An Emissions Cap Alternative to New Source Review

1. An Emissions Cap Alternative to New Source Review September 27, 1999

2. Overview • EPA is embracing cap and trade programs for many pollutants. • NSR is duplicative and counterproductive on top of a cap. • Replacing NSR with a cap provides the same environmental protection with lower cost and greater environmental benefit.

3. Cap and Trade Use is Growing • EPA is supporting expanded use of cap and trade programs. • The cap provides more secure protection of the environment. • Variation in production, growth, other variability all must come under the cap. • Accurate measurement verifies the results. • All units affected - no grandfathering.

4. Cap and Trade Flexibility is Attractive to Sources • Allows choice of compliance options - new technology, alternate fuels, improved efficiency and pollution prevention, or reduced utilization. • Accommodates fluctuation in production, changes in operation. • Allows for better planning and cost containment.

5. Cap and Trade Reduces Cost of Administration and of Control • Regulators do not have to determine where cuts should be made. • Tradable allowance market finds the lowest cost reductions - typically at older high emitting plants. • Automatically addresses “grandfathering” by creating an economic incentive to clean up old high-emitting plants.

6. Cap and Trade Supports Broad EPA Policy Goals • Explicitly recognizes efficiency improvements and other similar actions taken by sources as pollution prevention - any type of reduction is valuable under the approach. • Output-based approach forces sources to balance the costs of pollution (emissions) vs. the value of the useful product (output).

7. Cap and Trade Provides Technology-Forcing Driver • There is an economic incentive to create cost-effective reductions at every plant. • With growth, there is even stronger pressure to find more effective control technology. SCAQMD shows this clearly. • Private sector support for technology innovation is clearly a benefit of cap and trade.

8. The Cap Paradox • Emissions cannot exceed the cap. • Emissions won’t be below the cap either - allowances not used at one source will be emitted somewhere else. • If you still apply NSR to sources under the cap, other sources will produce the pollution avoided by the source subject to NSR. This will all occur at a higher cost.

9. NSR is the Opposite of Cap and Trade • No flexibility - technology and emissions are specifically determined on a case-by-case basis. • No cost minimization - sources required to apply the newest (most expensive and often unreliable) technology. • No environmental certainty - actual emissions depend on production rate - no absolute cap. • No support for pollution prevention or efficiency - rates are typically input-based, focus on add-on control.

10. NSR Negates Many Benefits of Cap and Trade • NSR forces higher cost reductions from new sources rather than low cost reductions from old sources. • Marginal reductions squeezed out of new sources are simply emitted by other sources. • NSR slows capital turnover and efficiency improvement. • Offsets already handled by cap.

11. If NSR Were Removed for a Capped Sector: • Program emissions would not change. • Compliance, administration and consumer costs would go down. • Capital turnover would accelerate. • Non-capped emissions would decrease. • Costs would go down, environment would be cleaner.

12. Specific Proposal • NSR offset and technology (BACT/LAER) requirements are replaced by an emission cap and trade program covering a particular source category and geographic area. • Local attainment issues still must be addressed separately. • WEPCO-type protection still required for non-capped criteria pollutants.

13. Outcome • Relief from NSR allows the cap and trade program to work effectively and provides incentives for clean growth and capital turnover. • The cap ensures that emissions do not increase regardless of new construction or modifications.

14. Outcome (2) • Technology forcing effects maintained. • Local attainment issues still addressed • Costs are lower and the environment is cleaner.

15. Policy Benefits • Allows efficient, proper operation of the cap and trade program. • Provides incentives instead of mandates: • to states and sources to adopt cap and trade programs • to sources to update or turn over capital stock • Guarantees environmental safeguards, since emission levels will be capped at levels that appropriately mitigate demonstrated health and environmental risks.

16. Implementation • Source type - Would apply to an entire source category within the affected geographic area. Alternative would be company-wide limit. • Geographic - At least at the state level but much more effective if implemented at regional and national levels.

17. Implementation • Size - Start at existing levels (15-25 MW and 250 MMBtu). Might need to go smaller to minimize leakage for new smaller generation technologies. Allow Opt-in for smaller sources as well. • Timing/seasonality - Based on appropriate mitigation requirements. • Cap Size - Based on needed mitigation for appropriate health and environmental goals.

18. Legal Basis • Offsets - Base on EPA communications related to RECLAIM and OTR cap. • BACT/LAER applicability • Build on PAL concepts. • Work from definition of “emissions increase” for a capped source, company or sector.

19. Conclusions • Cap and trade programs are proliferating. • Within a cap, NSR is duplicative and counterproductive. • With proper design, cap can provide the same environmental benefits as NSR at lower administrative and financial cost. • Industry would like to work with EPA to find the proper implementation mechanism.