Under the Clean Air Act, EPA establishes health-based air quality standards that the states must meet and regulates air pollutant emissions from various sources. These include industrial facilities and mobile sources, such as automobiles and other transportation. EPA has issued air quality standards for six primary pollutants—carbon monoxide, lead, nitrogen oxides, ozone, particulate matter, and sulfur dioxide—that have been linked to a variety of health problems. For example, ozone can inflame lung tissue and increase susceptibility to bronchitis and pneumonia. In addition, nitrogen oxides and sulfur dioxide contribute to the formation of fine particles that have been linked to aggravated asthma, chronic bronchitis, and premature death. In 2002, the most recent year for which data were available, 146 million Americans lived in areas that failed to meet at least one air quality standard, according to EPA. Subject to EPA’s oversight, state and local air quality agencies generally administer the NSR program and operate under one of two arrangements. First, some agencies located in areas that meet air quality standards have “delegation” agreements with EPA under which they implement the NSR program contained in EPA’s regulations. Under the second arrangement, agencies design their own programs by incorporating all of their air quality regulations, including federal requirements, into overall air quality plans, known as state implementation plans. They update these plans periodically and submit them to EPA for approval. In addition, the Clean Air Act requires those agencies that implement their own air quality programs to ensure their requirements are at least as stringent as EPA’s regulations. State and local agencies may also supplement the federal NSR program with additional requirements. However, some jurisdictions have laws or policies that prevent agencies from implementing more stringent regulations. Throughout its history, the NSR program has been characterized by complexity and controversy, involving disputes between EPA and industry about, among other things, whether certain facility changes qualified for the routine maintenance, repair, and replacement exclusion. In recent years, EPA has taken enforcement action against companies in several industries, including some electricity producers, forest product manufacturers, and petroleum refineries, alleging noncompliance with the program. In addition to concerns about enforcement related issues, some industry representatives have also raised concerns that the time required to obtain a NSR permit and the cost of installing controls have prevented facilities from making changes that enhance energy efficiency and reduce air emissions, such as modifying a boiler so that it produces the same amount of energy with less fuel. In May 2001, the Vice President’s National Energy Policy Development Group recommended, among other things, that the Administrator of the EPA, in consultation with the Secretary of Energy and other federal agencies, examine the impact of the NSR program on investments in new utility and refinery generation capacity, on energy efficiency, and on environmental protection. In its June 2002 NSR Report to the President, EPA concluded, among other things, that the program had not affected investments in new power plants and refineries but had discouraged some energy efficiency projects at existing facilities, including some that would have reduced air emissions. This report also contained recommendations for revising the program. Subsequently, EPA issued a final rule on December 31, 2002, which contained five provisions, identified in table 1, which exempt certain facility changes from requirements to obtain NSR permits. These revisions have been the subject of congressional debate. For example, in 2002, the Congress held hearings during which members of the Congress, EPA officials, and a number of stakeholders—including industry, states, and environmental groups—presented their positions on the revisions. Also, legislation has been introduced in the Congress that seeks to further regulate emissions from industrial facilities. In addition, a number of environmental and public health groups, as well as a group of states primarily from the Mid-Atlantic and Northeast, claimed that the December 2002 final rule violated the Clean Air Act and asked EPA to reconsider several aspects of the rule. In July 2003, EPA agreed to do so and then solicited public comment on the areas under reconsideration. Based on this input, EPA announced at the end of October 2003 that it would make several technical changes to the rule. State and local agencies that operate under delegation agreements were required to have implemented the December 2002 rule by March 2003 or return responsibility for implementing the rule to EPA, while those operating under state implementation plans have until January 2006 to revise their regulations accordingly. As for the December 2002 proposed provisions—that would further specify what facility changes are exempt from NSR requirements under the routine maintenance, repair, or replacement exclusions—a coalition of primarily Mid-Atlantic and Northeastern states and environmental and public health groups challenged the legality of the equipment replacement rule in court after it was finalized in October 2003. State and local agencies that operate under delegation agreements were required to implement this rule by December 26, 2003 or have EPA implement it for them, while those operating under state implementation plans have until October 2006 to revise their regulations accordingly. However, on December 24, 2003, the U.S. Court of Appeals for the District of Columbia Circuit stayed the equipment replacement rule pending further review, preventing the rule from going into effect while the court considers the legal challenges. EPA has not determined what additional action, if any, it will take regarding establishing an annual maintenance allowance below which facility changes would be considered exempt from NSR requirements. A majority of the state officials expect that the December 2002 final rule will provide industry with greater flexibility to make facility changes without triggering NSR requirements for permits. However, a majority of the officials also expect that the rule will lead to an overall increase in emissions of harmful air pollutants and hinder efforts to meet air quality standards, potentially creating or exacerbating risk to public health. Most of the officials also expect that the rule will increase their agencies’ workload. In pursuing the December 2002 final rule, EPA, among other things, sought to offer facilities greater flexibility to improve and modernize their operations. Similarly, the state air quality agency officials (29 of 44) said that in their professional opinion, obtaining fewer permits and more flexibility to modify facilities are the rule’s two primary positive effects for industry. For example, more than half of the state officials believe that four of the five provisions of the rule—including the revised test for determining whether a facility modification significantly increases net emissions and is, therefore, subject to NSR—will decrease the number of permits state air quality agencies issue. For perspective, the state officials reported that their agencies had issued a total of 600 NSR permits during the 3 years prior to the final rule to companies that were modifying existing facilities. The officials expect the number of such permits issued to decrease under the final rule because it expands the range of activities that companies may pursue without a permit and, in some cases, controls. Forty of the state officials identified the requirements to install pollution controls as one of the best features of the NSR program prior to the final rule. According to EPA, however, several provisions of the rule require companies to make certain commitments, such as accepting an overall limit on their emissions, in exchange for avoiding permitting. Therefore, EPA believes the rule will encourage investments that decrease emissions. As we reported in our August 2003 report, EPA found that the December 2002 final rule would lead to overall benefits by encouraging energy efficiency projects, reducing emissions and related health risks, and providing economic benefits to companies affected by the program. For example, EPA’s analysis found that the rule would encourage companies to implement energy efficiency projects that would reduce emissions, such as upgrades to boilers used to generate power. However, only 9 of the 44 officials we surveyed anticipated that the rule would provide the impetus for companies to increase these projects. A majority of the state officials expect emissions to increase as a result of the final rule—in contrast to EPA’s conclusion, in the agency’s analysis of the rule’s environmental effects, that it will reduce emissions from industrial facilities. More specifically, 27 of the 44 officials we surveyed expect that overall, the December 2002 rule will increase emissions; 8 officials believe emissions will decrease or remain the same (the remaining 9 officials could not judge the emissions impact). At least half of the officials thought the rule would increase emissions of carbon monoxide, nitrogen dioxide, ozone, particulate matter, or sulfur dioxide— all of which have been linked to health problems and are controlled by a variety of Clean Air Act programs. When asked about the emissions impact of each specific provision in the final rule, a majority of the state officials identified two of the rule’s provisions as most likely to cause emissions increases, as table 2 illustrates. These include the revised methods for determining (1) a facility’s historical or “baseline” emissions and (2) whether a change will result in a significant net emissions increase. For example, a majority of the officials believe the “baseline” provision will increase emissions. This provision allows industrial facilities to use any consecutive 24-month period in the previous decade as a baseline. EPA changed this emissions calculation method to, among other things, account for variations in business cycles. The agency concluded that this provision would have negligible emissions consequences because it would not alter the baseline for most facilities, including coal-fired power plants (the largest emitting group of facilities). In addition, companies must adjust their baselines downward to reflect any other emissions limitations that have become effective since the period of time they selected for establishing their baseline, according to EPA. EPA program managers, therefore, maintain that emissions baselines will not significantly increase as a result of this provision. Nevertheless, some officials provided written responses to our survey describing their concerns over this provision. Several such officials asserted that it allows companies to select the 24-month period within the previous 10 years in which their emissions were highest. In addition, 24 officials thought that the provision for plantwide emissions limits, whereby facilities accept a cap on their overall emissions to avoid undergoing NSR, would nevertheless increase emissions.