On December 17, 2003, the Environmental Protection Agency (EPA) issued proposed rules toaddress the effects of interstate transport of air pollutants on non-attainment of the National AmbientAir Quality Standards (NAAQS) for fine particulates (PM 2.5 ) and ozone (specifically, the 8-hourstandard). (1) The proposed Interstate Air Quality (IAQ)rule appeared in the Federal Register January30, 2004. For PM 2.5 , the proposed rule finds that the interstate transport of sulfur dioxide(SO 2 ) andnitrogen oxides (NOx) from 28 states and the District of Columbia contributes significantly todownwind non-attainment; for ozone, the proposed rule finds that interstate transport of NOx from25 states and the District of Columbia contributes significantly to downwind non-attainment of the8-hour standard. To remedy the situation, the proposed rule generally follows the methodology EPA employed in an earlier regulation that addressed interstate transport of ozone pollution, the NOx SIP Call. (2) Inthe NOx SIP Call, EPA found 21 states and the District of Columbia significantly contributed to non-attainment of the 1-hour ozone NAAQS. (3) To remedy thesituation, EPA set statewide emissionsbudgets for NOx emissions, and recommended that states achieve those budgets through "highlycost-effective" controls on electric generators and large industrial facilities under a regional cap andtrade program. States are to implement controls by May 31, 2004. With the IAQ rule, EPA proposes a region-wide emissions cap for NOx and SO 2 to be implemented in two phases -- 2010 and 2015. Based on the methodology employed in the proposedrule, EPA's estimates of emissions under the caps are provided in Table 1, along with percentreductions from the basecase. EPA's methodology determines the caps by applying "highly costeffective" pollution controls on electric generating units. Table 1. EPA Estimates of Regional NOx and SO2 Caps and Percentage Reduction (million tons) Source: Proposed Interstate Air Quality Rule (69 Federal Register 4566-4650) Based on the cost-effectiveness methodology, each of the affected states is assigned a statewide "emissions budget." Each covered state would be required to submit a revised State ImplementationPlan (SIP) identifying measures it intended to implement to achieve its emissions budget. Stateswould be free to choose whatever means they deemed appropriate, subject to EPA approval. However, EPA strongly believes that the regional emissions cap can be most cost-effectivelyachieved through a regional cap-and-trade program focused on electric generators and intends onissuing a proposed cap-and-trade model program rule to encourage that option. In 1997, EPA finalized new NAAQS for both PM 2.5 and ozone. (4) The new NAAQS for ozonerevised the previous ozone NAAQS by tightening the standard from 0.12 parts per million (ppm) to0.08 ppm, increasing the averaging time from 1 hour to 8 hours, and measuring compliance byaveraging concentrations rather than by counting individual peak concentrations exceeding thestandard. The new PM 2.5 NAAQS was set at an annual maximum concentration of 15 microgramsper cubic meter (ug/m3) based on the 3-year average of annual arithmetic mean PM 2.5 concentrationsfrom one or more community-oriented monitors; and a 24-hour concentration of 65 ug/m3, basedon the 3-year average of the 98th percentile of 24-hour PM 2.5 concentrations at eachpopulation-oriented monitor within an area. EPA has taken a cautious approach to implementing the two NAAQS. Attempts to coordinate the new 8-hour standard with the previous 1-hour standard proved difficult and subject toconsiderable litigation. In the case of the PM 2.5 standard, comprehensive monitoring data wereunavailable in 1997 to determine compliance and make designations. In 1998, the Congress set astatutory schedule for the two NAAQS, based on EPA's previously announced InterimImplementation Policy. (5) Judicial review and otherfactors combined to delay the designations. Figure 1 (based on 2000-2002 data) shows that for PM 2.5 , EPA analysis indicates violations ofthe NAAQS over the eastern part of the United States and parts of California and Montana. Specifically, data show at least one monitor measuring concentrations in exceedence of the NAAQSin 120 counties. All 120 counties violate the annual standard; a few violate both the annual and the24-hour standard; none violate only the 24-hour standard. The population of the affected countiesis 65 million. (6) Figure 1 also shows that for the8-hour Ozone NAAQS, EPA analysis indicateswidespread violations of the NAAQS over the eastern and midwestern United States, California andTexas, along with scattered areas in Louisana, New Mexico and the lower Midwest. Specifically,data show 297 counties currently violate the 8-hour ozone standard. The population of the affectedcounties is 115 million. (7) Source: Environmental Protection Agency. The 1997 8-hour ozone and PM 2.5 NAAQS set in motion the Clean Air Act's SIP process under section 110. The promulgation of the revised ozone NAAQS andthe new PM 2.5 NAAQS meant that the SIPs of many states were no longer adequateto bring those states into compliance by the statutory deadline. Under Section110(k)(5), if EPA finds a SIP inadequate, it must require the affected state to submita revised SIP that includes sufficient measures to bring that state into compliance. This is known as a "SIP Call." In the case of the 8-hour and PM 2.5 NAAQS, the process of developing effective compliance strategies is complicated by the problem of transported air pollutants. Under section 110(a)(2)(D), SIPs must include adequate provisions to preventsources within that state from contributing significantly to non-attainment in one ormore downwind states. Finding that interstate transport of SO 2 and NOx contributessignificantly to ozone and PM 2.5 non-attainment, the EPA issued the proposedInterstate Air Quality rule (IAQ) in December, 2003. Combining the requirements of the CAA with EPA intentions as stated in the proposed rule, the major milestones are set out in Table 2. Table 2. Estimated Schedule for 8-hour Ozone and PM2.5 NAAQS As indicated by the table above, EPA would require States to submit their IAQ rule SIP before the NAAQS non-attainment SIPs are required. EPA justifies thesubmission of transported air pollutant SIPs by upwind states before the submissionof non-attainment SIPs by downwind states on the basis of Section 110(a)(1)-(2) andSection 172(b) of the Clean Air Act and on policy considerations. (8) EPA argues thatthe upwind reductions will facilitate planning by downwind states and that downwindstates will benefit from the relatively early reductions because they themselvescontribute to non-attainment elsewhere. The proposed IAQ rule is based on a series of determinations by EPA with respect to pollution transport, cost-effective pollution control, and compliancefeasibility. These determinations are made within the SIP process of Sections110(k)(5) and 110(a)(2)(D). (9) Significant Contribution. The pivotal finding by EPA in the proposed IAQ rule is that affected states significantlycontribute to non-attainment in downwind states. This determination defines thegeographic scope of the proposed rule. For states in the eastern United States, EPAconducted a series of modeling runs to determine the contribution various upwindstates are projected to make to areas in the eastern U.S. projected by EPA to be innon-attainment in 2010 and 2015. For ozone non-attainment, a "significantcontribution" was defined by EPA as the product of three factors: (1) actual amountof transported pollution from upwind states that contribute to non-attainment indownwind states; (2) how often contributions over specific thresholds occur; and (3)the comparative amount of the upwind transported contribution to the total non-attainment situation in thedownwind area. (10) For the 8-hour ozone NAAQS,EPAmodeled the emissions impact of the 31 states east of or bordering the MississippiRiver on 47 eastern downwind counties. States whose maximum contribution wasestimated at less than 2 parts per billion (ppb) and/or contribute less than 1 percentto total non-attainment were screened out. After evaluating the remaining easternstates on the three criteria above on 47 eastern downwind counties, 25 states werefound to make a significant contribution to non-attainment. (11) Those states are shownin Figure 2. For PM 2.5 NAAQS, EPA modeled the emissions impacts of 41 states on 57 eastern downwind counties. (12) Because thecontrolling PM 2.5 NAAQS is the annualstandard, EPA only considered two of the three factors listed for ozone indetermining significant contribution: actual amount and comparative amount. (13) In theproposed rule, EPA is suggesting that the threshold for determining significantcontribution be 0.15ug/m 3 -- one percent of the annual standard of 15 ug/m 3 . Basedon that threshold, EPA found 28 states and the District of Columbia were projectedto contribute significantly to 2010 PM 2.5 non-attainment. These states are shown inFigure 2. As an alternative, EPA modeled emission contributions if the thresholdwas a more stringent 0.10 ug/m 3 . This threshold added two states to the list ofcontributors -- North Dakota and Oklahoma. EPA does not specify the process by which it determined that interstate transport of pollution is not a significant contributor to non-attainment in states such asCalifornia, Arizona, or Montana. The proposed rule simply states: In analyzing significant contribution to nonattainment, we determined it was reasonable to exclude the Western U.S.,including the States of Washington, Idaho, Oregon, California, Nevada, Utah andArizona from further analysis due to geography, meteorology, and topography. Based on these factors, we concluded that the PM 2.5 and 8-hour ozone nonattainmentproblems are not likely to be affected significantly by pollution transported acrossthese States' boundaries. Therefore, for the purpose of assessing States'contributions to nonattainment in other States, we have only analyzed thenonattainment counties located in the rest of theU.S. (14) The rule provides no other specific basis for EPA's determination that western non-attainment areas should not be subject to the rigorous modeling eastern non-attainment areas were. None ofthe extensive modeling conducted for non-attainmentareas in the eastern United States was conducted on non-attainment areas in thewestern United States. Source: Environmental Protection Agency. Regional Cap / State Budget. With a determination of significant contribution, the proposed IAQ rule moves towarddeveloping a cost-effective remedy. Maintaining the need to base its remedy on"highly cost-effective reductions," EPA examined the potential balance of localcontrol to interstate controls along with the availability and timing of cost-effectivepollution control measures in upwind states. Projecting non-attainment areas in2010, EPA concluded that for many PM 2.5 non-attainment areas: ...it would be difficult, if not impossible, to reach attainment unless transport is reduced to a much greater degreeand over a much broader regional area than by the simultaneous adoption of localcontrols within specific nonattainment areas. In addition, we found that much of theair quality improvement that did occur in downwind areas with this strategy was dueto reductions in transported sulfate attributable to upwind SO 2 emissions. (15) EPA conclusions with respect to 8-hour ozone non-attainment areas were less dramatic, but still significant enough for EPA to conclude that further regionalreductions were warranted. (16) Calling for a combination of local and interstate transport control, EPA developed criteria for determining "highly cost-effective" transport control levels.SO 2 and NOx are emitted by a variety of sources. As indicated in Figure 3, below,sulfur dioxide is primarily emitted by stationary sources, particularly coal-firedelectric generators. In the case of nitrogen oxides, mobile sources are the primarysource, although stationary sources, particularly electric generators and industrialboilers, make substantial contributions to the overall totals. Generally arguing thatelectric generators provided the most cost-effective emission reduction source andthat data were lacking on other stationary sources, EPA focused on reductions fromelectric generators to determine emission budgets. In contrast, for the NOx SIP Call,large industrial combustion sources were included in EPA's cost-effectivenesscalculations. Focusing on electric generators 25 MW or greater, EPA developed a threshold for controlling transported pollutants by comparing the average and marginal costsof other SO 2 and NOx regulatory actions, along with other factors. Specifically,EPA compared the average and marginal costs of installing flue-gas desulfurization(FGD) and selective catalytic reduction (SCR) technologies on electric generatorswith the average and marginal costs of other regulatory actions, including BestAvailable Control Technology (BACT) determinations, individual state actions, NewSource Performance Standards (NSPS), and various mobile source decisions. Comparing the costs presented in Table 3 with previous regulatory actions, EPAfound these costs to be "highly cost-effective." Applying these "highly cost-effective"control technologies on electric generators, EPA determined the final regionwide cappresented in Table 1. Table 3: Projected Control Costs for Electric Generators (1999$/ton removed) * Assumes high electricity demand and high natural gas prices. Source: Proposed Interstate Air Quality Rule, p. 4613-4615 Based on the assumption that States would solely target electric generators for control, EPA proceeded to determine the appropriate statewide emission budgets. For SO 2 , EPA attempted to meld the proposed rule's allocation scheme with theexisting Title IV acid rain program. With both programs based on electricgenerators, EPA proposes to essentially have states require a two-for-one redemptionof CAA Title IV allowances during phase 1, and a three-for-two redemption of TitleIV allowances during phase 2. Such redemption ratios would represent a 50%reduction during phase 1 and 67% during phase 2. For NOx , EPA would calculateemission budgets for affected units by multiplying a NOx emission rate specified inthe proposed rule by the unit's historical annual heat input. Similar to the allocationformula for Title IV, the proposed rule would set the NOx emission rate at 0.15lb./mmBtu during phase 1, increasing the stringency to 0.125 lb./mmBtu duringphase 2. The baseline for the annual heat input for each unit would be the highestannual input for any year 1999 through 2002. Implementation Schedule. As noted up front, EPA's proposed rule would divide the mandated reductions into twophases beginning in 2010 and 2015. The deadline for phase 1 was determined byEPA based primarily on an analysis of available boilermaker labor. (17) Based on theassumption that all reductions would come from electric generators and from theinstallation of FGD and SCR, EPA argues that 49 gigiwatts (Gw) of additionalscrubbers and 25 Gw of additional SCR units would be necessary to meet the 2010phase 1 requirement. (18) EPA believes this to bethe maximum feasible FGD and SCRconstruction that can be completed by the year 2010. EPA does not provide a detailed analysis of its justification for choosing 2015 for the deadline for phase 2. Indeed, it doesn't provide the amount of additionalcontrol technology installation necessary to achieve the incremental reduction. Instead, EPA states the following to justify 2015 for phase 2: The EPA recognizes that the power sector will need to devote large amounts of capital to meet the control requirementsof the first phase. Controls installed in 2010 will generally be the largest and easiestto install. Subsequent controls will need to be installed at more plants and undermore challenging circumstances. We believe that deferring the second phase to 2015will provide enough time for companies to overcome these technical challenges andraise additional, reasonably-priced capital needed to installcontrols. (19) Cap and Trade. EPA's preferred implementation strategy is a regionwide cap and trade program focused solely onelectric generators. Under the proposed rule, if states choose to cap emissions fromtheir electric generators, they do not have to require reductions on any other type ofemission source, stationary, mobile, or area. If a state chooses to control electricgenerators, it "must impose a cap because this category may feasibly implement acap." (20) States are encouraged to submit SIPs thatfollow the guidelines EPA wouldprovide in a model cap and trade program to be promulgated later. It is EPA's hopethat States will join together to make the system regionwide, such as the case withthe NOx SIP Call. However, states could not be forced to join a regionwide program,just as with the NOx SIP Call, nor to restrict affected sources to electric generators. Under the proposed rule, there would be two cap and trade systems -- one each for SO 2 and NOx. Each would cover the same 28 state area defined by the PM 2.5 significant contribution finding and operate on an annual basis, as both pollutantscontribute to the PM 2.5 problem. No specific treatment of NOx emissions reductionsis provided for in the proposed rule to deal with the seasonal nature of the ozoneproblem. The purpose of the proposed rule is to address interstate transport of pollutants that are hindering downwind states from attaining the 8-hour ozone and PM 2.5 NAAQS. As indicated by Figures 4 and 5, the proposed rule is predicted by EPA tohave a greater impact on PM 2.5 attainment in the eastern U.S. than on eastern 8-hourozone attainment. According to EPA, 120 counties were out of compliance with thePM 2.5 NAAQS in 2002. The projected basecase is predicted by EPA to bring 58 ofthose counties into compliance by 2015. EPA further predicted that the proposedIAQ rule will bring an additional 28 counties into compliance. EPA states this wouldleave 13 counties in the eastern U.S. in non-compliance in 2015. EPA does notprovide any data on the 2015 non-compliance situation in the West where theproposed IAQ rule would have no effect. In contrast, EPA states that 297 countrieswere out of compliance with the 8-hour ozone standard in 2001. The projectedbasecase is predicted by EPA to bring 240 counties into compliance. EPA furtherpredicts that the proposed rule will bring an additional 8 eastern counties intocompliance. EPA states this would leave 26 counties in the eastern U.S. in non-compliance in 2015. Like thePM 2.5 analysis, EPA doesn't provide data on the 2015non-compliance situation in the West where the rule would have no direct effect. Source: Environmental Protection Agency. Source: This environmental result raises several questions with respect to the proposed rule's adequacy. The first is the magnitude of the reductions required. As EPA notesin the proposed rule, a court review of the NOx SIP Call suggested that EPA couldbe very aggressive in defining significant contribution. Quoting the court in Michigan v. EPA , EPA focused on the following: EPA has determined that ozone has some adverse health effects -- however slight -- at every level [citing NationalAmbient Air Quality Standards for Ozone 62 FR 38856 (1997)]. Withoutconsideration of cost it is hard to see why any ozone-creating emissions should notbe regarded as fatally "significant" under section 110(a)(2)(D)(i)(I). (21) [emphasis inoriginal] A more stringent threshold for significant contribution could result in more states being involved in the reduction scheme. Likewise the stringency of the "highly cost-effective" criteria for determining actual budgets could be questioned. EPA has based its reduction program on"highly-cost effective" SO 2 and NOx emission reductions from electric generators. It has defined "highly cost-effective"in terms of reduction costs compared withprevious regulatory actions, similar to its criteria in the NOx SIP Call. However, EPA's own cost-benefit analysis suggests that control costs could rise dramaticallywithout jeopardizing the very favorable cost-benefit results. As stated by EPA: The benefit-cost analysis concludes that substantial net economic benefits to society are likely to be achieved as a result of thereduction in emissions occurring as a result of this rulemaking. The results detailedbelow show that this rule would be highly beneficial to society, with annual netbenefits in 2010 of approximately $55 billion ($58 billion benefits compared tosocial cost of approximately $3 billion) and net benefits in 2015 of $80 billion ($84[billion] benefits compared to social costs of $4 billion). All amounts are reflectedin 1999$. (22) Thus, it could be argued that "highly cost-effective" could be interpreted in a way to justify greater reductions based on the cost-benefit analysis, rather thanrelying on the proposed rule's rationale that is based on the proposed rule'scomparative cost with other regulatory actions. EPA's choice of focusing only on electric generators may also raise questions, given the cost-benefit analysis, the recommendations of the Ozone TransportAssessment Group (OTAG), and EPA's NOx SIP Call. (23) OTAG's recommendationsto EPA with respect to the NOx SIP Call called for NOx controls on large andmedium non-utility stationary sources in addition to controlling utility sources. Inthe final NOx SIP Call, EPA calculated state emission budgets based on five sectors:electric utility, nonutility sources, area sources, nonroad engines, and highwayvehicles. Budgets were based on cost effective reductions, with substantialreductions required from electric generators and from nonutility sources. IndeedEPA used a 70% reduction requirement for large industrial facilities and RACTcontrol (generally 25-50%) for smaller sources. (24) In the proposed IAQ rule, EPAgenerally released the other stationary source components from the proposed rulebecause of lack of data. However, EPA does not explain why it felt it had sufficientdata in 1997 to propose a NOx SIP Call that included these sources, but doesn't havesufficient data to include these sources in the proposed IAQ rule. A third aspect of the scope of the rule that may raise questions is the decision to exempt the West from consideration. As indicated in figure 1, the West hassignificant areas out of compliance with the PM 2.5 standard, the 8-hour ozonestandard, or both. As noted earlier, EPA does not present any detailed analysisjustifying its choice to exclude the West. With the court decision looking favorablyon an aggressive interpretation of "significant contribution," the highly favorablecost-benefit analysis, and the significant problems of 8-hour ozone and PM 2.5 non-attainment in partsof the West (particularly in California), some will maintain a morecomprehensive analysis is in order. A final parameter of the proposed rule that may raise questions is the timing of the reductions. For states facing attainment deadlines and the prospect of imposingcostly local controls, cost-effective emissions reductions from the proposed IAQ ruleare viewed as critical. As stated by Pennsylvania: Pennsylvania endorses the comments submitted by the Ozone Transport Commission. These comments list a number ofconcerns that the states in the Ozone Transport Region have with the IAQR. Themost important concern with the IAQR is that the reductions do not come soonenough. Compliance with the proposed emissions caps is not required until after the8-hour ozone and the PM2.5 attainment dates and therefore cannot be relied upon forcontrol measures to meet these ambientstandards. (25) EPA argues that 2010 is the earliest that reductions can feasibly be mandated, taking into account regulatory, economic, and engineering considerations. However,questions may be asked about the magnitude of reductions that are feasible by 2010. In the proposed rule, EPA focuses on the availability of skilled boilermakers as animportant constraint on installing control technology -- specifically FGD and SCR. (26) Arguing that demand for pollution control equipment and skilled boilermakers wouldcome during a narrow window (18 months) at the end of the compliance period, EPAconcludes: In developing the first phase control levels, we intended to maximize the total control installations possible (and thus totalreductions) considering the constraint on boilermaker labor, while getting similarreductions for both pollutants. This results in predicted reductions of between 40 and50 percent for both pollutants in the first phase. (27) Obviously, if a more phased-in installation schedule was assumed by EPA, the labor constraint could be lessened, allowing additional control technologyinstallations to occur. Interestingly, if EPA's logic used to justify its phase 1 schedule is applied to its smaller phase 2 schedule, the resulting phase 2 deadline could arguably follow phase1 by only18 months -- July 1, 2011. This would be based on a seamless rotation ofdesign, construction, and test personnel from phase 1 to phase 2. (28) If the lesserreduction required for phase 2 meant fewer labor constraints, the deadline could bemoved up. This scenario would provide continuous employment for the industry,maintaining a quality labor pool, rather than the start-stop-start scenario provided byEPA's 2015 deadline. However, EPA modified its logic for justifying its 2015 phase2 deadline from an analysis focused on labor to a qualitative argument focused onpotential site-specific technical problems with further installations and potentialutility financing problems. As quoted earlier, EPA provides no details connectedwith its proposed 2015 deadline. In the proposed rule, EPA stresses the similarity of the proposed rule's methodologies to those of its previous NOx SIP Call. Although the methodologiesused by EPA to develop the proposed rule may rest substantially on the NOx SIPCall, there are differences between the two rules that may raise questions. First,because the NOx SIP Call focuses on ozone attainment, it is a seasonal controlprogram (May-September). In contrast, the proposed rule's NOx trading programwould be run on an annual basis. This presents questions because the proposed rule'sscope is different from that of the NOx SIP Call. For example, Massachusetts,Rhode Island, and New Hampshire are under either the NOx SIP Call's or the OzoneTransport Commission's trading scheme for seasonal control of NOx, but are notcovered under the proposed rule. The NOx SIP Call includes large industrial boilersalong with electric generators in its trading program; the proposed rule focuses onelectric generators alone. The details of the proposed IAQ rule's trade and cap program are not addressed in the proposed rule. EPA intends to address transitional and compatibility issues,along with providing affected states with a model cap and trade program, in aSupplemental Notice of Proposed Rulemaking (SNPR). For electric generatorsduring phase 1, the transition may not be difficult as the mandated emissions rate forphase 1 is the same as it is for the NOx SIP Call (.15 lb./mmBtu), although theproposed program's baseline year and annual basis are different. However, for statesand industrial sources that could be left in a much smaller seasonal trading program,the economic impact could be substantial, as most sources move to the larger annualtrading program set up under the proposed rule. Working to develop a regional cap and trade SO 2 program raises issues with respect to the statutory nationwide SO 2 cap and trade program created under Title IVof the 1990 Clean Air Act Amendments. Title IV of the 1990 CAA Amendmentsrequired the reduction of SO 2 emissions from electric generators from about 15million tons in 1988 to 8.95 million tons by January 1, 2000. In addition, it mandatesthat the 8.95 million ton cap be maintained into the future, requiring new SO 2 emitting utility plants to offset their emissions with further reductions from existingfacilities. To implement the program, Title IV created a comprehensive permit andemissions allowance system. An allowance is a limited authorization to emit a tonof SO 2 during or after a specific year. Issued by EPA, the allowances are allocatedto existing power plants according to formulas provided in Title IV. The utilityreceives the allowances for a given plant regardless of the actual operation of theplant. For example, a utility may choose to shut down an existing power plant anduse those allowances to offset emissions from two or more newer, cleaner facilities. Generally, a power plant that commenced operation after enactment receives noallowances, requiring it to obtain allowances from the existing pool of allowances inorder to operate. A utility may trade allowances nationally as well as bankallowances for future use or sale. EPA's attempt to add a more stringent regional system to a nationwide program raises several questions. The most obvious is the creation of a large quantity ofsurplus Title IV allowances developing as sources in the regional control area reduceemissions. These allowances could potentially be used by states not participating inthe proposed rule (a phenomenon commonly called "leakage"). EPA believes thiswill not be a big problem, arguing: The potential for leakage is dependent upon the size of the region. The large eastern trading region proposed in today's rule-- which is based upon addressing PM 2.5 -- is not likely to result in significantleakage because the region is large enough to take advantage of the physicallimitations in the electricity grid that prevent large power movements from the Eastto the West (or vice versa) through the WesternInterconnect. (29) EPA proposes to require states to modify Title IV allowances for affected powerplants, requiring two-for-one and three-for-two transactions as discussedpreviously (p. 10). Modifying Title IV allowances could be a source of contention;however, allowances are not cast in concrete by the 1990 CAAA. As noted, anallowance is a limited authorization to emit SO 2 . Title IV states explicitly that anallowance is not a property right, and that: "Nothing in this title or in any otherprovision of law shall be construed to limit the authority of the United States toterminate or limit such authorization." (Section 403(f)). The Senate report on TitleIV (from which this language originated) elaborates on this provision with thefollowing: The purpose in characterizing the legal or property status of allowances in new section [403](f) of the Act is to make clearthat regulatory actions taken subsequent to the issuance of allowances are not subjectto the "takings clause" of the U.S. Constitution. Allowances are, in large part, simplyiterations of each unit's permit under this title. Since the permits will be, in effect,legally binding statements of each unit's emissions limitation obligations under thepollution control program established herein, the subsection makes clear that shouldthe Congress or the Administrator limit, revoke or otherwise modify the allowancesor the underlying regulatory program established by new title IV of the Act or theregulations promulgated pursuant thereto, the U.S. government will not be obligedto compensate allowance-holders for loss of the allowances or any loss in their value. Allowances are but the means of implementing an emissions limitation program,which can be altered in response to changes in the environment or for other reasonsof public policy. (30) Thus, EPA may have significant flexibility in modifying Title IV allowances "in response to changes in the environment or for other reasons of public policy." However, the proposed IAQ rule's attempt to modify and restrict Title IV allowancesmay nonetheless be subject to litigation. Besides the programs discussed above, the proposed rule would have effects on other provisions of the Clean Air Act, particularly the regional haze program, (31) andpotential Section 126 petitions. The reductions required under the proposed rule would have the effect of reducing regional haze in the eastern U.S.. EPA requests comment on the extent towhich the requirements of the proposed rule could satisfy the requirements of itsregional haze program. Presumably, this would include the requirement underSection167A of the CAA that certain existing sources install Best Available RetrofitTechnology (BART) to protect visibility in national parks and wilderness areas. Inaddition EPA requests comment on whether the emissions cap under the proposedrulemaking could be expanded to states outside the IAQ control region to assist themin meeting their regional haze obligations. (32) EPA does not discuss the potential problems SO 2 emission leakage could have on the regional haze program in the West. A second CAA provision potentially affected by the proposed rule concerns petitions filed under Section 126. Under Section 126(b), any state or politicalsubdivision may petition EPA for a finding that any major source or group ofstationary sources located in another state is emitting pollutants that "significantlycontribute" to the non-attainment of a NAAQS by the downwind state. (33) Under theNOx SIP Call, EPA, along with several states that had filed Section 126 petitions toforce upwind states to reduce NOx emission affecting their ability to meet the 1-hourozone NAAQS, agreed to use the threat of action under Section 126 as a backup tothe NOx SIP Call if that rule was derailed by the courts. In the proposed rule, EPAproposes to use any Section 126 petitions with respect to PM 2.5 or 8-hour ozone inthe same manner. (34) However, it is not clear thatpetitioning states will agree withEPA that a program with a 10 year compliance schedule meets the spirit and letterof Section 126. A third interaction between the proposed rule and the CAA is controls on mercury (Hg) emissions from coal-fired electric generators. In announcing theproposed IAQ rule in December, 2003, the Administration also announced acompanion proposed Hg rule for electric generators. (35) The Hg proposal attempts tointegrate its reduction requirement with the NOx and SO 2 requirements of the IAQrule by mandating Hg reductions that can be achieved by the technologies that wouldbe used to achieve the IAQ rule. The result is a modest reduction in Hg comparedwith the levels of reductions achieved under EPA's previous regulations onMunicipal Waste Combustors and on Medical Waste Incinerators, or achieved byutility Hg control technology that has been field-tested and is being actively marketedcommercially. (36) EPA's integrated approach allowselectric generators to meet itsproposed Hg limits without having to install specific Hg control technology, such ashas been installed on incinerators and other facilities. However, if the IAQ rule isstalled, then the economic advantage of the integration for Hg control will be lost. In contrast, if the Hg rule is stalled, the IAQ will achieve the modest reductionsentailed in the Hg rule without the rule. In any case, the Hg rule most likely will bethe source of extensive litigation. The proposed rule is not the Bush Administration's preferred means of addressing the transported air pollution problem. (37) Its preferred means is the ClearSkies Act ( H.R. 999 / S. 485 ) introduced in the 108thCongress. Clear Skies would amend the Clean Air Act to place emissions caps onelectric utility emissions of SO 2 , NOx, and Hg. Implemented through a tradeableallowance program, the emissions caps would be imposed in two phases: 2010 (2008in the case of NOx) and 2018. (38) However, notingthe uncertainty of the legislativeprocess, EPA believes the proposed rule is the prudent course. The Administration's preference for Clear Skies is not hard to understand for a variety of reasons. The larger market and additional time provided by the nationalscope and extended deadlines of Clear Skies promise a less expensive remedycompared with the proposed IAQ/Hg rules in terms of cost per ton of pollutantreduced. The national scope also eliminates issues of leakage and lack of westerncoverage that may create controversy for the proposed IAQ rule. The statutory natureof Clear Skies means changes in the Title IV allowance program and the NOx SIPCall would be definitive. Perhaps more importantly, Clear Skies deals directly with many of the CAA interface issues raised above. Clear Skies' modifications to CAA provisions toresolve problems that otherwise could arise include: New statutory standards for SO 2 , NOx, particulate matter, and Hg for new sources that would replace NSPS; modified sources could opt in and beexempted from BACT determinations, LAER determinations, BART requirements,New Source Review (NSR), and Maximum Achieveable Control Technology(MACT) requirements (the latter with respect to Hg). Existing sources can alsoreceive these exemptions if they agree to meet a particulate matter standard specifiedin the bill along with good combustion practices to minimize carbon monoxideemissions within 3 years of enactment. Exemption for steam electric generating facilities from Hg regulation under Section 112 of the CAAA. Relief from enforcement of any Section 126 petition before 2012 However, these changes raise questions of their own that could enlarge the debate on the Clean Air Act beyond the increased use of market mechanisms. Inaddition, there is yet to be a vote on Clear Skies, or any other multi-pollutant controlbill in this Congress. Whether the proposed rule will encourage or discourage sucha vote this year is unclear. The 60 day public comment period for the proposed rule ends on March 30th. With much of the public focus on the accompanying proposed mercury rule, theInterstate Air Quality rule has not received much attention. However, ifpromulgated, the proposed rule would have far-reaching effects in terms ofeconomics, environmental impact, and policy. In terms of economics, there are different perspectives at work. The economic perspective embodied in the proposed rule may best be described as a cost-effectiveness approach. Cost curves areconstructed and compared with an eyetoward finding the most cost-effective reduction level -- the "knee" in the cost curve. At this point, the proposed rule is maximizing the reductions achieved per dollarspent. Accordingly, the proposed rule sets its reduction targets in this vicinity. Toincrease the likelihood that reductions will be economically efficient, the proposedrule includes several market mechanisms, such as trading and banking, to encourageaffected parties to seek the most efficient solution to their compliance problem.Likewise, deadlines are set with cost considerations in mind. Implementingenvironmental goals through market mechanisms, thereby allowing polluters tochoose their lowest cost abatement actions, represents a general elevation ofeconomic "efficiency" as the guiding principle of decision-making. This focus ismore evident when one considers the interaction between the proposed Interstate AirQuality rule with the proposed Mercury rule. A second economic perspective on setting reduction targets under the proposed rule would be to base it on cost-benefit analysis. The difference between the costsand benefits of the proposed rule is an order of magnitude in favor of the benefits. This number is based primarily on one benefit -- reduced premature fatalities amongadults resulting from reduced PM 2.5 . (39) Other potential categories of benefits are notassessed. (40) If one were to adopt the classiceconomic perspective of setting themarginal cost of control at the marginal benefit received, it is highly likely that thereductions mandated by the proposed rule would be higher. Likewise, deadlinesmight be advanced to achieve the benefits quicker. This approach of defining "highlycost-effective" reductions is not discussed in the proposed rule. Economics appearsto be defined in the proposed rule as costs to the electric utility industry. Alternativeperspectives are not addressed. Environmental impacts addressed by the proposed bill derive primarily from sulfur dioxide control. The phase 1 NOx requirements for electric generators aresimilar to those of the NOx SIP Call. Ozone is not a focus, even to the point ofignoring the seasonal nature of the problem in favor of an annual reduction program. As a result, the primary benefits of the proposed rule are from PM 2.5 compliance andavoidance of related SO 2 -caused impacts such as regional haze. The focus on SO 2 is in line with EPA's cost-benefit analysis that quantifies benefits mostly from SO 2 control. However, from the perspective of the proposed rule's environmental goal of addressing non-attainment of the PM 2.5 and ozone NAAQS in downwind states, acomplementary focus on the characteristics of the ozone problem might seemappropriate. In this case, refinement of the proposed rule with respect to ozonewould be necessary. The NOx SIP Call is a seasonal program because ozone is aseasonal problem. If EPA wishes to keep the annual NOx program proposed in therule because of its PM 2.5 and regional haze advantages, a seasonal weighting factormight be considered to ensure greater NOx reductions during the ozone season whileallowing greater emissions at other times of the year. Whether this would have apositive or negative effect on the overall cost-benefit of the rule can not bedetermined quantitatively as EPA did not estimate many benefits of ozone reduction. Thus, while more focus on NOx and consequently on ozone could make the proposedrule more effective, it is unclear if it would be more economically efficient. From a policy standpoint, EPA has presented the proposed Interstate Air Quality rule and the accompanying proposed Mercury rule as a "suite of integrated airactions" to reduce emissions of three pollutants -- SO 2 , NOx, and Hg. (41) The twoproposed rules are integrated in such a way that the technologies reducing SO 2 andNOx emissions under the Interstate Air Quality rule also reduce enough Hg emissionsto meet the 2010 reduction requirements of the proposed Mercury rule. Thiscombination of requirements and technology allows utilities to meet the requirementsof both rules without installing three different control technologies -- one for eachpollutant. If the Hg reduction were more stringent, utilities could be forced to installactivated carbon injection (ACI) in addition to the FGD and SCR technologiesassumed to be chosen under the proposed Interstate Air Quality rule. As EPA doesnot provide a cost-benefit analysis of Hg reductions, it is not possible toquantitatively determine whether this decision is economically efficient in terms ofpotential Hg benefits foregone by the lower reduction requirement. However, from the broader perspective of the interaction of the proposed rules with the underlying Clean Air Act, there is a resulting lack of integration. It is likelyto be argued that the proposed rule simply adds another layer on an already multi-layered cake called the Clean AirAct. Adding a regionwide annual cap and tradeprogram on top a regulatory structure whose foundation is health-based nationalstandards that focus on the local concentration of pollutants in the ambient airpresents numerous difficulties. As a result, there are multiple inconsistencies betweenthe proposed rule and other provisions of the Clean Air Act. These conflicts are notsurprising -- there is little EPA can do to resolve them through regulation. If theAdministration's goal is to restructure CAA compliance strategies toward market-oriented cap and trade programswithout creating more layers and conflicts, it ispossible a statutory solution will be necessary.

Summary: On December 17, 2003, the Environmental Protection Agency (EPA) issued a proposed rule to address the effect of interstate transport of air pollutants on non-attainment of the NationalAmbient Air Quality Standards (NAAQS) for fine particulates (PM 2.5 ) and ozone (specifically, the8-hour standard). The proposed Interstate Air Quality (IAQ) rule appeared in the Federal Register January 30, 2004. For PM 2.5 , the proposed rule finds that the interstate transport of sulfur dioxide(SO 2 ) and nitrogen oxides (NOx) from 28 states and the District of Columbia contributessignificantly to downwind non-attainment; for ozone, the proposed rule finds that interstate transportof NOx from 25 states and D.C. contributes significantly to downwind non-attainment of the 8-hourstandard. With the IAQ rule, EPA proposes a region-wide emissions cap for NOx and SO 2 to be implemented in two phases -- 2010 and 2015. Based on the methodology employed in the proposedrule, EPA estimates reductions of about 70% from baseline emissions in 2015. EPA's methodologydetermined the caps by applying "highly cost effective" pollution controls on electric generatingunits. EPA has presented the proposed IAQ rule and the accompanying proposed Mercury (Hg) rule as a "suite of integrated air actions" to reduce emissions of three pollutants -- SO 2 , NOx, and Hg. The two proposed rules are integrated in such a way that the technologies reducing SO 2 and NOxemissions under the IAQ rule also reduce enough Hg emissions to meet the modest 2010 reductionrequirements of the proposed Hg rule. This combination of requirements and technology allowsutilities to meet the requirements of both rules without installing three different control technologies-- one for each pollutant. As EPA does not provide a cost-benefit analysis of Hg reductions, it is notpossible to quantitatively determine whether this decision is economically efficient in terms ofpotential Hg benefits foregone by not imposing a more stringent reduction requirement. However, from the broader perspective of the interaction of the proposed rules with the underlying Clean Air Act (CAA), there is a resulting lack of integration. It is likely to be argued thatthe proposed rule simply represents another layer on an already multi-layered cake called the CleanAir Act. Adding a regionwide annual cap and trade program onto a regulatory structure whosefoundation is health-based national standards that focus on the local concentration of pollutants inthe ambient air presents numerous difficulties. As a result, there are multiple inconsistencies betweenthe proposed rule and other provisions of the CAA. These conflicts are not surprising -- there islittle EPA can do to resolve them out by regulation. If the Administration's goal is to restructureCAA compliance strategies toward market-oriented cap and trade programs without creating morelayers and conflicts, it is possible a statutory solution will be necessary. This report will be updated if events warrant.