On March 10, 2005, the Environmental Protection Agency (EPA) issued its final rule toaddress the effects of interstate transport of air pollutants on nonattainment of the National AmbientAir Quality Standards (NAAQS) for fine particulates (PM 2.5 ) and ozone (specifically, the eight-hourstandard). (1) The Clean AirInterstate Rule (CAIR) was first proposed as the Interstate Air Quality (IAQ) rule and appeared inthe Federal Register January 30, 2004. (2) For PM 2.5 , CAIR finds that the interstate transport of sulfur dioxide(SO 2 ) and nitrogen oxides (NOx) from 23 states and the District of Columbia contributessignificantly to downwind nonattainment; for ozone, CAIR finds that interstate transport of NOxfrom 25 states and the District of Columbia contributes significantly to downwind nonattainment ofthe eight-hour standard. To remedy the situation, the rule generally follows (with some important exceptions) themethodology EPA employed in an earlier regulation that addressed interstate transport of ozonepollution, the NOx SIP Call. (3) In the NOx SIP Call, EPA found 21 states and the District ofColumbia significantly contributed to nonattainment of the 1-hour ozone NAAQS. (4) To remedy the situation, EPAset statewide emissions budgets for NOx emissions, and recommended that states achieve thosebudgets through "highly cost-effective" controls on electric generators and large industrial facilitiesunder a regional cap-and-trade program. States began implementing controls on May 31, 2004. With CAIR, EPA creates regional emissions caps for NOx and SO 2 to be implemented in twophases -- 2010 (2009 for NOx) and 2015. Two caps (annual SO 2 emissions and annual NOxemissions) apply to the region of 23 states (and District of Columbia) found to contribute to PM 2.5 nonattainment, and one cap (seasonal NOx emissions) applies to the region of 25 states (and Districtof Columbia) found to contribute to eight-hour ozone nonattainment. The regional caps for theaffected states are as follows: SO 2 annual caps: 3.6 million tons in 2010 and 2.5 million in2015 NOx annual caps: 1.5 million tons in 2009 and 1.3 million in2015 NOx ozone season caps: 580,000 tons in 2009 and 480,000 tons in2015 Based on methodology centered on reductions from electric generating facilities and adjustedfor type of fossil fuel burned, each affected state is assigned a portion of the regional cap in the formof a statewide "emissions budget" or cap. Each covered state is required to submit a revised StateImplementation Plan (SIP) identifying measures it intends to implement to achieve its emissionsbudget. States are free to choose whatever means they deem appropriate, subject to EPA approval. However, EPA strongly believes that the regional emissions caps can be most cost-effectivelyachieved through regional cap-and-trade programs focused on electric generators and stronglyencourages that states choose that option. A model cap-and-trade scheme for states to adopt isincluded in the final rule. That model scheme achieves a state's emissions budget through emissionlimitations solely on electric generating units. In 1997, EPA finalized new NAAQS for both PM 2.5 and ozone. (5) 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 one hour to eight hours, and measuring complianceby averaging 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 (Âµg/m 3 ) based on the three-year average of annual arithmetic mean PM 2.5 concentrations from one or more community-oriented monitors; and a 24-hour concentration of 65Âµg/m 3 , based on the three-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 tocoordinate the new eight-hour ozone standard with the previous 1-hour standard proved difficult andsubject to considerable litigation. In the case of the PM 2.5 standard, comprehensive monitoring datawere unavailable in 1997 to determine compliance and make designations. In 1998, the Congressset a statutory schedule for the two NAAQS, based on EPA's previously announced InterimImplementation Policy. (6) Judicial review and other factors combined to delay the designations. In 2004-2005, EPA issued designations on attainment and nonattainment for the eight-hourozone NAAQS and the PM 2.5 NAAQS. For PM 2.5 , EPA analysis indicates violations of the NAAQSover the eastern part of the United States and parts of California and Montana. Specifically, datashow 39 nonattainment areas covering all or part of 224 counties in 20 states either fail to meet thestandard or cause a downwind county to fail. All or part of 208 counties violate the annual standard;a few violate both the annual and the 24-hour standard; none violate only the 24-hour standard. Thepopulation of the affected counties is 90 million. (7) For the eight-hour ozone NAAQS, EPA analysis indicateswidespread violations of the NAAQS over the eastern and midwestern United States, California, andTexas, along with scattered areas in Louisiana, Arizona, and Colorado. Specifically, data show 126nonattainment areas covering all or part of 474 counties in 31 states violate the eight-hour ozonestandard. The population of the affected counties is 159 million. (8) The 1997 eight-hour ozone and PM 2.5 NAAQS set in motion the Clean Air Act's (CAA) SIPprocess under Section 110. The promulgation of the revised ozone NAAQS and the new PM 2.5 NAAQS meant that the SIPs of many states were no longer adequate to bring those states intocompliance by the statutory deadline. Under Section 110(k)(5), if EPA finds a SIP inadequate, itmust require the affected state to submit a revised SIP that includes sufficient measures to bring thatstate into compliance. This is known as a "SIP Call." In the case of the eight-hour ozone and the PM 2.5 NAAQS, the process of developingeffective compliance strategies is complicated by the problem of transported air pollutants. UnderSection 110(a)(2)(D), SIPs must include adequate provisions to prevent sources within that statefrom contributing significantly to nonattainment in one or more downwind states. Finding thatinterstate transport of SO 2 and NOx contributes significantly to ozone and PM 2.5 nonattainment, theEPA issued the proposed Interstate Air Quality rule (IAQ) in December 2003 to mitigate theproblem. This rule was finalized as the Clean Air Interstate Rule (CAIR) in March 2005. Combining the requirements of the CAA with EPA intentions as stated in the rule, the majormilestones for implementing the eight-hour ozone and PM 2.5 NAAQS are set out in Table 1 . Table 1. Estimated Schedule for Eight-Hour Ozone and PM 2.5 NAAQS As indicated by Table 1 , EPA would require states to submit their CAIR SIPs before theNAAQS nonattainment SIPs are required. EPA justifies the submission of transported air pollutantSIPs by upwind states before the submission of nonattainment SIPs by downwind states on the basisof Section 110(a)(1-2) and Section 172(b) of the Clean Air Act and on policy considerations. (9) EPA argues that the upwindreductions will facilitate planning by downwind states and that downwind states will benefit fromthe relatively early reductions because they themselves contribute to nonattainment elsewhere. CAIR is based on a series of determinations by EPA with respect to pollution transport,cost-effective pollution control, and compliance feasibility. These determinations are made withinthe SIP process of Sections 110(k)(5) and 110(a)(2)(D). (10) Significant Contribution. The pivotal finding byEPA in the rule is that affected states significantly contribute to nonattainment in downwind states. This determination defines the geographic scope of the rule. For states in the eastern United States,EPA conducted a series of modeling runs to determine the contribution various upwind states areprojected to make to areas in the eastern United States projected by EPA to be in nonattainment in2010 and 2015. For ozone nonattainment, a "significant contribution" was defined by EPA as theproduct of three factors: (1) actual amount of transported pollution from upwind states thatcontribute to nonattainment in downwind states; (2) how often contributions over specific thresholdsoccur; and (3) the comparative amount of the upwind transported contribution to the totalnonattainment situation in the downwind area. (11) For the eight-hour ozone NAAQS, EPA modeled the emissionsimpact of the 31 states east of or bordering the Mississippi River on 40 eastern downwind countiesprojected by EPA to be in noncompliance in 2010. States whose maximum contribution wasestimated at less than 2 parts per billion (ppb) and/or that contribute less than 1% to totalnonattainment were screened out. After evaluating the remaining eastern states on the three criteriaabove on 40 eastern downwind counties, 25 states and the District of Columbia were found to makea significant contribution to nonattainment. (12) These states constitute the region covered under CAIR seasonalNOx cap and are shown in Table 2 . For the PM 2.5 NAAQS, EPA modeled the emissions impacts of 37 eastern states on 62eastern downwind counties projected by EPA to be in noncompliance in 2010. (13) Because the controllingPM 2.5 NAAQS is the annual standard, EPA considered only two of the three factors listed for ozonein determining significant contribution: actual amount and comparative amount. (14) In the proposed rule, EPAsuggested that the threshold for determining significant contribution be 0.15 Âµg/m 3 -- 1% of theannual standard of 15 Âµg/m 3 . In the final rule, EPA settled on 0.2 Âµg/m 3 as the threshold. (15) Based on that threshold,EPA found 23 states and the District of Columbia were projected to contribute significantly to 2010PM 2.5 nonattainment. These states constitute the region covered under CAIR's annual NOx and SO 2 caps and are shown in Table 2 . Table 2. States Determined to Contribute Significantly toDownwind Nonattainment of the PM 2.5 and Eight-Hour Ozone NAAQS Source: Clean Air Interstate Rule , p. 25167. EPA does not specify the process by which it determined that interstate transport of pollutionis not a significant contributor to nonattainment in states such as California, Arizona, or Montana.The proposed rule simply stated: 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 and Arizona from further analysis due to geography,meteorology, and topography. Based on these factors, we concluded that the PM 2.5 and eight-hourozone nonattainment problems are not likely to be affected significantly by pollution transportedacross these States' boundaries. Therefore, for the purpose of assessing States' contributions tononattainment in other States, we have only analyzed the nonattainment counties located in the restof the U.S. (16) The rule provides no other specific basis for EPA's determination that western nonattainmentareas should not be subject to the rigorous modeling eastern nonattainment areas were. None of theextensive modeling conducted for nonattainment areas in the eastern United States was conductedon nonattainment areas in the western United States. Regional Cap/State Budget. With a determinationof significant contribution, CAIR moves toward developing a cost-effective remedy. Maintainingthe need to base its remedy on "highly cost-effective reductions," EPA examined the potentialbalance of local control to interstate controls along with the availability and timing of cost-effectivepollution control measures in upwind states. Projecting nonattainment areas in 2010, EPAconcluded in the proposed rule that for many PM 2.5 nonattainment areas: it would be difficult, if not impossible, to reachattainment unless transport is reduced to a much greater degree and over a much broader regionalarea than by the simultaneous adoption of local controls within specific nonattainment areas. Inaddition, we found that much of the air quality improvement that did occur in downwind areas withthis strategy was due to reductions in transported sulfate attributable to upwind SO 2 emissions. (17) EPA conclusions with respect to eight-hour ozone nonattainment areas were less dramatic, but stillsignificant enough for EPA to conclude that further regional reductions were warranted. (18) Calling for a combination of local and interstate transport control, EPA developed criteriafor determining "highly cost-effective" transport control levels. SO 2 and NOx are emitted by avariety of sources. Sulfur dioxide is primarily emitted by stationary sources, particularly coal-firedelectric generators (69% of the total in 2003) and industrial combustion (14% of the total in2003). (19) In the caseof nitrogen oxides, mobile sources are the primary source, although stationary sources, particularlyelectric generators (22% of the total in 2003) and industrial combustion (14% of the total in 2003),make substantial contributions to the overall totals. Generally arguing that electric generatorsprovided the most cost-effective emission reduction source and that data were lacking on otherstationary sources, EPA focused on reductions from electric generators to determine emission caps.In contrast, for the NOx SIP Call, large industrial combustion sources were included in EPA'scost-effectiveness calculations. Focusing on electric generators 25 megawatts (MW) or greater, EPA developed a thresholdfor controlling transported pollutants by comparing the average and marginal costs of other SO 2 andNOx regulatory actions, along with other factors. Specifically, EPA compared the average andmarginal costs of installing flue-gas desulfurization (FGD) and selective catalytic reduction (SCR)technologies on electric generators with the average and marginal costs of other regulatory actions,including Best Available Control Technology (BACT) determinations, individual state actions, NewSource Performance Standards (NSPS), and various mobile source decisions. Finding the electricgenerating control technologies to be "highly cost-effective," EPA determined the final regionwidecaps for affected states by assuming these control technologies were installed on electric generators.The projected cost per ton removed is shown in Table 3 . Based on the assumption that states would solely target electric generators for control, EPAproceeded to determine the appropriate individual statewide emission budgets. As noted earlier,under the SIP process, states are not required to adopt a electric-generator-only strategy in complyingwith its emissions budget; however, they must if they choose to participant in the EPA-sponsoredregional trading program set up under the model rule. Table 3. Projected Control Costs for Electric Generators underCAIR (1999 $/ton removed) Source: Clean Air Interstate Rule , pp. 25201-4613-4615. * Assumes high electricity demand and high natural gas prices. As noted above, EPA decided in its final rule to create three emissions caps: Two are annualemissions caps that address the interstate contribution of SO 2 and NOx to PM 2.5 nonattainment; thethird is a seasonal cap to address interstate NOx contribution to ozone nonattainment. Each of thesecaps and their accompanying model trading schemes has to be integrated into the existingmultilayered fabric of the Clean Air Act (CAA). As discussed below, each cap faced uniqueproblems in meshing with the CAA. Reducing PM 2.5 is a year-round problem, unlike ozone, which is a seasonal problem. Overwhelmingly, nonattainment areas are in noncompliance with the annual PM 2.5 NAAQS, not the24-hour standard. Thus, the two caps are averaged on an annual basis, an averaging time thatprovides maximum flexibility and potential cost-savings to polluters. SO2 Annual Cap. Unlike annual NOx emissions,annual SO 2 emissions are already controlled to some degree by an existing statutory cap-and-tradeprogram -- Title IV of the CAA. Indeed, it is the success of the Title IV program that hasencouraged the development of other market-oriented programs, including the NOx SIP Call andCAIR. Title IV of the 1990 CAA Amendments required the reduction of SO 2 emissions from electricgenerators from about 15 million tons in 1988 to 8.95 million tons by January 1, 2000. In addition,it mandates that the 8.95 million ton cap be maintained into the future, requiring new SO 2 emittingutility plants to offset their emissions with further reductions from existing facilities. To implementthe program, Title IV created a comprehensive permit and emissions allowance system. Anallowance is a limited authorization to emit a ton of SO 2 during or after a specific year. Issued byEPA, the allowances are allocated to existing power plants according to formulas provided in TitleIV. The utility receives 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 and use thoseallowances to offset emissions from two or more newer, cleaner facilities. Generally, a power plantthat commenced operation after enactment receives no allowances, requiring it to obtain allowancesfrom the existing pool of allowances in order to operate. A utility may trade allowances nationallyas well as bank allowances for future use or sale. Developing a new regional cap-and-trade SO 2 program raised several issues with respect tothe statutory nationwide SO 2 cap-and-trade program created under Title IV. Among the issues EPAhad to resolve were (1) allocation of state budgets, (2) treatment of excess Title IV allowances bythe more stringent CAIR program, and (3) treatment of existing banked Title IV allowances. Because the Title IV program is both statutory and successful, EPA felt it needed to protectthe program, thus limiting its ability to suggest alternative allocation schemes under CAIR. (20) Based on the assumptionthat states would solely target electric generators for control, EPA proceeded to determine CAIR'sappropriate statewide emission budgets by melding CAIR's allocation scheme into the existing TitleIV acid rain program. With both programs based on electric generators, the effect of this allocationscheme is to continue the grandfathering of pre-1990 existing plants under CAIR. EPA recognizesthis, but argues that maintaining the integrity of the Title IV program prevents it from pursuingalternative allocation schemes that might provide relief to newly constructed sources. Perhaps the most obvious problem with a CAIR-Title IV interface is the creation of surplusTitle IV allowances as sources in the regional control area reduce emissions to the more stringentCAIR limits while the rest of the country is under the Title IV caps. To prevent the build-up of TitleIV allowances, EPA mandates CAIR-affected states require a two-for-one redemption of CAA TitleIV allowances during phase 1, and a 2.86-for-one redemption of Title IV allowances during phase2. Such redemption ratios would represent a 50% reduction during phase 1 and 65% during phase2. These Title IV allowance redemptions are required regardless of whether or not the state choosesto participate in the EPA-sponsored CAIR SO 2 trading scheme. Modifying Title IV allowances could be questioned by some; however, allowances are notcast in concrete by the 1990 CAAA. As noted, an allowance is a limited authorization to emit SO 2 . Title IV states explicitly that an allowance is not a property right, and that "[n]othing in this title orin any other provision 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 Title IV (from whichthis language originated) elaborates on this provision with the following: The purpose in characterizing the legal or propertystatus of allowances in new section [403](f) of the Act is to make clear that regulatory actions takensubsequent to the issuance of allowances are not subject to the "takings clause" of the U.S.Constitution. Allowances are, in large part, simply iterations of each unit's permit under this title. Since the permits will be, in effect, legally binding statements of each unit's emissions limitationobligations under the pollution control program established herein, the subsection makes clear thatshould the Congress or the Administrator limit, revoke or otherwise modify the allowances or theunderlying regulatory program established by new title IV of the Act or the regulations promulgatedpursuant thereto, the U.S. government will not be obliged to compensate allowance-holders for lossof the allowances or any loss in their value. Allowances are but the means of implementing anemissions limitation program, which can be altered in response to changes in the environment or forother reasons of public policy. (21) Thus, EPA may have significant flexibility in modifying Title IV allowances "in responseto changes in the environment or for other reasons of public policy." EPA provides a detaileddefense of its decision to use Title IV allowances in its CAIR trading program in the rule. (22) At the beginning of 2004, the Title IV allowance bank had about 7.6 millionallowances. (23) EPAdecided that pre-2010 banked Title IV allowances may be used on a one-for-one basis for meetingthe more stringent reductions under CAIR in order to encourage early reductions. (24) Essentially, this meansthat pre-2010 allowances could double in value beginning in 2010 and nearly triple in valuebeginning in 2015. One revision EPA does make in the Title IV program per se as part of the CAIR SO 2 tradingprogram is to change the unit-by-unit allowance-holding requirement to a source-by-source system,effective July 1, 2006. (25) EPA argues that it is important to provide this additional compliance flexibility, and that it does notaffect the emissions monitoring and reporting requirements, which remain applied on a unit-by-unitbasis. NOx Annual Cap. Unlike SO 2 , there is nostatutory cap-and-trade program for NOx emissions from electric utilities. However, there is aregional, seasonal NOx cap-and-trade program (the NOx SIP Call) that includes electric utility andother major stationary sources. Like the model trading programs suggested under CAIR, the NOxSIP Call trading program is the product of an EPA-sponsored model rule and regional tradingscheme that was voluntarily adopted by the affected states to achieve their emissions budgets. Asdiscussed in the next section, CAIR eliminates the NOx SIP Call's seasonal cap-and-trade schemestarting in 2009 in favor of the seasonal CAIR NOx program. Unlike its approach with the SO 2 program, EPA did not attempt to meld the CAIR annualprogram with the existing NOx SIP Call by using a cap-and-trade scheme based on the NOx SIPCall. EPA calculated emission budgets for states by multiplying a NOx emission rate specified inthe rule by the state's electric generating units' historical annual heat input. The rule sets the NOx emission rate at 0.15 lb./mmBtu during phase 1, increasing the stringency to 0.125 lb./mmBtu duringphase 2. The baseline for the annual heat input is the highest annual input for any year 1999 through2002 on a unit-by-unit basis. (26) For powerplants beginning operations after 2002 or for rewardingearly reductions, or for assisting utilities having difficulties meeting their emissions limitations, EPAprovides for a Compliance Supplement Pool (CSP) of 200,000 allowances to be allocated to statesin proportion to their reduction requirement. The final annual CAIR NOx program includes three major changes from the proposed rule. First, the phase 1 compliance deadline was accelerated from 2010 to 2009. EPA believes thataccelerating the phase 1 deadline for both NOx and SO 2 is not practical, but a one-year accelerationof the NOx deadline was feasible. (27) Second, EPA chose to weight the heat input baseline by fueltype. Specifically, the adjustment factors are 1.0 for coal, 0.4 for natural gas, and 0.6 for oil. (28) This departure from theNOx SIP Call methodology (and the proposed rule) is justified by EPA on equity grounds. (29) The adjustment representsa 2Â½ weighing of coal combustion compared with natural gas combustion providing states withsubstantial coal-fired generation a significantly larger emissions budget than they would havereceived if all fossil fuel combustion were weighed the same. Third, EPA decided to offer states avoluntary opt-in provision for non-electric utility units that meet specific criteria. (30) The NOx annual cap and its model trading program presented several issues with respect toits relationship to CAIR's seasonal NOx program and the existing NOx SIP Call, including (1)melding CAIR methodology with the existing NOx SIP Call; (2) non-electric utilities included inthe NOx SIP Call, but not CAIR cap determinations and model trading programs; and (3) annualversus seasonal controls. Some of these problems were resolved by EPA's decision in the final ruleto include a seasonal NOx cap in addition to the annual CAIR NOx cap discussed here. Despite its emphasis on using NOx SIP methodology in developing CAIR, the annual CAIRNOx cap-and-trade scheme differs significantly from the NOx SIP Call in terms of the state budgetdetermined and the scope of participants. EPA's choice of focusing only on electric generators runscounter to the cost-benefit analysis, the recommendations of the Ozone Transport Assessment Group(OTAG), and EPA's NOx SIP Call. (31) OTAG's recommendations to EPA with respect to the NOx SIPCall called for NOx controls on large and medium non-utility stationary sources in addition tocontrolling utility sources. In the final NOx SIP Call, EPA calculated state emission budgets basedon five sectors: electric utility, nonutility sources, area sources, nonroad engines, and highwayvehicles. Budgets were based on cost- effective reductions, with substantial reductions requiredfrom electric generators and from nonutility sources. Indeed, EPA used a 70% reduction requirementfor large industrial facilities and Reasonably Available Control Technology (RACT) control(generally 25%-50%) for smaller sources. (32) In CAIR, arguing a lack of data, EPA generally released theother stationary source components from the rule. EPA notes it had sufficient data in 1997 topropose a NOx SIP Call that included these sources, but argues it doesn't have sufficient data in 2005to include these sources in CAIR because of the increased geographic scope of CAIR and itsinclusion of SO 2 . (33) The methodological differences resulting from the exclusion of stationary industrial sourcesfrom CAIR but not the NOx SIP Call presents difficulties for the CAIR cap-and-trade program. Bypermitting only electric utilities to participate in the CAIR model trading programs, along with thedecision to eliminate the NOx SIP Call trading program, industrial sources currently covered underthe SIP Call would have been left hanging with respect to the CAIR model trading program. In thefinal rule, EPA decided to permit states to include NOx SIP Call industrial sources under its modelseasonal NOx trading program, but not its model annual NOx trading program. A final issue is the seasonal nature of the NOx SIP Call versus the annual nature of the CAIRNOx program. In the proposed IAQ, EPA argued this was not a problem. In the CAIR, EPA partlychanged its approach and included a third cap to respond to the seasonal nature of the ozoneprogram. However, it included no flow control mechanisms to prevent the excessive use of emissionbanks in meeting emission limitations such as are contained in the current NOx SIP Call tradingprogram. In the final rule, EPA decided to include a seasonal NOx program directly focused on ozonenonattainment. This decision represents a reversal on EPA's part from its proposed rule that arguedthat ozone-affected states should be included in the proposed annual NOx program and no seasonalprogram was necessary. The seasonal NOx trading program is completely separate from the annual NOx tradingprogram in its operations, and would replace the existing NOx SIP Call seasonal trading program.Allowances banked under the seasonal program cannot be used for complying with the annualprogram and vice-versa. Likewise, existing banked allowances under the NOx SIP Call tradingprogram can be used only with the seasonal NOx program. As in the NOx SIP Call, the ozone seasonis defined as May-September. In the final rule, EPA found that five states -- Connecticut,Massachusetts, New Jersey, Delaware, and Arkansas -- would be covered under the seasonal NOxprogram, but not the annual NOx program. (34) All of these states are currently covered by the NOx SIP Call. However, EPA's CAIR seasonal NOx program's emissions budget allocation methodologyis based on its CAIR annual NOx program's methodology, not the existing NOx SIP Call. Thisincludes the sole focus on electric generating units, employing the same emission rates and historicbaselines that the annual program uses, and the inclusion of fuel-type adjustment factors fordetermining baseline heat rates. The decision to include a seasonal NOx cap and model trading program under CAIR reflectsa desire by EPA to eliminate the existing NOx SIP Call trading program. EPA believes its updatedmodeling justified an enlarged emissions cap, and that its CAIR cost-effectiveness strategy is themost appropriate means of distributing state budgets. As discussed previously, the differing scopeand methodologies created significant interfacing challenges. Perhaps the greatest challenge was the exclusion of industrial sources covered under the NOxSIP Call from the allocation methodology used for the CAIR seasonal state budgets and tradingprogram. EPA essentially provides NOx SIP Call states two options. (35) First, the state can chooseto adopt the seasonal NOx program's electric-generating-units-only system and assign reductionrequirements accordingly. As those states would be achieving their CAIR budgets solely throughcontrolling electric generating facilities, previously controlled industrial sources would no longerhave reduction requirements under the eliminated NOx SIP Call. The other option for states wouldbe to include industrial sources currently covered under the NOx SIP Call in the seasonal tradingprogram. Emission limitations for those sources would remain the same as under the current NOxSIP Call. Another melding problem resulted from the geographic difference between the 21-state NOxSIP Call program and the 25-state CAIR program. Because of different methodologies, Rhode Islandis included under the NOx SIP Call, but not the CAIR NOx program. EPA decided to give RhodeIsland two options: (1) join the CAIR seasonal NOx trading program, or (2) develop an alternativemethod to achieve its NOx SIP Call requirements. (36) Providing flexibility to participants is at the heart of the CAIR cap-and-trade implementationstrategy. EPA hopes the adoption of the model trading program by states will achieve emissionreductions earlier and less expensively than a command-and-control system. Incentives to achievereductions earlier than necessary include (1) one-for-one redemption of SO 2 allowances bankedbefore 2010 for more stringent CAIR requirements; (2) one-for-one use of NOx SIP Call allowancesbanked before 2009 for the seasonal NOx program; and (3) creation of a Compliance SupplementalPool (CSP) with 200,000 annual NOx allowances that states can use to reward early reductions byelectric utilities. (37) However, analysis of projected banking activity before and during CAIR does not indicatethat early reductions will be significant. As indicated in Table 4 , none of the three trading programunder CAIR is projected to have any net increase in banked allowances before the 2009/2010 phase1 dates. For the SO 2 program, the current bank of 7.6 million allowances is projected to fall to 6.9million allowances in 2010. From that point, the bank declines, producing the "glide slope" ofreductions that EPA wants in order to reduce costs. (38) However, that "glide slope" does not appear to include anyadditional early reductions resulting from CAIR. Table 4. Projected Net Banking Before and DuringCAIR Source: Environmental Protection Agency, IPM CAIR 2004 Final Run , located at http://www.epa.gov/airmarkets/epa-ipm/iaqr.html . For the annual NOx trading program, the projected banking activities indicates no "glideslope" whatsoever. There is no net banking activity projected under the annual NOx program. Forthe seasonal program, the model projects no banking before the 2009 compliance dates, but a slowlyaccumulating bank of seasonal NOx allowance after 2009. This accumulation continues through theprojected period. The effect this activity has on emission reductions is indicated in Table 5 . As suggestedabove, the SO 2 banking activity results in a smoothing out of the phase 1 and phase 2 reductionrequirement, but at the cost of emissions remaining over actual cap levels through the projectedperiod. In contrast, the annual NOx emission levels follow the reduction requirement in lockstepwith no smoothing of the emission levels over time. Finally, the emissions levels under the seasonalprogram remain below the cap limits throughout the period. Table 5. Projected Emissions Under CAIR (million tons) Source: Environmental Protection Agency, 2005. The last trend is interesting. When EPA proposed the IAQ, it did not include a seasonal NOxcap for ozone mitigation. Its decision in CAIR to include a seasonal NOx program with separateseasonal caps appears, at first, to be a major change from the proposed rule. However, the resultabove suggests that the annual NOx control requirement is dictating control strategies, not theseasonal cap. (39) Indeed, the result indicates that compliance with the annual cap results in a slight overcontrolsituation with respect to the seasonal cap -- hence the slowly increasing bank of seasonal allowances. If this projection proves correct, seasonal allowances may have little value -- something states maywant to consider in deciding whether to include their industrial NOx SIP Call sources in the seasonalCAIR program. The purpose of CAIR is to address interstate transport of pollutants that are hinderingdownwind states from attaining the eight-hour ozone and PM 2.5 NAAQS. As indicated by Table 6 ,most eastern U.S. counties currently in nonattainment will come into compliance with the PM 2.5 andeight-hour ozone NAAQS by implementing existing CAA programs over the next 5-10 years. Interms of the remaining counties, CAIR is predicted by EPA to have a greater impact on PM 2.5 attainment in the eastern United States than on eastern U.S. eight-hour ozone attainment. Accordingto EPA, CAIR will bring only three additional counties (out of the remaining 40) into compliancewith the eight-hour ozone NAAQS in 2010, and only a total of six additional counties (out ofremaining 22) by 2015. In contrast, EPA projects CAIR will bring 52 additional counties (out of theremaining 79) into compliance with the PM 2.5 NAAQS by 2010, and a total of 57 additional counties(out of the remaining 74) by 2015. Table 6. Projected Impact of CAIR on Eastern U.S. Compliancewith PM 2.5 and Eight-Hour Ozone NAAQS Source: Clean Air Interstate Rule , p. 25165; 2005 data from EPA website at http://www.epa.gov/cair/charts_files/nonattain_maps.pdf . As noted above, the purpose of CAIR is to address interstate transport of SO 2 and NOx, notto achieve the PM 2.5 and eight-hour ozone NAAQS on its own. That task will require a combinationof interstate and local controls. However, the relative lack of impact of the seasonal cap on ozoneattainment raises questions. If data are a problem, some may ask why not include industrial sourcesfor seasonal NOx control only (as is currently the case with the NOx SIP Call)? EPA has alreadydecided to separate the phase 1 deadlines between NOx (2009) and SO 2 (2010); why not includeindustrial sources for seasonal NOx only? There are only five states that are under the CAIRseasonal program but not the NOx SIP Call, so EPA's data concerns would be lessened. In addition, do EPA's projections of seasonal NOx banking suggest that the seasonal capcould be strengthened slightly? The seasonal NOx program is separate from the annual NOxprogram (as are the environmental problems they address), so the budget allocation schemes do nothave to be identical. With respect to the SO 2 results, the lessening of progress between 2010 and 2015 may raisequestions. How much is this the result of the banking activities during that time period? Would atighter reduction schedule or inclusion of industrial sources improve the results? What should EPAresponse be if it chooses to increase the stringency of the PM 2.5 standard in the future? EPA believes it has struck the correct balance between addressing the interstate transportcomponent of nonattainment and the need for local controls. Ultimately, it may be the Congress orthe courts that determine whether that assessment is correct. EPA does not provide any direct regulatory relief to facilities covered under CAIR,specifically New Source Review. (40) No exemptions or safe harbors are provided to facilities thatmeet the requirements of CAIR. However, two provisions of CAIR may offer some future relieffrom CAA requirements, depending on future EPA determinations. These are discussed below. Section 126 Petitions. Under Section 126(b) ofthe CAA, any state or political subdivision may petition EPA for a finding that any major source orgroup of stationary sources located in another state is emitting pollutants that "significantlycontribute" to the nonattainment of a NAAQS by their state. EPA is to respond to the petition within60 days. If the petition is granted, the offending sources must cease operations within three monthsunless the sources comply with emission controls and the compliance schedules as determined byEPA to bring them into compliance with the section. Section 126 petitions have been on file with EPA with respect to the eight-hour ozone standard since August 1997. (41) On January 18, 2000, EPA indefinitely stayed findings on theeight-hour ozone standard, because of litigation on that standard. (42) More petitions have beenreceived since. On March 19, 2004, EPA received a Section 126 petition from North Carolinaseeking reductions in upwind emissions to help it achieve the PM 2.5 and eight-hour ozoneNAAQS. (43) In CAIR,EPA did not state how it would rule on the North Carolina petition, stating: "When we proposeaction on the North Carolina petition, we will set forth our view of the interaction between section110(a)(2)(D) and section 126." (44) Regional Haze: BART. The reductions requiredunder CAIR would have the effect of reducing regional haze in the eastern United States. In theproposed rule, EPA requested comment on the extent to which the requirements of the proposed rulecould satisfy the requirements of its regional haze program. Of particular focus was the requirementof Section 167A of the CAA that certain existing sources install best available retrofit technology(BART) to protect visibility in national parks and wilderness areas. (45) In the proposed IAQ and in CAIR, EPA sets out a lengthy argument with respect to CAIRand BART. (46) Specifically, EPA argues that participation in CAIR should act as a substitute for complying withBART. However, EPA also decided to defer the decision on substituting CAIR for BART foraffected units until the BART guidelines are finalized. As stated by EPA: The results clearly indicate that the CAIR will achievegreater reasonable progress than BART as proposed, measured by the proposed better-than-BARTtest. At this time, we can foresee no circumstances under which BART for EGUs could producegreater visibility improvement than the CAIR. However, for the reasons noted in section IX.C.1above, we are deferring a final determination of whether the CAIR makes greater reasonable progressthan BART until the BART guidelines for EGUs and the criteria for BART-alternative programs arefinalized. (47) The final CAIR rule reflects several changes from the proposed IAQ resulting from improvedmodeling and other considerations. Changes include: Inclusion of a seasonal NOx emissions cap separate from the proposed annualNOx emission cap. Accelerating compliance with phase 1 of the two NOx caps from 2010 to2009. Five states -- Arkansas, Kansas, Delaware, New Jersey, and Massachusetts --were removed from the list of states contributing to PM 2.5 nonattainment. EPA has proposed thatDelaware and New Jersey be re-included under a separate rulemaking. Four states -- Arkansas, Delaware, Massachusetts, and New Jersey -- joinedConnecticut as states determined only to contribute to eight-hour ozonenonattainment. One state -- Kansas -- was removed from the rule. One state -- Georgia -- was removed from the list of states contributing toeight-hour ozone nonattainment, but remained on the list of states contribution to PM 2.5 nonattainment. One state -- Florida -- was added to the list of states contributing to eight-hourozone nonattainment in addition to remaining on the list of states contributing to PM 2.5 nonattainment. Creation of a 200,000 annual NOx compliance supplement pool (CSP) to allowstates to reward early reductions or assist needy participants. Inclusion of a fuel-type adjustment factor to the NOx allocation formula thatprovides more NOx allowances to states that burn coal for electricitygeneration. Decision not to finalize any determinations with respect to Section 126petitions or BART. Although these changes may be important in specific cases, they do not represent a majorshift in the thrust and scope of CAIR. Unlike the recently promulgated mercury (Hg) rule, (48) CAIR has not beenparticularly controversial, so major changes were not anticipated. That the rule has not had the visibility of the Hg rule should not be interpreted to mean thatthe underlying issue of PM 2.5 and eight-hour ozone compliance has been solved. In particular, EPAis currently reviewing the stringency of the PM 2.5 NAAQS, a process that could result in a morestringent standard and more counties out of compliance. Given the lengthy time frame of CAIR, itseems likely that efforts will be made to strengthen its provisions well before 2015, if the PM 2.5 standard is strengthened. Likewise, CAIR does not address the most potent environmental issue surroundingfossil-fuel-fired electric generating facilities -- global warming and the possibility of carbon dioxidereductions. Movement on that issue over the next decade could result in a modification of CAIR,or a new multipollutant control regime. Bills have been introduced in Congress to impose such asystem. (49) Finally, the promulgation of CAIR may raise questions about the future of the BushAdministration's legislative initiative -- Clear Skies. Clear Skies represents a complete rewrite ofTitle IV of the Clean Air Act and would impose a comprehensive cap-and-trade system on utilitySO 2 , NOx, and Hg emissions. In addition, it would have altered, deleted, or held in abeyance forsome time existing sections of the Clean Air Act with respect to affected electric generating unitsand industrial sources that chose to opt into the program. (50) With the promulgation of CAIR that achieves NOx and SO 2 emissions reductions from most of the country's electricity generating facilities, and of the final Hgrule, it is unclear what impetus remains for Clear Skies.

Summary: On March 10, 2005, the Environmental Protection Agency (EPA) issued its final rule toaddress the effects of interstate transport of air pollutants on nonattainment of the National AmbientAir Quality Standards (NAAQS) for fine particulates (PM 2.5 ) and ozone (specifically, the eight-hourstandard). The Clean Air Interstate Rule (CAIR) was first proposed as the Interstate Air Quality(IAQ) rule and appeared in the Federal Register January 30, 2004. For PM 2.5 , CAIR finds that theinterstate transport of sulfur dioxide (SO 2 ) and nitrogen oxides (NOx) from 23 states and the Districtof Columbia contributes significantly to downwind nonattainment; for ozone, CAIR finds thatinterstate transport of NOx from 25 states and the District of Columbia contributes significantly todownwind nonattainment of the eight-hour standard. This result differs some from the proposed rulebecause of improved modeling. EPA decided in CAIR to create three emissions caps: Two are annual emissions caps thataddress the interstate contribution of SO 2 and NOx to PM 2.5 nonattainment; the third cap is a seasonalcap to address interstate contribution of NOx to ozone nonattainment. The three caps areimplemented in two phases: Phase 1 begins in 2009 for the NOx caps and 2010 for the SO 2 cap. Improved modeling and other considerations resulted in some changes in the final rule from theproposed IAQ. For example, in CAIR, EPA added a fuel-type adjustment factor to the NOxallocation formula that provides significantly more NOx allowances to states that have coal-firedelectric generation compared with those with natural gas-fired generation. Although changes to the proposed rule may be important in specific cases, they do notrepresent a major shift in the thrust and scope of CAIR. That CAIR has not had the visibility of thecontemporaneous mercury (Hg) rule should not be interpreted to mean that the underlying issue ofPM 2.5 and eight-hour ozone compliance has been solved. EPA is currently reviewing the stringencyof the PM 2.5 NAAQS, a process that may result in a more stringent standard. Given CAIR's lengthyschedule, it seems likely that if the PM 2.5 NAAQS is strengthened, efforts to revise CAIR wouldoccur. Likewise, CAIR does not address the most potent environmental issue surroundingfossil-fuel-fired electric generating facilities -- global warming and the possibility of carbon dioxidereductions. Movement on that issue over the next decade could result in a modification of CAIR,or a new multi-pollutant control regime. Bills have been introduced in Congress to create such asystem. Finally, CAIR raises questions about the future of the Bush Administration's legislativeinitiative -- Clear Skies. Clear Skies represents a complete rewrite of Title IV of the Clean Air Actand would impose a comprehensive cap-and-trade system on utility SO 2 , NOx, and Hg emissions. In addition, Clear Skies would alter, delete, or hold in abeyance for some time existing sections ofthe CAA with respect to affected electric facilities and industrial sources that chose to opt into theprogram. With the promulgation of CAIR that achieves NOx and SO 2 emissions reductions frommost of the country's electricity generating facilities, and of the final Hg rule, it is unclear whatimpetus remains for Clear Skies. This report will not be updated.