United States
        Environmental Protection
        Agency
Office of Air Quality
Planning and Standards
Research Triangle Park, NC 27711
EPA-450/2-91-008
November 1991
& EPA
          THE CLEAN AIR ACT
       SECTION I83(d) GUIDANCE
       ON COST-EFFECTIVENESS

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                      The Clean Air Act Section 183fd) Guidance
                              on Cost-Effectiveness. 1991

                                     OMISSION
       EPA has published the following guidance on the application of the Urban Airshed
Model for SIP attainment demonstration:

Guideline for Regulatory Application of the Urban Airshed Model, EPA-450/4-91-013, U.S.
Environmental Protection Agency, Office of Air Quality Planning and Standards, Research
Triangle Park, NC, 1991.  Contact:  Cindy Baines, U.S. EPA, Office of Air Quality Planning
and Standards, Research Triangle Park, NC.  (919) 541-5690 or FTS 629-5690.

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                                EPA-450/2-91-008
    THE CLEAN AIR ACT
SECTION I83(d) GUIDANCE
 ON COST-EFFECTIVENESS
                 By


           Ambient Standards Branch

         Air Quality Management Division
      Office of Air Quality Planning and Standards
           Office of Air and Radiation
       U. S. Environmental Protection Agency
        Research Triangle Park, NC 27711

             November 1991

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This report has been reviewed by the Office of Air Quality Planning and Standards, U. S. Environmental
Protection Agency, and has been approved for publication. Any mention of trade names or commercial
products is not intended to constitute endorsement or recommendation for use.
                                      EPA-450/2-91-008
                                             11

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 PREFACE



       This guidance document was prepared by the Office of Air Quality Planning and
 Standards (OAQPS), U.S. Environmental Protection Agency, Research Triangle Park, NC
 27711. The principal authors are Frank Bunyard and Allyson Siwik under the supervision of
 Allen Basala.  In addition, the following individuals provided valuable technical assistance in
 preparing the final guidance:


       Kent Berry, Barry Gilbert, Doug Grano, Gretchen May, Nancy Mayer, David
       Misenheimer, Brock Nicholson, Donna Nickerson, John Silvasi, Jill Vitas, and Susan
       Wyatt of OAQPS;


       Jane Armstrong, Joanne Goldhand, Peter OkurowsM, and Rich Wilcox of the Office
       of Mobile Sources;


       Richard Ossias and Jan Tierney of the Office of General Counsel;

       Lynn Hamjian and Robert Judge of Region I;

       Tom Hansen and Kay Prince of Region IV;


       Candy Garret, Robin Sullivan,  Lucinda Watson, and Becky Weber of Region VI;

       David Jesson and Rebecca Tudor of Region IX;


       Maricruz McGowan of the Office of Policy, Planning and Evaluation;

       Kathy Kaufman of the Office of Policy Analysis and Review.

Questions and comments should be directed to Frank Bunyard at (919) 541-5297 or FTS 629-
•j^y t.

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TABLE OF CONTENTS


Introduction and Purpose  	  1

Status of Nonattainment of Ozone Air Quality  	  1

Fundamentals of Cost-Effectiveness	  5

Role of Cost-Effectiveness
in State Implementation Plans	7

Important Considerations for
Cost-Effectiveness Analysis  	  11

      Estimation of Emission Reductions 	  11

      Rule Effectiveness	  12

      Rule Penetration  	  14

      Cost-Effectiveness Threshold Values
      and Geographical  Variability	  14

      Multiple Pollutant Considerations
      and Assignment of Costs  	  19

Applications of Cost-Effectiveness Analysis	  21

      Modeling NOx and VOC	  21

      ERCAM-PC Software Capability	  21

Conclusion	  22

Endnotes	  23

Bibliography of Cross References 	  25

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 INTRODUCTION AND PURPOSE

       On November 15, 1990, the President signed into law the new Clean Air Act (Act),
 which was passed by an overwhelming majority in the Congress, P.L. 101-549, codified at 42
 U.S.C. sections 7401-7671q (1991).  The passage of the Act was in part an endorsement of
 market-based principles-innovative mechanisms through which cleaner air and better health
 for the Nation's citizens can be attained.  One type of market-based principle is cost-effective,
 emission-reduction strategies.  Cost-effectiveness is encouraged in Tide I,  Subpart 2, section
 183(d) of the Act, which states "[w]ithin  1 year after the date of the enactment of the Clean
 Air Act Amendments of 1990, the Administrator shall provide guidance to the States to be
 used in evaluating the relative cost-effectiveness of various options for the control of
 emissions from existing stationary sources of air pollutants which contribute to nonattainment
 of the national ambient air quality standards  for ozone."

       In keeping with the Act's endorsement of market-based principles,  this document is
 aimed at achieving, at lower cost, the compliance milestones for emission  reductions to attain
 and maintain the national ambient air quality standard (NAAQS) for ozone.  This document
 provides illustrative guidance on how to compare various types of control  measures  (i.e.,
 process changes,  add-on controls). In addition, it provides  a list of references that can serve
 as cost-analysis guidance. The illustrative guidance and cross references are helpful in
 designing cost-effective strategies for State implementation plans written to fulfill section  110
 and Title I, Part D requirements of the 1990  Act.

       Furthermore, it should be made clear  that this document focuses primarily on
 determining the cost-effectiveness of stationary source "strategies.  However, EPA recognizes
 that States will also need to consider mobile  and area sources when designing their overall
 control strategies.  Consequently, EPA has included some information on mobile sources,  but
 this information is meant to be used only  as an illustration and is not the focus of this
 document.
                                                                           **•
 STATUS OF NONATTAINMENT OF OZONE AIR QUALITY

       As of October 26, 1991, there were 98 areas in violation of the ozone ambient air
 quality standard.1  Table 1 gives a listing  of those nonattainment areas, their respective design
 values, and classifications.  Except as noted in the table, the areas comprise consolidated
 metropolitan statistical areas (CMSA's) or metropolitan statistical areas (MSA's), as  defined
 by the U. S. Department of Commerce. The  areas are ranked according  to ozone design
 values based on monitoring data over the  1988-1990 time period.  In addition, the table lists
 the classification status of each area based on two factors-current design values  and the area
 classifications referenced in Subpart 2, section 181(a) of the new Act.  This table gives
 insight into the level of control for which  individual States should strive  in designing their
 State implementation plans. More specifically, classification indicates the need for emission
reductions~i.e.,ein general, increased severity of nonattainment requires greater emission
reductions.

                                           1

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     TABLE 1.  THE STATUS OF NONATTAINMENT OF OZONE AIR QUALITY
  LOCATION
  Los Angeles-South Coast Basin
  Southeast Desert Modified CA
  Houston-Galveston-Brazoria TX
  New York NJ-NY-CT CSMA
  Baltimore MD
  San Diego CA
  Chicago-Gary-Lake CO, IL-IN
  Philadelphia-Wilm-TrentonPA-NJ-DE-MD
  Milwaukee-Racine WI
  Muskegon MI
  Sheboygan WI
  Greater Connecticut
  Ventura Co. CA
  San Joaquin Valley CA
  El Paso TX
  Manitowoc Co, WI**
  Springfield (Western  MA) MA
  Boston-Lawrence-Worcester MA
  Washington, DC-MD-VA
  Portsmouth-Dover-Rochester NH
  Huntington-Ashland WV-KY-OH
  Baton Rouge LA
  Providence RI (all RI)
  Atlanta, GA
  Beaumont-Port Arthur TX
  Sacramento Metro CA
  Charlotte-Gastonia NC
  Knox & Lincoln Cos. ME
  Cleveland-Akron-Lorain OH
  Cincinnati-Hamilton OH
  St. Louis MO-IL
 Portland ME
 Parkersburg WV
  Greensboro-WS-H Point NC
 Pittsburgh-Beaver Valley PA
 Kewaunee Co. WI
 Louisville KY-IN
 Atlantic City NJ
 Detroit-Ann Arbor MI
DESIGN VALUE
     0.330
     0.240
     0.220
     0.201
     0.194
     0.190
     0.190
     0.187
     0.183
     0.181
     0.176
     0.172
     0.170
     0.170
     0.170
     0.167
     0,167
     0.165
     0.165
     0.165
     0.164
     0.164
     0.162
     0.162
     0.160
     0.160
     0.158
     0.158
     0.157
     0.157
 -,    0.156
     0.156
     0.152
     0.151
     0.149
     0.147
     0.149
     0.145
     0.144
  CLASS
  Extreme
 Severe-17
 Severe-17
 Severe-17
 Severe-15
 Severe-15
 Severe-17
 Severe-15
 Severe-17
 Serious*
  Serious
  Serious
Severe-15*
  Serious
  Serious
Moderate*
  Serious '
  Serious
  Serious
  Serious
Moderate*
  Serious
  Serious
  Serious
  Serious
  Serious
Moderate
Moderate*
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
SOURCE: Designations-Areas for Air Quality Planning Purposes, 56 FR 56694, U.S. EPA, November 6, 1991.
   * Indicates 5% classification change.   ** Indicates an area not a CMSA/MSA.

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         TABLE 1. THE STATUS OF NONATTAINMENT OrOZONE AIR QUALITY (cont'd)
LOCATION
Grand Rapids MI
Salt Lake City UT
Jefferson Co NY
Salt Lake City UT
Dayton-Springfield OH
Richmond-Petersburg VA
Phoenix AZ
Reading PA
Raleigh-Durham NC
San Francisco-Bay Area CA
Dallas-Fort Worth TX
Edmonson Co KY**
Santa Barbara-Santa Maria-Lompoc CA
Memphis TN-AR-MS
Toledo OH
Miami-Fort Lauderdale-W. Palm Beach EL
Monterey Bay CA
Charleston WV
Nashville TN
Lewiston-Auburn ME
Allentown-Bethlehem-Easton PA-NJ
Owensboro KY
Harrisburg-Carlisle-Lebanon PA
Canton OH
Knoxville TN
Poughkeepsie NY
Youngstown-Warren-Sharon OH-PA
Birmingham AL
Hancock & Waldo Cos. ME**
Johnstown PA •
Cherokee Co SC**
Buffalo-Niagara Falls
Columbus OH
Kent & Queen Anne's Co MD**
Lake Charles LA
RenoNV
Seattle-Tacoma WA
Norfolk- Virg. Beach-Newport N VA
Sussex Co DE**
DESIGN VALUE
0.143
0.143
0.143
0.143
0.143
. 0.142
0.141
0.141
0.141
0.140
0.140
0.140
0.140
0.140
0.140
0.138
0.138
0.138
0.138
0.137
0.137
0.137
0.136
0.135
0.135
0.134
0.134
0.133
0.133
0.133
0.132
0.131
0.131
0.131
0.131
0.131
0.131
0.130
0.130
CLASS
Moderate
Moderate
Marginal*
• Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Marginal*
Moderate
Marginal*
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal -
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
Marginal
SOURCE: Designation of Areas for Air Quality Planning Purposes, 56 FR 56694, U.S. EPA, November 6, 1991.
   * Indicates 5% classification change.    ** Indicates an area not a CMSA/MSA.

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         TABLE 1. THE STATUS OF NONATTAINMENT OF OZONE AIR QUALITY (cont'd)
  LOCATION
  York PA
  Tampa-St Petersburg-Clear FL
  Walworth Co W*
  Scranton-Wilkes-Barre PA
  Altoona, PA MSA
  Erie PA
  Portland-Vancouver OR-WA
  Manchester-Nashua NH
  Albany-Schenectady-Troy NY
  Jersey Co IL**
  Essex Co NY**
  Door Co WI**
  Lexington-Fayette KY
  Lancaster PA
  Smyth Co VA**
  Evansville IN
  Paducah CO KY**
  Indianapolis IN
  South Bend-Elkhart IN
  Kansas City MO-KA
DESIGN VALUE
     0.129
     0.129
     0.129
     0.129
     0.129
     0.129
     0.128
     0.128
     0.128
     0.128
     0.127
     0.126
     0.126
     0.125
     0.125
     0.124
     0.124
     0.121
     0.121
     0.120
  CLASS
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
  Marginal
Submarginal
SOURCE: Designation of Areas for Air Quality Planning Purposes, 56 FR 56694, U.S. EPA, November 6, 1991.
   * Indicates 5% classification change.   ** Indicates an area not a CMSA/MSA.

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 FUNDAMENTALS OF COST-EFFECTIVENESS

       Cost-effectiveness analysis is one of many tools available to analysts and decision
 makers involved in environmental quality management.  In the broadest sense, cost-
 effectiveness analysis is used to rank a set of least-cost alternatives which achieve differing
 degrees of air quality improvement or health risk reductions.  As used in this guidance, cost-
 effectiveness analysis is a procedure for evaluating alternatives to minimize the cost of
 attaining and maintaining the ozone NAAQS in accordance with Tide I and other related Act
 requirements. These air quality or health risk reduction goals are pre-determined policy
 objectives. For more information on concepts and definitions of cost-effectiveness, refer to
 the paper by Walton and Basala, "Cost-Effectiveness Analysis and Environmental Quality
 Management," listed in the bibliography.

       Ozone is a secondarily-generated air pollutant. It is the product of nitrogen oxides
 (NOx) and volatile organic compounds (VOC's) in the presence of sunlight.  Consequently,
 this guidance illustrates the evaluation of measures to control these ozone precursors.  Given
 the emission reductions required to attain and maintain the ozone NAAQS over some period,
 the costs of achieving these emission reductions are estimated and compared among
 alternative strategies.

       Costs for alternative measures may not occur evenly across the time period of
 evaluation. For example, investment costs  tend to occur prior to outlays for operation and
 maintenance. There are two common ways for the estimation and evaluation of costs over
 time: (1) the levelized method, and (2) the present value method.  The levelized method
 adjusts investment and operation and  maintenance costs so that they are equivalent to a yearly
 payment that remains the same over the analyzed time period.  The present value method
 adjusts investment and operation and  maintenance costs so that they are equivalent to a given
 sum expended today.  The California Clean Air Act Cost-Effectiveness Guidance discusses
 both methods and is referenced in the bibliography.  The OAQPS Control Cost Manual is also
 referenced in the bibliography and presents the  levelized method, as well as engineering
 approaches to cost estimation.

       Care should be taken in defining "cost" Cost is a measure of worth assigned to inputs
 (e.g., materials, fuel, ducting) and activities (e.g., design, fabrication, operation) used to
provide emission reductions.  Most of these costs are explicit or are costs for which one could
produce an expense voucher.  However, other costs are implicit. Although we cannot produce
 a voucher for these costs, they are not any less  real. For example, if additional down time at
a production facility is required to install a pollution control system, the foregone output
should be  valued and included as part of the cost of pollution control.

       Cost may include purchase and installation of control equipment, as well as the  annual
cost of operating, maintaining, and insuring the equipment.  In addition, there may  be costs
ancillary to the equipment or its operation such as operating permits, monitoring, and
compliance certification.  Under certain circumstances, control requirements may result  in

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 higher product prices and concomitant reductions in output and employment These output
 and employment adjustments may also be considered costs.  Although such adjustments are
 not reflected in the cost-effectiveness calculations described in this document, in some
 instances, these costs may be important.

        An important consideration in addressing the costs of control alternatives is the
 identification of the baseline. Within a given time frame, if certain pollution controls are
 already in place or already required under federally-enforceable provisions at the emission
 source, then the costs of these controls represent the baseline.* In such a situation, it is the
 incremental costs of installing and operating additional technologies~i.e., the difference in
 total control costs  before and after a new technology is installed—that are relevant for cost-
 effectiveness analyses.

        Application of cost-effectiveness analysis provides insight into the potential savings
 from lower-cost measures implemented to achieve the ozone  NAAQS in accordance with
 Tide I and related requirements.  Figure 1 provides  an illustration of strategies for achieving a
 desired level of air quality.  Strategy A is the dominant control strategy because it represents
 the least-cost method of attaining the 0.12 ppm ozone NAAQS. A hypothetical dominant
 control strategy could be based on the following: (1) various  lower-cost, add-on controls for
 stationary sources; (2) enhanced inspection and maintenance;  or (3) economic incentive rules
 (outlined in section 183(g)(4) of the Act) such as marketable  permits.  In Figure 1, Strategies
 B and C are inferior strategies.
                   53
                   a
                   4-
                   8-
                  o
                      Figure 1. Illustrative Concept of Control Strategy Dominance
                  I
                   1
a   C
                                n   B
                                            Inferior Strategics
             • Dominant Strategy
                                 0.12 ppm <
                                    Air Quality
* In other words, if a source is required to comply with pre-existing (prior to Act Amendments) requirements-cither
adopted or not yet adopted by the State ~ then the costs of those controls should be placed in the baseline, and not in
the additional costs of control for the purpose of cost-effectiveness determination.

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       Figure 2 provides an illustration of two alternative strategies that might be
 implemented in a nonattainment area.  Path A and Path B have overlapping, well-defined and
 low-cost control measures. When these control measures are implemented, divergence in
 costs occurs as Path A pursues process control opportunities (e.g., substitution of high solids
 or waterborne coatings for spray booths in specialty coating operations) and Path B pursues
 add-on controls for sources. Path A becomes the dominant strategy because it reduces
 emissions at less cost per ton than Path B. Path B therefore becomes the inferior strategy.
     CO
     6
                      Figure 2. Impact of Control Strategy Selection
                                   on Emission Reduction Costs
                                                          PathB

                                "3  ••  %   ^
                                g  ^v -.% \% s v- <^v^ i%54
Paths A, B
Path A
                 Total Emissions Reduction
ROLE OF COST-EFFECTIVENESS IN STATE IMPLEMENTATION PLANS

      After the EPA promulgates national ambient air quality standards, the Act requires
States to develop and submit implementation plans for EPA approval. State implementation
plans (SIP's) contain enforceable regulations that provide for attainment and maintenance of
the NAAQS.

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        To select a control strategy, States must initially identify mandatory control measures
 that are required by the Act, such as the reasonable further progress requirements, reasonably
 available control technology (RACT) for stationary sources, volatility rules for fuels, and
 inspection and maintenance (1/M) for mobile sources.  In addition, the amended Act requires
 that control measures adopted or required to be adopted under the pre-amended Act remain in
 effect [section 193]. Therefore, these mandatory control measures  must be adopted and
 retained for certain nonattainment areas. Beyond these constraints, States may select cost-
 effective, discretionary measures to attain and maintain the ozone NAAQS.

        Figure 3 illustrates the process of selecting a cost-effective control strategy.  As. the
 chart shows, the first step in the selection of discretionary control measures is the
 determination of required emission reductions.  Two inputs for determining these reductions
 are the following:

        o      A well-defined emission inventory that includes (1) an understanding of
              the relationships between emission factors (e.g., amount or rate of
              emissions) and the parameters (i.e., inputs used in the production
              process such as labor and materials) affecting production of marketable
              goods and services in the economy,  (2) speciation of VOC's in terms of
              photochemical reactivity, (3) the implications of economic growth on
              projection of quantities, and (4) the implications of geographical
              distribution of future emissions for a nonattainment area.  For further
              information, see EPA's guidance, Procedures for Preparing Emissions
              Projections.

       o      Air quality  modeling for the relevant emissions inventory. Modeling
              tropospheric ozone as a criteria pollutant involves a complex set of
              relationships. These relationships characterize the atmospheric chemical
              reactions that occur between those emissions that function as precursors,
              primarily YOC's and nitrogen oxides.  When the linkage between the emissions
              inventory-and air quality (design value) has  been defined, the emission
              reductions required to meet attainment can be determined. The result is an
              environmental objective or target.  The Urban Airshed Model is available to
              States to calculate the spatial and temporal concentrations of ground level
              ozone within urbanized areas or regional urbanized areas, such as the
              Northeastern United States (See Yocke, et al., listed  in the bibliography).

       The second step in the process of selecting a cost-effective control strategy is to
catalog all the control possibilities by some measure of cost versus environmental
improvement. The proxy of cost-per-ton ratio is widely used in EPA analyses for developing
regulations for individual source categories.  The required inputs for this measurement call for
the development of (1) a measurement that tracks control performance such as control
efficiency or emission reductions per unit of time or production, and (2) cost (engineering
cost) algorithms-mathematical expressions of the relationships between capital and operating

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 costs and engineering parameters, such as size and production rates.  Based on a technical
 assessment of performance and costs, costs per ton of emissions reduction are calculated for
 each control measure.

       The third step is to identify several control strategy options, including the least-cost
 control strategy for the target emission reductions. Identification of control strategy options is
 performed by combining various  control measures and evaluating the emission reductions and
 incremental cost for each measure to derive a total incremental cost for implementation of the
 entire strategy.  Different strategies are developed iteratively in this manner to ensure that the
 least-cost strategy is identified. Mathematical programming techniques are sometimes
 appropriate to make this, determination.  It is important to note that the cost-effectiveness of a
 given control strategy may be sensitive to the order in which individual control measures are
 applied.  For example, if add-on control measures controlling 90 percent of emissions are
 applied to a stationary source before, after, or simultaneously with reformulated  production
 inputs, the cost per ton of emissions reduced would vary between the three scenarios.

       To this point, the process of identifying the least-cost control strategy is
 straightforward. However, there are policy (growth versus environmental tradeoffs) and
 socio-economic issues (employment dislocation and household sector impacts) that may not
 be quantifiable, or not readily quantifiable, in a least-cost mathematical programming
 structure. In addition, there may be implementation and enforcement issues, including the
 division of certain monitoring and certification responsibilities among various governmental
 entities and the regulated sources, that may not be quantifiable in this context. Control
 strategy selection is therefore a multi-attribute decision. In addition to costs, policy, socio-
 economic effects, and certain implementation and enforcement considerations may also factor-
 into the decision.                    .                                                 •  .

       As a further caveat, there are other issues affecting cost-effectiveness that have yet to
 be mentioned in this guidance.  Baseline emission level, specification  of emission reductions,
 rule effectiveness, and rule penetration are important factors that may  influence the cost-
 effectiveness calculation and possibly the outcome of the control strategy selection.  A
 discussion of these concepts is presented further in this document.  Additionally, speciation
 may be important in the reactivity of various compounds and how those reactive compounds
 relate to ozone formation. The Agency position on reactivity is that all volatile organic
 compounds, except for those designated in the Federal Register as being negligibly reactive2,
 are of equal importance insofar as the mandatory 15 percent reductions for aU nonattainment'
 areas classified as moderate or above.  Reactivity, however, becomes important in modeling"
for demonstration of attainment and maintenance of the NAAQS.  There is more discussion
on reactivity and its impact on cost-effectiveness  in the California Clean Air Act Cost-
Effectiveness Guidance (See Bibliography at the end of this document.)

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   Figure 3.  Process for Selection of Cost-Effective Control Strategy
               Emissions
                Inventory
Develop Control Measures
  Socio-
 Economic
-, Issnes
Determine
Emission
Reductions
                                    Rank By
                                   Cost per Ton
                                   Identify
                                  Least Cost
                                 Control Strategy
                                   Select
                                   Control
                                   Strategy
               Develop Cost Functions
                        Implementation'
                         Enforcement
                           Issues
                                     10

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IMPORTANT CONSIDERATIONS FOR COST-EFFECTIVENESS ANALYSIS

Estimation of Emission Reductions

       The manner in which reduced emissions are derived can affect the cost-effectiveness
value.  To be consistent with EPA guidance for the development of emission inventories,
projections of emissions, and other guidance related to tracking emission reductions3, the
estimation of emission reductions is based on the following:

       o     determination of baseline emission level

             Baseline emissions reflect actual emissions in the nonattainment area [sections
             182(a)(l) and 182(b)(l)(B)]. Emissions are to be based on conditions that exist
             during the peak ozone season of the year of enactment of the Clean Air Act
             Amendments, i.e., 1990.   Reasonable further progress (RFP) requirements
             must use actual emissions, with certain exceptions as specified in the Act
             section 182(b)(l)(D).   Refer to the upcoming guidance on estimation of
             emission reductions for RFP planning due out in the spring of 1992.

      o     specification of emission  reductions

             Emission reductions are calculated using the baseline emission level as
             described above as the reference point from which expected emission
             reductions are derived. Emission reductions are either actual or allowable
             depending upon the methods used to determine post-control emissions within
             the attainment plan. If the post-control emissions are based on an enforceable
             emission rate, some allowable operating, capacity and an anticipated operating
             schedule, then the  emission reductions are construed to be allowable emission
            reductions.  Conversely, if post-control emissions are determined based on
             actual operating conditions (verified by compliance certification), then the
            emission reductions are considered actual emission reductions.  According to
            the EPA guidance, Procedures for Preparing Emissions Projections, States
            must identify whether the emission  projections are allowable or actual. For the
            purpose of identifying control strategy options, the emission reduction
            calculation should  be modified for the following: (1) nondiscretionary
            emissions limitations that will apply in the future [e.g.,  maximum achievable
         •  control technology (MACT) regulations], (2) anticipated regulations that will
            provide sources with additional operational flexibility (e.g., marketable
            permits).
                                         11

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Rule Effectiveness

       Expected costs and emission reductions for a given control strategy to attain and
maintain the ozone NAAQS may not be the same as the realized costs and emission
reductions. More often than not, when the expectations for a control strategy are not realized,
the emission reductions are less than anticipated.

       Rule effectiveness reflects the ability, or lack thereof, of a regulatory program to
achieve all the emission reductions possible through full compliance by all sources all the
time. For stationary sources, the EPA presumes a rule effectiveness of 80 percent for State
implementation plan rules unless the State demonstrates a higher figure is  appropriate for a
source category.

       By calculating cost-effectiveness numbers assuming 100 percent rule effectiveness
when rule effectiveness is less, the amount of emissions reduced will be overestimated,
resulting in an underestimate of the cost per ton of emissions reduced.  This  potential effect is
illustrated in Table 2.

       As an example, suppose a control agency determines that a particular source category
has uncontrolled emissions of 2500 tons per year.   The agency believes that an objective of
90 percent emissions reduction is possible and specifies some allowable rate  based on some
output parameter, such as pounds of VOC emitted per pound of high solids coating applied.
The source category installs control devices that are supposed to control at 95 percent control
efficiency.  With 100 percent rule effectiveness, emissions are reduced by  2375 tons per year
(2500 tons/year x 0.95).  However, rule effectiveness of less than  100 percent may result for a
variety of reasons, including equipment leaks and failure to maintain specified operating
conditions (e.g., flame temperature). Using EPA's default value of 80 percent rule
effectiveness, the estimated emissions reductions are only 1900 tons per year (2500 tons/year
x (0.95 x 0.80)). Improved monitoring and enforcement of presently regulated sources, more
inspections, improved record keeping and reporting, and corrective actions should be
examined for enhancement of rule effectiveness, emission reduction potential and cost-
effectiveness.6 This is not to say that rule effectiveness is the only way in which to achieve
additional emission reductions.  Enhanced rule effectiveness should be compared to other
methods of achieving reductions.
                                          12

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CN
a
Pf
||f
Emissions
Reductions
(tons/yr)
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 Rule Penetration

       Rule penetration is closely related to the rule effectiveness concept. The term is
 defined as the extent to which a regulation may cover emissions from a source category. For
 example, a rule promulgated for Stage I vapor recovery at gasoline stations and bulk
 terminals might exempt some sources from the vapor recovery requirement if the gasoline is
 delivered from 6ut-of-state.  In this case, the rule would not cover all emissions from this
 source category.  Exemptions from a given rule may decrease the rule penetration and
 therefore result in less emission reductions from a source category.  -Authorities may therefore
 wish to regulate additional sources of emissions in an attempt to achieve emission reduction
 progress requirements.  Cost-effectiveness  considerations may be one of the factors decision,.
 makers must consider in determining the degree of penetration for a given rule.


 Cost-Effectiveness Threshold Values  and Geographical Variability

       Cost-effectiveness should be used with caution in making decisions for implementing
 control strategies.  Decisions based on one universally-applied ceiling value ($/ton) may leave
 some nonattainment areas short of target emission reduction requirements and cause other
 areas to overshoot their targets. For example, nonattainment areas classified as severe or
 extreme may need more expensive  controls at the margin-foreach additional unit of emission
 reduction—than marginal or moderate nonattainment areas.  Similarly, variability in the
 average cost of control among nonattainment areas is likely to be the norm.  Figure 4 presents
 the modeling results of a control strategy study of 81 nonattainment areas using 1987 to 1989
 ozone monitoring data and illustrates  this variability.7 It is important to recognize that the
 incremental costs of control at the margin may not reflect the average cost-effectiveness
 across these areas.

       The marginal  cost per ton of reduced emissions is likely to vary for the following
reasons:

      o     sources available and selected for control

             The marginal cost of control for a nonattainment area depends upon the mix of
             sources available for control and the various control measures needed to reduce
             emissions within and across source categories.   The potential variability in
             emission reductions from source categories across nonattainment areas is
             displayed in Figure 5.  The graphic represents the lower cost measures
             available to the selected nonattainment areas for attainment and maintenance of
             the ozone NAAQS. Within a given nonattainment area, there may be more
             reductions available from mobile sources rather than large point sources.
                                          14

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 03
 C/3

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     Figure 4. Cost-Effectiveness for Nonattainment Areas
            A profile of CMSA's/MSA's by Avg. Cost per Ton
                          Projection Year-2010
      >S2000/ton
$1000 to
$2000Aon
      
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   co
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  13
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                 Figure 5. Percentage of Emission Reductions
                                 by Source Category
                        for Selected Nonattainment Areas

     30
 "20
 gp
 |  10

I  °
PL,
                                             •

                      A
                    severe
                 Source

                 Category
               B
              serious
   Nonattainment Areas
                           c
                         serious
Mobile
Area
                                                       Large
                                                       point
SOURCE: "Ozone Nonattainment Analysis
Clean Air Act Amendments of 1990"
By EH. Pechan, Inc. for US EPA, Sept. 1991.
Notes:
      o Large point sources are defined as those sources emitting greater than 100 tons per year for VOC.
      o Area sources are those emitting less than 100 tons per year.
      o The mobile source category does not include off-highway vehicles such as construction equipment, aircraft
        agricultural and forestry equipment, locomotives, and vessels.
      o Projection Year-2010
                                           16

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       o      baseline control levels

              Some nonattainment areas may have already achieved the lower cost emission
              reductions available. Higher cost control measures might be required to reduce
              any additional units of emissions.

       o      degree of control required

              The amount of emissions reductions necessary to achieve attainment varies
              across nonattainment areas and therefore affects the relative marginal costs of
              control. These varying amounts of control are explained by differences in such
              factors as size and location of sources as well as daily and seasonal fluctuations
              in temperature, emission rates,  and wind patterns.

       o      control techniques

              The marginal cost of control is dependent upon the control measure selected to
              achieve additional emission reductions.  In some instances, process change may
              be less costly than  add-on controls, or rule-effectiveness enhancement less
              costly than greater  rule penetration.

       Table 3 illustrates various  VOC control measures and relative cost-effectiveness.
These costs are national averages  and represent current estimates.8  Again, it should be noted .
that the marginal costs of VOC control measures for a given nonattainment area may differ
from  the national averages  for these source  categories.  It should also be emphasized that
some of these measures  are mandatory while others may be discretionary in terms of
combining various measures for an overall control strategy. In general, process changes are
lower in cost than end-of-pipe incineration controls on small sources (including small marine
vessels). Rule effectiveness has been added as a "source category" to the table because
improving rule effectiveness may  help to achieve emission reductions.  More inspections,
improved record keeping and reporting, and corrective actions represent some of the elements
identified in the March 31 Rule Effectiveness  Study Protocol.9  It should be noted that
emission reductions resulting from rule effectiveness improvements occurring before  1990 and
that are built into the emission inventory baseline are not creditable to the 15 percent progress
requirements.  Additionally, rule effectiveness is not without costs.  Greater enforcement
and/or inspection and maintenance procedures cost resources.  Finally, transportation control
measures that achieve actual emission reductions are also available, such as employer-based,
ride-sharing programs, mass public (rail or bus) transit, van pooling, and parking restriction
ordinances  in centralized business sections of  metropolitan areas.  A more comprehensive list
is included in section 108(b) of the Act.
                                          17

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        TABLE 3.  ILLUSTRATIVE VOC CONTROL MEASURES AND COST-
                                   EFFECTIVENESS*
Source Category
Architectural Coatings
Stage II Refueling
Treatment, Storage, and
Disposal Facilities (RCRA)
air emissions
Enhanced Inspection and
Maintenance
Volatility rules
Marine Vessel
Loading/Unloading
Small Source Coating
Operation
Rule Effectiveness
Consumer Products
Control Measure
Application of High Solids
Coating Technology
Vapor Balance Fuel Recovery
Tank covers, controls on
aerated treatment and storage
tanks
Higher performance standards
Reid Vapor Pressure 7.8 psi
Ventilation System and
Incineration
Ventilation System and
Incineration
More inspections, Corrective
Actions
Substitute stick applicators
for aerosol propellants
Cost-Effectiveness
($ per ton)
Savings
770 to 1350
190
1400 to 5300b
140
1000 to 50,000
10,000 to 20,000
May lower the cost of
control0
400 and higher
 E. H. Pechan. and Associates, under contract with the U. S. Environmental Protection Agency, "Ozone
Nonattainment Analysis Clean Air Amendments of 1990", September 1991.
  U. S. Environmental Protection Agency, Office of Mobile Sources, Enhanced Inspection & Maintenance Briefing,
October 1991.
c Refer to Table 2.
                                            18

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       The control measures listed for NOx emission reductions in Table 4 represent an
illustration of various combustion sources to which process changes, such as low NOx
burners, staged air combustion, and add-on controls, namely selective catalytic reduction,
could apply.  The range in costs per ton is due to factors such as flue gas flow rates, fuel,
boiler configuration (tangential, wall), and application. More information on these types of
controls can be found in the July 22, 1991 draft report entitled, "Cost Effectiveness of
Stationary Sources for VOC and NOx Controls," prepared by E.H. Pechan and Associates for
the U.S. Environmental Protection Agency.

       As described above, control requirement needs and marginal costs and the anticipated
environmental quality improvements vary across nonattainment areas; therefore,  setting
control limits based on single $/ton values may not be appropriate.
Multiple Pollutant Considerations and Assignment of Costs

        In an unencumbered world, a control strategy would target a single pollutant for
achieving an environmental objective.  This eliminates problems of double counting—paying
for the same controls twice for two separate environmental objectives. In addition, such an
approach eliminates biases in the process of developing the least-cost envelope of dominant
controls. Unfortunately, there are pragmatic problems with attempting to assign single .
pollutant ($/ton) values to control measures.  Oftentimes, control measures being considered
reduce several pollutants. An example is certain types of catalytic controls on combustion
sources (e.g., mobile source tailpipe controls) that reduce carbon monoxide, nitrogen oxides,
and VOC's. If the environmental objective in a State implementation plan is to reduce ozone,
apportioning higher weights to nitrogen oxides and VOC's relative to carbon monoxide may
be appropriate in transportation control measures, such as employee trip reductions. In
another example, some controls (e.g., Stage n refueling) designed  for a State implementation
plan may reduce toxic pollutants that may be subject to Title IE.   The cost-effectiveness
computation should include reductions in the ozone precursors. However, the incidental
reduction in toxics may be considered as a secondary benefit and should be noted.
Discussion on various ways to apportion weights per pollutant for assignment of cost-
effectiveness is presented in the California Clean Air Act Cost-Effectiveness Guidance. The
EPA has no preferred option for assigning costs for multiple pollutants, as  the method used
would vary with the control scenario.
                                          19

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 APPLICATIONS OF COST-EFFECTIVENESS ANALYSIS

 Modeling NOX and VQC
       Modeling of control strategies that combine NOx and VOC controls to attain the
 ozone standard may be a difficult problem. As an example, a nonattainment area may
 employ the Urban Airshed Model (UAM) to estimate the spatial relationships of ozone
 concentration changes to determine optimal control strategies by applying a mix of NOX and
 VOC controls.  Such a model may produce several control strategies that are equivalent in
 terms of attaining and maintaining the ozone standard. For example, preliminary UAM
 modeling in the Ventura County portion of the South Central Coast Air Basin District has
 demonstrated that attainment can be achieved by reducing 55 percent of either VOC or NOX,
 or a combined strategy of 40 percent emission reduction from both VOC and NOx.10 Cos1>
 effectiveness analysis can play a useful role in the selection of the least-cost strategy from
 three equivalent strategies.  The analysis involves a two-staged process with the following
 elements:

       o     to ensure efficiency, selection of the dominant controls across source categories
             (e.g., low NOX burners on industrial boilers) in a cost per ton iterative process
             for each of the three strategies, and

       o     selection of the least-cost strategy from total annual costs perspective for the
             area.
ERCAM-PC Software Capability

       Under a contract with E. H. Pechan and Associates, Inc., EPA developed a model to
provide States 'and local agencies with the capability to analyze emission control strategies
and costs of emission reductions needed to attain the ozone NAAQS. The model, known as
the Emission Reduction and Cost Analysis Model (ERCAM), was developed from a national
model used to analyze the various legislative initiatives during the debates over the 1990
Clean Air Act Amendments.  The ERCAM was developed for a single State, but the model
readily adapts to other States by inserting State-specific emission factors derived from mobile
source emission factor models11 and the Aerometric Information and Retrieval System (AIRS)
for stationary  sources.  In addition, EPA has developed a cost-effectiveness model (CEM) for
inspection and maintenance programs that can be used in conjunction with ERCAM.  The
model is programmed in dBASEHI Plus and operates on a PC.
                                         21

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CONCLUSION
       Cost-effectiveness analysis is a tool designed to identify the least-cost means of
achieving an environmental objective.  However, other factors may warrant consideration
prior to adoption of a control strategy. With respect to cost-effectiveness analysis, several
considerations are important including rule effectiveness, rule penetration, threshold values,
and multiple pollutants.  A model, ERCAM, when used in conjunction with other models,
does exist to enable States to consider cost-effectiveness. The application of ERCAM,
although not mandated, should prove useful in designing lower-cost control strategies.
                                         22

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 ENDNOTES
 1      Designation of Areas for Air Quality Planning Purposes, 56 FR 56694, November 6,
       1991, U.S. Environmental Protection Agency.

 2      Requirements For Preparation, Adoption, and Submittal of Implementation Plans,  56
       FR 11387, March 18, 1991, U.S. Environmental Protection Agency.

 3      Emission Inventory Requirements for Ozone State Implementation Plans, EPA-450/4-
       91-010, U.S. Environmental Protection Agency, Office of Air Quality Planning and
       Standards, Research Triangle Park, NC, March, 1991.
       Procedures for Preparing Emissions Projections, EPA-450/4-91-019, U.S.
       Environmental Protection Agency, Office of Air Quality Planning and Standards,
       Research Triangle Park, NC, July 1991.
       Guidance on  Reasonable Further Progress Requirements will be available in the
       spring of 1992.

 4      Emission Inventory Requirements for Ozone State Implementation Plans, March 1991,
      •pp. 10 and 13.
       Procedures for the Preparation of Emission Inventories for Carbon Monoxide and
       Precursors of Ozone, Volume I: General Guidance for Stationary Sources, EPA-
       450/4-91-016, U.S. Environmental Protection Agency, Office of Air Quality Planning
       and Standards, Research Triangle Park, NC, May 1991.

 5      Workshop for Implementation of Clean Air Act Provisions Relating to Ozone, and
       Carbon Monoxide Emission Inventories, U.S. Environmental Protection Agency,
       Office of Air .Quality Planning and Standards, Research Triangle Park, NC, June 4-6
       1991.                                         •

 6      Memorandum from John Seitz, Director of Stationary Source Compliance Division,
       Office of Air Quality Planning and Standards, to U.S. EPA Regional Directors,
       "Implementation of Rule-Effectiveness Studies," March 31,  1988.

7      Ozone Nonattainment Analysis Clean Air Act Amendments  of 1990, Draft Report, E.
      H. Pechan and Associates, Inc., prepared for U.S. Environmental  Protection Agency,
      Office of Air Quality Planning and Standards, Research  Triangle Park, NC,
      September, 1991.

8     Ozone Nonattainment Analysis Clean Air Act Amendments  of 1990, E. H.  Pechan and
      Associates, Inc., September,  14991.


                                         23

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9     Memorandum from John Seitz, March 31, 1988.

10    Modeling of Preliminary Emission Reduction Estimates for Attainment of the National
      Ambient Air Quality Standard for Ozone in Ventura County, submitted as part of
      Docket No. 90-CA-VENT-l.  Referenced in: Federal Register, Vol. 56, No. 12,
      January 17, 1991, Proposed Rules, p. 1754.

11    The EPA is presently completing MOBILES, which should be available in the spring
      of 1992. The EPA recommends that States use this model if at all possible. In the
      mean time, however, MOBILE4.1 is available but does not include the effects of the
      Clean Fueled  Heets Programs, the Reformulated Gasoline Program, the On-board
      Diagnostics Program, and the Evaporative Test Procedure Changes.
                                       24

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 A BIBLIOGRAPHY OF CROSS REFERENCES

 California Clean Air Act Cost-Effectiveness Guidance, California Air Resources Board, Office
 of Air Quality Planning and Liaison, September 1990.
 This document provides guidance to District agencies implementing the California Clean Air
 Act according to requirements for cost-effectiveness (i.e, least-cost envelope to select
 dominant control strategies) analysis prior to adoption of rules for attainment of air quality
 standards.  Appendices provide insight into alternative methods of annualizing costs from a
 time value of money perspective.

 E.H. Pechan and Associates, Inc., Cost Effectiveness of Stationary Source VOC and NOx
 Controls, Draft Report, prepared for the U. S. Environmental Protection Agency, Office of
 Air Quality Planning and Standards, Research Triangle Park, NC, July  1991.
 This report is a compilation of cost-effectiveness values, including parameters for cost
 equations used in the ERCAM-VOC for all stationary source control measures to reduce VOC
 and NOx emissions.  The report also contains references for sources of cost information used
 to develop cost equations. Contact:  Frank Bunyard, U.S. EPA, Office of Air Quality
 Planning and Standards, Research Triangle Park, NC, (919) 541-5297 or FTS  629-5297.

 E. H. Pechan and Associates, Inc., ERCAM-VOC: Description and Applications (Design
 Objectives, Structure and Use of the Emission Reduction and Cost Analysis Model for Volatile
 Organic Compounds), prepared for the U. S. Environmental Protection  Agency, Office of
 Policy, Planning, and Evaluation, March 1989.
 Although dated with respect to the enactment date of the new Clean Air Act, this paper
 provides a fairly  comprehensive overview of the national ERCAM.  The paper describes the
 model objectives and structure, including a description of files used to model controls and
 costs for analyzing impacts (i.e., emissions, emission reductions, costs)  of base programs and
 mandatory measures of the new Clean Air Act for four projection years through 2010.
 Contact: Frank Bunyard, U.S. EPA, Office of Air Quality Planning and Standards, Research
 Triangle Park, TSTC, (919) 541-5297 or FTS 629-5297.

 E. H.  Pechan and Associates, Inc., User's Guide for the Prototype State Emission Reduction
 and Cost Analysis Model for Volatile Organic Compounds, prepared for the U. S.
 Environmental Protection Agency, Office of Air Quality Planning and Standards, Research
Triangle Park, NC,  October 18, 1990.
This document provides information on the model structure, inputs, and outputs.  State
ERCAM is in the process of being modified and adapted for all States.  A draft User's Guide
of the present model is available.  Contact:  Frank Bunyard, U.S. EPA,  Office of Air Quality
Planning and Standards, Research Triangle Park, NC, (919) 541-5297 or FTS 629-5297.
                                         25

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OAQPS Control Cost Manual, Fourth Edition, EPA 450/3-90-006, U. S. Environmental
Protection Agency, Office of Air Quality Planning and Standards, Research Triangle Park,
NC, January 1990.
Provides a standardized engineering approach to develop cost information for control systems
for reducing gaseous and paniculate emissions from stationary point sources. Provides a
good tutorial on the description of types of cost estimates and annualization methods. The
manual employs an engineering design and parameterization method, using plenty of example
problems to developing capital costs.  Contact: EPA Regional Offices or William Vatavuk,
U.S. EPA, Office  of Air Quality Planning and Standards, Research Triangle Park, NC, (919)
541-5309 or FTS  629-5309.

Procedures for Preparing Emissions Projections, EPA-450/4-91-019, U.S. Environmental
Protection Agency, Office of Air Quality Planning and Standards, Research Triangle Park,,
NC, July 1991.
This document provides  guidance for projecting emissions to future years focusing primarily
on procedures for projecting how the combination of future emission controls and changes in
source activity will influence future air pollution emission rates.  Contact: EPA Regional
Offices or Keith Baugues, U.S. EPA, Office of Air Quality Planning and Standards, Research
Triangle Park, NC, (919) 541-5366 or FTS 629-5366.

Procedures for the Preparation of Emission Inventories for Carbon Monoxide and Precursors
of Ozone, Volume I: General Guidance for Stationary Sources, EPA-450/4-91-016, U.S.
Environmental Protection Agency, Office of Air Quality Planning and Standards, Research
Triangle Park, NC, May 1991.
This document discusses procedures for preparing inventories of VOC, NOx, and CO for the
purposes of establishing  baseline ozone levels in nonattainment areas.  Contact: E.L
Martinez, U.S. Environmental Protection Agency, Office of Air Quality Planning and
Standards, Research Triangle Park, NC, (919) 541-5575 or FTS 629-5575.

Users Guide to MOBILE4.1 (Mobile Source Emission Factor Model), U.S.  Environmental
Protection Agency, Office of Mobile Sources, Ann Arbor, MI, July 1991.
The users guides for MOBILES and CEM are presently unavailable, but should be available
in the spring of 1992.  Contact:  Terry Newell, U.S. EPA, Office of Mobile Sources, Ann
Arbor, MI, (313) 668-4462 or FTS 374-8462.

Walton, Thomas and Allen C. Basala, "Cost-Effectiveness Analysis and Environmental
Quality Management," U. S. Environmental Protection Agency, Office of Air Quality
Planning and Standards,  Research Triangle Park, NC, June 1981.
A presentation at the 1981 national meeting of the Air Pollution Control Association'. This
paper presents an  in-depth primer on definitions, selection of appropriate algorithms for a
cost-effectiveness  analysis, and identification of potential pitfalls in the use of cost-
effectiveness analysis.  Contact:  Allen Basala, U.S. EPA, Office of Air Quality Planning and
Standards, Research Triangle Park, NC, (919) 541-5622 or FTS  629-5622.
                                         26

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Yocke, M. A., et al, "Methodologies for Applying the Urban Airshed Model to Determine the
Effectiveness of Measures to Reduce Ozone Levels in the Los Angeles Air Basin," April 27,
1989.
A presentation at the 82nd Air and Waste Management Association Annual  Meeting, June
1989. This paper summarizes UAM modeling results combining VOC and NOX strategies for
the South Coast Air Basin.  An overall view of ozone reduction effectiveness as the criterion
for comparison of alternative control strategies is presented.   This paper provides an example
of implementation of cost-effectiveness guidance.  Contact: Frank Bunyard, U.S. EPA, Office
of Air Quality Planning and Standards, Research Triangle Park, NC, (919) 541-5297 or FTS
629-5297.
                                         27

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