
reduction
of
10
million
tons
from
1980
emissions,
but
the
individual
source
information
for
1980
was
poor,
so
Title
IV
established
the
baseline
period
based
on
emissions
from
1985
through
1987,
proportionately
reduced
to
equal
estimated
1980
emissions.
42
U.
S.
C.
§
7651a(
4)
(
1994).
36.
See
42
U.
S.
C.
§
7651b(
e)
(
1994).
37.
By
far
the
largest
quantity
of
bonus
allowances
was
the
3.5
million
extension
allowances,
allocated
primarily
(
2.1
million)
to
units
that
installed
scrubbers.
The
origin
of
these
3.5
million
bonus
allowances
was
a
shift
forward
of
one
year
in
the
effective
date
of
the
Act,
in
moving
from
the
Senate
bill
to
the
Administration
bill.
During
Phase
I,
this
achieved
an
added
3.5
million
ton
reduction,
redistributed
as
bonus
allowances
to
firms
choosing
to
install
scrubbers,
which
was
in
the
interest
of
states
with
high­
sulfur
coal
deposits.
42
U.
S.
C.
§
7651c(
d)
(
1994);
Torrens
et
al.,
supra
note
6,
at
215.
A
similar
advance
of
one
year
for
Phase
II
led
to
the
allocation
of
an
additional
530,000
allowances
for
the
years
2000
through
2009.
Id.
at
213
n.
1.
38.
Although
300,000
bonus
allowances
were
authorized
to
reward
efforts
to
develop
alternative
energy
sources,
only
30,377
were
allocated
during
Phase
I.
42
U.
S.
C.
§
7651c(
g)
(
1994).
In
addition,
up
to
35,000
allowances
a
year
were
authorized
for
small
diesel
refineries
producing
low­
sulfur
fuel,
of
which
147,820
were
allocated
in
Phase
I.
Id.
§
7651i(
h).
Allocation
data
from
EPA
COMPLIANCE
REPORTS.
39.
42
U.
S.
C.
§
7651o(
b)­(
d).
The
auction
and
Direct
Sales
Reserve
provisions
were
added
to
Title
IV
to
counter
"
fears
that
market
imperfections,
such
as
irrational
hoarding
of
allowances
by
utilities
or
anti­
market
behavior
by
state
public
utility
regulators,
might
make
it
impossible
for
new
entrants
to
acquire
allowances
necessary
to
construct
and
operate
new
generating
capacity."
ELLERMAN
ET
AL.,
supra
note
10,
at
169
&
n.
5.
40.
See
id.
§
7651b(
b).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
321

emit
at
the
unit's
annual
baseline
tonnage
limit;

emit
below
the
limit
and
generate
unused
allowances
that
can
be
banked
for
later
use,
used
by
other
units
within
the
company,
or
sold
or
traded
to
other
firms;
or

emit
above
the
limit
and
obtain
allowances
to
cover
the
additional
emissions.
41
In
order
to
guard
against
the
transfer
of
generation
from
Phase
I
units
to
noncovered
Phase
II
units,
Title
IV
required
firms
to
maintain
their
average
heat
input
from
their
baseline
period,
or
suffer
the
loss
of
allowances.
42
However,
another
flexibility
mechanism
allowed
them
to
designate
non­
Table
A
units
that
would
otherwise
not
be
covered
until
Phase
II
as
"
substitution
units"
during
Phase
I.
43
Once
a
firm
elected
to
do
so,
the
EPA
determined
a
baseline
for
the
units
and
provided
them
with
allowances
just
like
Table
A
units,
allowing
firms
to
use
the
emissions
reductions
(
or
exceedances)
from
these
plants
as
part
of
their
overall
compliance
strategy.
44
Finally,
Title
IV
incorporates
an
extremely
strict
monitoring
and
compliance
system.
Continuous
Emissions
Monitoring
Devices
(
CEMS)
must
record
data
every
fifteen
minutes
and
regularly
report
consolidated
data
to
the
EPA,
including
data
that
indicates
that
the
monitor
is
functioning
properly.
45
The
CEMS
cost
almost
$
1
million
per
stack.
46
At
year
end,
following
a
two­
month
period
for
"
true­
up,"
each
company
must
show
that
it
has
sufficient
allowances
to
cover
all
emissions
for
that
year.
47
If
not,
firms
automatically
receive
a
$
2000
fine
per
ton
of
exceedances,
and
must
restore
each
excess
ton
plus
a
penalty
ton
that
is
41.
Such
allowances
can
come
from
the
allowance
market
or
from
other
units
owned
by
the
company,
whether
generated
contemporaneously
or
banked
in
previous
years.
Id.
42.
See
id.
§
§
7651c,
7651g(
c)(
1);
Clean
Air
Act,
40
C.
F.
R.
§
72.43
(
2000).
43.
Id.
§
7651c(
b).
44.
Id.
§
7651c(
b),
(
c).
45.
Clean
Air
Act,
40
C.
F.
R.
§
75.1
(
2000).
This
is
more
stringent
than
the
new
source
provisions,
which
require
only
two
data
points
per
hour.
Clean
Air
Act,
40
C.
F.
R.
§
60.47a(
g)
(
2000).
It
has
been
noted
that
predictive
emissions
monitors
are
far
cheaper
and
may
be
as
accurate
as
CEMS,
since
sulfur
emissions
can
be
accurately
predicted
from
fuel
sulfur
content
and
boiler
characteristics,
but
these
are
rarely
allowed.
C.
Foster
Knight,
How
Regulations
Impact
Innovative
Environmental
Technologies:
A
Recent
Case
Study,
TOTAL
QUALITY
ENVTL.
MGMT.
119
(
Spring
1995)
(
discussing
predictive
emissions
monitoring
systems).
46.
ELLERMAN
ET
AL.,
supra
note
10,
at
248­
50.
47.
At
the
end
of
the
year,
utilities
are
granted
a
sixty­
day
"
true­
up,"
or
grace
period,
during
which
SO2
allowances
may
be
purchased,
if
necessary,
to
cover
each
unit's
emissions
for
the
year.
At
the
end
of
the
grace
period,
the
allowances
that
a
unit
holds
in
its
compliance
account
must
equal
or
exceed
the
annual
SO2
emissions
recorded
by
the
unit's
monitoring
system.
Any
remaining
allowances
may
be
sold
or
banked
for
use
in
future
years.
Clean
Air
Act,
40
C.
F.
R.
§
77.3
(
2000).
322
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
deducted
from
the
firm's
allotment
for
the
following
year.
48
This
system
has
resulted
in
100%
compliance
over
the
five
years
of
the
Phase
I
program.
49
This
cap­
and­
trade
system
is
both
more
rigid
and
more
flexible
than
traditional
regulation.
The
emissions
cap
is
more
rigid
because
it
creates
zero
growth
of
emissions,
which
benefits
the
environment.
The
monitoring
rules
and
compliance
system
are
also
extremely
strict,
with
severe
and
automatic
penalties.
However,
the
system
provides
great
flexibility
to
firms
in
choosing
compliance
options.
Due
to
the
true
performance
standard
established
by
the
emissions
cap,
together
with
trading,
a
utility
is
free
to
choose
among
competing
compliance
approaches,
including
scrubbing,
switching
to
lower
sulfur
coal,
blending
coals
with
different
sulfur
contents,
and
shifting
load
to
units
that
emit
less
sulfur.
In
addition,
government
regulators
are
not
involved
in
decisions
about
technology
choice,
as
they
are
in
application
of
technology­
based
standards
like
BACT,
RACT,
and
LAER.
50
The
government
role
is
that
of
strict
compliance
monitoring,
not
supervising
the
choice
of
technology,
which
greatly
lowers
transaction
costs
and
allows
firms
to
rapidly
change
their
compliance
approaches.

C.
Industry
Response
The
electric
industry's
response
to
Title
IV
can
be
characterized
in
three
overlapping
stages.
In
the
earliest
years
of
the
program,
firms
significantly
over­
invested
in
compliance,
including
constructing
scrubbers
for
twenty­
seven
Phase
I
units.
51
These
actions
were
driven
by
predictions
of
relatively
high
allowance
prices
in
the
$
300
to
$
1000
range,
and
uncertainty
as
to
whether
additional
allowances
would
be
available
on
the
market.
52
In
the
second
stage,
firms
began
to
recognize
and
react
to
the
lower
cost
of
compliance
represented
by
lower
allowance
prices
in
the
$
150
range,
which
first
became
evident
in
the
48.
42
U.
S.
C.
§
7651(
j)
(
1994);
Clean
Air
Act,
40
C.
F.
R.
§
77.6
(
2000).
49.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2.
50.
42
U.
S.
C.
§
§
7479(
3),
7501(
3),
7502(
c)(
1)
(
1994).
51.
See
infra
note
91.
52.
When
the
cap­
and­
trade
system
was
first
proposed
in
1990,
the
EPA's
marginal
cost
estimates
for
Phase
I
were
between
$
290
and
$
410
per
ton,
and
$
580
to
$
815
for
Phase
II
in
constant
1995
dollars.
ICF
RESOURCES,
INC.,
COMPARISON
OF
THE
ECONOMIC
IMPACTS
OF
THE
ACID
RAIN
PROVISIONS
OF
THE
SENATE
BILL
(
S.
1630)
AND
THE
HOUSE
BILL
(
H.
1630)
(
July
1990)
[
hereinafter
ICF
RESOURCES].
The
National
Acid
Precipitation
Assessment
Program
(
NAPAP)
estimated
that
only
modest
SO2
reductions
could
be
made
at
under
$
200
per
ton,
and
that
the
marginal
cost
of
a
10
million
ton
reduction
by
2000
would
be
$
700
to
$
900
per
ton.
NAPAP
INTEGRATED
ASSESSMENT,
supra
note
3,
at
411.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
323
period
from
1992
to
1993.53
These
price
signals
led
some
firms
to
cancel
scrubber
contracts,
and
led
to
a
growing
use
of
low­
sulfur
coal
to
reach
compliance.
54
In
this
stage,
and
continuing
throughout
Phase
I,
the
trading
provisions
were
used
by
many
firms
to
bank
allowances
for
future
use
and
for
intra­
firm
averaging
among
different
units,
with
only
a
handful
of
firms
using
inter­
firm
trading
as
a
compliance
strategy.
55
A
third
stage
became
evident
toward
the
end
of
Phase
I,
in
which
many
firms
increased
their
participation
in
the
allowance
market,
trading
directly
with
other
firms
and
increasing
trading
for
arbitrage
or
profitmaking
purposes.
56
However,
this
third
stage
did
not
represent
any
change
in
compliance
strategies.
Virtually
all
firms
continued
essentially
autarkic
or
self­
reliant
compliance
strategies
throughout
Phase
I,
emitting
well
below
their
limits
and
banking
allowances
for
future
use.
57
The
following
sections
describe
firms'
observed
compliance
behavior,
and
assess
how
the
legal
provisions
or
other
aspects
of
Title
IV
have
acted
to
influence
this
behavior.

1.
Price
Signals,
Coupled
with
the
Flexibility
of
Title
IV,
Drove
Major
Shifts
in
Businesses'
Compliance
Strategy
One
of
the
most
interesting
aspects
of
the
early
years
of
Title
IV
was
firms'
relatively
rapid
response
to
price
signals
generated
by
the
allowance
market
that
reflected
the
underlying
cost
of
compliance.
Initial
industry
expectations
in
1991
were
for
prices
between
$
300
and
$
1000
per
allowance.
58
In
1992
and
1993,
the
earliest
signals
began
to
reveal
that
prices
would
be
substantially
lower.
The
first
trades
took
place
in
1992
at
$
265
and
$
300,59
and
the
EPA's
first
auction
of
53.
ELLERMAN
ET
AL.,
supra
note
10,
at
231­
35
(
discussing
estimates
of
Phase
I
costs
prior
to
implementation).
54.
U.
S.
GENERAL
ACCOUNTING
OFFICE,
PUB.
NO.
GAO/
RCED­
95­
30,
AIR
POLLUTION:
ALLOWANCE
TRADING
OFFERS
AN
OPPORTUNITY
TO
REDUCE
EMISSIONS
AT
LESS
COST
29
(
1994)
[
hereinafter
GAO
1994
TRADING];
Burtraw,
supra
note
28,
at
133­
67.
55.
See
Figure
2­
3.
See
generally
A.
Denny
Ellerman,
From
Autarkic
to
Market­
Based
Compliance:
Learning
from
Our
Mistakes,
in
EMISSIONS
TRADING
(
Richard
F.
Kosobud
et
al.,
eds.
2000)
(
discussing
utility
emphasis
on
self­
reliance
and
Phase
I
over­
compliance).
56.
See
id.
at
12.
57.
See
Figures
2­
3
A,
B.
58.
An
industry
poll
showed
widespread
expectations
of
allowance
prices
on
the
order
of
$
300
to
$
725
for
Phase
I
and
$
500
to
$
1000
for
Phase
II
in
June­
July
1991,
falling
to
$
200
to
$
550
for
Phase
I
and
$
300
to
$
700
for
Phase
II
by
October/
November
1991.
Torrens
et
al.,
supra
note
6,
at
220.
Similarly,
the
EPA
and
other
economic
studies
predicted
that
allowances
would
cost
$
290
to
$
410
during
Phase
I,
and
$
580
to
$
815
in
Phase
II.
See
ICF
RESOURCES,
supra
note
52.
See
generally
Burtraw,
supra
note
28,
at
152
(
setting
forth
long­
run
cost
estimates).
59.
The
first
trade
was
of
10,000
allowances
at
$
265
per
allowance
from
Wisconsin
Power
&
Light
Company
to
the
Tennessee
Valley
Authority.
Frank
Edward
Allen,
Tennessee
324
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
allowances
in
March
of
1993
revealed
prices
at
$
131.60
As
shown
below,
private
transactions
continued
for
almost
a
year
to
be
somewhat
above
the
price
set
by
the
1993
auction,
but
by
mid­
1994
they
fell
to
the
$
150
level
set
by
the
EPA
auction
in
March
of
1994,
and
continued
in
the
$
100
range
through
Phase
I,
until
they
began
to
climb
towards
$
200
as
Phase
II
approached.
61
See
Figure
2­
1:
SO2
Allowance
Prices62
Since
allowance
prices
are
closely
tied
to
the
cost
of
compliance,
the
low
allowance
prices
reflect
a
very
positive
development:
a
low
cost
of
compliance.
63
The
major
drivers
of
the
lower
costs
in
Phase
I
were
innovation
and
investment
relating
to
low­
sulfur
coal,
as
well
as
increased
scrubbing
efficiency.
64
These
responses
were
prompted
in
large
part
by
the
design
of
Title
IV,
although
unrelated
market
forces,
such
as
increased
rail
competition,
also
contributed.
65
The
ability
of
firms
to
shift
compliance
strategies
in
response
to
the
changing
costs
of
different
compliance
options
is
directly
related
to
the
cap­
and­
trade
standard.
Title
IV
allowed
firms
to
respond
to
the
unexpectedly
low
price
of
low­
sulfur
coals;
several
firms
cancelled
scrubber
contracts
and
many
switched
to
low­
sulfur
coal.
Altogether,
scrubbers
were
built
for
only
twenty­
seven
Phase
I
units,
significantly
fewer
than
were
anticipated
at
the
time
the
1990
CAA
Amendments
were
adopted.
66
Title
IV
is
therefore
unlike
the
previous
rate­
based
NSPS
standards
that
limited
compliance
technologies
to
scrubbing
or
the
use
of
Valley
Authority
Is
Buying
Pollution
Rights
From
Wisconsin
Power,
WALL
ST.
J.,
May
11,
1992,
at
A12.
The
second
was
a
trade
of
25,000
allowances
from
ALCOA
to
Ohio
Edison
for
$
300
per
allowance.
Joan
E.
Rigdon,
Alcoa
Unit
Arranges
$
7.5
Million
Sale
of
Pollution
Allowances
to
Ohio
Edison,
WALL
ST.
J.,
July
1,
1992,
at
A6.
60.
See
Ellerman,
supra
note
55,
fig.
1,
at
6.
61.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
10.
62.
EPA,
PUB.
NO.
EPA­
430/
R­
00­
0007,
ACID
RAIN
PROGRAM:
1999
COMPLIANCE
REPORT
(
2000).
63.
Researchers,
however,
have
pointed
out
that
allowance
prices
may
be
lower
than
expected
because
they
may
reflect
the
marginal
cost
of
compliance,
and
be
less
than
the
average
cost
due
to
the
"
lumpy"
nature
of
certain
investments
in
compliance
technologies,
such
as
scrubbers.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
297­
302;
Dallas
Burtraw
&
Byron
Swift,
A
New
Standard
of
Performance:
An
Analysis
of
the
Clean
Air
Act's
Acid
Rain
Program,
26
ENVTL.
L.
REP.
10,411
(
1996).
64.
See
infra
Part
II.
C.
5.
a­
d.
65.
Richard
Schmalensee
et
al.,
An
Interim
Evaluation
of
Sulfur
Dioxide
Emissions
Trading,
12
J.
ECON.
PERSP.
53,
57
(
1998).
66.
GAO
1994
TRADING,
supra
note
54,
at
29;
Burtraw,
supra
note
28,
at
133­
67;
see
also
infra
Part
II.
C.
5.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
325
"
compliance
coal."
67
It
also
differs
markedly
from
traditional
regulation
by
not
requiring
regulatory
approval
of
changes
in
compliance
choices,
thus
avoiding
delay
and
transaction
costs.

2.
Over­
Compliance
and
Banking
Title
IV
required
firms
to
reduce
emissions
at
Phase
I
units
to
a
base
level
of
approximately
6.7
million
tons
per
year
(
including
both
Table
A
and
substitution
units),
68
but
the
addition
of
bonus
allowances
distributed
primarily
in
the
first
years
of
the
program
meant
that
the
annual
cap
was
between
8.7
and
7
million
tons
during
Phase
I,
as
shown
in
Figure
2­
2.

See
Figure
2­
2:
Phase
I
Sulfur
Dioxide
Emissions
and
Allowance
Cap
(
1990­
1999)
69
Utilities
responded
to
the
Title
IV
program
by
over­
complying
and
reducing
SO2
emissions
to
5.2
million
tons,
or
approximately
30%
below
the
cap.
70
This
over­
compliance
in
part
reflects
a
conservative
business
tendency
to
leave
a
margin
of
safety
when
complying
with
environmental
regulations.
However,
two
aspects
of
Title
IV
provided
firms
additional
impetus
to
over­
comply.
The
first
was
the
significant
allocation
of
almost
4
million
bonus
allowances
in
Phase
I,
mostly
for
construction
of
scrubbers
as
a
concession
to
coal
mining
interests.
71
Second,
the
ability
to
bank
allowances
under
Title
IV
added
value
to
early
reductions
because
allowances
would
become
more
valuable
in
Phase
II
when
allocations
to
Table
A
units
would
be
reduced
and
all
other
67.
The
design
of
Title
IV
prompted
both
innovation
and
investment
in
low­
sulfur
coal,
as
firms
actively
began
to
experiment
with
fuel
blending
as
a
compliance
strategy.
See
infra
Parts
II.
C.
4,
II.
C.
6.
a;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
244.
Previous
industry
experience
in
reducing
SO2
was
under
the
New
Source
Performance
Standards
(
NSPS),
which
were
rate
standards
and
strongly
limited
compliance
options.
See
supra
text
accompanying
notes
21­
25.
68.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
7,
exh.
3.
Approximately
5.7
million
were
allocated
to
Table
A
units,
and
1
million
per
year
to
substitution
units.
69.
EPA,
PUB.
NO.
EPA­
430/
R­
00­
0007,
ACID
RAIN
PROGRAM:
1999
COMPLIANCE
REPORT
(
2000),
at
7,
9.
The
1990
emissions
level
of
9,720,466
tons
is
the
average
of
the
1995­
1999
units'
emissions
in
1990,
and
was
derived
from
data
in
EPA,
ACID
RAIN
PROGRAM:
1999
EMISSIONS
SCORECARD
(
2000).
70.
Id.
at
7,
9.
If
the
4
million
tons
of
bonus
allowances
are
not
counted,
the
overcompliance
falls
to
22%
below
the
cap
amount.
See
ENVIRONMENTAL
DEFENSE,
FROM
OBSTACLE
TO
OPPORTUNITY:
HOW
ACID
RAIN
EMISSIONS
TRADING
IS
DELIVERING
CLEANER
AIR
22
(
2000).
71.
See
supra
note
37.
Interviews
with
government
regulators
and
utility
representatives
indicate
that
the
bonus
allowances
motivated
the
construction
of
an
additional
five
to
six
scrubbers,
generating
additional
reductions.
326
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
units
would
enter
the
program.
72
Together
these
factors
created
significant
motivation
towards
over­
compliance
in
Phase
I.
73
The
net
result
in
Phase
I
was
that
38.1
million
allowances
were
issued
over
all
five
years
and
net
emissions
were
only
26.5
million
tons.
This
created
a
bank
of
11.6
million
allowances
saved
for
use
in
Phase
II
that
is
not
expected
to
be
depleted
until
2010.74
Overall,
a
principal
effect
of
banking
may
simply
be
to
smooth
the
transition
between
Phases
I
and
II,
as
it
promotes
a
more
gradual
decline
in
emissions.
The
banking
behavior
also
has
minor
positive
environmental
significance
because
it
achieved
early
reductions
during
Phase
I,
although
the
saved
tons
may
be
expected
to
be
emitted
in
later
years.
75
Banking
may
be
considered
a
form
of
trading,
as
it
shifts
the
use
of
allowances
from
one
year
to
another.
If
so,
the
extensive
banking
behavior
becomes
the
principal
use
of
Title
IV's
trading
mechanisms.
Overall,
14,031,943
tons
of
emission
reductions
were
created
by
units
that
emitted
below
their
allowance
allocations.
Of
this
amount,
10,518,211,
or
fully
75%,
were
banked
for
later
use,
and
only
3,541,045
were
"
traded"
in
the
more
traditional
sense
to
offset
emissions
of
other
units
during
Phase
I.
76
72.
42
U.
S.
C.
§
7651d
(
1994).
73.
Analysis
by
Resources
for
the
Future
shows
that
banking
helped
to
drive
overinvestment
in
scrubbers.
Dallas
Burtraw
&
Erin
Mansur,
The
Effects
of
Trading
and
Banking
in
the
SO2
Allowance
Market,
DISCUSSION
PAPER
NO.
99­
25,
at
19,
at
http://
www.
rff.
org/
environment/
air.
htm
(
Mar.
1999).
In
theory,
allowing
for
banking
should
decrease
costs.
However,
we
find
that
the
opportunity
for
banking
actually
led
compliance
costs
to
be
higher
by
$
651
million
in
1995
and
$
339
million
in
2005
in
our
model.
Banking
encouraged
the
construction
of
scrubbers
that
appear
ex
post
to
be
cost­
inefficient.
Given
changes
in
fuel
markets
subsequent
to
the
planning
and
construction
of
these
facilities,
we
calculate
that
none
of
the
21
scrubbers
that
were
built
in
Phase
I
would
have
been
built
if
there
had
not
been
banking.
Id.
74.
The
11.6
million
ton
bank
includes
the
net
10.5
million
allowances
created
by
overcompliance
at
utility
units
during
Phase
I,
plus
other
allowance
pools
not
directly
allocated
to
those
units,
i.
e.,
the
750,000
auctioned
allowances,
339,705
allowances
to
industrial
opt­
in
sources
and
the
147,820
allowances
issued
to
small
diesel
refineries.
These
figures
are
derived
from
ELI
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
75.
Since
acid
deposition
creates
cumulative
impacts,
early
reductions
are
beneficial
as
they
may
prevent
threshold
effects
for
acid
deposition
that
harm
ecosystems.
One
analysis
shows
banking
may
also
slightly
improve
health
effects
over
time,
primarily
by
displacing
emissions
out
of
highly
populated
areas
in
the
northeast,
but
that
this
effect
may
be
countered
by
future
population
growth.
Burtraw
&
Mansur,
supra
note
73,
at
15.
76.
See
Figure
2­
5.
Figures
derived
through
ELI
analysis
of
EPA
COMPLIANCE
REPORTS.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
327
3.
Autarkic
Compliance
Compliance
responses
in
Phase
I
revealed
a
strong
tendency
for
firms
to
adopt
an
autarkic
or
"
comply
on
your
own"
strategy.
Most
of
the
fifty­
one
affected
firms
made
extensive
use
of
the
flexibility
mechanisms
to
achieve
emission
reductions
within
their
own
firm,
but
as
shown
in
Figures
2­
3,
A
and
B,
only
three
firms
(
Illinois
Power,
Tampa
Electric,
and
Duquesne
Power)
used
inter­
firm
trading
as
a
compliance
option
over
the
full
period
of
Phase
I.
All
other
firms
achieved
compliance
through
actions
taken
within
the
firms
themselves.

See
Figure
2­
3A:
SO2
Allowances
and
Emissions
of
Top
10
Phase
I
Utilities
by
Total
Allowances
Allocated
(
1995­
1999)
and
Figure
2­
3B:
SO2
Allowances
and
Emissions,
Phase
I
Utilities
(
except
10
largest)
(
1995­
1999)
77
This
finding
of
minimal
inter­
firm
allowance
trading
is
significant
because
most
economic
analyses
reveal
substantial
differences
in
compliance
costs
among
the
Phase
I
units.
Those
differences
should
have
driven
greater
use
of
the
inter­
firm
trading
option.
78
The
discussion
in
Part
II(
C)(
9)
provides
some
reasons
why
firms
did
not
use
inter­
firm
trading
to
the
full
extent
that
it
may
have
been
economically
justified.
Another
aspect
of
autarkic
compliance
is
the
unequal
burden
placed
on
smaller
firms
with
few
units.
When
firms
primarily
use
the
trading
provisions
for
intra­
firm
averaging,
large
firms
are
able
to
lower
their
cost
of
compliance
due
to
the
variability
among
their
own
multiple
units
and
may
be
little
affected
by
the
lack
of
inter­
firm
trading.
On
the
other
hand,
absent
the
ability
to
trade
with
other
firms,
a
firm
with
only
one
or
two
units
would
be
limited
to
compliance
options
that
could
achieve
the
needed
reductions
at
those
particular
units.
Indeed,
a
few
of
these
smaller
firms
chose
to
install
scrubbers,
a
relatively
expensive
compliance
option
for
a
small
plant.
79
77.
Figures
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
See
also
figure
2­
5.
Data
shows
the
sum
of
all
emissions
and
allowance
allocations
to
Phase
I­
affected
units
for
each
firm
in
the
years
1995­
1999.
78.
GAO
1994
TRADING,
supra
note
54,
at
72­
73;
Ellerman,
supra
note
55,
at
190­
91;
Douglas
R.
Bohi
&
Dallas
Burtraw,
SO2
Allowance
Trading:
How
Do
Expectations
and
Experience
Measure
Up?,
10:
7
ELEC.
J.
67
(
1997)
(
noting
that
many
utilities
have
failed
to
take
advantage
of
allowance
trading
as
a
method
of
reducing
compliance
costs).
79.
These
firms
included
small
municipal
utilities
for
the
City
of
Owensboro,
and
Atlantic
City.
See
Figure
2­
5.
See
generally
Todd
J.
Zywicki,
Environmental
Externalities
and
Political
Externalities:
The
Economy
of
Environmental
Regulation
and
Reform,
75
TULANE
L.
REV.
845,
864
(
1999)
(
finding
that
the
fixed
cost
of
scrubber
installation
falls
harder
on
small
businesses).
328
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
4.
Strategies
for
Compliance
As
noted
above,
Title
IV
provides
firms
with
a
very
wide
scope
of
compliance
options
that
include:
1.
scrubbing;
2.
fuel
switching
to
lower­
sulfur
coals;
3.
shifting
to
natural
gas
or
renewable
energy;
4.
optimization,
or
increasing
the
efficiency
of
the
unit;
5.
load
shifting
to
lower­
emitting
units;
6.
use
of
substitution
provisions;
7.
allowance
trading;
8.
allowance
banking;
9.
demand­
side
management;
80
and
10.
retirement.
81
The
emissions
cap
(
as
opposed
to
the
trading
provisions)
is
the
primary
aspect
of
Title
IV
that
allows
firms
the
flexibility
to
choose
among
the
first
four
compliance
options.
Traditional
emissions
rate
standards
would
be
more
restrictive
because
they
tend
to
reward
technologies
that
reduce
end­
of­
pipe
emission
rates,
which
may
not
allow
firms
to
achieve
pollutant
reductions
through
cleaner
processes,
increased
efficiency,
or
reduced
demand.
82
The
greater
flexibility
afforded
by
the
emissions
cap
approach
is
supplemented
by
the
trading
and
substitution
mechanisms
in
Title
IV
that
allow
firms
added
flexibility
in
the
locus
of
emissions
reductions.
The
trading
provisions
allow
intra­
firm
averaging,
trading
with
other
firms,
and
banking
allowances,
and
the
substitution
provisions
allow
for
greater
inclusiveness
of
units.
The
table
below
shows
that
firms
achieved
the
major
share
of
SO2
reductions
by
two
methods.
Scrubbing,
an
end­
of­
pipe
control
80.
Demand­
side
measures
are
those
taken
to
improve
the
efficiency
of
consumer
power
use,
or
to
reduce
consumption.
Clean
Air
Act,
40
C.
F.
R.
§
72.2
(
2000).
Note
that
while
demandside
management
is
a
compliance
mechanism
under
a
cap­
and­
trade
approach,
the
phased
nature
of
Title
IV
required
firms
in
Phase
I
to
not
reduce
their
overall
utilization.
Therefore,
special
rules
were
needed
in
Phase
I
to
encourage
demand­
side
management.
See,
e.
g.,
id.
§
§
72.43,
73.80.
81.
Again,
as
with
demand­
side
management,
the
retirement
of
inefficient
or
obsolete
units
is
a
compliance
mechanism
generally
under
a
cap­
and­
trade
approach,
but
the
phased
nature
of
Title
IV
required
firms
in
Phase
I
to
not
reduce
utilization.
42
U.
S.
C.
§
7651g(
c)(
1)
(
1994).
82.
Rate
standards
limit
or
restrict
compliance
technologies.
In
the
SO2
context,
the
New
Source
Performance
Standard
adopted
in
1977
only
allowed
scrubbing,
and
the
1971
NSPS
standard
limited
compliance
choice
to
scrubbing
or
a
particular
quality
of
coal.
In
the
NOX
context,
standards
such
as
BACT
are
interpreted
by
some
states
to
only
recognize
reductions
made
through
end­
of­
pipe
control
equipment,
not
through
process
change.
See
infra
Part
IV.
E.
1.
Rate
standards
thus
often
do
not
recognize
or
reward
reductions
made
upstream,
such
as
those
made
through
the
use
of
cleaner
processes
or
fuels.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
329
technology
that
reduces
SO2
to
a
solid
waste,
83
contributed
35%
of
the
total
emission
reductions
made
during
Phase
I
(
not
counting
bonus
allowances).
Fuel
switching
by
firms
that
blended
or
switched
to
lowsulfur
or
medium­
sulfur
coal
contributed
59%
of
reductions.
Retiring
units
contributed
another
6%
of
reductions
although
their
output
was
generally
made
up
at
other
units.

Figure
2­
4.
Source
of
Reduction
for
Plants
that
Reduced
Emissions
Below
Allocations
(
Total
Reductions
Made
in
Phase
I,
1995­
1999)
84
units
Reductions
with
Bonus
%
Reductions
w/
o
Bonus
%

scrubbing
total
26
5,856,376
42
3,665,433
32
switching
total
126
5,526,657
39
5,178,540
45
Table
A
Units
retired/
not
util.
7
283,905
2
283,905
2
scrubbed
16
292,469
2
292,469
3
unscrubbed
113
1,712,075
12
1,712,075
15
Substitution
Units
retired/
not
util.
44
360,461
3
360,461
3
Total
14,031,943
100
11,492,883
100
Figure
2­
5
reveals
individual
firms'
compliance
strategies.
The
first
column
shows
firms'
net
allowance
savings
or
withdrawals
during
Phase
I.
The
second
column
shows
the
allowance
savings
made
by
unscrubbed
Table
A
firms
that
emitted
below
their
allowance
allocation.
The
third
shows
the
allowance
withdrawals
used
by
units
that
emitted
above
their
allocations.
Subsequent
columns
show
the
reductions
achieved
through
scrubbed,
retired,
or
substitution
units.
Bonus
allowances
allocated
to
firms
are
shown
for
information
purposes,
but
these
allowances
are
also
included
in
the
other
columns
since
they
formed
part
of
firms'
compliance
strategies.

See
Figure
2­
5.
Compliance
Methods
of
Fifty­
One
Companies
in
Phase
I
(
1995­
1999)
85
Several
compliance
strategies
are
evident:
(
a)
Sixteen
utilities
scrubbed
at
one
plant
and
used
the
excess
allowances
for
all
or
a
substantial
part
of
their
allowance
needs
at
their
other
units.
Firms
such
as
American
Electric
Power,
TVA,
and
Allegheny
Power
scrubbed
a
single
large
plant
to
create
over
a
million
excess
allowances
in
each
case.

83.
See
REGENS
&
RYCROFT,
supra
note
3,
at
59­
74.
84.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
Note
that
only
plants
that
reduced
emissions
below
allocations
are
included.
85.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
330
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
(
b)
Thirty­
four
firms
adopted
a
primary
strategy
of
switching
to
lower­
sulfur
coals
at
some
units
to
create
excess
allowances
for
all
or
a
substantial
part
of
their
needs
at
their
other
units.
The
large
Southern
Company
achieved
net
reductions
at
all
of
its
forty­
nine
units
primarily
by
switching
to
lower­
sulfur
coal.
(
c)
Only
one
firm,
Illinois
Power,
purchased
allowances
as
its
principal
compliance
strategy.

5.
The
Scrubbing
Story:
Fewer
Scrubbers
than
Expected
but
Lower
Costs
Due
to
Economics,
Innovation,
and
Regulatory
Design
Scrubbing,
or
flue
gas
desulfurization,
86
was
the
principal
compliance
strategy
for
sixteen
utilities,
and
scrubbed
plants
achieved
35%
of
all
emissions
reductions.
87
Scrubbing
was
clearly
the
central
compliance
strategy
of
major
firms
such
as
American
Electric
Power,
the
TVA,
and
Allegheny
Power.
These
firms'
scrubbing
strategies
not
only
offset
excess
emissions
at
other
units,
but
allowed
each
firm
to
build
up
a
banked
supply
of
over
1
million
allowances
for
Phase
II.
88
In
addition
to
these
larger
firms,
some
small
firms,
such
as
municipally
owned
entities,
chose
scrubbing
despite
the
relatively
high
per­
ton
compliance
costs
to
install
scrubbers
at
smaller
units.
These
firms
did
so
because
it
was
an
available
compliance
option
that
allowed
each
firm
to
comply
on
its
own.
89
Contrary
to
initial
expectations,
scrubbing
turned
out
to
be
the
more
expensive
of
the
two
principal
compliance
methods,
and
the
actual
number
of
scrubbers
built
was
substantially
less
than
expected,
as
firms
turned
to
low­
sulfur
coals
as
a
cheaper
compliance
option.
A
1994
Government
Accounting
Office
report
found
that
scrubber
vendors
expected
to
complete
thirty­
five
or
forty
contracts
in
Phase
I,
though
some
vendors
claim
that
they
expected
a
need
for
as
much
as
100,000
86.
Scrubbing
essentially
replicates
the
chemical
reaction
that
gives
rise
to
acid
precipitation,
but
is
contained
within
the
scrubbing
vessel.
This
technology
sprays
limestone
or
another
calcium
source
into
the
fuel
chamber,
causing
a
chemical
reaction
with
the
flue
gas
that
turns
the
SO2
gas
into
a
solid.
The
resulting
slugs
are
then
disposed
of
in
landfills
or,
if
calcium
sulfite
is
used,
employed
in
the
production
of
wallboard.
Id.
87.
Phase
I
scrubbers
cost
$
249
per
kilowatt
to
install,
or
$
150
million
for
a
600
MW
plant.
See
Figure
2­
7.
They
also
use
about
1.5%
of
the
electric
power
generated
by
the
plant
to
run,
consume
significant
lime
or
limestone,
and
generate
solid
wastes
that
over
the
lifetime
of
a
300
MW
plant
would
fill
1000
acres,
unless
alternative
uses
of
the
wastes
can
be
found,
such
as
for
gypsum
or
landfill.
Interviews
with
scrubber
manufacturers.
88.
Each
of
these
companies
generated
over
a
million
allowances
at
a
single
scrubbed
plant,
Cumberland
(
TVA),
Harrison
(
Allegheny
Power),
and
Gavin
(
AEP).
See
Figure
2­
11.
89.
Interviews
with
smaller
firms
show
that
most
never
seriously
considered
allowance
purchases
for
compliance.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
331
MW
of
installed
or
retrofit
scrubber
capacity.
90
Ultimately,
only
twentyseven
scrubbers
were
installed
for
Table
A
plants,
with
a
capacity
of
16,167
MW.
91
Most
utilities
that
installed
scrubbers
did
so
in
part
due
to
the
need
for
early
implementation
of
compliance
options.
A
retrofit
scrubber
requires
from
eighteen
to
thirty
months
of
advance
planning,
so
commitments
to
scrubbing
vendors
had
to
be
made
as
early
as
1992,
when
estimates
of
the
cost
of
compliance
and
of
allowances
still
ranged
from
$
300
to
$
700.92
Had
these
early
projections
of
compliance
costs
proven
to
be
accurate,
scrubbing,
especially
at
larger
plants,
would
have
been
a
cost­
effective
compliance
strategy.
93
However,
economic
analysis
shows
that
in
retrospect,
few
or
none
of
these
scrubbers
would
now
be
considered
to
have
been
an
economic
investment.
94
The
bonus
allowance
provisions
in
Title
IV
also
contributed
to
the
early
over­
investment
in
scrubbers.
As
a
concession
to
high­
sulfur
coal
mining
interests,
Congress
allocated
about
2.1
million
of
the
3.5
million
extension
allowances
awarded
during
Phase
I
to
utilities
that
committed
to
install
scrubbers.
95
These
bonus
allowances
provided
subsidies
regarded
as
worth
$
200
to
$
400
million
based
on
the
value
of
90.
GAO
1994
TRADING,
supra
note
54,
at
29.
An
MIT
Center
for
Energy
and
Environmental
Policy
Research
(
MIT/
CEEPR)
survey
of
respondents
who
represented
about
half
of
the
retrofitted
scrubbing
capacity
also
identified
3600
MW
where
scrubbing
was
the
initial
option
but
not
the
last.
A.
D.
ELLERMAN
ET
AL.,
EMISSIONS
TRADING
UNDER
THE
U.
S.
ACID
RAIN
PROGRAM:
EVALUATION
OF
COMPLIANCE
COSTS
AND
ALLOWANCE
MARKET
PERFORMANCE
50
(
M.
I.
T.
Center
for
Energy
and
Envtl.
Policy
Research,
1997);
cf.
ICF
RESOURCES,
supra
note
52
(
predicting
lower
need
for
scrubbed
capacity).
91.
The
scrubbers
for
these
twenty­
seven
units
were
constructed
in
the
early
to
mid­
1990s
in
response
to
Title
IV.
In
addition,
a
scrubber
was
installed
at
one
Table
A
plant
in
1985,
which
was
therefore
part
of
its
baseline
and
not
a
compliance
strategy.
Another
Table
A
unit,
Big
Bend
Unit
1,
installed
a
scrubber
in
December
1999,
which
was
the
last
month
of
Phase
I,
and
relevant
only
for
Phase
II
compliance.
In
addition
to
the
Table
A
units,
substitution
units
had
installed
fifteen
pre­
1990
NSPS
scrubbers,
with
a
capacity
of
6056
MW,
making
a
grand
total
of
21,223
MW
scrubbed
capacity
for
units
in
Phase
I
for
all
five
years.
However,
the
reductions
at
substitution
units
made
before
1990
do
not
count
as
Phase
I
reductions,
but
instead
are
part
of
their
baseline
emissions.
See
Clean
Air
Act,
40
C.
F.
R.
§
72.41(
c)(
3)
(
2000).
92.
See
Torrens
et
al.,
supra
note
6,
tbl.
1,
at
220.
In
a
survey
conducted
by
the
MIT/
CEEPR,
75%
of
respondents,
representing
about
half
of
the
retrofitted
scrubbing
capacity,
"
indicated
that
expectations
of
allowance
prices
of
$
300
to
$
400
were
`
very
important'
in
decisions
to
scrub."
ELLERMAN
ET
AL.,
supra
note
90,
at
50.
The
long
lead
time
to
install
a
retrofit
scrubber
was
needed
so
the
equipment
could
be
installed
during
planned
outages
in
1994
or
1995.
93.
Economic
estimations
are
that
few
scrubbers
would
have
been
built
during
Phase
I
had
firms
been
able
to
accurately
predict
the
lower
costs
of
switching.
See
Burtraw,
supra
note
28.
94.
Burtraw
&
Mansur,
supra
note
73.
95.
These
3.5
million
allowances
represent
the
savings
made
by
moving
up
the
effective
date
of
the
legislation
one
year,
from
1996
to
1995.
332
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
allowances,
and
were
a
significant
factor
that
motivated
several
utilities
to
install
Phase
I
scrubbers
at
an
estimated
five
or
six
units.
96
See
Figure
2­
6.
Scrubbers
Installed
by
Year
and
Type97
One
of
the
significant
stories
of
Phase
I
was
the
declining
cost
of
scrubbing
over
the
course
of
Phase
I.
ICF
Resources
projected
in
1990
that
scrubber
costs
for
Phase
I
units
would
amount
to
$
455
per
ton
of
SO2
removed.
98
Actual
costs
calculated
by
MIT
were
$
282
per
ton,
caused
not
by
a
decline
capital
costs,
but
major
reductions
in
operating
costs,
as
shown
in
Figure
2­
7.
By
2000,
scrubbing
costs
had
declined
yet
again,
this
time
due
to
a
precipitous
drop
in
capital
costs
to
the
$
100/
kW
level,
less
than
half
the
$
249/
kW
cost
in
1995.99
Figure
2­
7.
Phase
I
Scrubber
Cost
Components
(
in
1994
dollars)
100
Predicted
1995
(
ICF
Resources,
1990)
Actual
1995
(
MIT,
2000)
Initial
Capital
cost
($/
KW)
$
249
$
249
Fixed
O&
M
($/
KW­
yr)
$
6.55
$
2.00
Variable
O&
M
(
per
kWh)
1.81
mills
1.26
mills
Removal
efficiency
90%
95%
Utilization
65%
82%
Cost
per
ton
SO2:
$
455
$
282
Capital
charge
(@
11.33%)
$
285
$
206
96.
See
Interviews
with
state
regulatory
officials
and
utility
companies.
States
such
as
Illinois
also
attempted
to
protect
their
high­
sulfur
coal
mining
industries
by
providing
subsidies
for
scrubber
installation.
Even
these
incentives
were
insufficient
to
tilt
the
balance
in
favor
of
scrubbing.
One
utility
spent
$
35
million
to
begin
construction
of
a
scrubber,
received
approval
for
a
subsidy
from
the
state
for
the
scrubber,
but
opted
instead
to
achieve
compliance
by
first
purchasing
allowances
in
Phase
I,
and
subsequently
by
switching
to
low­
sulfur
coal
in
Phase
II,
thus
foregoing
a
substantial
subsidy
for
the
scrubber
installation.
See
American
Bar
Association,
New
Strategies
for
New
Market:
The
Electric
Industry's
Response
to
the
Environmental
Protection
Agency's
Sulfur
Dioxide
Emission
Allowance
Trading
Program,
47
ADMIN.
L.
REV.
469,
480­
81
(
1995)
(
describing
Illinois
Power's
decision
to
cancel
"
its
plan
to
install
scrubbers"
in
favor
of
purchasing
allowances
to
comply
with
Phase
I).
97.
U.
S.
ENERGY
INFORMATION
AGENCY,
PUB.
NO.
EIA­
0348(
99)
12.
FLUE
GAS
DESULFURIZATION
(
FGD)
CAPACITY
IN
OPERATION
AT
U.
S.
ELECTRIC
UTILITY
PLANTS
AS
OF
DECEMBER
1999,
2
ELEC.
POWER
ANNUAL,
tbl.
30
(
October
2000).
The
type
of
scrubber
was
determined
through
interviews
with
plant
managers
and
scrubber
manufacturers,
and
also
by
reference
to
data
compiled
by
MIT's
Center
for
Energy
and
Environmental
Policy
Research.
98.
See
Figure
2­
7.
99.
See
Interviews
with
scrubber
manufacturers.
100.
ICF
RESOURCES,
INC.
COMPARISON
OF
THE
ECONOMIC
IMPACTS
OF
THE
ACID
RAIN
PROVISIONS
OF
THE
SENATE
BILL
(
S.
1630)
AND
THE
HOUSE
BILL
(
H.
1630[
sic])
(
July
1990);
A.
D.
ELLERMAN
ET
AL.,
MARKETS
FOR
CLEAN
AIR:
THE
U.
S.
ACID
RAIN
PROGRAM,
tbl.
9.3,
240
(
2000).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
333
Fixed
Overhead
and
Maintenance
$
66
$
15
Variable
Overhead
and
Maintenance
$
104
$
65
These
major
cost
reductions
were
due
to
several
factors:
technological
innovation
in
scrubber
design,
economic
factors
that
led
firms
to
increase
utilization
at
scrubbed
plants
in
Phase
I,
and
Title
IV's
flexible
design
that
allowed
more
efficient
scrubbers
to
be
built.
The
innovation
and
rapid
decline
in
scrubber
costs
during
Phase
I
stand
in
marked
contrast
to
the
previous
two
decades,
during
which
scrubbing
vendors
enjoyed
a
monopoly
in
SO2
compliance
technology
for
new
firms.
During
that
time
relatively
little
innovation
in
scrubber
design
had
taken
place.
101
a.
Increased
Scrubber
Utilization
One
factor
that
led
to
decreased
per­
ton
costs
of
scrubbing
was
the
unexpectedly
high
utilization
rate
of
scrubbed
units
during
Phase
I,
which
spread
the
capital
costs
over
a
larger
number
of
tons.
The
increased
utilization
can
be
explained
by
the
relatively
low
variable
costs
of
scrubbing,
at
about
$
65
per
ton
of
SO2,
once
the
significant
capital
investment
is
made.
102
Operating
an
existing
scrubber
was
therefore
profitable
as
long
as
the
variable
cost
was
lower
than
the
price
of
allowances.
This
cost
savings
created
an
impetus
for
firms
to
shift
power
generation,
or
"
load,"
away
from
Phase
I
unscrubbed
units
to
scrubbed
units.
103
b.
Innovation
in
Scrubber
Design
Design
improvements
also
lowered
scrubbing
costs.
Interviews
with
scrubber
manufacturers
revealed
that
significant
innovation
in
scrubbers
has
occurred
since
the
first
Phase
I
scrubbers
were
installed
in
101.
ELLERMAN
ET
AL.,
supra
note
10,
at
241
("
A
recent
study
of
the
advances
in
scrubber
technology
in
the
United
States
through
1992
found
`
no
significant
progress
.
.
.
in
abatement
technology'
and
attributes
this
result
to
the
`
small
incentives
for
innovation
[
associated
with]
the
form
of
regulation
typically
used
in
the
U.
S.'");
see
also
Allen
Bellas,
Empirical
Evidence
of
Advances
in
Scrubber
Technology,
20
RESOURCES
&
ENERGY
ECON.
327
(
1998);
Paul
A
Ireland
et
al.,
A
Review
of
Phase
I
Retrofit
FGD
Cost
Experience
 
New
Benchmarks
for
the
Future,
Presentation
at
AMWA
Mega
Symposium
sponsored
by
EPRI­
DOE­
EPA
(
1995)
(
notes
on
file
with
author).
102.
See
Figure
2­
7.
103.
ELLERMAN
ET
AL.,
supra
note
10,
at
235­
42.
334
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
1995.104
The
major
advance
that
led
to
price
reductions
was
eliminating
redundancy.
Modern
scrubbers
typically
have
a
single
vessel
that
serves
multiple
units,
greatly
reducing
costs.
Redundancy
has
been
reduced
in
other
components
as
well.
Another
advance
has
been
higher­
speed
flue
gas
streams
that
increase
the
rate
at
which
the
reaction
between
flue
gas
and
the
reagent
slurry
occurs.
105
Other
advances
include
using
less
expensive
ceramic
materials
in
scrubbing
vessels
and
sourcing
materials
worldwide.
In
addition
to
these
design
improvements,
innovation
has
taken
place
in
waste
disposal
practices.
Since
the
solid
wastes
from
a
scrubber
may
cover
1000
acres
over
the
life
of
a
large
plant,
waste
disposal
is
a
significant
part
of
scrubbing
cost.
106
Utilities
have
worked
to
enhance
cost­
effective
ways
to
recover
saleable,
commercial­
quality
gypsum
from
scrubbing
waste
by
using
a
different
reagent,
or
by
further
processing.
107
c.
Title
IV's
Design
A
third
factor
in
reducing
scrubbing
expense
is
that
Title
IV's
design
allowed
more
efficient
scrubbers
to
be
built.
Until
1992,
most
utilities
installed
scrubbers
to
meet
New
Source
Performance
Standards,
although
a
few
utilities
had
installed
scrubbers
to
meet
state
SO2
emission
or
ambient
standards.
108
Under
NSPS,
sources
had
to
achieve
a
90%
or
70%
reduction
on
a
continuous
basis.
109
NSPS
scrubbers
therefore
had
to
be
very
reliable
to
ensure
strict
compliance
with
this
rate
limit,
as
any
deviation
would
lead
to
a
violation
and
potentially
require
shutting
down
the
plant
while
the
scrubber
was
repaired.
As
a
consequence,
the
scrubber
built
for
NSPS
required
significant
redundancy
and
typically
an
entire
backup
scrubber
module
in
case
the
104.
In
one
case,
scrubbers
being
built
at
two
units
of
the
Mount
Storm
plant
today
will
cost
30%
to
40%
less
than
the
scrubber
built
at
an
identical
unit
of
that
plant
in
1995.
See
Interviews
with
industry
representatives;
Pollution
Engineering
Online,
Marshley
Wins
$
88
Million
Scrubber
Contract,
at
http://
www.
pollutionengineering.
com
(
Apr.
1999).
105.
This
has
made
it
possible
to
achieve
the
same
amount
of
SO2
emissions
reduction
with
a
smaller
scrubbing
vessel,
thereby
lowering
capital
costs
and
maintenance
costs
by
15%
to
20%.
106.
See
Interviews
with
scrubber
manufacturers.
107.
An
increase
in
the
demand
for
gypsum
has
helped
fuel
research
and
development
in
refining
this
process,
with
the
result
that
by­
product
gypsum
production
has
become
highly
economical
for
some
utilities.
Gypsum
companies
are
now
building
facilities
close
to
some
generating
units.
The
use
of
gypsum
obtained
from
scrubbers
increased
from
1.5
million
tons
to
2.5
million
tons
between
1996
and
1998.
R.
F.
BALAZIK,
U.
S.
GEOLOGICAL
SURVEY,
MINERALS
INFORMATION
 
1998:
ANNUAL
REVIEW
FOR
GYPSUM
35.1
(
1999).
108.
See
Interviews
with
electric
utilities;
ELLERMAN
ET
AL.,
supra
note
10,
at
235­
42.
109.
See
supra
note
25.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
335
first
one
failed,
causing
costs
to
be
far
higher
than
needed
to
reduce
sulfur
emissions
efficiently.
Title
IV
adopted
a
mass
limit
with
an
annual
averaging
period,
allowing
a
utility
to
average
its
emissions
over
a
year
and
even
to
purchase
allowances
if
needed
to
compensate
for
scrubber
down
time.
As
a
result,
scrubbers
built
to
comply
with
Title
IV
do
not
have
to
be
over­
built,
nor
include
backup
modules,
significantly
lowering
their
capital
and
operating
costs.
110
Another
aspect
of
Title
IV's
design
that
promoted
innovation
was
its
flexibility,
which
introduced
competition
into
the
SO2
reduction
field.
For
the
first
time
scrubbers
had
to
compete
with
other
compliance
methods,
thus
spurring
innovation.
A
second
factor
of
Title
IV's
design
is
that
every
ton
of
reductions
counts,
creating
incentives
for
businesses
to
raise
scrubber
efficiencies.
The
NSPS
rate
standard,
on
the
other
hand,
created
no
incentives
for
achieving
removal
efficiency
greater
than
the
established
rate
limits.
111
6.
The
Low­
Sulfur
Coal
Story
 
Regulatory
Design
and
Economic
Choices
The
widespread
use
of
low­
sulfur
coal
has
been
a
major
compliance
strategy
during
Phase
I,
accounting
for
59%
of
actual
reductions.
112
Firms
such
as
the
Southern
Company
switched
to
lower­
sulfur
coals
as
the
centerpiece
of
their
compliance
strategies,
characterized
by
the
company
as
"
BUBA,"
or
"
Bank,
Use
and
Buy
Allowances."
All
fortynine
of
Southern's
units
emitted
below
their
allowance
allocation,
allowing
the
company
to
build
a
1
million
ton
bank
of
allowances
for
Phase
II.
113
Many
other
firms
were
also
able
to
switch
to
low­
sulfur
coal
at
relatively
low
cost,
although
geographic
location
in
relation
to
lowsulfur
coal
fields,
and
the
availability
of
low­
cost
transportation
from
these
fields,
were
important
factors.
114
110.
See
Figure
2­
7.
111.
Some
firms
reported
that
some
public
utility
commissions
prohibited
overcompliance
with
the
90%
reduction
new
source
standard
for
scrubbing,
as
any
overcompliance
was
not
in
accordance
with
a
"
prudent
investment"
policy.
This
represents
an
extreme
example
of
the
limitations
caused
by
rate­
based
standards.
112.
See
Figure
2­
4.
113.
Gary
R.
Hart,
Southern
Company's
BUBA
Strategy
in
the
SO2
Allowance
Market,
in
EMISSIONS
TRADING
204,
205
(
Richard
F.
Kosobud
ed.,
2000)
("
Our
plan
was
to
procure
a
substantial
supply
of
this
low­
sulfur
coal
for
our
affected
units
during
Phase
I
while
at
the
same
time
paying
little
or
no
premium
for
this
1%
coal
[
emitting
SO2
at
1.67
lb/
mmBtu]
as
opposed
to
a
coal
that
emitted
the
2.5
lb/
mmBtu
rate.").
114.
See
Jeffrey
M.
Hirsch,
Emission
Allowance
Trading
Under
the
Clean
Air
Act:
A
Model
for
Future
Environmental
Regulations?,
7
N.
Y.
U.
ENVTL.
L.
J.
352,
381­
82
(
1999).
336
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
The
use
of
low­
sulfur
coal
was
catalyzed
by
the
flexibility
afforded
by
Title
IV,
which
unlike
any
of
the
NSPS
standards
did
not
place
constraints
on
the
use
of
low­
sulfur
coal
for
compliance.
115
This
led
to
experimentation
and
innovation
in
fuel
blending
techniques
that
facilitated
greater
use
of
low­
sulfur
western
coals,
and
provided
incentives
to
use
eastern
low­
and
medium­
sulfur
coals,
as
described
below.
These
innovations,
together
with
investment
prompted
by
Title
IV,
lowered
the
expected
cost
premium
for
low­
sulfur
coals
and
increased
their
use.
116
a.
Low­
Sulfur
Western
Coal
Coal
from
the
Powder
River
Basin
(
PRB)
in
Wyoming
and
Montana
has
a
very
low
sulfur
content
at
or
below
0.6
lb/
mmBtu.
117
The
market
for
western
coal
was
growing
even
before
Title
IV
was
enacted
because
of
its
low
cost
to
mine,
lower
shipping
prices
produced
by
rail
deregulation,
and
state
acid
precipitation
regulatory
programs
in
states
such
as
Minnesota
and
Wisconsin.
118
Following
the
enactment
of
Title
IV
several
utilities,
especially
those
within
1000
miles
of
the
PRB,
moved
rapidly
to
adapt
their
coal
handling
and
milling
equipment
to
accommodate
PRB
coal.
119
Use
of
PRB
coal
has
now
penetrated
east
to
West
Virginia
and
south
to
Georgia.
120
Despite
its
low
sulfur
content,
the
use
of
PRB
coal
presents
problems:
it
is
subbituminous,
and
has
both
higher
ash
content
and
lower
heat
value
than
harder
eastern
bituminous
coals,
which
can
cause
derating
(
or
loss
of
generating
capacity)
and
interfere
with
boiler
operation.
121
Prior
to
the
enactment
of
Title
IV,
many
utilities
believed
that
western
coals
would
not
perform
well
in
their
generating
units,
especially
the
large
cyclone
boilers
in
the
midwest
built
to
handle
eastern
coals.
122
Available
options
therefore
were
believed
to
be
scrubbing
or
switching
to
relatively
expensive
eastern
low­
sulfur
coals.

115.
42
U.
S.
C.
§
7651b
(
1994).
116.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
82­
89;
infra
text
accompanying
note
131.
117.
EIA,
COAL
INDUSTRY
ANNUAL,
PUB.
NO.
DOE/
EIA­
0584(
98)
(
1999).
118.
Utility
emissions
of
SO2
had
already
begun
to
fall
before
Phase
I,
with
1993
levels
7%
below
1985
levels.
EPA
1999
EMISSIONS
SCORECARD,
supra
note
1.
119.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
82­
88.
"[
T]
he
consequence
of
competition
and
productivity
improvements
has
been
the
halving
of
the
rail
rate
for
long­
distance
shipments
of
coal
out
of
the
PRB."
Id.
120.
See
Interviews
with
utility
companies.
121.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
244.
122.
See
Interviews
with
utility
companies;
Burtraw
&
Swift,
supra
note
63.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
337
In
response
to
the
impetus
provided
by
Title
IV's
design,
which
credits
any
emission
reductions,
utilities
began
experimenting
with
blending
inexpensive
low­
sulfur
PRB
coal
with
traditionally
highersulfur
midwestern
coal
to
reduce
total
SO2
emissions.
123
Early
on,
typical
blends
were
40%
low­
sulfur
PRB
coal
and
60%
higher­
sulfur
bituminous
coal,
a
combination
firms
believed
would
prevent
or
minimize
the
operational
and
derating
problems.
Experimentation
allowed
utilities
to
steadily
increase
the
percentage
of
PRB
coal
through
reengineering
their
plants.
124
Today,
blends
of
up
to
80%
PRB
coal
are
not
uncommon,
and
a
number
of
plants
have
been
modified
in
ways
that
permit
using
100%
PRB
coal.
125
PRB­
related
innovation
is
closely
tied
to
Title
IV's
mass
standard
because
firms
initially
did
not
think
they
could
blend
PRB
coal
to
reach
rate
values
such
as
1.2
lb/
mmBtu.
126
Because,
unlike
a
rate
standard,
Title
IV
rewarded
any
reduction,
such
as
moving
from
high
emissions
to
medium
emissions,
firms
began
to
experiment
with
blending
PRB,
with
the
positive
results
outlined
above.

b.
Low­
and
Medium­
Sulfur
Eastern
Coals
As
Phase
I
continued,
eastern
low­
and
medium­
sulfur
coals
also
began
to
compete
with
western
coal
for
new
market
share.
The
greater
distance
from
western
coal
fields
and
the
operating
issues
with
PRB
coal
increased
the
attractiveness
of
Appalachian
low­
sulfur
coal,
with
sulfur
content
at
about
1.2
lb/
mmBtu.
A
study
by
MIT
of
the
early
years
of
Phase
I
showed
this
coal
was
able
to
capture
a
significant
part
of
the
market,
accounting
for
44%
of
SO2
reductions
from
fuel
switching,
with
the
medium
sulfur
coal
accounting
for
another
35%
of
reductions
from
fuel
switching.
127
123.
ELLERMAN
ET
AL.,
supra
note
10,
at
250.
124.
Id.
at
244.
"[
I]
n
what
must
be
considered
a
triumph
of
tinkering
and
continuous
tinkering,
it
was
found
that
subbituminous
coal
could
be
blended
with
the
local
bituminous
coal
up
to
a
point
without
incurring
significant
derating."
Id.
125.
See
Interviews
with
utility
firm
representatives.
See
also
ELLERMAN
ET
AL.,
supra
note
10,
at
129
(
noting
that
PRB
coal
accounts
for
about
15%
of
the
SO2
emissions
reductions
from
fuel
switching
under
Title
IV
and
10%
of
the
overall
SO2
emissions
reductions
under
Title
IV).
126.
The
rate
value
of
1.2
lb/
mmBtu
has
significance
as
it
is
the
rate
standard
new
plants
have
to
achieve
under
NSPS,
and
is
the
rate
standard
on
which
the
Phase
II
cap
was
established.
Most
units
would
need
to
reach
such
a
rate
level
by
Phase
II.
127.
ELLERMAN
ET
AL.,
supra
note
10,
at
128­
29.
338
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
c.
Economic
Considerations
in
Switching
to
Low­
Sulfur
Coals
In
considering
switching
from
higher­
sulfur
to
low­
sulfur
coals,
firms
considered
three
primary
cost
elements:
mine­
mouth
cost,
transportation
cost,
and
the
premium
paid
for
the
lower
sulfur
content
of
the
coal.
128
All
three
costs
can
vary
considerably
between
coals.
129
For
example,
PRB
coal
from
large
open­
pit
mines
costs
only
$
0.20
per
mmBtu
to
mine,
or
one
quarter
of
the
cost
of
mining
eastern
coals,
but
transportation
costs
are
higher
due
to
the
greater
distance
to
eastern
generating
units.
130
A
major
element
affecting
Title
IV
implementation
has
been
the
lower
than
expected
sulfur
premium,
which
has
led
to
greater
use
of
lowsulfur
coal.
One
factor
contributing
to
the
lower
price
was
rail
deregulation
in
the
1980s,
which
lowered
shipping
cost
and
made
PRB
coal
more
competitive.
131
Title
IV
itself
promoted
major
investment
by
utilities.
One
study
identified
$
12
billion
in
added
investment
associated
with
Title
IV
by
mid­
1995:
$
6
billion
for
development
of
low­
sulfur
coal
fields,
$
3
billion
for
scrubbers
and
modifications,
$
2
billion
in
coalrelated
rail
investment,
and
over
$
1
billion
in
allowance
purchases.
132
This
spurred
rail
industry
innovations
in
the
design
of
cars
and
infrastructure,
133
and
some
utilities
also
invested
in
transportation
infrastructure,
including
barges
and
rail
cars,
to
ensure
access
to
PRB
coal
at
competitive
prices.
134
These
investments
in
assets
and
infrastructure
addressed
bottlenecks
and
barriers
to
the
use
of
low­
sulfur
coal,
and
contributed
to
the
observed
reduction
in
compliance
cost.
The
second
factor
leading
to
greater
than
expected
use
of
low­
sulfur
coal
was
the
lower
than
expected
capital
cost
of
retrofitting
boilers
so
they
could
use
low­
sulfur
coal,
which
included
the
cost
of
boiler
modifications,
coal­
handling
equipment,
and
particulate
controls.
135
Here,
there
is
an
important
distinction
between
eastern
and
western
coals.
Most
boilers
built
for
the
bituminous
coal
prevalent
in
the
eastern
part
of
the
country
can
switch
to
low­
sulfur
bituminous
coal
at
low
128.
See
Ireland,
supra
note
101.
129.
ELLERMAN
ET
AL.,
supra
note
10,
at
129­
30.
130.
Id.
131.
See
id.
at
128­
30;
EIA,
THE
EFFECTS
OF
TITLE
IV
OF
THE
CLEAN
AIR
ACT
AMENDMENTS
OF
1990
ON
ELECTRIC
UTILITIES:
AN
UPDATE,
PUB.
NO.
DOE/
EIA­
0528(
97),
at
23­
25
(
1997).
132.
Clean
Air
Capital
Markets,
Research
(
1995)
(
unpublished
data,
Washington,
D.
C.)
(
on
file
with
author).
133.
Burtraw
&
Swift,
supra
note
63,
at
10,419.
134.
See
Interviews
with
utility
representatives.
135.
Id.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
339
capital
expense,
around
$
5
to
$
10
per
kW
of
capacity
for
most
units.
136
It
costs
more
to
retrofit
these
boilers
to
burn
sub­
bituminous
coals
from
the
western
United
States,
which
have
higher
ash
and
moisture
content,
and
hence
different
combustion
characteristics.
The
magnitude
of
this
expenditure
depends
on
the
plant,
but
typically
is
in
the
range
of
$
50
to
$
75
per
kW.
137
Although
significant,
these
costs
are
far
less
than
the
$
249/
kW
in
capital
costs
to
install
scrubbers.
A
third
factor
related
to
the
use
of
low­
sulfur
coal
was
the
concern
about
the
use
of
PRB
coal
potentially
resulting
in
derating
and
operational
problems.
These
concerns
failed
to
materialize.

d.
Effect
of
Title
IV
on
Coal
Pricing
Title
IV
significantly
changed
coal
prices.
Prior
to
Title
IV,
the
principle
added
value
was
for
coal
with
a
sulfur
content
of
1.2
pounds
or
less
of
sulfur
per
million
Btu
of
heat
content.
Often
referred
to
as
"
compliance
coal,"
it
allowed
firms
built
between
1971
and
1978
to
meet
the
New
Source
Performance
Standard
in
effect
at
that
time,
or
similar
state
standards.
138
The
sulfur
content
of
coal
made
little
difference
to
other
plants:
plants
built
before
1971
were
essentially
unregulated,
and
plants
subject
to
the
new
source
standard
imposed
after
1978
were
required
to
scrub,
making
them
apt
to
buy
the
cheapest
coal
regardless
of
its
sulfur
content.
139
Title
IV
dramatically
changed
this
situation
by
making
any
reduction
in
SO2
valuable.
This
introduced
more
price
competition
among
fuels
and
created
a
uniform
gradient
in
the
price
of
coals
based
on
sulfur
content.

7.
Retirement
Normally,
retirement
of
a
unit
would
be
an
effective
compliance
strategy
under
a
cap­
and­
trade
program,
as
it
would
result
in
allowance
savings.
However,
the
phased
nature
of
Title
IV
required
that
firms
136.
See
Ireland
et
al.,
supra
note
101;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
224
(
switching
to
PRB
cost
$
15
to
$
75
per
kW;
switching
to
other
bituminous
coals
cost
$
0
to
$
15
per
kW).
137.
See
Ireland
et
al.,
supra
note
101;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
224.
Added
particulate
controls
were
also
needed
because
western
coal
is
"
dustier"
than
most
eastern
coal,
increasing
explosion
danger
as
well.
138.
Clean
Air
Act,
40
C.
F.
R.
§
60.43
(
2000);
see
also
supra
text
accompanying
note
22.
139.
See
supra
text
accompanying
note
25.
If
a
utility
had
to
install
a
scrubber
in
order
to
meet
ambient
air
quality
standards
or
if
a
plant
subject
to
NSPS
opted
for
the
90%
removal
standard,
the
principle
consideration
in
the
choice
of
coal
was
price,
not
sulfur
content,
since
there
was
no
regulatory
or
economic
advantage
to
using
lower
sulfur
coal.
Many
of
the
utilities
in
the
central
part
of
the
country
chose
to
use
lower
priced
high
sulfur
coal
mined
in
the
region.
See
Interviews
with
utility
representatives.
340
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
maintain
their
baseline
utilization
during
Phase
I,
although
they
could
average
the
utilization
of
all
their
units.
140
For
the
most
part,
this
precluded
retirement
as
an
independent
compliance
strategy
in
Phase
I,
since
the
reduced
utilization
would
need
to
be
made
up
at
other
units.
Overall,
only
seven
Table
A
units
(
1343
MW)
in
the
midwest
with
short
remaining
lives
were
shut
down,
with
lost
generation
made
up
at
other
units.
141
Approximately
forty
substitution
units,
or
more
than
3000
MW,
also
were
retired,
reducing
the
emissions
of
these
units
by
383,587
tons,
but
again
with
offsetting
generation
at
other
units.
142
8.
Substitution
Units
Firms
made
significant
use
of
substitution
units,
confirming
their
readiness
to
make
use
of
a
flexibility
mechanism
with
low
transaction
costs.
Almost
three­
quarters
of
all
firms,
thirty­
six
in
all,
designated
substitution
units,
and
substitution
was
a
significant
method
of
compliance
for
a
dozen
firms.
143
Overall,
195
units
were
included
as
substitution
units
for
at
least
one
year,
and
net
reductions
from
substitution
units
were
2,365,005
tons,
about
20%
of
the
total
reductions
achieved
during
Phase
I.
144
The
substitution
provisions
were
intended
to
allow
greater
flexibility
in
meeting
the
reduction
requirements,
as
firms
found
it
cheaper
to
achieve
the
needed
reductions
at
another
of
their
units
rather
than
the
ones
designated
under
Table
A.
For
example,
it
might
make
more
economic
sense
to
scrub
a
newer
Phase
II
unit,
or
switch
to
lowsulfur
coal
at
a
Phase
II
unit
that
was
located
nearer
to
a
transportation
route
such
as
a
river
or
railway.
However,
analysis
conducted
at
MIT
shows
that
allowing
firms
to
voluntarily
choose
which
units
to
include
led
in
part
to
"
gaming,"
with
firms
choosing
to
include
units
that
would
have
decreased
their
emissions
anyway.
145
Again,
this
is
a
problem
with
the
phased
structure
of
Title
IV,
and
will
not
be
an
issue
once
all
firms
are
included
in
Phase
II.

140.
42
U.
S.
C.
§
7651g(
c)(
1)
(
1994).
141.
Four
of
the
units
were
Wisconsin
Electric
Power's
old
North
Oak
Creek
plant,
and
the
lost
utilization
was
made
up
at
the
South
Oak
Creek
plant
owned
by
the
same
utility.
The
other
retired
units
were
Avon
Lake
11
in
Ohio,
Breed
1
in
Indiana
and
Des
Moines
11
in
Iowa.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
B­
4.
See
generally
Ireland
et
al.,
supra
note
101
(
citing
POWER
ENGINEERING
UPDATE,
Mar.
1993).
142.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
B­
4.
143.
Eleven
companies
with
three
or
more
units
achieved
roughly
half
or
more
of
their
compliance
through
substitution
units.
In
addition,
two
smaller
firms
participated
in
Phase
I
only
because
their
units
were
chosen
as
substitution
units.
See
Figure
2­
5.
144.
See
id.
145.
ELLERMAN
ET
AL.,
supra
note
10,
at
197­
220.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
341
The
use
of
the
substitution
provision
could
have
been
even
greater
had
not
the
environmental
community
and
certain
elements
of
the
industry
litigated
in
response
to
initial
rules
promulgated
by
the
EPA
that
would
have
allowed
firms
to
count
the
reductions
made
at
substitution
units
that
installed
scrubbers
between
1985
and
1990.146
Although
advocates
of
this
approach
argued
that
the
scrubbers
were
installed
in
anticipation
of
the
legislation,
and
thus
that
their
reductions
should
be
counted,
the
plaintiffs
argued
against
retroactively
counting
any
reductions
achieved
before
1990.
The
EPA
settled
the
case
by
agreeing
with
the
plaintiffs,
and
providing
that
baseline
emissions
would
be
the
lower
of
1985
or
1990
levels.
147
These
events
left
a
searing
memory
in
many
of
the
firms
interviewed,
who
view
the
lesson
learned
as
"
early
compliers
lose."
They
also
partly
attribute
industry's
reluctance
to
voluntarily
reduce
CO2
emissions
before
passage
of
final
legislation
to
these
earlier
events.
148
9.
Trading
The
trading
mechanisms
under
Title
IV
represent
the
most
significant
use
of
emissions
trading
in
our
environmental
laws,
and
so
have
received
a
great
deal
of
attention.
Although
not
as
critical
as
the
emissions
cap,
trading
is
an
important
element
of
Title
IV,
as
it
contributed
to
cost
reductions
by
allowing
firms
to
bank
allowances,
shift
load
between
their
units
as
a
compliance
strategy,
and
to
benefit
from
inter­
firm
trading.
Allowance
trading
climbed
steadily
throughout
Phase
I
as
firms
became
more
accustomed
to
its
use,
and
as
movement
toward
a
deregulated
energy
policy
placed
greater
emphasis
on
marketing
and
trading
in
general.
EPA
data
from
the
Allowance
Tracking
System
shows
that
at
least
81.5
million
allowances
were
traded
during
Phase
I.
149
However,
most
of
these
consisted
simply
of
internal
reallocation
within
a
firm,
and
the
extent
of
trading
is
better
reflected
in
the
30.8
million
allowances
traded
between
economically
unrelated
entities,
as
shown
in
Figure
2­
8.150
146.
See
Acid
Rain
Program:
Permits,
59
Fed.
Reg.
60,218
(
Nov.
22,
1994).
147.
See
Clean
Air
Act,
40
C.
F.
R.
§
72.41(
c)(
3)
(
2000).
148.
See
Interviews
with
utility
representatives.
149.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
10­
11.
These
figures
include
trades
of
both
Phase
I
and
Phase
II
allowances,
which
are
not
reported
separately
by
the
EPA.
150.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
11.
342
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
See
Figure
2­
8.
Allowance
Transactions
Between
Unrelated
Entities
(
1995­
2000)
151
The
experience
of
Phase
I
reveals
a
number
of
interesting
contrasts
and
findings
regarding
trading.
One
was
its
increased
importance
and
use
for
arbitrage
and
profit­
making
purposes,
contrasting
with
firms'
conservative
use
of
trading
for
compliance.
Aside
from
banking,
only
3.5
million
of
the
traded
allowances,
or
13%
of
total
emissions,
were
used
for
compliance
purposes
during
Phase
I.
152
Most
of
these
were
used
internally
by
firms
to
average
the
emissions
of
their
own
units,
and
interfirm
trading
for
compliance
comprised
only
577,583
allowances,
or
2%
of
total
emissions.
153
Another
was
that
early
fears
about
market
power
in
trading,
or
the
creation
of
emissions
hot
spots,
never
materialized.
Finally,
the
effect
of
trading
in
creating
a
price
for
a
ton
of
emissions
reduction
allowed
the
greater
integration
of
an
environmental
parameter
into
the
economic
decision­
making
of
firms.
Before
examining
the
use
of
trading
in
Phase
I,
it
is
important
to
note
the
relationship
of
trading
to
the
emissions
cap.
The
cap
is
arguably
the
more
important
element
of
Title
IV,
as
it
creates
the
environmental
integrity
and
much
of
the
economic
efficiency
in
the
program.
The
cap
also
creates
the
context
in
which
trading
can
take
place
through
allowances,
which
combine
far
greater
opportunity
for
trading,
lower
transaction
costs,
and
greater
environmental
integrity
than
the
previous
forms
of
credit
trading.
This
commodity­
like
nature
of
allowances
allows
trades
to
be
made
without
government
presence,
and
creates
some
of
the
important
environmental
and
economic
benefits
of
allowance
trading.

a.
Establishment
of
the
Trading
System
The
growth
of
trading
has
been
influenced
by
the
annual
EPA
auction
of
allowances
and
the
role
of
an
independent
community
of
allowance
brokers
who
facilitate
allowance
transactions.
The
initial
1993­
1994
period
of
trading
was
marked
by
relatively
little
trading
and
uncertainty
in
the
market.
154
Roughly
50%
of
allowance
transactions
were
made
through
the
official
EPA
auctions,
which
provided
an
early
151.
Id.
152.
3.5
million
was
the
total
number
of
allowances
needed
by
individual
units
to
cover
emissions
that
exceeded
their
allowance
allocations.
See
Figure
2­
5.
153.
Only
three
firms
emitted
more
allowances
than
they
were
allocated,
requiring
their
use
of
577,583
allowances.
See
Figure
2­
5.
A
slightly
higher
number
is
reached
if
one
adds
the
130,789
allowances
used
by
other
firms
that
exceeded
their
allowance
allocation
for
only
one
or
two
years.
See
infra
note
171.
154.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
11.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
343
signal
of
the
unexpectedly
low
price
of
compliance.
Allowance
prices,
however,
varied
between
the
auction
and
private
deals,
indicating
an
immature
market.
155
Confirming
firms'
lack
of
familiarity
with
the
market,
most
trades
were
made
through
brokers,
and
different
brokers
charged
commissions
of
$
3.50
to
$
10
per
allowance
in
this
period.
156
Today,
about
6
to
10
million
allowances
are
traded
annually
between
separate
entities,
largely
through
private
transactions.
Only
2%
of
transactions
take
place
through
the
EPA
auction.
157
However,
the
EPA
helps
establish
a
secure
market
through
its
Allowance
Tracking
System,
which
records
allowance
transactions,
typically
within
twenty­
four
hours.
158
Prices
are
transparently
quoted
in
several
privately
maintained
indexes,
and
the
consistency
of
prices
is
high.
159
One
aspect
of
firms'
increased
familiarity
with
trading
is
the
decreased
fraction
of
trades
made
through
brokers
today.
Direct
trades
made
by
utilities
have
climbed
from
a
negligible
amount
in
1994­
1997
to
an
amount
equal
to
the
total
made
through
brokers.
This
trend
is
also
reflected
in
the
commission
charged
by
brokers,
which
has
steadily
declined
to
$
1
per
ton
in
1995,
$
0.50
per
ton
in
1997,
and
$
0.20
per
ton
in
1999.160
One
of
the
early
concerns
during
the
creation
of
Title
IV
was
that
allowances
simply
would
not
be
available,
due
to
hoarding
or
other
market
power
problems.
This
concern
led
to
inclusion
of
the
provisions
for
an
allowance
auction
and
a
guaranteed
reserve
of
allowances
priced
at
$
1500.161
However,
there
has
been
widespread
liquidity
throughout
Phase
I,
assisted
by
the
independent
community
of
emissions
brokers.
162
155.
Ellerman,
supra
note
55,
fig.
1,
at
6.
156.
See
Interviews
with
emissions
brokers.
One
firm
charged
$
10
per
allowance
in
this
early
period,
and
sold
a
significant
share
of
the
early
allowances,
but
provided
considerable
technical
and
strategic
advice
along
with
the
allowance
sale.
157.
Only
150,000
allowances
are
traded
in
the
EPA
auction,
which
was
about
2%
of
the
10
million
allowances
traded
in
1999.
See
Figure
2­
8.
158.
Clean
Air
Act,
40
C.
F.
R.
§
73.30
(
2000).
See
Joseph
A.
Kruger
et
al.,
A
Tale
of
Two
Revolutions:
Administration
of
the
SO2
Trading
Program,
in
EMISSIONS
TRADING
115,
121
(
Richard
F.
Kosobud
ed.,
2000)
(
noting
that
the
"
EPA
processes
about
90%
of
allowance
transactions
within
24
hours
of
receipt,
using
just
two
Acid
Rain
staff.").
159.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
10
(
showing
allowance
price
indexes
of
Fieldston
Publications
and
Cantor
Fitzgerald).
160.
Carlton
J.
Bartels,
Turning
Gas
into
Cash,
ENVTL.
FIN.
32
(
Nov.
1999);
ELLERMAN
ET
AL.,
supra
note
10,
at
167
n.
4.
161.
Each
year
approximately
3%
of
allowances
are
withheld
from
units
to
be
auctioned,
and
a
limited
reserve
of
allowances
are
guaranteed
to
be
available
at
a
price
of
$
1500,
to
ensure
the
availability
of
at
least
a
small
number
of
allowances.
42
U.
S.
C.
§
7651o
(
1994);
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
169
n.
5.
162.
See
Interviews
with
emissions
brokers;
see
also
Bartels,
supra
note
160.
344
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
b.
Use
of
Trading
Allowance
trading
encouraged
utilities
to
seek
out
"
least­
cost"
compliance
options
among
their
plants
in
order
to
minimize
the
cost
of
compliance.
Such
strategies
can
be
clearly
seen
in
firms'
decisions
to
install
scrubbers
on
the
largest
plants,
where
the
cost
per
ton
of
emission
reductions
would
be
the
lowest;
or
to
switch
those
plants
closest
to
existing
rail
or
water
transportation
to
low­
sulfur
coal,
thereby
minimizing
the
cost
of
the
transported
coal.
163
The
benefits
of
trading
have
the
potential
to
be
significant,
as
most
studies
have
shown
great
variability
in
the
cost
per
ton
of
emissions
reductions
at
various
plants.
164
The
extent
of
trading
depends
greatly
on
the
definition
of
trading.
As
shown
in
Figure
2­
8,
over
30
million
allowances
were
traded
between
discrete
entities,
but
in
contrast
only
3.5
million
allowances
were
used
for
compliance
purposes
by
units
to
emit
above
their
allowance
allocation.
165
Almost
all
of
this
use
was
for
averaging,
or
trading
between
units
owned
by
the
same
firm,
and
only
708,372
allowances
were
used
over
all
of
Phase
I
to
allow
firms
to
exceed
their
allowance
allocation
in
any
one
year.
166
The
use
of
the
trading
provisions
at
the
unit
level
is
shown
by
Figure
2­
9,
which
compares
actual
emissions
of
the
372
units
in
the
program
all
five
years
with
their
allowance
allocations.
The
figure
shows
that
a
majority,
or
244
units,
emitted
lower
than
their
allocated
level
and
banked
allowances,
while
128
units
emitted
over
their
allocated
level
and
used
excess
allowances
generated
by
other
units
for
compliance.

See
Figure
2­
9:
Difference
Between
SO2
Emissions
and
Allowances,
Phase
I
Units
(
1995­
1999)
167
c.
Compliance
Trading
Notwithstanding
the
greatly
increased
use
of
trading,
firms'
use
of
trading
for
compliance
purposes
was
relatively
unchanged
throughout
Phase
I,
and
remained
conservative.
Firms
made
major
use
of
only
two
potential
compliance
uses
of
trading,
those
of
banking
and
intrafirm
163.
See
Interviews
with
utility
representatives;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
129­
36.
164.
GAO
1994
TRADING,
supra
note
54.
165.
See
Figure
2­
5
(
showing
that
only
3,541,045
allowances
were
used
by
units
to
emit
over
their
allowance
allocations).
166.
See
infra
note
171.
167.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
345
averaging,
and
made
less
use
of
interfirm
trading
than
may
have
been
dictated
by
purely
economic
factors.

i.
Banking
The
most
extensive
use
of
the
trading
provisions
in
Title
IV
was
inter­
temporal
trading
or
banking,
described
earlier.
Banking,
or
saving
allowances,
accounted
for
almost
75%,
or
10,518,211,
of
the
14,031,943
allowances
created
by
the
244
units
that
emitted
below
their
allowance
allocations.
168
ii.
Averaging
Firms
made
considerable
use
of
the
opportunity
to
trade
allowances
between
different
units
for
the
purpose
of
intra­
firm
averaging.
Almost
60%,
or
thirty
of
the
fifty­
one
firms,
used
averaging
to
achieve
compliance
over
the
five
years
of
the
program,
and
even
more
used
averaging
to
allow
a
unit
to
emit
over
its
allowance
total
for
at
least
one
year.
169
For
instance,
all
of
the
forty­
nine
units
owned
by
the
Southern
Company
emitted
below
their
allocations
over
the
five
year
period,
but
a
few
required
allowances
to
meet
their
compliance
obligations
in
one
or
more
years.
170
iii.
Inter­
firm
Trading
for
Compliance
Inter­
firm
trading
of
allowances
for
compliance
purposes
totaled
only
708,372
allowances
during
Phase
I,
or
less
than
3%
of
total
emissions.
171
Despite
the
growing
level
of
trading,
only
one
utility,
Illinois
Power,
relied
extensively
on
allowances
to
meet
its
compliance
obligations
in
Phase
I,
emitting
44%
over
its
allocation.
172
Only
two
168.
See
Figure
2­
4.
169.
See
Figure
2­
5
(
showing
ELI
analysis
of
unit
data
in
EPA
1999
COMPLIANCE
REPORT,
supra
note
1).
170.
Id.
171.
The
total
use
of
allowances
by
firms
to
emit
more
than
their
allowances
in
any
one
year
was:
Illinois
Power,
503,208;
Tampa
Electric,
60,138;
Duquesne
14,237,
and
all
others
130,789.
Id.
These
708,372
allowances
used
by
firms
to
cover
their
allowance
deficit
during
Phase
I
is
2.6%
of
Phase
I's
26.5
million
tons
of
total
emissions.
Data
from
ELI
analysis
of
EPA
COMPLIANCE
REPORTS
1995­
1999.
172.
This
situation
occurred
primarily
due
to
political,
and
not
economic,
considerations
concerning
the
1900
MW
Baldwin
Plant,
responsible
for
most
of
Illinois
Power's
emissions.
The
Baldwin
plant
burned
local
high­
sulfur
coal,
with
emissions
over
5
lb/
mmBtu.
There
was
political
opposition
from
coal
miners
and
the
legislature
to
closing
these
mines
and
allowing
the
plant
to
switch
to
low­
sulfur
coal.
Illinois
Power
initially
started
to
build
a
scrubber
at
Baldwin,
although
according
to
some
sources
this
was
simply
to
appease
the
local
legislature
and
in­
state
coal
miners.
Ultimately,
Illinois
Power
stopped
building
the
scrubber,
and
instead
used
allowances
for
compliance
throughout
Phase
I.
See
Interviews
with
government
regulators
and
346
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
other
firms
made
net
allowance
purchases
during
Phase
I:
Tampa
Electric
emitted
14%
over
its
allocation,
and
Duquesne
Power
emitted
4%
over.
173
An
additional
twelve
firms
used
inter­
firm
trading
to
emit
more
than
their
allowances
in
a
given
year,
but
in
all
cases
only
did
so
for
one
or
two
years,
and
emitted
below
their
allocation
for
Phase
I
as
a
whole.
174
In
large
part,
the
limited
interutility
trading
reveals
a
bias
towards
autarkic
behavior
by
firms
in
their
environmental
strategies.
However,
several
specific
problems
discouraged
such
trading.
The
most
important
involved
state
public
utility
regulations,
which
typically
required
that
gains
or
losses
generated
by
trading
be
refunded
to
ratepayers
as
an
element
of
fuel
cost.
175
A
second
disincentive
is
the
tax
treatment
of
allowances.
The
Internal
Revenue
Service
considers
allowances
to
have
a
zero
cost
basis,
since
they
are
allocated
for
free.
176
This
imposes
a
large
tax
on
the
first
seller
of
an
allowance,
creating
a
significant
disincentive.
Discussions
with
several
utilities
showed
that
this
was
a
serious
constraint
for
some
firms,
but
not
for
others
that
had
offsetting
tax
credits
or
other
special
situations
that
avoided
tax
consequences.
177
Thirdly,
public
opposition
to
trading
in
the
early
years
of
the
program
led
some
utilities,
such
as
TVA,
to
limit
buying
or
selling
allowances
for
compliance.
178
environmental
groups.
Illinois
Power
has
now
achieved
a
90%
reduction
in
SO2
at
Baldwin
by
shifting
to
low­
sulfur
coal
at
the
advent
of
Phase
II.
ST.
LOUIS
POST­
DISPATCH,
Nov.
13,
1998.
173.
The
excess
emissions
were:
Illinois
Power,
503,208;
Tampa
Electric,
60,138;
Duquesne
14,237.
See
Figure
2­
5.
174.
See
supra
note
171.
175.
ELLERMAN
ET
AL.,
supra
note
10,
at
193
("[
A]
cross
all
states
issuing
regulations,
public
utility
commission
regulations
on
allowance­
trading
activity
largely
require
that
100%
of
both
expense
and
revenues
be
returned
to
the
ratepayers.").
See
generally
Elizabeth
M.
Bailey,
Allowance
Trading
Activity
and
State
Regulatory
Rulings:
Evidence
from
the
U.
S.
Acid
Rain
Program,
at
web.
mit.
edu/
afs/
Athena.
mit.
edu/
org/
c/
ceepr/
www/
workingpapers.
htm
(
Mar.
1998)
(
analyzing
public
utility
trading
in
response
to
state
regulation).
176.
See
Gary
Hart,
Roadblocks
to
an
Optimal
Trading
System,
ENVTL.
FIN.
26,
26
(
May
2000),
available
at
http://
www.
emissions.
org/
publications/
member_
articles/
index.
html.
"
The
potential
tax
policy
consequences
coupled
with
the
direct
refunding
of
the
remaining
proceeds
to
customers
.
.
.
.
have
led
many
utilities
to
hold,
or
bank,
allowances
for
future
compliance
and
not
participate
fully
in
the
allowance
market."
Id.
177.
Id.;
see
also
Interviews
with
utility
representatives.
One
practice
of
utilities
was
to
make
a
six­
month
loan
of
allowances
to
brokers
or
other
utilities
to
trade,
which
is
tax­
free.
The
allowances
would
be
repaid
by
the
broker
with
interest
in
an
additional
amount
of
allowances,
such
as
5%.
See
Hart,
supra
note
176,
at
26.
Although
this
was
a
way
of
making
profits
from
allowances
holdings,
it
has
little
relevance
to
compliance.
178.
TVA's
board
of
directors
adopted
a
no­
trading
policy
after
negative
publicity
on
its
participation
in
one
of
the
very
first
SO2
allowance
trades
in
1992.
See
Matthew
L.
Wald,
Utility
Is
Selling
the
Right
to
Pollute,
N.
Y.
TIMES,
May
12,
1992,
at
A1
(
criticizing
the
firm's
participation
in
the
allowance
trade).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
347
d.
New
Paradigm
of
Trading
and
Arbitrage
Trading
Trading
of
energy­
related
commodities
such
as
power,
fuels,
and
emissions
has
been
at
the
center
of
the
revolution
in
the
power
sector
as
many
states
have
initiated
deregulation
to
a
market­
based
system
for
the
generation
and
marketing
of
power.
179
In
this
new,
competitive
era,
firms'
use
of
trading
has
also
evolved,
with
many
firms
commencing
to
trade
for
arbitrage
or
profit­
making
purposes
as
well
as
compliance.
180
The
increased
emphasis
on
marketing
and
trading
in
many
firms
has
led
to
a
major
realignment
in
which
the
generation
division
within
a
firm
may
no
longer
dictate
terms
to
the
traders,
but
vice­
versa.
181
Arbitrage
trading
by
some
firms
has
become
significant,
with
allowances
regarded
as
an
asset
that
can
lead
to
profits
through
trading,
especially
if
combined
with
fuel
and
energy
trading.
182
This
new
attitude
toward
trading
has
been
assisted
by
practices
such
as
six­
month
tax­
free
loans
of
allowances
between
utilities
and
brokers
that
the
broker
uses
for
trading,
and
then
repays
to
the
utility
with
additional
allowances
as
interest.
183
Such
arbitrage
trading
is
neutral
in
terms
of
the
environment,
and
helps
to
explain
the
difference
between
the
30.8
million
allowances
traded
between
distinct
entities
in
Phase
I,
and
the
only
3.5
million
traded
for
actual
compliance
purposes.
The
enormous
importance
of
trading
to
some
firms
is
reflected
in
the
placement
of
emissions
trading
authority
in
the
corporate
structure.
The
allowance
trading
function
was
traditionally
located
in
the
company's
environmental
department,
after
which
it
was
shifted
in
some
firms
to
the
fuel­
purchasing
department
where
allowances
are
bought
and
sold
along
with
other
commodities
like
coal.
Today,
many
electricity­
generating
companies
have
established
a
division
or
separate
corporate
entity
for
trading
energy­
related
commodities.
184
Some
smaller
firms
with
particularly
active
programs
may
generate
as
much
gross
revenue
from
such
trading
as
they
do
selling
electricity.
185
179.
See
Energy
Survey,
THE
ECONOMIST,
Feb.
10,
2001,
at
11.
180.
See
Interviews
with
emissions
brokers
and
utility
representatives.
181.
See
Vito
Stagliano
&
Sarah
Emerson,
Energy
Trading:
The
Market's
Response
to
Deregulation,
RESOURCES
127
(
Spring
1997);
see
also
Interviews
with
utility
representatives.
182.
See
Interviews
with
utility
representatives.
183.
Id.;
see
also
ELLERMAN
ET
AL.,
supra
note
10,
at
178
(
discussing
allowance
swapping).
184.
See
Interviews
with
utility
representatives
185.
See
Interviews
with
emission
trading
representatives
of
utility
companies.
Cinergy,
a
larger
firm,
reported
revenues
of
$
640
million
from
its
trading
subsidiary,
about
11%
of
its
total
1998
revenues.
CINERGY
CORP.,
1998
FINANCIAL
REPORT
&
1999
PROXY
STATEMENT
C­
20,
C­
26
(
1999).
348
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
e.
Trading
Helped
to
Integrate
Environmental
and
Economic
Issues
A
potentially
profound
influence
of
trading
on
compliance
behavior
is
its
effect
in
establishing
a
market
price
for
a
ton
of
reductions.
This
has
allowed
a
greater
integration
of
environmental
and
certain
economic
aspects
of
the
industry
and,
some
claim,
allowed
far
greater
integration
of
environmental
considerations
into
overall
business
decisionmaking
186
The
most
evident
example
of
this
integration
is
that
allowance
prices
are
today
fully
integrated
into
the
price
of
coal:
the
sulfur
premium
for
coal
tracks
the
allowance
price,
and
coal
suppliers
now
bundle
allowances
with
their
coal.
187
This
integrates
the
environmental
effects
of
coal
into
its
price,
and
hence
into
all
firm
decisions
about
fuel
cost
and
efficiency.
It
also
creates
an
even
cline
in
the
sulfur
premium
that
contributes
to
a
competitive
coal
market.
A
second
example
is
that
allowance
prices
are
regularly
updated
in
the
dispatch
models
that
dictate
which
of
a
firm's
plants
will
operate
at
any
time.
188
Again,
this
fully
integrates
an
environmental
parameter
into
one
of
a
firm's
key
ongoing
economic
decisions.
Neither
of
these
integrations
would
be
possible
under
rate
standards,
and
both
show
how
cap­
and­
trade
systems
continue
to
exert
dynamic
effects
on
a
continuing
basis
long
after
the
effective
date
of
the
regulations.
Some
argue
further
that
creating
a
price
for
pollution
causes
a
revolution
in
compliance
behavior
because
it
broadly
moves
consideration
of
pollution
effects
into
mainstream
company
decisions.
189
By
allowing
companies
to
profit
from
trading
allowances,
they
argue
that
firms
begin
to
view
environmental
compliance
as
another
arena
for
competition,
lowering
resistance
to
regulation
by
firms
that
perceive
they
may
out­
compete
other
firms
in
this
arena.
Achieving
these
positive
effects
is
assisted
if
the
company's
accounts
reflect
the
market
value
of
186.
See
Interviews
with
emission
trading
representatives
of
utility
companies
and
indepen­
dent
emissions
brokers.
187.
The
allowance
system
allows
coal
suppliers
to
"
bundle"
allowances
with
their
coal
to
meet
emissions
limits
or
utilities'
demands.
The
opportunity
to
profit
through
arbitrage
trading
if
coal
prices
are
out
of
line
with
allowance
prices
ensures
a
relatively
high
degree
of
consistency
between
allowance
prices
and
the
sulfur
premium.
Coal
suppliers
have
opened
accounts
in
the
EPA's
Allowance
Tracking
System
and
trade
allowances
to
bundle
them
with
coal
supplies.
These
practices
tie
in
the
price
of
coal
with
other
compliance
strategies,
and
so
achieve
economic
efficiency
and
least­
cost
compliance.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
255­
57.
188.
See
Interviews
with
environmental
compliance
representatives
of
power
generation
firms.
Many
update
allowance
prices
on
a
monthly
basis.
189.
The
discussion
in
the
following
paragraphs
is
derived
from
confidential
interviews
with
industry
sources.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
349
allowances,
instead
of
carrying
them
at
zero
basis
if
they
are
allocated
for
free.
Once
the
cost
of
allowances
is
reflected
in
the
accounts,
the
pollution
consequences
of
actions
may
affect
all
economic
decisions
made
by
a
firm.
One
regulatory
factor
that
appears
to
be
critical
in
achieving
this
integration
is
the
ability
to
freely
trade
allowances
with
minimal
transaction
costs
or
delay.
This
creates
a
market
price
through
a
competitive
and
transparent
trading
market
that
is
national
in
scope
with
no
restrictions
or
limits
on
trades.
Because
of
the
cap­
and­
trade
system,
this
can
be
done
while
maintaining
very
high
environmental
integrity.
190
10.
Phased
Structure
Caused
Problems
Title
IV
created
a
two­
phased
structure
that
regulated
only
certain
generating
units
in
Phase
I.
However,
because
of
the
interconnected
nature
of
the
electricity
grid,
this
created
the
potential
for
these
units
to
transfer
generation
and
therefore
emissions
to
other
units
not
included
in
Phase
I.
191
Title
IV's
rules
partially
prevent
this
practice
by
requiring
firms
to
utilize
their
Phase
I
plants
at
least
to
the
level
at
which
they
were
operated
during
the
baseline
period.
192
However,
they
did
not
prevent
firms
from
meeting
the
increased
demand
for
energy
that
occurred
during
Phase
I
by
increasing
the
use
of
Phase
II
generating
units
proportionally
more
than
Phase
I
units.
The
MIT
Center
for
Energy
and
Environmental
Policy
Research
analyzed
utilization
levels
in
the
years
1995­
1997,
and
concluded
that
firms
did
indeed
shift
some
utilization
due
to
growth
from
Phase
I
to
Phase
II
units,
leading
to
greater
SO2
emissions
over
time.
193
These
actions
actually
reduced
Phase
I
emissions
by
a
total
of
427,590
tons,
as
190.
The
cap
assures
environmental
quality,
while
the
strict
monitoring
and
penalty
provisions
assure
the
integrity
of
trading.
The
allowance
method,
unlike
credit
trades,
also
means
that
no
government
pre­
approvals
are
needed
that
would
slow
trades
and
add
significant
transaction
costs.
191.
While
Phase
I
achieved
early
reductions,
it
created
a
problem
due
to
the
interconnectedness
of
all
electricity
generating
firms.
Firms
could
potentially
reduce
emissions
at
Phase
I
units
simply
by
generating
more
electricity
at
other
units
that
would
not
be
covered
until
Phase
II.
See
BRIAN
MCLEAN,
EPA,
PUB.
NO.
EPA
95­
RA12004,
LESSONS
LEARNED
IMPLEMENTING
TITLE
IV
OF
THE
CLEAN
AIR
ACT
7
(
1995).
Further,
as
described
infra
in
Part
II.
C.
8,
the
substitution
provisions
also
likely
resulted
in
excess
Phase
I
emissions.
192.
See
42
U.
S.
C.
§
7651g(
c)(
1)
(
1994);
Clean
Air
Act,
40
C.
F.
R.
§
72.2
(
2000).
193.
Susanne
Schennach,
The
Effect
of
Title
IV
on
SO2
Emission
and
Heat
Input,
in
MARKETS
FOR
CLEAN
AIR:
THE
U.
S.
ACID
RAIN
PROGRAM
323
(
Ellerman
et
al.
eds.,
2000);
ELLERMAN
ET
AL.,
supra
note
90,
at
50;
E­
mail
from
A.
Denny
Ellerman,
Executive
Director,
MIT
Center
for
Energy
and
Environmental
Policy
Research,
to
Byron
Swift,
Environmental
Law
Institute
(
Dec.
29,
1999)
(
on
file
with
author)
(
calculating
that
7%
of
heat
input
was
transferred
from
Phase
I
unscrubbed
units
to
Phase
II
units,
and
the
emissions
transferred
to
Phase
II
less
the
emissions
reductions
in
Phase
I).
350
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
the
Phase
II
units
were
generally
cleaner.
194
However,
it
allowed
the
Phase
I
units
to
bank
an
additional
1,159,995
allowances,
potentially
creating
a
net
difference
of
732,404
additional
tons
of
emissions
over
time.
195
These
problems
indicate
that
phasing
of
power
plants
in
a
regulatory
system
is
difficult
at
best,
and
if
done
again,
more
sophisticated
rules
need
to
be
developed.

11.
Environmental
Effects
or
"
Hot
Spots"
from
Trading
Concern
has
been
expressed
that
Title
IV's
allowance
trading
system
could
result
in
"
hot
spots,"
or
areas
of
localized
high
pollution
levels,
by
allowing
heavily
emitting
units
simply
to
buy
allowances
instead
of
reducing
emissions.
196
The
results
of
Phase
I
reveal
that
allowance
trading
had
a
relatively
small
effect
in
shifting
emissions,
with
a
slight
tendency
towards
cooling
hot
spots,
not
creating
them.
197
Since
local
pollutant
levels
depend
primarily
on
the
overall
stringency
of
regulation,
together
with
economic
factors
such
as
plant
siting,
size,
and
utilization,
it
appears
that
rate­
based
systems
may
allow
greater
hot
spots
than
cap­
and­
trade
systems.
Before
examining
the
results
of
trading
in
Phase
I,
it
is
important
to
note
that
Title
IV
requires
reductions
in
addition
to
the
existing
ambient
standards
for
SO2
that
are
designed
to
protect
public
health
in
the
vicinity
of
a
plant.
198
As
noted
before,
many
plants
met
these
ambient
standards
through
tall
stacks
and
not
emissions
reduction,
but
these
ambient
standards
still
exist
and
serve
as
a
check
against
SO2
trading
ever
causing
significant
hot
spots.
199
Phase
I
data
indicates
there
has
been
relatively
little
shifting
of
emissions
due
to
trading.
First,
as
shown
in
the
figure
below,
emissions
were
fairly
evenly
below
authorized
allocations
in
virtually
all
states.

See
Figure
2­
10:
SO2
Allowances
Allocated
and
Emissions
by
State
(
1995­
1999)
200
A
second
indication
of
the
lack
of
effect
of
trading
in
causing
hot
spots
during
Phase
I
is
an
EPA
analysis
of
the
origin
of
all
allowances
194.
See
supra
note
193.
195.
Id.
196.
Byron
Swift,
Allowance
Trading
and
SO2
Hot
Spots
 
Good
News
from
the
Acid
Rain
Program,
31
ENV'T
REP.
954
(
May
12,
2000),
available
at
http://
www.
epa.
gov/
airmarkets/
articles/
so2trading­
hotspots_
charts.
pdf.
197.
Id.
198.
See
42
U.
S.
C.
§
7651
(
1994).
199.
See
supra
text
accompanying
notes
17­
20.
200.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS,
1995­
1999.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
351
actually
used
at
units
to
offset
emissions
in
the
years
1995­
1998.201
This
study
revealed
that
81%
of
allowances
actually
used
originated
in
the
same
state
as
the
source,
and
that
net
inter­
regional
trading
only
constituted
3%
of
all
allowances
used.
202
A
third
way
to
look
at
the
effects
of
trading
is
to
review
the
reductions
made
at
individual
plants
during
Phase
I.
The
data
confirms
a
general
prediction
made
about
cap­
and­
trade
programs
that
they
will
tend
to
create
incentives
for
the
dirtiest
plants
to
clean
up
the
most,
as
the
per­
ton
cost
of
emissions
reductions
should
be
lowest
where
the
capital
costs
of
control
are
spread
over
the
largest
number
of
tons.
Figure
2­
11
reveals
that
the
largest
emitters
have
reduced
emissions
the
most,
with
the
result
of
cooling
hot
spots
rather
than
creating
them.

See
Figure
2­
11:
Allowances
vs.
Emissions
of
the
Twenty
Largest
Phase
I
Plants203
Overall,
it
appears
that
localized
levels
of
pollution
are
determined
overwhelmingly
by
economic
factors,
notably
plant
location,
size,
and
utilization.
To
the
extent
that
regulation
has
any
effect
on
localized
levels
of
pollution,
it
is
the
overall
stringency
of
the
regulation
that
matters,
not
whether
it
is
achieved
by
a
rate
or
cap­
and­
trade
system.

III.
REGULATORY
PROGRAMS
FOR
NOX
This
Part
discusses
the
standard
for
nitrogen
oxides
(
NOX)
established
under
Title
IV,
with
reference
to
other
NOX
regulations
applicable
to
sources
in
northeastern
states
and
to
new
sources.
Title
IV's
Phase
I
NOX
program
has
succeeded
in
many
respects.
Although
litigation
delayed
the
program
one
year,
firms
achieved
100%
compliance
with
the
standards
in
every
year
thereafter.
204
In
other
ways,
however,
the
program
failed
to
achieve
noteworthy
results.
The
standards
were
relatively
weak,
and
exempted
major
groups
of
boilers
201.
EPA,
Clean
Air
Markets
Div.
(
unpublished
data,
on
file
with
author)
(
2000).
202.
Even
the
3%
of
interregional
trading
showed
little
directionality,
often
consisting
of
transfers
between
neighboring
states
that
happened
to
cross
a
regional
boundary.
See
Swift,
supra
note
196,
at
954­
55,
957;
U.
S.
GENERAL
ACCOUNTING
OFFICE,
PUB.
NO.
GAO/
RCED­
00­
47
ACID
RAIN:
EMISSIONS
TRENDS
AND
EFFECTS
IN
THE
EASTERN
UNITED
STATES
(
Mar.
2000),
available
at
http://
www.
gao.
gov/
archive/
2000/
re00047.
pdf
[
hereinafter
GAO
2000
EFFECTS].
203.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS
1995­
1999.
Emissions
and
allowance
totals
were
calculated
by
summing
the
emissions
and
allocations
to
Phase
I
affected
units
within
each
plant.
204.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2;
EPA,
OTC
NO
X
BUDGET
PROGRAM:
1999
COMPLIANCE
REPORT
2
(
2000),
available
at
http://
www.
epa.
gov/
airmarkets/
cmprpt/
otc99/
index.
html
(
last
updated
Dec.
11,
2000)
[
hereinafter
EPA
1999
OTC
NOX
COMPLIANCE
REPORT].
352
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
from
coverage.
As
contemplated
by
Congress,
the
standards
led
firms
to
do
little
more
than
install
retrofits
of
low­
NOX
burners
on
most
boilers,
limiting
innovation
to
one
point
in
time
and
to
methods
that
reduced
the
cost
of
making
the
retrofits.
Title
IV
established
the
first
regulation
of
NOX
faced
by
many
existing
power
plants.
Most
coal­
fired
power
plants
were
built
before
the
Clean
Air
Act
of
1970,
and
so
faced
few
restrictions
on
NOX
emissions,
as
Clean
Air
Act
regulation
focused
on
new
sources.
205
Although
states
were
authorized
to
regulate
existing
sources
in
areas
that
had
not
attained
the
national
ambient
standards,
these
tended
to
be
large
urban
centers;
since
most
coal
plants
were
located
outside
such
areas,
few
states
imposed
significant
restrictions.
206
Major
state­
level
regulatory
activity
on
NOX
did
not
commence
until
the
1990s,
when
scientists
began
to
emphasize
the
role
of
NOX
in
the
formation
of
urban
ozone.
207
During
the
period
studied,
incentives
to
firms
to
make
added
NOX
reductions
came
primarily
from
the
Ozone
Transport
Commission
(
OTC)
cap­
and­
trade
program
established
in
1999,208
and
from
new
source
NOX
standards
that
apply
primarily
to
gas­
fired
turbines.
209
The
OTC
program
led
firms
to
use
a
variety
of
additional
technologies
to
make
further
NOX
reductions,
but
innovation
under
the
new
source
standards
has
focused
primarily
on
end­
of­
pipe
control
technologies.
210
The
regulatory
system
for
NOX
therefore
creates
a
fragmented
set
of
rate
standards
that
impose
different
limits
and
compliance
burdens
on
205.
See
Figure
3­
4
for
data
on
age
of
plants.
The
1970
Clean
Air
Act
established
federal
performance
standards
for
new
or
modified
sources,
initially
establishing
New
Source
Performance
Standards,
followed
by
the
more
complex
New
Source
Review
process
in
the
1977
Amendments.
42
U.
S.
C.
§
§
7411,
7503
(
1994).
New
Source
Performance
Standards
for
NOX
for
boilers
and
turbines
are
found
at
40
C.
F.
R
§
61
(
2000).
In
contrast,
existing
power
plants
were
not
subject
to
direct
federal
regulation
until
Title
IV
was
passed
in
1990.
206.
Illinois,
for
example,
only
regulated
larger
existing
plants
in
the
Chicago
or
St.
Louis
(
IL)
major
metropolitan
areas,
and
imposed
fairly
lenient
NOx
standards.
These
were
0.46
kg/
MW/
hr
(
0.3
lbs/
mmBtu)
for
gas
or
liquid
fossil
fuels,
and
1.39
kg/
MW/
hr
(
0.9
lbs/
mmBtu)
for
coal.
See
Existing
Emission
Sources
in
Major
Metropolitan
Areas,
ILL.
ADMIN.
CODE
tit.
35,
§
217.141
(
2001).
Many
other
states
simply
did
not
develop
any
standards
for
existing
power
plants.
See,
e.
g.,
41
KY.
ADMIN.
REGS.
61
(
1981).
Compare
with
standards
set
for
new
electric
utility
steam
generating
units.
41
KY.
ADMIN.
REGS.
59:
016
(
1981).
States
in
the
Ozone
Transport
Region
typically
did
not
impose
NOX
standards
on
existing
plants
until
March
15,
1994.
See,
e.
g.,
N.
Y.
COMP.
CODES
R.
&
REGS.,
tit.
6
§
227­
2
(
2001).
Earlier
standards
for
stationary
sources
focused
on
particulates
and
opacity.
See
id.
§
227­
1.
207.
See
generally
NAT'L
RESEARCH
COUNCIL,
RETHINKING
THE
OZONE
PROBLEM
IN
URBAN
AND
REGIONAL
AIR
POLLUTION
(
1991)
(
discussing
national
policy
on
the
effect
of
NOx
in
urban
areas).
208.
See
infra
Part
III.
E.
1;
42
U.
S.
C.
§
7511c
(
1994).
209.
See
infra
Part
III.
E.
2.
210.
See
Figure
4­
2.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
353
different
technologies
and
far
more
lenient
standards
on
old
versus
new
sources.
This
is
very
unlike
the
SO2
program
in
which
all
sources
faced
the
uniform
emissions
cap
and
allowance­
trading
system.
211
A.
Background
Nitrogen
oxide
(
NOX)
is
a
criteria
pollutant
regulated
under
the
Clean
Air
Act,
212
and
plays
a
major
role
in
a
variety
of
environmental
problems,
including
acid
precipitation,
the
formation
of
particulates
and
ozone
dangerous
to
human
health,
and
damage
to
plants
and
agricultural
productivity.
213
Electricity­
generating
facilities
emitted
6.1
million
tons
of
NOX
in
1998,
25%
of
national
emissions,
with
88%
of
these
emissions
from
coal­
fired
generation.
214
The
combustion
process
produces
NOX
in
two
principal
ways.
Fuel
NOX
is
created
through
oxidization
of
nitrogen
in
the
fuel,
with
combustion
conditions
determining
the
extent
of
NOX
formation.
Thermal
NOX
is
created
by
the
reaction
of
molecular
nitrogen
and
oxygen
in
the
combustion
air,
and
increases
with
combustion
temperature
and
oxygen
content.
Fuel
NOX
can
be
controlled
to
a
small
degree
by
burning
coal
with
lower
nitrogen
content,
but
thermal
NOX
must
be
controlled
by
lowering
flame
temperature
and
creating
oxygenlean
conditions
in
the
combustion
process
to
reduce
NOX
formation.
Low­
NOX
burners
control
fuel
and
air
mixing
to
reduce
peak
flame
temperatures,
and
are
an
economical
way
to
limit
the
formation
of
NOX
in
electricity­
generating
units.
215
Installing
low­
NOX
burners,
however,
is
more
difficult
in
some
boiler
types
than
others,
and
achieves
different
levels
of
emissions
reductions
in
different
boilers.
216
Because
low­
NOX
burners
may
increase
unburned
carbon
levels,
they
typically
lower
boiler
211.
See
infra
Part
III.
E.
3.
212.
42
U.
S.
C.
§
7409(
c)
(
1994).
213.
See
EPA,
PUB.
NO.
EPA­
456/
F­
99­
006R,
TECHNICAL
BULLETIN,
NITROGEN
OXIDES
(
NO
X),
WHY
AND
HOW
THEY
ARE
CONTROLLED
(
Nov.
1999),
available
at
http://
www.
epa.
gov/
ttn/
catc/
dir1/
fnoxdoc/
pdf.
214.
EPA
EMISSIONS
TRENDS,
supra
note
8,
at
2­
2,
3­
4.
Vehicles
contributed
53%
of
national
emissions,
while
other
fuel
combustion
contributed
17%.
Id.
215.
Normally,
"[
r]
etrofitting
low­
NOX
burners
in
wall­
fired
boilers
.
.
.
involves
removing
the
existing
burners
and
providing
more
space
for
the
installation
of
the
low­
NOX
burners"
together
with
modifications
to
the
waterwall
and
windbox.
"
For
small
furnaces,
installation
of
low­
NOX
burners
may
cause
flames
to
impinge
on
the
opposite
wall
of
the
furnace,"
causing
derating
of
the
unit
load
and
corrosion
of
the
waterwalls.
EIA,
Reducing
Nitrogen
Oxide
Emissions:
1996
Compliance
with
Title
IV
Limits,
ELEC.
POWER
MONTHLY,
at
xv
(
May
1998),
available
at
http://
www.
eia.
doe.
gov/
cneaf/
electricity/
nox_
emissions/
contents.
html.
216.
Id.
354
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
efficiency
by
a
few
percentage
points.
217
In
addition
to
these
"
combustion
controls"
that
limit
NOX
formation,
NOX
emissions
can
be
destroyed
after
formation
by
control
technologies.
Our
research
found
that
utilities
struggled
with
the
alternatives
available
for
reducing
NOX
emissions.
Most
had
limited
experience
with
most
of
the
later
generation
low­
NOX
burner
technology,
and
there
were
major
concerns
over
detrimental
impacts
of
low­
NOX
burners
on
boiler
tubes
and
overall
efficiency.
Control
technologies
like
Selective
Catalytic
Reduction
(
SCR)
and
Selective
Non­
Catalytic
Reduction
(
SNCR)
at
the
time
were
not
well
proven
on
a
commercial
scale
nor
for
large
coal­
fired
units.
Also,
deregulation
was
on
the
horizon
and
some
companies
were
hesitant
to
invest
capital
with
a
lengthy
recovery
period.
Changing
to
lower
emitting
fuels
could
possibly
trigger
New
Source
Review
(
NSR)
requirements
and
could
adversely
affect
unit
efficiency,
driving
up
production
cost
and
making
the
unit
less
competitive.
These
uncertainties
caused
firms
to
delay
and
minimize
expenditures
to
the
extent
possible
while
maintaining
their
obligation
to
serve
load.
218
B.
Title
IV
NOX
Standard
and
Its
Legislative
History
Title
IV
was
designed
to
cut
NOX
emissions
from
utility
boilers
by
2
million
tons
from
1980
levels
by
the
year
2000.219
However,
instead
of
using
an
emissions
cap
and
allowance­
trading
system
as
with
SO2,
Congress
established
annual
average
emission
limits
for
coal­
fired
electric
utility
units
based
on
the
use
of
"
low­
NOX
burner
technology."
220
Phase
I
of
the
NOX
program
lasted
from
1996
through
1999,
and
applied
to
the
265
wall­
fired
and
tangentially­
fired
boilers221
included
in
the
Acid
Rain
Program
as
Table
A
units,
or
substitution
units
active
on
January
1,
1995.222
The
legislation
exempts
other
boiler
types
from
217.
Low­
NOX
burners
may
increase
carbon
monoxide
and
unburned
carbon
levels,
contributing
to
imbalances
in
the
distribution
of
air
and
fuel.
Operating
low­
NOX
burners
with
systems
that
accurately
regulate
the
fuel
and
air
supplies
can
alleviate
these
problems.
STATE
AND
TERRITORIAL
AIR
POLLUTION
PROGRAM
ADMINISTRATORS
&
ASSOCIATION
OF
LOCAL
AIR
POLLUTION
OFFICIALS
(
STAPPA/
ALAPCO),
CONTROLLING
NITROGEN
OXIDES
UNDER
THE
CLEAN
AIR
ACT:
A
MENU
OF
OPTIONS
18
(
July
1994)
[
hereinafter
STAPPA/
ALAPCO
1994];
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program,
57
Fed.
Reg.
55,632,
55,639
(
Nov.
25,
1992).
218.
See
Interviews
with
utility
representatives.
219.
42
U.
S.
C.
§
7651(
b)
(
1994).
220.
Id.
§
7651f(
b).
221.
Most
boilers
firing
pulverized
coal
are
wall­
fired
or
tangentially
fired.
Wall­
fired
boilers
produce
discrete
flames
from
burners
mounted
in
the
boiler
wall,
or
in
opposing
walls.
Tangentially­
fired
boilers
have
burners
at
the
four
corners
of
the
furnace
to
create
a
single
rotating
fireball
in
the
center.
See
STAPPA/
ALAPCO
1994,
supra
note
217,
at
14.
222.
42
U.
S.
C.
§
7651f(
b)
(
1994).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
355
Phase
I
because
low­
cost
combustion
controls
such
as
low­
NOX
burner
technology
were
not
known
to
be
available
for
these
boilers
at
the
time
of
passage
of
the
Act.
223
Phase
II
of
the
program
started
in
2000,
and
includes
all
other
units
affected
by
Title
IV.
224
Since
the
units
included
in
Phase
I
have
already
made
their
boiler
modifications,
they
are
permanently
grandfathered
at
the
lower
Phase
I
standards
and
not
the
more
stringent
Phase
II
standards.
225
Figure
3­
1
shows
the
emissions
limits
applicable
to
different
boiler
types
in
Phase
I
and
Phase
II
of
the
program.
Phase
I
limits
for
wallfired
and
tangentially­
fired
boilers
were
0.50
and
0.45
lb/
mmBtu,
a
significant
reduction
from
their
average
uncontrolled
emission
level
of
0.95
and
0.65
lb/
mmBtu
respectively.
226
Figure
3­
1.
Title
IV
NOX
Standards
by
Boiler
Type
(
lb/
mmBtu)
227
Phase
I
Phase
II
Boiler
Type
#
of
Units
Standard
#
of
Units
Standard
Tangentially­
fired
135
0.45
308
0.40
Dry
bottom
wall­
fired
130
0.50
299
0.46
Cell
burners
36
0.63
Cyclones
(>
155
MW)
55
0.86
Vertically
fired
28
0.84
Wet­
bottom
(>
65
MW)
26
0.84
223.
These
units,
known
as
Group
2
boilers,
include
cell,
cyclone,
and
wet­
bottom
boilers.
Id.
§
7651f(
b)(
2).
224.
Phase
II
includes
both
wall­
and
tangentially­
fired
(
Group
1)
boilers
not
covered
in
Phase
I
and
other
types
of
boilers
(
Group
2).
Congress
authorized
the
EPA
to
establish
a
lower
limit
for
these
remaining
Group
1
boilers
"
if
the
Administrator
determines
that
more
effective
Low­
NOX
burner
technology
is
available."
The
EPA
made
such
a
finding,
and
in
1996
established
slightly
lower
limits
for
Group
1
boilers
in
Phase
II.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,113
(
Dec.
19,
1996).
225.
42
U.
S.
C.
§
7651f(
b)(
2)
(
1994).
226.
EPA,
PUB.
NO.
AP­
42,
COMPILATION
OF
AIR
POLLUTANT
EMISSION
FACTORS
(
1995);
see
also
ICF
CONSULTING,
INC.,
REGULATORY
IMPACT
ANALYSIS
OF
THE
PROPOSED
INTERVENTION
LEVEL
PROGRAM
FOR
SULFUR
DIOXIDE:
FINAL
REPORT,
PUB.
NO.
EPA­
452/
R­
96­
14
(
1996)
[
hereinafter
ICF
RIA
1996].
227.
See
Clean
Air
Act,
40
C.
F.
R.
§
§
76.5,
76.6
(
2000);
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,112­
18
(
Dec.
19,
1996).
356
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
In
contrast
to
the
intense
debate
on
sulfur
standards,
there
is
relatively
little
legislative
history
on
the
NOX
standard
adopted
in
Title
IV.
The
NOX
reductions
were
perceived
to
be
an
adjunct
to
SO2
regulation,
as
the
contribution
of
NOX
to
acid
deposition
was
confined
mostly
to
western
states,
and
NOX
controls
were
expected
to
cost
far
less
than
SO2
controls.
228
Although
the
motives
for
regulating
NOX
included
its
contribution
to
nutrient
loading
in
sensitive
waters
and
in
ozone
formation,
at
that
time
the
role
of
NOX
in
ozone
formation
was
not
perceived
to
be
as
important
as
it
is
today.
229
The
manner
in
which
NOX
would
be
regulated
shifted
dramatically
during
the
legislative
process.
As
introduced,
the
NOX
provisions
required
affected
units
to
meet
an
annual
tonnage
limit
for
NOX
and
provided
an
allowance
trading
provision,
similar
to
the
SO2
cap­
andtrade
program.
230
However,
this
was
changed
radically
upon
adoption
of
a
substitute
provision
introduced
by
Senator
Trent
Lott
of
Mississippi
that
established
emission
rate
standards
for
NOX
set
in
the
traditional
manner
for
each
boiler
type.
231
The
final
rate
standard
was
based
on
what
could
be
achieved
using
low­
NOX
burner
technology,
with
an
explicit
recognition
by
Congress
that
this
would
not
lead
to
major
costs.
232
Subsequently,
Congress
added
a
number
of
flexibility
provisions
designed
to
reduce
the
costs
to
affected
firms.
First,
the
rate
standard
is
an
annual
standard,
which
allows
more
flexibility
in
technology
use
than
a
daily
or
monthly
standard.
233
Second,
companies
are
allowed
to
average
their
units
to
meet
the
rate
standard,
an
important
tool
that
most
companies
would
use.
234
Third,
the
law
allows
an
individual
unit
to
228.
S.
REP.
NO.
101­
228,
at
333
(
1989).
229.
See
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
I;
Final
Rule,
59
Fed.
Reg.
13,538
(
Mar.
22,
1994);
NAPAP
INTEGRATED
ASSESSMENT,
supra
note
3,
at
2­
4.
230.
S.
1630,
101st
Cong.
§
407
(
1990).
231.
Senator
Lott
stated
that
under
his
amendment,
"
utilities
will
not
be
forced
to
install
unreasonably
expensive
equipment"
and
NOX
emission
limits
will
be
based
on
"
the
application
of
low­
NOX
burner
technology,
a
much
more
reasonable
and
cost­
effective
method
proven
to
successfully
achieve
significant
NOX
reductions."
136
Cong.
Rec.
5044
(
1990).
232.
42
U.
S.
C.
§
7401(
a)(
4)
(
1990)
(
current
version
at
42
U.
S.
C.
§
7401
(
2000));
S.
1630
101st
Cong.
§
401(
a)(
4)
(
1990).
Together
with
Senator
Lott,
Senator
Lincoln
Chafee
asserted
that
the
provisions
that
became
section
407
would
not
force
the
installation
of
"
unreasonably
expensive
equipment"
and
added
that
"
reasonable
and
cost­
effective
methods
have
proven
to
be
successful
in
achieving
significant
NOX
reductions."
136
Cong.
Rec.
5044
(
1990);
see
also
MCLEAN,
supra
note
191,
at
9.
"
It
seems
that
through
the
legislative
process,
the
goal
shifted
from
a
specific
emissions
reduction
target
to
specific
performance
standards
to
a
requirement
to
use
1
or
more
technologies.
.
.
."
Id.
233.
See
42
U.
S.
C.
§
7651f
(
1994).
234.
See
id.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
357
obtain
an
Alternate
Emission
Limit
(
AEL)
if
it
could
not
meet
the
standard
even
after
installing
a
low­
NOX
burner.
235
A
final
flexibility
provision
created
through
the
regulations
was
the
Early
Election
Program
that
allowed
Phase
II
units
an
exemption
from
Phase
II
standards
until
2008
if
they
voluntarily
met
Phase
I
standards
by
1997.236
The
end
result
was
a
rate
standard
with
both
flexibility
and
a
waiver
provision
that
ensured
firms
would
not
need
to
do
more
than
install
known,
relatively
inexpensive
combustion
controls
on
their
units.
The
limitations
of
this
mandate
became
apparent
when
the
Court
of
Appeals
for
the
District
of
Columbia
Circuit
subsequently
determined
that
the
EPA's
initial
regulation,
which
would
have
required
both
low­
NOX
burners
and
"
overfire
air"
(
a
related
combustion
control),
exceeded
the
agency's
authority.
237
The
court
held
that
only
low­
NOX
burners
were
required.
238
In
this
sense,
Title
IV
was
almost
as
much
a
limitation
on
the
EPA's
power
to
regulate
NOX
emitted
by
electricity­
generating
units
as
it
was
an
authorization.

C.
Results
of
Title
IV
1.
Initial
Litigation
and
Delay
The
initial
result
of
the
Title
IV
NOX
standard
was
controversy
over
the
meaning
of
low­
NOX
boiler
technology.
After
much
debate,
the
EPA
promulgated
regulations
establishing
NOX
emission
limits
for
Phase
I
units
to
begin
in
1995,
based
on
the
combined
effect
of
low­
NOX
burner
and
overfire
air
technology.
239
However,
industry
sued
and
the
United
States
Court
of
Appeals
for
the
D.
C.
Circuit
vacated
the
rule,
holding
that
low­
NOX
burners
do
not
incorporate
the
combination
of
low­
NOX
burners
and
overfire
air.
240
Consequently,
the
EPA
reissued
a
revised
final
rule
in
April
of
1995
that
eliminated
the
incorporation
of
overfire
air,
and
delayed
the
effective
date
of
Phase
I
by
one
year
to
1996.241
235.
Id.
§
7651f(
d).
236.
Clean
Air
Act,
40
C.
F.
R.
§
76.8
(
2000).
237.
Al.
Power
Co.
v.
EPA,
40
F.
3d
450,
456
(
D.
C.
Cir.
1994).
238.
Id.
239.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
I;
Final
Rule,
59
Fed.
Reg.
13,538,
13,540
(
Mar.
22,
1994).
240.
Al.
Power,
40
F.
3d
at
451
(
vacating
Phase
I
NOX
final
rule).
241.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program:
Direct
Final
Rule,
60
Fed.
Reg.
18,751,
18753,
18757
(
Apr.
13,
1995).
358
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
2.
Implementation
Following
the
lawsuit,
implementation
of
the
NOX
program
was
relatively
straightforward,
and
all
265
coal­
fired
units
affected
under
Phase
I
met
the
legal
requirements
in
each
year.
242
Most,
or
175
units,
met
the
emissions
rate
limits
as
expected
through
the
installation
of
low­
NOX
burners.
243
The
rate
and
tonnage
reductions
resulting
from
Phase
I
are
shown
graphically
in
Figures
3­
2
and
3­
3.
Overall,
units
lowered
their
average
NOX
emissions
rates
to
0.40
lb/
mmBtu
during
Phase
I,
43%
below
the
1990
average
of
0.70
lb/
mmBtu.
244
This
reduced
NOX
emissions
by
approximately
400,000
tons
per
year,
or
32%
below
1990
levels,
with
overall
reductions
projected
to
rise
to
2,060,000
tons
per
year
during
Phase
II,
which
started
in
2000.245
There
is
less
reduction
in
total
tons
than
in
rates
because
economic
growth
led
to
higher
utilization
of
generating
units.
Unlike
the
SO2
program,
in
which
emissions
are
capped,
the
rate­
based
NOX
program
will
allow
NOX
emissions
to
rise
with
increased
utilization.
246
See
Figure
3­
2.
NOX
Rate
Reductions
During
Phase
I247
See
Figure
3­
3.
NOX
Tonnage
Reductions
During
Phase
I248
Most
of
the
265
Phase
I
units
achieved
compliance
in
a
straightforward
manner,
by
retrofitting
low­
NOX
burners.
Overall,
175
units
(
66%)
installed
low­
NOX
burner
technologies
for
compliance,
with
most
(
114)
of
these
units
coupling
the
low­
NOX
burners
with
overfire
242.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2.
243.
Data
derived
from
ELI
analysis
of
EPA,
ACID
RAIN
PROGRAM:
1998
EMISSIONS
SCORECARD
(
1999),
available
at
http://
www.
epa.
gov/
airmarkets/
emissions/
score98
(
last
updated
Dec.
11,
2000)
[
hereinafter
EPA
1998
EMISSIONS
SCORECARD].
This
1998
EMISSIONS
SCORECARD
was
used
because
the
1999
EMISSIONS
SCORECARD,
supra
note
1,
was
found
to
contain
errors,
notably
in
recording
that
28
Phase
I
units
had
switched
from
low­
NOX
burners
to
an
uncontrolled
state,
which
upon
investigation
by
ELI
turned
out
to
be
inaccurate.
244.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
C­
2.
The
range
of
emissions
rates
for
the
affected
boilers
also
has
been
reduced,
from
1990
baseline
emissions
ranging
from
0.26
to
1.41
lb/
mmBtu
to
a
range
from
0.13
to
0.81
lb/
mmBtu
in
1999.
245.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
12.
These
2
million
tons
are
a
reduction
in
what
would
have
been
emitted
without
regulation,
as
the
rate­
based
standard
allowed
overall
emissions
to
grow
with
economic
growth
and
increased
utilization.
See
id.
at
2.
246.
EPA,
ACID
RAIN
PROGRAM:
1998
COMPLIANCE
REPORT
13­
15
(
1999),
available
at
http://
www.
epa.
gov/
airmarkets/
cmprpt/
arp98
(
last
updated
Dec.
11,
2000).
Note
the
slight
reduction
in
emissions
observed
from
1998
to
1999
was
caused
in
part
by
the
initiation
of
the
cap­
and­
trade
NOX
budget
program
for
sources
in
northeastern
states.
See
infra
Part
III.
E.
1.
247.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
exh.
9,
at
14.
248.
Id.
exh.
10,
at
15.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
359
air.
249
Many
firms
also
used
the
ability
to
average
emissions
among
their
plants,
creating
twenty­
two
averaging
plans
covering
204
of
the
265
units
in
Phase
I.
250
This
allowed
fifty­
two
uncontrolled
units
to
continue
to
emit
above
the
limit,
and
comply
by
averaging;
of
the
remaining
units,
twenty­
three
already
met
the
Phase
I
limits,
seven
were
not
operating,
and
eight
used
other
compliance
technologies,
principally
independent
overfire
air.
251
Figure
3­
4
shows
the
use
of
compliance
technologies
according
to
the
decade
in
which
the
plant
was
built.

See
Figure
3­
4.
Phase
I
NOX
Control
Technologies
by
Age
of
Plant252
Overall,
flexibility
provisions
in
the
law,
including
the
annual
rate
standard
and
the
ability
to
average
emissions
among
a
firm's
units,
allowed
relatively
economical
compliance.
Only
ten
received
interim
Alternate
Emissions
Limits
from
the
EPA
when
they
could
not
meet
their
rate
limits
even
after
installing
low­
NOX
burners.
253
Overall,
the
EPA
estimated
that
the
cost
of
the
Phase
I
NOX
reduction
program
to
the
electric
power
industry
was
$
267
million
per
year.
254
Analysis
of
the
cost
of
the
burner
retrofits
in
Phase
I
reveal
an
average
per­
ton
reduction
cost
of
$
412,
with
an
average
capital
cost
of
$
19.75/
kW
in
1990
dollars.
255
The
two
types
of
boilers
represented
in
Phase
I,
however,
experienced
markedly
differing
costs.
Wall­
fired
boilers
achieved
reduction
at
$
161/
ton,
whereas
tangentially­
fired
boilers
cost
$
631/
ton.
256
D.
Business
Behavior
and
Title
IV
The
following
Subparts
discuss
business
responses
to
Title
IV's
NOX
program
and
relate
findings
to
Title
IV's
regulatory
structure.
Subsequent
sections
discuss
other
NOX
regulations
affecting
electricity
generators
in
the
1990s.
Finally,
Part
IV
compares
the
results
of
the
regulatory
programs
for
NOX
with
those
for
SO2.

249.
EPA
1998
EMISSIONS
SCORECARD,
supra
note
243.
250.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
exh.
8,
at
13,
app.
C­
1.
251.
See
EPA
1998
EMISSIONS
SCORECARD,
supra
note
243.
252.
Data
derived
from
analysis
of
EPA
report.
Id.
tbl.
B1.
253.
See
id.
254.
EIA,
supra
note
215,
at
4.
255.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program,
61
Fed.
Reg.
67,112,
67142­
43
(
Dec.
19,
1996).
256.
Id.
at
67,141­
42.
Of
the
boilers
assessed,
wall­
fired
boiler
retrofits
averaged
$
161
per
ton
of
NOX
reductions,
with
a
high
of
$
382
and
a
low
of
$
37,
whereas
tangentially­
fired
boilers
achieved
average
costs
of
$
631
with
a
high
of
$
2625
and
a
low
of
$
312.
The
unweighted
average
of
all
boilers
is
$
282,
but
a
weighted
average
is
$
412.
Id.;
see
also
EIA,
supra
note
215,
at
10
(
noting
that
capital
cost
for
twenty­
one
wall­
fired
plants
varied
between
$
9
and
$
44
per
kilowatt).
360
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
1.
Rate
Standards
Led
to
One­
Time
Compliance
Using
the
Expected
Technology
As
can
be
seen
from
Figure
3­
4,
the
principal
effect
of
the
Title
IV
rate
standards
was
the
one­
time
retrofit
of
a
known
compliance
technology.
Although
these
standards
significantly
reduced
NOX
emissions
from
baseline
levels,
thereafter
firms
made
little
effort
or
progress
in
reducing
NOX.
This
reveals
one
of
the
intransigent
problems
with
rate­
based
limits,
as
they
do
not
encourage
continuous
efforts
by
firms
to
reduce
emissions,
or
provide
incentives
to
go
beyond
the
standard.

2.
In
Making
Pollutant
Reductions,
Firms
Sought
First
to
Optimize
Their
Process
Efficiency,
as
Regulations
Were
Sufficiently
Flexible
to
Create
Benefits
Through
Doing
So
The
initial
response
of
plant
operators
subject
to
the
Phase
I
NOX
program
was
to
optimize
boilers
by
addressing
such
parameters
as
air/
fuel
mixtures
and
temperatures
to
assure
the
lowest
possible
NOX
emissions
prior
to
investing
in
additional
control
technology.
257
Optimization
can
increase
efficiency,
and
so
reduce
not
only
NOX
but
all
other
pollutants
emitted
by
the
plant
as
well.
Since
most
units
had
not
been
subject
to
NOX
requirements
before,
258
the
results
of
optimization
were
generally
positive.
Plant
operators
report
that
the
optimization
process
achieved
NOX
reductions
of
several
percent,
although
some
reported
gains
of
10%
to
20%.
259
Vendors
of
the
services
and
software
products
involved
in
optimization
claim
greater
reductions
of
up
to
30%,
especially
in
plants
that
were
previously
poorly
maintained.
260
257.
Note
the
difference
between
optimization,
or
fine­
tuning
boiler
process
to
achieve
maximum
efficiency,
and
compliance
options
that
involve
purely
operational
modifications.
While
the
latter
may
not
involve
any
additional
NOX
controls,
they
represent
compliance
alternatives
that
reduce
NOX
further
but
involve
costs
or
a
loss
of
efficiency.
As
the
OTC
capand
trade
program
shows,
many
firms
discovered
low­
cost
reductions
through
operational
modifications
when
subject
to
a
broad
and
flexible
regulatory
standard
that
made
them
"
look
everywhere"
for
reductions,
but
this
differs
from
optimization.
258.
The
exceptions
were
plants
built
after
1971,
and
thus
already
subject
to
new
source
standards
under
the
Clean
Air
Act.
See
42
U.
S.
C.
§
7411
(
1994);
see
also
supra
Part
III.
A.
259.
See
Interviews
with
utility
representatives;
see
also
ELEC.
POWER
RESEARCH
INST.,
EPRI
PLANT
MAINTENANCE
OPTIMIZATION
SERVICES,
Document
SO­
113427
(
July
1999)
[
hereinafter
EPRI
PLANT
MAINTENANCE];
Elec.
Power
Research
Inst.,
Overhauling
the
Plant
Maintenance
Process,
EPRI
FOSSIL
PLANT
NEWS
(
Winter,
1999).
260.
The
optimization
process
has
been
greatly
assisted
by
the
development
of
new
optimization
software
programs
that
monitor
and
develop
correlations
between
parameters,
allowing
operators
to
better
understand
the
combustion
process
and
adjust
the
parameters
to
yield
optimal
results
(
i.
e.,
low
levels
of
NOX
and
carbon
monoxide,
together
with
best
efficiency).
The
developers
of
one
such
program,
Boiler
Op,
report
NOx
reductions
averaging
between
20%
and
30%
at
a
dozen
units
implementing
their
system,
with
minimum
deterioration
of
heat
rate
and
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
361
The
availability
of
flexibility
mechanisms
in
Title
IV,
such
as
averaging
and
the
Early
Election
Program,
prompted
widespread
use
of
optimization
in
the
Phase
I
NOX
program.
Regulatory
design
strongly
affects
the
use
of
optimization,
as
less
flexible
rate
standards
may
create
few
incentives
for
optimization.
For
example,
a
percentage
rate
reduction
standard,
like
the
1977
SO2
New
Source
Performance
Standard,
creates
no
incentives
for
efficiency
or
optimization
because
it
only
measures
reductions
achieved
within
the
stack.
Concentration
rate
standards
provide
incentives
to
optimize
only
to
those
units
that
previously
exceeded
the
rate
limit
by
a
small
amount.
All
others
must
install
control
technology.
However,
more
flexible
regulatory
systems,
such
as
those
that
allow
averaging
or
trading,
make
optimization
important
for
most
or
all
affected
units,
and
thereby
promote
efficiency
as
well
as
lower­
cost
compliance.

3.
Firms
Heavily
Used
Flexibility
Mechanisms
with
Low
Transaction
Costs,
Such
as
Averaging
Firms
heavily
used
the
two
flexibility
provisions
in
the
law
that
provided
significant
economic
benefits
with
relatively
simple
procedures.
One
was
the
averaging
provision,
which
allowed
firms
to
average
the
emissions
rates
of
various
units
under
their
control.
261
The
second
was
the
Early
Election
Program,
which
allowed
firms
to
include
Phase
II
units
in
Phase
I,
giving
them
a
seven­
year
grace
period
from
more
stringent
Phase
II
limits.
262
Both
had
low
transaction
costs
because
they
could
be
implemented
through
a
simple
designation
by
a
firm.
263
In
contrast
to
these,
the
AEL
exemption
process
was
complex
and
could
be
used
only
if
a
unit
could
not
reach
the
standard
even
after
installing
a
low­
NOX
burner;
it
was
used
for
only
ten
units.
264
other
operating
parameters.
Carlos
Romero
et
al.,
Field
Results
from
Application
of
Boiler
Op
to
Utility
Boilers,
Presentation
at
EPRI­
DOE­
EPA
Mega
Symposium
(
August
1999)
(
notes
on
file
with
author).
Another
program
uses
a
sequential
optimization
process
that
maintains
boiler
performance
while
achieving
reduction
in
NOX.
Using
this
program,
without
any
other
add­
on
reduction
equipment,
reductions
in
NOX
of
between
5%
and
20%
from
historical
levels
were
achieved
at
one
unit.
Another
similar
program,
GNOCIS,
an
EPRI
collaborative
project,
monitored
twenty­
five
to
fifty
parameters
and
achieved
about
a
10%
reduction
in
NOX.
See
EPRI
PLANT
MAINTENANCE,
supra
note
259;
Elec.
Power
Research
Inst.,
supra
note
259.
261.
42
U.
S.
C.
§
7651f(
e)
(
1994).
262.
Clean
Air
Act,
40
C.
F.
R.
§
76.8.
263.
Id.
§
§
76.8,
76.11.
264.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
12.
362
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
a.
Averaging
and
Uncontrolled
Units
The
Clean
Air
Act
allowed
utilities
to
comply
with
applicable
rate
standards
by
averaging
the
heat­
input­
weighted
annual
emissions
rate
of
two
or
more
units
to
meet
the
applicable
rate
standard.
265
This
allowed
large
firms
with
many
units
to
shift
the
burden
of
compliance
between
units,
providing
flexibility
almost
equivalent
to
that
of
trading.
Averaging
was
a
widely
used
compliance
strategy,
and
twenty­
two
firms
included
204,
or
80%,
of
the
265
affected
units
in
averaging
plans
in
a
typical
year.
266
Averaging
plans
allowed
larger
firms
to
avoid
installing
low­
NOX
burner
technology
in
some
units,
and
helped
to
lower
compliance
costs
while
maintaining
the
overall
emissions
reduction
goal.
As
evident
in
Figure
3­
4,
it
also
allowed
a
shift
in
investment
to
newer
facilities,
as
units
built
before
1954
were
more
likely
to
be
uncontrolled
than
controlled.
Interviews
addressed
the
question
whether
the
averaging
provision
may
have
allowed
firms
to
extend
the
life
of
older
facilities,
but
respondents
generally
reported
using
averaging
as
a
flexibility
provision,
to
save
on
costs
they
would
have
otherwise
incurred
in
installing
low­
NOX
burners
in
these
plants.
267
Despite
allowing
greater
flexibility,
most
averaging
plans
surprisingly
resulted
in
a
significant
level
of
over­
compliance,
with
the
average
emissions
rates
10%
or
more
below
the
applicable
limits.
268
The
results
also
show
that
some
firms
were
overly
cautious
in
creating
averaging
plans,
as
nine
plans,
including
thirty­
seven
units,
actually
did
not
need
to
average
at
all
since
all
units
met
the
standard.
269
However,
even
for
these
units,
inclusion
in
an
averaging
plan
may
have
provided
firms
with
greater
operational
security
during
the
year,
providing
compliance
assurance
even
if
one
unit
were
to
fail
to
meet
its
rate
limit.
Averaging
allowed
fifty­
two
units,
typically
older
ones,
to
remain
uncontrolled
despite
exceeding
the
emissions
standard.
270
With
average
emissions
of
0.61
lb/
mmBtu,
still
above
the
statutory
limits,
these
units
265.
42
U.
S.
C.
§
7651f(
e).
266.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
exh.
8,
at
13,
app.
C­
1.
The
list
of
units
included
in
averaging
plans
shows
that
most
(
seventeen
plans
or
77%)
involved
units
in
only
a
single
state.
267.
TVA,
for
example,
averaged
six
units
of
its
Johnston
plant
that
marginally
exceeded
their
limit,
avoiding
a
major
capital
outlay
for
a
small
NOX
reduction.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
C­
1,
C­
4.
268.
Id.
app.
C­
1.
269.
See
EPA
1999
COMPLIANCE
REPORT,
supra
note
1.
270.
Fifty­
two
plants
are
listed
as
uncontrolled
in
EPA
1998
EMISSIONS
SCORECARD,
supra
note
243.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
363
can
remain
uncontrolled
due
to
the
flexibility
afforded
by
averaging.
271
Although
they
remain
uncontrolled,
the
averaging
provisions
still
create
an
incentive
for
reductions,
such
as
through
optimization,
as
any
emissions
reduction
helps
the
overall
average.
Therefore,
these
units
have
reduced
their
emissions
rate
from
0.67
lb/
mmBtu
in
1990,
and
the
rates
of
the
highest
emitters
have
been
reduced
from
1.41
lb/
mmBtu
in
1990
to
0.81
lb/
mmBtu
in
1999.
An
additional
twenty­
three
units,
mostly
substitution
units,
are
relatively
clean
plants
that
are
uncontrolled
because
they
meet
the
required
emissions
limits
anyway,
totaling
seventy­
two
uncontrolled
units
in
all.
Because
of
averaging
incentives,
even
these
plants
reduced
their
emissions,
from
an
average
of
from
0.45
lb/
mmBtu
in
1990
to
0.35
lb/
mmBtu
in
1999.272
b.
Early
Election
Units
Another
widely
used
flexibility
provision
designed
to
promote
early
NOX
reductions
was
the
Early
Election
compliance
option
created
by
the
EPA.
273
Under
this
regulatory
program,
wall­
or
tangentially
fired
boilers
that
would
normally
not
be
regulated
until
Phase
II
could
elect
to
comply
with
Phase
I
emissions
limits
starting
in
1997,
and
would
not
be
required
to
meet
the
more
stringent
Phase
II
limits
until
2008.274
Two
hundred
seventy­
four
units
in
thirty­
six
states
participated
in
the
EPA's
Early
Election
Program
for
NOX,
almost
half
of
the
614
eligible
units.
275
These
participating
units
reduced
their
NOX
emissions
rates
by
20%,
from
an
average
of
0.46
lb/
mmBtu
in
1990
to
0.37
lb/
mmBtu
in
1999.276
The
Early
Election
Program
resulted
in
environmental
results
by
achieving
net
emissions
reductions
of
435,790
tons,
or
the
difference
between
additional
reductions
of
557,491
tons
271.
In
this
paragraph,
emissions
rate
figures
are
derived
from
ELI
analysis
of
unit
emissions
data
of
these
fifty­
two
units
using
EPA
1999
EMISSIONS
SCORECARD,
supra
note
1.
272.
Id.
app.
C­
2.
273.
Clean
Air
Act,
40
C.
F.
R.
§
76.8
(
2000).
274.
There
was
vigorous
debate
between
the
EPA,
environmentalists,
and
industry
as
to
the
appropriate
number
of
years
of
exemption
from
Phase
II
limits.
The
goal
was
to
provide
early
election
units
so
there
would
be
an
incentive
for
firms
to
join,
but
also
guarantee
net
environmental
benefits.
The
final
result
was
a
seven
year
exemption.
See
id.
If
a
utility
failed
to
meet
this
annual
limit
for
a
boiler
during
any
year,
the
unit
was
subject
to
the
more
stringent
Phase
II
limit
for
Group
1
boilers
beginning
in
2000,
or
the
year
following
the
exceedance,
whichever
was
later.
Id.
275.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
16.
276.
Id.
1990
emission
rates
for
these
units
ranged
from
0.17
to
1.15
lb/
mmBtu.
Ten
units
in
the
Early
Election
Program
were
not
operating
in
1990:
Cliffside
1,
2,
3,
and
4;
Riverbend
9
and
10;
W.
H.
Zimmer
1;
Cross
1;
J.
K.
Spruce
1;
and
Glen
Lyn
52.
Reductions
for
these
units
were
calculated
by
ELI
from
their
1995
emissions
rates.
364
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
achieved
in
1997­
1999,277
and
the
expected
higher
emissions
of
121,701
tons
during
the
period
2000­
2007.278
Another
environmental
benefit
was
the
added
value
in
achieving
earlier
reductions,
which
helped
ecosystem
recovery.
Firms
also
benefited
economically
from
the
Early
Election
Program
because
it
allowed
operators
to
use
less
expensive
compliance
methods
at
certain
units
that
could
meet
Phase
I
standards
at
low
cost,
and
to
avoid
more
costly
investments,
such
as
burner
retrofits,
that
would
be
needed
to
meet
the
more
stringent
Phase
II
limits.
Typical
Early
Election
units
had
emissions
rates
slightly
above
the
Phase
I
standard,
and
could
meet
that
standard
through
optimization
or
other
compliance
methods
that
were
low
in
cost,
but
could
only
achieve
limited
reductions.
279
Another
business
benefit
of
the
program
was
that
it
provided
greater
regulatory
certainty
over
a
longer
planning
horizon
for
firms.
Indeed,
many
units
appeared
to
have
been
entered
into
the
early
election
program
as
a
precaution,
as
one­
third,
or
ninety,
of
the
early
election
units
were
already
below
Phase
II
limits
in
1990,
and
two­
thirds,
or
201,
below
them
in
1999.280
277.
The
net
benefits
total
is
given
for
118
units
using
unit
data
presented
in
EPA
COMPLIANCE
REPORTS
from
1997­
1999.
The
calculations
do
not
include
any
reductions
made
by
units
that
were
already
operating
at
or
below
Phase
I
limits
in
1990,
nor
by
the
thirty­
three
units
located
in
OTC
states
that
had
to
comply
with
lower
limits
under
state
law.
Early
election
units
in
OTC
states
were
located
in
Connecticut
(
one),
New
York
(
nine),
Pennsylvania
(
seventeen),
and
northern
Virginia
(
six),
and
were
required
to
meet
OTC
RACT
requirements
at
least
as
stringent
as
those
of
Title
IV
by
1995.
It
was
also
assumed
that
emissions
rates
of
units
emitting
at
or
below
Phase
I
limits
in
1990
reflect
either
unit
design
or
changes
made
to
the
unit
prior
to
the
development
of
the
Early
Election
Program,
and
so
would
not
have
risen
above
Phase
I
limits
during
Phase
I.
278.
Detriments
were
calculated
for
seventy­
two
units
using
unit
data
presented
in
EPA
COMPLIANCE
REPORTS
from
1997­
1999.
The
calculations
exclude
the
OTC
units
and
all
those
whose
average
1997­
1999
emissions
were
at
or
below
Phase
II
levels.
The
added
emissions
from
these
seventy­
two
units
in
2000­
2007
is
the
difference
between
the
actual
emissions
rate
achieved
during
Phase
I
and
the
more
stringent
Phase
II
emissions
rate,
multiplied
by
seven
years.
However,
if
it
is
assumed
that
these
plants
would
have
emitted
at
a
rate
10%
below
Phase
II
levels
as
a
typical
margin
of
safety,
detriments
increase
to
483,783
tons,
creating
net
benefits
of
only
73,708
tons
from
the
program.
279.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1.
Low­
cost
compliance
methods
include
low
excess
air
and
burners
out
of
service,
which
can
achieve
only
10%
to
20%
NOX
reduction
but
cost
very
little.
STAPPA/
ALAPCO
1994,
supra
note
217,
at
16­
17.
Some
operators
interviewed
report
they
had
never
optimized
their
boilers
until
Title
IV
provided
the
incentive
through
the
Early
Election
Program.
280.
Analysis
derived
from
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
C­
2.
The
lateness
of
the
promulgation
of
Phase
II
rules
may
have
been
a
factor
that
led
some
firms
to
designate
units
that
already
met
the
Phase
II
standard.
Although
firms
had
until
January
1,
1997,
to
identify
the
units
they
would
enter
into
the
Early
Election
Program,
most
firms
practically
had
to
do
so
before
the
Phase
II
rules
were
finalized
on
December
19,
1996.
See
Clean
Air
Act,
40
C.
F.
R.
§
76.8
(
2000)
(
Early
election
for
Group
1,
Phase
II
boilers);
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112
(
Dec.
19,
1996).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
365
c.
Alternative
Emissions
Limits
(
AELs)

In
contrast
to
the
simple
procedures
for
averaging
and
early
election
units,
a
third
flexibility
option,
Alternative
Emissions
Limits
(
AELs),
required
high
transaction
costs
and
was
little
used.
In
order
to
qualify
for
an
AEL,
firms
had
to
compile
a
detailed
justification
demonstrating
that
they
attempted
to
install
a
low­
NOX
burner
in
a
unit
and
that
it
still
failed
to
meet
the
emissions
rate
limit.
281
Firms
filed
for
AELs
for
ten
units
in
Phase
I.
These
requests
have
only
been
approved
on
an
interim
status
by
the
EPA,
and
are
still
involved
in
administrative
proceedings
four
years
after
the
start
of
the
program.
282
4.
Businesses
Faced
with
Rate
Standards
Can
Be
Expected
to
Over­
Comply
by
10%

One
of
the
evident
characteristics
of
firm
behavior
was
overcompliance
with
the
NOX
standards.
For
Table
A
units,
average
emissions
were
0.435
lb/
mmBtu
during
the
four
years
of
the
program,
11%
below
the
average
limitation
of
0.49
lb/
mmBtu.
283
Substitution
unit
emissions
were
even
lower,
averaging
0.37
lb/
mmBtu,
partly
because
many
of
the
substitution
units
were
newer
and
were
therefore
already
lower
NOX
emitters.
284
This
over­
control
represents
several
factors.
Most
firm
representatives
indicated
that
10%
over­
compliance
represents
a
reasonable
operating
margin
to
ensure
that
a
particular
limit
is
not
exceeded.
285
Since
exceeding
the
limit
would
bring
about
a
$
2000
per
ton
fine
and
potential
criminal
penalties,
286
firms
tend
to
design
compliance
technology
that
would
slightly
surpass
the
limit
in
case
the
technology
does
not
perform
quite
as
well
as
predicted,
and
operate
the
equipment
to
281.
See
Clean
Air
Act,
40
C.
F.
R.
§
76.10
(
2000).
The
firm
must
show
that
it
installed
a
low­
NOX
burner
or
equivalent
at
the
unit
that
was
designed
to
meet,
but
then
could
not
meet,
the
applicable
emissions
limitation,
and
provide
operating
data
showing
it
was
properly
installed
and
operated
in
accordance
with
the
design
specifications.
282.
See
Interview
with
Brian
McLean,
Director
of
EPA
Clean
Air
Markets
Division,
in
Washington,
D.
C.
(
July
18,
2000).
283.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
14.
Emissions
rates
of
Table
A
units
gradually
moved
lower
during
Phase
I,
from
0.45
lb/
mmBtu
in
1996,
9%
below
the
average
emissions
limit,
to
0.42
lb/
mmBtu
in
1999,
14%
below
the
average
limit.
Id.
284.
Id.
Many
substitution
units
had
already
met
New
Source
Performance
Standards
that
are
only
moderately
higher
than
the
Phase
I
limits.
As
a
group,
the
substitution
units
collectively
emitted
only
0.52
lb/
mmBtu
NOX
in
1990,
well
below
the
0.77
lb/
mmBtu
emitted
by
Table
A
units.
Id.
285.
See
Interviews
with
utility
representatives.
286.
Title
IV
provides
for
an
excess
emissions
penalty
of
$
2000
for
each
ton
emitted
in
excess
of
a
unit's
emissions
limitations
requirement.
42
U.
S.
C.
§
7651j(
a)
(
1994).
The
Act
also
provides
civil
and
potential
criminal
penalties
for
each
violation.
Id.
§
7413.
366
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
slightly
over­
comply
in
case
a
malfunction
reduces
its
efficiency
towards
the
year's
end.
287
However,
over­
compliance
is
also
the
result
of
expected
business
behavior
in
the
face
of
regulatory
uncertainty,
which
was
exacerbated
in
this
case
by
the
delay
in
promulgating
proposed
regulations,
the
subsequent
lawsuit,
and
revisions
to
the
standard.
288
The
effects
of
uncertainty
are
pronounced
in
the
case
of
NOX
combustion
controls,
as
every
low­
NOX
burner
must
be
designed
for
a
specific
boiler,
and
eighteen
to
twenty­
four
months
are
needed
to
design
and
install
the
burners.
289
Therefore,
during
the
early
stages
of
the
planning
process,
when
the
NOX
rules
were
not
final,
some
firms
opted
to
install
overfire
air
technology
(
OFA)
as
called
for
by
the
initial
regulation,
achieving
slightly
higher
levels
of
emissions
reductions.
290
5.
Innovation
under
Title
IV's
Moderate
Rate
Standards
Was
Limited
in
Scope
and
Extent
A
retrospective
view
reveals
that
the
Title
IV
NOX
standards
had
only
limited
effects
in
leading
firms
to
develop
new
solutions.
The
sections
below
describe
technical
innovation
for
the
three
main
boiler
types
and
for
overfire
air.
This
assessment
also
reveals
that
the
Title
IV
rate
standards
led
firms
to
identify
better
or
cheaper
ways
of
compliance
only
at
the
time
the
standard
took
effect,
and
did
not
drive
continuous
improvement.

a.
Wall­
Fired
Boilers
Innovation
significantly
reduced
the
costs
of
compliance
for
wallfired
boilers.
The
initial
assumption
was
that
Title
IV
would
require
firms
to
replace
existing
burners
with
low­
NOX
burners,
which
was
the
basis
of
the
EPA's
cost
estimates
in
its
regulatory
analysis.
291
However,
manufacturers
and
users
of
wall­
fired
boilers
found
that
if
the
burners
were
in
good
condition
and
of
sufficient
capacity,
removing
a
line
of
burners
near
but
not
at
the
top
of
the
boiler
would
distribute
air
in
a
way
287.
See
Interviews
with
utility
representatives.
288.
See
supra
Part
III.
C.
289.
See
Interviews
with
utility
representatives.
290.
There
are
also
business
reasons
to
install
OFA
simultaneously
with
low­
NOX
burners
during
the
same
unit
outage,
to
preclude
having
to
take
the
unit
off­
line
for
another
extended
period
of
time
for
installation
of
the
OFA
system
alone.
Simultaneous
installation
would
yield
revenue
savings
and
could
avoid
system
reliability
problems
for
the
purchaser
of
the
power.
See
Interviews
with
utility
representatives.
291.
See
1992
Acid
Rain
Program:
Nitrogen
Oxides
Emission
Reduction
Program;
Proposed
Rule,
57
Fed.
Reg.
55,632
(
Nov.
25,
1992).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
367
that
replicates
a
new
low­
NOX
burner.
This
innovation
reduced
cost
to
a
small
fraction
of
the
cost
of
installing
a
new
burner,
with
capital
costs
on
the
order
of
only
25%
to
50%
of
the
cost
of
low­
NOX
burners
for
comparable
NOX
control.
292
Some
vendors
report
even
lower
numbers
for
some
units,
with
capital
cost
about
$
1
per
kilowatt,
compared
to
the
$
10
to
$
20
per
kW
cost
of
a
new
low
NOX
burner.
293
b.
Tangentially
Fired
Boilers
Low­
NOX
burner
technology
for
tangentially­
fired
boilers
differs
from
that
for
wall­
fired
boilers,
with
overfire
air
playing
a
more
integrated
role.
294
Retrofit
applications
of
low­
NOX
burners
significantly
reduce
NOX
emissions
from
tangentially­
fired
boilers,
with
reductions
in
emissions
between
10%
and
48%
in
one
study,
and
controlled
levels
ranging
from
0.34
to
0.55
lb/
mmBtu.
295
However,
contrary
to
the
findings
for
wall­
fired
and
cyclone
boilers,
no
significant
innovation
reduced
the
costs
for
low­
NOX
burner
retrofits
for
tangentially­
fired
boilers.
The
cost
of
reductions
averaged
$
631
per
ton,
and
capital
costs
ranged
from
$
6
to
$
42
per
kilowatt.
296
c.
Cyclone
Boilers
Although
cyclone
boilers
were
not
included
in
Phase
I,
the
reasons
for
this
exclusion
and
the
circumstances
of
their
inclusion
in
Phase
II
present
a
good
example
of
business
behavior
and
innovation
when
292.
Research
by
General
Electric
Energy
and
Environmental
Research
Corporation
and
others
have
found
that
rather
than
completely
replacing
a
burner,
it
may
be
possible
to
modify
a
conventional
circular
burner
to
effectively
control
fuel
air
mixing
.
.
.
.
[
S]
ince
the
hardware
changes
are
simple,
the
retrofit
costs
for
Low­
NOX
Burner
Modifications
are
much
lower
than
for
new
Low­
NOX
Burners.
Usually
there
is
no
need
to
change
flame
scanning
and
ignition
equipment,
electric
actuator
drives
or
registers,
and
no
need
to
modify
coal
conduits
or
the
windbox.
As
a
result
the
capital
cost
is
typically
on
the
order
of
only
25%
to
50%
of
the
cost
of
Low­
NOX
Burners
for
comparable
NOX
control.
Todd
Melick
&
Roy
Payne,
Low
NOx
Burner
Modifications
for
Cost
Effective
NOx
Control,
Presentation
at
EPRI­
EPA­
DOE
Combined
Utility
Air
Pollutant
Control
Symposium
(
Aug.
1999)
(
notes
on
file
with
author).
293.
Interviews
with
technology
vendors.
294.
A
commonly
applied
low­
NOX
burner
technology
in
United
States
coal­
fired
boilers,
the
low­
NOX
concentric
firing
system
is
specifically
designed
for
tangentially­
fired
boilers.
These
require
the
replacement
of
all
fuel
and
air
nozzles;
however,
no
major
changes
in
the
structure,
windbox,
or
waterwall
are
needed.
Most
of
these
systems
include
overfire
air.
EIA,
REDUCING
NITROGEN
OXIDE
EMISSIONS:
1996
COMPLIANCE
WITH
TITLE
IV
LIMITS
(
1998),
at
http://
www.
eia.
doe.
gov/
cneaf/
electricity/
nox_
emissions/
(
last
modified
Dec.
14,
2000).
295.
See
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,142
(
Dec.
19,
1996).
296.
Id.;
see
also
EIA,
supra
note
215,
tbl.
3,
at
10.
368
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
confronted
with
rate
standards.
Cyclone
burners
are
quite
different
from
wall­
and
tangentially­
fired
boilers,
firing
chunk
rather
than
pulverized
coal.
Because
no
low­
NOX
burner
technology
was
known
to
be
applicable
to
cyclone
boilers
in
1990,
they
were
exempted
from
regulation
under
Phase
I.
297
The
law
did
provide,
however,
that
if
technology
"
comparable
to
the
costs"
of
low­
NOX
burner
technology
became
available,
the
EPA
could
issue
standards
for
cyclones
and
other
boilers
for
Phase
II
starting
in
the
year
2000.298
The
industry
made
few
efforts
to
identify
NOX
reduction
methods
for
cyclones
until
1995,
when
the
EPA
indicated
it
would
regulate
them
in
Phase
II
because
the
cost
of
downstream
technologies
such
as
reburn
and
SCR
had
become
"
comparable"
to
the
cost
of
low­
NOX
burners.
299
The
EPA
promulgated
regulations
in
1996
permitting
relatively
high
emissions
(
0.86
lb/
mmBtu),
and
exempting
cyclones
less
than
155
MW
altogether,
based
on
the
cost­
effectiveness
of
these
technologies.
300
The
industry
then
formed
the
Cyclone
NOX
Control
Interest
Group
(
CNCIG)
under
the
auspices
of
the
Electric
Power
Research
Institute
(
EPRI)
in
1995
to
commence
research
and
development.
301
This
group
achieved
spectacular
results,
and
by
1997
demonstrated
that
applying
overfire
air
technology
to
cyclones
could
achieve
significant
NOX
reductions,
on
the
order
of
50%,
at
very
low
cost.
302
This
result
was
297.
42
U.
S.
C.
§
7651f
(
1994).
298.
Id.
§
7651f(
b)(
2).
299.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,114
(
Dec.
19,
1996).
"
For
cyclone
fired
boilers,
gas
reburning
and
SCR
are
the
best
continuous
control
systems
that
are
available
and
meet
the
cost
comparability
criteria."
Id.
300.
Id.
at
67,142­
43.
301.
Elec.
Power
Research
Inst.,
First
Demonstration
of
Overfire
Air
on
Cyclone
Steam
Generator
Reduces
Costs
of
NOx
Compliance,
EPRI
INNOVATORS
1
(
Oct.
1998)
(
on
file
with
author)
[
hereinafter
EPRI,
First
Demonstration];
E­
mail
from
David
O'Connor,
Electric
Power
Research
Institute,
to
Byron
Swift,
Environmental
Law
Institute
(
Nov.
29,
1999)
(
on
file
with
author).
302.
The
first
models
were
completed
in
early
1996,
and
the
first
successful
demonstration
of
overfire
air
technology
began
in
1997.
See
E­
mail
from
David
O'Connor,
supra
note
301;
David
O'Connor
et
al.,
The
State
of
the
Art
in
Cyclone
Boiler
NOx
Reduction,
Presentation
at
EPRI­
EPA­
DOE
Combined
Utility
Air
Pollutant
Control
Sympos.
(
Elec.
Power
Research
Inst.)
(
Aug.
1999)
(
notes
on
file
with
author);
EPRI,
First
Demonstration,
supra
note
301.
The
results
have
clearly
demonstrated
the
technical
and
operational
feasibility
of
OFA
as
a
commercially
viable
NOX
control
approach
for
cyclones.
The
application
of
the
technology
on
5
cyclone
furnaces
.
.
.
showed
maximum
NOX
reductions
reaching
50­
to
75%
from
uncontrolled
levels
using
combustion
air
staging
techniques.
Preliminary
observations
and
tests
.
.
.,
showed
no
substantial
impacts
from
slagging,
fouling,
or
corrosion
of
waterwall
tubes
when
fueled
by
western
coal.
Elec.
Power
Research
Inst.,
Report
No.
TR­
113643,
NOx
Control
Field
Test
Results
on
Coal­
Fired
Cyclone
Boilers
 
CNCIG
Programs
(
Sept.
1999)
(
on
file
with
author).
These
articles
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
369
unanticipated,
as
the
attempts
made
in
the
1980s
to
use
overfire
air
were
failures,
and
had
led
to
unacceptable
wall
wastage
or
carbon
loss.
The
R&
D
investment
in
CNCIG
was
relatively
modest,
less
than
$
2
million,
including
full
scale
demonstrations,
and
the
payback
saved
the
industry
a
minimum
of
$
250
million
in
the
cost
of
retrofitting
cyclone
boilers
to
meet
Title
IV
requirements.
303
Once
this
group
achieved
its
objective
in
meeting
the
Title
IV
rate
limits,
however,
the
research
effort
was
scaled
back.
304
Although
this
technology
innovation
is
now
available,
it
is
underused
because
the
regulations
do
not
require
reductions
beyond
the
rate
limit
even
if
they
are
inexpensive,
and
they
also
exempt
cyclone
units
under
155
MW,
which
may
continue
to
emit
NOX
at
uncontrolled
levels
over
1.5
lb/
mmBtu,
higher
than
that
of
any
other
boiler
type.
305
This
example
illustrates
the
problems
with
rate
standards
when
government
regulators
fail
to
accurately
predict
technology
innovation,
as
well
as
the
sporadic
nature
of
technology
research
they
motivate.

d.
Overfire
Air
Overfire
air
technology
can
be
combined
with
low­
NOX
burners
to
divert
about
20%
of
combustion
air
at
the
burner
level
to
air
ports
above
the
burner
zone,
reducing
the
oxygen
availability
at
the
burners.
306
However,
although
overfire
air
decreases
NOX
formation
during
combustion,
it
can
inadvertently
promote
waterwall
wastage
by
creating
reducing
conditions
within
the
burner
zone.
Wastage
has
appeared
mostly
in
high­
temperature
supercritical
boilers,
and
in
some
cases
was
severe
enough
to
instigate
tube
failures
and
forced
outages.
307
These
indicate
that
many
cyclones
could
achieve
the
0.86
lb/
mmBtu
standard
using
overfire
air,
especially
those
firing
PRB
coal,
with
baseline
emissions
of
1.1
to
1.2
lb/
mmBtu.
303.
See
E­
mail
from
David
O'Connor,
Electric
Power
Research
Institute,
to
Byron
Swift,
Environmental
Law
Institute
(
Jan.
15,
2001)
(
on
file
with
author).
304.
Id.
(
noting
that
current
R&
D
projects
for
cyclones
continue
on
two
fronts:
(
1)
further
NOX
reduction,
using
a
technique
called
Rich
Reagent
Injection,
and
(
2)
improving
the
operability
and
results
from
using
overfire
air
with
cyclones,
including
ongoing
corrosion
assessments
and
controls
issues).
305.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,164
(
Dec.
19,
1996).
306.
This
system
results
in
more
complete
burnout
of
the
fuel
and
formation
of
N2
rather
than
NOX.
Many
firms
added
overfire
air
technologies
to
low­
NOX
burners
to
achieve
further
NOX
reductions.
Some
did
this
to
gain
benefits
due
to
averaging
their
units,
and
others
did
it
to
comply
with
the
EPA's
initial
Phase
I
rule,
which
would
have
required
the
use
of
overfire
air
but
was
later
overturned
in
court.
Interviews
with
utility
representatives.
307.
EPRI
reports
that
nearly
a
third
of
those
with
overfire
air
ports
initially
suffered
postretrofit
waterwall
wastage:
Early
retrofits
of
low­
NOX
burners
without
OFA
generally
did
not
increase
waterwall
wastage,
but
when
low­
NOX
burner
systems
with
OFA
ports
were
introduced
to
reduce
370
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
problems
made
many
operators
reluctant
to
use
the
technology
in
their
boilers.
An
EPRI
team
discovered
that
low­
cost
changes
in
burner
settings
and
operating
practices
appeared
able
to
cut
waterwall
wastage
significantly
in
many
boilers
by
reducing
the
area
covered
by
damaging
iron
sulfide
deposits.
308
E.
Other
NOX
Regulation
in
the
1990s
Title
IV
applied
to
both
old
and
new
power
generation
sources,
but
was
significant
principally
in
its
effects
on
older
units,
most
of
which
had
never
been
subject
to
NOX
regulation.
In
order
to
evaluate
firm
behavior
with
regard
to
NOX
regulation,
ELI
reviewed
the
other
major
NOX
regulations
affecting
utility
plants
in
the
1990s.
These
include
the
Ozone
Transportation
Commission
(
OTC)
program
for
summertime
NOX
reductions
in
northeastern
states,
309
and
the
new
source
standards
that
affect
new
plants
or
major
modification
of
existing
plants.
Additional
reductions
of
NOX
emissions
from
power
plants
in
eastern
states
has
been
proposed
by
the
EPA
under
its
NOX
SIP
call
regulation,
but
this
will
not
take
effect
until
2004.310
1.
OTC
Cap­
and­
Trade
in
1999
Forced
Further
Reductions
at
Existing
Plants
In
the
twelve
northeast
and
mid­
Atlantic
states,
311
NOX
emissions
from
large
power
plants
have
been
controlled
not
by
Title
IV,
but
by
NOX
emissions
further,
wastage
began
showing
up
throughout
the
power
industry.
.
.
.
Of
some
150
boilers
retrofitted
with
low­
NOX
burners
featuring
OFA,
as
many
as
40
have
reported
increased
waterwall
wastage,
or
discovered
wastage
where
there
was
none
before.
Elec.
Power
Research
Inst.,
Guidelines
to
Ward
off
Boiler
Waterwall
Wastage,
EPRI
FOSSIL
PLANT
NEWS
(
Winter
1999).
308.
Id.
309.
See
infra
Part
III.
E.
1.
310.
The
EPA
has
relied
on
its
authority
to
address
the
transport
of
ozone
between
states
to
promulgate
a
"
SIP
call"
that
requires
a
group
of
at
least
nineteen
eastern
states
to
reduce
summertime
NOX
emissions
by
2004.
Finding
of
Significant
Contribution
and
Rulemaking
for
Certain
States
in
the
Ozone
Transport
Assessment
Group
Region
for
Purposes
of
Reducing
Regional
Transport
of
Ozone,
63
Fed.
Reg.
57,356,
57,380,
57,401
(
Oct.
27,
1998)
(
covering
twenty­
two
states,
and
achieving
reductions
equivalent
to
a
0.15
lb/
mmBtu
rate
standard
by
2003);
cf.
Michigan
v.
EPA,
213
F.
3d
663
(
D.
C.
Cir.
2000),
cert.
denied,
121
S.
Ct.
1225
(
2001)
(
upholding
lower
court
decision
limiting
application
to
nineteen
states
and
extending
deadline
to
2004).
The
EPA's
rule
encourages
the
states
to
achieve
most
of
these
reductions
in
the
utility
sector,
through
a
regional
emissions
cap
and
allowance
trading
program
that
reduces
these
emissions
from
1.5
to
0.5
million
tons.
63
Fed
Reg.
at
57,434,
tbl.
III­
5.
311.
The
OTC
comprises
the
states
of
Maine,
New
Hampshire,
Vermont,
Massachusetts,
Connecticut,
Rhode
Island,
New
York,
New
Jersey,
Pennsylvania,
Maryland,
Delaware,
the
northern
counties
of
Virginia,
and
the
District
of
Columbia.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
371
more
stringent
state
regulations
to
reduce
summertime
NOX
emissions
coordinated
under
the
OTC.
The
OTC
was
created
under
the
Clean
Air
Act
Amendments
of
1990
to
facilitate
regional
planning
of
states'
efforts
to
attain
the
National
Ambient
Air
Quality
Standard
(
NAAQS)
for
ground
level
ozone.
312
In
September
of
1994,
all
OTC
states
but
Virginia
adopted
a
Memorandum
of
Understanding
to
achieve
regional
reductions
of
NOX
from
power
generators
starting
in
1995.313
In
Phase
I
of
the
OTC
program,
states
required
sources
to
install
Reasonably
Available
Control
Technology
(
RACT),
a
standard
roughly
equivalent
to
the
Title
IV
NOX
standards
but
applying
almost
one
year
earlier.
314
Pennsylvania
required
sources
to
install
low­
NOX
burners
with
separate
overfire
air,
and
other
states
such
as
New
York
and
New
Jersey
defined
rate
standards
that
were
slightly
more
stringent
than
the
Title
IV
standards.
315
Most
states
also
allowed
averaging
among
a
firm's
facilities,
creating
standards
slightly
more
stringent
but
similar
in
nature
to
Title
IV.
316
The
result
was
also
similar,
with
most
firms
adding
combustion
controls
such
as
low­
NOX
burners
and/
or
overfire
air
to
most
units.
For
Phase
II,
starting
in
1999,
nine
OTC
states
established
a
NOX
Budget
Program
creating
an
emissions
cap
and
allowance­
trading
system
similar
to
the
EPA's
SO2
Acid
Rain
Program.
317
The
emissions
cap
312.
See
42
U.
S.
C.
§
7511(
c)
(
1994).
313.
See
Memorandum
of
Understanding
Among
the
States
of
the
Ozone
Transport
Commission
on
Development
of
a
Regional
Strategy
Concerning
the
Control
of
Stationary
Source
Nitrogen
Oxide
Emissions
(
Sept.
27,
1994),
at
http://
www.
sso.
org/
otc/
att2.
htm
[
hereinafter
Memorandum
of
Understanding].
Phase
I
included
the
installation
of
reasonably
available
control
technology
(
RACT).
In
Phase
II,
starting
in
1999,
states
adopted
an
emissions
cap
and
allowance­
trading
program
to
reduce
region­
wide
NOX
emissions.
The
OTC
states
plan
another
cut
in
NOX
emissions
in
2003.
Id.
This
is
consistent
with
the
EPA's
plan,
generally
referred
to
as
the
"
NOX
SIP
call,"
that
affects
a
broader
group
of
at
least
nineteen
states.
See
Finding
of
Significant
Contribution
and
Rulemaking
for
Certain
States
in
the
Ozone
Transport
Assessment
Group
Region
for
Purposes
of
Reducing
Regional
Transport
of
Ozone,
63
Fed.
Reg.
57,356
(
Oct.
27,
1998).
314.
See
Memorandum
of
Understanding,
supra
note
313.
315.
Pennsylvania
law
defines
RACT
for
large
coal­
fired
units
as
"
the
installation
of
low
NOX
burners
with
separate
overfire
air."
25
PA.
CODE
§
129.93(
b)(
1)
(
2001).
New
Jersey
requires
utility
boilers
to
meet
the
following
standards:
Tangentially­
fired
burners:
0.38
lb/
mmBtu;
wall­
fired:
0.45
lb/
mmBtu;
and
cyclone
0.55
lb/
mmBtu.
N.
J.
ADMIN.
CODE
tit.
7,
§
27­
19.4
(
2000).
New
York
State
RACT
regulations
set
standards
for
dry­
bottom
coal­
fired
tangential
plants
at
0.42
lbs./
mmBtu,
wet­
bottom
coal­
fired
tangential
plants
at
1.0
lbs./
mmBtu,
wall­
fired
dry
bottom
plants
at
0.45
lbs./
mmBtu,
and
for
wall­
fired
wet
bottom
plants
at
1.0
lbs./
mmBtu.
N.
Y.
COMP
CODES
R.
&
REGS.,
tit.
6
§
227­
2.4
(
1997).
316.
See
supra
note
315.
317.
See
Memorandum
of
Understanding,
supra
note
313.
The
OTC
NOX
Budget
Program
was
developed
in
collaboration
with
the
EPA,
industry,
utilities,
and
environmental
groups.
Under
the
OTC
program,
budget
sources
were
allocated
allowances
by
their
state
government.
Each
allowance
permits
a
source
to
emit
one
ton
of
NOX
during
the
summer
period
372
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
required
912
electricity­
generating
units
to
reduce
NOX
emissions
by
55%
to
65%
from
their
1990
baseline
of
417,444
tons.
318
Despite
the
stringency
of
the
standard,
sources
over­
complied,
reducing
emissions
20%
below
the
cap
level
in
1999.319
Compliance
levels
were
also
very
high,
with
only
one
source
failing
to
meet
its
standard
by
one
ton,
therefore
subjecting
it
to
an
automatic
penalty.
320
Despite
initial
expectations
that
many
sources
would
need
to
use
expensive
end­
of­
pipe
controls
such
as
Selective
Catalytic
Reduction
(
SCR)
to
achieve
these
deep
reductions,
the
flexibility
afforded
by
the
cap­
and­
trade
approach
led
to
unexpected
results.
One
was
that
126
of
the
142
affected
coal­
fired
units
achieved
up
to
30%
NOX
reductions
through
operational
changes
alone,
without
significant
capital
additions.
321
The
cap
approach
allowed
compliance
through
a
number
of
technologies,
described
in
Figure
3­
5,
and
not
only
SCR.
As
a
consequence,
allowance
costs,
after
initial
volatility
at
the
program's
start
in
which
prices
ranged
from
$
3000
to
$
7000
per
ton,
have
settled
down
to
$
500
to
$
1000,
significantly
lower
than
originally
estimated.
322
(
May
through
September).
Allowances
may
be
bought,
sold,
or
banked.
However,
regardless
of
the
number
of
allowances
a
source
holds,
it
cannot
emit
at
levels
that
would
violate
other
federal
or
state
limits
(
e.
g.,
federal
NSPS,
Title
IV,
or
state
NOX
RACT
rules).
See
EPA
1999
OTC
NOX
COMPLIANCE
REPORT,
supra
note
204.
318.
State
Allocations
And
Emissions
in
1999
under
the
OTC
NOX
Budget
Program
(
in
tons)
were:
State
1990
Baseline
Emissions
1999
Allocation*
1999
Emissions
Connecticut
11,130
6,312
5,830
Delaware
13,510
6,142
6,160
Massachusetts
41,330
19,680
17,293
New
Hampshire
14,589
6,788
3,463
New
Jersey
46,963
21,292
15,390
New
York
85,642
54,276
47,267
Pennsylvania
203,181
103,668
79,166
Rhode
Island
1,099
580
274
Total
417,444
218,738
174,843
*
Includes
early
reduction
credit
allowances
of
24,635.
See
EPA
1999
OTC
NOX
COMPLIANCE
REPORT,
supra
note
204,
exh.
1,
at
2,
available
at
http://
www.
epa.
gov/
airmarkets/
cmprpt/
otc99/
index.
html
(
last
updated
Dec.
11,
2000).
319.
Id.
at
1.
320.
Id.
at
2.
321.
Joel
Bluestein,
Energy
and
Environmental
Analysis,
Inc.,
OTR
NOX
Market:
Lessons
Learned
(
1999)
(
unpublished
report
presented
at
missions
Marketing
Associates
in
Oct.
1999)
(
cited
in
Byron
Swift,
Command
Without
Control:
Why
Cap­
and­
Trade
Should
Replace
Rate
Standards
for
Regional
Pollutants,
31
ENVTL.
L.
REP.
10,330
(
Mar.
2001));
GAS
RESEARCH
INSTITUTE,
LOW
COST
OPTIONS
FOR
ACHIEVING
DEEP
NO
X
REDUCTIONS,
at
http://
www.
gri.
org
(
Apr.
2000).
322.
The
EPA
estimated
the
average
cost
of
reductions
in
the
electric
power
sector
to
be
$
1468
per
ton
of
NOX.
EPA
1998
RIA,
supra
note
14,
at
ES­
2.
Compliance
cost
is
reflected
in
the
price
of
an
allowance,
and
during
the
year
2000,
allowance
prices
for
1999
or
2000
tons
for
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
373
Figure
3­
5:
Technology
Options
Available
to
Existing
Coal­
Fired
Plants
to
Meet
Stringent
NOx
Standards323
Combustion
controls
are
boiler
modifications
that
minimize
the
formation
of
NOx
in
the
boiler.
In
addition
to
the
direct
burner
modifications
required
for
Title
IV,
advanced
combustion
controls
can
include
overfire
air
and
computer
controls
that
enhance
mixing
of
coal
and
air
in
the
boiler.

Gas
Reburn
technologies
reduce
NOx
by
injecting
natural
gas
above
the
coal
combustion
zone.
Gas
reburn
may
achieve
up
to
55%
NOx
reduction
using
15%
gas
injection,
with
capital
costs
of
$
12
to
$
25
per
kW
and
additional
operating
costs
for
the
relatively
more
expensive
natural
gas
fuel.
Enhanced
forms
of
gas
reburn
can
use
reagents
such
as
amine
injection
to
increase
NOX
reductions
to
60%,
although
these
are
slightly
more
expensive.

Selective
Non­
Catalytic
Reduction
(
SNCR)
injects
a
urea­
based
reagent
in
the
upper
furnace
to
reduce
NOX.
SNCR
achieves
about
a
35%
NOX
reduction
at
a
capital
cost
of
$
5
to
$
20
per
kW.
Combining
re­
burn
with
SNCR
can
get
over
70%
reductions.

Selective
Catalytic
Reduction
(
SCR)
injects
ammonia
into
the
boiler,
which
catalytically
reduces
the
NOX.
SCR
has
the
greatest
NOX
reducing
potential,
achieving
70%
to
90%
reductions,
but
is
also
the
most
expensive,
with
capital
costs
of
$
50­
100
per
kW.
In
addition,
SCR
has
substantial
operating
costs,
uses
toxic
catalysts
that
must
be
replaced,
releases
ammonia
and
entails
a
0.5%
efficiency
loss.

It
is
interesting
to
view
firms'
response
to
the
OTC
cap,
since
the
affected
units
were
previously
subject
to
rate
standards
set
at
levels
similar
to
Title
IV
standards.
Figure
3­
6,
developed
by
the
Gas
Research
Institute,
shows
emissions
levels
for
coal­
fired
units
subject
to
the
OTC
cap
in
1999.

See
Figure
3­
6:
1999
Ozone
Season
NOX
Emission
Rates
for
OTR
Coal
Boilers
Without
Post­
Combustion
Controls324
These
results
show
how
different
units
emit
at
different
levels
under
a
cap­
and­
trade
system
that
creates
a
uniform
cost
per
ton
for
emissions
reductions.
This
is
due
to
the
"
step­
wise"
nature
of
technology
choice.
In
other
words,
at
a
given
moment
in
time
some
firms
may
find
it
inexpensive
to
achieve,
for
example,
a
56%
reduction,
but
very
expensive
to
reach
57%
because
that
would
require
major
new
the
Ozone
Transport
Region
were
in
the
$
500
to
$
1,000
range.
See,
e.
g.,
Cantor
Fitzgerald
Environmental
Brokerage
Services
Website,
at
www.
cantor.
com/
ebs
(
last
modified
Apr.
5,
2001).
323.
STATE
AND
TERRITORIAL
AIR
POLLUTION
PROGRAM
ADMINISTRATORS
&
ASSOCIATION
OF
LOCAL
AIR
POLLUTION
OFFICIALS
(
STAPPA/
ALAPCO),
CONTROLLING
NITROGEN
OXIDES
UNDER
THE
CLEAN
AIR
ACT:
A
MENU
OF
OPTIONS
18
(
July,
1994);
GAS
RESEARCH
INSTITUTE,
supra
note
321.
324.
GAS
RESEARCH
INSTITUTE,
supra
note
321,
at
Fig.
1.
374
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
equipment.
Another
firm
may
face
this
"
cost
knee"
at
a
higher
or
lower
level.
So
at
an
equal
cost,
firms
will
want
to
operate
units
to
emit
at
slightly
different
levels.
However,
over
time,
firms
may
find
ways
to
incrementally
improve
processes
or
operations
to
achieve
greater
reductions,
typically
at
low
cost.
325
Systems
like
a
cap­
and­
trade
approach
encourage
such
differential
behavior
and
the
seeking
of
continuous
reductions.
A
rate
standard
sets
one
limit
that
must
be
achieved
at
a
certain
date,
and
so
eliminates
both
these
possibilities,
restricting
firm
behavior,
raising
costs,
and
eliminating
incentives
for
continued
incremental
improvements.

2.
New
Source
Standards
In
contrast
to
existing
plants,
new
plants
or
significant
modifications
of
existing
plants
have
been
subject
to
NOX
standards
since
the
initiation
of
the
Clean
Air
Act
in
1971.326
Today,
new
sources
are
subject
to
a
stringent
federal
New
Source
Review
process,
which
requires
at
a
minimum
compliance
with
NSPS.
327
Traditional
NSPSs
establish
emissions
rate
standards
for
each
power­
generation
technology;
e.
g.,
coal­
fired
boilers
are
allowed
to
emit
twice
the
NOX
as
oil­
fired
boilers,
and
three
times
that
of
gas­
fired.
328
In
1998,
the
EPA
established
a
new,
fuel­
neutral
NSPS
of
0.15
lb/
mmBtu
for
major
modifications
of
existing
sources,
and
1.6
lb/
MWh
of
electricity
generated
for
new
sources,
the
latter
an
innovative
outputbased
standard
that
provides
a
benefit
to
efficient
producers.
329
However,
this
fuel­
neutral
NSPS
rarely
applies,
as
the
standards
created
under
the
New
Source
Review
process
are
more
stringent
and
therefore
control.
330
New
Source
Review
establishes
an
emissions
rate
standard
set
by
regulators
on
a
case­
by­
case
basis
based
on
the
specific
plant
and
powergeneration
technology,
such
that
more
lenient
standards
are
applied
to
325.
See
Nicholas
Ashford,
An
Innovation
Based
Strategy
for
the
Environment,
in
WORST
THINGS
FIRST?
THE
DEBATE
OVER
RISK­
BASED
NATIONAL
ENVIRONMENTAL
PRIORITIES
(
A.
M.
Finkle
&
D.
Golding
eds.,
1994).
326.
42
U.
S.
C.
§
7411
(
1994).
327.
Id.
328.
The
initial
NSPS
for
power
plant
boilers
built
prior
to
1998
established
NOX
emissions
limits
of
0.50­
0.80
lb/
mmBtu
for
coal­
fired
boilers,
0.30
lb/
mmBtu
for
oil­
fired
boilers,
and
0.20
lb/
mmBtu
for
gas­
fired
boilers.
Clean
Air
Act,
40
C.
F.
R.
§
60.44a
(
2000).
329.
Id.
§
60.44a(
d);
see
also
Revision
of
Standards
of
Performance
for
Nitrogen
Oxide
Emissions
from
New
Fossil­
Fuel
Fired
Steam
Generating
Units,
63
Fed.
Reg.
49,442,
49,448­
49
(
Sept.
16,
1998).
330.
The
New
Source
Review
standards,
BACT
and
LAER,
establish
more
stringent
requirements
that
specify
NSPS
only
as
a
floor.
See,
e.
g.,
42
U.
S.
C.
§
§
7479(
3)
(
describing
the
standard
for
Best
Available
Control
Technology),
7501(
3)
(
describing
the
standard
for
Lowest
Achievable
Emissions
Rate).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
375
dirtier
technologies.
331
Sources
built
after
August
7,
1977,
in
areas
that
have
attained
the
federal
ambient
ozone
standard
set
by
the
EPA
must
prevent
significant
deterioration
of
air
quality,
and
install
the
Best
Available
Control
Technology
(
BACT)
for
the
type
of
plant
proposed
considering
"
energy,
environmental,
and
economic
impacts
and
other
costs."
332
New
plants
in
nonattainment
areas
must
meet
the
even
more
stringent
Lowest
Achievable
Emissions
Rate
(
LAER)
standard,
which
excludes
considerations
of
cost.
333
These
strict
standards
are
meant
to
achieve
ambient
standards,
prevent
airshed
deterioration,
and
be
used
as
mechanisms
to
spur
the
development
and
application
of
new
technologies.

3.
Technology­
Based
Rate
Standards
for
NOX
in
the
1990s
Created
an
Uneven
Regulatory
Framework
and
Varied
Economic
Signals
for
Most
Business
Units
As
shown
in
Figure
3­
7,
power
plant
NOX
regulation
in
the
1990s
created
a
highly
uneven
regulatory
framework
that
sent
different
economic
signals
to
the
owners
of
different
technologies.
Because
rate
standards
were
set
at
differing
levels
for
the
different
base
technologies,
they
created
a
progression
in
which
the
dirtier
a
power­
generating
technology
was
in
terms
of
NOX
emissions,
the
more
lenient
the
rate
standard.
This
created
highly
differential
costs
for
NOX
reductions
for
different
technologies,
in
the
hundreds
of
dollars
per
ton
of
reductions
for
higher­
emitting
coal­
fired
units,
and
up
to
$
10,000
per
ton
for
clean
gas
turbines.

Figure
3­
7:
Differential
Standards
for
NOX
Emissions
and
Costs
from
Generating
Technologies
(
1996­
1999)
334
Old
Sources
(
Title
IV/
RACT)
New
Sources
(
BACT/
LAER)

Cyclone
coal
Wallfired
coal
T­
fired
coal
New
coal
New
gas
large
New
gas
small
331.
42
U.
S.
C.
§
7479.
332.
Id.
§
§
7475(
a)(
4),
7479(
3).
333.
Id.
§
7503(
a)(
2).
334.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,113
(
Dec.
19,
1996);
STAPPA/
ALAPCO
1994,
supra
note
217,
at
24­
29;
Marvin
Schorr
&
Joel
Chalfin,
Gas
Turbine
NOX
Emissions
Approaching
Zero
 
Is
It
Worth
the
Price?,
Presentation
at
Air
&
Waste
Mgmt.
Ass'n
92d
Annual
Meeting,
St.
Louis,
MO
(
June
20,
1999)
(
notes
on
file
with
author);
Leslie
Witherspoon
&
Ken
Smith,
NOX
Control
Technology
Options
and
Development
Activity
for
Mid­
Range
Natural
Gas
Fired
Turbines
(
1999),
Unpublished
Presentation
(
notes
on
file
with
author).
376
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Uncontrolled
NOx
(
lb/
mmBtu)
1.50
0.95
0.65
0.50
0.05
0.10
Legal
standard
(
lb/
mmBtu)
none
0.50
0.45
0.15
0.02+
0.02+

Cost
per
ton
of
NOx
reduction
none
$
161
$
631
$
565
(
SCR)
$
2,500
$
10,000+

The
disparities
in
the
regulation
of
NOX
emissions
from
different
technologies,
as
well
as
between
old
and
new
plants,
created
strong
economic
incentives
for
the
use
of
dirtier
technologies
and
against
the
installation
of
new
plants.
They
also
imposed
high
costs
on
new
technologies,
despite
creating
few,
if
any,
net
ambient
environmental
benefits.
These
standards
create
a
situation
in
which
regulation
of
NOX
may
frustrate
the
economic
drivers
leading
firms
to
use
cleaner
energy
sources,
and
fail
to
capture
multi­
pollutant
reductions
created
by
switching
to
such
sources.
335
IV.
GENERAL
FINDINGS
The
design
of
Title
IV
and
other
regulatory
programs
to
reduce
NOX
and
SO2
emissions
in
the
electricity­
generating
sector
led
to
dramatically
different
industry
responses.
ELI's
review
of
business
responses
to
these
programs
provides
a
foundation
for
looking
at
how
regulatory
design
affects
environmental
results,
compliance
decisions,
and
innovation.
Key
distinctions
between
the
programs
examined
include
the
difference
in
the
standards
(
an
equal
effort
approach
using
rates
versus
an
equal
cost
per
ton
approach
using
cap­
and­
trade);
the
degree
of
flexibility
allowed
in
compliance
technology;
the
degree
of
governmental
involvement
in
firm
decision­
making
about
compliance;
and
whether
the
systems
created
continuous
or
one­
time
incentives
for
firms
to
reduce
their
pollution
levels.
The
mass­
based
standards
such
as
cap­
and­
trade
systems
worked
better
than
rate
systems
in
these
regards,
as
they
imposed
stringent
environmental
standards
while
allowing
greater
integration
of
environmental
parameters
into
business
decision­
making.

335.
See
generally
Tina
Kaarsburg
&
Julie
F.
Gorte,
Promoting
Productivity
and
Clean
Air
with
Innovative
Electric
Technologies,
NORTHEAST
MIDWEST
ECON.
REV
(
Nov./
Dec.
1999).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
377
A.
Environmental
Standards
Have
Been
Essential
to
Drive
Businesses
to
Reduce
NOX
and
SO2
Emissions
Although
economic
forces
may
also
lead
firms
to
cleaner
production,
regulatory
standards
have
clearly
been
necessary
in
order
to
ensure
that
firms
reduced
NOX
and
SO2
emissions.
Title
IV
led
firms
to
make
major
additional
SO2
reductions
by
building
scrubbers
and
increasing
their
use
of
lower­
sulfur
coals.
336
Regulation
was
even
more
important
in
making
firms
reduce
NOX
emissions,
as
NOX
controls
for
coal­
fired
boilers
generally
involve
a
loss
of
efficiency
or
additional
costs.
Therefore,
virtually
no
firms
reduced
NOX
emissions
at
existing
boilers
before
the
advent
of
regulatory
standards,
and
exempted
units
continue
to
emit
NOX
at
uncontrolled
levels.
337
This
indicates
the
importance
of
setting
standards
to
regulate
firm
behavior.
The
record
also
shows
that
economic
forces
have
also
played
an
important
independent
role
in
leading
firms
to
lower
emissions
of
both
SO2
and
NOX.
Prior
to
the
advent
of
Title
IV's
SO2
standard,
firms
near
the
Powder
River
Basin
began
to
switch
to
cheaper
lower­
sulfur
coals
for
economic
reasons.
338
An
analysis
by
MIT
shows
that
a
portion
of
SO2
reductions
in
Phase
I
can
be
attributed
to
this
economic
trend.
339
Regarding
NOX,
economic
forces
have
cut
both
ways.
Although
there
are
few
economic
incentives
for
owners
of
existing
coal
boilers
to
reduce
NOX
emissions,
the
situation
for
new
plants
is
completely
different.
New
combined
cycle
gas
turbines,
which
emit
no
SO2
and
about
a
tenth
of
the
NOX
of
older
plants,
are
more
efficient
and
cheaper
than
new
coal
plants,
and
are
forecast
to
capture
over
90%
of
the
market
for
new
plants.
340
Because
economic
forces
also
can
lead
to
major
pollutant
reductions,
in
some
cases
to
a
greater
extent
than
regulatory
mandates,
good
environmental
regulation
should
enhance
rather
than
interfere
with
such
positive
economic
drivers.

336.
See
supra
Part
II.
D.
5.
337.
See
supra
Part
III.
D.
338.
ELLERMAN
ET
AL.,
supra
note
10,
at
228­
29.
339.
Id.
(
noting
that
no­
cost
reductions
made
by
businesses
switching
to
lower­
sulfur
coal
that
was
also
cheaper
than
what
they
formerly
used
amounted
to
approximately
425,000
tons
of
SO2
reductions
per
year,
out
of
a
total
annual
reduction
of
3,888,000
tons).
340.
DOE
ANNUAL
ENERGY
OUTLOOK
2001,
supra
note
1,
at
75,
78
(
noting
that
advanced
natural
gas
combined
cycle
technology
generates
electricity
at
lower
cost
than
advanced
coal).
Dramatic
technology
innovation
in
developing
the
dry
low­
NOX
turbine
has
meant
that
new
gas
plants
both
cost
less
and
are
far
cleaner
than
coal
boilers
or
older
gas
technologies,
emitting
NOX
at
or
below
0.05
lb/
mmBtu
(
uncontrolled
coal
boilers
emit
at
0.65
to
1.50
lb/
mmBtu);
see
also
Schorr
&
Chalfin,
supra
note
334;
STAPPA/
ALAPCO
1994,
supra
note
217,
at
22.
378
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
B.
It
Has
Proven
Difficult
to
Set
Standards
That
Properly
Align
Private
with
Social
Costs,
and
Both
NOX
and
SO2
Standards
Were
in
Retrospect
Too
Lenient
While
standards
appear
necessary,
it
has
proven
difficult
to
set
standards
that
properly
align
firms'
private
costs
with
social
benefits.
341
Ideally,
environmental
standards
should
create
an
economic
context
that
makes
private
sources
perceive
costs
that
reflect
a
broader
social
context
of
costs
and
benefits.
In
retrospect,
Congress
in
1990
both
overestimated
the
costs
of
compliance
with
Title
IV,
342
and
underestimated
the
harm
stemming
from
NOX
and
SO2
emissions.
343
For
both
the
NOX
and
SO2
programs,
the
cost
of
control
has
remained
well
below
current
estimates
of
the
social
benefits
of
additional
reductions.
For
NOX,
the
cost
of
retrofitting
boilers
with
low­
NOX
burners
in
Phase
I
averaged
$
412
per
ton,
and
the
results
of
the
OTC
NOX
cap
show
that
significant
added
reductions
could
be
made
at
a
cost
of
around
$
500
to
$
1000
per
ton.
344
In
comparison,
the
benefit
of
added
NOX
reductions
in
eastern
states
is
estimated
by
the
EPA
to
be
between
341.
Sources
would
then
clean
up
pollution
to
the
point
at
which
the
marginal
cost
of
removing
a
ton
of
pollution
equals
the
social
benefit
from
having
that
ton
removed.
In
this
situation,
the
economic
costs
perceived
by
private
firms
reflect
the
overall
social
and
economic
value
of
pollution
reduction,
creating
efficiency
in
attaining
social
welfare.
342.
Although
the
political
process
grappled
with
the
cost
of
the
programs
in
both
cases,
actual
costs
of
compliance
turned
out
to
be
far
lower
than
predicted.
For
the
SO2
program,
information
at
the
time
of
the
Act's
passage
in
1990
indicated
that
costs
would
be
$
300
to
$
1000
per
ton,
far
higher
than
the
observed
cost
of
allowances
at
around
$
150.
Also,
the
Direct
Sales
Reserve
provision
of
Title
IV
that
authorizes
sales
of
allowances
at
$
1500
is
another
indication
of
the
perceived
value
of
additional
reductions,
and
again
far
higher
than
the
actual
costs.
See
42
U.
S.
C.
§
7651o
(
1994).
Had
an
accurate
understanding
of
the
costs
been
available,
it
is
quite
likely
that
Congress
would
have
set
the
SO2
cap
lower,
suggesting
that
the
current
cap
is
set
too
high
to
align
private
costs
with
social
benefits.
343.
Seven
northeastern
states
have
petitioned
the
EPA
to
strengthen
the
secondary
NAAQS
for
NOX,
SO2
and
PM
2.5.
The
petitioners
"
suggest
that
the
acid
rain
provisions
in
title
IV
of
the
CAA
do
not
go
far
enough
to
ensure
full
recovery
of
sensitive
ecosystems."
Petition
for
Secondary
National
Ambient
Air
Quality
Standards
for
Nitrogen
Dioxide,
Sulfur
Dioxide,
and
Fine
Particle
Matter
and
Related
Request,
65
Fed.
Reg.
48,699,
48,700
(
Aug.
9,
2000)
[
hereinafter
Northeastern
States
Petition].
The
petition
cites
in
support
of
its
assertions
the
NATIONAL
ACID
PRECIPITATION
ASSESSMENT
PROGRAM,
BIENNIAL
REPORT
TO
CONGRESS
(
May
1998),
available
at
http://
www.
nnic.
noaa.
gov/
CENR/
NAPAP/
NAPAP­
96.
htm;
and
EPA,
PUB.
NO.
EPA­
452/
R­
97­
002,
NITROGEN
OXIDES:
IMPACTS
ON
PUBLIC
HEALTH
AND
THE
ENVIRONMENT
(
Aug.
1997),
available
at
http://
www.
epa.
gov/
ttncaaa1/
t1/
reports/
noxtech.
pdf;
which
"
document
increasing
damage
caused
by
acid
deposition
to
the
lakes
and
forests
in
the
Northeastern
States
and
other
environmental
effects.
.
.
."
Petition
for
Secondary
National
Ambient
Air
Quality
Standards
for
Nitrogen
Dioxide,
Sulfur
Dioxide,
and
Fine
Particle
Matter
and
Related
Request,
65
Fed.
Reg.
at
48,701.
344.
See
supra
notes
256,
322.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
379
$
1262
and
$
4786
per
ton.
345
Similarly,
the
cost
of
SO2
allowances
in
Phase
I
averaged
$
150,
far
below
current
estimates
of
the
social
benefits
of
added
SO2
reductions,
which
exceed
$
5000
per
ton.
346
Therefore,
for
both
pollutants,
additional
reductions
would
be
fairly
inexpensive
and
very
beneficial,
but
are
not
forced
by
the
standards­
based
approach.
This
shows
the
indispensable
nature
of
establishing
the
overall
standard
at
the
correct
level
of
stringency,
whether
it
is
expressed
as
a
cap
or
a
rate.
Technology­
based
rate
standards,
and
the
new
source/
old
source
distinction
in
the
Clean
Air
Act,
both
cause
an
added
disadvantage
in
aligning
private
with
social
values
because
they
impose
highly
differential
costs
on
different
technologies.
347
This
creates
a
heterogeneous
set
of
cost
signals
based
on
technologies
which
are
not
aligned
with
one
another.
Under
NOX
rate
regulation,
some
of
the
dirtiest
technologies
faced
lenient
or
no
standards
even
though
some
could
reduce
emissions
cheaply
at
prices
under
$
100
per
ton,
whereas
the
cleanest
technologies
faced
the
most
stringent
standards
and
were
forced
to
pay
thousands
of
dollars
per
ton.
Clearly,
the
economic
drivers
faced
by
these
firms
result
in
little
consistency
or
rationality
when
compared
to
each
other,
or
to
a
social
optimum.
The
cap­
and­
trade
programs
performed
better
in
equating
private
and
social
costs
because
they
created
a
uniform
cost
faced
by
all
firms,
eliminating
the
inefficiency
caused
by
multiple
rate
standards
that
create
different
economic
signals
for
different
technologies.
The
cap­
and­
trade
standard
is
also
better
in
its
environmental
result
over
time,
since
it
permanently
caps
emissions,
whereas
rate
standards
can
be
expected
to
allow
emissions
to
grow
over
time
along
with
economic
growth.
Therefore,
while
SO2
emissions
were
capped
during
Phase
I
despite
increased
power
generation,
NOX
emissions
grew
slightly.
The
cap­
and­
trade
system
is
also
more
dynamic
at
the
firm
345.
EPA
1998
RIA,
supra
note
14,
at
ES­
6
(
noting
that
total
benefits
are
between
$
964
and
$
3654
per
ton
of
NOX
reductions
in
1990,
or
between
$
1262
and
$
4786
in
1999
dollars).
In
comparison,
costs
were
estimated
to
be
$
1468
per
ton
in
1990.
Id.
at
ES­
3.
346.
See
Figure
2­
1.
The
reduction
in
sulfate
particulate
emissions
alone
is
estimated
by
Resources
for
the
Future
to
be
approximately
$
5335
per
ton
of
SO2
reductions.
ELI
CLEANER
POWER,
supra
note
14,
at
14
(
estimating
$
24.5
billion
in
benefits
from
a
4,592,000
ton
reduction
in
SO2
emissions);
see
also
CLEAN
AIR
TASK
FORCE,
supra
note
14,
at
4­
5
(
noting
that
a
75%
reduction
in
SO2
leads
to
benefits
of
over
$
100
billion
from
particulate
reductions,
or
over
$
10,000
per
ton
of
reductions).
347.
Although
the
EPA
set
these
standards
based
on
its
best
estimates
of
technology
availability
and
cost,
in
retrospect
these
forecasts
were
not
accurate
for
most
technologies,
and
in
particular
failed
to
include
unexpected
innovation.
This
is
particularly
evident
for
wall­
fired
boilers
and
for
cyclone
boilers
(
where
no
reductions
were
required
because
of
the
perceived
high
costs).
In
both
cases,
it
turned
out
that
innovations
could
have
provided
inexpensive
reductions
to
and
below
the
standards.
On
the
other
hand,
reductions
at
tangentially­
fired
boilers
cost
more
than
predicted.
See
supra
Part
III.
D.
5.
b.
380
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
level,
as
firms
have
continuing
incentives
to
reduce
pollution
to
meet
their
quota
or
create
additional
allowances;
in
contrast,
rate
standards
simply
require
a
firm
to
install
technology
once
and
then
maintain
it.
However,
the
cap
is
set
at
a
fixed
amount
for
the
industry
as
a
whole,
limiting
its
dynamic
aspect
over
time.
348
Understanding
how
different
regulatory
systems
will
interact
with
firm
behavior
over
time
is
an
important
element
of
understanding
regulatory
design.

C.
Standards
Based
on
Rates
or
an
Old
Source/
New
Source
Distinction
May
Create
Conflict
Rather
Than
Alignment
Between
Regulatory
and
Economic
Drivers
for
Environmental
Quality
A
central
finding
of
this
study
is
that
traditional
environmental
regulations
fail
to
align
the
regulatory
and
economic
drivers
that
lead
firms
to
improve
their
environmental
performance.
The
lack
of
alignment
appears
to
be
unintentional,
and
stems
both
from
the
new
source/
old
source
distinction
in
our
law,
and
from
the
inflexibility
inherent
in
rate­
based
regulatory
methods.
Examples
of
the
lack
of
integration
created
under
traditional
regulations
follow:
Example
1:
A
firm
is
choosing
between
continuing
to
operate
an
existing
coal­
fired
plant,
or
replacing
it
with
a
new
gas­
fired
combined
cycle
plant
with
no
SO2
emissions
and
90%
to
95%
lower
NOX
emissions.
Environmental
regulations
place
few
costs
or
burdens
on
the
firm
if
it
chooses
to
continue
operating
the
older
and
dirtier
facility,
but
require
the
firm
to
undergo
a
lengthy
New
Source
Review
process
and
may
require
it
to
install
expensive
controls
if
it
chooses
to
build
the
new
and
cleaner
facility.
The
distinction
between
new
sources
and
old
sources
creates
economic
incentives
to
firms
that
strongly
favor
the
older,
more
polluting
technology.
Example
2:
A
firm
is
deciding
between
two
new
generation
technologies,
one
clean,
such
as
natural
gas,
and
the
other
with
far
higher
emissions,
such
as
coal.
There
are
large
social
benefits
if
the
firm
chooses
the
clean
technology,
as
total
pollution
levels
are
greatly
reduced.
The
NOX
rate
limits
treat
each
technology
separately,
and
impose
proportionately
equal
burdens
on
each,
and
so
create
no
incentive
for
the
firm
to
choose
the
cleaner
one.
Firms
may
even
face
lower
perton
environmental
costs
in
choosing
the
dirtier
technology.
349
Example
3:
A
firm
is
choosing
between
building
a
new
single­
cycle
gas
turbine
or
a
combined­
cycle
gas
turbine
that
achieves
greater
348.
One
can
imagine
that
a
very
different
scenario
would
have
developed
had
Title
IV
established
an
allowance
auction
with
a
price
floor
set
at
$
300,
the
lower
end
of
most
cost
estimates
in
1990;
far
less
SO2
would
have
been
released
during
Phase
I.
349.
See
Figure
3­
7.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
381
efficiency.
Since
emissions
rate
standards
under
BACT
or
LAER
are
based
on
parts
per
million
(
ppm),
they
provide
no
benefit
to
the
firm
in
achieving
greater
efficiency
or
lowering
overall
pollution
by
using
the
combined­
cycle
unit.
Example
4:
A
firm
building
a
new
coal
plant
must
decide
on
what
kind
of
coal
to
use.
The
SO2
cap­
and­
trade
program
encourages
it
to
use
cleaner,
low­
sulfur
coal.
However,
the
rate­
based
SO2
New
Source
Performance
Standard
requires
it
to
use
scrubbers,
regardless
of
how
clean
the
coal
is.
In
another
example,
if
a
firm
builds
a
new
gas­
fired
plant,
New
Source
Review
requirements
in
many
states
require
it
to
install
end­
of­
pipe
controls
for
NOX
regardless
of
whether
or
not
it
uses
very
clean
process
technology.
In
either
case,
rate­
based
New
Source
Performance
Standards
dictate
the
installation
of
control
technologies
and
preclude
compliance
through
cleaner
fuels
or
processes
that
may
cost
less
and
create
less
overall
pollution.
One
root
cause
of
the
conflict
may
be
that
regulations
are
developed
on
a
policy
basis,
with
paramount
attention
paid
to
broad
political
and
social
considerations,
whereas
business
decisions
are
made
on
an
economic
basis,
in
which
small
differences
in
cost
and
regulatory
design
make
an
enormous
difference.
Because
businesses
try
to
find
the
lowestcost
method
to
comply
with
the
precise
wording
of
regulatory
standards,
it
makes
a
huge
difference
if
standards
require
compliance
with
rate
limits
or
mass
limits
(
cap­
and­
trade);
whether
averaging
times
are
hours,
days,
or
months;
whether
rate
standards
are
set
by
concentration
limits,
inputs,
or
outputs;
and
whether
regulation
focuses
upstream
or
downstream
in
the
process.
The
dramatic
differences
in
the
ways
in
which
the
precise
nature
of
a
standard
will
affect
businesses'
economic
behavior
are
often
paid
inadequate
attention
when
standards
are
established.

D.
Different
Regulatory
Designs
Greatly
Affect
the
Cost
of
Compliance
for
Achieving
Equivalent
Environmental
Results
Many
types
of
environmental
regulations
fail
to
harness
the
strong
business
drivers
that
can
lower
compliance.
This
is
shown
in
Figure
3­
7
for
NOX,
where
firms
are
not
allowed
to
pursue
least­
cost
approaches
to
reducing
overall
NOX
levels
on
an
industry­
wide
basis,
because
each
technology
is
regulated
separately.
The
constraints
imposed
by
environmental
laws
can
be
seen
even
more
clearly
in
SO2
regulation,
where
we
can
benefit
from
a
historical
analysis
of
different
types
of
SO2
regulations
and
their
costs.
Figure
4­
1
shows
how
the
greater
flexibility
of
different
environmental
regulation
of
SO2
leads
to
significantly
lowered
cost
in
achieving
a
similar
environmental
result.
It
compares
cost
estimates
for
382
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
achieving
equivalent
environmental
reductions
via
a
technology
prescription
mandating
scrubbers;
the
1977
NSPS
that
required
a
70%
to
90%
reduction
in
potential
emissions;
the
1971
NSPS
concentration
rate
standard
of
1.2
lb/
mmBtu;
and
the
Title
IV
cap­
and­
trade
program
with
and
without
the
trading
element.
The
Figure
shows
how
different
regulatory
designs
create
very
different
compliance
costs,
from
$
1.2
billion
and
$
7
billion
annually
for
equivalent
reductions.

Figure
4­
1:
Technologies
Permitted
and
Compliance
Costs
Under
Different
SO2
Regulatory
Systems350
Regulatory
Method
Technology
Prescription
Emissions
Rate
(%
Reduction)
Emissions
Rate
(
Concentration)
Emissions
Cap
Without
Trading
Emission
Cap
With
Trading
Technologies
Permitted
 
scrubbers*
 
scrubbers*
 
scrubbers*
 
limited
use
low­
sulfur
coal
 
more
efficient
scrubbers
 
major
use
low­
sulfur
coal
 
fuel
blending
 
demand
side
management
 
more
efficient
scrubbers
 
major
use
lowsulfur
coal
 
fuel
blending
 
demand
side
management
 
power
shifting
 
trading
Estimated
Compliance
Cost
in
Billions
per
Year
$
7
$
4.5
 
$
2.5
$
1.2
*
In
addition
to
limiting
compliance
options
to
scrubbing,
the
scrubber
technology
permitted
under
various
standards
varied.
The
1977
rate
standard
has
short
averaging
periods,
which
required
scrubbers
to
be
significantly
over­
built
with
redundant
modules,
greatly
increasing
their
cost.
Title
IV
allowed
significant
innovation
and
gains
in
efficiency
in
scrubber
design.

An
encouraging
result
of
this
study
is
that
the
cost
of
compliance
for
both
cap­
and­
trade
programs
were
greatly
below
estimates,
and
several
times
lower
than
the
cost
of
equivalent
rate­
based
regulatory
approaches.
In
the
Title
IV
SO2
program,
allowances
cost
$
150
during
Phase
I,
far
lower
than
the
$
300
to
$
1000
initially
forecast.
Similarly,
the
OTC
NOX
cap
resulted
in
allowance
prices
of
$
500
to
$
1000,
or
one
third
of
most
estimates.
The
cap­
and­
trade
approach
is
less
expensive
as
it
helps
align
economic
and
environmental
incentives
by
freeing
technology
choice
and
creating
a
uniform
incentive
for
all
sources
to
reduce
pollution.

350.
U.
S.
GENERAL
ACCOUNTING
OFFICE,
AIR
POLLUTION:
ALLOWANCE
TRADING
OFFERS
AN
OPPORTUNITY
TO
REDUCE
EMISSIONS
AT
LESS
COST
37­
41
(
Dec.
1994);
Paul
R.
Portney,
Economics
and
the
Clean
Air
Act,
J.
ECON.
PERSP.
4(
4),
173­
81
(
Fall
1990)
(
cost
estimate
of
$
7
billion
based
on
the
Waxman­
Sikorski
bill
of
the
98th
Congress
(
H.
R.
3400),
mandating
scrubbers
for
fifty
plants
to
gain
a
10­
million
ton
reduction).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
383
A
final
observation
is
that
firms'
efforts
to
achieve
lower
costs
of
compliance
generally
have
incidental
and
positive
environmental
effects.
The
reason
is
that
lower
economic
costs
typically
reflect
a
lowered
use
of
resources
and
energy,
which
is
a
positive
environmental
result.
Often,
lower
costs
also
represent
a
shift
towards
pollution
prevention
in
compliance
instead
of
the
use
of
end­
of­
pipe
controls.
Therefore
increased
flexibility
under
Title
IV
led
firms
to
use
cleaner
coal
instead
of
scrubbing
emissions,
which
wastes
about
1.5%
of
plant
energy
and
creates
high
waste
volumes,
and
helped
to
halve
the
capital
cost
of
scrubbing
which
represents
significant
savings
in
materials
used.

E.
Rate
Standards
Were
Inflexible,
Limiting
Businesses'
Ability
to
Develop
and
Implement
Compliance
Methods
and
Technologies
One
of
the
chief
findings
of
this
study
is
that
rate
standards
such
as
those
used
in
the
Title
IV
NOX
program
and
new
source
standards
for
both
NOX
and
SO2
proved
to
be
poor
performance
standards,
as
they
significantly
restricted
the
range
of
technology
choices
available
for
compliance
and
provided
limited
incentives
for
innovation
and
improvement.
In
the
past,
it
has
been
noted
that
traditional
rate­
based
standards
established
on
a
technology­
by­
technology
basis
do
not
encourage
shifts
to
cleaner
technology
and
tend
to
freeze
innovation.
351
351.
Historically,
pollution
standards
under
the
CAA
have
been
established
as
rate
standards
measuring
the
concentration
or
percentage
of
a
pollution
in
end­
of­
pipe
emissions.
See,
for
example,
air
standards
such
as
Reasonably
Available
Control
Technology
(
RACT)
for
existing
sources,
Best
Available
Control
Technology
(
BACT)
for
new
sources,
and
Maximum
Achievable
Control
Technology
(
MACT)
for
hazardous
pollutants.
42
U.
S.
C.
§
§
7502(
c)(
1),
7475(
a)(
4),
7412(
g)(
2)(
A)
(
1994).
Water
standards
include
Best
Available
Technology
Economically
Achievable
("
BAT").
See
33
U.
S.
C.
§
1311(
b)(
2)(
A)
(
1994).
The
use
of
rate
standards
is
appropriate
when
addressing
the
local
concentration
of
a
pollutant,
which
was
of
concern
in
the
early
years
of
the
CAA.
However,
they
become
less
and
less
appropriate
in
addressing
total
pollutant
loadings
and
regional
issues
such
as
urban
ozone
formation
and
interstate
transport
of
NOX.
Rate­
based
standards
are
a
major
cause
of
the
inflexibility
in
current
environmental
laws
that
is
identified
in
the
National
Advisory
Council
for
Environmental
Policy
and
Technology
(
NACEPT)
reports,
ELI
studies,
and
other
reinvention
publications
as
one
of
the
major
environmental
regulatory
issues.
See,
e.
g.,
EPA,
PUB.
NO.
EPA­
101/
N­
91/
001,
PERMITTING
AND
COMPLIANCE
POLICY:
BARRIERS
TO
U.
S.
ENVIRONMENTAL
TECHNOLOGY
INNOVATION
39
(
1991),
available
at
http://
www.
epa.
gov/
clariton/
clhtml/
pubtitle.
html
(
last
updated
Nov.
30,
2000)
[
hereinafter
EPA
PERMITTING].
Specifically,
policy
makers
should
reconsider
the
way
`
best
available
technology'­
based
regulations
are
now
developed
and
applied.
Such
regulations
use
agency
established
technology­
based
limits
and
use
a
technology
to
demonstrate
that
the
limits
are
achievable.
Even
though
these
are
performance­
based
requirements,
they
have
a
strong
tendency
to
lock
in
the
technology
that
is
used
to
demonstrate
achievability.
To
some
extent,
reliance
on
`
best
available
technology'­
based
regulations
impedes
the
development
and
introduction
of
innovative
technologies.
Id.;
see
ENVTL.
LAW
INST.,
BARRIERS
TO
ENVIRONMENTAL
TECHNOLOGY
INNOVATION
AND
USE
(
1998)
[
hereinafter
ELI
INNOVATION];
Debra
Knopman
&
Emily
Fleschner,
Second
Generation
of
384
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
The
findings
of
this
study
reveal
four
characteristics
of
rate
standards
that
have
limited
business
ability
to
develop
and
implement
effective
and
efficient
compliance
methods
for
NOX
and
SO2
in
the
power
sector,
as
described
below.

1.
Emissions
Rate
Standards
Limited
Technology
Choice
As
shown
in
this
study,
rate­
based
standards
inherently
limit
technology
options
compared
to
mass­
based
performance
standards
because
of
the
very
language
of
the
standard.
By
defining
performance
as
a
reduction
in
rates
instead
of
a
reduction
in
tons,
rate
standards
may
limit
or
even
preclude
technologies
that
would
reduce
amounts
but
not
rates
of
pollution.
This
included
both
the
1971
and
1977
NSPS
for
SO2,
which
limited
compliance
to
either
a
certain
quality
of
coal
or
to
scrubbing.
352
Another
is
the
New
Source
Review
standards
for
NOX
that
are
defined
in
"
parts
per
million"
(
ppm),
and
so
preclude
compliance
by
increasing
efficiency
or
similar
prevention
methods.
353
By
defining
performance
as
rate
reduction,
rate
standards
tend
to
emphasize
end­
ofpipe
controls
instead
of
cleaner
fuels
or
more
efficient
processes.
Figure
4­
2
shows
the
actual
use
of
technology
under
the
rate
standards
reviewed,
compared
with
the
technologies
used
by
firms
in
the
cap­
and­
trade
programs
for
NOX
and
SO2.
Technology
solutions
are
divided
into
the
three
basic
means
of
compliance:
cleaner
fuels,
cleaner
processes,
and
end­
of­
pipe
controls.
They
are
further
characterized
as
high­
tech,
low­
tech
or
no­
tech
to
emphasize
that
compliance
responses
do
not
have
to
be
high­
tech
to
create
highly
effective
solutions,
since
an
emissions
reduction
by
any
method
benefits
the
environment
equally.
The
Figure
shows
how
weak
NOX
rate
standards
in
this
sector
have
simply
led
to
retrofits
of
known
technologies
(
combustion
controls
and
averaging),
and
stringent
NOX
rate
standards
promoted
innovation
principally
in
high­
tech
end­
of­
pipe
controls
(
SCR
and
SCONOX).
354
In
Environmental
Stewardship:
Improve
Environmental
Results
and
Broaden
Civic
Engagement
(
Progressive
Policy
Inst.,
ed.)
(
May
1,
1999),
at
http://
www.
ppionline.
org/
ndol/
print.
cfm?
contentid=
767
(
arguing
that
first
generation
approaches
to
environmental
problems
impede
innovation
while
second
generation
approaches
drive
innovation
and
improve
accountability);
NAT'L
ACADEMY
OF
PUBLIC
ADMIN.,
SETTING
PRIORITIES,
GETTING
RESULTS:
A
NEW
DIRECTION
FOR
THE
EPA
102
(
Apr.
1995);
William
D.
Ruckelshaus
&
Karl
Hausker,
Enterprise
for
the
Environment,
The
Environmental
Protection
System
in
Transition:
Toward
a
More
Desirable
Future
3
(
Jan.
1998),
available
at
http://
www.
csis.
org/
pubs/
pubse&
e.
html#
env_
trans;
THINKING
ECOLOGICALLY:
THE
NEXT
GENERATION
OF
ENVIRONMENTAL
POLICY
(
Marian
R.
Chertow
&
Daniel
C.
Esty
eds.,
1997).
352.
See
supra
Part
II.
A.
353.
See
infra
note
376.
354.
Stringent
rate
standards
under
NOX
New
Source
Review
only
allow
the
use
of
control
technologies
such
as
SCR
and
SCONOX.
"
SCONOX"
is
a
trademarked
catalytic
absorption
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
385
contrast,
cap­
and­
trade
systems
allow
the
use
of
any
technology
that
could
reduce
emissions,
and
so
promote
the
application
of,
refinement,
and
innovation
in
the
broadest
set
of
potential
technologies.

Figure
4­
2:
Technologies
Used
to
Meet
NOX
Standards355
High­
Tech
Low­
Tech
No­
Tech
Cleaner
Fuels
Shift
to
gas
Low­
NOX
coals
Cleaner
Processes
Dry
Low­
NOX
Turbine
Combustion
Controls
(
LNB/
OFA)
Averaging
Load
shifting
Burners
out
of
service
End­
of­
Pipe
Controls
SCR
SCONOX
SNCR
Gas
Reburn
Technologies
used
for
NSPS
in
italics;
for
Title
IV
underlined;
all
used
for
OTC
cap­
and­
trade
A
key
distinction
between
new
source
rate
standards
versus
a
cap­
andtrade
approach
is
in
how
they
treat
cleaner
new
sources.
Cap­
and­
trade
approaches
created
declining
costs
for
plants
as
their
pollution
emissions
declined
and
so
encouraged
the
use
of
any
cleaner
technology.
However,
New
Source
Review
standards
differentially
placed
very
high
burdens
and
costs
on
new
technologies,
even
if
they
were
relatively
clean.
This
has
proven
particularly
important
for
NOX,
as
over
the
past
decade,
major
technological
advances
in
natural
gas
turbines
have
reduced
uncontrolled
NOX
emissions
from
over
100
ppm
to
the
very
low
9
to
15
ppm
range,
ten
to
thirty
times
lower
than
coal­
fired
boilers.
356
While
this
has
achieved
a
90%
pollution
reduction,
these
reductions
often
may
not
count
when
a
regulatory
body
applies
a
standard
like
BACT
or
LAER.
357
system
developed
by
Goal
Line
Environmental
Technologies,
LLC.
See
CALIFORNIA
ENVIRONMENTAL
TECHNOLOGY
CERTIFICATION
PROGRAM,
SCONOX:
GOAL
LINE
ENVIRONMENTAL
TECHNOLOGIES,
at
http://
www.
calepa.
ca.
gov/
calcert/
CertifiedTech/
GoalLine.
htm
(
last
modified
Dec.
20,
2000)
[
hereinafter
California
Environmental
Technology
Certification
Program].
Many
states
require
SCR
even
for
clean
gas
plants,
and
whether
or
not
cleaner
fuels
or
processes
such
as
the
dry
low­
NOX
burner
can
be
used
is
the
subject
of
current
EPA
guidance
deliberations.
See,
e.
g.,
Notice
of
Availability
for
Draft
Guidance
on
BACT
for
NOX
Control
at
Combined
Cycle
Turbines,
65
Fed.
Reg.
50,202
(
Aug.
17,
2000).
355.
EPA,
RACT/
BACT/
LAER
CLEARINGHOUSE
ANNUAL
REPORT
FOR
1998:
A
COMPILATION
OF
CONTROL
TECHNOLOGY
DETERMINATIONS
EPA
456/
R­
98­
0004
(
June
1998).
Interviews
with
federal
and
state
air
pollution
control
officials,
representatives
of
utility
companies,
vendors
of
pollution
abatement
technologies,
and
environmental
organizations.
356.
See
Byron
Swift,
Grandfathering
New
Source
Review
and
NOx
 
Making
Sense
of
a
Flawed
System,
31
ENV'T
REP.
1538
(
July
21,
2000);
STAPPA/
ALAPCO
1994,
supra
note
217,
at
53­
54.
357.
See
42
U.
S.
C.
§
§
7479(
3),
7501(
3)
(
1994).
386
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Some
states
applying
these
rate
standards
require
end­
of­
pipe
control
equipment
such
as
SCR
when
applying
NSR
to
these
very
clean
sources,
and
do
not
count
what
has
been
achieved
through
pollution
prevention
or
process
change.
358
The
epitome
of
this
tendency
may
be
SCONOX,
which
doubles
the
cost
of
controls
to
achieve
a
very
small
additional
reduction.
359
The
energy
used
to
run
SCONOX
itself
creates
more
ancillary
pollution
than
the
incremental
reductions
it
achieves,
360
but
this
may
not
be
able
to
be
considered
under
a
literal
interpretation
of
the
inflexible
LAER
rate
standard.
361
Figure
4­
3
shows
different
technologies
used
under
SO2
regulations.
The
percentage
reduction
standard
of
the
current
NSPS
limited
technology
choice
to
a
single
method:
scrubbing.
362
In
contrast,
the
SO2
cap­
and­
trade
approach
allowed
maximum
technology
choice,
and
because
it
did
so,
led
to
unexpected
innovation
in
fuel
blending
that
allowed
far
greater
use
of
low­
sulfur
coal
for
compliance,
dramatically
reducing
the
cost
of
compliance.
It
also
created
competition
for
scrubbing
that
has
driven
innovation
and
cost
reductions
in
scrubbing.

358.
See,
e.
g.,
MASS.
REGS.
CODE
tit.
310,
§
§
7.00,
7.02
(
2001);
MASS.
DEP'T
OF
ENVTL.
REG.,
CONDITIONAL
COMPREHENSIVE
PLAN
APPROVAL
OF
MYSTIC
STATION
13
(
2000)
(
requiring
end­
of­
pipe
SCR
technology
to
reach
2
ppm
in
addition
to
dry
low­
NOX
burner),
http://
www.
state.
ma.
us/
dep/
energy/
mystic/
mysca.
pdf.
This
problem
is
addressed
in
Notice
of
Availability
for
Draft
Guidance
on
BACT
for
NOx
Control
at
Combined
Cycle
Turbines,
65
Fed.
Reg.
50,202­
02
(
2000),
suggesting
that
BACT
not
require
the
addition
of
SCRs
on
low­
emitting
gas
turbines,
and
arguing
that
adding
costs
to
such
turbines
actually
increases
NOX
because
the
power
from
the
new
generation
would
be
expected
to
displace
power
from
far
dirtier
facilities.
Environmental
groups
strongly
objected
to
the
proposal.
See
Inside
Washington
Publishers,
Activists
Threaten
Litigation
on
Permit,
Turbine
Policies,
11
CLEAN
AIR
REPORT
4
(
Sept.
28,
2000).
359.
Swift,
supra
note
196.
360.
The
variable
cost
of
operating
SCONOX
is
almost
double
that
of
SCR
for
gas
turbines,
yet
SCONOX
achieves
only
a
very
small
marginal
reduction
of
NOX,
from
3
ppm
to
2
ppm
(
equivalent
to
moving
from
0.0100
to
0.0072
lb/
mmBtu,
both
extremely
low).
See
California
Environmental
Technology
Certification
Program,
supra
note
354;
MASS.
DEP'T
OF
ENVTL.
REG.,
supra
note
358.
If
one
compares
this
1
ppm
to
the
incremental
energy
used
by
SCONOX
in
comparison
to
SCR,
the
energy
used,
were
it
taken
from
the
grid,
leads
to
emissions
of
about
1000
pounds
of
NOX,
2
tons
of
SO2
and
over
100
tons
of
CO2
for
every
ton
of
NOX
abated.
See
DOE
ANNUAL
ENERGY
OUTLOOK
2001,
supra
note
1,
tbl.
A8,
at
132.
If
one
also
considers
the
embedded
energy
use
in
all
the
other
added
operating
costs
of
SCONOX,
these
indirect
emissions
would
be
even
higher.
This
example
shows
how
the
inflexibility
of
rate
standards
leads
to
perverse
environmental
results,
and
prevent
cost
reductions.
361.
Goal
Line
Envtl.
Technologies,
L.
L.
C.,
SCONOX
Available
for
Gas­
Fired
Boilers,
1
CATALYTIC
SOLUTIONS
FOR
CLEAN
AIR,
at
http://
www.
glet.
com/
update_
10­
99.
htm#
SCONOx
AVAILABLE
(
Oct.
1999).
362.
This
type
of
rate
standard
was
motivated
by
political
concerns
to
assure
jobs
for
miners
and
others
whose
jobs
depended
on
continued
extraction
of
high­
sulfur
eastern
coals.
See
ACKERMAN
&
HASSLER,
supra
note
4,
at
44­
45.
The
1971
NSPS
was
also
a
rate
standard,
imposing
a
concentration
limit
based
on
Btu
input,
which
was
slightly
more
flexible.
See
supra
Part
II.
A.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
387
Figure
4­
3:
Technologies
Used
to
Meet
SO2
Standards363
High­
Tech
Low­
Tech
No­
Tech
Cleaner
Fuels
Low
Sulfur
Coal:
sub­
bituminous
Rail
Investment/
Innovation
Shift
to
gas
LSC:
bituminous
Demand
Side
Management
Cleaner
Processes
Trading
Averaging
Load
shifting
End­
of­
pipe
Controls
Scrubbing
Allowed
under
NSPS
in
italics
2.
Emissions
Rate
Standards
Did
Not
Force
a
Move
Toward
Cleaner
Technologies
Because
emissions
rate
standards
under
the
CAA
are
individually
set
for
each
specific
production
technology,
they
create
different
standards
for
the
kind
of
fuel
used
and
the
specific
boiler
or
turbine
technology.
364
This
created
no
incentive
for
firms
to
move
towards
cleaner
technologies.
The
NOX
study
shows
how
the
use
of
technologybased
rate
standards
may
create
perverse
results
under
which
the
dirtiest
sources
receive
the
weakest
economic
signals
to
reduce
pollution,
and
clean
sources
the
greatest.
As
shown
in
Figure
3­
7,
rate
standards
have
actually
placed
differentially
greater
burdens
on
cleaner
technologies,
creating
economic
signals
contrary
to
those
needed
to
promote
cleaner
production.
365
3.
Rate
Standards
Promote
One­
Time
Compliance
Without
Incentives
for
Further
Progress
One
of
the
strongest
drivers
firms
face
is
the
economic
incentive
to
reduce
costs.
Environmental
regulations
can
harness
these
drivers
by
creating
economic
benefits
from
pollutant
reductions
on
a
continuing
basis.
However,
fixed­
rate
standards
created
no
incentives
for
continuous
reductions,
or
for
compliance
that
goes
beyond
stated
limits.
Therefore,
once
firms
installed
low­
NOX
burners
as
required
by
the
Title
363.
EPA,
RACT/
BACT/
LAER
CLEARINGHOUSE
ANNUAL
REPORT
FOR
1998:
A
COMPILATION
OF
CONTROL
TECHNOLOGY
DETERMINATIONS
EPA
456/
R­
98­
004
(
June
1998).
See
Interviews
with
federal
and
state
air
pollution
control
officials,
representatives
of
utility
companies,
vendors
of
pollution
abatement
technologies,
and
environmental
organizations.
364.
See
supra
Part
III.
E.
3.
365.
This
situation
is
further
exacerbated
by
the
new
source/
old
source
distinction
under
the
NOX
standards,
which
is
discussed
in
Part
III.
E.
2.
This
distinction
in
CAA
regulation
focuses
requirements
on
new
sources
that
are
already
so
clean
that
reducing
their
emissions
does
not
significantly
reduce
total
NOX
pollution,
but
by
placing
high
burdens
on
these
clean
new
sources,
may
perversely
provide
economic
incentives
to
keep
old
plants
on
line.
388
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
IV
rate
limits,
they
took
no
further
action
to
reduce
pollution
under
Title
IV.
366
This
limits
compliance
options
to
capital
or
process
choices
made
at
the
time
a
plant
is
built
or
modified,
and
eliminates
the
possibility
of
compliance
through
changes
in
management
practices,
fuels,
or
any
other
operational
decisions
after
a
plant
is
built.
Many
NOX
reduction
technologies,
such
as
gas
reburn
and
overfire
air,
are
incremental,
and
can
be
adjusted
to
achieve
various
rates
of
NOX
control
depending
on
the
cost
of
inputs
and
other
parameters.
367
In
contrast,
the
first
year
of
application
of
the
OTC
NOX
cap­
andtrade
program
revealed
that
once
a
market
incentive
was
created
to
reduce
NOX
emissions
on
a
continuing
basis,
firms
found
ways
to
lower
NOX
by
20%
to
30%
at
existing
units
without
significant
capital
additions.
368
Achieving
such
NOX
reductions
through
operational
changes
can
be
highly
effective,
and
may
be
essential
to
reduce
NOX
to
very
low
levels.
Similarly,
the
Title
IV
SO2
cap­
and­
trade
program
has
encouraged
continuing
innovation
and
improvement
that
has
significantly
increased
scrubber
efficiency
and
steadily
lowered
the
costs
of
scrubbing
and
of
low­
sulfur
coal
throughout
Phase
I.

4.
Rate
Standards
Created
High
Transaction
Costs
Rate­
based
standards
typically
require
significant
government
intervention
in
approving
the
compliance
technology
chosen
by
firms,
creating
significant
transaction
costs
and
delay.
This
is
particularly
true
of
New
Source
Review
standards,
which
require
a
case­
by­
case
determination
of
the
required
technology
by
government
regulators.
369
However,
regulations
such
as
cap­
and­
trade
systems
have
created
very
strict
standards
in
allowing
zero
growth
in
emissions
without
government
review
and
with
very
low
transaction
cost.

5.
The
Design
of
Rate­
Based
Standards
Can
Be
Marginally
Improved
The
performance
of
NOX
and
SO2
regulations
also
show
how
the
design
of
rate­
based
standards
can
strongly
affect
business
compliance
alternatives
and
costs.
Making
rate
standards
uniform,
annual,
and
366.
See
supra
Part
III.
D.
1.
367.
See
supra
Part
III.
D.
5.
368.
See
supra
note
321.
369.
BACT
and
LAER
require
a
case­
by­
case
assessment
and
approval
of
compliance
technology.
See,
e.
g.,
42
U.
S.
C.
§
§
7479(
3),
7501(
3)
(
1994);
see
also
supra
note
330.
For
a
glimpse
of
the
intensive
negotiations
about
technology
choices
involved
in
the
application
such
standards,
see
Environmental
Appeals
Board,
Formal
Opinions;
Clean
Air
Act
Prevention
of
Significant
Deterioration
(
PSD)
Permit
Appeals,
at
http://
www.
epa.
gov/
eab/
eabpsd.
htm
(
last
updated
Apr.
23,
2001).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
389
output­
based
could
improve
the
performance
of
rate
standards,
as
described
below.
However,
these
alternative
rate­
based
approaches
do
not
resolve
all
of
the
inflexibilities
of
rate
standards,
and
would
not
work
as
well
for
the
economy
or
the
environment
as
the
cap­
and­
trade
system.

a.
Longer
Averaging
Periods
Short
averaging
periods,
such
as
the
thirty­
day
average
for
the
SO2
NSPS,
have
been
shown
to
limit
technology
development
and
increase
the
cost
of
compliance.
370
On
the
other
hand,
long
averaging
periods,
such
as
the
one­
year
period
for
the
Title
IV
NOX
standards,
increased
flexibility.
371
Longer
averaging
periods
should
be
used
unless
the
specific
characteristics
of
a
pollutant
and
the
resulting
health
and
environmental
problems
require
the
use
of
shorter
averaging
periods.
372
b.
Uniform
Rate
Standards
A
uniform
rate
standard
that
does
not
discriminate
between
old
and
new
sources,
or
between
technologies,
would
address
the
problems
identified
above
that
stem
from
the
variability
of
rate
standards
between
technologies
and
the
distinction
between
old
and
new
sources.
It
could
also
reduce
transaction
costs
by
creating
a
simple,
objective
parameter.
373
However,
such
a
standard
may
be
perceived
as
unfair.
It
would
also
still
suffer
from
the
problems
that
rate
standards
experience
in
restricting
technology
and
compliance
choices,
not
promoting
compliance
above
the
limit,
and
not
creating
a
continuous
driver
for
improvement
and
innovation.

c.
Output­
Based
Rate
Standards
Another
important
goal
is
to
change
from
input­
based
standards
such
as
lb/
mmBtu,
or
concentration
standards
such
as
ppm,
to
outputbased
standards
such
as
lb/
MWh,
to
reward
efficiency.
A
breakthrough
was
made
in
this
regard
in
the
EPA's
New
Source
Performance
Standard
370.
See
supra
Part
II.
C.
5.
c;
Clean
Air
Act,
40
C.
F.
R.
§
60.43a(
g)
(
2000).
371.
See
supra
text
accompanying
note
233.
372.
Rate­
based
standards
and
short
averaging
times
work
best
when
there
is
limited
dispersion
of
a
pollutant,
and
the
rate
is
related
to
the
size
and
output
of
the
source.
Therefore,
rate
standards
are
likely
to
perform
better
with
vehicles
than
with
stationary
sources,
and
with
pollutants
with
highly
localized
effects.
The
regional
nature
of
the
effects
of
NOX
and
SO2,
and
the
great
variability
in
size
of
stationary
sources,
would
indicate
the
use
of
long
averaging
periods
for
these
pollutants.
373.
See,
e.
g.,
Tim
Woolf
&
Bruce
Biewald,
Electricity
Market
Distortions
Associated
with
Inconsistent
Air
Quality
Regulations,
13
ELECTRICITY
J.
42­
49
(
2000)
(
analyzing
the
market
distortions
that
exist
partially
due
to
varying
rate
standards
for
old
and
new
sources
and
advocating
uniform
standards),
available
at
http://
www.
synapse­
energy.
com/
publications.
htm.
390
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
for
boilers
adopted
in
1998,
which
established
a
uniform
output­
based
NOX
standard
of
1.6
lb
per
MWh
of
electricity
generated
from
new
boilers.
374
Unfortunately,
NSPS
is
no
longer
what
determines
compliance
for
new
sources,
as
New
Source
Review
imposes
a
more
stringent
standard
under
BACT
or
LAER.
375
Currently
those
standards
are
based
on
parts
per
million,
which
does
not
reward
efficiency
and
is
a
very
poor
indicator
of
the
actual
pollution
caused
by
the
plant.
376
d.
More
Frequent
Updating
of
Rate
Standards
by
Government
Another
way
of
improving
rate
standards
would
be
for
government
to
more
frequently
update
the
standards.
However,
there
are
practical
impediments
to
this
approach
in
the
length
of
time
it
takes
to
promulgate
rules.
377
Title
IV
could
be
considered
a
laboratory
experiment
of
this
approach,
as
it
created
a
two­
phased
rate­
based
rulemaking
process
for
NOX,
with
Phase
I
starting
in
1996
and
a
more
stringent
Phase
II
in
2000.
However,
the
Phase
II
process
occasioned
the
typical
response
of
lawsuits,
a
lack
of
industry
focus
on
achieving
reductions
until
the
regulations
were
imminent,
and
lack
of
reductions
beyond
the
standards
after
they
were
promulgated.
Also,
in
retrospect
the
standards
failed
to
predict
and
capture
a
major
opportunity
for
emissions
reductions
in
cyclone
boilers.
Only
when
the
OTC
cap­
and­
trade
program
started
did
firm
behavior
reveal
that
an
additional
20%
to
30%
in
NOX
emissions
reductions
could
be
achieved
through
operational
changes
at
plants.
378
374.
Clean
Air
Act,
40
C.
F.
R.
§
60.44a(
d)
(
2000).
This
final
rule
was
adopted
in
Revision
of
Standards
of
Performance
for
Nitrogen
Oxide
Emissions
from
New
Fossil­
Fuel
Fired
Steam
Generating
Units,
63
Fed.
Reg.
49,442,
49,444
(
Sept.
16,
1998).
375.
See
42
U.
S.
C.
§
§
7479(
3),
7501(
3);
see
also
supra
text
accompanying
note
330.
376.
EPA,
PUB.
NO.
EPA­
456/
R­
98­
004,
RACT/
BACT/
LAER
CLEARINGHOUSE
CLEAN
AIR
TECHNOLOGY
CENTER
ANNUAL
REPORT
FOR
1998:
A
COMPILATION
OF
CONTROL
TECHNOLOGY
DETERMINATIONS
(
1990
ed.,
8th
Supp.
1998),
available
at
http://
www.
epa.
gov/
ttn/
catc/
dir1/
rblc98.
pdf.
Measurement
of
ppm
varies
considerably
between
technologies
due
to
different
test
methods,
and
so
is
a
particularly
poor
measure
of
overall
pollution.
See
Clean
Air
Act,
40
C.
F.
R.
§
60,
app.
A,
method
19
(
showing
that
ppm
varies
greatly
depending
on
percent
of
oxygen
in
exhaust
air).
377.
It
now
takes
five
to
ten
years
between
initiation
and
implementation
of
a
major
rulemaking
process,
which
is
a
far
slower
pace
than
the
rate
of
development
of
technology
change.
378.
See
GAS
RESEARCH
INSTITUTE,
supra
note
321.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
391
F.
Emissions
Cap
and
Allowance­
Trading
Programs
Allow
Greater
Integration
of
Environmental
Issues
into
Business
Decision­
Making
Processes,
Providing
Greater
Flexibility
and
Lowering
Costs
Without
Sacrificing
Environmental
Integrity
This
study
shows
that
technology­
neutral
performance
standards
such
as
emissions
cap
and
allowance­
trading
systems
can
rectify
the
problems
caused
by
rate
standards
without
sacrifice
to
the
environment,
by
creating
more
flexible
systems
and
eliminating
governmental
review
of
technology
choice.
379
Both
the
Acid
Rain
Program's
SO2
cap
and
the
OTC
NOX
cap
create
major
emissions
reductions
and
a
zero
new
source
standard
without
any
lengthy
permitting
procedures
(
transactions
take
less
than
twenty­
four
hours)
or
case­
by­
case
conflicts
between
regulators
and
regulated.
The
major
benefits
of
a
good
cap­
and­
trade
system
are
that
it
enacts
a
stringent
and
permanent
cap
on
emissions,
which
serves
society's
interest
in
pollution
reductions,
while
allowing
the
widest
possible
breadth
of
compliance
options,
hence
allowing
firms
to
reduce
costs.
Cap­
and­
trade
approaches
establish
a
uniform
standard
for
both
old
and
new
plants,
and
so
place
no
undue
burdens
on
new
plants
that
may
be
cleaner
and
more
efficient.
They
also
are
technology­
neutral,
helping
to
move
compliance
away
from
the
end­
of­
pipe
controls
promoted
by
rate
standards
toward
the
use
of
cleaner
technologies.
Because
any
reduction
creates
economic
value
to
a
firm,
firms
also
face
a
continuous
driver
to
reduce
emissions
and
develop
innovative
technologies
and
methods.
380
Cap­
and­
trade
approaches
also
remove
government
from
making
caseby
case
decisions
about
technologies,
redirecting
business
effort
away
from
contesting
regulatory
authority
and
towards
competing
in
the
marketplace.
A
more
subtle
change
created
by
cap­
and­
trade
programs
is
that
by
establishing
a
price
for
a
ton
of
additional
pollution
reduction,
they
have
helped
to
link
environmental
with
economic
decision­
making
within
a
379.
Note
that
rate
standards
under
the
CAA
could
be
improved
to
be
uniform
and
outputbased
and
then
would
meet
some
of
these
objectives.
However,
even
such
improved
rate
standards
would
suffer
from
the
problems
of
restricting
technology
and
compliance
choices,
not
promoting
compliance
above
the
rate
limit,
not
creating
a
continuous
driver
for
improvement,
and
imposing
high
transaction
costs.
380.
A
system
of
pollution
charges
or
fees
may
also
provide
similar
benefits
if
the
charges
are
set
high
enough,
but
such
systems
have
rarely
been
implemented
in
the
United
States.
Although
such
fee­
based
systems
are
theoretically
attractive,
studies
have
shown
that
in
practice,
pollutant
fees
or
taxes
have
almost
never
been
able
to
be
established
at
levels
high
enough
to
affect
behavior.
See
ORGANIZATION
FOR
ECONOMIC
COOPERATION
AND
DEVELOPMENT,
ENVIRONMENTAL
TAXES
IN
OECD
COUNTRIES
(
1995).
392
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
firm.
381
One
instance
of
this
is
that
the
price
of
an
allowance
is
regularly
entered
into
firms'
dispatching
models
that
determine
which
generation
units
are
operated.
In
another,
the
allowance
price
has
become
integrated
with
the
quality
of
coal
so
that
the
price
of
coal
now
reflects
its
sulfur
emissions.
Both
of
these
create
efficiency
in
merging
the
environmental
quality
demanded
by
society
with
industry
decision­
making.
Another
reason
that
flexible
systems
such
as
cap­
and­
trade
programs
may
function
effectively
is
that
they
provide
shared
benefits.
The
environment
benefits
from
the
permanent
emission
reductions
created
by
the
emissions
cap,
together
with
high
levels
of
compliance
and
a
zero
new
source
mandate.
Industry
benefits
from
the
lower
costs
of
compliance
as
well
as
a
greater
ability
to
integrate
compliance
planning
with
investment
cycles,
seek
out
least­
cost
solutions,
and
save
or
even
make
money
through
trading.
In
a
sense,
the
cap­
and­
trade
approach
allows
firms
to
apply
their
entrepreneurial
skills
to
innovate
or
reduce
the
costs
of
compliance,
and
retain
part
of
the
economic
gains
that
result
from
these
efforts.
These
shared
benefits
may
allow
for
more
stringent
standards
to
be
set,
while
allowing
industry
to
make
the
most
cost­
effective
reductions.

G.
Innovation,
Investment,
and
Cleaner
Production
The
different
regulatory
programs
controlling
NOX
and
SO2
emissions
elicited
dramatically
different
responses
as
to
the
scope,
quality,
and
timing
of
innovation.
As
described
above,
the
Title
IV
NOX
rate
approach
elicited
only
one­
time
and
limited
innovation
for
existing
plants,
leading
principally
to
the
installation
of
low­
NOX
burners.
382
In
contrast,
Title
IV's
SO2
cap­
and­
trade
program
created
continuous
drivers
for
innovation
that
lasted
throughout
Phase
I,
as
well
as
a
broader
effort
by
firms
to
seek
pollution
prevention
methods.
383
New
Source
Performance
Standards
drove
innovation,
but
only
for
a
limited
set
of
primarily
end­
of­
pipe
control
technologies.
384
The
lesson
learned
is
that
even
when
applied
at
moderate
levels
such
as
in
Title
IV,
cap­
and­
trade
381.
Traditional
rate­
based
regulations
create
a
dichotomy
between
environmental
compliance
and
all
other
aspects
of
firm
behavior
that
has
been
referred
to
as
a
"
green
wall"
separating
environmental
compliance
from
the
rest
of
the
firm.
See
ENVIRONMENTAL
STRATEGIES
FOR
INDUSTRY:
INTERNATIONAL
PERSPECTIVES
ON
RESEARCH
NEEDS
AND
POLICY
IMPLICATIONS
8­
12
(
Kurt
Fischer
&
Johan
Schott
eds.,
1993);
Patricia
S.
Dillon,
Implications
of
Industrial
Ecology
for
Firms,
in
THE
GREENING
OF
INDUSTRIAL
ECOSYSTEMS
(
Braden
R.
Allenby
&
Deanna
J.
Richards
eds.,
1994).
The
integration
achieved
by
cap­
and­
trade
programs
serves
to
overcome
this
division.
382.
See
supra
Part
III.
C.
383.
See
supra
Part
II.
C.
9.
384.
See
supra
Part
IV.
E.
3.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
393
programs
can
be
expected
to
create
significant
innovation,
whereas
ratebased
standards
limit
both
the
breadth
and
extent
of
innovation.
385
1.
Cap­
and­
Trade
Programs
Promote
Broader
Technology
Use
and
Innovation
Figures
4­
2
and
4­
3
show
that
both
SO2
and
NOX
cap­
and­
trade
programs
promoted
broad
technology
choice,
and
thereby
increased
the
opportunity
for
innovation.
In
particular,
the
wider
breadth
of
technology
choice
creates
greater
opportunity
for
unexpected
innovation
to
occur
that
cannot
be
predicted
or
captured
in
a
government­
controlled,
rate­
setting
exercise.
It
is
also
noteworthy
that
despite
their
purpose
of
helping
to
force
innovation,
the
new
source
standards
principally
promoted
innovation
in
high­
tech,
end­
of­
pipe
technologies,
leaving
out
many
potential
technologies
and
solutions
used
under
the
cap­
and­
trade
programs
that
could
achieve
environmental
benefits.
386
Possibly
the
best
example
of
how
the
flexibility
of
cap­
and­
trade
programs
promoted
innovation
and
breakthroughs
in
compliance
was
firms'
increased
use
of
low­
sulfur
western
coals
under
the
Title
IV
SO2
program.
387
Title
IV
encouraged
early
experimentation
in
blending
PRB
coal
precisely
because
it
did
not
impose
a
rate­
based
standard.
Initially,
most
firms
believed
they
could
not
use
sufficient
amounts
of
low­
sulfur
subbituminous
PRB
coals
in
their
boilers
to
meet
a
particular
rate
standard
such
as
a
1.2
lb/
mmBtu.
388
However,
since
a
rate
standard
was
not
involved,
and
all
tons
of
reductions
were
rewarded,
firms
began
to
experiment
with
blending
coals.
Unexpectedly,
blending
worked
far
better
than
believed
possible,
and
at
lower
cost.
By
the
end
of
Phase
I,

385.
In
the
early
1990s,
the
EPA's
National
Advisory
Council
for
Environmental
Policy
and
Technology
(
NACEPT)
recognized
that
"[
e]
nvironmental
improvements
in
process
and
materials­
require
long­
term,
continuous
investment
in
the
development
of
new,
more
economically
and
environmentally
efficient
technologies
which
make
it
possible
to
leapfrog
to
a
new
level
of
environmental
improvement
and
economic
efficiency."
EPA,
PUB.
NO.
EPA­
100/
R­
93­
004,
TRANSFORMING
ENVIRONMENTAL
PERMITTING
AND
COMPLIANCE
POLICIES
TO
PROMOTE
POLLUTION
PREVENTION
5
(
1993),
available
at
http://
www.
epa.
gov/
clariton/
c/
html/
pubtitle.
html.
NACEPT
also
observed
that
the
command­
and­
control
environmental
regulatory
system
severely
constrains
innovation
because
government
regulators
tend
to
require
regulated
entities
to
only
use
existing
technologies
that
are
known
to
meet
the
emissions
limitations.
EPA
PERMITTING,
supra
note
351;
see
also
ELI
INNOVATION,
supra
note
351.
386.
See
supra
text
accompanying
notes
382­
385;
see
also
Figures
4­
2,
4­
3.
387.
See
supra
Part
II.
C.
6.
a.
388.
This
rate
level
is
significant
because
the
permanent
emissions
cap
in
Phase
II
was
based
on
multiplying
baseline
emissions
by
1.2
lb/
mmBtu.
Therefore
most
units
by
Phase
II
would,
on
average,
have
to
meet
or
exceed
this
rate.
394
TULANE
ENVIRONMENTAL
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14
blends
using
as
high
as
80%
PRB
coal
were
common,
driving
low­
cost
emission
reductions.
389
2.
Rate­
Based
Systems
Were
Unfriendly
to
Innovation
Another
finding
of
this
study
is
that
rate­
based
systems
are
unfriendly
to
innovation
due
to
the
same
four
characteristics
that
limit
business
compliance
alternatives,
described
in
Part
IV(
E).
By
limiting
the
kinds
of
technologies
used
for
compliance,
rate
standards
in
turn
limit
the
scope
for
innovation.
By
limiting
compliance
to
one
point
in
time,
they
create
no
incentives
for
ongoing
improvements
in
operational
techniques.
390
Because
technology­
based
rate
standards
impose
stricter
standards
on
cleaner
technologies,
they
limit
the
incentives
for
business
to
develop
or
use
cleaner
technologies.
391
Finally,
by
failing
to
create
continuous
drivers
for
improvement,
they
limit
research
and
development
efforts.
392
As
described
below,
these
barriers
have
also
contributed
to
declining
funding
for
environmental
technology
development.

3.
While
Innovation
Can
Be
Expected
to
Occur
Broadly,
It
Is
Not
Guaranteed
for
Any
Specific
Technology
One
of
the
reasons
that
flexible
programs
such
as
cap­
and­
trade
approaches
encourage
innovation
is
that
innovation
can
be
expected
to
occur
broadly
over
an
industry,
but
cannot
be
guaranteed
to
occur
for
any
particular
base
technology.
For
example,
under
the
Title
IV
NOX
program,
innovation
led
to
major
cost
reductions
for
two
of
the
three
major
boiler
types,
wall­
fired
and
cyclone
boilers,
but
not
tangentially­

389.
See
supra
Part
II.
C.
6.
a.
390.
The
lost
opportunity
is
revealed
by
the
OTC
NOX
cap,
which
led
some
firms
to
make
up
to
30%
NOX
reductions
through
operational
changes
alone,
which
had
not
been
implemented
under
the
previous
rate
standards.
Although
New
Source
Review
standards
theoretically
apply
again
to
a
plant
if
it
undergoes
a
major
modification,
this
happens
infrequently.
In
practice,
NSR
can
result
in
perverse
incentives
for
firms
to
not
improve
plant
performance
or
make
operational
changes
that
might
trigger
the
costs
of
New
Source
Review.
391.
As
Figure
3­
7,
describing
NOX
regulations,
shows,
dirtier
plants
may
in
practice
actually
face
much
lower
costs,
giving
no
incentive
to
move
towards
cleaner
technologies.
The
"
equal
effort"
approach
embodied
in
current
standards
creates
weak
drivers
for
firms
to
innovate
through
developing
newer,
cleaner
technologies.
392.
This
was
evident
in
cyclone
boilers
and
NOX,
where
industry
launched
a
research
effort
when
it
learned
of
the
EPA's
initiative
to
regulate
cyclones
in
Phase
II,
discovered
an
inexpensive
technology
that
would
lower
NOX
to
the
proposed
rate
level,
and
then
scaled
down
the
research
effort.
This
aspect
of
rate
standards
is
explored
in
major
studies
such
as
Nicholas
Ashford
et
al.,
Using
Regulation
to
Change
the
Market
for
Innovation,
9
HARV.
ENVTL.
L.
REV.
419
(
1985);
Kurt
Strasser,
Cleaner
Technology,
Pollution
Prevention
and
Environmental
Regulation,
9
FORDHAM
ENVTL.
L.
J.
1
(
1997).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
395
fired
boilers,
where
the
cost
of
compliance
exceeded
estimates.
393
Therefore,
rate
standards
that
establish
specific
limits
for
an
individual
base
technology
such
as
a
boiler
type
must
be
set
conservatively,
as
that
technology
might
not
experience
innovation.
This
limits
the
potential
benefits
from
unexpected
innovation
when
using
technology­
specific
standards.

4.
Traditional
Regulatory
Approaches
Have
Discouraged
and
Distorted
Private
Investment
in
Research
and
Development,
and
Capital
Markets
for
Innovation
A
significant
negative
effect
of
the
current
rate­
based
regulatory
system
is
its
role
in
lowering
and
limiting
industry
commitment
to
research
and
development.
Since
the
rate
standards
create
no
continuous
driver
to
lower
emissions,
firms
do
not
invest
continuously
in
research
and
development
to
enhance
environmental
quality,
because
there
is
no
compliance
benefit
in
doing
so.
Instead,
the
periodic
effort
to
lower
the
rate
standards
becomes
a
political
issue,
with
industry
battling
through
its
lawyers
to
make
sure
the
rate
standard
is
as
lenient
as
possible
and
to
use
existing
technologies
for
compliance.
As
demonstrated
by
the
cyclone
boiler
situation,
when
a
rate
standard
is
announced,
there
is
then
a
flurry
of
research
activity
on
how
to
reach
the
standard
at
least
cost,
after
which
the
research
effort
subsides
again.
394
This
has
virtually
eliminated
private
venture
capital
in
the
environmental
field,
which
has
shrunk
from
a
meager
$
200
million
in
1990
to
only
$
60
million
in
1999,
during
a
decade
in
which
funding
for
technology
skyrocketed
to
a
record
$
35
billion.
395
Environmental
financiers
interviewed
gave
two
reasons
for
this:
innovative
environmental
technologies
could
not
survive
the
length,
transaction
costs,
and
delay
of
the
government
regulatory
approval
process
under
technology­
based
rate
systems;
and
the
permitting
process
for
the
ratebased
system
fractures
the
national
market
into
the
hundreds
of
permitting
districts,
vastly
reducing
potential
markets.
396
The
consequence
of
this
is
that
there
is
virtually
no
venture
capital
for
environmental
technology,
when
it
could
be
one
of
the
strongest
drivers
of
innovation
and
progress.

393.
See
supra
Part
III.
D.
5.
394.
See
supra
Part
III.
D.
5.
c.
395.
See
ELI
INNOVATION,
supra
note
351,
at
9,
25;
see
also
PricewaterhouseCoopers,
1999
Money
Tree
Survey,
at
http://
www.
pwcmoneytree.
com.
396.
See
Interviews
with
environmental
financiers;
see
also
ELI
INNOVATION,
supra
note
351.
396
TULANE
ENVIRONMENTAL
LAW
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[
Vol.
14
In
addition
to
the
problems
caused
by
rate­
based
standards,
the
new
source/
old
source
distinction
in
the
CAA
also
distorts
industry
investments
in
research
and
development.
The
power
industry
research
coalition,
EPRI
(
formerly
the
Electric
Power
Research
Institute),
had
a
1999
budget
of
$
364
million,
of
which
over
90%
was
devoted
to
improving
existing
plants,
not
developing
new
technologies.
397
On
the
other
hand,
government
spending
is
about
evenly
split,
with
half
of
the
DOE's
energy
research
budget
devoted
to
developing
new
electricity­
generating
technologies.
398
We
see,
therefore,
that
our
regulatory
system,
which
imposes
stringent
environmental
requirements
on
new
plants
but
not
old
plants,
creates
major
economic
pressure
on
business
to
extend
the
life
of
old
plants,
causing
the
industry
to
mis­
allocate
hundreds
of
millions
of
research
dollars.

H.
Imposing
Stricter
Standards
on
New
Sources
Has
Proven
Ineffective
in
the
Power
Sector,
and
Has
Led
to
Neither
Cheaper
Compliance
Nor
Better
Environmental
Results
One
of
the
fundamental
elements
of
our
clean
air
legislation
has
been
to
impose
stricter
standards
on
new
sources
than
on
existing
sources,
in
order
to
attain
ambient
pollution
levels,
help
prevent
the
degradation
of
airsheds,
and
to
spur
innovation.
399
Originally,
federal
standards
applied
only
to
new
sources,
on
the
theory
that
it
would
be
cheaper
to
attain
ambient
standards
by
requiring
new
sources
to
install
modern
technologies
or
controls,
and
that
retirement
would
ultimately
lead
to
all
sources
being
covered
under
new
source
standards.
400
Today
the
distinction
is
carried
forward
in
the
relatively
lenient
standards
applied
to
existing
sources
under
Title
IV,
compared
to
the
stringent
standards
applied
to
new
sources.

397.
EPRI's
1999
Annual
Report
shows
a
research
program
of
$
364,856,000,
including
$
102,600,000
in
supplemental
project
funding
by
its
members.
Almost
all
projects
are
applied
and
oriented
towards
improving
existing
plants
and
technologies.
ELEC.
POWER
RESEARCH
INST.,
ANNUAL
REPORT
(
1999),
available
at
www.
epri.
com.
398.
Roughly
half
of
the
DOE's
$
2.1
billion
fiscal
year
2000
appropriation
for
"
Energy
Resources"
is
oriented
towards
new
power
technologies
and
energy
conservation.
U.
S.
DEPT.
OF
ENERGY,
FY
2001
BUDGET
REQUEST
TO
CONGRESS
(
2000);
see
also
EIA,
PUB.
NO.
SR/
OIAF/
1999­
03,
FEDERAL
FINANCIAL
INTERVENTIONS
AND
SUBSIDIES
IN
ENERGY
MARKETS
1999:
PRIMARY
ENERGY,
available
at
http://
www.
eia.
doe.
gov/
oiaf/
servicerep/
subsidy/
index.
html
(
last
modified
July
10,
2000)
(
noting
that
overall,
"
nearly
two­
thirds
of
Federal
energy
R&
D
($
2.8
billion)
is
allocated
to
basic
research")
An
additional
$
1.6
billion
in
applied
research
is
divided
between
research
to
develop
new
technologies
and
research
to
improve
existing
technologies.
Id.
at
25.
399.
FRANK
P.
GRAD,
TREATISE
ON
ENVIRONMENTAL
LAW
§
2.03[
14]
(
1995);
Clean
Air
Act
Amendment
of
1977,
S.
Rep.
No.
95­
127
(
1977);
H.
Rep.
No.
95­
294,
at
11­
14
(
1977).
400.
See
supra
note
399.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
397
1.
New
Source
Standards
Have
Not
Effectively
Reduced
Ambient
Pollution
Levels
Contrary
to
the
initial
supposition
that
it
would
be
cheaper
to
achieve
significant
reductions
at
new
plants
rather
than
older
plants,
it
has
not
in
fact
been
cheaper
for
new
sources
to
reduce
pollution.
A
review
of
the
costs
of
NOX
reduction
in
Figure
3­
7
shows
that
it
is
far
cheaper
today
for
older
sources
to
reduce
NOX
than
for
cleaner
modern
technologies.
Because
fundamental
technology
change
in
the
power
sector
has
produced
far
cleaner
natural
gas
generation
technologies,
401
significant
reductions
are
available
principally
at
old
plants,
where
they
are
also
far
cheaper.
Yet
the
new
source
standards
impose
very
high
costs
on
the
new
gas­
fired
facilities
to
reduce
small
amounts
of
NOX,
while
many
older
and
dirtier
sources
must
make
only
modest
or
even
no
reductions.
402
The
law's
emphasis
on
reductions
from
new
sources
may
derive
from
an
older,
static
view
of
technology
in
which
the
base
technology
is
assumed
to
not
change
much.
However,
a
modern
view
is
that
fundamental
technology
change
may
be
expected
in
most
industries,
and
new
sources
are
likely
to
be
more
efficient
and
less
polluting
than
old
sources.
A
strategy
focused
on
new
sources
will
not
work
well
when
technology
change
is
rapid,
plants
are
long­
lived,
or
when
fundamentally
different
technologies
are
used
for
new
sources
than
old
sources.
In
these
cases,
New
Source
Review
can
become
an
obstructionist
policy
that
achieves
little
pollution
reduction,
but
imposes
high
transaction
and
compliance
costs
only
on
the
new
clean
technologies.
These
findings
stress
the
importance
of
adopting
regulatory
systems
that
create
equal
pressure
on
both
old
and
new
sources
to
reduce
emissions.

2.
New
Source
Standards
Force
Only
Limited
Kinds
of
Innovation
New
source
standards
were
also
adopted
in
part
for
their
role
in
prompting
innovation,
and
here
their
role
is
more
complex.
New
source
401.
Even
without
controls,
modern
gas
combined­
cycle
plants
emit
virtually
no
SO2,
particulates,
or
air
toxics.
Their
NOX
levels
are
around
0.05
lb/
mmBtu,
which
is
well
below
the
NSPS
and
ten
to
forty
times
lower
than
that
of
coal
units.
Because
they
are
more
efficient
than
coal
plants,
they
also
emit
roughly
half
the
CO2.
See
STATE
AND
TERRITORIAL
AIR
POLLUTION
PROGRAM
ADMINISTRATORS
&
ASSOCIATION
OF
LOCAL
AIR
POLLUTION
OFFICIALS
(
STAPPA/
ALAPCO),
REDUCING
GREENHOUSE
GASES
AND
AIR
POLLUTION:
A
MENU
OF
HARMONIZED
OPTIONS
49
(
1999).
402.
See
Figure
3­
7.
Modern
gas
plants
are
cheaper
to
build
than
coal
plants,
and
achieve
55%
efficiency
instead
of
the
34%
average
for
coal
plants.
This
offsets
the
relatively
more
expensive
fuel
cost
for
natural
gas,
and
the
DOE
estimates
that
90%
of
new
generation
between
the
years
2000
and
2020
will
be
gas­
fired.
See
DOE
ANNUAL
ENERGY
OUTLOOK
2001,
supra
note
1,
at
65,
78.
398
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
standards
have
led
to
development
of
new
technologies,
including
innovative
control
technologies
such
as
SCONOX
and
XONON.
403
They
have
also
contributed
to
a
collaborative
federal­
industry
effort
to
develop
cleaner
and
more
efficient
gas
turbines,
in
which
federal
research
funds
have
also
played
a
large
role.
404
However,
new
source
standards
have
also
suppressed
innovation
and
improvement.
By
definition,
new
source
standards
fail
to
prompt
innovation
in
existing
plants,
and
because
they
apply
only
at
one
time
they
did
not
encourage
innovation
and
improvement
in
ongoing
management
and
operational
practices.
As
shown
in
Figures
4­
2
and
4­
3,
new
sources
standards
have
created
only
limited
innovation,
focused
on
expensive,
end­
of­
pipe
controls.
New
source
standards
also
discouraged
improvement
at
old
plants,
as
firms
have
limited
upgrades
or
efficiency
investments
that
might
trigger
New
Source
Review,
which
would
impose
major
transaction
and
compliance
costs
on
the
firm.
405
Finally,
new
source
standards
have
significantly
distorted
the
focus
of
industry
research
efforts
towards
extending
the
life
of
older
plants,
and
not
developing
new
technologies.
406
3.
NSR
Rate
Standards
Create
Few
Net
Benefits
When
Combined
with
Offsets
or
in
Conjunction
with
an
Emissions
Cap
New
source
standards
also
help
to
prevent
the
deterioration
of
airsheds,
but
this
goal
is
addressed
more
effectively
by
establishing
an
emissions
cap,
especially
if
the
cap
level
implements
significant
reductions.
The
irony
is
that
once
an
emissions
cap
is
established
for
a
pollutant,
there
are
no
net
environmental
benefits
from
the
stringent
emissions
rate
limits
imposed
by
New
Source
Review.
407
Despite
imposing
high
costs
on
cleaner
new
technologies,
they
create
no
net
reduction
in
emissions,
which
are
now
controlled
by
the
cap.
The
same
result
applies
today
in
nonattainment
areas,
where
the
CAA
requires
any
new
source
to
fully
offset
its
emissions
with
matching
reductions
from
existing
sources.
408
In
both
of
these
circumstances,
a
better
policy
would
403.
XONON
is
a
flameless
catalyst
module
developed
by
Catalytica
Combustion
Systems.
Nutech,
Ultra
Low
NOx
Combustor,
at
http://
www.
nutech.
org/
stationary/
fuel_
burn/
boilers/
other/
xonon.
html
(
n.
d.).
404.
Federal
funding
of
the
Advanced
Turbine
Systems
program
has
risen
from
$
5
million
in
Fiscal
Year
(
FY)
1992
to
$
33
million
in
FY
1999.
EIA,
supra
note
398,
at
33.
405.
See
supra
Parts
II(
A),
III(
E)(
2).
406.
See
supra
note
397
(
noting
that
90%
of
industry
research
efforts
focused
on
existing
plant
and
equipment).
407.
See
supra
Part
III.
E.
2.
408.
See
42
U.
S.
C.
§
7502
(
1994).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
399
be
to
not
apply
NSR,
as
it
creates
few
net
environmental
benefits
and
may
hinder
the
multi­
pollutant
benefits
that
come
from
the
transition
to
cleaner
new
technologies.
409
I.
Transaction
Costs
in
Cap­
and­
Trade
and
Rate­
Based
Programs
The
NOX
and
SO2
cap­
and­
trade
and
rate­
based
programs
differ
greatly
in
transaction
costs.
410
These
include
both
the
effort
required
to
establish
the
programs
and
the
ongoing
transaction
costs
in
applying
the
regulatory
programs
to
new
and
old
sources.
In
general,
although
the
creation
of
cap­
and­
trade
programs
may
involve
extensive
efforts
and
lobbying
activity,
once
created
they
perform
with
very
low
transaction
costs.
411
Rate­
based
regulations
on
the
other
hand
may
also
be
difficult
to
create
if
they
are
set
at
stringent
levels,
but
importantly
create
high
transaction
costs
and
a
culture
of
conflict
in
their
implementation
phase.
In
doing
so
they
may
exact
a
heavy
toll
on
economic
development
by
lengthening
and
creating
uncertainty
in
the
process
of
siting
new
plants,
despite
creating
no
net
environmental
benefits
in
comparison
to
a
capand
trade
approach.
412
1.
Transaction
Costs
in
Establishing
Legislation
Creating
legislation
for
either
a
rate­
based
or
cap­
and­
trade
program
involves
extensive
efforts
and
lobbying
activity,
which
depend
primarily
on
the
stringency
of
the
standard.
There
were
considerable
transaction
costs
in
establishing
the
Acid
Rain
Program
in
Congress,
especially
with
regard
to
the
SO2
standard.
413
There
was
significant
lobbying
activity
as
to
the
overall
level
of
SO2
reductions,
and
an
even
greater
amount
on
specific
provisions
as
firms
jockeyed
to
have
Congress
include
special
allowance
allocations
that
benefited
their
particular
firm
or
region.
414
409.
This
is
particularly
true
for
carbon
dioxide,
the
principal
greenhouse
gas.
Since
CO2
is
a
long­
lived
gas
that
lasts
for
centuries
once
emitted,
it
is
critical
to
achieve
major
carbon
reductions
in
the
next
decade
or
two.
The
most
feasible
way
to
do
so
is
to
invest
heavily
in
new
gas­
fired
plants
that
are
more
efficient
and
far
cleaner
than
the
older
coal­
fired
power
plants.
Yet
our
NOX
policies
make
such
new
investment
considerably
more
difficult,
leading
to
continued
emissions
from
older
plants.
The
cost
burden
of
NSR
is
especially
severe
for
smaller
gas­
turbine
units
that
are
precisely
those
used
for
co­
generation
at
industrial
sites,
and
could
achieve
the
greatest
efficiency
gains
and
greenhouse
gas
reductions.
410.
See
supra
Part
IV.
B.
411.
See
supra
Part
III.
E.
1.
412.
See
supra
Part
IV.
G.
4.
413.
See
COHEN,
supra
note
4,
at
25­
44.
414.
This
resulted
in
twenty­
nine
separate
formulas
for
allowance
allocation
that
have
little
to
do
with
achieving
program
goals,
but
have
a
great
deal
of
economic
impact
in
redistributing
allowances
between
firms.
See
ELLERMAN
ET
AL.,
supra
note
10,
at
16;
MCLEAN,
supra
note
191,
at
8.
400
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Although
the
ten
years
it
took
to
enact
acid
rain
legislation
might
be
interpreted
to
indicate
the
difficulty
of
establishing
a
cap­
and­
trade
program,
this
delay
had
more
to
do
with
the
stringency
of
the
program
itself
rather
than
the
cap­
and­
trade
mechanism
finally
adopted
in
1990.415
The
emissions
cap
and
allowance­
trading
approach
was
only
initiated
under
President
Bush
at
the
end
of
this
period,
and
is
generally
thought
to
have
facilitated
enactment
of
the
legislation
by
satisfying
environmental
concerns
for
a
10
million
ton
reduction
while
allowing
business
greater
flexibility
to
reduce
costs.
416
The
Title
IV
NOX
program
occasioned
far
less
discussion
or
lobbying
activity
in
the
legislative
proceedings,
in
part
because
the
2
million
ton
NOX
reduction
was
less
than
the
10
million
ton
SO2
reduction.
In
addition,
the
expected
compliance
cost
was
considerably
less,
even
though
the
NOX
standard
also
represented
a
roughly
50%
reduction
from
prior
emissions
levels.
The
expected
capital
cost
of
a
low­
NOX
burner
was
$
20/
kW,
417
far
less
than
the
$
249/
kW
capital
cost
of
scrubbing
expected
to
meet
the
SO2
standard.
This
suggests
that
there
may
be
fewer
transaction
costs
in
enacting
less
costly
standards.
Indeed,
establishing
other
more
stringent
NOX
rate
standards
for
power
plants
such
as
the
OTC
NOX
reductions
program,
418
the
new
NOX
NSPS,
419
and
the
new
ambient
limits
for
ozone
have
all
involved
major
transaction
costs.
420
2.
Transaction
Costs
in
Establishing
Regulations
Transaction
costs
were
far
lower
for
the
Title
IV
SO2
program
than
the
NOX
program
in
the
next
phase,
that
of
establishing
regulations
to
415.
See
COHEN,
supra
note
4,
at
152­
66.
416.
See
generally
ELLERMAN
ET
AL.,
supra
note
10,
at
31­
35;
COHEN,
supra
note
4,
at
152­
66
(
discussing
the
legislative
history
of
the
Clean
Air
Act).
417.
See
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
II
Final
Rule,
61
Fed.
Reg.
67,112,
67,113
(
Dec.
19,
1996).
418.
The
OTC
NOX
reduction
program,
which
included
both
rate­
based
standards
in
its
first
phase
and
an
emissions
cap
and
allowance­
trading
standard
starting
in
1999,
took
extensive
discussions
between
states
to
establish
the
overall
regulatory
framework,
baselines,
and
allocations.
See
the
series
of
multistate
memoranda
and
resolutions
starting
in
1991
that
are
listed
at
the
Ozone
Transport
Commission
homepage,
at
http://
www.
sso.
org/
otc/.
419.
See
Clean
Air
Act,
40
C.
F.
R.
§
60.44a
(
2000);
Revision
of
Standards
of
Performance
for
Nitrogen
Oxide
Emissions
from
New
Fossil­
Fuel
Fired
Steam
Generating
Units,
63
Fed.
Reg.
49,442,
49,444
(
Sept.
16.,
1998)
(
setting
NOX
New
Source
Performance
Standard
of
1.6
lb/
MWh).
420.
Industry
sued
the
EPA
over
its
new
NAAQS
for
ozone
and
fine
particulate
matter
smaller
than
2.5
microns.
National
Ambient
Air
Quality
Standards
for
Ozone,
62
Fed.
Reg.
38,856,
38,856
(
July
18,
1997),
struck
down
in
part
by
Am.
Trucking
Ass'n
v.
EPA,
175
F.
3d
1027,
1037
(
D.
C.
Cir.
1999),
modified
on
reh'g
by
195
F.
3d
4
(
D.
C.
Cir.
1999),
aff'd
in
part,
rev'd
in
part
sub
nom.
Whitman
v.
Am.
Trucking
Ass'n,
121
S.
Ct.
903
(
2001).
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
401
implement
the
program.
One
reason
was
that
key
sections
of
the
SO2
provisions
were
self­
executing.
421
Another
was
that
there
was
less
area
for
dispute
in
cap­
and­
trade
programs,
since
the
law
established
both
the
basic
standard
and
the
allocations.
Except
for
a
lawsuit
concerning
the
rules
for
substitution
units,
which
was
settled,
422
the
only
lawsuits
filed
under
the
SO2
program
were
relatively
minor
ones
dealing
with
specific
allocation
disputes.
423
In
contrast,
the
Title
IV
NOX
standards
were
the
subject
of
an
intensive
government­
industry
negotiation
process
over
the
meaning
of
"
low­
NOX
technology"
that
significantly
delayed
the
proposal
of
regulations.
424
An
industry
lawsuit
then
successfully
contested
the
EPA's
interpretation,
delaying
implementation
of
the
program
by
a
full
year.
425
The
implementation
of
Phase
II
standards
have
been
similar.
There
was
relatively
little
conflict
in
implementing
the
Phase
II
SO2
standard,
which
simply
reduced
allowance
amounts.
In
contrast
the
NOX
421.
See
Brian
Mclean,
Evolution
of
Marketable
Permits:
The
U.
S.
Experience
with
Sulfur
Dioxide
Allowance
Trading,
8
INT'L
J.
ENVTL.
&
POLLUTION
19
(
1997).
"
If
EPA
failed
to
put
implementing
regulations
in
place,
emission
limitations
stated
in
the
law
would
apply
to
every
source
.
.
.
.
Coupled
with
the
automatic
noncompliance
penalties,
this
provision
encouraged
the
industry
to
support
the
timely
promulgation
of
regulations
to
avoid
the
more
costly
statutory
fallback."
Id.
422.
Several
major
environmental
groups
and
fifty
utilities
sued
the
EPA
over
its
initial
final
rule
for
substitution
units
that
would
have
allowed
firms
to
count
the
reductions
achieved
by
building
a
scrubber
on
a
unit
after
1985
but
before
1990.
See
Proposed
Settlement;
Acid
Rain
Core
Rules
Litigation,
59
Fed.
Reg.
42,227
(
Aug.
17,
1994);
Proposed
Settlement;
Acid
Rain
Core
Rules
Litigation,
59
Fed.
Reg.
28,522
(
June
2,
1994).
The
EPA
agreed
to
change
its
rule
to
not
allow
this
result.
See
Clean
Air
Act,
40
C.
F.
R.
§
72.41
(
2000);
Acid
Rain
Program:
Permits,
59
Fed.
Reg.
60,218,
60,220
(
Nov.
22,
1994).
423.
Only
two
other
judicial
challenges
were
brought,
which
focused
only
on
a
specific
provision
that
outlined
the
extension
allowances
available
to
utilities
that
installed
scrubbers.
In
one
challenge,
three
utilities
unsuccessfully
sought
to
require
the
EPA
to
process
extension
allowance
applications
in
order
of
receipt
before
issuing
its
final
regulations
for
the
acid
rain
program.
Monongahela
Power
Co.
v.
Reilly,
980
F.
2d
272,
278
(
4th
Cir.
1992).
A
second
unsuccessful
challenge
was
brought
by
an
individual
utility,
Indianapolis
Power
and
Light
Company,
challenging
the
EPA's
failure
to
adjust
its
emissions
data
to
account
for
an
extended
period
of
time
a
unit
was
out
of
operation
due
to
unexpected
major
repairs.
Indianapolis
Power
&
Light
Co.
v.
EPA,
58
F.
3d
643,
643
(
D.
C.
Cir.
1995).
424.
The
EPA
promulgated
NOX
regulations
in
March
1994
(
almost
two
years
after
the
May
15,
1992,
deadline
set
by
statute),
following
lengthy
but
unsuccessful
efforts
to
achieve
a
negotiated
rulemaking
that
covered,
among
other
things,
low­
NOX
burner
technology
issues.
Acid
Rain
Program;
Nitrogen
Oxides
Emission
Reduction
Program
 
Phase
I,
Final
Rule,
59
Fed.
Reg.
13,538
(
Mar.
22,
1994).
425.
Following
issuance
of
the
regulations,
the
industry
successfully
challenged
the
EPA's
decision
that
"
low
NOX
burner
technology"
included
overfire
air.
See
Al.
Power
Co.
v.
EPA,
40
F.
3d
450
(
D.
C.
Cir.
1994)
(
vacating
the
rule).
As
a
result,
utilities
were
not
required
to
comply
until
January
1,
1996,
after
the
EPA
had
re­
issued
the
rule
in
April
1995,
a
full
year
after
the
statutory
compliance
deadline
for
Phase
I
NOX
emissions
limitations.
See
Acid
Rain
Program:
Nitrogen
Oxides
Emission
Reduction
Program:
Direct
Final
Rule,
60
Fed.
Reg.
18,751
(
Apr.
13,
1995).
402
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
standards
led
to
considerable
efforts
to
determine
the
appropriate
rate
standards
that
fit
with
the
statutory
language,
and
the
industry
again
filed
lawsuits
over
the
proposed
Phase
II
NOX
regulations.
426
Again,
the
NOX
standards
created
greater
transaction
costs
in
establishing
the
regulations.

3.
Transaction
Costs
in
Implementing
the
Programs
The
ongoing
transaction
costs
under
the
NOX
and
SO2
programs
are
very
different,
especially
for
new
sources.
Phase
I
SO2
permits
consist
simply
of
a
sheet
of
paper
that
states
the
correct
allowance
allocation
and
monitoring
protocols.
427
The
principal
government
roles
are
to
operate
the
allowance­
trading
systems,
monitor
emissions,
and
perform
end­
ofyear
reconciliations.
428
This
creates
extremely
low
transaction
costs:
the
government
role
in
recording
allowance
transactions
typically
takes
place
in
less
than
twenty­
four
hours.
429
The
Phase
I
NOX
program
also
faced
relatively
few
transaction
costs
in
requiring
a
one­
time
retrofit
of
a
defined
technology,
although
some
firms
had
to
apply
for
an
alternative
emissions
limit.
430
However,
for
new
sources,
the
SO2
cap­
and­
trade
program
creates
far
lower
transaction
costs
than
NOX­
based
regulation,
even
though
it
implements
a
zero
new
source
standard
in
which
emissions
cannot
grow.
New
sources
are
simply
subject
to
the
same
allowance
system
as
other
plants,
which
imposes
low
transaction
costs
and
no
permitting
delays
for
new
plants.
In
contrast,
the
ongoing
transaction
costs
for
new
sources
to
comply
with
NOX
regulation
are
extremely
contentious
and
timeintensive
with
New
Source
Review
a
major
cause
of
conflict
between
the
industry
and
government
over
the
past
decade.
The
NSR
process
typically
takes
months
or
even
years
to
permit
a
new
plant,
creating
426.
Challenges
to
SO2
program
implementation
were
primarily
based
on
individual
EPA
allocation
decisions.
See
Tex.
Mun.
Power
Agency
v.
EPA,
89
F.
3d.
858,
858
(
D.
C.
Cir.
1996)
(
upholding
EPA
utility­
specific
allocation
decisions);
Madison
Gas
&
Elec.
Co.
v.
EPA,
25
F.
3d
526
(
7th
Cir.
1994)
(
challenging
successfully
the
EPA's
failure
to
award
bonus
allowances).
The
NOX
Phase
II
challenges
were
broad
challenges
that
could
have
potentially
delayed
implementation
of
NOX
emissions
limitations
for
Group
1,
Phase
II
and
Group
2
boilers.
See
Appalachian
Power
Co.
v.
EPA,
135
F.
3d
791,
822
(
D.
C.
Cir.
1998).
The
petitioners
failed
in
several
broad
challenges
to
Phase
II,
Group
1
regulations
and
succeeded
in
part
with
their
challenges
to
Group
2
regulations.
Id.
427.
Clean
Air
Act,
40
C.
F.
R
§
72.31
(
2000);
EPA,
PUB.
NO.
OMB­
2060­
0258,
ACID
RAIN
PROGRAM:
PHASE
II
PERMIT
APPLICATION
(
1998),
available
at
http://
www.
epa.
gov/
airmarkets/
forms
(
last
updated
Jan.
19,
2001).
428.
See
supra
Part
II.
C.
11.
429.
About
90%
of
SO2
trades
under
the
Acid
Rain
Program
are
recorded
under
the
EPA
Allowance
Tracking
System
in
less
than
twenty­
four
hours.
Kruger
et
al.,
supra
note
158,
at
121.
See
EPA
1999
COMPLIANCE
REPORT,
supra
note
1.
430.
See
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
12­
13.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
403
administrative
costs
to
governments
and
major
opportunity
costs
for
firms.
431
Under
this
process,
the
law
requires
government
regulators
to
make
a
specific
determination
of
what
precise
technology
is
the
"
best
available"
or
"
lowest
achievable."
432
These
standards
pit
regulators
against
the
applicant
in
a
series
of
factual
issues,
and
create
high
transaction
costs.
433
However
there
may
be
no
gain
to
the
environment
if
the
plant
is
a
modern
gas
plant,
as
NOX
emissions
are
minimal
and
the
plant
would
be
expected
to
create
multi­
pollutant
benefits
by
displacing
power
from
dirtier
sources.

4.
Transaction
Costs
in
Incrementally
Lowering
Standards
An
interesting
benefit
of
the
cap­
and­
trade
approach
was
evident
in
the
transition
from
Phase
I
to
Phase
II
of
Title
IV.
Under
the
rate­
based
approach
for
the
NOX
standards,
it
would
have
been
unfair
to
again
require
Phase
I
units
to
retrofit
their
boilers
a
few
years
after
the
beginning
of
Phase
I
in
order
to
meet
the
slightly
lower
Phase
II
standard
in
2000.
Therefore
all
Phase
I
units
were
exempted
from
meeting
the
more
stringent
Phase
II
limits
and
were
grandfathered
at
the
lower
Phase
I
limits.
434
In
contrast,
Phase
II
of
the
SO2
program
was
able
to
require
added
reductions
from
all
the
Phase
I
units
simply
by
reducing
their
allowance
allocations,
while
including
all
other
sources
equally.
435
This
was
implemented
without
any
grandfathering
problem,
transaction
costs,
or
major
lawsuits.
The
cap­
and­
trade
approach
therefore
allows
a
simple,
effective,
and
equitable
way
to
require
firms
to
reduce
emissions
if
needed
in
the
future.

431.
See
Anthony
Arcone
&
Josh
Margolis,
New
Source
Review
ERC
Trading
 
The
Good,
The
Bad
and
The
Difficult,
ENVTL.
FIN.
21
(
Oct.
2000).
432.
42
U.
S.
C.
§
7479(
3),
7501(
3)
(
1994).
The
procedure
is
detailed
in
EPA,
DRAFT
NEW
SOURCE
REVIEW
WORKSHOP
MANUAL;
PREVENTION
OF
SIGNIFICANT
DETERIORATION
AND
NONATTAINMENT
AREA
PERMITTING
(
1990).
The
results
of
individual
determinations
are
collected
in
EPA,
PUB.
NO.
EPA­
456/
R­
99­
004,
RACT/
BACT/
LAER
CLEARINGHOUSE
CLEAN
AIR
TECHNOLOGY
CENTER
ANNUAL
REPORT
FOR
1999:
A
COMPILATION
OF
CONTROL
TECHNOLOGY
DETERMINATIONS
(
1990
ed.,
9th
Supp.
1999),
available
at
http://
www.
epa.
gov/
ttn/
cact/
dir1/
rblc99.
pdf.
433.
For
BACT,
the
law
requires
these
be
made
"
on
a
case­
by­
case
basis,
taking
into
account
energy,
environmental,
and
economic
impacts."
42
U.
S.
C.
§
7479(
3).
Contested
cases
are
frequent,
and
results
of
litigation
are
reported
by
state,
or
in
cases
of
federal
direct
jurisdiction,
in
cases
before
the
EPA
Environmental
Appeals
Board,
at
http://
www.
epa.
gov/
eab/
eabpsd.
htm.
434.
42
U.
S.
C.
§
7651a.
435.
See
id.
§
7651d.
404
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
J.
Monitoring
and
Compliance
Both
Title
IV
NOX
and
SO2
programs
have
achieved
100%
compliance
with
emission
limitations
in
all
years
of
Phase
I.
436
The
factors
of
regulatory
design
that
contributed
to
this
excellent
result
are
described
below.

1.
Strict
Monitoring
and
High
Penalties
Key
factors
in
the
100%
compliance
rate
are
the
strict
monitoring
protocols
that
require
continuous
emissions
monitors,
437
and
the
high
penalties.
Title
IV
imposes
a
penalty
of
$
2000
for
each
ton
of
NOX
or
SO2
emitted
in
excess
of
emissions
limitations
requirements,
438
forfeiture
of
allowances
under
the
SO2
program,
as
well
as
regular
civil
and
criminal
penalties.
439
Since
the
monitoring
ensures
that
violators
will
be
caught,
and
the
high
penalties
are
many
times
the
cost
of
compliance,
both
programs
work
well
to
assure
compliance.

2.
Design
of
Cap­
and­
Trade
Programs
Another
factor
in
the
very
high
compliance
levels
is
the
design
of
cap­
and­
trade
programs.
440
The
Title
IV
SO2
program
achieved
100%
compliance
in
emissions
reductions,
and
there
was
only
one
violation
of
one
ton
in
the
OTC
NOX
program
in
1999,
which
led
to
a
swift
and
automatic
penalty.
441
These
compliance
rates
are
significantly
better
than
the
80%
compliance
typical
under
other
federal
air
programs.
442
Several
factors
contribute,
including
the
factual
simplicity
of
the
standard,
which
lacks
any
limitations
or
special
conditions.
Also,
the
availability
of
436.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2;
EPA
1999
OTC
NOX
COMPLIANCE
REPORT,
supra
note
204,
at
2.
437.
Title
IV
requires
"
CEMS,
[
or]
any
alternative
monitoring
system
that
is
demonstrated
as
providing
information
with
the
same
precision,
reliability,
accessibility
and
timeliness
as
that
provided
by
CEMS."
42
U.
S.
C.
§
7651k(
a).
438.
Id.
§
7651j(
a).
439.
Id.
§
7413.
440.
See
EPA,
RULE
EFFECTIVENESS
STUDY
(
1993)
(
noting
a
compliance
rate
of
80%
for
traditional
air
programs).
In
the
five
years
of
Phase
I,
there
were
only
thirty­
eight
actions
against
forty­
five
plants
(
ninety
units)
for
more
minor
infractions
such
as
violations
of
monitoring,
record
keeping,
and
reporting
rules.
This
number
of
violations
in
comparison
to
the
2500
units
covered
by
the
Acid
Rain
Program
monitoring
requirements
results
in
a
96%
compliance
result
for
the
program
over
five
years,
again
much
better
than
typical
compliance
rates
under
the
EPA's
air
programs.
Zofia
Kosim,
Acid
Rain
Program:
Compliance
and
Enforcement,
Presentation
at
Elec.
Utilities
Envtl.
Conference,
Tucson,
Ariz.
(
Jan.
9,
2001)
(
notes
on
file
with
author).
441.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
at
2;
EPA
1999
OTC
NOX
COMPLIANCE
REPORT,
supra
note
204,
at
2.
442.
EPA
1993
RULE
EFFECTIVENESS
STUDY,
supra
note
440.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
405
trading
coupled
with
the
annual
reconciliation
period
after
the
end
of
the
year,
creates
a
"
no­
fault"
aspect
to
compliance
under
cap­
and­
trade
helps
firms
achieve
100%
compliance
without
compromising
environmental
integrity.
443
Finally,
as
demonstrated
by
the
one
OTC
violation,
enforcement
is
also
very
simple
under
cap­
and­
trade
programs,
with
penalties
immediately
and
automatically
assessed.

3.
Inclusiveness
of
Cap­
and­
Trade
Programs
A
final
benefit
of
cap­
and­
trade
programs
is
their
lack
of
exceptions,
which
allows
more
sources
to
be
included
in
the
compliance
system.
Cap­
and­
trade
programs
typically
include
all
relevant
sources,
and
provide
for
no
exceptions.
In
contrast,
entire
classes
of
boilers
(
i.
e.,
the
Group
2
boilers)
were
not
placed
in
the
Phase
I
NOX
program
because
of
the
perceived
lack
of
available
technology.
444
Second,
special
alternative
emissions
limits
were
provided
to
ten
units
that
installed
low­
NOX
burners
but
could
still
not
meet
the
rate
standards.
445
Therefore,
although
the
NOX
rate
program
achieved
100%
compliance,
446
there
was
limited
participation
and
the
need
to
authorize
exceptions
for
some
units
through
the
granting
of
alternate
emissions
limit
(
AEL)
permits.

K.
Over­
Compliance
and
Other
Conservative
Compliance
Strategies
by
Firms
Both
Title
IV
programs
led
to
conservative
strategies
by
firms,
leading
to
self­
reliance
and
over­
compliance.
Under
the
Title
IV
NOX
program,
Table
A
firms
reduced
emissions
11%
below
established
rate
limits
to
assure
a
margin
of
safety,
resulting
in
additional
pollutant
reductions.
447
Emissions
were
30%
below
authorized
levels
in
Phase
I
of
the
Title
IV
SO2
program,
but
the
ability
of
firms
to
bank
allowances
means
that
these
early
reductions
are
not
permanent,
and
the
tons
are
likely
to
be
emitted
in
the
future.
The
OTC
NOX
cap­
and­
trade
program
also
surprised
analysts
when
firms
over­
complied
by
20%
in
the
first
year.
The
banking
rules
for
the
OTC
NOX
program
may
result
in
future
reductions
of
banked
allowances,
448
creating
additional
environmental
443.
Sources
that
find
themselves
out
of
compliance
at
year
end
can
purchase
allowances
to
achieve
compliance
within
sixty
days
of
the
end
of
the
year.
Clean
Air
Act,
40
C.
F.
R.
§
77.3
(
2000).
444.
See
supra
Part
III.
D.
5.
445.
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
exh.
8,
at
13.
446.
Id.
at
2,
13.
447.
Id.
exh.
9,
at
14;
see
also
supra
Part
III.
D.
4.
448.
1999
emissions
were
174,843
tons
compared
to
allowance
allocations
of
218,738
tons.
Banked
allowances
may
only
be
used
up
to
10%
of
authorized
allowances
in
each
year.
406
TULANE
ENVIRONMENTAL
LAW
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[
Vol.
14
benefits.
Thus,
although
both
cap­
and­
trade
programs
led
to
overcompliance
future
environmental
benefits
are
diluted
by
the
ability
to
bank
reductions.

L.
Flexibility
Mechanisms
with
Low
Transaction
Costs
Were
Widely
Used
Firms
made
extensive
use
of
all
flexibility
mechanisms
that
provided
economic
benefits
with
low
transaction
costs.
Under
the
NOX
program,
80%
of
units
were
included
in
averaging
plans,
and
almost
half
of
potential
units
used
the
early
election
option.
449
Under
the
Title
IV
SO2
program,
30%
of
potential
substitution
units
entered
the
program,
and
most
firms
used
both
the
banking
and
trading
mechanisms.
450
In
contrast,
flexibility
mechanisms
with
high
transaction
costs,
such
as
the
AEL
program,
were
infrequently
used.
The
effect
of
the
flexibility
mechanisms
on
firms'
behavior
can
be
seen
in
Figures
4­
4
and
4­
5
that
compare
compliance
results
achieved
under
both
Title
IV
programs.
The
emissions
figures
for
NOX
show
most
firms
emitted
at
or
around
the
rate
standard
level,
with
averaging
provisions
allowing
some
units
to
exceed
the
rate
standard
by
a
small
amount.
The
data
for
SO2
shows
a
different
behavior,
with
unit
emissions
uniformly
spread
over
a
wide
range
from
very
low
levels
to
140%
of
the
standard,
indicating
the
importance
of
the
flexibility
provided
by
market
mechanisms.

See
Figure
4­
4.451
Emissions
Results
(
by
quintiles)
for
Unit
Emissions
of
SO2
in
Phase
I
(
1995­
1999)

See
Figure
4­
5452:
Emissions
Results
(
by
quintiles)
for
Unit
Emissions
of
NOX
in
Phase
I
(
1996­
1999)

The
economic
effect
of
the
flexibility
mechanisms
was
clearly
positive,
as
it
allowed
firms
greater
flexibility
in
their
compliance
planning,
leading
to
lower
costs.
However,
they
gave
some
slight
economic
advantage
to
larger
firms,
as
larger
firms
may
make
the
greatest
use
of
Banked
allowances
are
reduced
by
a
variable
ratio
(
2:
1
in
2000)
for
use
over
that
10%
threshold.
The
differences
in
banking
rules
for
SO2
and
NOX
are
motivated
in
part
by
the
greater
sensitivity
of
health
benefits
to
short­
term
fluctuations
in
NOX.
See
EPA
1999
OTC
NOX
COMPLIANCE
REPORT,
supra
note
204,
at
2­
3.
449.
See
supra
Part
III.
D.
3.
450.
See
supra
Part
II.
C.
9.
451.
Data
derived
from
analysis
of
EPA
COMPLIANCE
REPORTS
1995­
1999.
452.
Id.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
407
provisions
like
averaging
and
internal
trading,
due
to
the
greater
number
of
units
they
have
to
include
in
the
programs.
The
environmental
effect
of
the
flexibility
mechanisms
was
minimal
or
nonexistent.
The
tendency
of
most
firms
to
comply
autarkicly
meant
that
most
flexibility
mechanisms
were
used
locally.
Eighty
percent
of
SO2
allowances
used
for
compliance
come
from
within
the
same
state,
and
80%
of
NOX
averaging
plans
are
also
confined
to
one
state.
453
The
concern
that
trading
could
shift
emissions
to
cause
hot
spots
also
proved
unfounded,
as
an
analysis
of
the
first
four
years
of
the
SO2
cap­
and­
trade
program
showed
that
regional
movements
of
allowances
were
minimal
(
i.
e.,
3%
of
all
allowances
used),
and
that
trading
may
even
have
helped
cool
hot
spots
by
encouraging
emissions
reductions
at
the
largest
plants.
454
M.
Retirement
and/
or
Switching
to
Cleaner
Power
Sources
Neither
standard
resulted
in
significant
switching
to
cleaner
power
sources
such
as
natural
gas
or
renewable
sources,
or
the
retirement
of
older
coal­
fired
facilities.
In
retrospect,
it
can
be
seen
that
neither
standard
was
sufficiently
stringent
to
create
an
economic
rationale
that
would
lead
firms
to
switch
from
existing
coal­
fired
plants.
Since
existing
coal
power
plants
have
paid
off
their
capital
costs,
they
generate
electricity
at
low
cost
 
around
2
¢
per
kWh.
455
This
is
sufficiently
below
the
cost
of
alternative
sources
of
power,
including
new
gas
generation
at
3
¢
to
4
¢
per
kWh,
456
to
lead
firms
to
invest
heavily
in
these
older
plants
before
it
makes
economic
sense
to
retire
them
in
favor
of
new
generation.
Economic
analyses
have
shown
that
even
imposing
New
Source
Performance
Standards
on
old
plants,
thereby
requiring
a
90%
reduction
in
SO2
and
attainment
of
a
0.15
lb/
mmBtu
NOX
standard,
would
force
only
limited
retirement.
457
Therefore,
Title
IV
standards,
which
are
far
less
stringent
than
new
source
standards,
would
evidently
not
lead
to
significant
retirement.

453.
SO2
information
from
EPA
Allowance
Tracking
System;
NOX
averaging
plans
in
EPA
1999
COMPLIANCE
REPORT,
supra
note
1,
app.
C­
1.
454.
See
generally
GAO
2000
EFFECTS,
supra
note
202,
at
7
(
discussing
the
movement
of
allowance
trading);
Swift,
supra
note
196
(
showing
major
reductions
in
largest
plants,
several
of
which
were
scrubbed).
For
acid
rain
trading
program
information,
see
http://
www.
epa.
gov/
airmarkets/
trading.
html
(
last
updated
Dec.
11,
2000).
455.
DOE
ANNUAL
ENERGY
OUTLOOK
2001,
supra
note
1,
fig.
73,
at
67.
456.
Id.
457.
Bruce
Biewald
et
al.,
Grandfathering
and
Environmental
Comparability:
An
Economic
Analysis
of
Air
Emission
Regulations
and
Electricity
Market
Distortions,
at
http://
www.
synapse­
energy.
com/
publications.
htm
(
Jan.
26,
1998).
408
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ENVIRONMENTAL
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[
Vol.
14
V.
CONCLUSION
A.
Stringency
A
central
conclusion
of
this
study
is
that
both
the
Title
IV
NOX
and
SO2
standards
were
too
lenient,
and
failed
to
align
the
private
costs
faced
by
firms
in
reducing
pollution
with
the
society­
wide
benefits
from
pollutant
reductions.
In
both
cases,
the
private
cost
to
businesses
of
reducing
an
additional
ton
of
pollution
was
far
below
the
social
health
and
welfare
benefits
of
additional
reductions.
458
In
the
case
of
SO2,
these
costs
were
possibly
an
order
of
magnitude
lower,
indicating
major
net
benefits
of
further
SO2
reductions.
This
calls
for
additional
action
by
legislation
or
regulation
to
further
reduce
SO2
and
NOX
emissions
levels.
459
B.
Regulatory
Design
Other
major
findings
of
the
study
relate
to
regulatory
design,
where
dramatic
differences
were
found
in
the
efficiency
and
effectiveness
of
the
various
regulatory
programs
for
NOX
and
SO2.
Overall,
the
two
Title
IV
standards
embody
fundamentally
different
methods
of
establishing
objective
and
fair
regulatory
regimes,
reflecting
fundamental
choices
in
environmental
law.
The
NOX
regulatory
program,
like
most
environmental
regulation
today,
is
rate­
based
and
embodies
an
"
equal
effort"
philosophy
that
accepts
any
base
technology,
but
requires
firms
to
achieve
reasonable
or
best
controls
for
that
given
technology.
Title
IV's
SO2
and
the
OTC
NOX
cap­
and­
trade
programs
are
two
of
the
first
major
pieces
of
environmental
regulation
to
impose
an
"
equal
cost
per
ton"
approach
to
pollution,
in
which
all
firms
face
a
similar
cost
for
an
additional
ton
of
pollution.
460
These
different
approaches
were
found
to
have
very
different
effects
on
firm
behavior
and
the
functioning
of
the
regulatory
systems,
as
summarized
in
Figure
5­
1.

458.
See
supra
Part
IV.
B.
459.
See
Northeastern
States
Petition,
supra
note
343.
Also,
legislation
has
been
introduced
in
both
House
and
Senate
to
significantly
reduce
emissions
of
four
pollutants
emitted
by
power
generating
plants
(
SO2,
NOX,
CO2
and
mercury).
See
Clean
Power
Act
of
2001,
S.
556,
107th
Cong.
(
2001);
H.
R.
1256,
107th
Cong.
(
2001).
460.
This
is
the
other
fundamental
alternative
for
objectively
neutral
regulation,
and
is
implemented
through
market­
based
regulations
such
as
pollutant
charges
set
at
a
uniform
price,
or
emissions
cap
and
allowance
trading
systems.
Under
these
approaches,
all
firms
face
an
equal
cost
per
ton
of
pollution,
which
is
indicated
by
the
allowance
price
in
cap­
and­
trade
systems,
or
the
level
of
a
pollutant
charge
or
fee.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
409
Figure
5­
1.
Comparison
of
Performance
of
Rate­
Based
and
Cap­
and­
Trade
Systems
for
NOX
and
SO2*

Cap
&
Trade
CAA
Rate
1.
Allows
business
flexibility
to
choose
different
compliance
approaches
+
­
2.
Applies
uniform
standards,
creating
benefits
for
firms
that
choose
cleaner
technologies
+
­
3.
Lowers
cost
of
compliance
+
­
4.
Creates
continuous
drivers
for
improvement
and
innovation
o
­
5.
Ensures
effective
monitoring
of
emissions
+
+
6.
Achieves
high
levels
or
100%
compliance
+
o
7.
Minimizes
transaction
costs
and
conflict.
+
­
*
Note:
+
is
positive,
o
neutral,
and
 
negative
Overall,
the
rate­
based
or
equal
effort
approach
is
shown
to
have
a
number
of
key
problems
that
distort
the
economic
context
faced
by
firms
in
ways
that
prevent
them
from
achieving
lower
costs
or
greater
environmental
quality.
It
creates
few
incentives
for
firms
to
choose
cleaner
base
technologies,
eliminating
what
is
possibly
the
principal
driver
towards
environmental
quality.
Second,
it
creates
incentives
for
the
business
to
achieve
emissions
reductions
at
only
one
point
in
time,
and
not
continuously.
Third,
rate
standards
are
inflexible,
driving
up
costs
and
limiting
compliance
technologies
and
potential
innovation.
These
problems
are
both
magnified
and
added
to
by
the
new
source/
old
source
distinction
in
current
air
pollution
laws.
These
characteristics
create
conflict
rather
than
alignment
between
environmental
and
economic
drivers
that
cannot
be
resolved
without
moving
away
from
the
rate
standard
approach.
The
cap­
and­
trade
programs
performed
far
better,
creating
significant
environmental
and
economic
benefits
by
imposing
a
mandatory
environmental
standard
while
allowing
firms
to
minimize
their
compliance
costs.
Important
features
of
these
programs
were
the
elimination
of
the
distinction
between
new
and
old
firms
and
between
different
technologies,
allowing
greater
efficiency
in
creating
pollutant
reductions.
Overall,
this
approach
was
considerably
less
intrusive
to
businesses
and
dramatically
lowered
compliance
costs,
without
compromising
environmental
integrity.
Several
overarching
issues
are
worth
mentioning.
One
is
the
difference
in
the
industry/
government
relationship
under
the
two
approaches.
The
rate­
based
standards
in
place
for
NOX
and
new
SO2
sources
require
government
regulators
to
review
and
permit
every
firm
action
to
control
pollution,
imposing
high
transaction
costs
and
410
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
inflexibility.
Under
the
cap­
and­
trade
programs,
the
government
role
is
transformed
to
one
of
assuring
high
quality
monitoring
and
compliance,
and
leaving
the
choice
of
compliance
technology
to
firm
decisionmaking
This
vastly
reduces
transaction
costs
and
delay,
and
also
creates
less
friction
and
conflict
between
regulators
and
the
regulated,
possibly
making
future
regulatory
needs
less
contentious.
The
second
concerns
innovation.
In
order
to
broadly
support
incentives
for
efficiency,
innovation,
and
pollution
prevention,
environmental
regulations
must
create
a
continuous
driver
for
pollution
reduction.
Rate
standards
cannot
do
so,
as
they
apply
only
at
one
time
and
create
incentives
only
to
attain
a
precise
level,
providing
no
incentives
to
go
beyond
the
limit.
The
cap­
and­
trade
approach
creates
such
continuous
incentives,
both
through
the
lack
of
growth
in
the
cap
and
the
opportunity
for
trading.
Thirdly,
the
two
approaches
differ
in
their
ability
to
align
economic
and
regulatory
drivers
toward
cleaner
production.
For
both
NOX
and
SO2,
economic
forces
could
lead
firms
to
make
pollutant
reductions,
including
drivers
for
greater
efficiency,
the
use
of
low­
sulfur
western
coal,
and
cheaper
and
cleaner
gas
turbines
for
new
generation
sources.
However,
traditional
regulations
for
NOX
and
SO2
were
found
to
actively
interfere
with
these
economic
drivers,
primarily
due
to
the
inflexibility
of
rate
standards
and
the
distinction
between
new
and
old
sources.
The
record
of
traditional
environmental
regulations
in
actually
frustrating
environmentally
positive
economic
forces
is
one
of
the
most
troublesome
aspects
of
current
regulation.
As
with
many
problems,
this
was
able
to
be
resolved
in
the
period
studied
by
moving
towards
a
performancebased
approach
using
cap­
and­
trade
systems
to
control
NOX
and
SO2
pollution.
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
411
412
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ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
2
­
2
SO2
Emis
s
ions
and
A
llowance
C
ap,
1
9
9
0­
1999
0
2000000
4000000
6000000
8000000
10000000
12000000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Year
Tons
SO2/
Allowances
Emissions
Allowance
C
ap
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
413
Fig.
2­
3A
SO2
Allowances
and
Emissions
of
Top
10
Phase
I
Utilities
by
Allowances
Allocated,
1995­
1999
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
SOUTH
AEP
TVA
ALLEG
CINERGY
UNION
OHED
ILPOW
CENTERIOR
PP&
L
Utilities
Allowances/
Tons
SO2
Net
Allowances
Net
Emissions
414
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ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
2­
3B
SO2
Allowances
and
Emissions,
Phase
I
Utilities
(
except
10
largest),
1995­
98
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
PEPCO
DAYTON
LILCO
WEPCO
DUQUES
EKYPOW
PSEG
WIPUB
PAPOW
SPRINGMO
SMSEL
Utilities
Allowances/
Tons
SO2
Net
Allowances
Net
Emissions
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
415
Net
Allowance
Table
1
Table
1
Table
1
Table
1
Substitution
Bonus
Compliance
Total
Parent
Company
Savings
Under­
emitters
Over­
emitters
Scrubbed
units
Retired
units
Units*
Allowances
Mechanism
0.70
Central
Hudson
33,923
0
0
0
33,923
0
N/
A
1.00
Cardinal
33,489
33,489
0
0
0
0
LSC
1.00
Iowa
Power
11,295
0
0
0
11,295
0
0
Retire
1.00
Interstate
Power
39,188
39,188
0
0
0
0
LSC
1.00
Kansas
City
6,489
6,489
0
0
0
0
LSC
1.72
Midamerican
6,074
9,454
­
3,380
0
0
0
LSC
2.00
Empire
District
38,298
38,875
0
0
­
577
0
LSC
2.00
Hoosier
Energy
5,779
6,395
­
616
0
0
0
LSC
2.00
S.
Mississippi
7,546
0
0
0
7,546
0
N/
A
2.00
City
of
Owensboro
64,659
0
0
64,659
0
0
Scrub
2.05
Duquesne
Light
­
14,237
20,807
­
42,017
0
6,973
3,211
LSC/
Trade
2.08
Atlantic
City
71,879
0
­
26,975
98,854
0
46,114
Scrub
2.28
IES
Utilities
36,326
39,119
­
2,793
0
0
0
LSC
2.96
Dayton
56,836
20,177
­
62,166
0
98,826
0
Sub
3.00
East
Kentucky
Power
57,721
57,721
0
0
0
0
LSC
3.00
NIPSCO
334,559
105,037
0
229,522
0
152,355
Scrub
3.00
NYSEG
72,956
0
­
6,276
79,232
0
0
Scrub
3.00
Utilicorp
United
3,393
0
­
1,367
0
4,760
0
Sub
3.00
VEPCO
167,688
0
­
82,044
249,732
0
97,855
Scrub
4.00
Public
Service
of
NH
16,517
0
­
23,428
0
39,945
0
Sub
4.00
City
of
Springfield
28,542
4,012
0
0
24,530
0
Sub
4.00
Tampa
Electric
­
60,138
62,917
­
131,769
0
8,714
0
LSC/
Trade
4.17
S.
Indiana
Gas
Co
74,560
2,309
­
30,757
87,708
15,300
0
Scrub
4.21
BGE
46,445
0
­
30,526
74,493
2,478
34,337
Scrub
5.00
Associated
329,950
314,005
0
0
15,945
0
LSC
5.68
Wisconsin
Power
&
Light
128,668
80,600
0
0
48,068
0
LSC
6.00
LILCO
375,566
353,178
0
0
22,388
0
LSC
6.00
Commonwealth
Edison
233,309
219,534
0
0
13,775
0
LSC
6.00
Northern
States
38,112
10,862
0
0
27,250
0
Sub
6.19
PEPCO
142,389
24,997
­
8,754
68,172
30,660
62,245
Scrub
6.20
Kentucky
Utilities
275,801
89,417
­
4,573
190,957
0
128,493
Scrub
6.33
GPU
42,789
0
­
73,173
115,962
0
67,418
Scrub
7.00
Big
Rivers
160,427
147
­
16,414
139,665
37,029
98,890
Scrub
7.00
Dairyland
84,802
49,497
0
0
35,305
0
LSC/
Sub
7.00
Kansas
City
Power
and
Light
146,332
76,746
0
0
69,586
0
LSC/
Sub
7.32
Wisconsin
Public
Service
106,595
51,921
0
0
54,674
0
LSC/
Sub
9.00
Consumers
Power
119,406
102,187
0
0
17,219
0
LSC
9.23
Pennsylvania
Power
and
Light
304,121
154,939
­
3,251
80,154
72,279
50,921
All
10.26
Niagara
Mohawk
43,121
0
­
44,711
0
87,832
0
Sub
11.00
Indianapolis
Power
and
Light
123,378
3,261
­
21,570
157,814
­
16,127
0
Scrub
11.30
Other
Utility
Companies
637,369
215,742
­
38,357
338,072
121,911
177,860
N/
A
14.40
Union
Electric
554,952
448,480
­
19,864
0
126,336
0
LSC
15.20
CIPSCO
48,196
90,022
­
28,469
0
­
13,357
0
LSC
17.00
WEPCO
198,480
82,825
0
0
107,355
8,300
0
LSC/
Retire
22.20
Illinois
Power
­
503,208
70,258
­
707,217
0
133,751
0
Trade
22.38
Allegheny
Power
1,036,131
47,598
­
98,589
1,053,448
33,674
569,609
Scrub
23.97
Cinergy
145,055
74,342
­
262,427
202,428
130,711
120,470
Scrub/
Sub
25.25
Ohio
Edison
426,446
243,291
­
87,574
20,596
250,133
75,520
LSC/
Sub
26.00
TVA
1,025,569
292,345
­
556,918
1,290,142
0
807,217
Scrub
29.68
Centerior
177,301
36,533
­
203,713
0
63,855
280,625
7,081
Sub
36.46
AEP
1,001,083
344,991
­
921,358
1,271,101
101,400
204,949
863,790
Scrub
49.07
Southern
Company
1,976,284
1,602,950
0
43,664
329,670
141,972
LSC
467.28
10,518,211
5,526,657
­
3,541,045
5,856,376
283,905
2,365,005
3,505,357
*
Includes
10
Opt­
in
Units
Allowances
gained
Fig.
2­
5
Compliance
Methods
of
51
Companies
in
Phase
I
(
1995­
1999)
416
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
2­
6
Scrubber
Installations
by
Year
and
Type
0
2
4
6
8
10
12
14
16
18
20
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Year
Number
of
Installations
Other
Phase
1,
Table
A
NSPS
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
417
Fig.
2­
9
Difference
Between
SO2
Emissions
and
Allowances,
Phase
I
Units,
1995­
1999
­
800000
­
600000
­
400000
­
200000
0
200000
400000
372
Individual
Units,
including
only
those
sub.
units
in
PI
from
1995­
1999,
including
Phase
I
extension
allowances
Tons
SO2
Emissions­
Allowances
418
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
2­
10
SO2
Allowances
Allocated
and
Emissions
by
State,
1995­
1999
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
KY
MD
NJ
NY
PA
TN
WV
IA
IL
IN
KS
MI
MN
MO
OH
WI
MA
NH
AL
FL
GA
MS
State
Allowances/
Tons
So2
Allowances
Emissions
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
419
Fig.
2­
11
Top
20
Phase
I
Plants
by
1985
SO2
Emissions:
1985
Emissions,
1999
Allowances,
and
1999
Emissions
0
50000
100000
150000
200000
250000
300000
350000
400000
W
H
Sammis
Eastlake
Hatfield's
Ferry
Kyger
Creek
Muskingum
River
Labadie
Cumberland
Top
20
Phase
I
Plants
by
1985
Emissions
(
not
including
Phase
I
Extension
Allowances)
Tons
SO2/
Allowances
1985
Emissions
1999
Allowances
1999
Emissions
420
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
3­
2
NOx
Rate
Reductions
During
Phase
I
0.77
0.45
0.44
0.43
0.42
0.52
0.36
0.36
0.37
0.34
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
1990
1996
1997
1998
1999
Year
lb/
mmBtu
Nox
Table
I
Units
Substitution
Units
Limit
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
421
Fig.
3­
3
NOx
Tonnage
Reductions
During
Phase
I
1,046,339
669,017
676,797
686,492
672,265
287,583
239,373
241,694
257,176
237,800
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1990
1996
1997
1998
1999
NOx
Tons
Table
I
Units
Substitution
Units
422
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig
3­
4
NOx
Controls
on
Phase
I
NOx
Plants,
by
Age
of
Plant
0
5
10
15
20
25
30
35
40
45
1930
1940
1950
1960
1970
1980
Decade
Number
of
Plants
OFA
LNB
LNB+
OFA
U
NO
2001]
HOW
ENVIRONMENTAL
LAWS
WORK
423
Fig.
4­
4
Emissions
Profile
SO2
0
10
20
30
40
50
60
70
80
90
0­
20
>
20­
40
>
40­
60
>
60­
80
>
80­
100
>
100­
120
>
120­
140
>
140­
160
>
160­
180
Over
180
Percent
of
Allowances
Emitted
Number
of
Units
Number
of
Units
424
TULANE
ENVIRONMENTAL
LAW
JOURNAL
[
Vol.
14
Fig.
4­
5
Number
of
Units
Emitting
at
Percent
of
NOx
Emissions
Rate
Limit
0
20
40
60
80
100
120
0­>
20
20­>
40
40­>
60
60­>
80
80­>
100
100­>
120
120­>
140
140­>
160
160­>
180
Percent
of
Emission
Rate
Limit
Number
of
Units
Number
of
Units