Regulating Air Pollutants from Power Plants: What is Sensible?
Tuesday, February 19, 2002

Perhaps the most controversial decision made by President Bush in the early months of his administration was the rejection of the Kyoto Protocol. Although pushed from the headlines, the issues of air pollution and global climate change have never disappeared. New proposals in Congress would sharply reduce emissions of four pollutants from power plants: nitrogen oxides (NOx), sulfur dioxide (SO₂), mercury and carbon dioxide (CO2). On February 14, the Administration put forth its own proposal for reductions in the first three and a voluntary program for CO2, the main greenhouse gas. A conference hosted by the Joint Center evaluated these policies.

Peter E. Tsirigotis, EPA: Mr. Tsirigotis began the conference by explaining the Administration’s Clear Skies Initiative, which proposes cuts in SO2, NOx and mercury emissions. All three pollutants would be regulated under a cap and trade program, similar to the systems currently used for SO2 nationally and for NOx regionally. The Administration proposed the following reductions:

Pollutant	Current Emissions	2010	2018	% reduction
SO2	11 million tons	4.5 mill. tons	3 mill. tons	73
NOx	5 million tons	2.1 mill. tons	1.7 mill. tons	67
Mercury	48 tons	26 tons	15 tons	69

EPA expects that utilities will use selective catalytic reduction (SCR) to reduce NOx and scrubbers to reduce SO2. EPA forecasts that both technologies will be phased in between now and 2018 with marginal costs eventually reaching $1200 per ton of SO2 and $1700 per ton of NOx by the year 2020. EPA also expects an increase in demand for coal from the East and Midwest compared to the West as utilities find a new equilibrium between transport and pollution control costs.

According to Mr. Tsirigotis, mercury reductions are harder to predict because this is the first ever national cap on mercury emission1s. Therefore, we have less knowledge about emission reduction technologies. EPA expects that increased use of SCR and scrubbers will reduce levels of mercury in the early years of the program without any mercury specific devices, such as activated carbon. Meeting the tough standards of the later years of the program, from 2015 to 2020, will require technology beyond SCR. However, Mr. Tsirigotis expressed optimism about the ability of the industry to find cost-effective solutions to mercury control and compared the situation to the state of knowledge about NOx control ten years ago.

Anne E. Smith, Charles River Associates: Ms. Smith highlighted some of the uncertainties present in the EPA’s analysis. According to Ms. Smith, the biggest uncertainty is the amount of mercury control we can expect from SCR and scrubbers. Ms. Smith and her colleagues think that EPA may have been too optimistic when extrapolating mercury co-control benefits from a relatively small data set. Their own analysis suggests that control costs could be 50% higher than the estimates done by EPA if there are no co-control benefits. Another source of uncertainty is the absence of a clear, long-term carbon policy. If there are no carbon caps, as EPA analysis assumes, then retrofitting coal plants is more cost-effective for utilities. However, if there are carbon caps in the future, natural gas may be the preferred fuel. Switching to natural gas would increase uncertainty further by tying costs to the natural gas market.

On the benefits side, Ms. Smith also found many uncertainties. The benefits of mercury control are uncertain and the proposed cap seems somewhat arbitrary. Ms. Smith recommends a permit price cap, at least until benefits are better understood. Although NOx and SO2 are known components of fine particulate matter, also called PM 2.5, other pollutants compose about 50% of total urban PM 2.5. Why, when there are so many contributors to fine PM, should we focus exclusively on NOx and SO2? More fundamentally, Ms. Smith would like to see EPA quantify benefits in actual health and welfare endpoints, for example expected lives saved, instead of merely tons of pollution avoided.

Randall Lutter, Joint Center: Mr. Lutter suggested two significant changes to the Clear Skies Initiative and the similar proposals in Congress. First, he suggested that the markets for NOx and SO2 be integrated. Both pollutants cause similar environmental problems, PM and acid rain. Mr. Lutter did note that NOx also contributes to ozone, but utilities emit only a small share of total NOx and ozone is already regulated. Combining the NOx and SO2 markets could reduce compliance costs while increasing environmental protection. On the current markets, NOx permits sell for around $2000 per ton while SO2 permits sell for $150 per ton. Yet, EPA considers SO2 to be more damaging to the environment. Therefore, allowing firms to exchange NO_x and SO₂ permits based on the expected environmental effects could produce results that are good for everyone. For example, suppose the government sold 40 NO_x permits in exchange for 11 SO₂ permits. As long as the expected incremental environmental damages from a ton of SO₂ were four times greater than from a ton of NO_x, every trade would reduce expected environmental damages by the equivalent of one ton of SO₂. Choosing a correct NOx-SO2 exchange rate would be a challenge, although not impossible, and the rewards could be substantial.

Second, Mr. Lutter favors a more modest mercury program, at least until the risks and costs are better understood. Trace mercury has been shown to cause neural damage, but the effects are very subtle. Further, the link between mercury emissions and negative health effects in children, the subpopulation of concern is not very well understood. To illustrate, Mr. Lutter showed a slide depicting the tenuous connection between utility emissions and human health effects (see Lutter powerpoint presentation). According to Mr. Lutter, current evidence does not justify a massive mercury emissions reduction. A better solution would be a modest cap with a price limit on mercury permits and a reevaluation after several years.

The three panelists presented different views on the economics of reducing air pollution. Peter Tsirigotis outlined the Administration’s Clear Skies Initiative and its system of cap and trade permits for SO2, NOx and mercury. Anne Smith highlighted some key uncertainties in EPA estimates. Randy Lutter suggested combining the NOx and SO2 markets and setting more modest mercury goals. However, all the panelists seem to agree on a few points: there are uncertainties, especially for the costs and benefits of reducing mercury emissions, and the cap and trade approach is a good basic framework for this program.

Jeffrey R. Holmstead, Environmental Protection Agency: Mr. Holmstead built on the presentation of his colleague Peter Tsirigotis and explained the motivation behind the Clear Skies Initiative. Mr. Holmstead pointed out that a series of new ambient air quality standards will be issued in the next 10 to 15 years under the current Clean Air Act. EPA will promulgate new PM 2.5 and 8-hour Ozone standards based on health criteria. A significant number of regions, especially on the east coast, will not be in attainment with these new standards and the states will need to find ways to cut emissions. Since utilities are the largest single source of PM 2.5 pollutants, accounting for 70% of the SO2 and 25% of the NOx in the eastern U.S., further regulation of utilities is inevitable. Furthermore, EPA is in the process of developing a standard for mercury emissions, so this, too, is inevitable.

Mr. Holmstead states that further regulation of the utility industry is a cost-effective method for society to reduce pollution. The marginal cost of controlling emissions is cheaper than for other sectors of the economy. For example, the marginal cost of controlling SO2 under the Clear Skies Initiative will reach $1,200, compared to a marginal cost of at least $5,000 to control emissions from the next cheapest source. The costs of controlling NOx from mobile sources has been more expensive than controlling power plant emissions.

According to Mr. Holmstead, Clear Skies is an attempt to recognize the inevitability of regulating utility emissions and move ahead of the process, instead of enduring another round of Section 126 petitions. The Administration’s tool of choice is the market-based approach that has proven effective in reducing SO2. And while a formal cost benefit analysis has not been completed, the benefits of the emission reductions will substantially exceed the costs, possibly by a 2 to 1 margin.

David G. Hawkins, Natural Resources Defense Council: Mr. Hawkins argued that the Clear Skies Initiative is an unacceptable weakening of an EPA proposal presented to utilities in September 2001. EPA proposed capping SO2 at 2 million tons per year in 2010 compared with the Clear Skies cap of 4.5 million tons in 2010 and 3 million tons in 2018. For NOx, the EPA’s 2001 proposal called for 1.9 million tons in 2008 and 1.25 million tons in 2012. The Clear Skies Initiative proposed caps of 2.1 million tons in 2008 and 1.7 million tons in 2018. The EPA proposed capping mercury at 24 tons in 2008 and 7.5 tons in 2012, while Clear Skies caps mercury at 26 tons in 2010 and 15 tons in 2018. Hawkins also noted that the fine print of the Administration’s proposal allows EPA to adjust the later caps, giving industry another chance to lobby against tough restrictions.

The differences between the original EPA plan and the Clear Skies Initiative quickly add up. Between 2010 and 2020, the Bush plan will allow 45 million tons of SO2 emissions, compared to the 22 million tons allowed under EPA proposal. For NOx, 26 million tons will be emitted instead of 19 million tons. Between 2008 and 2020, Clear Skies will cap mercury emissions at 350 tons, twice the 164 tons emitted under EPA proposal. Even the amount allowed by EPA plan well exceeds the 65 tons that the Natural Resources Defense Council (NRDC) thinks the current Clean Air Act requires. Compared with the 2001 EPA proposal, Clear Skies will allow an additional 12,000 deaths per year from 2010 to 2018 and at least 5,500 per year after that from fine particulate matter. This is in addition to the increased acid deposition, increased ozone, and decreased visibility at national parks. NRDC estimates that compared to EPA proposal, the Clear Skies Initiative will save about $5 billion per year, but sacrifice $50 to $80 billion per year in fine PM benefits alone.

As for the Administration’s carbon policy, Mr. Hawkins called it "business as usual." President Bush has called for an 18% reduction in carbon intensity, the carbon emissions per dollar of GDP, over the next decade. Since carbon intensity decreased 18% over the last decade, this is not real action. Carbon emissions will still rise by 270 million metric tons of carbon equivalent over the next decade. The costs of separating carbon policy from the other three pollutants will be costly––$7 billion per year according to EPA estimates.

C. Boyden Gray of Wilmer, Cutler & Pickering: Mr. Gray thinks the Clear Skies Initiative has taken the wrong approach, both environmentally and legally. The Administration has targeted SO2 without understanding its role in fine particulate matter or health effects. We do not know if SO2 is the right target; other pollutants, like volatile organic compounds, aromatics and diesel fuel, also contribute to fine PM. Recent studies have shown the importance of mobile sources in PM 2.5 and any program that ignores these sources is incomplete. Aromatics are an especially inviting target. Besides contributing to PM, aromatics are carcinogenic, a component of ozone, and the most carbon intensive part of gasoline. And by reducing NOx without addressing volatile organic compounds, we risk aggravating ozone. While reducing power plant emissions may nudge some rural areas into compliance, it may not have much effect on the large urban counties where the health gains would be greatest. Furthermore, we should be careful not to discourage the development of electric cars by over-regulating the electric industry.

Mr. Gray questions the legal philosophy of the Clear Skies Initiative as well. The Clean Air Act is built on a federalist approach, which Clear Skies abandons. The current Act gives the states and EPA ample power to address this problem in a comprehensive way and provides sanctions for states that fail to meet the standards. In fact, the states will still suffer the penalties of non-attainment, even as the Clear Skies Initiative infringes on their ability to reach attainment levels as they see fit. Mr. Gray concludes that the Administration should stay with the federalist structure of the current Act.

John Palmisano, Evolution Markets: Mr. Palmisano raised a variety of points related to the environmental and legal aspects of the Clear Skies Initiative. Environmentally, Palmisano would like to expand the scope of the proposal. Since some Mexican power plants affect air quality in Texas and the Southwest and since Canada is developing its own trading program, why not create a NAFTA trading program? Such a program could easily be accommodated in the NAFTA framework, and could produce better results. New Source Review must also be addressed––especially the offset provision, which may soon become a significant limitation to the addition of new capacity in urban areas. On a different note, voluntary trading programs have not proven to be effective in the past.

The legal issues behind the carbon registry for reduction credits need to be thought out more carefully. What is the statutory authority for creating entitlements to credits and how will we legally define the relevant property rights? Are we going to retroactively add 1605b participants to the new registry? Is this voluntary program committing us to a regulatory approach that we may not want? If, hypothetically, there were tort cases involving air pollution, will the registry become a smoking gun? What role can or should states play? New York is currently in court, defending its right to limit permit trading in the state. Congress and EPA should take this opportunity to send a message to the court.

Administrator Christine Todd Whitman, U.S. Environmental Protection Agency: Administrator Whitman began her remarks by praising the subtitle of the conference, "What is Sensible?" Health, safety and environmental regulation cost society billions of dollars a year, so the challenge in developing new air pollutant reduction measures is to figure out how to achieve the greatest improvement in air quality at the least cost to the consumer. And while judging regulation by both costs and benefits may not be the most popular route, Ms. Whitman believes that it is a sensible path to follow.

Administrator Whitman brought up the controversy over lowering the arsenic standard in drinking water as an example. The EPA, under Whitman, decided to delay the new Clinton-era arsenic standard so that the Bush Administration could review it. Administrator Whitman was concerned about the costs, not only as measured in dollars, but also in terms of unintended consequences. Specifically, she was worried that high compliance costs would drive small water systems out of business, forcing local residents to drink untreated well water that would exceed the current standard. This possible consequence seemed like common sense, but many distorted EPA’s decision to review the arsenic standards for political gain. According to Ms. Whitman, the Administration has proven its commitment to the environment: first, by passing brownfields legislation that had stalled in Congress for years and now with the Clear Skies Initiative, the most ambitious air pollution program in a generation.

Clear Skies also represents another step away from the traditional command and control philosophy of regulation. Command and control has been successful over the last 30 years, not only in improving the environment, but in changing the public’s perceptions about the importance of protecting the natural world. We can now move forward to regulatory methods that focus on progress and results, not process. The voluntary Energy Star program has been a successful example of the new regulatory philosophy. In the year 2000 alone, Energy Star saved consumers $5 billion and reduced pollution equal to that emitted by 10 million automobiles.

The SO2 trading program has been another success story. The cap and trade program has reduced pollution more than predicted at costs lower than expected and requires only 20 EPA employees to supervise its operation. The Clear Skies Initiative builds on this success, working to reduce air pollutants and the regulatory thicket. With time, command–and–control regulation may become the least desirable option available to regulators, one tool among many.

Ms. Whitman concluded by saying that Clear Skies will improve health and help states meet the upcoming NAAQS requirements, all at a cost of up to one third less than traditional command–and–control regulation. The cap and trade method will make compliance easier, cheaper and less litigious. She hopes this initiative will encourage real environmental progress, not posturing, as we pursue our common goal of leaving a healthy environment for our children.

Administrator Whitman responded to several questions after her remarks. On the role of science at EPA, she stated her desire to increase the role of sound science in the Agency. Ms. Whitman wants new regulatory efforts to be driven by science, not politics, and an expanded role for peer review. On the topic of small business, she realizes that, although less important than utilities or mobile sources, small businesses need to play a role in reducing air pollution. Whitman wants to work with small firms to help them improve environmental performance without crushing them under burdensome regulation. On the topic of the Kyoto Protocol, Ms. Whitman explained the Administration’s proposed carbon policy, emphasizing how programs in the developing world would help those nations avoid many of the polluting technologies used during our own industrialization.