The electric utility industry is a major source of air pollution, particularly sulfur dioxide(SO 2 ), nitrogen oxides (NOx), and mercury (Hg), as well as suspected greenhouse gases, particularlycarbon dioxide (CO 2 ). On October 27, 2005, the Environmental Protection Agency (EPA) releaseda long-awaited analysis comparing the costs and benefits of alternative approaches to controlling thispollution. Called multi-pollutant proposals, the alternative schemes focus on using market-orientedmechanisms to achieve health and environmental goals in simpler, more cost-effective ways. EPA'snew analysis compares four versions of the Administration-based "Clear Skies" proposal to billsintroduced by Senator Jeffords ( S. 150 ) and Senator Carper ( S. 843 of the108th Congress), which would impose more stringent requirements. The Administration has been reluctant to conduct such a study, citing the cost and difficultyof doing so, but it relented after the Senate Environment and Public Works Committee, on a tie vote,failed to report the Clear Skies bill ( S. 131 ) in March 2005. One reason the bill failedto advance, according to its opponents, was the concern that an analysis comparing its provisions tothose of Senator Jeffords' and Senator Carper's bills had not been conducted. The issue was raisedagain in April 2005, during confirmation hearings for Stephen Johnson, who was sworn in as EPAAdministrator May 2. As one of his first official acts, he promised to conduct a cost-benefit analysisof Clear Skies and the other Senate bills, the results of which have now been released. Electric utility generating facilities are a major source of air pollution. The combustion offossil fuels (petroleum, natural gas, and coal), which accounts for about two-thirds of U.S. electricitygeneration, results in the emission of a stream of gases. These gases include several pollutants thatdirectly pose risks to human health and welfare, including particulate matter (PM), (1) sulfur dioxide, nitrogen oxides,and mercury. PM, SO 2 , and NOx are currently regulated under the Clean Air Act, and EPA hasfinalized rules to regulate mercury. Other gases may pose indirect risks, notably carbon dioxide,which may contribute to global warming. (2) Table 1 provides estimates of SO 2 , NOx, and CO 2 emissions fromelectric generating facilities. As indicated, SO 2 and NOx emissions have declined over the past sixyears as regulations resulting from the 1990 Clean Air Act Amendments have taken hold. In contrast,CO 2 emissions, which are unregulated, have continued to rise. In 2003, fossil-fuel-fired electricgenerating plants accounted for about 72% of the country's SO 2 emissions, 24% of its NOxemissions, and 41% of its CO 2 emissions. Annual emissions of Hg from utility facilities are moreuncertain; current estimates indicate about 45 tons (more than 40% of the country's total Hgemissions) come from electric generating units. Table 1. Emissions from U.S. Fossil-Fuel ElectricGenerating Plants (thousands of metric tons) Source: Energy Information Administration. Includes emissions fromcombined-heat-and-power plants. The evolution of air pollution controls over time and the growing scientificunderstanding of health and environmental impacts of power plant emissions haveled to a multilayered and interlocking patchwork of controls. Moreover, additionalcontrols are now underway, particularly with respect to NOx as a precursor to ozone,to both NOx and SO 2 as contributors to PM 2.5 , and to Hg as a toxic air pollutant. Also, under the United Nations Framework Convention on Climate Change, theUnited States agreed to voluntary limits on CO 2 emissions. The current BushAdministration has rejected the Kyoto Protocol, which would impose mandatorylimits, in favor of a voluntary reduction program. In contrast to the Administration'sposition, in June, 2005, the Senate passed a Sense of the Senate resolution calling formandatory controls on greenhouse gases that would not impose significant harm tothe economy. (3) For many years the complexity of the air quality control regime has causedsome observers to call for a simplified approach. One focus of this effort is the"multi-pollutant" or "four-pollutant" approach. This approach involves a mix ofregulatory and economic mechanisms that would apply to utility emissions of up tofour pollutants in various proposals -- SO 2 , NOx, Hg, and CO 2 . The objective wouldbe to balance the environmental goal of effective controls across the pollutantscovered with the industry goal of a stable regulatory regime for a period ofyears. (4) To some degree, this new approach already has been incorporated intoexisting law with three recently finalized rules: (1) the Clean Air Interstate Rule(CAIR), promulgated May 12, 2005, that caps emissions of SO 2 and NOx in theeastern U.S.; (2) the Clean Air Mercury Rule (CAMR), promulgated May 18, 2005,that caps emissions of Hg from coal-fired powerplants; and (3) the Clean AirVisibility Rule (CAVR), promulgated July 6, 2005, that focuses on SO 2 and NOxemissions that impair visibility surrounding national parks and wilderness areas. More SO 2 and NOx reductions are in the pipeline. With new ambient airquality standards for ozone and fine particles taking effect nationwide in 2005,emissions of NOx (which contributes to the formation of ozone) and SO 2 (which isamong the sources of fine particles) need to be reduced further. Mercury emissionsare also a focus of concern: 44 states have issued fish consumption advisories formercury, covering 13 million acres of lakes, 765,000 river miles, and the coastalwaters of 12 entire states. Mercury enters water bodies from air emissions that areeither deposited directly in them or are deposited on land and end up in water throughprecipitation run off. Many in industry, environmental groups, Congress, and the Administrationagree that legislation that addresses power plant pollution in a comprehensive(multi-pollutant) fashion could achieve health and environmental goals in simpler,more cost-effective ways. In the 109th Congress, six bills have been introduced thatwould impose multi-pollutant controls on utilities. (5) Suchlegislation (the Administration version of which is dubbed "Clear Skies") wouldaddress SO 2 , NOx, and Hg from electric generating facilities on a coordinatedschedule, and would rely, to a large extent, on a system like that used in the acid rainprogram, where national or regional caps on emissions are implemented through asystem of tradeable allowances. Some of the legislative proposals include CO 2 capsas well. Key questions in the ensuing congressional debate have been how stringentthe caps should be, how quickly reductions should be mandated, and whether carbondioxide should be among the emissions subject to a cap. Regarding the stringencyissue, all bills would eventually require a 70% to 80% reduction of both NOx andSO 2 emissions from 1998 levels. Regarding mercury, the bills eventually wouldrequire reductions of 70%-90%. The Clear Skies bill ( S. 131 ) would impose the least stringentstandards and would be phased in over the longest period of time. For all threepollutants, the final Clear Skies deadlines would be 2018, but the actual 70%reduction targets might not be met for as long as a decade after that. The reason forthe delay is the use of what are called "banking" provisions in the regulatory scheme. Because the deadlines are far in the future, utilities would be likely to "overcomply"in the early years of the program, building up credits that could be used in place offurther emission reductions in later years. The Administration uses the projectedovercompliance as a selling point for its approach, arguing that it will achievereductions sooner than would a traditional regulatory approach with similardeadlines. But overcompliance in the early years would lead to large holdings ofbanked emission allowances to be used in place of actual reductions in later years,delaying achievement of emissions caps. In its analysis of the Clear Skies bill, EPAdoes not expect to see the full 70% emission reductions until 2026 or later. The Jeffords and Carper bills also allow banking and trading of allowances;but, with earlier and more stringent caps on emissions, utilities would be unable tobank so many allowances and, thus, would reach full compliance at least a decadesooner than under Clear Skies. With respect to carbon dioxide, Clear Skies would not impose controls on it,whereas the Jeffords and Carper bills would. The absence of CO 2 from the mixmight lead to different strategies for achieving compliance, preserving more of amarket for coal, and lessening the degree to which power producers might switch tonatural gas or renewable fuels as a compliance strategy. The cost-benefit analysis released by EPA, October 27, (6) examined sixoptions: four of the six were variants of the Administration's Clear Skies bill or itsregulatory counterparts (7) ; the other two options were Senator Carper's CleanAir Planning Act ( S. 843 in the 108th Congress, but as of the date of theanalysis, not yet introduced in the 109th) and Senator Jeffords' Clean Power Act( S. 150 ). The results of the analysis show very little difference between the four ClearSkies options, so it may be best to think of them as one (for most purposes) andsimplify the discussion to three principal choices: Clear Skies, Carper, and Jeffords. Of the four Clear Skies options that EPA examined, we have chosen the version mostrecently drafted, the Managers' Mark version, which was offered at the SenateEnvironment and Public Works Committee markup of S. 131 on March9, 2005. (8) EPA's Multi-Pollutant Regulatory Analysis assumes as a baseline that in theabsence of new legislation, EPA and the states will take no additional action tocontrol SO 2 , NOx, Hg, or CO 2 emissions beyond those rules, regulations, oragreements finalized by mid-2004. This baseline is put forth despite three rulesrecently finalized by EPA that directly bear on SO 2 , NOx, and Hg. (9) Why EPA chose not to include three finalized rules that clearly delineateEPA's current approach to addressing SO 2 , NOx, and Hg control is unclear. (10) Instead,EPA included the three regulations as a "sixth proposal" for controlling thesepollutants -- a curious designation for finalized rules. This report uses that analysis,the CAIR/CAMR/CAVR (11) case, for its baseline because it most accuratelyportrays the status of current and future clean air regulation with respect to thesepollutants. Arguably, the uncertainty with respect to those rules (and others) is nomore than the uncertainty about the specific provisions and implementation of anymulti-pollutant legislation. For example, S. 843 was introduced in the108th Congress. There is no guarantee that a 109th Congress or later version wouldmaintain the deadlines contained in the 2003 proposal. Likewise, the Managers'Mark, almost by definition, was an evolving proposal and could change again if theCommittee resumes consideration of it. Finally, the regulations supporting anypassed legislation would be subject to some of the same uncertainties and delays asthe finalized regulations that were not included in EPA's baseline. Controlling airpollution is a moving target and we believe it is important that any analysis workfrom updated baseline projections and assumptions when possible. EPA's cost analysis places special emphasis on three basic parameters: Electric Demand Price Elasticity (Demand Response). EPAanalyzes two scenarios: (1) zero price elasticity (i.e., no demand response toincreasing electricity prices), and (2) a very inelastic short-term price elasticity (i.e.,a very limited demand response to increasing electricityprices). Assumed Short-term Construction Constraints (Feasibility). EPA analyzes two scenarios (1) an assumed shortage in boilermaker labor that limitsthe amount of SO 2 and NOx emissions control equipment that can be built by 2010,and (2) an assumption that the market will respond to the demand for new equipmentin a timely fashion (i.e., no constraint on short-termconstruction). Assumed Electricity Demand Growth and Natural Gas Supply. EPA analyzes two scenarios: (1) EPA's baseline assumption of 1.55% annualelectricity demand growth and baseline natural gas prices of $3.34 per MMBtu in2010 (1999 dollars), and (2) the Energy Information Administration (12) (EIA)baseline assumption of 1.83% annual electricity demand growth and baseline naturalgas prices of $3.62 per MMBtu in 2010 (1999 dollars). Under EPA model, theseprices rise under the impact of proposed legislation. Based on these parameters, EPA developed four scenarios that includedifferent combinations of these assumptions (as shown in Figure 1). EPA's Base Case Scenario assumes zero price demandelasticity, short-term construction constraints, and EPA electricity demand growthand natural gas supply assumptions. No Construction Constraint Scenario assumes zero priceelasticity, no short-term construction constraints, and EPA's electricity growth andnatural gas supply assumptions. EPA Demand Response Scenario assumes very inelasticshort-term price elasticity, short-term construction constraints, and EPA's electricitygrowth and natural gas supply assumptions. Higher Electricity Growth and Natural Gas Scenario assumes zero price elasticity, short-term construction constraints, and EIA's higher electricitygrowth and natural gas supply assumptions. This report uses EPA's Demand Response Scenario as the benchmarkanalysis. This choice is a compromise based on the three factors and lack ofalternative combinations. Each of the scenarios raises questions; however, thestrongest case can be made for including a short-term demand response function inthe modeling. Electricity price elasticities are well established in the literature,particularly short-term elasticities. (13) The short-term price elasticities chosen by EPAto incorporate Figure 1. EPA's FourScenarios into their Demand Response Scenario (the only scenario to contain the demand function) are well within the range suggested by the literature. Why EPA did not choose to include this refinement in all of the scenarios is unclear. However, EPAonly included it in the one, so CRS chose it. This is not to suggest that the other assumptions incorporated in the DemandResponse Scenario are not debatable, particularly EPA's assumption with respect toboilermaker labor. EPA assumes in three of the four scenarios above that there willbe limited boilermaker labor for constructing SO 2 and NOx control equipment until2010, following which unlimited labor would be available. (14) This is anassumption EPA incorporated into its regulatory rulemaking on the Clean AirInterstate Rule (CAIR), also called the Interstate Air Quality Rule (IAQR). Thisconstraint has been questioned by some, including the Institute of Clean AirCompanies (ICAC), the trade association that represents the air pollution controlindustry. During the rulemaking on CAIR, ICAC conducted their own analysis ofboilermaker labor availability and found no constraint on construction, even if the2015 deadline of CAIR was moved to 2010. As stated by ICAC: In summary, the air pollution control industry has demonstrated thatthey are able to install significant amounts of air pollution controlequipment in short periods of time. This has been demonstrated morerecently with the installation of SCRs [selective catalytic reductioncontrols] for the NOx SIP call as well as for control installations inboth Germany and Japan. The resources required for the projectedinstallations under the IAQR will also require a significant number ofair pollution control installations but the resources required tocomplete them are not expected to be limiting. Factors such as theuse of modular construction methods and non-union craft labor willreduce the demand for union boilermakers. This reduction inboilermaker demand combined with the six month increase incompliance time window will further reduce the demand onboilermaker labor. In the event of a shortage, additional boilermakerlabor is available through the Canadian boilermaker union as well asfrom ship builders' and iron workers' labor pools. In conclusion, therewill be more than sufficient boilermaker capacity to carry out theprojected IAQR and control installation for 2010 and 2015. Evenmore significantly, it will be possible to complete the 2015requirements in the 2010 timeframe. (15) The assumption of limited boilernaker availability, which only affects the twomost stringent alternatives ( S. 843 and S. 150 ) is includedin three of the four scenarios used by EPA in its analysis. The one scenario thatremoves this constraint simultaneously assumes zero price elasticity for electricitydemand. Thus, despite questions with respect to this assumption, one is forced tochoose whether to address it or to address the demand elasticity assumption. CRSbelieves that given the lack of an EPA alternative that includes both demandelasticity and no boilermaker constraint, it is more important to include a demandelasticity function in the benchmark analysis than to remove the questionablefeasibility constraint. (16) Thus, we chose EPA's demand response scenarioas our base case. Finally, there is the important issue of future natural gas supply. There areno facts about the future and, therefore, sensitivity analysis is very important tounderstand the robustness of cost estimates. The natural gas supply curves developedfor the EPA's model generally project more natural gas availability at lower pricesthan the natural gas supply curves developed by EIA. EPA provides one scenariowith the steeper EIA supply curves -- Higher Electricity Growth and Natural GasScenario -- along with the short-term feasibility constraint and zero short-term priceelasticity. In the current market climate, it is difficult not to argue that the EIAcurves may be more representative of future supplies than EPA's estimates. However, natural gas supply has a long history of volatility and the 15-year timeframe of the analysis leaves plenty of room for debate. Recognizing serious questions about EPA's feasibility constraints and thehistoric volatility of the natural gas market, this analysis uses the Demand ResponseScenario as the basis of its discussion. Including a short-term demand function isfully justified based on the literature. Clear Skies. Clear Skies wouldcost substantially less than the other two bills, both in the short- and long-term. Asindicated by Tables 2 and 3, Clear Skies' costs and benefits are minimal comparedwith the reconstructed baseline case. That Clear Skies has the lowest cost should notbe surprising. Compared to the other bills, it has less stringent requirements and laterdeadlines, so, particularly in the early years, there is a vast difference in the annualcosts of the three approaches. In particular, the provisions with respect to Hg areweak compared with the other two bills and there are no provisions for CO 2 . Moreimportantly, as discussed in a previous CRS report, Clear Skies is principally anattempt to revamp the Clean Air Act's existing structure with something morecost-effective. (17) Clear Skies' benefits would also be substantially less than the Carper andJeffords bills, which were designed to reduce pollution faster than existingrequirements. In 2010, the Clear Skies bill would provide $6 billion in annualbenefits, according to EPA, compared to benefits of $51 billion (Carper) and $83billion (Jeffords). The benefits of Clear Skies almost merge with the baselineincrease in later years, and continue to lag the two other bills, which have benefits of$19 billion and $66 billion annually in 2020. The higher benefits for the Carper andJeffords bills reflect the fact that Clear Skies' required pollution caps are lessstringent, and the implementation schedule is more relaxed. As noted, EPA compares the three bills' effects to a baseline that does notinclude current Clean Air Act requirements. If one adjusts the baseline to reflectcurrent Clean Air Act requirements (including the CAIR, CAMR, and CAVR rules,promulgated earlier this year), Clear Skies has essentially no incremental cost. Itsbenefits are also relatively small -- equal to an additional 10% of the benefits of thenewly promulgated rules in 2010 and only 2% of the benefits in 2020. This resultsuggests the success EPA has had in incorporating the market-based regulatoryscheme of Clear Skies into its new regulations. At the same time, the analysis maybolster the arguments of Clear Skies' opponents, who maintain that the requirementsof current law are at least as good as the Clear Skies requirements. S. 150 (Jeffords). Asindicated by Tables 2 and 3 , Senator Jeffords' bill would have the greatest benefits. In 2010, its benefits would be $83 billion annually, $32 billion more than those of theCarper bill, and about 14 times the benefits of Clear Skies. In 2020, its benefitscontinue to exceed those of the other bills: at an estimated $66 billion annually, theyare three-and-a-half times those of the Carper bill and 22 times those of Clear Skies. Table 2. EPA 2010 Cost and Benefit Estimatesfor Three Multi-Pollutant Proposals, Compared with Existing Law (in billions of 1999 dollars) Note: Benefit estimates presented represent the mid-point of the range provided byEPA. Table 3. EPA 2020 Cost and Benefit Estimates for Three Multi-Pollutant Proposals, Compared with Existing Law (in billions of 1999 dollars) Note: Benefit estimates presented represent the mid-point of the range provided byEPA. S. 150 would also be the most costly bill. As discussed later,more than the other bills, the Jeffords bill suffers from the short-term constructionconstraints EPA imposed on the analysis. EPA maintains that a shortage of skilledlabor will limit the number of scrubbers that can be installed by 2010. Lackingscrubbers, coal-fired power plants are forced to shut down in the agency's analysisof the bill. The Jeffords bill would reduce coal production and coal-fired electricgeneration by about 40%, according to EPA. Vast numbers of natural-gas-fired andrenewable fuel generators would be required in their place, at great cost: the Jeffordsbill would lead to an additional 65 gigawatts of generation from renewable sources(about 6 times the amount projected under either of the other options) and nearly 100gigawatts of additional oil- and gas-fired capacity. By contrast, coal use wouldincrease under either Clear Skies or the Carper bill. While the cost of S. 150 may lead Clear Skies' proponents tocharacterize it as too costly, the net benefits of S. 150 (i.e., benefits minuscosts) far exceed those of Clear Skies and S. 843 . S. 843 (Carper). Asindicated by Tables 2 and 3 , both the benefits and costs of S. 843 arelower than those of S. 150 , but higher than those of Clear Skies. Thisis by design, as S. 843 attempts to achieve substantial emission reductionsbeyond those currently incorporated in the Clean Air Act, but allow sufficient timeto avoid serious short-term price increases. As discussed later, the more phased-inschedule of the bill helps mitigate (but does not eliminate) the short-term constraintsEPA imposes on the analysis. In addition, as discussed later, S. 843develops a limited and flexible CO 2 requirement that achieves some reduction in theincrease in carbon dioxide emissions at a nominal cost. EPA conducted a number of sensitivity analyses on the various bills. Asnoted earlier, three variables highlighted by the analyses were (1) price elasticity, (2)short-term construction constraints, and (3) higher electricity growth and moreconstrained natural gas supply. Unfortunately, these variables were not isolated fromeach other, but examined in selected combinations. As noted earlier, the benchmarkanalysis used for this report assumes limited short-term price elasticity, short-termconstruction constraints, and EPA's electricity growth and natural gas supply curves. The other three combinations that EPA analyzed were: No Construction Constraint Scenario , which assumes zeroprice elasticity, no short-term constraints, and EPA's electricity growth and naturalgas supply curves; EPA Base Case Scenario , which assumes zero price elasticity,short-term constraints, and EPA electricity growth and natural gas supply curves;and Higher Electricity Growth and Natural Gas Scenario , whichassumes zero price elasticity, short-term constraints, and EIA's higher electricitygrowth and natural gas supply curves. The first alternative, the No Construction Constraint Scenario, removes EPA'sassumed short-term construction constraint assumption contained in the benchmarkanalysis but includes a zero demand price elasticity assumption. As indicated in Table 4, this swap of assumptions is pretty much a wash for S. 843 andthe Managers' Mark. Indeed, in the case of S. 843, the analysis indicatesthat the short-term construction assumptions are slightly more important to the costanalysis than the removal of any price elasticity. However, the assumption of zerodemand price elasticity in this scenario has a substantial impact on the cost of S. 150 , both short (36% increase) and long-term (157% increase), as theremoval of any price elasticity exceeds the saving gained by removing EPAshort-term construction constraint assumptions. This is not surprising, given thesignificant compliance cost of S. 150 -- a cost that, with zero elasticityassumed, results in no demand-side reaction from consumers. Table 4. Incremental Cost of AlternativeAssumptions Compared with the CRS Base Case (in billions of 1999 dollars) The second alternative, the EPA Base Case Scenario, replaces the short-termprice elasticity estimate of our benchmark analysis with an assumption of zero priceelasticity. The short-term construction constraint assumptions are maintained. Thiscase confirms the dramatic effect that removal of any short-term price elasticity hason the costs of S. 150 with increases of 63% in 2010 and 147% in 2020over the benchmark analysis, and indicates the relative size of the effect on S. 843 . For S. 843, removal of any price elasticity results ina cost estimate 86% higher than our benchmark estimate for 2010. Along with thefirst sensitivity analysis, this result suggests that demand response and short-termconstruction constraint assumptions heavily influence EPA's 2010 cost estimates forS. 843. In contrast, EPA's assumptions have little effect on S.843 cost estimates in the long-term or for the Managers' Mark. The third alternative, the Higher Electricity Growth and Natural Gas Scenario,essentially takes the zero price elasticity estimate and short-term constructionconstraint assumptions of the EPA Base Case Scenario and adds EIA's higherelectricity growth assumptions and steeper natural gas supply curves. Compared withthe benchmark analysis, this case maintains the short-term construction constraintassumption, removes any demand price elasticity, and employs EIA assumptions forelectricity growth and natural gas supply. Not surprisingly, the combination of zerodemand response, greater demand for electricity, and tighter natural gas supplyresults in higher costs, particularly for S. 150 . Compared with theassumptions of the EPA Base Case, the effect of higher growth and natural gas costsin the context of zero demand response is most pronounced in the case of S.150 and puts even more pressure on EPA's assumption of zero demandprice elasticity, particularly for 2020. The impact on S. 843 isconsiderably less dramatic and is nonexistent for the Managers' Mark. However, thesensitivity analysis here is pretty limited and a more comprehensive analysis of futurenatural gas availability could be valuable in determining appropriate targets andtimetables for any multi-pollutant legislation. EPA's assumption of zero demand price elasticity has adramatic impact on the S. 150 short and long-term cost estimates. Thiseffect is accentuated when EIA higher electricity growth and natural gas assumptionare employed, particularly over the long term. Removal of EPA's assumed short-termconstruction constraints reduces the effect some in the short-term, but does notovercome it. EPA's assumption of zero demand price elasticity and assumedshort-term construction constraints appear to have significant and about equal effectson S. 843 in the short term. Both effects decrease substantially over thelong term, even if EIA's higher cost assumptions are employed, because of S.843's less aggressive time frame. EPA's assumptions have little effect on the Managers' Markcost estimates, either short or long-term. This is not surprising as the basis of theManagers' Mark and much of newly-finalized regulations -- Clear Skies -- wasdeveloped using EPA's model. That the Managers' Mark has only an incrementalimpact on the cost and benefits of existing law and regulations ensures that itseconomic impact is minimal under any conditions compared with those of existinglaws and regulations. Two of the bills analyzed by EPA, Senator Jeffords' S. 150 andSenator Carper's S. 843 , contain provisions to reduce carbon dioxideemissions. The S. 150 provision sets an emissions cap of 2.05 billion tonsannually beginning in 2010 (about 7% below 1990 levels). S. 843 wouldset an emissions cap of about 2.655 billion tons (estimated 2006 emissions) in 2009,decreasing to 2.454 billion tons (2001 emissions level) beginning in 2013. Asindicated in Table 5 , the more modest reduction requirement, combined with aslower reduction schedule, results in an order of magnitude lower costs for CO 2 allowances under S. 843 compared to S. 150. The S. 150 reduction requirement and schedule are morerepresentative of the requirements of the Kyoto Protocol than S. 843 . As indicated in Table 5, adjusting S. 150's carbon dioxide reduction costsfor 2005 dollars and metric tons results in costs of $19 a metric ton in 2010 and $33a metric ton in 2020. This estimate range is within that of the current EuropeanUnion market prices as the EU ramps up for meeting its more stringent 8% reductionbelow 1990 levels required under the Kyoto Protocol. The current EU price for ametric ton of carbon dioxide reduction is about $25. (18) Table 5. EPA Estimates for Carbon Dioxide Allowance Prices -- 2010 and 2020 (per short ton, except as noted) Given the short deadline for completing the study, EPA and its contractor didnot develop new data on the cost or cost-effectiveness of control technologies,instead relying on assumptions used in conducting analyses of the CAIR and CAMRrules promulgated early in 2005. Those analyses used cost and cost-effectivenessdata collected in 2003. As noted in an earlier CRS report, the effectiveness ofmercury control technology has advanced rapidly since 2003. Thus, we conclude thatthe present analysis may overstate the cost of emission controls for mercury by asubstantial margin. The air pollution control industry maintains that the cost ofactivated carbon injection (ACI) controls, which the model assumes would beimposed on about 40% of coal-fired plants under the Carper bill, is now onlyone-fourth what the cost would have been in 2003. (19) EPA's Hg control cost assumptions have less of a distorting effect in itsanalysis of S. 150 , simply because its other assumptions (discussedearlier) lead it to conclude that 40% of coal-fired plants would be shut down by 2010under the bill. EPA's analysis and CRS's reanalysis of the data show benefits substantiallyoutweighing costs for both S. 150 and S. 843 . The benefitsrepresent the monetized human health effects (principally reduced mortality) fromreducing emissions of SO 2 and fine particles. Some of these benefits are summarizedin Table 6 below. Table 6: Selected Heath Effects Avoided byProposals Over Baseline (in annual incidences avoided) Note: These effects are incremental to the effects of the CAIR, CAMR, and CAVRrules. Three other sets of likely benefits were not estimated, at least in part because of the methodological difficulty of doing so. First, the analysis makes no attempt tomonetize environmental benefits, which are significant in the case of sulfur dioxideand mercury controls. SO 2 emissions are the primary cause of acid deposition, whichharms aquatic life and affects forest growth, as well as damaging building materials. Reductions in SO 2 emissions could have significant environmental benefits, whichare not estimated in the analysis. The emissions are also a significant factor in theformation of regional haze, the effects of which were also not monetized. Mercurydeposition, as noted earlier, has led to widespread fish consumption advisories, withattendant economic impacts. The omission of environmental benefits has its greatesteffect on S. 150 and S. 843 which have more aggressiveSO 2 , NOx, and Hg control schemes. Second, the analysis does not model mercury heath effects. Agency analysesof the economic benefits of reducing Hg health effects have ranged from a fewmillion dollars per year to several billion dollars per year. (20) The impactof omitting these benefits would be significant if one accepts the latter estimate. Onceagain, this omission has its greatest effect on S. 150 and S. 843 , which have more aggressive Hg control schemes. Finally, the analysis did not attempt to estimate the possible benefits ofcontrolling CO 2 emissions. There is no accepted methodology for making such anestimate. Still, the absence of such a factor in the analysis may be a significantomission, which understates the potential benefits of the Jeffords and Carper bills. The Jeffords bill is the most aggressive of the three in regard to controlling CO 2 (whereas Clear Skies does not cap CO 2 emissions at all). Thus, the Jeffords bill maybe most disadvantaged as a result of this factor. In reexamining EPA's analysis, several points stand out in thinking aboutmulti-pollutant legislation: EPA has been very successful in incorporating the caps of ClearSkies in now promulgated rules. As a result, after adjusting for those rules, EPA'sanalysis finds little cost and a small benefit associated with passage of Clear Skieslegislation. The Jeffords and Carper bills, however, set more stringent standards thanthe promulgated rules. For both bills, the analysis shows benefits far outweighingadditional costs. Carbon dioxide costs depend on the amount and schedule ofany proposed reductions. The modest reduction requirement and relaxedimplementation schedule of S. 843 results in nominal carbon dioxidereduction costs. As reduction requirements increase and implementation schedulestighten, costs rise. Mercury control costs are dependent on the timeliness of thedata. The EPA analysis does not reflect current data on costs of Hgcontrols. EPA's benefit analysis is limited and incomplete, which worksto the disadvantage of alternatives to Clear Skies that include more stringentstandards. Although it represents a step toward understanding the impacts of thelegislative options, EPA's analysis is not as useful as one could hope. Thecombination of assumptions used in the analysis works in favor of the various ClearSkies alternatives by overstating the Hg control costs of the alternatives, and --through its assumption of constraints on labor availability -- heavily penalizingshort-term pollution reduction schedules. In addition, the analysis does notadequately analyze the effect that natural gas price volatility may have onimplementation strategies and costs. The analysis suffers from being based on 2003assumptions, both in terms of natural gas markets and Hg control costs. The resultis an analysis that some will argue is no longer sufficiently up-to-date to contributesubstantively to congressional debate.

Summary: The electric utility industry is a major source of air pollution, particularly sulfur dioxide(SO 2 ), nitrogen oxides (NOx), and mercury (Hg), as well as suspected greenhouse gases, particularlycarbon dioxide (CO 2 ). On October 27, 2005, the Environmental Protection Agency (EPA) releaseda long-awaited analysis comparing the costs and benefits of alternative approaches to controlling thispollution. The alternative schemes focus on using market-oriented mechanisms directed at multiplepollutants to achieve health and environmental goals. The new analysis compares four versions ofthe Administration-based "Clear Skies" proposal to bills introduced by Senator Jeffords( S. 150 ) and Senator Carper ( S. 843 of the 108th Congress), which wouldimpose more stringent requirements. This report, which will not be updated, examines EPA's analysis and adjusts some of itsassumptions to reflect current regulations. The most important adjustment is the choice of baseline. The agency's analysis assumes as a baseline that, in the absence of new federal legislation, EPA andthe states will take no additional action to control SO 2 , NOx, Hg, or CO 2 emissions beyond thoseactions finalized by mid-2004. This baseline is put forth despite three rules recently promulgated byEPA that limit SO 2 , NOx, and Hg emissions on a timeframe similar to that proposed by the ClearSkies legislation. CRS reexamines EPA's data, producing cost and benefit estimates for each bill incrementalto the costs and benefits of current law and promulgated regulations. The reanalysis finds that ClearSkies would have negligible incremental costs and added benefits of $6 billion in 2010 and $3 billionin 2020. For the same years, S. 843 would have annual net benefits 8 and 5 times asgreat as Clear Skies at annual costs of $4.2 billion and $3 billion, and S. 150 wouldhave annual net benefits 10 and 16 times those of Clear Skies at annual costs of $23.6 billion and$18.1 billion. EPA conducted limited sensitivity analyses to examine the effect on cost of selectcombinations of assumptions, including (1) the responsiveness of electricity demand to changes inprice; (2) the availability of skilled labor to install control equipment; and (3) the growth ofelectricity demand and natural gas prices. However, some potentially useful combinations ofassumptions were not examined. For example, if EPA had combined a relaxed skilled laborconstraint with some responsiveness of electricity demand to changes in price, the cost of S. 150 and S. 843 would be substantially reduced. CRS also concludedthat the Hg control costs used in the analysis may be substantially overstated because of datedassumptions. Numerous benefits were not estimated by EPA, partly because of methodologicaldifficulties. Benefits not estimated include the environmental (as opposed to health) benefits ofcontrolling the pollutants; the health effects of mercury control; and any benefits from controllingCO 2 emissions. Thus, even though benefits exceeded costs for each of the options in both EPA's andour analysis, one should perhaps view the benefit estimates as a floor rather than a best estimate,particularly for S. 150 and S. 843 , which include significant Hg and CO 2 reductions.