Clean Air Interstate Rule (CAIR)

1. Clean Air Interstate Rule (CAIR) CAIR State Budgets Office of Air and Radiation April 2005

2. State Budgets under CAIR • State Budgets needed for three programs: • CAIR ozone-season NOx program • CAIR annual NOx program • CAIR SO2 program • State Budgets for NOx are set differently than are the NOx regional budgets.

3. State Annual SO2 budgets under CAIR • CAIR SO2 budgets are only relevant/binding if a State does not choose to participate in the EPA-run cap and trade program. • If a state controls non-EGUs • EGU Budgets will be reduced by the amount of reductions achieved by non-EGUs and will be binding. • If a state controls only EGUs but chooses not to participate • EGU Budgets are binding state-level caps on SO2 emissions • CAIR SO2 emissions reductions in the trading program are achieved through retirement ratios of Title IV allowances, not through budgets. • In any particular year, a state may emit more or less than its budget, since its sources can buy, sell or bank allowances.

4. How were the State SO2 budgets Calculated? State SO2 budgets were calculated by: • Taking the sum of the title IV allowances originally allocated to sources in that state for the year 2010 • Adding that State’s total of any Additional Phase I allowances. • There are 50,000 such allowances in 2010, all given to states that are part of the CAIR region for PM. • Adding Special Allowance Reserve Allowances. • Since 250,000 title IV allowances for any vintage year were not originally allocated, but rather held by EPA and auctioned, these allowances were added to each state’s total in proportion to the State’s original 2010 title IV allocation. (since states outside the CAIR region were allocated title IV allowances, only about 202,190 of these allowances were added back in). • Dividing this total by 2 in Phase I and by 2.86 in Phase II • This results in the final state budgets values presented in Section V of the preamble (and in the Regional Budget TSD).

5. State NOx budgets under CAIR • State NOx budgets (both annual and ozone-season) are binding if a State does not choose to participate in the EPA-run cap and trade program. • If a state controls non-EGUs • EGU Budgets will be reduced by the amount of reductions achieved by non-EGUs • If a state controls only EGUs but chooses not to participate • EGU Budgets are binding state-level caps on NOx emissions • Within the trading program, the NOx budgets represent the number of allowances that a State receives (and has discretion to allocate). • In any particular year, a state may emit more or less than its budget, since it can buy, sell or bank allowances.

6. How were the State NOx budgets Calculated? The State NOx budgets were calculated by: • Taking each State’s average heat input, from both the Acid Rain units and non-Acid Rain units, for the years 1999-2002 by fuel burned and multiplying by the fuel adjustment factors. • Fuel adjustment factors were 1.0 for coal, 0.4 for natural gas and 0.6 for oil • These reflect for each fuel (coal, gas and oil), the 1999-2002 average emissions by State, summed for the CAIR region, divided by average heat input by fuel by State, summed for the CAIR region. • Summing up the adjusted heat inputs of all the CAIR States in the relevant program. • Dividing the States adjusted heat input by the total adjusted heat input for the region to determine the States share of the total • Multiplying the State’s share of the total by the region-wide budget (previously determined) to determine the state budget. • Reminder: The region-wide budget is determined by taking each states maximum heat input for Acid Rain units only for 1999-2002 and multiplying it by 0.15lb/mmbtu for Phase I and by 0.125lb/mmbtu for Phase II.

7. How were the State NOx budgets Calculated? (ctd) • The annual program uses a State’s annual heat input data and applies the same methodology as used for the CAIR ozone-season NOx Program. • The CAIR ozone-season NOx program uses a State’s seasonal heat input data for the above calculations. • Reminder: The methodology of setting NOx State budgets does not determine the allocations to individual units. States have the flexibility to allocate their NOx budget as they wish.

8. Compliance Supplement Pool • EPA is establishing a NOx compliance supplement pool (CSP) for the annual NOx program. • 200,000* annual NOX allowances of vintage 2009 • Patterned after the NOX SIP call CSP • Distribution of the Annual NOx CSP • Based on assumption that a State’s need for CSP allowances is proportional to the magnitude of the State’s reduction requirements (State’s 2009 base case emissions minus 2009 Annual NOX budget). • 200,000 allowances are apportioned to CAIR States plus NJ and DE on a pro rata basis, based on each State’s share of the total NOX emissions reduction requirement for the region in 2009. * 198,494 tons are allocated to CAIR States in the final rule; approximately 1,503 tons would be allocated to New Jersey and Delaware.

9. Commenters’ Concerns – SO2 budgets • Regarding SO2 allocations and State budgets • Some commenters criticized basing State budgets on title IV allocations • initial allocation was not equitable and that the electric power sector has changed significantly since 1985-87. • this approach does take into account units exempt from title IV or new units • EPA believes that setting State budgets according to title IV allowances represents a reasonable approach. • It is necessary in order to ensure the preservation of a viable title IV program • desire to maintain the trust and confidence that has developed in the functioning market for title IV allowances, which is key to its success • It is a logical starting point since it is the current effective cap on SO2 emissions for Acid Rain units, which make up the large majority of affected EGU CAIR units.

10. Commenters’ Concerns – SO2 budgets (ctd) • Regarding SO2 allocations and State budgets • EPA believes that setting State budgets according to title IV allowances represents a reasonable approach (ctd). • Congress decided to allocate title IV allowances in perpetuity, realizing that the electricity sector would not remain static over this time period. • There are numerous potential methodologies of dividing up the regional budgets among the States. While initial allocations of State budgets are important for distributional reasons, under a cap-and-trade system, they would not impact the attainment of the environmental objectives or the overall cost • Each of the alternate methods also has shortcomings, many of which have been identified by commenters. • Allocating allowances based on title IV yields results that fall within a reasonable range of results obtained from using a number of alternate methodologies.

11. Commenters’ Concerns – NOx budgets • Regarding NOx State budgets • Some commenters have stated that budgets based on heat input, (and particularly those that would use different fuel factors) do not encourage efficiency. • Neither a heat input, nor an output-based approach, if allocated once and based on a historical baseline, would provide any efficiency incentives • The cap-and-trade system itself, regardless of how the allowances are distributed, provides the primary incentive for efficient, clean generation. • A fuel factor approach provides States with allowances more in proportion with their historical emissions. It recognizes that different States are facing the reduction requirements with different starting stocks of generation, with different starting emission profiles. • The fuel burned is a key factor in differentiating the generation.

12. Commenters’ Concerns – NOx budgets (ctd) • Regarding NOx State budgets • It is not expected that this decision would disadvantage States with gas-fired generation. It would eliminate significant allowance “windfall” for some states with significant amounts of older gas and oil generation. • Commenters voiced differing opinion regarding using growth in the setting of budgets (as was done in the SIP Call). • EPA believes that setting budgets using such a heat input approach - without a growth adjustment - is fair and would be simpler. • Methods involving State-specific growth rates present challenges due to the inherent difficulties in predicting State-specific growth in heat input over a lengthy period.

13. Annual NOx and SO2: Historic Emissions and budgets Note: Projected SO2 Emissions in 2010 and 2015 are expected to exceed budgets because of banking of Title IV allowances.

14. Seasonal NOx: SIP Call EGU budgets, CAIR budgets, projected emissions

15. For more information • Section V of the CAIR final preamble • Discussion of setting of state budgets • Table V-1 – EGU SO2 budgets • Table V-2 – EGU annual NOx budgets • Table V-3 – NOx Compliance Supplement Pool • Table V-4 – EGU Seasonal NOx budgets • Technical Support Document – Regional and State SO2 and NOx emissions budgets: • http://www.epa.gov/cair/pdfs/finaltech06.pdf • Excel Files used in development of State budgets • In Docket