(V
United States
Environmental Protection
Agency
Offic* of
Polled Anaivsis
Washington. D.C. 20460
yfcs
EPA-2304745412
July 198S
a tu*
The Emissions Trading
Policy in the United States
of America: an Evaluation of
its Advantages and
Disadvantages and Analysis
of its Applicability in the
Federal Republic of
Germany
22
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r
I
The Emissions Trading Policy in the United States of America;
An Evaluation of its Advantages and Disadvantages and Analysis
of its Applicability in the Federal Republic of Germany
by Eckard Rehbinder and
Rolf-Ulrich Sprenger
A Study -for the Federal Republic of Germany
Ministry of the Interior, The U.S. Environmental
Protection Agency, and the German Marshall Fund
of the United States
Frankfurt/Main - Munich lrr-4
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The German Marshall Fund of the United States:
A Memorial to the Marshall Plan is an independent
U.S. grant-making institution. It was established
in 1972 by a gift from the Federal Republic of Germany
in appreciation of American postwar recovery assistance.
The fund supports activities that (1) will promote a
better understanding of issues that arise between
Western Europe and the United States, and (2) will permit
individuals on both sides of the Atlantic to develop new
perspectives on selected domestic problems common to both
Western Europe and the United States.
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•» T —
Contents
• Page
Tables . VI
Exhibits VI
Abbreviations VII
Appendices VIII
Preface Ix
Executive Summary XV
Chapter
A Introduction 1
I. Background 1
II. Objectives, Scope, and Methodology 3
B Emissions Trading in the Context of the
Present Regulatory System 6
I. The Regulatory System 6
1. Key Elements of the Regulatory System
Established by the CAA of 197O 7
a) National Ambient Air Quality Standards 7
b) State Implementation Plans 11
c) National Emission Standards for
Hazardour Pollutants 14
d) New Source Performance Standards 15
2. The Nonattainment Program 17
a) Background of the Nonattainment Program 17
b) Revision of SIPs 'IS
c) Preconstruction Review 2O
d) Requirements for Major New Fources 21
e) Requirements for Existing Sources • 25
f) Requirements for Minor Sources 2fi
3. The Prevention of Significant Deterioration
Program 26
a) Key Elements of the PSD Program 26
b) Role of SIPs 28
c) Preconstruction Review 29
d) Requirements for Major New Sources 3O
e) Requirements for Other Sources 33
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- II -
II. The Emissions Trading Policy as a Market-Oriented
Concept in the Regulation of Air Pollution 34
1. Objectives of, Reasons for and Background
of the Emissions Trading Policy 34
a) Introduction 34
b) The Offset Policy 36
c) The Bubble Policy 37
d) The Netting Policy 38
e) Emission Reduction Banking 39
2. The Role of the Emissions Trading Policy
in the Regulatory System 41
3. Elements and Features of Emissions Trading 45
a) Creation of-Emission Reduction Credits 46
b) Use of Emission Reduction Credits 54
c) Banking of Emission Reduction Credits 61
4. Legal and Administrative Framework
Conditions of Emission Trades 65
a) Protection of ERCs against Confiscation 66
b) Contractual Issues 69
c) Tax Considerations 72
d) Administrative procedures 82
5. Reorientation of the American Emissions
Trading Policy ? 86
C Evaluation of the Advantages and Disadvantages
of EPA's Emissions Trading Policy
I. Criteria for Evaluating EPA's Emissions Trading
Policy
II. MethodologicalIssues in Applying the Evaluative
Criteria
III. Advantages and Disadvantages of the Emissions
Trading Policy
99
99
102
109
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1. Air Quality Improvement
a) Netting may lead to significant net
increases in emissions
b) Equal intrapollutant trade-offs may none-
theless degrade air quality
c) Restrictions on interpollutant trades may
undermine attainment strategy
d) Ambient equivalence of "pound-for-pound"
trades is sometimes questionable
e) Different time phasing of emissions increases
and decreases may lead to short-term
violations of NAAQSs
f) Concern for the permanence of emission
reduction credits
g) Crediting "surplus" reductions in areas with
a pollution reduction "deficit" may jeopar-
-.dize RFP
ga) Use of allowable emissions as the baseline
for emission reduction credits
gb) Crediting Reductions from Shutdowns
gc) Crediting reductions from uninventoried
sources
gd) Crediting emission reductions before they
are incorporated in the emission inventory
ge) Crediting emission reductions before they
are legally required or before they occur
gf) Extension of compliance deadlines may
jeopardize RFP
Cost-Effectiveness
Economic development
Technological Advancement
5. Administrability
6. Enforceability
7. Legal Feasibility
a) Consistency of the Netting Program with the
Clean Air Act
b) Consistency of the Bubble Program with the
Clean Air Act
c) Consistency of Single Elements of the Emissions
Trading Policy with the Clean Air Act
d) Position Taken by EPA in the New Policy State-
ment of August 1983 as to the Permissibility of
Credits for Shutdowns in Nonattainment Areas
109
115
115
117
118
123
124
126
129
131
133
134
135
137
138
152
161
169
187
196
197
201
205
209
e) The Decision of the Supreme Court on the Netting
lattainment Areas
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8. Conclusions
a) Main Advantages
b) Neutral Effects
c) Problems, Risks and Weak Points during
Implementation
d) Conclusions
D Possibilities of Transferring the US Emissions
Trading Concept into W. German Law
I. The W. German Regulatory System
1. Basic Requirements under the Federal
Emissions Control act of 1974
a) Ambient Air Quality Standards
b) Emission Standards and State-of-the-Art
c) Hazardous Pollutant Standards
2. Nonattainment Areas
3. Clean Areas
II. General Comparison of Strategies, Instruments, and
Implementation of the Air Pollution Control Policy
in West Germany and the United States
1. Stragegies
2. Instruments
3. Implementation and Enforcement
III. Parallels to the American Emissions Trading Concept
ur.dar the Federal Emissions Control Act
1. Offsets
a) Offsets for Attaining Ambient Air Quality
Standards
b) Offsets in Nonattainment Areas
212
212
21
215
217
227
227
227
227
234
237
238
239
3. Dibbles
4. Nev; Scurce Performance Bubbles
IV. Necessery Changes of the FECA for introduction of
a "Pure" American Model of Emissions Trading
1. Offsets
2. Netting
3. Bubbles
241
241
243
244
246
246
246
248
252
256
261
264
266
268
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V. Functional Prerequisites for a Successful
Application of the American Model in the
Federal Republic of Germany 271
1. Potential Demand for Emission Reduction
Credits 271
a) Nonattainment Areas 271
b) Clean Areas (Prohibition of Deterioration
of Air Quality) 273
c) Other Areas 274
2. Potential Offer of Emission Reduction
Credits • 275
3. Determination of the Baseline " 277
4. The criterion of Air Quality Neutrality
of Transactions 28O
5. Administrability 280
VI. Legal-Political Assessment of the Introduction of
An Emissions Trading Policy into German Law 281
1. Assurance of the Functioning of a German
Emissions Trading Policy 281
2. Offsets 283
3. Netting 285
4, Bubbles for Existing Sources 286
5. Bubbles for Complying with State-or-the-Art
Requirements to New Sources 286
6. Modification of the American Model in the
Light of Environmental Requirements 287
Footnotes
Chapter b (1 - 219) 91
Chapter C (1 - 122) 219
Chapter D (1 - 76) • 289
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Tables
Table (Chapter B)
1 National Ambient Air Quality Standards
2 Number of Counties Nonattainment for
Primary Standards
3 Summary of Permissible Transactions in
Emission Reduction Credits under the
Emissions Trading Policy
(Chapter C)
4 National Air Pollutant Emissions,
by Pollutant, 1970-198O
5 Nonattainment Areas in All or Part of the
Counties in the U.S.
6 National Expenditures for Air Pollution
Abatement and Control
7 General Structure of Clean Air Regulation
for Stationary Sources
8 Proposed Bay Area Air Quality Control
Measures, 1982
9 U.S. Government Transaction Costs for
Air Pollution Control, V372-1979
10 Bubbles Processed under New Jersey's
Generic VOC Bubble Rule
11 States' Response to a 20 % Reduction
in Federal Support
12 United States Environmental Protection
Agency
13 Compliance Status of Major Air Pollution
Sources, 198O
Exhibits
No.
1: Major Elements in Air Quality Management
in the U.S.
2: State/Local Emissions Trading Programs
Page
8
10
47
111
112
14O
142
144
171
177
178
18O
189
13
107
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- VII -
Abbreviations
APCA
AQCR
AQMR
BAAQMD
BACT
CAA
CBE
CEQ
CO
CTG
EPA
ERG
FECA
GAO
IRC
LAER
NAAQS
NESHAP
NO 2
N0x
NRDC
NSPS
NSR
PSD
RACT
RFP
SIP
so2
TPH
TPY
TSP
VOC
Air Pollution Control Agency
Air Quality Control Region
Air Quality Management Region
Bay Area Air Quality Management District
Best Available Control Technology
Clean Air Act
Citizens for a Better Environment
Council on Environmental Quality
Carbon Monoxide
Control Technique Guideline
U.S. Environmental Protection Agency
Emission Reduction Credit
Federal Emissions Control Act
General Accounting Office
Internal Revenue Code
Lowest Achievable Emissions Rate
National Ambient Air Quality Standard
National Emission Standards for Hazardous
Air Pollutants
Nitrogen dioxide
Nitrogen oxides
Natural Resources Defense Council
New Source Performance Standard
New Source Review
Prevention of Significant Deterioration
Reasonably Available Control Technology
Reasonable Furthes Progress
State Implementation Plan
Sulfur dioxide
Tons per hour
Tons per year
Total suspended p^rticulates
Volatile organic compounds
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Appendices
APPENDIX I:
APPENDIX II:
APPENDIX III:
APPENDIX IV:
APPENDIX V:
APPENDIX VI:
APPENDIX VII:
APPENDIX VIII:
APPENDIX IX;
APPENDIX
X:
APPENDIX XI:
APPENDIX XII:
APPENDIX XIII:
APPENDIX XIV:
Glossary
Federal Register Actions on
Emissions Trading
Emissions Trading Policy Statement
(47 FR 15076, April 7, 1982)
Emissions Trading Policy Statement
(48 FR 17O, August 31, 1983)
Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc.
(Nos. 82-1005, 82-1247, and 82-1591)
State Local Emissions Trading Programs
(As of 4/7/83)
Comparison of Selected State Generic
Comprehensive Emissions Trading Rules
(Massachusetts, New Jersey, Oregon,
and Maryland)
Comparison of Selected State Emissions
Banking Rules
(Jefferson County, Puget Sound. Bay Area Air
Quality Management District, and Allsgheny
County)
Emissions Bank Accounting Program of
Jefferson County
(As of 6/30/82)
Bubble Summary
(As of 4/7/82; by pollutant, industry
category, source of ERCs, and EPA Region)
Bubble Information
(As_ of 11/1/82; by industry category, source
of ERC,^emissions impact, ana cr.:-t savings)
Description of Representative
Profile of Interviews
Bibliography
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Preface
For more than a decade, economists have discussed the poten-
tial advantages of using market-oriented techniques to achieve
environmental quality goals. In contrast to the traditional
"command-and-control" form of regulation, which specifies
detailed requirements for compliance, these alternative
approaches are designed to increase private decision making
and the effectiveness of environmental policies.
Plant/managers are given greater flexibility and more incenti-
ves to devise innovative and cost-effective ways to control.
pollution.
For example, standard regulatory approaches to controlling air
pollution have generally imposed uniform emission limits on
each stack or vent within a plant. These approaches do not
consider the wide variation in control costs that exist among
plants because of age, design, size, and production .factors.
However, the U.S. Environmental Protection Agency, throvgh its
Emissions Trading Program, allows plants to take advantage of
these differences to find the most efficient, least-cost, or
even profitable way of controlling air pollution.
"Emission Reduction Credits" are created when plants decrease
their air emissions beyond current legal requirements. Plants
will usually make these reductions when they are laast expen-
sive. For example, when old equipment is being rersl^ced or
new pollution control requirements must be met. These credits
can be used as soon as they are created to offset pollution
resulting from existing plants that expansion. They can be
"banked" for future use, or traded with other plants that may
find it cheaper to buy those credits than to create their own.
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The costs of controlling a pound of same pollutant from
adjacent processes in plants often varies by as much as
10O to 1. This new flexibility can save plant managers
millions of dollars on control expenditures without adversely
affectin air quality.
Another example of the market-based approach to controlling
pollution is the system of effluent charges administered by
the States in the Federal Republic of Germany, which is close-
ly tied to the traditional regulation system of the Federal
Water Management Act. Under this act dischargers are required
to meet minimum standards of waste water treatment. Simul-
taneously, a fee.is levied under the Federal Waste-Water
Charges Act for every unit of discharge depending on the
quantity and noxiousness of the effluent. Dischargers have
the choice of paying the charge or reducing the discharge
- consequently reducing the payment - through increased p
treatment. They can develop individual control and payment
strategies that are least expensive.
The advantage of this charge system is that pollution control
may become cost-effective for all dischargers. Every discharger
facing an effluent charge has an incentive to reduce pollution
to the extent that is less, expensive to install controls
rather than pay the ligher charge. Therefore, all dischargers
facing the same charge will spend the sante amount per unit of
removal at the margin. This equalization of marginal costs
means that the cost of control will be the lowest possible.
Moreover, what ever the total expenditure on controls, the
reduction in discharge will be the maximum possible for
expenditures of that magnitude.
An Effluent Charge Program that is designed to induce
to pretreat is unique to the Federal Republic of Germany.
Similarly the Emissions Trading Program is well established
only in the United States. The implementation problems
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associated with these approaches have been more or less exten-
sively studied in the respective countries. However, no infor-
mation has been developed or exchanged that would allow the
governments to determine the applicability of these approaches
to their own systems.
Therefore, the governments of both the United States and the
Federal Republic of Germany, in cooperation with the German
Marshall Fund of the United States have launched in July 1982
a unique cooperative research program on "Achieving Environ-
mental Quality through Economic Incentives: A Comparative
Analysis of Alternative Regulatory Approaches in the United
States and the Federal Republic of Germany" which was set up
under the terms of the US-FRG Environmental Agreement of 1974.
The purpose of the program was to ficilitate an exchange of
information and experience concerning effluent charges and
emissions .trading between the U.S. Environmental Protection
Agency and the West German Ministry of Interior. Using existing
literature and empirical studies of these market-oriented
approaches, the research program should determine the advan-
tages and limitations of implementing such techniques in the
United States and West Germany.
The study reported in this volume was done as part of this
research program. The report summarizes the results of a
one-year effort to evaluate the U.S. Environmental Protection
Agency's Emissions Trading Policy and to analyze its applica-
bility in the Federal Republic of Germany.
Many people made important contributions to the project by
providinc assistance, by sharing their insights and research
results, by providing very helpful comments on an earlier draft,
and debate with the authors.
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The work could never have begun without the cooperation
assistance of the bilateral panel of experts.
The American panel members were:
— o Joseph Cannon, Associate Administrator for Policy
and Resource Management, U.S. EPA, Washington, D.C.;
-- o Christopher DeMuth, Administrator for Information and
Regulatory Affairs in the Office of Management and
Budget, Washington, D.C.;
— o Allen V. Kneese, Senior Economist at Resources for the
Future, Washington, D.C.;
•— o Marvin H. Kosters, Director, Center for the Study of
. Government Regulations at the American Enterprise
Institute, Washington, D.C.;
— o Charles D. Mai loch, Regulatory Management Director,
Monsanto Corporation, St. Louis, Missouri;
-- o Michael T. DeBusschere, Air Pollution Control Officer,
Louisville, Kentucky.
The German panel members were:
— o Gerhard Feldhaus, Director, Office of Environmental
Policy and Emissions Control, Federal Ministry of the
Interior, Bonn;
- - o Walter Loeth-, Deputy Director, Federal Ministry of
Economics, Bonn;
— o Franz-Josef Dreyhaupt, Deputy Director, Ministry of
Labor, Health, and Welfare, Land Nordrhein-Westfalen,,
Dlisseldorf;
— o Jiirgen Salzwedel, University Bonn;
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- XIII -
— o Horst Siebert, University Mannheim;
— o Malte Faber, University Heidelberg;
— o Martin Uppenbrink, Director, Department of Environmental
Planning, Umweltbundesamt {ex officio), Berlin.
Additional valuable suggestions were provided by the panel
members at the two Advisory Panel meetings in Washington, D.C.
and Bonn.
We are grateful for the cooperation and assistance of the
Regulatory Reform Staff of the U.S. Environmental Protection
Agency. In particular, we would like to thank Michael H. Levin
andean J. Tether, who suffered with the utmost patience and
good humor our interminable questions, and Mahesh K. Podar,
who spent a lot of time to make the arrangements for our
interviews.
We wish to thank a variety of individuals who found time in
their busy schedules to.provide very helpful critiques and
suggestions. Extensive comments on an earlier draft were
provided by Michael T. DeBusschere, Franz Josef Dreyhaupt,
Malte Faber, Allen V. Kneese, Marvin H. Rosters, Allan Krupnick,
Michael H. Levin, Richard A. Liroff, Charles D. Malloch, Roger
C- Noll, Leslie Sue Ritts, van I. Tether, and Lutz Wicke. Mi-.
Michael H. Levin and Ivan Tether in particular offered numerous
helpful comments on content and organization. The result is
an updated, substantially revised version of the original
manuscript. We are deeply indebted to the reviewers for identi-
fying factual errors and analytical flaws. None, of course,
bear any responsibility for our use (or misuse) of their sugge-
stions or for the resulting product.
We are grateful for the translation services of Ruth Sprerger,
particularly with respect to Chapter C. Finally, we would like
to thank Marianne L. Ginsburg of the German Marshall Fund of -
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- XIV -
the United States, Mahesh K. Podar of the U.S. EnvironmentJiP!
Protection Agency, and Wolfgang Kitschler of the F.R.G.
Ministry of the Interior whose continuing support kept the
project moving forward.
Eckard Rehbinder
Rolf-Ulrich Sprenger
IFO-INSTITUT FUR WIRTSCHAFTSFORSCHUNG
8 MUNCHEN 86, POSCHINGERSTRASSE 5
POSTFACH 860460
This cooperative project produced two reports:
The Emissions Tracing Poi.icy in the United States of America: An
Evaluation of itfs "Advantages and DisadvantagesT ancT Analysis of
its Applicability in the Federal Republic of Germany, Eckard
Rehbinder, Professor of Law, at.the J.W. Goethe University,
Frankfurt; Rolf-Ulrich Sprenger* Senior Fellow, Institute for
Economic Research (TK) Munich). '
The Effluent Charge System in the Federal Republic of Germany,
Gardner M. Brown, Professor of Economics, and Ralph W. Johnson,
Professor of Law, University of Washington, Seattle.
Copies of these publications can be obtained in the United States
through the EPA and in Germany through the Federal Ministry of
Interior and the Institute for'Economic Research (IFO Munich).
Both documents are available in English and German.
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Executive Summary
I. Introduction
•This report summarizes the results of a one-year effort to
evaluate the U.S. Environmental Protection Agency's Emissions
Trading Policy under six criteria meant to be relevant, neutral
and fair: the Policy's ability to improve air quality; and its
real or potential effects on cost-effectiveness, economic deve-
lopment, technological innovation, the administration and en-
forceability of the Clean Air Act, and its legal feasibility.
Such an evaluation must state several caveats. First, as for any
innovation, it is critical not to compare the effects of the
new policy against an- idealized version of the existing regula-
tory regime. The test must be the new policy's incremental effects,
for better or worse, on the Clean Air Act as it actually operates,
rather than its effects on a statute assumed to operate perfectly.
Second, it is not always possible to identify those impacts direct-
ly attributable to EPA's regulatory reforms. For instance, it is
not possible to determine whether certain emission reductions
only have occurred owing to the banking and trading system or
would have occurred anyway without an emissions bank (e.g. as an
incidental side-benefit of projects undertaken for some other
economic reason, such as energy conservation or solvent recovery).
Third, the criteria are difficult to apply in a quantitative sense.
For instance, it is not possible to quantitatively evaluate the
cost-effectiveness cf thf? new strategy. It is possible, however,
to ask whether the new policy is likely to be more o: less cost-
effective than tne existing policy. Therefore, we do not attempt
to quantify the extent to which the emissions trading policy will
meet any particular criterion. Rather, we indicate where it
appears that emissions trading is more or less successful in
meeting a criterion than the existing policy.
.
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Fourth, the policy is new and rapidly evolving. The Policy
Statement issued in 1982 was an interim policy, was followed
by a request for further public comment {August 31, 1983), and
will soon be replaced by a final revised policy, both of which
address concerns identified here. This evaluation is therefore
preliminary. The issues it identifies are based more on fears
than on adverse effects that have actually materialized; and
steps taken by the policy to preclude such effects must also
be recognized.
Furthermore, the experience with emissions trading is limited
so we can make no pretense of fully understanding all there
is to know about how it will work out. However, it is nature
enough that some clear insights are beginning to emerge. The
purpose of this paper is to isolate those insights.
Fifth, we are confronted with the problem that our analysis
aimed at a variety of targets since there are a number of state
and local versions aside from the EPA policy on emissions tra-
ding as articulated in the Policy Statement. The Policy Statement.
only sets forth minimum legal conditions EPA considers neces-
sary for emissions trades to satisfy CAA requirements. There-
fore states are free to adopt generic rules which incorporate
all or any combination of the proposed trading approaches or
to let trades continue to be implemented as individual SIP
revisions. Furthermore, states are free to stipulate additional
criteria for assuring that certain loopholes are avoided and
their attainment strategy will not be jeopard.-v^d. This evalua-
tion is therefore incomplete.
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II. Emissions Trading
Generally speaking, the policy allows plants to reduce pollution
control costs by substituting inexpensive extra emission re-
ductions- for costly required ones, so long as this "trade" pro-
duces equal or better environmental results. Savings are possible
because the cost of removing one unit of the same pollutant often
varies widely. They may be pursued by bubbles which allow emergers
of existing one or more plants to re-allocate their SIP emission
limits, controlling cheaply-controlled stacks or vents more in
exchange for less control of those which are expensive to control?
by netting, which excuses expansions or modernizations in clean
areas from stringent requirements applicable to "new sources",
provided plant-wide emissions do not significantly increase; by
offsets, which allow new sources to locate in nonattainment
areas, so long as they secure greater reductions from existing
plants; and by banking, which encourages plants to create extra
reductions at optimal times and store them in a legally-protected
manner for future use or sale.
The components of emissions trading complement one another.
Where a bubble produces an overall reduction in emissions-, that
reduction may be stored in a bank for future use or sale; where
banked reductions exist, they can be used either by existing
sources to meet State control requirements inexpensively, or by
new sources seeking to locate, expand or modernize in noM-attain-
ent areas.
Transactions under the emissions trading system can only use re-
ductions (ERCs) that are surplus (greater than required by law),
permanent, quantifiable, and enforceable. They must involve
emissions of the same pollutant. They cannot, be used to avoid
limits applicable to hazardous emissions or new facil.it.ies.
Applicants must demonstrate, through dispersion modelling or
specified surrogates, that they will produce ambient results
equal to or better than regulations applicable before the trade.
All trades must be confirmed by specific enforceable permit
changes, before they can be used.
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Ill- Conclusions
Air Quality Improvement. Traditional regulation has achieved
only qualified success (despite progress, after 13 years many
areas have still not met statutory deadlines or air quality
standards). It will become increasingly complex as regulators
attempt to squeeze more reductions from already-regulated sources
or regulate small unregulated ones. Emissions trading can break
this regulatory deadlock in theory, and in at least some
respects has produced better air quality improvement in fact.
Each offset, for example, must by definition improve air quality
in nonattainment areas. Banked reductions produce extra air
quality while surplus reductions remain in the bank. Though
bubbles are not required to improve air quality, many have
produced more reductions and faster compliance than traditional
regulations. The policy's general criteria for approvable emis-
sions trades seem well calculated to encourage such results and
achieve air quality objectives.
Nevertheless, the ways these criteria might be implemented raise
concerns that trades could adversely affect air quality. Some
of these are: that nets may worsen overall air quality in
attainment areas through cumulative "insignificant" increase
in emissions; that equal trades of the same pollutants might
worsen air quality due to these emissions' different biochemical
characteristics, undetected trace elements, unknown synergies,
or effects on longrange transport; and that trades shown by
dispersion modelling to produce ambient equivalence may never-
theless result in "hot spots" due to modelling ambiguities.
Perhaps the most serious concern is that trades allowing credit
for the ,'ihutdown of elderly facilities may unacceptably increase
long-te-.-m emissions, if the source securing those credits can
continue to use them beyond the "supplying" source's useful life.
These concerns are fears of effects which do not yet seem to
have materialized. They must be evaluated against both the
current operation and steps prescribed by the policy to counter-
act them. Under the policy and associated regulations, for example,
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any cumulative increases in emissions due to nets must be tracked
by states for individual plants {to protect the integrity of New
Source Review) and for the area as a whole (to protect the PSD
increment). Adverse effects are further minimized because netting
sources must still meet stringent NSPS, and because nets can only
occur in areas well below ambient health standards. Equal trades
of emissions with different biochemical characteristics, etc.,
may well improve air quality, since such ancillary effacts are
not considered in the original regulations. Modelling is more
likely to produce "hot spots" under the traditional regime,
where emission increases showing modelled attainment must be
granted despite similar ambiguities and without an accompa-
nying decrease. Even shutdown credits raise cognizable problems
only where a state plan to promptly attain standards has not
been approved by EPA. If such a plan has been approved, the area
will attain without regard to any shutdown credits or the tra-
ding sources' remaining lives. If a plan has not yet been
approved,mno more than one-fifth of.the shutdown source's
emissions may be given credit under the 1982 policy, and a full
plan must still be developed.
Trading should produce neutral or better ambient results than
traditional regulation, if implemented with an eye toward these
concerns. The 1982 policy noted several ways states could address
such issues- EPA recently requested comment on further options,
including a ban on shutdown credits or a requirement that they
produce extra improvements, in nonattainment areas without
approved plans.
Cost-effectiveness. Emissions trading can substantially re- •
duce both the direct and indirect costs of traditional U.S.
air pollution control for individual firms, state agencies
and society. Unlike traditional regimes it provides strong
incentives for industry to seek out low-cost innovative control
methods, to control emissions more than the minimum required,
to capitalize on control opportunities presented by site-speci-
fic variations, and to disclose this information, thereby
facilitating air quality management.
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By December 1982, EPA had approved or proposed to approve 34(
bubbles saving more than $ 164 million over the cost of tradi^
tional control, with many producing greater reductions than con
ventional regulation. More than 10O other bubbles with average
compliance savings of % 3 million each were under review by
EPA and states. These bubbles enabled more cost-effective
compliance by existing sources.
Offsets and netting serve analogous functions by allowing new
and expanding sources to locate, modernize or increase pro-
duction more easily and cost-effectively. Between 1976 and
1982 more than 1900 offset transactions also produced con-
siderable cost-savings. (A March 1982 report by the U.S.
Congress1 General Accounting Office estimated compliance
savings in the billions per year from broader use of all
three approaches.)
Banking can produce further savings by smoothing state agenc
workloads and making a pre-approved pool of reductions readily
available for use in bubbles, offsets or nets. It also reduces
the risk of control innovations, by making EJRCs available
should a new technique perform less well than required.
Economic Development. The traditional regime attempts to recon-
cile industrial growth with air quality progress by imposing
very stringent "technology forcing" requirements on new sources
and major modifications. The net effect has been to discourage
modernization, protect existing sources from competition, and
perpetuate older sources, leading to greater pollution than if
regulatory barriers to replacement were not so high. Emissions
trading can better allov normal industrial expansion by easing
entry of new sources and rcjvitalization of existing ones, with-
out sacrificing air quality to development. Indeed, trading^
apprears <-to have done so, since by October 1382 nearly all'
states had adopted offset provisions and about T9OO offset
transactions had taken place. However, less than 5 % of these
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- XXI -
offsets were between firms (as opposed to within the same firm),
suggesting that development effects turn on the details of the
trading system adopted by a state. I.e., the past market for
interfirm transactions has been limited perhaps because
banking was not available to help cources find outside reductions
and better accomodate these competing goals.
Technological innovation. Trading appears preferable to tradi-
tional "technology-forcing/" which is slow, based on inevitably
poor information, and capable of worsening air quality by dis-
couraging modernization. The policy encourages firms to control
more than required, to use their superior knowledge of creative
control opportunities, and to disclose such opportunities in
order to profit by them. While most ERCs to date have come from
low-cost investments such as transfers of available technology,
or as side-benefits of other projects, this may be related to
"command-and-control" tendencies to make new approaches manda-
tory requirements. Moreover, such results should be expected
in the early stages of a new program, where regulatory risks to
users are perceived to be high, where the most inexpensive
alternatives would be used first, and where firms would seek to
minimize large research or development costs. Nevertheless
some firms did make substantial investments in alternative
control strategies that seem "innovative", either in ways of
managing pollution or in actual controls.
Administration/enforceability. In general the policy will
neither lighten nor aggravate complex current processes for
limitsetting and enforcement, though in many cases it can ease
such burdens. Needs for meaningful operating permits and better
compliance data are examples: it may be easier for states to
require production limits or continuous monitoring on a case-
by-case basis as conditions of trades from which applicants
stand so save mil],ions of dollars, than to impose such require-
ments across-the-board. Generic trading rules, netting, banking,
and the fact that applicants must document acceptability can
%also simplify traditional procedures, while screening out appli-
cations whose administrative costs are likely to be high.
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- XXII -
Major concerns here are the policy's potential to delay
compliance through last-minute bubble proposals, and its
potential to increase state permitting burdens through the
need to evaluate novel control techniques or permit previously
unregulated sources. However, the policy explicitly provides
that no enforceable compliance schedule can be extended with-
out EPA approval; and bubble applications dc not defer such
schedules, which remain fully enforceable until a bubble
assuring equal or better progress is actually approved. More-
over, in view of the situation faced by states whose current
regulations are inadequate to attain health standards, novel
control techniques and increased permitting are inevitable,
whether or not trades are used. The need for such additional
knowledge, and for incentives to encourage sources to request
regulation instead of resisting it put another way, the
defect of centralized efforts to mandate further controls
without such knowledge or flexibility was the main
trading was conceived.
-------
A. Introduction
I. Background
Economists and other analysts of government policy have long
contended that the imposition of detailed rules may not be
the best way to accomplish derived goals in environmental
management. While such rules appear to go directly to the
heart of things and guarantee the desired outcomes, they
have been criticized for being economically inefficient,
subject to excessive administrative and litigative delays,
and demanding of far too much detailed technical knowledge
for the capabilities of state and federal agencies. For a
variety of reasons - perhaps the most important of which is
the growing concern with the costs implied by the environmen-
tal laws of the 197Os - this concern of academics has come
to be shared by many people in the U.S. government.
The U.S. Environmental Protection Agency has developed and
encouraged the application of new regulatory techniques and
incentives under the Clean Air Act whose objectives are to
enhance the cost-effectiveness of regulation and to demonstrate
the compatibility of the'nation's economic development and
environmental protection goals. The specific regulatory reforms,
collectively referred to as "emissions trading" include:
— the Bubble Policy^ existing sources (or groups of sources)
may be permitted to increase emissions beyond the current
standard in ".xvhange for compensating emission reductions
at other sources at the same facility or at other facili-
ties (owned hy the same or another firm).
— The Netting Policy; an existing source expanding or moder-
nizing will not be subject to resource-intensive and time-
consuming administrative procedures for new plants if the
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- 2 -
sources compensate for added emissions by reducing the
pollution from existing emission sources in the same
plant.
— the Offset Policy: a new source may add emissions in a
nonattainment area if it pays for a greater reduction in
emissions somewhere else in the same area;
—Emissions Banking and Trading; a firm that beats its
emission standard may deposit as a credit some fraction
of its excess emissions reductions in an emissions bank,
which can be stored in a legally-protected manner for
possible future expansion needs, used .as a hedge against
future reductions in permissible emissions, or sold to
some other firm that seeks emission permits.
All of these approaches are intended to encourage the use ofj
emissions trades to achieve a more rapid attainment of national
ambient air quality standards by stimulating faster compliance.
They are designed to introduce flexibility into the means by
which firms comply with environmental regulations by introdu-
cing the possibility of trading emissions at one place for
emissions somewhere else. They are designed to produce signi-
ficant savings in pollution control ccsts and to remove '
existing barriers to technological innovation. They are also
intended to make extra pollution control profitable generating
voluntary control by unregulated sources as well as improved
control by regulated ones and to produce better information for
air quality planning.
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- 3 -
II. Objectives, Scope, and Methodiclogy
Given the foregoing background, the objectives of this study
are:
— to summarize available information on EPA's regulatory
reforms under the Clean Air Act
— to trace the evolution of the new market-oriented approaches
— to identify the factors influencing their design and
implementation
— to describe initial experience implementing the new
approaches
— to evaluate their advantages and disadvantages
and finally,
— to examine whether the U.S. experience may provide lessons
useful to future efforts in the Federal Republic of Germany
to implement such market-oriented approaches to pollution
control.
To meet these objectives, we have focussed on the following
main issues:
First, we have attempted to characterize EPA's emissions tra-
ding policy by focusing on:
— the history and goals of EPA's regulatory reforms under
the Clean Air Act
— the evolution of the emissions trading policy
— the design of the new concept and its key terms
— the basic requirements that have to be satisfied by any
applicant
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- 4 -
— the political, legal, administrative and economic frame-
work of these reforms
— and the number of transactions that have occured thus far.
This summary of the major facts about EPA's regulatory reforms
has served as a necessary background for the subsequent evalu-
ation of these reforms.
A second focus of the study was on the environmental impacts,
cost-effectiveness, growth effects incentives for innovation,
administrative ease, enforceability etc. of the emissions
trading policy from a theoretical and empirical point of view.
Here we have tried to examine a wide range of questions related
to the evaluation of any environmental policy. EPA's regula-
tory reform has been assessed in accordance with evaluative cri-
teria derived both:
— from the specific objectives of U.S. air pollution control
policy, and
— from reasonable expectations one should have about any
environmental policy.
A "i-^_ir<3 focus of the study was on the usefulness of an export
of EPA's new policy across the Atlantic and a future applica-
tion in the Federal Republic of Germany.
Here we have engaged in analyzing the problems associated with
an application and implementation of novel regulatory refr
in the Federal Republic of Germany.
We have focussed most of our attention upon any significant
differences in the environmental goals and in the legal,
institutional, or economic structures of the United States
and the Federal Republic of Germany that may eff-ect implemen-
-------
_ c _
tation of novel regulatory reforms. We have attempted to
identify some of the questions West German decision-makers
must confront when developing an emissions trading system in
the Federal Republic of Germany.
To meet the objectives of this study, we first conducted a
thorough review of the Emissions Trading Policy Statement and
other government publications, literature, economic studies,
and articles pertaining to the Clean Air Act, command-and-
control regulation, and emissions trading. This research
effort provided an overview about regulatory development at
the federal level and nation-wide efforts toward implementing
market-oriented approaches.
Second, armed with hypotheses as to the possible working of
the emissions trading policy we performed an extensive pro-
gram of interviews with experts and interest groups (see
Appendix
Our methodological approach thus consisted of a review of
literature and field work. Throughout the report, we rely
heavily on legal and economic analysis. Moreover, we made
every effort to obtain documented evidence on, implementation
problems associated with the emissions trading policy.
Since the experience with emissions trading is limited we
cannot pretend to fully understand all there is to know about
how it will work out. It is mature enough, however, that some
clear insights are beginning to emerge. The purpose of this
report is to isolate those insights.
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- 6 -
'B. The EmissionsTrading Policy in the Context of the
Present Regulatory System
I. The Regulatory System
The Clean Air Act 1970 seeks to keep the ambient con-
centrations of selected pollutants at a .level considered
to be sufficient to protect public health and public wel-
fare by., establishing ambient air quality standards that
are to be enforced by state implementation plans. Further-
more, it limits the emissions of certain hazardous pollu-
tants by requiring the determination of emission stan-
dards. Finally, it establishes performance standards,
i.e. regularly emission standards, for new and modernizing
existing sources reflecting the application of advanced
control technology (New Source Performance Standards).
2\
The Clean Air Act Amendments of 1977 ' added two complex
regulatory frameworks which supplement the general re-
quirements, the nonattainment and the non-deterioration
programs. The nonattainment program mandated the states
to revise the state implementation plans in areas that
did not attain the ambient air quality standards by the
statutory deadline ai*u•introduced stricter requirements
for sources regulated under these implementation plans,
especially by imposing the use of advanced control tech-
nology (lowest achievable emission rate for new and mod-
ernizing existing sources, and reasonably available con-
trol technology for existing sources). The non-deterio-
ration program attempts to maintain the existing air
quality in areas of the country where the ambient air
qualify is better than the ambient air quality standards
require; it permits only specified increases of the exist-
,ing pollution levels and requires new and modernizing
existing sources to use advanced control technology (best
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- 7 -
available control technology). Since any area in the
country is, with respect to a particular criteria pollu-
tant, either a nonattainment or a clean (attainment') area,
either of the two regulatory frameworks is applicable
throughout the country.
1. Key Elements of the Regulatory System Established by
the CAA of 1970
a) National Ambient Air Quality Standards
National Ambient Air Quality Standards (NAAQS) estab-
lished by the Environmental Protection Agency specify
maximum concentrations of pollutants legally permissible
throughout the country. ' The standards define the qual-
ity of air which must be achieved to prevent adverse ef-
fects. Two kinds of standards are provided: primary and
secondary. The primary standards are designed to protect
public health, while allowing an adequate margin of safe-
ty, and establish levels of pollution which cannot be ex-
ceeded without causing adverse "effects on human health.
The secondary standards are designed for the protection
of public welfare, e.g., vegetation, property damage,
scenic value. Air quality standards are set for a limited
number of pollutants which the legislature considered to
4)
be most critical, the so-called criteria pollutants,
namely particulates, sulfur oxide, photochemical oxi-
dants (measured as ozone), hydrocarbons, nitrogene oxides,
carbon monoxide, and lead (See Table 1). There is no ambient
air quality control program for any other pollutant.
-------
Table 1
- 8 -
National Anibient Air Quality Standards a/
Pollutant
PM
Averaging
Time
Annual (geo-
metric mean)
24 hrs b/
Primary
75 ug/m3
260' ug/m3
Standard Levels
Secondary
60 ug/tn3
150 ug/m3
SO
CD
Annual (arith-
metic mean)
24 hrs b/
3 hrs
8 hrs b/
1 hr b/
80 ug/ra3 (0.03ppm)
365 ug/m3 (0.14ppKi)
10 uc/m3 (9 ppm)
40 ug/m3 (35 ppm)
Annual (arith- 100 uc/m3 (0.05 ppm)
metric mean)
°3
HC (non-
methane) c/
Lead
1 hr b/
3 hrs"
(6 am to 9 am)
3 months
235 ug/m3 (0.12 ppn)
160 ug/m3 (0.24 ppm)
1.5 ug/m3
1300 ug/m3 (O.Spon)
10 ug/m3 (9 ppx.)
40 ug/m3 (35 ppm)
100 ug/m3 (0/05 ppa)
235 ug/ra3 (0.12 pern)
160 ug/m3 (0.24 ppm)
1.5ug/m3
a/The National Arribient Air Quality Standards (NA^S) are classified as either
prinary or secondary, and cross-classified according to various time periods
of compliance. The primary NAACS are designed to "protect the public health."
The secondary standards are more severe and are designed to "protect the pub-
lic welfare £rom any known or anticipated adverse effects-...." The functicnal
meaning of a tandem NAACS can be best described as that of a target and goal
relationship: i.e., the primary SAAQS serves as a target with the secondary
NRACS as the goal. The Clean Air Act calls for attaining the primary standard
"as expedif.r^.ly as practicable" while specifying a reasonable ti^je at which
such seer isiiry standard will be attained."
b/Mot, to *e exceeded more than once per year. Pr.-.viously, this standard
governed cor^entraticns of photochemical oxic?.its, which are approximately
90 percent ozone.
c/A ncnhealth related standard used as a guide for ozone control.
Source: Envir:
ntal_CXality_: The lltji Annual Report of the Council en
Environmental Quality-1980, p. 172.
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- 9 -
The principal NAAQSs were set in 1971. The lead standard
was determined only in 1978, and in 1979 the (short-term)
ozone standard was somewhat relaxed; all other standards
have remained unchanged since their original specification.
The secondary standards are largely identical with the
primary standards. Exceptions are sulphur dioxide and par-
ticulates, for which there are stricter long- and/or short-
term standards.' Since the NAAQSs are designed to prevent ad-
verse effects by air pollution and scientific evidence
demonstrates that such adverse effects presented by air
pollutants may depend on the time of exposure, the stan-
dards often determine two kinds of limitations of concen-
tration levels - long-term standards which may not be-ex-
ceeded on an annual average, and short-term standards
which may not be exceeded for periods between one or 24
hours, depending on the pollutant. The annual standard is
•applied as a (geometric or arithmetric) mean, while the
short-term standards are applied as maximum concentrations
which, over the period indicated, may not be exceeded more
than once per year.
As stated, the standards are designed to protect against
adverse effects of air pollutants. With respect to primary
standards, economic considerations are irrelevant; in par-
ticular, the.economic feasibility of achieving a primary
standard does not justify non-enforcement of the stan-
dard . The secondary standards may contain an element of
economic feasibility only to a limited extent. The Act
does not require that .these standards allow for an ad-
equate margin of safety; to this extent, economic con-
siderations are legitimate.
The Clean Air Act 1970 provided that the primary stan-
dards should have been attained by 1975, subject to a
two-year extension under certain conditions. July 31,
1977 was the ultimate statutory deadline for attainment
8)
of the primary standards. The secondary standards
9 i *
should be achieved within a "reasonable time". ' Since by
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-------
- 11 -
the ultimate deadline many areas had not attained the
primary standards - attainment was highest with respect
to sulphur dioxide and carbon monoxide and lowest with
respect to photochemical oxidants and hydrocarbons - the
Clean Air Act Amendments of 1977 extended the ultimate
deadline for compliance with the primary standards until
December 31, 1982, for carbon monoxide and oxidants until
December 31, 1987. it can be predicted that these relaxed
deadlines will not be met, either, by all AQCRs, so that
a new extension may become necessary.
b) State Implementation Plans
The primary instrument for ensuring the implementation,
maintenance and enforcement of the primary and secondary
standards is the State Implementation Plan (SIP) . The
responsibility to develop and adopt the SIP is delegated
to the state agencies; however, the SIPs must be submit-
ted to EPA for approval, and where a SIP does not ensure
attainment of the standards by the statutory deadline,
EPA may substitute its own SIP for that submitted by the
state agency. ' To provide basic geographic units for
the air pollution control program, the country was div-
ided into 247 air quality control regions (AQCRs) which
were composed of smaller air quality management areas
(AQMAs) . Attainment must be achieved in any AQCR or
AQMA; however, with the exception of California, the
states would adopt only a single SIP for their whole ter-
ritory (based on partial plans developed by the regions) .
For obtaining EPA approval, the SIP must set forth a. com-
bination of control measures whose combined effect will
result in attainment by chfc statutory deadline. The
applicable control measures arc emission limitations,
schedules and time-tables for compliance, and, if neces-
sary, other measures that are necessary to ensure attain-
ment and maintenance of the standards such as technical
specification standards, input standards and transpor-
tation controls. Dispersion techniques such as stack heights
-------
- 12 -
T
V
and intermittent controls are in principle not allowed as
a means of achieving the NAAQSs; since 1977 stack height
can only be considered to the extent that it does not ex-
ceed good engineering practice as determined under regu-
lations promulgated by the EPA.
The first generation of SIPs were rather deficient. '
Due to the lack of available air quality data and adequate
modelling, many SIPs utilized a simplified concept of
making a single computation for the whole AQCR and applied
a standard rollback approach, estimating the total quan-
tity of the pollution of the AQCR and the amount of re-
duction necessary to attain the standards, and requiring
all major sources to reduce their emissions by the per-
centage so calculated. This approach had the result that
in many portions of the AQCR, the controls required of
the polluters were inadequate, while in - fewer - other
parts excessive controls were imposed upon polluters. The
1977 amendments therefore required a complete revision of
all implementation plans in all areas where the standards
have not been achieved by the original statutory deadline.
This revision was to be completed by July 1, 1979, and it
was expected that the revised SIPswere based on better
monitoring data and modelling with respect to particular
sources. The deadline of 1979 has not been met by many
states. In the Spring of 1984, there still were some states
that did not have approved SIPs for their or some of their
non-attainment areas, and other SIPs had only been approved
conditionally.
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- 13 -
EXHIBIT 1
Major Elements in Air Quality Management in the U.S.
Federal
State
State
local
Stationary
sources
Local
state
federal
SIP __ Control techniques
regulation! document
Set NAAQS
—
NSPS
regulations
SIP development (attain NAAQS/PSD)
New source review
."NSPS
.PSD
. Emission off set
Permits
. construction
. operating
. variances
New or modified
sources
Existing sources
Self monitoring/samplmg/analysis/reporting
Agency monitoring/samp ling/analysis
Non Compliance
Enforcement/sanctions
Attainment maintenance PSD
Source: Brady and Bower, Benefit-Cost Analysis in Air Quality Management, 15
Environmental Science and Technology 256 (1981)
-------
- 14 -
The implementation plans set forth individual require-
ments with respect to all sources, new sources as well as
existing sources. The most frequent control technique are
requirements applicable to particular categories of sour-
ces rather than individual sources. In this case, the in-
dividual emission limitations applicable to a source can
only be tracked by reference to additional computerized
lists of sources and requirements applicable to them.
Generally, there are no absolute emission limitations but,
rather, emission rates per production unit or operating
hours. However, the SIP normally assumes, in a rough
fashion, a certain production capacity of the regulated
sources.
The major control device for ensuring compliance with the
SIP is a preconstruction review program for major new
sources and the (significant) modification of existing
14)
sources. However, the Act of 1970 did not require the
granting of permits for these sources.
c) National Emission Standards for Hazardous Pollutants
In addition to the ambient air quality standards, the
Clean Air Act requires EPA to promulgate National Emis-
sion Standards for Hazardous Pollutants (NESHAP).15*
These standards apply to pollutants to which no ambient
air quality standard is applicable and which cause or
contribute to an increase in mortality or serious irre-
versible illness. EPA listed more than 40 pollutants that
qualify for potential regulation but has listed only
seven as hazardous. Hazardous pollutant standards apply
to substc-ices such as asbestos, beryllium, mercury, vinyl
chloride, and benzene. The enforcement of these standards
is ensured by the requirement of preconstruction review
which is applicable to new sources and the modification
of existing sources; however, the standards are in prin-
ciple also applicable to all existing sources.
-------
d) NewSource Performance Standards
Independent of ambient considerations, the construction of
major new sources and the (significant) modification of
existing sources is subject to new source performance
standards (NSPSs). These standards are uniform tech-
nology-based emission standards which are set forth by EPA
for individual industrial categories. Source is defined as
any building, structure, facility, or installation which
emits or may emit any air pollutant. Modification of an
existing source is any physical change in, or change in
the method of operation which increases the amount of any
18)
pollutant or causes new pollution. The regulation of
"major sources, i.e. sources with an emission potential of
c
more than 100 tons per year, has priority; however, minor
sources that contribute significantly to air pollution,
shall also be regulated, and there are a number of NSPSs
that cover such minor sources.
In principle, the law permits only the establishment of
performance standards, not of other standards such as
specification and operation standards. Only where per-
formance standards are not feasible, other standards may
19)
be set. With respect to fossil fuel fired sources,
emission limitations as well as percentage reductions
can be prescribed; with respect to all other sources, the
law only provides for the setting of emission limitations.
The NSPSs shall reflect the application of the best tech-
nological system of continuous emission-reduction which
has been adequately demonstrated. This formula con-
tains a dynamic element; it is not necessary that the
control technology is already routinely achieved in in-
dustry. In prescribing the standards, the cost of achiev-
ing the standard as well as energy considerations must
be taken into account. This calls for some cost-benefit
considerations; in the practice of the EPA, the firms'
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•- 16 -
ability to bear the cost of a particular standard as well
as marginal cost-effectiveness are taken as basis for
standard setting.
The requirements are technological. Therefore, in the case
of fossil fuel fired sources, the use of low sulfur coal
is not a means to comply with the standard. However, de-
2.2)
sulphurization of fuel may be credited. EPA is em-
powered to set forth,in respect of a pollutant, different
23)
standards for different categories of sources.
As of December 31, 1983, EPA had promulgated NSPS for more
than 70 categories of industrial sources. These standards
sometimes apply to the whole plant, more often to certain
facilities or equipment within plants.
-------
- 17 -
The standards promulgated so far are no absolute limitations
of total emissions; normally, they set forth a quantitative
limitation per production unit. For example, the emission
standard for S02 for coal-fired power plants is 1.2 pounds
per million BTU,* in addition an emission reduction rate of
90 or 70 percent is prescribed. With respect to particulate
matter originating from cement production the emission stan-
dard is 0.3 pounds per ton of input. Although the law pre-
scribes that the standards reflect the best emission re- .
duction system available, and it was expected that the stan-
dards would be quite strict, effectively preventing the de-
terioration of air quality and contributing to attainment
of NAAQSs, the practice of the EPA shows that this is not
the case. The standards are relatively lenient; they normal-
ly are at the weak end of performance achieved by reference
24)
technology. '
The instrument for enforcing the NSPS is the requirement
of preconstruction review. Sources subject to the stan-
dard may only be constructed or modified if the competent
25\
state agency has granted the operator a permit. ' For
that purpose, the operator must give advance notification
to the state before beginning construction or modifi-
cation, further notification is required before starting
operation of the source, and finally the operator must
submit operating data after start-up.
2. The Nonattainment Program
a) Background of the Nonattainment Program
The provisions of the 1977 Amendments are a Congressional
response to the failure of the states to achieve the
NAAQSs within the "time limit provided in the Clean Air
Aot 1970. ' As stated, in developing SIPs to achieve the
NAAQCs, the states used incomplete data and, if any, in-
adequate modelling; they concentrated on cleaning up pol-
lution from existing sources, normally by using a rough
roll-back .strategy of equal reduction of pollution from
these sources; delays occurred because many polluters
were able to negotiate extensions for compliance. This
.had the result that in many areas the controls of exist-
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- 18 -
ing sources to achieve compliance were inadequate. More-
over, the control of new and modified sources was not
satisfactory. Although the Clean Air Act 1970 required the
states to adopt, in the framework of the SIP, a program
for preconstruction review of new and modified sources and
these sources were also subject to preconstruction review
to achieve the NSPSs, little attention was laid on review
of these sources for the purpose of achieving the targets
of the SIP. It was assumed that the NAAQSs would be at-
tained and that, due to the NSPSs, new sources could not
be expected to contribute considerably to ambient quality
problems. With the passage of the initial deadline for
achieving the NAAQSs in 1975 it gradually became clear
that in many areas the standards would not be met. This
would have had serious consequences for the construction
of new and the modification of existing sources. Under
the concept of the Clean Air Act 1970, no new construction
or modification permits could be issued if the deadlines
for attainment were not met. Thus, the Clean Air Act could
have stopped new industrial construction in substantial
parts of the country, in 1976 EPA made an attempt to limit
the rigor of this restriction and reconcile the conflict-
ing national interests in clean air and continued indus-
trial growth by issuing ar Interpretative Ruling which
27)
introduced the "offset policy". The Ruling provided
that new plants could be constructed and existing ones
modified in non-attainment areas, but only if stringent
conditions were met; in particular, emission increases
from new or rnoderniz? 9 existing sources had to be offset
by decreases from other sources.' Congress responded '.o
the no-growth dilemma b^ adopting the Clean Air Act Amend-
ments -1977 which contain many-elements of the EPA offset
policy.
Under the Clean Air Act Amendments 1977, the country is
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- 19 -
divided into nonattainment and attainment areas. Where
an AQCR or, more frequently, an AQMA violates a primary
or secondary NAAQS, with respect to any criteria pollutant,
it is considered a nonattainment area for that pollutant;
for pollutants that do not exceed the NAAQSs, the same
area is an attainment (PSD) area. The final determination
of areas as nonattainment areas is made by EPA.
b) Revision of SIPs
The states are required to revise their implementation
plans with respect to nonattainment areas by June 30,
1979. If approved or conditionally approved, the revised
SIP is the framework for pollution control in these areas. -
In particular, it applies to all sources that seek to con-
struct or modify in nonattainment areas. If a state fails
to adopt a revised SIP or approval has not been given by
EPA by mid-1979, the 1977 Amendments provide for a con-
28)
struction ban for major new or modified sources. The
major impact of this threat was not so much that new con-
struction was actually stopped; rather, it lead to a speedy
revision of SIPs (although the 1979 deadline was met only by
a few states). The reason for this is that pending permit
applications could be processed and EPA avoided the construe-
99)
tion ban by giving deficient SIPs conditional approvals.'
The revised SIP must ensure the attainment of any of the
NAAQs as "expeditiously as practicable". ' The ultimate
deadline is December 31, 1982, and with respect to photo-
chemical oxidants and carbon monoxide December 31, 198"?.
As many as 29 states applied for such extensions for all
or parts of the stace, especially for metropolitain ureas.
Before the scheduled attainment of the NAAQs, the revised
SIP must provide "reasonable further progress" (RFP)
towards achieving the NAAQSs. Reasonable further pro-
gress is defined as annual incremental reductions in emis-
.sions, including substantial reductions in the early years.
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- 20 -
following approval of the revised SIP and regular re-
ductions after that period that provide attainment by the
deadline.
c) Preconstruction Review
Moreover, the revised SIP must provide a permit program
for new sources and modified existing sources
32)
The
Clean Air Act Amendments of 1977 substituted this direct
permit program for the previous preconstruction review
which left the states latitude in determining the appli-
cable control program for these sources. Its purpose is
to ensure that the construction or modification of major
sources does not prevent attainment of the NAAQSs by the
statutory deadline.
The precontruction review program does not apply to all
new sources or modified existing sources. Rather, it is
confined to major sources; in the case of a modification
of a major source, only a significant modification is rel-
evant. Major source is defined as a source which emits,
or has the potential to emit, 100 tons per year of any
criteria pollutant for which a NAAQS exists. Some states,
such as California, have introduced lower cutoff levels
for new source review. A significant modification is de-
fined as a change in the design or mode of operation of a
source which increases the annual emissions by 40 tons
. per year.
The interpretation of the new requirements caused a num-
ber of difficulties. First of all, the defiv:.tion of "po-
tential to emit" which is designed to esv.end the coverage
"of the control program for new or modified sources was
controveisial. EPA determined that the threshold would be
calculated on the basis of the source's uncontrolled emis-
sions, disregarding emissions that are controlled by the
34)
operation of control technology. ' After the decision of
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- 21 -
the US Court of Appeal for the District of Columbia in
Alabama Power Co^ v. Costie , the interpretation of the
term "potential to emit" is based on the controlled emis-
sions of the source. The threshold is to be calculated on
the assumption that air pollution control equipment is in-
corporated into the design of the facility and will func-
tion to control emissions in the manner anticipated when
the calculation is made; in other words, for determining
the threshold only those emissions are taken into account
that are likely to be emitted when control equipment has
been installed and is operating, and emission limitations
are federally enforceable (according to recent suggestions:
are enforceable, i.e. contained in SIPs, NSPSs, construc-
tion permits issued under SIPs or NESHAPs). The new defi-
nition narrows the scope of application of preconstruction
review but it sets a more realistic standard; as a prac-
tical matter, it allows for greater initial growth in non-
attainment areas.
Problems with the interpretation of the term "source" have
also arisen. They are, in particular, relevant for the de-
termination whether a modification of an existing source
is subject to new source review or emission increases from
new equipment can be compensated by decreases from existing
equipment to avoid new source review. The "netting policy",
which is a part of the "Emissions Trading Policy", permits
modernizing plants to "net out" of preconstruction review
(see below pp. 38-9) .
d) Requirements for Major New Sources
Major new and modified existing sources are, within the
framework of preconstruction psmit procedure, subject to
four sets of requirements:
- lowest achievable emission rate,
- compliance of all other sources operated or owned by the
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- 22 -
applicant with existing regulations or orders/
- the applicable SIP must be carried out,
- a net reduction of total emissions in the area.
First, the applicant must demonstrate that the emissions
of the relevant source are within the lowest achievable
emission rate (LAER) for that source . The Act states
that this rate must reflect the most stringent emission
limitation which is contained in any implementation plan
or which is achievable in practice,, whichever is more
stringent. The objective of this provision is to force
new or modified sources in nonattainment areas to use the
best control technologies and processes available in prac-
tice.' Availability in theory is not sufficient. In con-
trast to the BACT standard applicable in PSD areas, the
law does not direct that cost considerations be taken in-
to account; however, the requirement of availability in
practice means that a control technology that is so ex-
pensive as to prevent the construction or operation of
37)
the source is not to be considered as "achievable". It
is safe to say that cost considerations have less weight
than in NSPSs. Therefore, theoretically, the LAER stan-
dard is the strictest among the various technology-based
stand?rr5s established under the Act.
The LAER standard is to be set forth by the state in the
SIP. It is to be determined class-by-class or category-by-
category of sources. The statute assumes that a certain
variation among the states in determining LAER standards
will occur. The statutory requirement that LAER deter-
minations by the states may not be less stringent than the
federal NSPSs limits the discretion of the states. In
practice, the LAER standards do not set absolute emission
limitations; normally, the sources are subject to speci-
fied emission rates per unit of production or time. LAER
in general requires control technology that is similar to
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- 23 -
the NSPSs or even RACT (CTG). It must be noted that,
due to different cutoff levels, a source in a nonattain-
ment area may be subject to NSPSs but not to LAER.
Second, the applicant must demonstrate that all other sta-
tionary sources owned or operated by the applicant or by
any entity controlling, controlled by, or under common
control with the applicant within the same state are sub-
ject to emission limitations and are in compliance with
391
all applicable regulations or orders. ' Each source must
either comply with the applicable emission limitations,
.i.e. must have fully completed the required abatement pro-
gram, or be on an approved schedule for compliance. Where
a source is in delay with its abatement program, the SIP
must be revised in order to formally incorporate a re-
vised timetable for compliance, or EPA must have approved
the new schedule in a delayed compliance order. Mere ap-
proval by the state agency is not sufficient.
Third, a permit may be granted only if the applicable
4 01
SIP "is being carried out". ' This requirement links the
permit with the progress of the whole state air pollution
control program as set forth in the revised SIP and hence
with factors entirely beyond the control of the applicant.
The requirement means that there must be actual "reason-
able further progress" towards achieving the NAAQSs with-
in the statutory deadline. Where a revised SIP has been
unrealistic or is not enforced with sufficient vigor, it
may be difficult to demonstrate that the SIP is being
carried out.
Fourth, new sources or modified existing sources may be
allowed in nonattainment areas only when it is ensured
41 *
that a net reduction of total emissions occurs. The 1977
Amendments require reasonable further progress towards
-achieving the NAAQSs including substantial reduction of
emissions in the early years after the adoption of the
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- 24 -
revised SIP and regular reductions after that period. For
meeting this requirement, the states have the choice
between two options:
- growth allowance, or
- offset.
To make room for additional development, the states can
create a growth allowance by requiring reduction of emis-
sions from existing sources beyond the extent necessary
42)
for meeting the AAQSs; in this case, a new or modified
existing source will be permitted where its emissions
will not exceed the allowance for new sources in the area.
This method amounts to a mandatory creation of emission
reduction credits and transfer to the state which then
distributes them on the basis of "first-come-first-served".
It is not frequently used because the states found it dif-
ficult to reduce emissions from all existing sources to
an extent that not only the NAAQSs could be achieved by
the statutory deadline but also room for new sources was
43)
created. The only exceptions are states that had
adopted SIPs on the basis of the old ozone standards
which were then relaxed by EPA; these states were able to
use the existing emission limitations for creating a
growth margin.
The other more realistic option for a state is to simply
require reductions of emissions from existing sources
which are sufficient to meet the NAAQSs in the future; in
this case, the 1977 Amendments allow the construction of
a major new or the modification of an existing source only
when total allowable emissions from existing sources, from
new sources which are iot major emitting sources and from
the proposed facility are less than total emissions from
existing sources allowed under the SIP prior to the ap-
plication and this net reduction of emission represents
further reasonable progress. For achieving such reductions,
-------
the relevant new source will have to seek reductions of
emissions from other (existing) sources which offset its
44)
emissions. This offset concept had been adopted by the
EPA in the Interpretive Ruling of 1976 when it became
clear that non-compliance with the NAAQSs in many AQCRs
and the ensuing construction ban for new sources in these
areas threatened industrial growth. The Amendments of 1977
incorporate its essential elements into the Act.
It must be noted that in case of coal conversion EPA al-
lows a new source or a modification of an existing source
in a nonattainment area without obtaining offsets if the
source is in a locality within the area that meets the
NAAQSs.
e) Requirements for Existing Sources
Besides the requirements for major new or modified exist-
ing sources, the 1977 Amendments also contain special re-
quirements for existing sources in nonattainment areas.
The revised SIPs must provide such emission reductions
from existing sources in an nonattainment area as may be
obtained through the use of reasonably available control
technology (RACT) .This is a minimum standard which .
must be imposed on all major existing sources, except
where the necessary technology is not available. It requires
a determination that a given control technology, considering
the costs of installing and operation, is feasible for the
47)
average source of a class or category of sources. The SIP
may go beyond RACT or revise RACT definitions once accepted
or it may, with respect to particular sources or groups of
cources, set forth less scringent requirements if this can
be based on the particular conditions of the relevant sources,
although in practice this is rare.
EPA has published Con'trol Techniques Guidelines (CTG)
which define available control technology (design stan-
-------
- 26 -
dards) as a basis for the states to determine RACT.
f) Requirements for Minor Sources
With respect to new or modified existing sources which,
due to their low size, are not considered as major emit-
ting sources, the Act does not contain particular require-
ments. However, the states are free to set a lower
threshold for preconstruction- review than mandated by the
Act and thus subject certain minor sources to major new
source requirements.
3. The Prevention of Significant Deterioration Program
a) Key Elements of the PSD Program
The Prevention of Significant Deterioration (PSD) Program
which originally was developed under doubtful statutory
authority by EPA and the courts and then adopted in its
basic elements by the 1977 Amendments seeks to ensure
that economic growth and associated air pollution does not
severely compromise the existing ambient air quality in
areas in which the air is cleaner than the NAAQSs re-
A fl \
quire. In these areas (PSD areas), only a specified
growth ("increment") of air quality deterioration is per-
mitted, ar.cl majo.": new and modified,, existing sou^cec are
subject to a psrnit procedure that seeks to ensure that
these increments are not exceeded. The PSD program ap-
plies, with respect to TSP, to all or portions of 90 per-
cent, and with respect to SO,, to 97 percent of the
40) ^
country's AQCR.0.
Under "the Pi.;U program, the AQCRs that achiev the NAAQSs
with reppect to any criteria pollutant are divided into
three classes according to the relative degree of protec-
tion to be provided each. Certain pristine areas such
as national parks and wilderness areas of a certain size
are permanently designated by statute as Class I. This
category is afforded the highest degree of protection and
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- 27 -
allows only for minor air quality deterioration. All other
areas are initially designated Class II allowing more in-
tensive growth (amounting to roughly 25 percent increase
in pollution levels). States are authorized to redesignate
areas either as Class I or, subject to some exceptions,
also as Class III, put in practice, this has only seldom
been done. Thus, the regime for class II is the normal PSD
regime.
The 1977 Amendments themselves determine the allowable in-
crements for sulfur dioxide and particulates for each of
the three PSD classes .
M(b) (1) For an; elasf 1 area, the maximum allowable increase in
concentration* of sulfur dioxide and particuliU matter over the base-
line concentration of lueh pollutanti (ball not exceed the following
amount*:
-F.ll.liM Mula.a iimtu* l»mu> III
FMllrufelt mtur: mfintmm* »« t»w. ».<«rl
Aanutl t*awa*t mm* — ._ --- — . --_— — ,,....—.. — B
Twcntr-fou'-ae-r ^.wmin-i -- — — — ..... _—.——— 10
tfnlfur dioxide:
Annual •ritboiftle man --- _____ --- — .-— 2
TvtutT-raar-banr BMliMim__ --- „__.-____ ----- B
Th-M-boar atrlmnni ..................... - , ..— --- . --- xs
"(2) For any class II area, the maximum allowable increase in con-
cent rations of tulfur dioxide mod parliculale matter over the baseline
concentration of nich pollutants ih&ll not exceed the following
amounts:
*?•_•<••! H*i1mmm
Partlnlil* nalltr: mirrm
Suirur
Anouil "*"'~*T"'"~~* — .. --- -__-_ 20
. , ._ _ . -------- 01
..... - 1 H - - 512
"(8) For any elaas HI area, the maximum allowable increase in
concentrations of nilfnr dioxide and partieulatc matter over the base-
line concentration of such pollutant* shall not exceed the following
ainounta:
-r.lHU»t Hulaia Ul.w.kW IMT-U. (U
ParHnlllc m«O*r: ' »UT_R-_« v" nue •««)
Aaxual (•metric •--*• ——— 87
Tw*DCT-roer<_oDr —--'—• 7«
•alfar dioxide:
t:-IU>nHde maa -_ 40
182
Tbm-bnor mnTlinim TOO
The increments which are expressed in numerical values
(micxrograms p<__: cubic meter) are a measure of how much
dirtier the air may become at a particular location;
their structure corresponds to that of the NAAQSs. In each
class, the increments allow for the same absolute in-
creases in pollution levels. The upper limit of the in-
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- 28 -
crement is the ceiling. It is the baseline concentration
plus the increment. As a practical matter, the ceilings
are a kind of differentiated tertiary ambient air quality
standard for clean air areas specifying maximum levels of
allowable pollution from increases over the (varied) base-
line concentrations of individual pollutants.
52)
There is as yet no comparable PSD program for other pol-
lutants. By mid-1979/ the EPA was required to promulgate
regulations to prevent the significant deterioration of
air quality resulting from other pollutants such as hydro-
carbons, carbon monoxide/ photochemical oxidants and ni-
trogen oxides but has not done so. However, this does
not mean that these pollutants are outside the scope of
PSD regulation. All other requirements of the PSD program,
especially the analysis of anticipated emissions to de-
termine applicability of PSD review, the analysis of im-
pact on ambient air (maintenance of NAAQSs) and the tech-
54)
nology-related requirements appiy to these pollutants.
Moreover, the Act contains provisions for the protection
t».
of soil and vegetation as well as the protection of visi-
bility in pristine areas.
b) Role of SIPs
The implementation of the PSD program primarily is car-
ried out through the SIP. The SIP must ensure that the
allowable increments for sulphur dioxide and particulate
matter as well as the NAAQSs arc- not exceeded. EPA takes
the-view-" that this concept also itianrlcites special SIP re-
quirements-to prevent-a violjtic'i of the increments -
'beyond those necessary for simply Maintaining the NAAQS
'• for all," including existing, sources (e_.g.-, periodic
review of emission increases outside new source review
and additional emission limitations when necessary to cure
a violation of the increment). This view was upheld by the
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- 29 -
55)
courts. However, the emphasis of the PSD program is
laid on major new and modified existing sources (fa-
cilities) .
c) Preconstruction Review
Under the 1977 Amendments, major new and modified exist-
ing sources (facilities) in PSD areas are subject to the
requirement of a preconstruction permit.
Major emitting facilities are facilities whose potential
emissions exceed 100 tons per year if they fall into one
of the 28 categories specifically designated in the Act.
"Sec. 189. For purpose* of this part
"(1) The term 'major emitting facility' means any of the fol-
lowing stationary sources of air pollutant* which emit, or have
the potential lo emit, on* hundred tons,per year or more of any
air pollutant from the following types of stationary sources:
fossil-fuel fired iteam electric plants of more thin two hundred
and fifty million British thermal unite per hour heat input, coal
cleaning plant* (thermal dryers), kxaft pulp mil IB, Portland
Cement plants, primary zinc smelters, iron and steel mill plants,
primary aluminum ore reduction plants, primary copper smelurs,
municipal incinerators capable of charging more than two hun-
dred and fifty tons of refuse per daj, hydrofluoric, aulfuric, and
' nitric acid plants, petroleum refineries, lime plants, phosphate rock
processing plants, coke oven batteries, sulfur recovery plants,
carbon black plants (furnace process), primary lead smelters, fuel
conversion plants, sintering plants, secondary metal production
facilities, chemical process plants, fossil-i-el boilers of more than
two hundred and fifty million British t!i«rmal units per hour heat
input, petroleum storage and transfer facilities with a capacity
eicc*ding three hundred/housand barrels, ticonite ore processing
facilities, glass fiber processing plants charcoal production facili-
ties. '
The term "major emitting facility" also covers fa-
cilities with an emission potential of more than 250 tons
per year of any criteria pollutant. These levels are
relatively low. 90 percent of emissions: from new sources
in PSD areas stem from sources that emit 100 tons and
CQ \
more. As in the case of the nonattainment program, the
notion "potential to emit" does not mean the uncontrolled
emissions; rather, it refers to the facility's emitting
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- 30 -
capacity after application of control technology, provided
eg \
the emission limitations are federally enforceable.
Modifications of major facilities are only subject to PSD
preconstruction review where a certain threshold of sig-
nificance is exceeded. This level is 25 tons per year for
TSP, 40 tons for SO9, NO and VOCs, 100 tons for CO, and
M *t
0.6 tons for lead; for hazardous pollutants, the signifi-
cance level is 10 percent of the emission standard. ' A
modification of an existing facility requires a permit
where,due to the modification, the facility's potential to
emit increases so as to exceed these thresholds.
In contrast to the nonattainment program, the notion of
"facility" is broad, and the operator of a modernizing
plant can "net out" of preconstruction review where the
net increase of emissions is below the de minimis
thresholds. If the threshold is exceeded, the PSD re-
•*
quirements apply (only) to the modernized parts of the
plant.
d) Requirementsfor MajorNew Sources
The 1977 Amendments set forth two basic substantive re-
quirements for granting a preconstruction permit under the
PSD program: the applicant must demonstrate that the source
does not consume the allowable increment over the baseline
concentration and does not violate the NAAQSs, and he must
apply the best available control technology (BACT) for all
pollutants regulated by the Act. Furthermore, there are
procedural requirements, including the requirement of a
public haaring.
First, a permit for a new or modified existing source in a
PSD area requires that the applicant shows that the additio
nal emissions caused by him do not consume the applicable
^ ~~ fi~21
crements for sulfur dioxide or particulates. Since the
allowable increment relates to the preexisting ambient
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- 31 -
air quality, such a demonstration requires the determi-
nation of the baseline concentration of the relevant pol-
lutant which existed at the time of the first application
for a PSD permit in the area beginning August 1, 1977.
The baseline level also includes projected emissions from
major emitting facilities on which construction commenced
prior to January 6, 1975 but which has not yet begun oper-
ations before the application. All other increases in
pollution - from major new or modified facilities con-
structed after January 6, 1975 as well as from non-major
and existing facilities (not assumed in the SIP)-are
charged against the allowable increment. Any emissions
not included in the baseline are counted against the in-
crement. _The determination of the baseline and of incre-
ment consumption is based on actual emissions even if al-
lowables are higher. '
A demonstration by the applicant that sulfur dioxide or
particulates emitted from the new facility do not consume
the increment requires adequate monitoring data and ac-
curate dispersion models in order to determine the base-
line concentration, increment consumption due to the con-
tribution of previously approved major new sources and
existing sources not in the baseline and the consumption
ox the increment by the applicant's source. The Act re-
quires/ above certain insignificance levels, monitoring
of pollutant levels before application either by the ap-
plicant or the state. ' In addition, EPA may also demand
monitoring after construction when necessary. EPA has
also issued modelling guidelines that shall facilitate .;
the determination whether the increment is consumed.to "''
Nevertheless, the monitoring and modelling requirements
of the Act have remained controversial; in particular,
concerns have been raised about the uniformity of moni-
toring and modelling techniques employed by the EPA re-
gional offices, and about overlap problems.
68}
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- 32 -
In practice, increment consumption is not very important.
The application of federal and state emission standards,
including BACT, and the gradual retirement of existing
sources normally prevent an increment consumption. Apart
from some areas in the Northwest and Texas, the major ef-
fect of the increment consumption review seems to be on
69)
industrial planning.
Beyond increment consumption, the applicant must also
demonstrate that the pollutants emitted from the new or
modified source do not contribute to a violation of the
NAAQSs.' This requirement is important in PSD areas
where the concentration levels, although not exceeding the
NAAQSs, are high and any additional source may cause a
violation of the standards ("pre-nonattainment areas").
Moreover, this requirement is not only applicable for pol-
lutants for which increments have been established by the
Act, namely sulfur dioxide and particulates, but for all
other criteria pollutants.
Second, the applicant must use the best available control
technology (BACT) for all pollutants covered by NAAQSs,
NSPSs or NESHAP, not only those for which the source is
major (but subject to de minimis exceptions). In case
of modernization, E*.CT is required only for the modernized
unit and pollutants for which there is a significant net
increase. In contrast to the NSPSs, LAER and RACT stan-
dards, the BACT determination is made on a case-by-case
basis. Since the statute directs that "energy, environ-
mental, and economic impacts and other costs" must be
taken into account, one can say that the standard is
less stringent '.nan LAER. In theory, it is marginally
stricter than -Lhe NSPSs As in the case of LAER, the NSPSs
are the minimal level of technology which must be used in
making a BACT determination. In view of the laxity of the
NSPSs, there is a margin for stricter PSD requirements.
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- 33 -
In practice, BACT often corresponds to the NSPSs; however,
there are cases where BACT has led to emission limitations
that are stricter than the NSPSs as well as normal SIP re-
74)
quirements. Consequently, the main importance of the
BACT requirement is that it may also be imposed on sources
which are not (yet) covered by NSPSs.
The concept of the Act to determine BACT on a case-by-case
basis raises the problem of inconsistent determinations in
the states, EPA attempts to give the states guidance by
publishing abstracts of existing BACT determinations.
e) Requirements for Other Sources
Minor new or modified existing sources as well as existing
sources are not subject to special PSD requirements. How-
ever, there are retrofit obligations for existing sources
for the protection of visibility, ' and sources not
covered by the PSD program may be required by the SIP to
reduce their emissions if this is necessary to cure an
existing increment violation.
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- 34 -
!*• The Emissions Trading Policy as a Market-Oriented
Concept in the Regulation of Air Pollution
1. Objectives of, Reasons for-and Background of the
Emissions Trading Policy
a) Introduction
Generally speaking/ one can define emissions trading as a
regulatory policy that permits operators of sources to
create reductions .of emissions at certain emission sources .
beyond the applicable requirements and to use these re-
ductions to meet requirements applicable to other sources. '
Emissions trading involves the exchange of "rights to pol-
lute" granted the operator by a permit in conformity with
ambient requirements. However, in contrast to the various
proposals for introducing marketable rights to pollute,
emissions trading is a simple modification of the exist-
ing regulatory system of air pollution control. Emission
reducvion credits can only be used in the framework of
permitting procedures, either to fulfill substantive re-
quirements or to avoid the institution of such procedures.
Emission trading consists of emission offsets, bubbles,
netting and, emission reduction banking. Ihese elements of
the emissions trading policy are united by a common econ-
omic rationale. The emission trading policy is designed
to save pollution control costs by permitting the operator
or several operators to decide themselves about control
measures, so long as the net result is t'.iat the aggregated
requirements of the sources involved f.re met {or, in the
rase of o.-Jf set, there is a net reduc -.ion of emissions) ;
furthermore, the policy is designed to give firms an in-
centive to develop more efficient control technology o.r
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- 35 -
production processes. EPA's Emission Trading Policy State-
ment of 1982 establishes common minimum legal requirements
for creating, using and banking of emission reduction
credits. It makes the attempt to present a uniform legal
concept of the whole emissions trading policy. Neverthe-
less, emissions offsets, bubbles, netting and banking have
quite distinct roles in the regulatory system. Their his-
torical development is'quite different.
79)
The development of the emissions trading policy is cha-
racterized by two features: on the one hand, a strong dif-
ferentiation, if not fragmentation, into several elements
which only in the recent past has shown signs of a certain
unification; on the other hand, a gradual expansion of the
policy and relaxation (liberalization) of regulatory re-
straints. The reason for this development is the incremental
character of modern regulatory policy, but even more the con-
cept of'"deregulation that had already prevailed during the
•\
Carter administration and was continued by the even more mar-
ket-oriented Reagan administration. It must be emphasized,
though, that forms of emissions trading had already been prac-
ticed under the Ford administration. It was the Carter adminis-
tration that took the initiative to formally introduce
emissions trading as a supplemental concept of US air
pollution control. The Reagan administration expanded the
concept and attempted to relax certain restraints which
had previously been considered to be mandated by the pol-
icy goals of the Clean Air Act but which, in the view.of
the new administration, imposed too heavy economic and
administrative burdens and impeded the acceptance and use
of emissions trading by industry.
The conceptualization of the emissions trading policy as
a uniform policy also obscures another important fact,
namely the paramount role of the states. The emissions
trading policy only affords options for the states.
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- 36 -
It is spelt out in the Policy Statement - although this idel
could have been emphasized more strongly - that the emissions
trading policy clearly is voluntary. The states have often
been more restrictive than EPA in devising their own emissions
trading policy, and there is a relatively high degree of
variation among the states. Even the position of EPA's re-
gional offices is not entirely uniform. All this adds to
the already existing complexities of the emissions trading
policy.
b) The Offset Policy
The offset policy is the oldest emissions trading concept.
The offset policy allows new major stationary sources or
modernizing existing sources to comply with ambient re-
quirements in nonattainment areas by securing sufficient
surplus emission reductions from other (existing) sources
80)
to more than offset their new or increased emissions.
The offset policy allows new growth while improving the
air quality in nonattainment areas. It is a response to
the threat of a complete ban on new industrial develop-
ment in nonattainment areas which would have been the con-
sequence of the mandate of the Clean Air Act of 1970 to
attain the NAAQSs by July 3i> 1977 at the latest. Under
the Act, new and modifieo existing sources that emit any
criteria pollutant could not be constructed where the
NAAQSs for that pollutant are exceeded. On the other hand,
the Act was relatively lenient towards existing sources.
It was understood that existir.c sources should not be im-
posed, by the SIP, the same eir.-ission limitations as ap-
plicable to new or modifieo existing sources. Thus, one
may also state that the' threat ~,± a construction ban in
nonattainment areas was the result of a grossly unequal
treatment of new and existing sources to the disadvantage
of the former.
The EPA Interpretive Ruling of 1976,-which was amended in
-------
- 37 -
81 \
1979 and 1981, ' introduced the offset policy as a re-
sponse to the no-growth dilemma. The basic elements of
EPA's offset policy were then adopted by Congress as part
of -the Clean Air Act Amendments of 1977. The Interpretive
Ruling is since then only applicable in exceptional cases.
The offset program is administered by the states as part
of their (revised) SIPs. However, the Interpretive Ruling
still serves as a guideline for the states in administer-
82)
ing their offset program.
The offset policy represents a pragmatic relaxation of
the original ambient air quality goals of the Act of 1970
in that it allows new emitting sources in nonattainment
areas; however, it uses the construction of such sources
to achieve a new ambient air quality benefit beyond that
achieved by tougher requirements for existing sources.
*.
c) The Bubble Policy
The bubble policy is not directly related to ambient re-
quirements; rather, it is primarily oriented at emissions.
The bubble policy allows existing plants in attainment as
well as non-attainment areas to increase emissions at one
source beyond the emission limitations set forth in the
applicable SIP in exchange for compensating decreases of
831
emissions at other sources. The bubble concept con-
siders the several sources as one source and seeks to im-
pose on the group of sources an emission limitation which
is equivalent to the aggregated emission limitations pre-
i
viously applicable to these single sources. It does not
change the "status" of existing sources; in particular,
the relatively preferential treatment of existing sour-
ces which still exists under the Clean Air Act Amendments
of 1977, is not modified or even abolished by the policy.
It is an alternative means of meeting emission limitations
set forth in the SIP for several existing sources.
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- 38 -
The bubble policy is designed to give managers of existing
plants flexibility to develop less costly ways of meeting
emissions limitations while ensuring that the present
air quality in the area is maintained. Plant managers
may choose a more cost-effective combination of emission
reductions while not exceeding the applicable emission to-
tal. Moreover, it is expected that anticipated cost savings
will promote technological progress. Firms have an incen-
tive to develop cheaper control technology or low-pollution
processes if they do not lose the emission reduction
created by the use of these technologies or processes but
are accorded a credit that can be used to offset increased
emissions at another source. The bubble policy is a re-
sponse to the specific problems of existing plants in
meeting (especially new) emission limitations set forth
in the (revised) SIP. Since retrofit expenses normally are
higher than expenses for pollution control equipment for
new plants, it was thought that operators of existing
plants needed more flexibility for deciding on the use of
control technology to meet SIP requirements.
The bubble policy was first formally introduced by EPA in
197985) and then liberalized in the 1982 Emission Trading
Policy Statement. It has no express statutory basis in
the Clean Air Act. However, the provisions of the Act- on
SIP requirements are considered by EPA as flexible enough
to allow the use of the bubble policy in devising or re-
vising SIPs.
d) The Netting Policy
Netting exempts operators of-existing plants expending or
modernizing from new source review requirements, as long
as any increase in plant-wide emissions is insignificant
86 i
in the meaning of preconstruction review regulations.
(25 to 100 tons per year, depending on the pollutant, or
-------
0.6 tons for lead). In calculating whether the increased emis-
sions from the modified source are significant, only net in-
creases in plant-wide emissions are considered. A plant can
compensate increased emissions from the modified source by de-
creasing emissions from other sources within the same plant. The
rationale underlying this emission trading concept is the
saving of business and administrative cost in cases having
no or only a de minimis impact on ambient air quality. By
"netting out" of preconstruction review, the operator of
a modified source removes all the - procedural and sub-
stantive - burdens of new source review. The administrat-
ive workload decreases correspondingly since the competent
agency must only make sure that the prerequisites of net-
ting are fulfilled.
Netting is one of the oldest, perhaps - as far as actual
practice is concerned - the oldest of all emission trading
concepts, although it is only recently that it has been
formally recognized as a separate concept within the emis-
sion trading policy. The concept was first adopted in 1979
as part of the offset policy in nonattainment areas. In
1980, EPA allowed netting in PSD areas; with respect to
nonattainment areas, the concept was repealed but in 1S81
87)
reintroduced. To this extent, in the light of a decision
of the Court of Appeal for the District of Columbia of 1982,
its legality had become doubtful; however, a recent US Su-
preme Court decision has reversed the decision of the Court
of Appeal and;confirmed the netting program in nonattainment
areas (see below pp. 44). EPA's Emissions Trading Policy
Statement of 1982 expressly refers to the term of "netting".
Previously, netting was often referred to as part of the
bubble concept? even recent court decisions use this ter-
minology.
e) Emission Reduction Banking
Under the concept of emission reduction banking, firms
that cannot (fully) use an emission reduction to effec-
tuate a contemporaneous offset, bubble or netting trans-
action can be granted an emission reduction credit and
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- 40 -
store it for later use in offset, bubble or netting trans-
actions or - except for netting - for sale to another
88)
firm. There are two kinds of banking: informal and
formal banking. Informal banking is sufficient where the
relevant firm only seeks to store the credit for its own
use in the future. Formal banking is necessary where a
firm that has created an emission reduction credit wants
to store it for later sale to a third party; also, for-
mal banks serve as a clearing house for transactions in
emission reduction credits between different parties.
89)
The rationale underlying the banking policy is that
loss of emission reductions that cannot be used contem-
poraneously would deter firms from reducing emissions be-
fore they could use them themselves or sell them for con-•
temporaneous use by another party; as long as unused emis-
sion reductions are banked, they have a (temporary) posi-
tive impact on ambient air quality. Moreover, the prohib-
ition of banking would decrease the number of possible
trades and thereby weaken the cost-saving potential of the
emission trading policy.
EPA originally considered banking of emission reduction
credits as inconsistent with the basic policy of the
Clean Air Act (1976). However, together with the extension
of the emissions trading policy in 1979, EPA allowed
90)
banking. Since then, informal banking has been widely
practiced as part of the permitting procedure in respect
of netting and internal offset transactions, while for-
mal bankinc still is limited to a few areas. The Emissions
Trading Policy Statement of 1982 gives a detailed de-
scriptic.:i of the necessary components of a complete state
(formal) banking rule. EPA also has recently published
draft model banking rules that can be used by the states
as a model to devise their own banking rules (as part of
91)
generic emission trading rules or as separate rules). '
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- 41 -
2. The Role of the Emissions Trading Policy in the
Regulatory System
As stated, emission offsets, bubbles, netting and banking,
although united by a common economic rationale, have quite
distinct legal features and their place in the regulatory
921
system of air pollution control is different.
The offset policy is ambient quality-oriented. It allows
new major stationary sources and modified existing sour-
ces to comply with ambient requirements in nonattainment
areas if they secure sufficient surplus emission re-
ductions from other sources to more than offset their new
or additional emissions. The policy allows the location
of new sources or modernization of existing sources in-
spite of the nonattainment status of the area if, by vir-
tue of emission reductions the operator has obtained for
other sources, the air quality in the area is improved in
such a way as to constitute reasonable progress
towards achieving the NAAQSs by the (prolonged) statutory
deadline. These offsets may be created within the plant
(internal offset), they may also be created in other plants
owned by the operator of the new source or by a third par-
ty (external offset). Since the offset policy is designed
to enable sources to comply with ambient requirements,
offsets may not be used to meet technology-based stan-
dards for new sources in nonattainment areas, such as
931
NSPSs and LAER requirements.
The offset policy has been developed to cope with the par-
ticular problems of industrial -growth in nonattainment
areas anc1 in practice it is almost exclusively applied in
such aroas. However, the underlying concept has a broader
scope of application. It can also be used to comply with
94 1
ambient requirements in PSD areas. ' For example, it can
be used in a PSD area where pollutant concentrations are
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- 42 -
relatively high and the emissions of a new source, without
consuming the increment, would result in a violation of a
NAAQS. If the application of BACT does not secure suf-
ficient reductions to comply with the standard, the oper-
ator may seek reductions from other sources. to offset the
increased emissions. so that the standard is met. Moreover,
the offset concept is applicable where a new source in a
PSD area will have emissions that would violate an allow-
able increment. However, since the practice shows that in-
crement violation in PSD areas is not very frequent, the
use of the offset policy in PSD areas for offsetting an
increment violation that would otherwise occur is rela-
tively rare.
As in the case of nonattainment, offsets in PSD areas may
not be used to comply with technology-based requirements
for new sources such as NSPSs and BACT standards.
The bubble policy primarily is emissions-oriented. There
is an indirect link to ambient requirements in that the
bubble policy affords existing sources an alternative way
of meeting emission limitations set forth in the SIP for
attaining the NAAQS s. Furthermore, the requirement of "ambient
equivalence", .i.e. the requirement that a bubble transaction
:aay not deteriorate the ambient air quality, links, the bubble
policy to ambient considerations. T'ne bubble policy allows
existing plants to increase emissions at one source beyond the
applicable emission limitations in exchange for compensating
decreases of emissions at other sources. This compensation
can occur at the same plant (internal bubble), it may also
occur at two or more plants (of the same owner or dif-
95)
fe.rent owners) (external bubble) . The bubble concept
considers the several, sources : s one source and seeks to
impose on the group of sources an emission limitation
which is equivalent to the previous individual emission
limitations with respect to its impacts on ambient air
Bubbles are allowable both in nonattainment and in PSD'
Q g »
areas. The focus of the bubble policy is on nonattain-
ment areas; however, bubbles are also frequently used by
-------
-43-
existing plants in PSD areas to meet the requirements of
the applicable SIP in a less costly way. It should be no-
ted that not all states allow bubbles,* especially states
that have serious air pollution problems such as Califor-
nia have taken the position that emission reductions from
existing sources should not be credited but rather used
for improving the existing air quality.
The bubble concept applies to all emission limitations im-
posed upon existing sources by the applicable SIP, includ-
ing technology based requirements such as the RACT stan-
97)
dard in nonattainment areas.
Bubbles cannot be used to meet technology-based require-
ments for new and modified existing sources, such as NSPS,
98)
LAER and BACT standards. However, the extension of the
bubble concept to NSPSs under particular circumstances,
e.g. a combination of multiple sources each subject to the
99)
same NSPSs, is being considered.
Netting exempts operators of existing plants modernizing
or expanding from new source review requirements as long
as any increase in plant-wide emissions is insignificant
in the meaning of preconstruction review regulations. In
determining whether the threshold levels are exceeded,
only net increases in plant-wide emissions are considered.
A plant can, therefore, compensate increased emissions
from a modified source by decreasing emissions from other
sources within the same plant, provided the decrease is
contemporaneous, i.e. does not date back further than 5
years. External netting is not possible. Technically, the
netting policy is based on a broad definition of "facility"
(in PSD areas) or "source" (in nonattainment areas). EPA
regulations provide that for the purposes of preconstruc-
tion review, the notion "facility" or "source" means the
whole plant; even reconstruction of a source at the same
t
site is considered as a modification, while the addition
-------
- 44 ~
of new equipment to an existing plant is considered to be
the construction of a new source. ' This gives the oper-
ator of a plant the possibility to net plant-wide emissions
to avoid preconstruetion review.
The netting policy applies both to attainment and nonat-
tainment areas. However, in a recent decision, the US
Court of Appeal for the District of Columbia declared
the extension of the netting policy to nonattainment areas
to be inconsistent with the Clean Air Act and directed EPA
to restore the narrow source definition and the reconstruc-
tion rule. Since then, the status of the netting policy in
nonattainment areas has been insecure.
The effects of "netting out" of preconstruction review are
much farther-reaching than those of using the offset and
the bubble concepts. By "netting out" of preconstruction
review, the operator of a modified plant removes all the
burdens of a new source review requirements, including the
consideration of ambient violations (violation of NAAQSs
or violation of PSD increments) and associated monitoring
and modelling requirements, applicable bans on construction
and installation of BACT. In the case of nonattainment,
the regulations provided for the possibility to "net out"
of ambient requirements as well as of the requirement to
install technology thai- keeps emissions within LAER.
However, since ever* ir L'SD areas the broad definition of
"facility1 is not Applicable to NSPS, the netting concept
does not exempt modified sources from emission limjcs
established by NSPS. The most important practical consequence
of the netting policy is that the operator of a facility can
avoid the procedural requirements of the preconstruction
view procedure.
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- 45 -
3. Elements and Features of Emissions Trading
EPA's Emissions Trading Policy Statement of 1982 estab-
lishes common minimum legal requirements for creating,
using and banking of emission reduction credits (ERCs).
Since most emissions trades amount to a modification of
SIP requirements and, therefore, can in principle only be
effectuated through a revision of the SIP which in turn
requires the approval of EPA, the Policy Statement de-
scribes the policy EPA will follow in processing appli-
cations for SIP revisions involving emissions trades.
Where emissions trades are effectuated outside the SIP
review process through application of state generic rules,
these rules represent a "generic" SIP revision and there-
fore, assuming EPA has authority to approve such SIP re-
visions, require EPA approval; here, the Policy State-
ment determines EPA's policy in processing applications
for approval of state generic rules.
The statutory requirements for EPA approval of SIPs, in
particular the requirements of attainment of NAAQSs "as
expeditiously as practicable"'and of "reasonable further
progress", are relatively vague and EPA is accorded a
h?gh degree of discretion. Thus it may be assumed that
the principles pronounced by EPA in the Policy Statement
will essentially determine the future policy of the
agency in the field of emissions trading. This justifies
it that the following presentation of the emissions trad-
Ing policy primarily is based on the Policy Statement. It
must be noted, however, that the Policy Statement is a
draft only and that EPA may change the Statement in sev-
eia'l respects following court developments and the-many
critical comments it has received.
-------
- 46 -
a) Creation ofEmission Reduction Credits
The Policy Statement refers to four general requirements
that emission reductions must meet to qualify as emission
reduction credits (ERCs) and be used or banked in an emis-
sions trade. They must be
— surplus,
— enforceable,
— permanent, and
— quantifiable.
104)
105)
First, all emission reductions must be surplus.'v~" Sur-
plus reductions are such reductions that go beyond what a
particular source is required. Only surplus reductions at
a particular source can be substituted for a reduction re-
quired at another source in an emissions trade. Otherwise,
the trade would have an adverse ambient impact and would
run counter to the goals of the Clean Air Act.
In order to determine whether a reduction is "surplus",
it is necessary to establish a level of baseline emissions
of a source ,,beyond which the reduction must occur to re-
ceive a credit. Generally speaking, the determination of
the baseline depends on whether the area is nonattainment
or attainment, and by the way the SIP ha-? been developed
by the state.
-------
- 47 -
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In nonatta inment areas, the baseline may be either maximum
allowable emissions or actual historical emissions, depend-
ing on the assumptions used in the SIP in developing a
strategy for attainment by the statutory deadline. It
should be noted, however, that where actual emissions are
taken as a baseline, this normally requires that the
source does not violate existing emission limits; in other
words: the actual emissions must be lower than the allow-
able emissions.
In nonattainment areas that used allowable emissions as
the basis for their attainment strategy, the allowable
limits can be used as the basis for creating ECRs, even if
actual historical emissions of a source are lower than the
allowables.
In nonattainment areas where actual emissions, based on
inventories or back-calculated from ambient values, were
used as the basis for demonstrating attainment, the actual
emissions of a source normally are the baseline for creat-
ing ERCs. The Policy Statement contains little guidance on
the reference period (average or average of highest year
in larger period, seasonal operations). However, the new
source review regulations of 1980 cover some of these ques-
tions. EPA admits under certain prerequisites also the use
of allowable emissions on a case-by-case basis where this
••:
conforms with reasonable further progress and the source
does not create a new ambient violation or prevent the
planned removal of an existing violation.
The creation of ECRs is also possible in areas which
stiM lack' an approved SIP that demonstrates attainment by
thj statutory deadline, provided this is consistent with
reasonable further progress towards attainment and ulti-
mate attainment of the relevant ambient standard . If
RACT has already been defined in the SIP for existing
sources, it is the baseline. If it has not yet been de-
fined, an agreed RACT baseline may be taken as the base-
-------
- 49 -
v
line for creating ECRs. In this case the source can agree
on acceptable RACT limits for the emission sources in-
volved in the trade. Any reduction in excess of those re-
quired by the agreed RACT limits would be considered sur-
plus. The problem is that the state, when adopting, the
SIP, might determine that more stringent RACT standards
are necessary to meet the NAAQSs. The policy of the EPA
is to encourage the states to protect the ERC as long as
possible in view of the statutory deadline (^.e., with
respect to CO and VOC: 1987). However, the acceptance of
the agreed RACT baseline does not mean that the state can
"give away" the RACT determination. If ambient consider-
ations require so, it may and must impose stricter RACT
limits that must be complied with either by the source
that had created the credit or by the user of the credit
who would have to acquire new credits.
Instead of using a negotiated RACT baseline, areas that
have received extensions for attaining the primary ozone
or carbon monoxide standards until 1987 as well as areas
that do not meet the secondary ambient standards for sul-
fur oxide or particulates, may also use current actual
emissions of a source as the baseline for creating ERCs.
The prerequisite for admitting such a transaction is that
the sources involved commit themselves to produce ad-
ditional reductions equivalent to future RACT limits when
the state imposes them'. This givss industry the possi-
bility to create and use ECRs at the earliest date until
RACT is imposed without having to negotiate individual
RACT baselines. The problem, of course, is how to achieve
future reductions when RACT is imposed. As a practical
matter, this concept will only be used where an operator
already anticipates the possibility of future emission
reductions, e.£. originating from a scheduled shutdown,
or can easily buy ECRs from third parties.
In PSD areas, the baseline for creating a surplus re-
-------
- 50 -
duction will generally be the actual emissions of a
source. Since actual ambient air quality is the basis
for determining increment consumption and attainment of
the NAAQSs, and the maintenance strategy is based on
actual emissions, these normally must also be the base-
line for creating an ERC. However, EPA also accepts allow-
able emissions as baseline if "proper consideration is
given to increment usage". This means that an emissions
trade based on allowables/ £.g_. in a case where actual
emissions are lower than allowables, may not contribute
to a violation of the increment or a violation of the
NAAQSs. Contrary to what the Policy Statement seems to
suggest, allowable emissions may not be used in netting
transactions .
A very controversial issue is the question whether and to
what extent plant shutdowns (as well as production cur-
tailments) can be considered in determining whether an
emissions reduction is surplus. EPA in principle allows
the use of shutdowns as a means of creating ERCs The
Policy Statement seems to limit this to bubble trades but
existing regulations also seem to allow the use of shut-
111)
downs in offset and netting transactions. Pursuant to
a settlement concluded in a litigation between EPA and the
Chemical Manufacturers' Aseoriation (CMA), EPA considers
to abolish certain restrictions with respect to offsets that
are contained in the Interpretive Ruling (time-limits, limi-
tation to replacement projects, legal enforceability of the
112)
reduction via shut-down) . However, the principles
governing the treatment of pre-existing reductions must be
observed in order to avotd double-counting. An emissions
reduction may not alre? iy be included as part of the base-
line of the source's ^missions used for demonstrating at-
tainment of the NAAQSs in the relevant SIP.
The treatment of pre-existing reductions is different ac-
cording to the assumptions of the SIP for demonstrating
attainment of the ambient standards. If the SIP for a
-------
- 51 -
nonattainment area is based on allowable emissions for de-
monstrating future attainment, there is, according to the
Policy Statement, no objection based on principle against
using pre-existing reductions in excess of the allowable.
If the SIP is based on actual emissions, reductions that
occurred before monitoring data were collected for use in
developing the SIP cannot be used to create ERCs because
monitoring levels already reflect these reductions and
their use would amount to double-counting. Reductions
made after the inventory or monitoring data were collected
for developing the most recent (revised) SIP are admis-
sible, even if they were made some time before the ap-
plication to grant a credit for the reduction.
In attainment (PSD) areas, reductions that were made be-
fore the PSD emissions baseline was established do not
qualify for credit since these reductions are already as-
sumed by the relevant state in establishing the PSD base-
line.
The requirement that shut-downs do not qualify for creat-
ing credits if they have already been assumed in develop-
ing the area's attainment strategy decreases the import-
ance of the shut-down problem.
Difficult questions arise where the SIP already assumed a
given quantity of. net "turnover" reductions from new
plant openings having cleaner sources and existing plant
shutdowns having dirtier sources and incorporated these
assumptions into its attainment strategy. Where the to-
tal number of shutdowns assumed in the SIP has already oc-
curred, EPA allows additional shutdowns as a source for
creating emission reduction credits without further re-
strictions (such as consideration of the geographical
distribution of the previ.ous shutdowns; however, to a
limited extent, this deficiency is compensated by the
necessary ambient tests when using the credit). If the
-------
- 52 -
requisite number of shutdowns has not yet been reached,
EPA offers states two options for creating ERCs while avoid
ing double-counting which amount to a certain deviation
from the attainment strategy chosen in the SIP. The states
may choose not to take credit for "turnover" reductions or
they may credit a percentage of the total emission reduc-
tions realized from a shutdown if they can show that such
credit is consistent with the SIP's demonstration of at-
tainment and reasonable further progress.
State generic and banking rules show that states tend to
be more restrictive than EPA. Some rules expressly disal-
low the use of shutdowns; others require contemporaneous
trades, limit the duration of credits created by shutdowns,
exclude cert3 in trades or require a determination that
there is no increase of the same pollutant at a similar
source (in order to cope with the problem of local elastici
of demand and ensuing increases of the production of exist
ing sources or the location of new sources).
Baseline pro>lems also exist in respect of uninventoried
sources (often open dust and fugitive emissions). Accord-
ing to the Policy 'Statement, the use of uninventoried
sources to create an ERC depends on the attainment strat-
1141
egy of thp SIP. ' For example, where-a state '-.?ed allow-
able emission limits for inventoried sources for demon-
strating attainment in a nonattainment area, reductions
from uninventoried sources can be credited using actual
emissions e.s the baseline. Where the SIP is based on
actual total emissions, some emissions limits such as
RACT or the: same; percentage reductions as are applicable
to inventoried sonrces must be imposed on ui .inventoried
sources before a credit for reductions in excess of these
limits can be granted. In PSD areas, all sources that re-
duce emissions beyond the baseline qualify for ERCs.
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~ 53 -
Second, alternative emission limits, .i.e. the creation of
ERCs and their use to meet requirements elsewhere, must be
enforceable. Each offset, bubble, netting or banking
transaction must be federally enforceable and must be ap-
proved by the state. ' There are two ways to ensure
federal enforceability, either through existing procedures,
in particular a revision of the SIP imposing on the source
new enforceable emission limitations, or through generic
rules. EPA is considering to dispense with the requirement
of federal enforceability in offset and netting transac-
tions. In the case of generic rules, additional re-
quirements must be observed. Emission trades effectuated
in application of generic rules are deemed to be part of
the SIP, in other words they amount to a SIP revision.
However, in order to be enforceable, such emission trades
must be incorporated in a compliance document which is le-
gally binding and practically enforceable, such as an
agreement between the source and the state, an operating
or construction permit, or a consent decree that sets
source-specific emission limits.
Third, all emissions reductions eligible for creating an
•t 17)
ERG must in principle be permanent. ' EPA recognizes an
exception to the principle of permanence in cases where a
firm creates or needs a temporary credit (e.g_. in case of
a temporary production curtailment). Here, a temporary
credit can be granted if emission increases and decreases
are equal in duration.
11 8)
Fourth, all reductions must be quantifiabl -.. In order
to meet this requirement, the state" must' establish a re-
liable basis for measuring the amount'and rate of: the re-
duction and describing its characteristics. However, EPA
does not require monitoring. The reduction can also be cal-
culated on the basis of emission factors, production or
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- 54 -
process inputs. It is remarkable that the Policy Statement
does not prescribe a measurement or calculation method
that expresses the emission reduction in absolute terms,
i.e. in total loadings or loadings per time unit based on
the assumption of limited time units available for pro-
duction.
b) Use of Emission Reduction Credits
While the previous section described the requirements for
creating an ERG, this section analyses the conditions un-
der which an existing ERC can be used in an offset, bubble
or netting transaction.
According to the Policy Statement, there are five substan-
tive principles governing the use of ERCs, namely
— trades must involve the same criteria pollutant,
— compliance with ambient tests,
— no net increases of emissions in nonattainment areas,
— no increase of hazardous pollutants,
— no use to meet technology-based requirements.
As an additional principle, one should mention the regional
limitation of emission trading. As a practical matter, emis-
sion trades are limited to AQMAs or at least AQCRs, inter-
regional trades do not occur. It is true that there is no
legal limitation and sources could prove the ambient equi-
valence, .of an emission trade without geographical restrictions
However, this is very rare in practice. On the other hand,
long-distance impacts of emission trades beyond AQCRs are
normally not considered in determining ambient equivalence.
Therefore, the principle of regionalisation could be con-
siderer. as implied in the applicable ambient requirements.
According to the Policy Statement, these principles apply to
all emission trades. However, in respecL of netting, certain
qualifications must be made.
First, emissions trades, i«e_. offsets, bubbles, or netting
~~~~~ ~" 119)
transactions, must involve the same criteria pollutant.
This requirement follows from the concept of the Clean Air
Act which addresses air pollution not on a global basis
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- 55 -
but rather pollutant-by-pollutant. Since the NAAQSs must
be met with respect to any criteria pollutant and separ-
ate SIPs must be developed, the emissions trading policy
also must distinguish between the different criteria pol-
lutants. However, in California interpollutant trades,
e.g_- between TSP and S02 and HC and NOX were permitted and
the recent new source review regulation of the South Coast
Air Quality Management District (Los Angeles) retains this
possibility. The purpose of these rules is to reduce
the ambient concentration of sulphates and ozone by tack-
ling their precursors.
On the other hand, the generic rules of some states con-
tain restrictions that are designed to cope with the prob-
lem that pollution involving the same criteria pollutants
is not necessarily associated with the same health and en-
vironmental impacts. For example, they require that the
pollutants must be of the same quality or have the same
health or welfare significance/or they contain restric-
tions as to particle size (for TSP) or reactivity (for
VOC) .
Second, all uses of ERCs must satisfy ambient tests .
This principle, although pronounced in a general fashion,
only is applicable to offsets and bubbles. Netting trades
are treated differently. The potential ambient impacts of
"netting out" of. preconstruction review normally are in-
significant because netting must take place within the
same plant by substituting emission decreases at a par-
ticular source for increases at another source within the
same plant. However, where stack heights are different, a
netting trade may have an adverse effect on air quality.
The existing rules only provide that the increases and de-
creases that are "netted" must have approximately the
same qualitative significance for public health and wel-
fare , but, persuant to the CMA settlement, EPA is con-
123)
sidering even to drop this liberal restraint on netting
It is true that the requirement of achieving "reasonable
further progress" may make a SIP revision necessary if
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- 56 -
netting sources are assumed as future reductions in the SIP,
The modelling rules of EPA with respect to offsets and
bubbles make stack height a crucial element for determin-
ing whether modelling is necessary or not. Therefore, it
is not consequential that netting trades should be entire-
ly exempted from ambient tests. The reason for this exemp-
tion seems to be that otherwise the very objective of al-
lowing netting trades, namely to relieve the enterprises
from the costly preconstruction review procedure, would
be frustrated.
The principle that the use of ERCs must satisfy ambient
tests means that use of ERCs may not create a new viol-
ation of an ambient standard or prevent the planned re- .
moval of such a violation in a nonattainment area. In a
PSD area, the use of ERCs may not violate an increment or
an ambient standard. This requirement follows from the
mandate of the Clean Air Act to attain and maintain the
NAAQSs and not to exceed the increments for the preven-
tion of significant deterioration of the existing air
quality.
The policy of the EPA with respect to ambient impacts of
emission reduction trades is different according to the
dispersion characteristics ol the pollutants involved.
Other aspects such as time-phasing are not considered; in
particular, the rules on ambient impact do not reflect
the structure of the NAAQSs1.24)
With respect to photochemical oxidants and nitrogen
oxides trades, EPA does noc require any ambient tests be-
cause it is of the opini;n that these pollutants are dis-
persed across broad geographic areas and local impact?
need not be considered. Therefore, "pound per pound"
1 25)
trades may be treated as equal in ambient effect. How-
ever, some states or regions that have adopted generic or
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- 57 -
banking rules, do not follow this view. They have estab-
lished a scheme of geographic discounting that requires
more than even reductions of emissions according to the
distance between the two sources involved.
In the case of particulates, sulfur oxide and carbon mon-
oxide , the dispersion behavior of these pollutants requires
^~~"^~^ 1 26)
in the opinion of EPA ambient tests. Distance between
the sources, plume parameters (especially stack height),
pollutant characteristics, meteorology, and topography af-
fect the ambient impact of emission reduction trades in-
volving these pollutants. The general principle is that
off-set transactions must demonstrate "ambient progress"
and that bubble transactions must demonstrate "ambient
equivalence", i.e. maintaining the status quo of existing
ambient air quality. However, in the latter case an improve-
ment of air quality may follow from the fact that bubbles
often are used to meet emission limitations that have been
stiffened due to a SIP revision.
Since determinations as to attainment of the NAAQSs as
well as to observation of PSD increment requirements are
made in relation to AQCRs and AQMAs, it follows that in-
terregional emission trades are not permitted. There is
no express language in the Policy Statement, though, that
trades between AQMAs are not allowed, either. Geographic
discounting of ERCs and monitoring and modelling the dis-
persion of emissions would seem to be sufficient to ensure
the geographic equivalence of inter-district emission re-
ductions and increases.
In order to facilitate the demonstration of ambient pro-
gress or ambient equivalence, EPA has developed a three-
tiered system of modelling that links the degree of re-
quired modelling to the likely ambient impact of the pro-
posed trade.
— No modelling is required if there is no net increase
of emissions, the relevant sources are located in the
same immediate vicinity, and no increase occurs at the
source with the lower effective plume height;
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- 58 -
— only limited modelling (screening) involving the emis-
sion sources participating in the trade is required if
there is no net increase of emissions and emissions
after the trade will not cause a significant ambient
impact; the term "insignificant" impact is expressed in
quantitative values derived from PSD regulations;
j
— full dispersion modelling and consideration of all
sources in the area of impact is required if there
either is a net increase of emissions or a significant
ambient impact.
Third, in nonattainment areas - as opposed to PSD areas -
emissions trades may in principle not result in a net in-
crease of baseline emissions.
127)
This requirement follows
from the mandate of the Clean Air Act that nonattainment
areas demonstrate reasonable further progress. There are
some limited exceptions to the principle. Thus, a net in-
crease-of emissions is permitted where generic rules exist
and the SIP hajcreated a growth margin, or where the state,
in order to mahe the emissions trade possible, revises its
SIP so as to create a compensation for the increased emis-
sions at another location, which is consistent with reason-
able further progress. Furthermore, insignificant net in-
creases of emissions are permitted in netting transactions.
It must be note^. that netting in nonattainment areas had
been declared by the US Court of Appeal for the District of
129^
Columbia ' 'as .inconsistent with the Clean Air Act; however
this decision h?s been reversed by the US Supreme Court
(see below p, >-
Fourth, emias.on trades may not increase emiss .ons of haz-
125)
ardous pcllutar.ts " . This principle is imprrtant because
i
the group of VOC for which a NAAQS exists comprises com-
pounds that are hazardous, such as benzene; furthermore,
hazardous pollutants may be produced as necessary components
of other criteria pollutant streams.
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- 59 -
f fc
The principle has two aspects: First, where a group of
criteria pollutants has hazardous and non-hazardous mem-
bers, an emissions trade may not increase hazardous emis-
sions. EPA allows emission trades between any pollutants
belonging to the group of VOC if the hazardous pollutant
emissions are decreased ("traded down") in exchange for
an increase of non-hazardous pollutant emissions, but not
vice versa. The same may be.true of TSP. The principle does
not modify the rule that emission trades must involve the
same criteria pollutants. However, in California trades
between different criteria pollutants are allowed in order
to reduce hazardous pollutants
Second, to a limited extent the bubble policy is appli-
cable to other hazardous pollutants. Bubbles are not al-
lowed with respect to hazardous pollutants for which
NESHAP are in force. However, with respect to the 37 pol-
lutants that are considered as hazardous but not yet sub-
ject to -specific -regulations, bubble trades can be made
provided there is an equivalent increase and decrease of
the same pollutant at reasonably close sources.
The Policy Statement expressly declares that the prohib-
ition against.hazardous pollutants trades is not meant to
exclude trades in "minute amounts" of such pollutants, '
without giving a definition of this term. It must be no-
ted that existing PSD regulations allow netting trades
associated with de minimis increases of hazardous pol-
lutants for which NESHAP are in force (10 percent of the
emission standard)
Fifth, emissions trades can in principle not be used to
meet technology-based requirements. ' This is a prin-
ciple which is subject to a number of•qualifications. New
sources cannot use ERCs from existing sources to meet
technology-based requirements, such as NSPS, LAER control
technology in nonattainment areas, or BACT in PSD areas.
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- 6C -
However, expanding or modernizing sources can use internal
emission reductions from within the same plant to "net
out" of preconstruction review. According to the Policy
Statement, the avoidance of preconstruction review means,
among others, that such sources are not subject to tech-
nology-based requirements for new sources, such as LAER in
1341
nonattainment areas and BACT in PSD areas, but some
states disallow netting out of BACT. Finally, existing
sources can meet technology-based requirements, such as
RACT in nonattainment areas, by using internal or external
emission reductions.
Besides substantive principles governing the use of ERCs
in offset, bubbles and netting trades, the_Policy State-
ment also sets forth some procedural requirements which
amount to a certain liberalization as compared to the pre-
vious policy. These principles are:
— bubbles can be used to achieve compliance,
— extensions of compliance deadlines are also possible
as part of a bubble trade
— a bubble cannot be approved for an individual emis-
sion source which is the subject of a pending enforce-
ment action or outstanding enforcement order unless
EPA approves the oroposal and the compliance schedule
it contains
136)
The previous bubble policy required that sources be sub-
ject to binding compliance schedules based on the orig-
inal SIP emission limits before thev c^-uld apply to use
an ERC to meet these requirements. £PA now allows the use
of ERCs to achieve compliance by agreeAiig to emission
limits as part of a bubble transaction. This is intended
to relieve the firms from the burden of having to pur-
chase conventional control technology which they might not
need once the bubble transaction has been approved and
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- 61 -
give them flexibility to determine for themselves the most
effective and quickest way of achieving compliance.
The extension of compliance deadlines is based on similar
considerations. Compliance deadlines may be extended by
the states as part of bubble trades in respect of VOCs or
CO sources, provided the deadlines for attainment of the
NAAQSs have been extended until 1987 and the bubble trade
is consistent with reasonable further progress.
c) Banking of Emission Reduction Credits
The Policy Statement also contains principles applicable
to the development of state rules for the banking of ERCs,
especially concerning the ownership, protection and
storage of ERCs ! Furthermore/ EPA has recently pub-
lished draft model state banking rules that are designed
138)
to assist states in devising their banking rules . These
principles or rules apply to formal banks, i.e. separate
subsystems of state or regional agencies that accept and
evaluate requests to certify ERCs, serve as a clearing-
house for credits on deposit, account for transfers and
withdrawals or even encourage the creation of credits and
transactions in them. Many states have established in-
formal banks which are a part of the permitting procedures
for individual polluters, especially in respect of netting
and internal offset transactions. For example, the state
recognized the ERC in a letter or in the permit document
and the firmtcould use it at some later date. The Policy
Statement does not seem to directly apply to these in-
formal banks. However, since informal banking raises some
of the problems involved in formal banking, it. cannot be
ruled out thai:, some of the principles bet fo-: th in the
Policy Statement are'of a more general applicability.
The introduction of formal banking is an option for the
states. Many states that have already adopted some forms
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- 62 -
of emissions trading have no banking rules, and some of
139}
them do not consider adopting such rules in the future '.
If states opt for banking of ERCs, the Policy Statement
requires them to designate an administering agency for the
bank, accept only such reductions that qualify as ERCs un-
der the principles established for the creation of ERCs,
define procedures for banking of credits (£.3* define the
kind of reductions that can be credited and banked and
the accompanying information required), establish owner-
ship rights regarding the ERCs, establish an ERC registry
and set forth rules concerning possible adjustment of ERCs
based on enforcement and ambient attainment considerations.
The states that already have adopted generic or banking
rules mostly are more restrictive than the Policy State-
ment. For example, many rules allow either bubbles or
offsets only - netting is almost invariably allowed -,
they often exclude transfers to third parties, they ex-
clude banking in the case where an ERC has been created
by a shutdown or production curtailment or limit the dur-
ation of the ERC in this case, they provide for geo-
graphic discounting according to the distance of the
sources involved even in VOC or NO trades (where accord-
Jfc
ing to EPA pound-per-pound trades are possible), etc. It
remains to be seen to what extent the new principles and
x.ules will influence future state practice.
A problem that has been addressed extensively in the
Policy Statement is the protection of ERCs . However,
this problem has more aspects than addressed in the State-
ment. Firstr'the banking rules must determine the duration
of banked ERCs. The Policy Statement does not contain an
enunciation of EPA policy on this matter. It appears that
this is due to EPA's view that rules on duration of ERCs ar
designed to prevent the hoarding of ERCs and are therefore
not based on environmental but rather on economic consider
tions. However, this is true of quite a number of questions
that have been addressed in the Policy Statement. There are
some federal rules whose continued applicability is some-
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- 63 -
what doubtful. The Offset Interpretive Ruling contained a
1411
one-year time limitation for ERCs created by shutdowns
but states have generally not followed this guideline in de-
vising their own offset policy under the 1977 Amendments.
With respect to netting, the applicable rules provide that
the requirement of "contemporaneous" increases and decreases
of emissions may be defined by the states; any reasonable
142)
time period is acceptable, the upper limit being 5 years
The existing state generic and banking rules contain provisions
on the duration of banked (unused) ERCs. Normally, they set
time-limits between 7 and 15 years. Some rules do not contain
express provisions, others set much stricter requirements
for ERCs created by shutdowns.
Second, the consequence of violations of the alternative
emission limits imposed on the originator of an ERC as
part of the emission trade must be determined. The Policy
Statement favors an absolute protection of an ERC already
used143I In other words, the ERC shall not be "devaluated"
or confiscated; rather, enforcement action is to be taken
against the originator. This is motivated by the goal to
avoid law-suits between the parties to an emissions trade.
The question whether, as a consequence of such a violation,
an ERC that is banked but not yet used may be adjusted
has not been addressed.
Finally, protection of ERCs against adjustment based on
ambient considerations poses serious problems. Additional
reductions of emissions may become necessary because the
area does not attain the NAAQSs, new RACT requirements
are introduced to attain ambient standards, or the area
violates an increment for the prevention of significant
deterioration. According to the Policy Statement, the
general principle for coping with this situation is that
the existence of banked (unused) ERC must not interfere
with the state's ability to obtain the additional re-
ductions. However, EPA tries to avoid that banked ERCs
are confiscated by the state instead of reducing emissions
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- 64 -
144)
from operating sources. In California, the relevant
rules provide that RACT may be redefined especially for
banked ERCs at the time when the use of an ERC is being
permitted (South Coast Air Quality Management District) or
the offset ratios may be readjusted periodically (after a
period of absolute protection of 3 years; Bay Area Air
Quality Management District). EPA seems to fear that such
rules would deter industry from accepting ERC banking; it
affords the states three options to avoid confiscation of
ERCs or at least unequal treatment of operating sources
145)
and ERCs. These options are:
— absolute protection of all ERCs against any adjust-
ment,
— moratorium on the use of ERCs or on future ERC de-
posits until ambient objectives are reached,
— equal reduction of ERCs corresponding to emission
reductions required from operating sources (either
through reduction of the amounts of ERCs or increase
in allowance rates).
Under the first option, the necessary emission reductions
would be imposed on all operating sources. Sources with
banked ERCs would, however, have an advantage because
they could meet these requirements by using their ERCs or
by purchasing ERCs elsewhere. An alternative to this
option is an absolute protection for a limited time with
the possibility of readjustment after expiration of the
protected period.
The moratorium wou'.d force the affected firms to suspend
the use or depos.-'.c of ERCs until the (revised) SIP has
secured sufficient emission reductions with operating
' sources to ensure reasonable further progress or to cure
an increment violation. This option, too, amounts to a
preferential treatment of ERCs, although it penalises
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- 65 -
those using the banking system in comparison to those
that have already used the ERCs and it may hamper busi-
ness planning due to the uncertainty associated with it.
The third option would impose on ERCs the same amount of
required emission reductions as . on operating sources
.having the same emissions and belonging to the same
category of equipment as represented by the ERC . This
amounts to a nominal devaluation of banked ERCs which,
however, may be compensated by increased demand for these
ERCs. Nearly all generic and banking rules (except those
in California) follow this system of equal reduction for
operating sources and ERCs. This option raises the problem
that ERCs may become non-homogenous commodities due to dif-
ferent source-specific discounting needs; however, this is
unavoidable as long as the applicable SIP does not require
over-the-board (equal) emission reductions from all sources
but, rather, differentiates according to categories of
sources.
4. Legal and AdministrativeFramework Conditions of
Emissions Trades
EPA encouragement and state adoption of emission trading
systems is a necessary step for transactions in ERCs. How-
ever, it is not a sufficient condition. to' The extent to
which ERCs are created, banked, and transferred, depends
on market forces and cost considerations. The cost of al-
ternative control options is a decisive factor. Besides,
legal and administrative framework conditions play an im-
portant role. The design of the emissions trading system,
the existing options for planning the contractual, tax and
financial consequences of transactions in ERCs and the
duration of administrative procedures involving emissions
trades all may either foster or.impede transactions in
ERCs, depending on the costs to be incurred by the rel-
.evant firms and the degree of insecurity associated with
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- 66 -
them. These aspects of emissions trading have just begun
to emerge, and it is therefore difficult to make any more
than preliminary assessments.
a) Protection of ERCs against Confiscation
Since ERCs certify a right to certain pollution units that
may be used only in the permit procedure and hence only
in the existing regulatory framework, it may become neces-
sary to modify them for ambient air quality purposes. The
SIP may have to be revised to achieve further reduction
of emissions in order to attain the NAAQSs. Unused ERCs
may be seen as a convenient source of reductions. This
may be done by adjusting their "value" to the SIP re-
quirements, especially by decreasing the number of credit
units of emissions or by modifying the offset ratios or
•
by imposing a moratorium on the use of banked credits.
This has a confiscatory effect on banked ERCs. It is the
policy,of EPA to encourage states to abstain from con-
fiscation of ERCs to the extent possible and rather grant
them cbsolute protection or at least treat operating
sourcer and ERCs equally. However, state rules show a
great variety of approaches and the question is whether
constitutional considerations afford owners of ERCs pro-
tection against confiscation and require a particular de-
sign or state banking systems.
It is generally agreed in the American discussion that
there is a fundamental right of the state to adjust ERCs
to new SIP requirements as an exercise of the police
power. Constitutional doctrine permits the conficcatory
effects rl government regulation when nec.-essary to pro-
tect p-iblic health or welfare from harm not anticipated
"I A. R \
at the tim-r when the credit was grantfd. ' However,
under the principles developed by the courts in inter-
preting the Fifth Amendment which prohibits a taking of
property for public use without due process and just com-
pensation, there may be situations where compensation
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- 67 -
149)
must be paid.
Constitutional protection is not excluded by the fact
that ERCs are not private property in the strict sense.
The ERG certifies a (future) right to pollute in amounts
indicated in the certificate which is reserved to the
holders of the ERC. However, this is no absolute right to
pollute. Rather, the ERC confers upon the owner a right
to a future permit; it can only be used in the permitting
process for fulfilling the applicable SIP requirements
and it may be subject to a variety of limitations on its
use and even transfer. Therefore, an ERC is not private
property but, rather, a public right created by the state
and accorded a citizen subject to limitations relating to
its scope, terms of use, duration and transferability.
Analogues that have been referred to in the American dis-
cussion are government licenses, such as broadcast li-
censes under the Federal Communications Act of 1934 and
crop acreage allotments (quotas) which were first intro-
duced by the Agriculture Adjustment Act of 1938. These
licenses are subject to close regulation; however, this
does not exclude that they enjoy a certain degree of con-
stitutional protection.
In determining whether state regulation is justified by
the police power or compensation must be paid, courts
balance the interest of the state in effective regulation
and the loss incurred by the owner. While the courts
would generally defer to the public interest in regulation,
they may afford the owner of an ERC a claim to compen-
sation, especially where the-emission reduction .was
created by investment or an ERC was bought-from the orig-
inator. The "test is "justice and fairness"; in applying
this test, the courts will take into account factors such
as economic impact of regulation, especially degree of in-
vasion of property, reasonable investment-backed expec-
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- 68 -
tations of the owner, and the character of the govern-
mental action. '
The analogues to broadcasting licenses and crop acreage
allotments as well as general case law suggest that there
is little protection where the creation of an ERC occurs
incidentally, £•£• as the result of a plant closure that .
would have occurred anyway. However, if the creation
or acquisition of a ERC is based on investment and the
originator or purchaser is led to expect a certain use of
the value of his "property", compensation may be neces-
sary. ' Especially a total destruction of an-ERC would
be vulnerable under these circumstances, while an ERC can
be more easily devaluated or a moratorium be imposed on
1 54)
its use. Also, a relevant factor is that the right has
been created by the state and that the costs incurred by
the possibility of adjustment are associated by a benefit
conferred on the holder] the whole credit for the emis-
sion reduction would be los.t in the absence of banking
rules unless used contemporaneously and, furthermore, the
holder can achieve substantial cost savings.
This line of argument may even be too cautious because it
has been held that the exercise of the statutory auth-
ority to revoke broadcast licenses does not constitute an
unconstitutional taking. A fortiori, this argument
should be valid for the adjustment of ERCs because here
the purpose of government intervention is not mere econ-
omic but rather health-relate--"1, regulation.^ In any case,
a proper design of the barJcir-:; system that clearly indi-
cates the duration of the wtadi.t,, the possibility and ex-
tent of adjustments.to new SIP requirements and the trans-
ferability of ERCs can normally avoid challenges based on
1 58 I
the "investment-backed expectations" rationale.
Another line of constitutional control over adjustment of
ERCs to new SIP requirements is equal protection.
159)
To
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- 69 -
the extent the state imposes on unused ERCs greater bur-
dens than on operating sources, a violation of equal pro-
tection may be found. This, too, can be avoided by the
design of a banking system. As long as the devaluation of
banked ERCs occurs at roughly the same ratio as the re-
duction of emissions from operating sources, compensation
need not be paid. Conversely, however, it is doubtful
whether EPA's proposal to grant banked ERCs a preferential
treatment when SIP revisions are necessary, is consistent
with equal protection. It may well be that, if further re-
ductions of emissions are needed, unused ERCs must also be
diminished to some extent.
Finally, due process requires that the holder of an ERC
must.be notified of the proposed adjustment and be given
an opportunity to comment on.it. This too, can be
taken care of by the design of banking rules.
b) Contractual Issues
The creation of a market for the exchange of external ERCs
requires institutional arrangements that enable the par-
ties to define what they are to expect of their trans-
action and to plan its financial consequences. The con-
tractual aspects of emission trades have just begun to
develop, and it is -safe to say that the law is not yet
well settled.
Exchange of ERCs can take the form of a sale or a lease
between the originator of the emission reduction and tha
potential user. In both cases, .the validity of the con-
tract, and the ability of ths parties to perform it, large-
ly lepend on the regulatory validity of the emissions
trading policy, the design of banking rules and the legal
1 161)
nature of ERCs as a (transferable) interest.
A crucial problem is the contractual distribution of risks
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- 70 -
where the state, for the purpose of SIP revision, reduces
the ERC after the purchase or lease agreement has been
concluded. The price paid for the credit may or may not
reflect the assumptions of the parties as to the risk as-
sociated with potential state intervention and the ques-
tion is whether the seller or lessor has guaranteed the
"legal value" of the ERC.
Another crucial question is the distribution of risk in
the case where the technology which is intended to create
and maintain the emission reduction does not yield the
expected results. As long as the applicable banking rules
provide that the purchaser's or lessee's right is not af-
fected by failure of technology, i.e. the originator ra-
ther than the user of ERCs would violate his (alternative)
emissions limitations, there is no need to take recourse
to the rules of sales and lease law that govern breach of
contract. The Policy Statement takes the position that to
avoid third-party lawsuits and encourage the purchase of
ERCs, the relevant state banking rules should provide
that, once an ERC has been used by another source, any
violation of the conditions under which it was created
should result in enforcement against the originator ra-
ther than the user of the ERC. It is true that litigation
between the parties of an emission transaction could lead to
delays in enforcement of controls and also to insecurities
in the market for ERCs. However, as a matter of policy, the
162)
contrary rule would also have some merits. Enforcement
against the buyer or lessee could encourage him to be
vigilant and force him to demonstrate contingency plan*
for the case of technology failure in the permit ^voc.eed-
ings. Also,...the originator may not be able to further re-
duce his emissions in order to compensate for incieased
emissions at the user's source.
In any case, these considerations may cause the parties
to negotiate a different arrangement and distribute the
risk of failure of technology differently from the bank-
ing rules; they may grant the lessor and, less likely,
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- 71 -
the seller, a right to cancel the agreement if such a si-
tuation arises. This may happen where it was the user who
has "bribed" the originator to achieve an emission re-
duction in favor of the former. Such a contractual dis-
tribution of risk would only make sense if the applicable
banking rules provided that the originator of an ERC has
an option to resort to his previous emission limits (be-
fore creation of the ERC) and have his permit modified
accordingly if the exchange of the ERC has been can-
celled. The interplay of air pollution regulation and
contract law here poses problems that have not yet been
addressed.
Insofar as the applicable banking rules do not protect
the purchaser or lessee against devaluation of ERCs and
technology failure/ the risk distribution would depend on
the characterization of the ERC under various bodies of
federal and state law. For example, the complex pro-
visions of Art. 2 Uniform Commercial Code (UCC) would ap-
ply if a sale, and less likely, a lease of ERCs would be
a transaction in "goods". The notion of "goods" generally
comprises tangible personal property. Art. 2 UCC ia in
principle not applicable to the sale of rights, such as
contractual rights and (transferable) public rights. It
has been held that the transfer of a broadcast license is
no "sale of goods" in the meaning of Art. 2 UCC. Given
the similarity of ERCs and broadcasting licenses, the sale
of ERCs would seem not to be covered by Art. 2 UCC. How-
ever, the courts have sometimes applied specific rales
contained in Art. 2 UCC to objects not encompassed by this
article. Probably, the general rules of commercial law
on the assignment of (contractual and other) rights are
applicable. Under these rules, the seller is under an im-
plied warranty as to his title (his right to sell) and the
legal enforceability of the right. There is no warranty
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- 72 -
that the obligor is solvent or that he will perform his
obligation.
.What these limited warranties mean in the context of a
sale of an ERC, is unclear. One could argue that the im-
plied warranty also covers the extent to which the pur-
chaser can use an ERC in his own permit proceedings. There
are not yet any court decisions that answer the question
whether and how the general rules on assignment of rights
or Art. 2 UCC apply. Therefore, ERC transactions are as-
sociated with a considerable amount of legal uncertainty,
which, however, can be mitigated by proper contract plan-
ning.
It is also possible that an ERC is created by a servj._ce
contract. In this case, the parties may provide that
the user of the ERC installs and operates control equip-
ment in the plant of the originator of the ERC. As con-
sideration, the user is allowed to use the credits so
created as long as he is able to procure the necessary re-
ductions. If this is not (or no longer) possible, this
will be a reason to cancel the service contract. The con-
tractor works at his own risk. Again, a coordination of
air pollution control and contract law would be necessary
in order to avcid a frustration of the contractual risk
distribution. Of•course, a service contract of this kind
only makes sense where no further trade is anticipated.
There is less flexibility, but on the other hand, more
legal certainty about the mutual rights and duties of the
parties!67'
c) Tax Cons-'derations
The tax treatment of the creation, financing, banking,
use and disposition (especially sale and acquisition) of
ERCs is a crucial issue of the whole emissions trading
policy. Taxation is a major incentive or, inversely, dis-
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- 73 -
incentive for business decisions on investment and trans-
actions. If the tax law discriminates against'the emissions
trading policy, its acceptance by the business community
will be seriously hampered. Uncertainty over the taw treat-
ment of ERCs will also have negative effect. An EPA-com-
1 68)
missioned study by Baker and Winslow ' contains an ex-
haustive analysis of the tax treatment of ERCs; its prin-
cipal arguments and conclusions will be presented in the
following text.
With respect to the creation of ERCs, there are three
major tax issues:
— the availability of the normal 10 percent investment
tax credits and accelerated cost recovery or elective
rapid amortization for the cost of pollution control
equipment;
— the availability of a loss deduction when a firm
creates an ERG through plant shutdown or production
curtailment;
— the tax basis of pollution control equipment acquired
to create an ERC.
Under the Internal Revenue Code (IRC), capital expendi-
tures incurred to acquire tangible business assets cannot
be deducted, from the total earning as cost; rather, these
expenditures must be capitalized and the firm can then
claim depreciation determined according to the useful life
of the asset or accelerated cost recovery deductions de-
termined according to the average midpoint useful life
169)
(or a range of 20 percent below or above it). For tan-
gible business property placed in service after December
31, 1980 the Accelerated Cost Recovery System has been in-
troduced. Under this system, the cost of these assets can
also be recovered over a fixed period which generally is
five years, or ten or fifteen years for public utility
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- 74 -
property. As an additional incentive for capital formation,
the firm is entitled to a credit on its tax liability (tax
credit) for the year the property is placed in service.
The maximum credit is equal to ten percent of the cost of
the qualified asset; there are further limitations in re-
lation to the amount of tax liability.
These tax advantages are also available for pollution
control equipment acquired in order to create an ERC. '
However, it is more doubtful whether also the special 60-
month rapid amortization for pollution control equip-
ment, which may be elected for investment in existing
plants (pre-1976) in lieu of other depreciation or ac-
celerated cost recovery methods, will always be available
in case of acquisition of pollution control equipment to
create an ERG, Certification of assets as a "pollution
control facility" shall be refused where "it appears
that by reason of profits derived through the recovery of
wastes or otherwise in the operation of such property,
its costs will be recovered over its actual useful
ii~e"]72) As Baker and Winslow173* point out, one could .
interpret the term "otherwise" as to include profits de-
rived from the sale of ERCs so created; but such' a po-
sition is not likely to be adopted since the authority
Tor determining whether profits will be "otherwise" de-
rived from the facility is vested in EPA and the present
EPA guidelines do not contain an indication that" EPA will
174)
construe this term broadly. Also, the prerequisite con-
f.;»«cd in Sec. 169 (d) (1) (C) IRC that the pollution
control facility may not "reduce .( ) the total_operating
costs of the plant" ,does not se.im to be applicable1 where
an ERC is sold at a profit beeiuse the day-to-day oper-
ating costs of the firm are not affected by the trans-
action!75
>
Where a firm creates an ERC through a shutdown or pro-
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- 75 r
ductioncurtailment, the question arises whether the firm
can claim a loss deduction under Sec. 165 IRC. This de-
duction does not require that the firm entirely terminates
business operations or does not replace the abandoned
property. However, a loss deduction can only be claimed
to the extent that the firm did not receive a compensation
for the loss. It is possible that the Internal Revenue
Service (IRS) would attempt to disallow a loss deduction
where an ERG is created on the grounds that the ERC is the
equivalent of compensation for the loss. Baker and Wins-
low conclude that such a position is not tenable be-
cause the Emissions Trading Policy is not designed to
compensate the owner of the firm for the loss incurred by
a plant closure or production curtailment. This certainly
is correct. However, the more important question is
whether the gain achieved through the sale of the ERC is
to be considered a compensation. The courts require that
the benefit is directly compensatory, is in the nature of
insurance and is intended to replace the loss in order to
qualify ar compensation. The US Court of Claims states in
1 78 1
Forward Communication Corp. v. U.S. ':"(T)he statute does
not bar a deduction for a loss actually incurred merely
because the taxpayer is able to effect an offsetting gain
on a different although contemporaneous transaction."
1 79)
The rationale underlying this and related decisions
is also applicable to ERCs. Although the owner of the
firm acquires a marketable commodity in the form of an
ERC, the loss sustained from the plant closure or pro-
Auction curtailment would seem to be deductable because
the benefit is or will in the fuiure be gained on a dif-
ferent transaction and is not intended to replace the
loss. This even is true where the shutdown or production
curtailment is only effected in order to create the ERC.
Finally in this context, the tax basis assigned to pol-
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- 76 -
lution control equipment produced, acquired and installed
to reduce emissions and create an ERG will be the cost in-
curred by the firm in producing, acquiring and installing
it. Theoretically, it would be possible to allocate these
costs between the equipment and the ERC. However, the ERC
is not bought from the seller of the equipment and is not
directly related to the production and installation of
such equipment but, rather, is created by the independent
actions of the buyer. The installation of new control
euqipment only permits the relevant party to severe a pre-
existing "right" to pollute and use it in the future or
sell it to other firms. Therefore, an allocation of pro-
duction costs cannot be allowed or required. ' By the
same token, transaction costs associated with the cre-
ation of ERCs do not affect the tax basis of the pollution
control equipment.
The financingof emission reductions in order to create
ERCs also poses some difficult tax problems, especially
in respect of
— use of tax-exempt, (low interest).industrial development
bonds,
— use of government subsidies, and
— lease of pollution control equipment'.
Sec. 103 (b) IRC provides that tax-exempt industrial de-
velopment bonds may be used for financing pollution con-
trol equipment, if certain limitative conditions are met
(generally, only enrt-of-uipe control equipment qualifies).
It is doubtful v'iet-i:v?r tiiis method of inexpensive finenc-
ing can also be c)limed for the creation of ERCs. Th^
general position of the IRS is that the qualifying josts
of a pollution control facility should be reduced to the
extent that an "economic benefit" is derived from the
facility. The Treasury Regulations provide that the
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- 77 -
qualifying expenditures must have been made only for the
purpose of controlling pollution and may not have any other
181)
significant purpose. In case of a dual purpose, only
the incremental costs associated with pollution control
qualify. The creation of an ERC could be considered by the
IRS as an economic benefit equivalent to the benefits de-
rived from the operation of the facility. Baker and Wins-
182)
low, . however, point out that the benefits derived from
the creation of an ERC are not derived from the operation
or "function"of the facility but rather from the state or
local agency policy in implementing the Clean Air Act.
They find, however limited, support in a Ruling of the IRS
which allowed the use of tax exempt bonds where cost
savings associated with the use of control equipment were
1 83)
not the direct result of its operation. However, the
question still is unsettled and this uncertainty may
seriously hamper the creation of ERCs through instal-
lation of new control technology.
Where a firm uses government subsidies for the instal-
lation of pollution control equipment and the creation of
ERCs, the tax basis of the acquired equipment will be re-
duced by the amount of the subsidy if the subsidy qulifies
as a tax-free capital contribution. Under the criteria
185)
developed by the courts, government grants for pollution
control investement generally qualify as tax exempt be-
cause their function is to become a part of the working
capital of the firm and they do not serve as a compen-
sation for a specific service provided to the grantor; the
expected benefit to the community at large is irrelevant.
Thus, the IRS rultd that a government grant to reduc* pol-
1 ft 6 *i
lution was tax-exer.pt. -' The rationale underlying .ihe
court decisions and the IRS ruling also apply where an ERC
is created because the grant is not motivated to produce
187
any direct benefit to the grantor.
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- 78 -
With respect to the leaseof pollution control equipment
for creating ERCs, the normal rules are applicable. The
transaction will be treated as a sale if all the economic
benefits and burdens of ownership are shifted to the les-
see. Generally, recognition of a lease transaction re-
quires that the equipment can still be used commercially
by the lessor or any other person at the end of the lease
time. However, the "safe harbor" provisions of Sec. 201
of the Economic Recovery Act of 1981 present significant
options for firms to make arrangements beyond general law
that ensure that the transaction will be treated as a
lease!88'
Apart from the tax treatment of capital investment made
for creating emission reductions that qualify as an ERC,
the taxtreatment of banked and used ERCs poses difficult
and complex problems that have as yet not been entirely
solved. The main issue is the amortization of ERCs.
The ERC is to be considered as an intangible capital as-
set. This question has not yet been decide^. However, the
IRS has ruled that cotton acreage allotments which accord
a farmer the right to grow a specified crop of his land
and are, therefore, grossly comparable to the limited
tight to pollute" reflected in an ERC, constitute an in-
tangible capital asset (in the meaning of Seic. 1221 IRC);
also, airline route certificates are considered as in-
189)
tangible capital assets. ERCs should be treated in the
same way. ' Sec. 167 IRC allows a depreciation or amort-
ization of intangible capital assets only wh?i-e the use-
ful life of the asset can be determined <*v.ri it has been
placed in service, and only to the extent its anticipated
salvage value is exceeded.
The requirement of a determination of the useful life of
the ERC poses the most serious problems. The applicable
regulations require that the useful life, ^.e. the period
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- 79 -
over which the asset may reasonably be expected to be use-
ful to the taxpayer in his business, can be estimated with
191)
reasonable certainty. Where an ERC is banked, an amort-
ization will not be allowed unless the applicable banking
19 2)
rules limit the duration of the ERC. Even if banking
rules establish an expiration date for the ERC, it could
be argued that the useful life of an ERC is not determined
by the period during which it can be banked but rather its
193)
potential use to meet regulatory requirements. The
question whether ERCs can be amortized would then depend
on whether or not they have an ascertainable useful life
after being used to fulfil permit requirements. The ma-
jority of precedents seem to suggest that the useful life
of ERCs used in this way is not determinable. It has re-
peatedly been held that permits that are renewed regular-
194)
ly are not amortizable. There is, however, a possi-
bility to draw analogies from the tax treatment of pipe-
line easements whose amortization has been allowed by a
court decision based on the useful life of the pipe-
195}
line. However, the rationale of this decision is
limited to the case that replacement or reconstruction
of the pipeline on the right-of-way is not contemplated
1 96)
or regularly practiced by the taxpayer. Hence, while
one could argue that the useful life of a used ERC is the
useful life of the facility or source, the fact that it
can also be used when the source modernizes or is recon-
structed would suggest that the courts ultimately will
conclude that once an ERC is incorporated in. a permit,
its useful life is as indeterminate as that of the per-
197)
mit. The result is that the costs-to create or pur-
chase an ERC cannot be amortized.
With respect to banked ERCs, it is also doubtful whether
198)
they can be considered to be placed in service. An as-
set is placed in service when it is available for its
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- 80 -
specifically assigned function in the business or in the
production of income. This requirement would not seem to
pose a problem to a firm that has banked or purchased an
EEC for its own future use and can show that it does not
intend to hold the ERC for sale. The notion "placed in
service" does not require actual use; rather, availability
1 99 1
for use-is sufficient if later use is contemplated. '
However, where an ERC is banked or purchased for future
sale, it is not income producing and hence not amortiz-
able?00'
Finally, the salvage value of ERCs may be so high that, as
a practical matter, amortization is not possible. Salvage
value is the value of the asset which is estimated (at the
time of acquisition) to be realizable by disposition of
the object when it is no longer useful to the taxpayer. '
Amortization is not possible to the extent of the esti-
mated salvage value of the intangible asset. Where the ap-
plicable state rules allow plant closures and production
curtailments as a method for creating ERCs, it may be ar-
gued that the value of the ERC can be realized by creating
a new ERC. Under this hypothesis, the ERC may have a sal-
202)
vage value that limits or even excludes amortization.
The -transfer of ERCs also raises tax problems. If ^he
originator of an ERC sells it for profit, the profit may
be considered ordinary income subject to normal taxation
or long-term capital gain subject to more favorable tax-
ation, depending on whether or not the ERC is a capital
asset.. Intangible rights granted by the state under re-
gulatory programs are generally held to be capital as-
secs, 'unless they are primarily held for sale .to cus-
tomers. However, if an ERC qualifies for amortization
during its.,banking period, the ERC technically would not
be a capital asset. But if an amortizable ERC is held
for a period of more than one year it probably would
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- 81 -
constitute a "Section 1231 asset" qualifying for favorable
long-term capital gain treatment. Since ERCs normally
would not be amortizable, the gains made in selling them
would in any case be considered as capital gains, and qual-
ify for favorable long-term capital gains if sold after a
holding period of one year.
The tax treatment of leasing arrangements for the use of
ERCs follows the general principles. However, the "safe
harbor" provisions of Sec. 201 Economic Recovery Act of
1981 are applicable only to tangible, not intangible capi-
tal assets. Therefore, the contractants must make sure
that the lessee does not bear all the risks and has all
the advantages of ownership. If this is ensured, -long-
term leasing arrangements provide significant tax advan-
tages. Since a purchased ERC cannot be amortized, these
tax advantages exceed those derived from the lease of
tangible capital goods.
Complicated tax problems arise where the parties choose,
in lieu of a sale or lease, a contractual arrangement
whereby the user of an ERC would act as an independent
contractor to operate pollution control equipment in the
plant of the creator of the ERC in exchange for the per-
mission to use the ERC (service agreement) . Some of these
questions have been clarified in two rulings of the IHS
concerning the SOHIO offset transaction in California.
In conclusion, one can state that there are two major tax
issues relating to ERCs that cannot be resolved w?th suf-
ficie?it certainty by application of the IRC, treasury
regulations, IRS rulings and court holdings, nair.ely the
availability of industrial bond financing for creating
ERCs and the amortization of ERCs. The analysis suggests
that important advantages can be derived from leasing
ERCs. As far as can be seen, the existing banking rules
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- 82 -
do not exclude leases as a means of transferring ERCs al-
though they normally do not specifically mention them.
However, it is doubtful whether originators of ERCs will
be willing to make leasing arrangements rather than sell
the ERCs. For a lease may have significant disadvantages
with respect to the risk of confiscation of ERCs, failure
of control technology etc. In any case, the insecure tax
treatment of ERCs may have contributed to the limited use
of banks established in several areas throughout the US.
d) Administrative procedures
The cost incurred by industry in administrative procedures
involving emissions trades may also be an impediment to
acceptance of the new policy by the business community.
The implementation of the Clean Air Act's regulatory
program including the emissions trading policy is charac-
terized by a complex interplay of federal and state
agencies, although the Clean Air Act strengthened the
federal role in the control of air pollution.. The NAAQSs
are determined by the administrator of the EPA. The states
have to devise implementations plans in order to ensure
the attainment of the NAAQSs. The SIPs require approval
by the EPA, and if a state f^il.s to adopt an adequate SIP,
the EPA can substitute an implementation plan of its own
for that of the state. Both at the state and the federal
levels public comment and hearing requirements are to en-
sure that conflicting views on the contents of the SIP are
considered by the competent agency. All this renders the
whole process of adopting and approving SIPs rather cum-
bersome. The same procedure applies in rase of SIP re-
vision. The new source review program which must be a
part of the revised SIPs In nonattainment areas is ad-
ministered by the states with little EPA supervision. In
PSD areas, new source preconstruction review also 'is the
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- 83 -
responsibility of the states; however, there is stronger
EPA involvement in the permit procedure, although this
responsibility can be, and to a certain extent has been,
delegated to the states. In both cases, not only the sub-
stantive prerequisites for granting a construction permit
but also the applicable procedures, especially the hearing
requirements, are obstacles to firms wishing to locate or
expand in a nonattainment or PSD area. The Clean Air Act
of 1970 also provides for greatly strengthened federal en-
forcement authority.
The emissions trading policy is integrated into this com-
plex regulatory framework. Its main objective is not to
decrease the administrative burdens of the EPA and the
state agencies but, rather, afford the affected firms less
costly ways to meet SIP requirements or avoid substantive
and procedural new source review requirements. However,
increased administrative costs of the competent agencies
caused by the complexity of applicable procedures normal-
ly also aremirrored by increased administrative costs of
the firms involved.
Only the netting policy clearly leads to saving adminis-
trative costs. When a modernizing or expanding plant can
"net out" of preconstruction review it avoids undergoing
the lengthy and cumbersome new source review procedure.
The competent agency must only check and the operator
demonstrate that the source fulfils the netting require-
ments. This task is facilitated by the absence of ambient
tests. Normally, there would also be no need to revise the
SIP. Apart from netting^in principle any emissions trade
requires an amendment .of the applicable SIP. Since the
creation and use of an ERC implies that the emission limi
tations laid down in or under the SIP for the relevant
sources are no longer valid and the transaction may have
ambient impacts, the transaction must be reflected in the
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- 84 -
SIP and hence the SIP be revised. To this extent, the
emissions trading policy increases the workload of the
competent agencies and the firms involved.
In respect of offset trades, it must be noted that offsets
are a necessary part of SIP revisions under the 1977
Amendments (unless a state opted instead for a growth al-
lowance policy). Almost all states incorporated offset
programs in their SIPs, often in the form of generic off-
set rules that formally were a part of the state air pol-
lution control regulations. About 1.900 offset transactions
are reported to have taken place.
In order to avoid the cumbersome procedure of individual
SIP revision, especially for bubbles,- EPA has since
1979 afforded the states opportunities to develop
generic rules under which certain classes of emissions
trades are exempt from individual SIP revisions. Alterna-
tive emissions limits approved under generic rules are
considered by EPA to be federally enforceable in the same
manner as SIP requirements. The first generic rule ap-
proved by EPA waj a generic VOC bubble, of New Jersey?08*
The Policy Paper of 1982 gives the states guidance for de-
termining under which prerequisites, a generic rule will
be approved by EPA Moreover, EPA is preparing mo-*?l rules
that are designed to facilitate the task of state and re-
gional officials in drafting individually such rules. A
draft of these rules has been circulated for comment?
Generally, a generic rule is approvable if it ensures that
applicable b?"*iiine emissions will hot increase, emissions
trades will be evaluated in a 'replicable proc*- Jure and
transactions do not interfere vith ambient attainment and
Industry urges a liberalization of these
maintenance.
principles in that at least de minimis net increases of
^^~~"""""""" 2111
the baseline emissions should be permitted.
-------
- 85 -
Moreover, the EPA describes a variety of possible elements
of generic rules that satisfy these general principles. No
SIP revisions will be required for:
— emission shifts totalling less than 100 tons per year;
— VOC and NO trades if no net increase in applicable
a
baseline emissions occurs;
— SO2,.CO or particulates trades if level I of the
modelling screen is applicable, i.e. the sources are
~~ 212)
located in the same immediate vicinity (250 meters)
there is no net increase of emissions and emissions de-
crease at the source with the lower plume height;
— SO_, CO or particulates trades if specific emission
t, •
limitation for groupings of sources are established
or criteria for simplified level II modelling are de-
veloped.
As of April 1983, EPA had approved generic rules of New Jersey,
Massachusetts, Connecticut, North Carolina, Oregon, South
Carolina and Pennsylvania ' . Most of these rules are limited
to VOC bubbles; the Oregon and South Carolina rule encompasses
all kinds of trades in VOC, TSP and SO2 including banking. More-
over, EPA has proposed to approve 3 other generic bubble rules
(Rhode Island, Maine, and Kentucky). Kentucky's rule is the most
comprehensive, covering VOC, SO,, TSP, NO , CO, and Pb. None
^ *x
of the rules concerns offsets because offsets are a part of
revised SIPs and there is less need for generic rules. Seven-
teen more states are developing or considering the establish-
ment of generic rules, half of them limited to VOC, the other
half also covering TSP, S02, and sometimes NO and CO.
If a generic rule has been approved, individual trades approved
by the state under the rule need no longer be submitted as in-
dividual SIP revisions. This reduces overlapping state and
federal review and saves administrative and business costs.
Trades which are not covered by generic rules can still be
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- 86 -
implemented as individual SIP revisions. Thus, the emissio
trading system becomes more predictable without losing its
flexibility. However, it remains to be seen to what extent
states that have adopted generic rules will, be prepared to
process applications for emission trades involving individual
SIP revisions.
5. Reorientation of the American Emissions Trading Policy?
The EPA's Policy Statement of April 1982 is not yet final.
Pursuant to existing procedures EPA, when publishing the
Policy Statement, had requested comments by interested persons
and organizations. In the light of numerous critical com-
ments received from environmental organizations and state
authorities as well as the decision of the Court of Appeal
in NRDC v. Gorsuch, EPA in a statement of August 1983 de-
clared that it was considering revision of the bubble
in particular with respect to the use of plant shutdowns for
214)
creating ERCs .EPA suggested a number of alternatives
and requested further comments by tue interested public on
these alternatives. The final Policy. Statement will be for-
mulated when thes_e comments have beeri received and discussed
within EPA. The envisaged reorientation of the emissions
trading policy only concerns the bubb? e policy. Thti offset
policy which already is set forth iu the CAA remains un-
changed. With respect to the nettina policy, EPA wanted to
wait for the pending decision of the Supreme Court; as things
have turned ont, changes are not legally necessary so far.
One of the questions posed by EPA j~ ti-.e August 1983 State-
ment, concerns the avoidance of doub1 e counting of shutdowns
2 * c \
in nonattainment areas (having or lacking an approved SIP)
EPA now recognizes that in cases whera the SIP is based on
summary assumptions on the emission increases related to
•economic growth, it is difficult to distinguish between
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- 87 -
emission reductions caused by shutdowns and emission in-
creases caused by new facilities. This could have the result
that credits for shutdowns in the relevant AQCRs could be
impermissible.
The Policy Statement of August 1983 focusses on the permis-
sibility of credits for shutdowns in nonattainment areas that
do not have an approved SIP and cannot demonstrate compliance
216^
with the NAAQSs . EPA defends its previous position that
credits for shutdowns in principle are permissible as a means
of useful partial solutions for improving the ambient air
quality. In its view, the credit of shutdowns serves to over-
come the information gap between administration and industry
and creates incentives for timely attainment of the SIP re-
quirements; the prerequisite also applicable in the case of
shutdowns that the emission reduction must be beyond the
(negotiated) RACT level ensures a sufficient contribution
for the improvement of air quality. However, EPA concedes
that, inspite of these prerequisites, a particular AQCR
may not be able to comply with the requirements of "reason-
able further progress" and maintenance of NAAQSs "as ex-
peditiously as possible". Therefore, it is considering a re-
orientation of the bubble policy which links this policy
more with the paramount objectives of improving air quality.
In particular, 6 alternatives for the bubble policy in non-
attainment areas that have no approved SIF are being dis-
^217)
cussed •
(1) In nonattainment areas lacking demonstration of attain-
ment (including areas that have been granted an extension
until 1982 for the establishment of revised SIPs) shut-
downs can be credited only insofar as the emissions re-
duction exceeds the negotiated RACT level. This alter-
native would exclude the use of actual emissions as base-
line for granting .credits for shutdowns. It has only a
limited importance since after expiration of the 1982
deadline most sources would be subject to the RACT re-
quirement anyway.
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- 88 -
(2) In nonattainment areas lacking demonstration of attain-
ment (including areas that have been granted an exten
sion until 1982 for the establishment of revised SIPs)
all bubble transactions can only be effectuated inso-
far as the emission reduction exceeds the negotiated
RACT level. This alternative is to make sure that bubble
transactions are only permitted where the RACT standards
are complied with as a minimum requirement.
(3) In nonattainment areas lacking demonstration of attain-
ment, credits for shutdowns are only granted where the
relevant transaction produces a substantial improvement
of air quality; as a threshold, EPA is considering a
net reduction of emissions by 20 percent. This solution
would secure speedy progress toward attainment and at
the same time establish a safety margin against un-
certainties associated with the assumptions underlying
the SIP.
(4) The requirement of a substantial improvement of air
quality could be extended to all bubble transactions
in nonattainment areas lacking demonstration of attain-
ment, in order to ensure a direct and immediate contri-
bution of each transaction to the improvement of air
quality.
(5) In the case of shutdowns in these areas it could be
required instead of an emissions reduction by a fixed
rate, e.g. 20 percent, that the contribution of the
shutdown to the improvement of air quality be propor-
tional to the extent by which the SIP's design value
exceeds the ambient standard at the time of the trade,
while other bubbles would simply have to produce e, -.^^.
air quality improvement. EPA considers this alternative
as politically doubtful because it requires from a single
source an excessive contribution to the solution of a
nonattainment problem that is largely to be
to other sources.
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- 89 -
(6) Finally, credits for shutdowns in nonattainment areas
lacking demonstration of attainment could be disallowed
entirely. EPA concedes that such a policy could lead
to a substantial improvement of air quality but might
also sacrifice any incentive for early, environmentally-
beneficial shutdowns of highly-polluting marginal fa-
cilities.
21 ft}
Apparently, a compromise has been reached within EPA ' .
Each bubble in nonattainment areas having no approved SIP
that demonstrates attainment must contribute to "reasonable
further progress". This shall be ensured by the requirement
of a RACT baseline for calculating the emission reduction
credit, the requirement of a contribution to the improve-
ment of air quality and a system of rebuttable presumptions
whereby a shutdown (or production curtailment) would likely
have occurred anyway.
The most interesting and novel aspect of this "new bubble
policy" are the rebuttable presumptions. They focus on the
time of the emission reduction and the relationship to
"standard industry practice". Where an emission reduction by
a shutdown is achieved far in advance of a bubble transaction
or because of normal production change, there is a presump-
tion that the emission reduction was not motivated by the .
emissions trading policy (in other words: was not motivated
by the desire to create a credit) but would have occurred
anyway. If the operator cannot rebut the presumption he will
not be granted a credit. However, it suffices that the grant-
ing of a credit was a motive among others; it need not be
the sole or paramount motive. The details must still be .
worked out; in particular, the reference to "standard In-
dustrial practice" seems to pose some problems.
It is still unclear when the final Policy Statement '..-ill be
adopted. Until this date, EPA will orient its policy at the
Policy Statement of 1982. This is-also true of nonattainment
areas for which the 1982 deadline for submission of revised
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- 90 -
SIPs with demonstration of attainment has expired. So long
as there is no final determination that these areas are no
capable of attaining the ambient quality standards, they can
effectuate bubbles transactions pursuant to the Policy State-
ment of 1982. Moreover, EPA is considering a flexible interim
solution for these cases in the final Policy Statement.
The innovations just described are restrictions of the Emis-
sions Trading Policy in the interest of environmental pro-
tection. On the other hand, there also is a certain trend
towards extension and liberalization, namely in the field of
NSPSs. Under the Policy Statement of 1982 bubble transactions
for complying with technology-based NSPSs are impermissible.
Now EPA is about to cautiously move off from this position
EPA is considering to permit the first NSPS Bubble for coal-
fired power plants. Instead of an emission standard for SO-
of 1.2 pounds per million BTU heat input the two boilers
of a new power plant in Illinois shall be subject to a stan-
dard of- 0.6 and 1.8 pounds respectively.. By different utilil
zation of the two boilers an emission reduction of 1000 tons
SO_ per year is expected. EPA is considering to expressly
provide for such NSPS bubbles in all future NSPSs.
219)
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_ 91 -
Footnotes (Chapter B)
1) Public Law 91-604, 42 USC § 1857 et seq. (1970)
2) Public Law 95-95, 42 USC § 7401 et seq. (Supp. I 1977);
cf. Quarles, p. 6 et seq.; Raffle, p. 1 et seq.
3) CAA § 109{a)-{c)
4) 40 C.F.R. § 50; 44 Fed. Reg. 8202 (1979)
5) CAA § 108(a)
6) Union Electric Co. v. EPA, 427 U.S. 246, 265/266 (1976)
7) CAA § 109(b)(2)
8.) CAA § 110{a) (2) (A) (i)
9) CAA § 110(a)(2)(A)(ii)
10) CAA § 110
11) CAA § 110(a)(1)
12) CAA § 123
13) 'NCAQ, p. 3.4-2; Quarles, p. 16; Liroff, p. 5
14) CAA § 110(a)(2)(D)
15) CAA 3 112
16) CAA § 111
17) CAA § 111(a)(3)
18) CAA § 111 (a) (4)
19) CAA § 111(h)
20) Portland Cement Association v. Ruckelshaus, 486 F.2d 375
(D.C. Cir. 1979); see Currie, 128 U. Pa. L. Rev. 1389,
at 1409 et seq. (1980)
21) CAA § 111(a)(1)(C); Essex Corp. v. Ruckelshaus, 486 F.2d
427 (D.C. Cir. 1979); Portland Cement, supra note 20;
National Lime Association v. EPA, 627 F.2d 416 (D.C.
Cir. 1980); Del Duca, 5 Harv. Envt'l L. Rev. 184, at 190,
192 et seq.; Currie, supra note 20, at 1420 et seq.
22) CAA § 111(a) (1) (C)
23) CAA § 111 (b) (2)
24) NCAQ, p. 3.7-2, 3 and 7; NRDC, Statement on New Source
Performance Bubble, p. 8
25) CAA § 110(a) (2) 'D)
26) For the following text see NCAQ, p. 3.4-2; Quarles, p.
6 et seq.
27) 41 Fed. Reg. 55524 (1976)
28) CAA § 110(a) (2) (I)
29) NCAQ, p. 3.4-13
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- 92 -
Dames, Moore, p.
Liroff, p. 21
2.5; Del Duea, supra
30) CAA §§ 110(a) (2) (A) (i), 172 (a) (2),
-------
- 93 -
60) 40 C.F.R. § 52.21(b) (23)
61) Alabama Power, supra note 35
62) CAA § 165(a)(3); see Quarles, p. 7 et seq.
63) CAA § 169(4)
64) Alabama Power, supra note 35; 45 Fed. Reg. 52676, 52718
(1980)
65) CAA § 169(4); 45 Fed. Reg. 52676, 52714 (1980)
66) CAA § 165 (a)(7)
67) Guidelines on Air Quality Modelling, April 1978;
43 F.Reg. 26, 398 (1978)
68) See NCAQ, p. 3.5-34 et seq.; Quarles, p. 9;' Lutz, 11
Envt'l Law 321, at 355 (1981)
69) NCAQ, p. 3.5-46, 58, 78; Dames, Moore, p. 4.1-4.2; Del
Duca, supra note 21, p. 210
70) CAA § 165(a)(3)
71) CAA § 165(a)(4); Quarles, p. 10/11; Currie, supra note
48, p. 66
72) CAA § 169(3)
73) CAA § 169(3); Currie, supra note 48, at 63
74) NCAQ, p. 3.5-42, 43, 56; Dames, Moore, p. 2.5; Currie,
supra note 48, at 65
75) See Quarles, p. 10; Lutz, supra note 68, at 350
76) CAA § 169A(b) (2) (a)
77) Policy Statement, p. 15076 col. 2/3
78) Policy Statement, p. 15076 col. 3
79) See the EPA actions referred to in Appendix II; Liroff,
p. 4 et seq., 23 et seq.; del Calvo y Gonzales, 5 Harv.
Envt'l L. Rev. 377, at 399 et seq. (1981); Quarles, p.
16 et seq.; Levin, p. 68 et seq.; Comments, 9 Envt'l L.
Rep. 10027 (1979); 10 Envt'l. L. Rep. 10014 (1980); 11
Envt'l L. Rep. 10119 (1981)
80) Policy Statement, p. 15077 col. 1
81) 41 Fed. Reg. 55524 (1976); 44 Fed. Reg. 3274 (1979);
45 Fed. Reg. 31304 and 52676 (1980)
82) 44 Fed. Reg. 3274, 3276 (1979)
83) Policy Statement, p. 15076 col. 3
84) Policy Statement, p. 15076 col. 3
85) 44 Fed. Reg. 71779 (1979)
86) Policy Statement, p. 15077 col. 1 '
87) 44 Fed. Reg. 3274, 3277 (1979); 45 Fed. Reg. 52676,
52696-98 (1980); 46 Fed. Reg. 50766, 50767-69 (1981)
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- 94 -
88) Policy Statement, p. 15077 col. 1
89) Comment, 128 0. Pa. L. Rev. 937, at 943 (1980)
90) 44 Fed. Reg. 3274, 3280 (1979); for the previous EPA
position see 41 Fed. Reg. 55524, 55529 (1976); cf.
Comment, supra note 89, at 942 et seg.
91) See Ritts, Model Emissions Trading Rules
92) Same opinion UARG, Comments on Policy Statement, p. 5
et seg.; CMA, Comments on Policy Statement, p. 2 et
seg.
93) CAA § 173(2); Policy Statement, p. 15083 col. 1; but
see the criticism by del Calvo y Gonzales, supra note
79, at 424
94) 43 Fed. Reg. 26401 (1978)
95) Policy Statement, p. 15176 col. 3
96) Policy Statement, p. 15O76 col. 3
97) Policy Statement, p. 15O76 col. 3
98) ASARCO v. EPA, 578 F.2d i19 (D.C. Cir. 1978); Policy
Statement, p. 15083 col. 1
99) New Source Performance Bubble Issues, OAQPS 1982; cf.
UARG, Comments on Policy Statement, p. 8 et seg.;
NRDC, Statement on New Source Performance Bubble
Issues, 1982; Note, 32 Stanford L. Rev. 943, at 951
et seg. (1980); del Calvo y Gonzales, supra note 79,
at 425 et seg.
100) 46 Fed. Reg. 50766-69 (1981); tor the previous EPA
position see 45 Fed. Rec;, 52676, 52697 (1980)
101) Natural Resources Defense Council v. Gorsuch, 12
Envt'l L. Rep. 20942 .(D.L. Cir. Aug". 17," 1982)
102) Policy Statement, p. 'ii077 rroi, 1, 15083 col. 1
103) There have been some conflicting views in EPA as to
whether such authority exists; see Ritts, Summary of
Comments on Policy Statement, p. 120
104) Policy Statement, p. 15077 col. 2
105) For the following text see PoJIcy Statement, p. 15080
et seg.
106) Policy Statement, p. ISG'iO col. 1/2 "- ~
V',7) Policy Statement', p. 15080 cci. 2/3
(08) Policy Statement, p. 15080 col. 1
109) 40 C.F.R. §§ 51.24(a)(3), 52.2Kb) (3); 45 Fed. Reg.
52676, 52700 (1980)
110) Policy Statement, p. 15081 col. 1
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- 95 -
111) 40 C.F.R. part 51 App. S § IV.C.3 (1981); 41 C.F.R.
§§ 51.18(j) (vii) (c) (1); 52.24(b) (3) (ii); but see 44
Fed. Reg. 3274 (1979)
112) 40 C.F.R. 51 App. S § IV.C. 3 n. 9; 40 C.F.R. 51.18
(j) (vii) (c) (1); 51.24(b) (3) (b) (ii); 52.21 (b) (3) (ii)
(a)
113) Policy Statement, p. 15081 col. 1
114) Policy Statement, p. 15081 col. 1/2
115) Policy Statement, p. 15081 col. 2/3
116) CMA v. EPA, No. 79-1112, Settlement of 22 Febr. 1982
117) Policy Statement, p. 15081 col. 3
118) Policy Statement, p. 15082 col. 1
119) Policy Statement, p. 15982 col. 1
120) South Coast Quality Management District, New Source
Review Regulations, Rule 1308 (d) (1982). The same
is reported for Idaho; see Vivian, Hall, p. 3 e_t seq.
121) Policy Statement, pi 15082
122) 40 C.F.R. 52.21 (b) (3) (vi) (c)
123) See above note 116
124) Interview with Prof. Marc Roberts, Harvard University
125) Policy Statement, p. 15082 col. 1/2
126) Policy Statement, p. 15082 col. 2
127) Policy Statement, p. 15082 col. 3
128) NRDC, supra note 101
129) Policy Statement, p. 15082 col. 3/15083 col. 1
130) See supra note 120
131) Policy Statement, p. 1S083 col. 1
132) 40 C.F.R. §§ 51.24(b) (23) , (i)(8); 52.21 (b) (23), (i)
(8); 45 Fed. Reg. 52676, 52698, 52708/9 (1980)
133) Policy Statement, p. 15083 col. 1
134) Policy Statement, p. 15083 col. 1; but see the de-
cision in NRDC, supra no tie 101
135) Policy Statement, p. 1507F. col. 3 (not mentioned in
the Technical Issues Document, Policy Statement, p.
15083 col. 1)
136) Policy Statement, p. 15083 col. 2/3
137) Policy Statement, p. 15083/84
138) See Ritts, Model Emission Trading Rules
139) Ritts, Summary of Comments on Policy Statement, p.
13 (Oklahoma), p. 99/100 (Illinois)
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- 96 -
140)
141)
142)
143)
144)
145)
146)
147)
148)
149)
150)
151)
152)
153)
154)
155)
156)
157)
158)
159)
160)
161)
162)
163)
164)
165)
Policy Statement, p. 15084
Supra note 112
40 C.F.R. § 52.21(b) (3)(ii) (a)
Policy Statement, p. 15084 col,
Policy Statement, p. 15084; cf,
1
Tether, Legal Issues,
p. 4 et seq., 16 et seq.
Policy Statement, p. 15084 col. 2/3
Kontnik, 8/82 Envt'l Analyst 3, at 5 (1982)
See Tether, Legal Issues; Comment, supra note 89,
at 949 et seq.
Tether, Legal Issues, p. 2, 7 et seq.; Comment, supra
note 89, at 949 et seq.
See suthors cited supra note 148
Cf. Comment, supra note 89, at 960 et seq.? Contra:
Landau, 9 Envt'l Law 575, at 597-99 (1979)
See, e.g_., Andrus v. Allard, 444 U.S. 51, 65 (1979);
Kaiser Aetna v. U.S., 44 U.S. 164, 175 (1979); Tether,
Legal Issues, p. 6; Haley, 54 Wash. L. Rev. 315 (1979)
Tether, Legal Issues, p. 2
Kaiser Aetna, supra note 151; Penn Central v. New
York, 438 U.S. 104 (1978); Tether, Legal Issues, p. 9
Tether, Legal Issues, p. 8/9
Wickard v. Filburn, 317 U.S. 111, 131 (1942) (con-
cerning crop acreage allotments); Tether, Legal
Issues, p. 13
American Bond and Mortgage Co. v. U.S., 52 F, 2d 318,
320 (7th Cir. 1931), cert, denied, 285 U.S. £38 (1932)
Tether, Legal Issues, p. 13, 14
Tether, Legal Issues, p. 11, 16 et seq.
Comment, supra note 89, at'951
Tether, Legal Issues, p. 10
See Kontnik, supra note 146
See Ritts, Summary of Comments on Policy St*+vr...;er.t,
p. 56
"Forster v. Colorado Radio Corp., 381'F.2« 222 HCth
Cir. 1967)
Cf. Kontnik, supra note 146, at 6
See 6 Am.Jur. 2d "Assignment", § 107; Williston-Jaeger!
Contracts, 3rd ed. vol. 3 (1960, Suppl. 1982), P. 316
et seq.
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_ 97 -
166) Kontnik, supra note 146, at 5
167) Kontnik, supra note 146r at 5
168) Baker, Winslow, Tax Considerations
169) Sees. 167 and 168 IRC
170) Baker, Winslow, p. 11
171) Sec. 169 IRC
172) Sec. 169 (e) IRC
173) P. 12
174) See Pollution Control Facilities, Guidelines for Cer-
tification, 36 Fed. Reg. 19132-19134 (Sept. 28, 1971)
175) Baker, Winslow, p. 13
176) Parmelee Transportation Co. v. U.S., 351 F. 2d 619
(Ct. Cl. 1965); Baker, Winslow, p. 15
177) P. 17/18
.178) 608 F. 2d 485 (Ct. Cl. 1979)
179) See also Shanahan v. Conunisioner, 63 T.C. 2T~ (1974) ;
Freitas Dairy, Inc. v. U.S., 582 F. 2d 500 (9th Cir.
1978)
180) Baker, Winslow, p. 21
181) § 1.103-8(g)(2)(iii) and (iv)
182) P. 28/29
183) Use of cheaper fuel which necessitated the installat-
ion of additional control equipment; Letter Ruling
7932050, May 10, 1979
184) Sec. 362 (c)(2) IRC
185) See the references in Baker, Winslow, p. 32/33
186) Letter Ruling 8017095, January 30, 1980
187) Baker, Winslow, p. 33
188) See Baker, Winslow, p. 37/38
189) Rev. Rul. 66-58) 1966-1 C.B. 186; 67-113, 1967-1 C.B. 55
190) Baker, Winslow, p. 42
191) Treasury Regs. § 1.167(a) (3); see Rodeway Inns of
America v. Commissioner, 63 T.C. 414 (1974)
192) Baker, Winslow, p. 42/43
193) Baker, Winslow, p. 43
194) Rev. Rul. 65-228, 1965-2 C.B. 43; Hoek v. Commisisloner,
51 T.C. 195 (1968); Nachman v. Commissioner, 191 F.
2d 934 (5th Cir. 1951)
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- 98 -
195) Northern Natural Gas Co. v.
(8th Cir. 1960)
O'Malley, 277 F. 2d 128
196) Rev. Rul. 71-120, 1971-1 C.B. 79, mod. Rev. Rul.
71-448, 1971-2 C.B. 130, and Rev. Rul. 72-403, 1972-
1 C.B. 102
197) Baker, Winslow, p. 46
198) Treasury Regs. § 1.167(a)-10(b)
199) Rev. Rul. 79-203, 1979-2 C.B. 94; Rev. Rul. 76-428,
1976-2 C.B. 47; Rev. Rul. 69-201, 1969-1 C.B. 60;
Baker, Winslow, p. 44
200) See, Hirschel v. Commissioner, Tax Ct. Mem. 1981-189
201) Treasury Regs. § 1.167(a)-1(c)
202) Baker, Winslow, p. 47
203) Rev. Rul. 66-58, 1966-1 C. B. 186; Parmelee Transport-
ation Co. v. U.S., 351 F.2d 619 (Ct. Cl. 1965}
204) Sec. 1221 (2) IRC; Rev. Rul. 58-133, 1958-1 C.B. 277
205) Baker, Winslow, p. 59/60
206) Rev. Rul. 79-264, 1979-2 C.B. ;Letter Ruling 7950049;
see Baker, Winslow, Appendix B
207) In '1979, EPA had still rejected the adoption of gene-'
ric rules; 44 Fed. Reg. 71779, 71786 (1979)
208) 46 Fed. Reg. 20551 (1981); see Comment, 11 Envt'l L.
Rep. 10119 (1981)
209) See Ritts, Model Emission Trading Rules
210) Policy Statement, p. 15024
211) See Ritts, Summary of Comments on Policy Statement,
p. 121 et seq.
212) Industry demands a distance of 800 meters as in stack
height regulations
213) For the status of generic rules see Appendix VI
214) New Emissions Trading Policy Statement of 25 Aug. 1983,
48 Fed. Reg. 39580 (1983)
215) New Policy Statement supra note 214, at 39581 col.1/2,
at 39584 col. 2/3
216) New Policy Statement supra note 214; at 39581 et seq.
217) New PCj.icy Statement supra note 214, at 39584 et seq.
218) Levin, Russel, Implementing "Alternatives" to Command-
and-Control Regulation at the U.S. Environmental Pro-
tection Agency, Paper given at the British-American
Conference on Comparative Administration and Law, Little
Aston House, Oxfordshire, May 1984, p. 12 et seq.
219} Levin, Russel supra note 218, p. 16
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C. Evaluation of the Advantages and Disadvantages of
EPA's Emissions Trading Policy
I- Criteria for Evaluating EPA's Emissions Trading Policy
Any environmental quality problem can be managed by a variety
of alternative strategies, but it appears that no single
strategy is best for all situations. Only through a systematic
evaluation of the many alternative strategies available for
any given problem and an explicit trade-off of the many con-
flicting effect of any chosen strategy, is the desired en-
vironmental quality likely to be achieved in an effective,
efficient, and equitable manner.
*
Before any judgements can be made about the merits or draw-
backs of EPA's new approaches to air pollution control, it is
necessary to establish some criteria on which to base our
evaluation. Such criteria should be useful to the extent that
they help assess the actual or expected advantages and dis-
advantages of the new policy relative to the existing command-
and-control approach.
Although many criteria are possible , the following list seems
to us to encompass the most pertinent considerations for t-.he
evaluation of the new policy:
(a) Air Quality Improvement; How does emissions trading
affect the attainment and maintenance of ambient air
quality standards? What is the likelihood that the new
strategy will improve air quality? How reliable f..re the
new approaches in achieving the stated air quality goals
as expeditiously as practicable? Are their ail quality
effects more or less certain and automatic than those of
existing traditional regulation?
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- 100 -
:W^^
(b) Co s t-Ef f ectiyen e ss; Does the new policy meet its st
goals at relatively low cost to society? Will the ne
policy increase or reduce the direct costs (i.e. all
costs of control equipment and the associated operation
and maintenance costs)? Will the new policy increase or
reduce the indirect costs incurred in the process of
complying with, and administering the requirements of
the new policies (such as information, administrative,
modeling, monitoring and enforcement costs)?
(c) Economic Development; Will the new policy allow for
growth in industrial activity which tends to accentuate
air pollution problems? Will it allow for easy entry
of new sources of pollution and expansion of existing
ones?
(d) Technological Advancement: Will the new policy enhance^
or undercut the general technology-forcing intent of
Clean Air Act? Does the new policy establish permanent
incentives to promote cost-effective technological inno-
vations or will it serve to freeze the existing state-
of-the-art?
(e) Administrability; What is the degree of difficulty
associated with the administration of emissions trading?
Would it necessitate added administrative costs in terms
of workload and budget for regulatory agencies and
complying firms?
;t") Enforceability; Will the n^w policy make enforcement
of the Clean Air Act's requirements more difficult?
What resources will be necessary to enforce this policy?
Does emissions trading encourage voluntary compliance?
Will violators be easily identifiable? Will enforceme|
be credible?
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(g) Legal feasibility; Is the emissions trading policy
consistent with Clean Air Act requirements? Does adequate
authority to implement the emissions trading policy
exist? Would existing legislation have to be changed
to enable implementation, or would entirely new legis-
lation have to be passed?
These criteria are subject to further development and re-
finement, but they provide a first necessary framework for
the analysis of any environmental policy. Policy evaluations
of any sub-set of these criteria, therefore, should be
regarded as incomplete.
The individual criteria are directed at conflicting goals
which must be balanced to achieve effective air pollution
control policy. For example, the new strategy may achieve
higher marks for encouraging cost-effectiveness but may
suffer on grounds of air quality grounds; it may provide
strong incentives for innovations in air pollution control
technology but may prove difficult to enforce.
Therefore, the final steop in evaluating the new poling would
be to combine the ratings on the individual criteria. This
process involves assigning relative weight to the individual
criteria. However, it is difficult to identify a weighted
or even an ordinal relationship between these criteria.
However, it is difficult to identify a weighted or even an
ordinal relationship between these criteria.
Aside from the difficulties in assigning relative weights
to the individual criteria it mv..'c be recognizes that this
process is the responsibility -of cecitions-makers, not of
analysts of government policy. It is also useful to note
that, as programs mature and prioriries shift, the relative
weight given to the cirteria can change, requiring modifi-
cations to the existing approach.
-------
II. Methodological Issues in Applying the Evaluative Criteria
After having established the criteria which we feel should
be applied in evaluating any environmental policy, EPA's
regulatory reforms are evaluated according to the indicated
criteria and relative to the existing policy of direct
regulation.
To do so, we assume that the overall goals of the air pollu-
tion control policy in the United States, as embodied in
the Clean Air Act and its amendments, have been set and,
therefore, must be taken as given. We do not attempt to
reexamine the setting of ambient air quality standards and
other air pollution control goals as set forth in the U.S.
legislation. It is our intent only to evaluate the emissions
trading policy for achieving and maintaining air quality
goals once those goals have been set. It should be emphasized,
however, that much dissatisfaction over air pollution cont
in the United States may in fact be the result of unrealist:
ambient air quality standards and arbitrary aspects of the
current attainment and nonattainment designations (based on
imprecise monitoring and modeling techniques) requiring
different types of pollution control as much as the manner
in which EPA-and the regional air pollution control author.!-
ties have attempted to implement and enforce these standards
Applying the indicated criteria to evaluate the emissions
trading policy is no simple task, because we are confronted
with several methodological problems. Therefore, several
important caveats should be observed when interpreting the
.results of our""evaluation:
2)
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- 103 -
First, as for any innovation, it is necessary to evaluate
how well the new policy has performed or how well it can be
expected to perform relative to the existing regulatory
regime. The actual or expected advantages and disadvantages
of emissions trading must not be compared to an implied
ideal command-and-control policy; neither must the present
poorly-defined regulatory regime be compared to an ideal tra-
ding system characterized by full-fledged market trades to meet
any regulatory requirement. The test must be the new policy's
incremental effects, for better or worse, on the Clean Air
Act as it actually operates, rather than its effects on a
statute assumed to operate perfectly.
Second, it is not always possible to identify those impacts
that can be solely or principally attributed to EPA's regula-
tory reforms. Since the new policy is only a supplement and
not an alternative to current regulations, it is difficult
if not impossible to identify those effects that only have
occurred owing to emissions trading. Furthermore, because of
the multiple factors which enter into any business decision,
it is generally difficult if not impossible to isolate those
motives for a decision to reduce emissions below required
levels. Therefore, it is not always possible to determine whether
certain emission reductions only have occurred owing to the
emissions trading system or would have occurred anyway as a side-
benefit of non-environmental decisions (such as projects under-
taken for energy conservation or solvent recovery).
Third, the criteria are difficult to apply in a quantitative
.r;ense. For instance, it is not possible to quantitatively
evaluate the cost-effectiveness of the new strategy. I-t is
possible, however, to ask whether the new policy is likely
to be more or less cost-effective than the existing policy.
Therefore, we do not attempt to quantify the extent to which
the emissions trading policy will meet any particular criterion.
-------
Rather, we indicate where it appears that emissions trading
is more or less successful in meeting a criterion than the
existing policy.
Fourth, we are confronted with the problem that our analysis
is aimed at a moving target since the emissions trading policy
is in a great flux. The policy has evolved even as this report
has been written. The Policy Statement replaces, streamlines,
simplifies and consolidates a number of closely related regu-
latory reforms including the bubble, offset, netting, and
emission reduction banking policy, and involves a lot of
changes compared to the early versions of these strategies
(see Appendix II).
For example, the Policy Statement replaces the original bubble
policy (Dec. 11, 1979; 44 FR 71779) and includes the following
major changes.
Specifically, it:
— allows states to adopt generic trading rules for all
criteria pollutants;
— extends use of the bubble to areas lacking approved
demonstrations of attainment;
— reduces air quality modeling requirements for proposed
trades;
— extends use of the bubble as an alternative means of
meeting RACT requirements;
— allows broader use of emission reductions from shutdowns.
To give another example, EPA has changed the Emission Offset
Interpretative Ruli;-,g (EOI) three times since the January 16,
1979 complete revised version. Based on the early versions of
the regulatory reforms states had incorporated offset and bank-
ing provisions in their SIPs, many of which now may become
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- 105 -
obsolete and must be changed. In light of the Policy Statement
many states are now implementing generic trading and banking
rules and thus are moving the target for a policy evaluation.
Therefore, we shall focus on the emissions trading policy
statement and refer to former versions of the new strategy
only where necessary and appropriate.
Furthermore, the present policy following the Policy Statement
issued in 1982 must be regarded as an interim policy that will
be followed by a request for further public comment (see Appen-
dix IV), and will be replaced by a final revised policy which
can and probably will address many potential problems identi-
fied in the following evaluation. Our evaluation is therefore
preliminary. The problems we have identified are based more on
fears than on adverse effects that have actually materialized?
and steps that can be taken by the final revised policy may
preclude-such problems.
Fifth, we are confronted with the problem that our analysis
is aimed at a variety of targets since there are a number of
state and local versions aside from the EPA policy on emis-
sions trading as articulated in the Policy Statement. As Appen-
dices VII and VIII show, there is already considerable variation
among states in some crucial features of the program. The Policy
Statement only sets forth legal minima EPA considers necessary
for emissions trades to satisfy CAA requirements. Therefore
states are free to adopt generic rules which incorporate all
or any combination of the proposed trading approaches or to
let trades continue to be implemented as individual SIP revi-
sions. Furthermore, states are free to stipulate additional
criteria for assuring that certain loopholes are avoided and
their attainment strategy will not be jeopardized.
Therefore, any policy evaluation that intends to be comprehensive
would have to deal with the many provisions that state and local
agencies have adopted in addition or in contrast to EPA's Policy
-------
- 106 -
Statement. In practice, such a comprehensive evaluation would^
have to include to date (April 1983):
— the provisions for offsets that almost all states have
incorporated in their SIPs;
— the seven generic bubble rules that EPA had approved;
three other generic bubble rules that EPA had proposed
with many others which are under development or conside-
ration for a significant number of states or areas;
— formal banking systems that five areas have in operation;
at least 12 other areas had drafted or proposed full
banking provisions.
In light of the variety of policy versions that could serve
as the b^sis for a comprehensive evaluation of emissions
trading, we do not attempt to discuss all federal, state and
local variations of the new approaches. Rather, we shall fo<
on the Policy Statement and, where necessary, point out some
examples of state and local rules that incorporate additional
or different provisions. Therefore, our evaluation is inevitably
incomplete.
Sixth, the experience with emissions trading is limited. It
is certainly too early to judge the new approaches by some of
the criteria siated above. Our evaluation is based on experi-
ence to date and our insights come from individual cases that
are not necessarily representative of the future use of emis-
sions trading.
However .-. widespread adoption and successful implementation
.* ' "*"
of emissions trading in .the future will depend on a number of
factors that are not yet predictable. Some uncertainties
already clout the future of emissions trading. Court suits,
modifications of national emission standards, a de facto
deletion of air-quality standard deadlines, and relaxed enforce-
ment are all examples of administrative changes which could
-------
- 107 -
GO.
-------
- 1O8 -
materially affect the viability of the new approaches. Also,
amendments to the Clean Air Act are currently being debated
before Congress. Any significant changes to the basic struc-
ture of the Act would probably affect the workability of
emissions trading.
Therefore, we can make no pretense of fully understanding all
there is to know about how emissions trading will work out
in the future. However, it is mature enough that some clear
insights are beginning to emerge.
-------
III. Advantages and Disadvantages of the Emissions Trading
Policy
1• Air Quality Improvement
Under the traditional regulatory approach, U.S. air pollution
control agencies have sought better air quality through
rules which apply specific, uniform emission limits to
every emission source within a regulated process. In theory,
this approach, if properly and widely implemented, could
achieve the stated air quality goals. Moreover, there are
several situations in which a conventional regulatory approach
has a clear advantage compared to any other strategy based
on economic incentives ':
First, where an emission is so dangerous that it is necessary
to prohibit it altogether, direct controls are the only effec-
tive option available. Thers is obviously nothing to be
gained by an approach that allows "pound-for-pound" trades
or requires offset ratios marginally greater than 1:1 for
trades involving toxic pollutants.
Second, direct controls may also be the only effective means
to deal with a sudden dangerous air quality-situation.Episodic
pollution emergencies call for prompt and substantial changes
in operation of emission sources, such as a temporary reduc-
tion or cessation of certain activities {e.g. restrictions of
the use of incinerators, cars, and so on).
Third, where emissions are difficult to measure and monitor,
because effective and reliabJ-i monitoring devices have not
been invented or are prohibitively costly to install and
operate, emissions trading will not be practical. Where the
amount of emission reductions proposed for a trade is not
quantifiable and even indirect methods of determining compli-
ance are not reliable, direct controls involve less risks than
trading transactions.
-------
In short, there are several good reasons for the use of
conventional direct controls in order to attain and main-
tain stated air quality goals and to improve air quality
beyond marginal attainment and maintenance.
In practice, if air quality trends since enactment of the
197O Clean Air Act are used to measure success or failure,
then the traditional regulatory approach must be deemed a
qualified success. For all available evidence shows that,
in general, air quality in the United States has improved
significantly despite new pollution from industrial growth.
While much still remained to be done, the nation had made
significant progress in cleaning up the air between 1970
and 1977, i.e. the period before market-oriented supple-
ments to the regulatory system {such as the offset and
bubble policy) came into effect (see Table 4 ).
But it must also be recognized that the Clean Air Act of
197O had made mid-1975 the target and mid-1977 the deadline
for federal, state, and local governments and for industry
to meet the primary NAAQSs. However, that deadline was not
met by many areas. Even today, there is a significant number
of areas that have still not attained the NAAQS. The follow-
ing Table 5 identifies the number of counties, cr portions
thereof, designated as nonattainment as of February 1,
1982. Thus, if strict, uniform compliance with the mid-
1977 deadline is used to measure the success or failure of
the traditional command-and-control approach, then it must
be deemed a failure.
Without change, the command-and-control approach would induce
only increased costs for both polluters and regulators in
areas with continuing air pollution problems. To meet NAAQSs
in the nonattainment areas, it would be necessary to squi
more emission reductions from sources already regulated,
bably at-steeply increasing costs per unit of reduction. It
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- 112 -
Table 5
NONATTAINMENT AREAS IN ALL OR PART
OF THE COUNTIES IN THE U.S.
Total Number Counties
or County Equivalents
with Nonattainment
Areas - 2/1/82
Carbon Monoxide
Nitrogen Dioxide
Ozone
Sulfur Dioxide
Total Suspended Particulates
156
11
486
88
378
Total Areas
1,119
Source: EPA, Maps Depicting Nonattainment Areas
Pursuant to Section 107 of the Clean Air
Act - 1982, EPA-450/2-82-012, February 1982
-------
- 113 -
would also be necessary to seek emission reductions from
small, previously unregulated sources - resulting in a more
complex and expensive regulatory process.
EPA's emissions trading policy, on the other hand has been
developed "to encourage use of emissions trades to achieve
more flexible, rapid and efficient attainment of national
4\ •
ambient air quality standards" .EPA "supports its accele-
rated use by states and industry to meet the goals of the
Clean Air Act more quickly and inexpensively
,,5)
According to the Policy Statement, all trades must be con-
sistent with ambient attainment and maintenance requirements
of the Clean Air Act. To assure that emissions trades do not
contravene relevant requirements of the CAA, general principles
are set out that will be used by EPA to evaluate individual
trades6*:
First, only reductions which are surplus, enforceable, per-
manent, and quantifiable can qualify as ERCs and be banked
or used in a trade.
Second, all trades must satisfy applicable ambient tests
and demonstrate "ambient equivalence".
Third, trades must involve emission increases and decreases
of the same criteria pollutant.
Fourth,trades cannot be used to meet NESHAPs requirements
or increase emissions beyond the levels they prescribe.
Fifth, emission reductions from existing sources cannot be
used to meet technology-based requirements applicable to
new sources locating in either attainment or nonattainment
areas.
These restrictions, if properly implemented, could ensure
that all trades will be consistent with air quality objec-
tives under the Clean Air Act.
-------
- 114 -
Moreover, some of the alternative's ot the emissions tradinc
program promise even better environmental results than wou.
have been achieved under traditional compliance requirements.
While bubble and netting transactions in principle will not
result in a net gain in controlling air pollution, air quali-
ty will improve as offsets occur. Offsets in nonattainment
areas are only allowed provided that the new or expanding
source can demonstrate that the emission reductions from
existing sources in the area are greater than the emissions
that will come from the new or expanding source. Air quality
will improve because of the higher than 1:1 offset ratio
required under this policy.
Similarly, .the creation and banking of emission reduction
credits will lead to cleaner air, at least temporarily.
Emission reductions that can properly regarded as '"surplus"
and that are banked will result in extra improvement in air
quality as long as they remain deposited in the bank.
As a matter of fact, initial experience with emissions tra-
cing demonstrates that many trades have resulted in signifi
cantly more reductions and/or faster compliance than would
have been if firms had complied with traditional regulatory
requirements {see Appendix X).
Nonetheless, emissions trading raises several problems that
may have an adverse effect on air quality. Problems for the
maintenance, attainment, and improvement of air quality
may occur in the following contexts: .
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- 115 -
a) Netting may lead to significant net increases in emissions
Netting excuses plants expanding or modernizing in PSD areas
from new source review requirement so long as the "net"
increase in plant-wide emissions is "insignificant" (i.e.
net emissions must not exceed 100 TPY for CO; 40 TPY for
NOX, S02, VOCS, and 25 TPY for TSP). Therefore, each indi-
vidual netting transaction, by definition, will carry the
risk of a slight degradation of air quality due to the fact
that insignificant net increases in emissions are de facto
considered to be equivalent in ambient effect. Moreover,
where insignificant net emission increases due to netting
transactions occur simultaneously at different plants or take
place successively at the same plant(s) in the same PSD area
a significant increase in emissions is to be expected. Un-
less such de minimis transactions are considered on a cumu-
lative basis over a reasonable period of time, sources could
be routinely expanded or modernized yearly, adding emissions
up to the significance level '.
b) Equal intrapollutant trade-offs may nonetheless degrade
air quality
The Clean Air Act requires states to develop separate plans
to attain and maintain the NAAQSs for -each criteria pollu--
tant. Thus all individual bubble, netting or offset cases
must insolve the same pollutant, i.e. trades across pollutant
categories are impermissible®'.For example, only reductions
of particulates can be substituted for increases of particu-
sates, reductions of SO2 for increases in SO- etc. Similarly,
increases in pollutants posing severe health hazards cannot
be traded against corresponding decreases in less harmful „
pollutants, even if within the same category. However,
decreases in hazardous pollutant emissions may be "traded
-------
- 116 -
down" against increases of non-hazardous pollutants within
the same category.
There are well-founded fears that equal trade-offs among the
same pollutants may nonetheless degrade environmental quality
because of the different physical and biochemical characteristics
of the traded emissions or the undetected presence of accom-
panying non-criteria pollutants.
For example, particulates emitted from a stack might have
a different size and chemical composition than fugitive dust
from roads or storage piles within a plant site and there-
fore might have a totally different and more harmful impact
on ambient air quality. This may become a major issue in
trades of fugitive dust emissions against emissions of parti-
culates from industrial processes even if ambient "equiva-
lence" 'is demonstrated through actual monitoring readings
rather than through air quality modeling.
Similarly, in some casrjs the failure of the Policy Statement
to differentiate between V'OCj of different reactivities can
lead to increases in emissions of highly photochemically
reactive compounds (numerically balanced by reductions of
negligibly reactive compounds) which could lead to
r> *
in ambient ozone formation^'.
Moreover, the Policy Statement does not prohibit trades in-
volving emissions of suspected hazardous pollutants, unless
those pollutants have bef^i officially designated as "hazardous"
under section 112 of *c.e CAA. However, once a pollutant has
been "listed" or " proposed " as hazardous, the require? .ents
for trades involving such pollutants should not be less
stringent than those for a fully-designated hazardous
tant until and unless a subsequent decision is made not do
designate it as hazardous
-------
- 117 -
Even if "pound for pound" trades will not increase total emis-
sions in an area, these transactions will generally redistribute
the total amount of emissions. And a redistribution of pollu-
tants within a given area may increase the total ambient
effects of pollutants when considering synergies of various
combinations of pollutants. On the other hand, some trades
which are not equal in ambient effect, nonetheless may have
beneficial air quality and public health benefits.
c) Restrictions on interpollutant trades may undermine
attainment strategy
By the Policy Statement1s restriction on interpollutant trades
between certain precursors of ozone the problem of ozone
formation" may be exacerbated in some areas. In various areas
in which the precursors contribute to the formation of ozone
for which a violation of the NAAQS exists, decreases in a
precursor generated by an interpollutant trade could reduce
ozone concentrations and thus bring these areas closer to
attainment11 * .
Furthermore, allowing inrerpollutant trades including NO
X
and SO- might be a useful mechanism for reducing acid depo-
sition 12) .
Finally, the Policy Statement would supersede regulations
in some AQCRs allowing interpollutant trades in order to
reduce hazardous pollutants13^.
-------
. -j-18 -
d) Ambient equivalence of "pound-for-pound" trades is some-
times questionable
Equal emissions from different emission points may well have
significantly different effects on ambient air quality, if
the impact areas of the emission points involved in a trans-
action are not the same. Therefore not only the amount of
emissions at the different sources but also the impact that
traded emissions will have on ambient air quality must be
taken into consideration. Since bubbles, offsets, netting
and emissions trading shift emissions to more cost-effective
pollution control locations, they will by definition gene-
rate some increase in ambient concentrations somewhere,
unless the emission plumes from the sources involved in
the transaction precisely overlap.
According to the Policy Statement, trades involving VQCs
and NO ., are exempt from ambient tests.owing to their
'mixing bowl1 characteristics, i.e. ambient impacts of
such trades generally occur across broad geographic areas.
Within such areas one ton of decreased emissions will be
regarded as equivalent in ambient effect to cne ton of in-
creased emissions, since source separation, plume height,
topography, and related factors ordinarily will make little
difference. As there is only little information available
about the atmospheric behaviour of these rsactive pollu-
tants, "pound for pound" trades may be treated as equal in
ambient effect. It may be true that the precise location of
increases and decreases of VOCs will make lii;tle difference
on ambient air quality, but the relative locsrlon of those
increases-and decreases makes a difference (e.g. coastal
increases of VOC in southern California can have more of
an.adverse air quality impact on ozone formation in the
downwind portions of the air basin than identical increase
located in the downwind areas). Therefore some states
-------
- 119 -
have stipulated additional criteria for assuring the ambient
equivalence of trades involving VOCs. For example, the
Commonwealth of Pennsylvania has a restriction on the di-
stance between sources of VOC involved in a bubble trans-
action, i.e. the sources involved must be within a maximum
40 miles of one another. In Massachusetts facilities lo-
cated at different sites can bubble provided for each 1O
miles of straight line distance between facilities, an
additional 5 % reduction of VOCs beyond RACT is realized.
It must be recognized, that also trades of NO emissions
Jt *"^^^—^^••^^^^^^^^^B*
involve the potential for localized site-specific ambient
standard violations14^.Asa matter of fact, the Policy State-
ment ignores the pronounced differential impacts of NOV
X
emissions and thus imperils the achievement or maintenance
of the NAAQS for N02- The dispersion characteristics of NO
emissions that .are converted into N02 after being released
from the stack are similar to those of SO- and TSP, i.e. the
ambient concentration of NO, at any location depends on the
location and stack parameters of NOV sources as well as
X
meteorological parameters. Hence, "pound for pound" trades
could deteriorate air quality at some points and lead to
violations of NAAQs for N02 if the ambient impact of N02
from the source increasing its NO emission is greater than
X
that of the source decreasing it. The result of such a trans-
action would merely be to trade one population's exposure
for anothers.
For trades involving non-reactive pollutants, such as £©2 »
TSP, or CO, whose ambient effect may vary with where the
emission increases or reductions occur, ambient considera-
tions are crucial. In addition to distance between sources,
plume parameters (e.g. stack height, temperature and velocity
of stack gases), pollutant characteristics, meteorology and
topography will also affect the ambient impact of such a
trade. In general, the area whose air quality is being im-
-------
- 120 -
proved by the added controls on one source will not
(or perhaps only coincide partially) with the area whose
air quality is being deteriorated by the other source in-
volved in the transaction. Therefore, "hot spots", i.e. sub-
areas of AQCRs in which the ambient air exceeds the ambient
standards, can occur even if dispersion modeling predicts
ambient equivalence of a transaction.
In some cases, the decision not to require modeling and the
assumption that trades resulting in no or insignificant in-
crease in emissions are equal in -ambient effect may have an
adverse impact on ambient air quality. For example, under
Level I of the three-tiered modeling screen no modeling is
required, if the proposed TSP, S02, or CO trade does not
result in a net increase in applicable baseline emissions,
the relevant emission sources are located in the same imme
diate vicinity, and no increase in emissions occurs at the
source with the lower effective plume height. In such cases
11 pound-for-pound" trades are treated as equal in ambient
effect, as it is assumed that modeling would not result in
different predictions. Similarly, "netting" transactions
are treated as equal in ambient effect and exempted from
modeling requirements, so long as any net increase in plant-
wide emissions is insignificant, and no-increase in emissions
occurs "at the source with the lower effective plume height.
Unfortunately, it cannot be assumed that the specific emis-
sion sources involved in such trades will always have simi-
lar effective stack height and consequently equivalent plume
parameters. Therefore, transactions involving emission sour-
ces of different stack heights and non-reactive pollutants
cannot ansure that their ambient effect is equivalent to
the impact of the original SIP limits. Moreover, such tran
actions offer the potential for sources to use increased
-------
- 121 -
stack height or dispersion techniques to cure localized
ambient standard violations by long-distance transport of
pollutants.
In general, no modeling is needed if the proposed trade does
not result in a net increase in applicable baseline emis-
sions. Whether a net increase in emissions has occurred,
thus triggering the requirement for modeling, will depend
on which level of emissions was used as the basis for the
design of the SIP. Where actual emissions were used, no
increase in actuals are permitted in Level I and II. If
allowables were used, increases in actuals up to the point
of allowables are permitted without triggering a require-
ment for modeling. In such a case, any increase in actual
emissions fbllowing the trade will inevitably lead to some
geographic variations in ambient conditions and a local
degradation of air quality, especially when non-reactive
pollutants are traded.
These problems are exacerbated, because of difficulties
in emission monitoring and uncertain and inadequate results
of emission-impact modeling^.First, monitoring techniques
for stack emissions are complex and unprecise and may lead-
to discrepancies between monitoring results and actual
ambient concentrations. For non-point emissions such as
wind blown dust and most other particulates, monitoring
techniques are almost speculative.
Second, modeling results are often of equal ambiguity. For
example,"most experts agree that modeling results may at best
be presumed to have a range of accuracy running from minus
SO percent to plus 100 percent" and "it is not uncommon to ... -
hear expert opinions that particulate modeling results are
inaccurate to a far greater degree" .'Hence, the difficulties
in tracking exactly the air quality effects will inevitably
-------
- 122 -
increase the probability that some pollution will go unde-j
tected, and ambient air quality will be degraded.
Third, when using traditional ambient air quality evaluation
techniques, such as the modeling screen contained in the
Technical Issues Document, the long-range transport of
pollutants involved in a trade will not be taken into consi-
deration. In general, these modeling techniques are based on
the conception of air quality as a local problem, whereas air
pollution, to a large extent, creates interstate pollution
problems due to the long-distance transport of pollutants.
For example, the long-distance transport problem, which
leads to secondary aerosols, regional haze, and acid rain
is associated with emission and transport of sulfur oxides,
particulate matter, and nitrogen oxides across several states.
Hence, even if trade applications can demonstrate ambient
equivalence and ambient progress respectively (when offset^
transactions are involved) for the AQCR where the trading
partners are located, these trades may nonetheless degrade
air quality in other regions due to the long-range transport
of the pollutants traded. Violations of ambient air quality
standards in one AQCR can thus be caused by trades among
sources in another AQCR over which the first has no control.
Although EPA is empowered to disapprove a state's implemen-
tation .plan if its emissions contribute to the violation of
NAAQSs elsewhere, proving culpability in interstate pollution
problems is difficult .In part because of the difficulty of
concluding that a single source in one state prevents another
state from meeting an ambient standard, EPA has not yet
acted on a single of those petitions filed to require emission
reductions from a source fn another state that violates
ambient standards by Ionj-distance transport of pollutants
'8}
-------
- 123 -
Different time phasing of emissions increases and decreases
may lead to short-term violations of NAAQSs
Another threat to air quality lies in the possibility that
emission increases at one source and emission decreases at
the other source(s) involved in a trade may not coincide over
time.
The Policy Statement requires that all emission reduction
credits must be based on a permanent reduction in the per-
mitted level of pollution emitted by a source. As an alter-
native, states may allow trades whose emission increases
and emission decreases are equal in duration rather than
strictly permanent.
However, this principle of "temporal equivalence" may be
violated if emission reductions from shutdowns would be
granted a permanent credit. According to the Policy Statement,
a state may grant permanent credits for emission reductions
regardless of how long the source which is reducing its
emissions would have been operating at the original emission
level. Emissions from a discontinued source may be treated
as if the source were continuing to operate. This option
allows firms to balance the emission increases from a rela-
tively modern plant, having a lifespan of 2O years or more,
with the reductions from a plant already at or near the end
of its life. For example, a plant that reduces emissions by
500 TPY, but will operate for just five more years, nonethe-
less will generate a credit of 500 TPY that may last twenty
years or more. Thus crediting reductions from shutdowns would
generate an increase in actual emissions in later periods.
It also carries the risk that the emissions of old high-pollu-
ting sources are replaced with emissions of existing modern
high-polluting sources.
-------
- 124 -
Even if emission increases and emission decreases are equal
in terms of permit duration, a different time phasing of the
traded emissions may lead to a temporary violation of ambient
air quality standards. When periods of higher emissions can
be balanced against periods of lower pollution, the resulting
temporal distribution of emissions could cause short-term
pollution episodes, in which the ambient air exceeds short-
term ambient standards. For example, if peak hydrocarbon
emissions from a new facility are in the fall, whereas the
reduced peak hydrocarbon evaporation from highway surfaces
would have been in spring or summer.
Similarly,if one generating station will burn high-sulfur
oil during peak load and will not operate for the rest of
the time, while a second generating station used for base
load supply burns low-sulfur coal without intermission. Or,
if a reduction in nightshift operations (e.g. a reduction from
3 to 2 workshifts) will be offset by -an increase in opera-
tions elswhere in the daytime.
In cases where ye.'rly (average) emissions do not increase
or even decrease as a result of a trade, nonetheless emissions
on a monthly, daily, or hourly basis can get worse. Therefore,
it must be recognized that emission increases and decreases
that may be equil on ?. long-term basis (e.g. yearly ^asis)
cannot always be mitigated on a day-to-day basis or on an
hour-to-hour basis.
f) Concern for the permanence of emission reduction credits
In general, for an emission reduction to qualify as an ERC,
it must be a permanent reduction in the level of pollution
emitted by a source. Use of an ERC which is not rarmanent
could adversely affect air quality by allowing ..ncreased
-------
- 125 -
emissions from both the source creating the ERC and the
source where it is used. Concern for the permanence of ERCs
is particularly relevant to reductions from fuel switches
and sources which are subject to-shifting demand.
In the case of utilities, in certain circumstances the use
of ERCs generated by fuel switches is likely to create sig-
19)
nificant dangers of future Clean Air Act violations . For
example, under the emissions trading policy a utility -may
well create and sell ERCs by voluntarily switching from oil
or coal to natural gas. Since the natural gas would burn
cleaner, as a result SO- emissions would decrease. The pro-
blem is that in the future the less-polluting fuel to be
used under the trade agreement may well be in short supply
or a mandatory requirement to switch back to the more
polluting fuel may be imposed on the source, but the neces-
sary offsets for the increase in emissions from the fuel
shift may not be immediately available. Then, in order to
keep producing electricty, the utility would have to switch
back to the higher-polluting fuel and thus would generate
emissions at higher levels than allowed. Therefore, ambient
air qx ality may be at least degraced until such time as
emission offsets become available.
In the case of sources which are s>uLj*sct to shifting demand,
it is particularly difficult, if not impossible, to insure
permanence of emission reductions that are credited and
used elsewhere . As a matter of fact, emission reductions
from certain existing facilities that cut back production
or even shut down will be offse-t- by equal or greater emis-
sion increases elsewhere whsn a relatively inelastic demand
for goods and services is likely to shift to similar sources
in the same area. Typical examples of such sources are dry
cleaners,, gas stations, and auto painting shops. If this
expansion takes place in the same nonattainment area, then
-------
- 126 -
the production cutback or shutdown will represent a "paper'U
reduction, constituting. little or no real reduction in net
emissions. If the corresponding increases in emissions from
another source or sources are not subject to permits and
offset requirements, granting ERCs in such circumstances
would inevitably result in a net increase in emissions.
Contributing to this problem is the fact that operating per-
mits frequently do not limit total production and thus total
emissions .The limitations apply to emission rates, specify-
ing a maximum level of emissions per unit of production, or
per unit of resource input. To the extent that permits do
not limit operating hours or production rates, their ability
to restrict total emissions is limited. Because many sources
operate below rated capacity, if demand for their product
increases they can step up operations and therefore increase
total emissions without requiring a permit modification
offsets.
g) Crediting "surplus" reductions in areas with a pollution
reduction "deficit" may jeopardize RFP
In addition to these issues, the emissions trading policy
raises several other problems that may have an adverse
impact.on ambient air quality. These problems relate espe-
cially to areas that have failed to identify and implement
sufficient emission reductions to meet NAAQSs, namely
(a) areas that have never developed a SIP or obtained EPA's
approval for-a complete SIP,
(b) areas that have gained EPA's approval for SIPs despite
• - • . ,-T**' - - i
the lack of a demonstration of attainment,
(c) areas whose demonstrations of attainment, even though
approved, are in reality gross overpredictions, and
(d) areas which have adequate SIPs on paper, but are not '
observing them.
-------
- 127 -
Even though these areas still have large pollution control
"deficits" to make up, the Policy Statement allows sources
located in these areas to treat some emission reductions
as "surplus" and to grant credits for such reductions. In
these areas, any such a reduction automatically would ad-
vance the date for meeting ambient standards, and would
reduce pollution thereafter. Crediting such a reduction,
however, would allow further delay in achieving already-
overdue standards, and thus undermine one fundamental re-
quirement of the Clean Air Act: the obligation to meet
NAAQSs "as expeditiously as practicable", and no later
than deadlines fixed in the Act. Moreover, crediting such
reductions will result in foregoing long-term improvement
of air quality beyond marginal attainment and maintenance.
Granting credits for reductions that cannot be properly
considered "surplus" raises very complex issues. As a matter
of fact, states have considerable latitude in meeting
attainment requirements of the CAA, so long as the total
amount of reductions required to satisfy the states' RFP
demonstration will not be reduced for each year in question.
The decision to impose stricter controls on other sources
than those granted an ERG for use in a trading transaction
is an option open to the discretion of the states in
establishing the mix of emissions which may be allowed while
still demonstrating RFP. In the Policy Statement, EPA even
encourages the spates to look everywhere else first, unless
there is no other practical way to satisfy attainment require-
than to take back or discount ERCs once granted
22)
However, the concept of RFP is only vaguely defined. Any de-
termination that an area is or is not demonstrating RFP may
be highly arbitrary and controversial. Many of the SIPs
fail to specify and commit to control measures needed to
demonstrate RFP, i.e. emission reductions identified as
-------
- 128 -
required in the SIP strategy are in many cases unspecific
regarding either source categories or the precise quantity
of required emission reductions. Some SIPs heavily rely on
emission reductions attributed to measures (e.g. a vehicle
inspection and maintenance program) which have yet to
receive legislative authorization. Often it is difficult,
if not impossible, to completely isolate a substantive
shortcoming in one area of a SIP from the rest of control
measures in the SIP. Any determination that emission reduc-
tions in addition to those traded have already occurred, or
that provisions for such additional reductions already exist,
is highly arbitrary. In most of these cases, the existing
uncertainties of demonstrating RFP are such that additional
reductions wilT definitely be needed to offset the emission
reductions used in trades.
However, finding, requiring, and implementing additional
emission reductions is no simple task and guarantees no
certain outcome. In theory, the sources wich have been
granted ERCs for "surplus" reductions may face the require-
ment to produce further rsductlons in the future, if RFP
does not materialize as projected. In practice, however,
this concept of requiring future reductions, if necessary,
is likely to prove unworkable - Once a firm has put on cer-
tain control equipment, it is bound to resist subsequent
efforts to require it to do more. Even though the facility
may have been earned that additional reductions may be
necessary after the credit has been granted, great amounts
of state resource? -.;ill often be required to insist on that
additional rrj-jtion. Or, worse, the additional reductions
may be~so costly, that thsy are never obtained. As further
'"control" frequently requires replacing or completely rede-
signing existing controls, it cannot simply be added. If
firms later must replace control equipment to produce off-f
setting emissions, the cost of applying retrofit techno-
-------
- 129 -
logy will be much higher than if emission reductions that
would be legally required in the future were incorporated
in the design of the initial equipment. Therefore, it may
be inappropriate to grant credits for emission reductions
before knowing if they are indeed "surplus".
The problem of granting credits for reductions that cannot
be properly considered "surplus" may occur in several diffe-
rent contexts:
(a) Use of allowable emissions as the baseline for emission
reduction credits
(b) Crediting reductions from shutdowns
(c) Crediting reductions from uninventoried sources
(d) Crediting reductions before they are incorporated in
the emission inventory
(e) Crediting reductions before they are legally required
24)
(f) Crediting reductions before they occur
ga) Use of allowable? emissions as the baseline for emission
reduction credits
Allowing an existing source to use allowable emissions as the
baseline for calculating surplus reductions, where it is
actually emitting substantially less than the amount permit-
ted under the relevant SIP (due to lower production levels,
more-than-required control, etc.), may result in air quality
deterioration. Evrr* if the SIP's demonstration of attainment
is based on •?.? lowable emissions and, in theory, the use of
allowables will not interfere with, the attainrcjnt requirements
of the CAA, these reductions are nonetheless "paper" reductions
While these trades on paper might look even, in fact emissions
would increase and thus undermine the obligation to meet
NAAQSs "as expeditiously as practicable".
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- 130 -
The Policy Statement prohibits such trades only if the actual
emissions rather than the allowables were used in the SIP'^Hp
demonstration of timely attainment, because then the difference
between actual and allowable emissions was assumed to be needed
to achieve attainment and cannot be used for trading. Never-
theless, a source can use an allowable emissions baseline in
an area where actual emissions were used to develop the SIP,
if it can demonstrate that the trade will not create a new
ambient violation or interfere with the planned removal
of an existing one, and if the state can show that the Base-
line is-consistent with its demonstration of RFP toward at-
tainment. However, when states have based SIP attainment demon-
strations on actual emissions rather than capacity or allow-
able emissions, in practice it is difficult, if not impossible,
to explain how the legality of granting a credit for "surplus"
reductions cculd be assured absent some link between the two.
Because there is no provision in the SIP which limits emissions
to the level that was used in the planning process. Thus, ^ffe
though the level of actual emissions may decrease to the point
where NAAQSs are met, emissions could subsequently increase
to the level Allowable in existing permits, resulting in a
violation of a NAAQS. In fact, reductions that affect only
permitted or allowable emission levels but not actual emis-
*•
sions would not be an improvement in «air quality. Crediting
such "paper" reductions would postpone attainment and con-
flict with the state's obligation to m^et the ambient stan-
dards "as expeditiously as practicable". Moreover, such cre-
dits would result in foregoing long-term improvement of air
quality beyond the level of marginal attainment.
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- 131 -
gb) Crediting Reductions from Shutdowns
The Policy Statement allows states to grant credits for
emission reduction from shutdowns if the SIP has not al-
ready assumed a set quantity of reductions from shutdowns
in its attainment strategy, because otherwise double-counting
would occur (i.e. granting credit for the same emission re-
duction, once to the state for use in its SIP, and a second
time to a source for use in a trade). Where SIPs assumed a
net "turnover" reduction due to the fact that new sources
are generally cleaner than existing sources which shut down,
states may still grant sources credits without this kind of
'double-counting. There are several options:
(1) They may adjust the SIP to eliminate "turnover" credits.
(2) They may allow credits only after the total quantity of
shutdown reductions assumed in the SIP has occurred.
(3) They may allow credit for a percentage of the total
emission reductions realized from a shutdown, if they
can show that such credit is consistent with the SIP's
demonstration of attainment and RFP.
Allowing ERCs from shutdowns in one of these ways will pose
problems in the following areas:
First, reductions from existing facilities which shut down
may be followed by equal or greater emission increases
elsewhere when a continued demand for goods and for services
is likely to shift to similar sources in the same area. There-
fore, allowing ERCs from shutdowns of sources serving a rela-
tively inelastic demand would resui *• j.n a net increase in
emissions.
Second, a reexamination of "turnover" credits and a decision
not to take credit for these reductions means that additional
reductions, beyond those predicted, will be needed if the
original predictions are to hold true. Crediting emission
-------
- 132 -
reductions from shutdowns therefore would allow further
in achieving ambient standards and conflict with the state's
obligation to meet NAAQSs "as expeditiously as practicable
Third, it will be extremely difficult, if not impossible, to
avoid double-counting when crediting emission reductions from
shutdowns. In practice, it cannot be determined whether the
SIP has already assumed credit for reductions from a parti-
cular shutdown in its attainment strategy, or whether it has
not. In general, SIPs incorporate into their attainment stra-
tegy a net "turnover" reduction in emissions. In light of the
methods generally used to project this net turnover reduction,
reductions from shutdowns are not an explicit or "set" quan-
tity but one which is implicit in the methods applied. Since
these methods project a net growth rate of emissions based
on the difference in emissions between new plant openings and
existing plants that shut down, no gross rate is determined
and no site-specific information is given. Hence, on the ba
of these methods, it cannot be definitely determined that a
particular shutdown has occurred in addition to those assumed
in the SIP and has caused a surplus reduction of emissions,
In this instance, to grant a credit to an individual shutdown
would inevitably involve the risk of double-counting the
en'-i!?<5ion reductions. Subsequent use of the ERCs would ti-ing
total emissions above the RFP demonstration level and would
contravene the CAA.
Nevertheless, EPA has accepted numerous transactions which
have employed 'shutdowns as a source of emission credits. In
-some areas credits for shutdowns even account for the
majority of ERCs claimed to date•.
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- 133 -
gc) Crediting reductions from uninventoried sources
According to the Policy Statement, sources not included in an
area's SIP emission inventory may create ERCs, so long as gran-
ting credits for reductions from these sources will not jeopar-
dize the area's demonstration of attainment or reasonable fur-
ther progress.
An examination of some of the early bubble and offset cases
indicates that some trades involve small sources and non-point
sources not previously subject to regulation, the emissions
of which have thus not been inventoried, modeled, and in-
cluded in-evaluating and designing the state's attainment
strategy. If emission reductions from such sources were parti-
ally credited and then used in a trade as a replacement for
reductions that were required to reach attainment, the SIP's
demonstration of attainment might be jeopardized. The result
of such a trade would be that NAAQSs could not be met "as
expeditiously as practicable" and that additional reductions,
beyond those originally projected, would be needed.
Another threat of crediting reductions from uninventoried
sources lies in the area of shifting demand - where new or
existing facilities not subject to permits, offset require-
ments, or production constraints increase production (and
emissions) to meet the demand generated by the production
curtailment or shutdown of a similar uninventoried facility.
-------
- 134 -
gd) Crediting emission reductions before they are incorporated
in the emission inventory
Current emission inventories are often seriously inadequate.
They suffer from being out of date and inaccurate. The problem
of uninventoried sources appears to be large and important.
Now, under the emissions trading policy firms will be granted
ERCs for emission reductions made after the most recent
emission inventory or monitoring data used in SIP developing.
Thus, ERCs would be granted for "pre-existing" emission reduc-
tions {i.e. reductions made before monitoring data are col-
lected for use in SIP planning) whenever states fail to update
their emission inventories or monitoring data.
In other cases, "windfall credits" will originate from
emission reductions obtained as an incidental side-benefit
of projects undertaken for some other economic reason (i.e
burning less fuel saves cash, and incidentally units less
pollutants or recovering the solvents saves costs in pur-
chasing expensive solvents, while the recovered solvents are
no longer emitted). Or, the control technology once installed
and operated, will turn out to generate emissions which are
below those specified in the permits. This situation may
exist because pollution control equipment operates in a step-
wise (and not-.incremental) manner or because of the difference
in costs of more or less polluting inputs (i.e. it is diffi-
cult, if not impossible, to generate reductions precisely
equal to the level required by regulation). When this happens,
sources would be granted "windfall credits" for not releasing
pollutants they woul<* not have released anayway. In the ab-
sence of the bankin-j and trading system these reductions would
have been a 100 % benefit for air quality.
-------
- 135 -
ge) Crediting emission reductions before they are legally required
or before they occur
So far in most areas PACT standards have been set only for
a small fraction of the source categories and individual
sources. In other areas, what the state have assumed to be
RACT appears to be inadequate, in relation to the ambient
air quality in these areas, and in relation to EPA's Control
Technique Guidelines and to standards in other areas.
Under the emissions trading policy a firm may gain an ERG
for reducing the emissions of a source lacking SIP-defined
RACT emission levels
(a) beyond a negotiated RACT baseline, or
(b) by using the actual emissions as a baseline.
Even though the states may take specific steps to satisfy the
attainment requirements of the CAA, these provisions are
giving some sources the opportunity to gain an ERC for a
last-minute "voluntary" reduction of emissions that soon
thereafter would partially have been required and implemen-
ted and which presumably should have been used to insure RFP.
The same problem may arise when a state allows a firm to make
a conditional deposit of ERCs, if the firm commits to produce
a specific emission reduction in the future. There is, indeed,
a potential for abuse of this provision through the banking
of future reductions in anticipation of pending new (or more
stringent) regulation. Such "surplus" reductions once banked
might thus be insulated from further regulatory tightening for
a significant portion of time. There may be a rush to the bank
whenever new technology requirement are anticipated because
firms will want to gain credits for reductions which would
soon be mandatory.
-------
- 136 -
As a matter of fact, reductions in emissions have already
occured by use of improved control technology and have been
used to offset increased emissions elsewhere, even though
rules that would have required the same technology were
already existing in the regulations of other states and/or
were pending in SIP revisions.
In general, the emissions trading policy will thus set the
stage for a race between regulatory agencies to set adequate
HACT standards or to update emission inventories and SIPs
and firms to claim credits for emission reductions that will
imminently be required by new (or more stringent) regulations
or will be assumed in calculating the reductions needed to
attain ambient standards.
As the Policy Statement proposes to grant a certain immunity
from the effects of new regulations as well as from updating
of inventories and monitoring data used in planning attainm
strategies, crediting such reductions and later using these
ERCs could undermine an area's attainment strategy. -Air quali
ty would r.ot be improved as expeditiously as practicable, and
additional reductions, beyond those already made and traded,
would be needed. Moreover, crediting such reductions would
result in foregoing continuous improvement of ambient air
quality beyond the level of marginal attainment-
-------
- 137 -
Extension of compliance deadlines may jeopardize RFP
According to the Policy Statement, states may extend compli-
ance deadlines for sources which propose a VOC or CO bubble,
so long as .they are located in areas that have received VOC
or CO attainment extensions until 1987 and can demonstrate that
these bubbles would be consistent with RFP.
Since any determination that emission reductions, in addition
to those deferred as part of the bubble approval, have alrea-
dy occurred, or that provisions for such additional reductions
already exist, is highly arbitrary and controversial, allowing
extensions of compliance deadlines may jeopardize RFP demon-
stration.
Similarly, the opportunity to bubble into compliance even
after enforcement actions are well underway may also delay
compliance while the proposed bubble is investigated. As a
result of such an extension of compliance deadlines, RFP
toward attainment might be placed in jeopardy.
-------
- 138 -
2. Cost-effectiveness
A central concern in designing environmental policies is to
meet the stated goals at the least costs to society. Therefore,
when evaluating the advantages and disadvantages of alternative
air pollution control strategies, particular attention must be
given to the costs of achieving the goals as set forth in the
U.S. legislation. The least-cost mechanism to meet the stated
goals should be encouraged.
When evaluating the cost-effectiveness of alternative pollution
control strategies, important caveats should be observed. First,
fair comparisions must include both private and public, direct
and indirect costs. Both the regulators and the regulatees will
bear costs associated with a specific air pollution control
strategy that must be taken into account. Moreover, both direct
,25)
and indirect costs must be included
Direct costs are the
costs of pollution control equipment and the associated opera^Lor
and maintenance costs. Indirect costs include all cosxs which
are not directly related to reducing emissions but which are
incurred in the process of coiuplying with and administering the
requirements of a particular approach, i.e. all transaction
costs, such as information, noddling, monitoring, administrative
and enforcement costs..
It is important to recognize that these transaction costs can
be, and usually are, significant; and that the ability to
correctly evaluate alternative strategies in terms of cost-
effectiveness heavily depends on ths ability to discern whether
each of these categories of ti* isaction costs are greater or
lesser among the alternatives in question.
Aside from such transaction costs, indirect costs also inclu
costs resulting from delays and uncertainties that can be a
buted to a particular approach. Even though direct costs and
-------
- 139 -
transaction costs of a particular strategy tend to be easier
to calculate than indirect costs of a delayed investment and
lost jobs, their omission from consideration would be a serious
failure in the evaluation.
Second, fair comparisons of aggregate pollution control costs,
both private and public, direct and indirect, caused by alter-
native strategies are only possible if the approaches bring
about comparable environmental results. For the case under con-
sideration, it can be assumed that emissions trading, if proper-
ly implemented, will produce equal or better ambient results
26)
than traditional regulation
Under the traditional command-and-control system regulatory
activities are directed toward prescribing detailed specifi-
cations for control technology to be installed and operated,
generally for each source of emissions within a plant. The main
focus in setting source-specific emission limits (such as design
standards, performance standards, or input standards) is on
achievement of emission reductions at each source. Generally,
i-h? costs per unit of emission reduction for a given pollutant
vary significantly between emission points within the same source
category and across different source categories (i.e. different
types of industry) emitting the same po]lutant(s). These cost
differences are the result of differences in age, design, size,
and other factors affecting an individual plant's marginal costs
of air pollution control. As a consequence individual sources
in some industries may spend many times more to remove an addi-
tional ton of pollution than sources in other industries or
even within the same industry.
In theory, "enlightened regulation'1 could take into account
the different pollution control costs faced by different sources
and reach cost-effective solutions by permitting less emission
reductions from sources with higher control costs in exchange
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- 141 -
for a greater emission reductions from sources with low
pollution control costs. In the actual implementation of source-
specific standards, U.S. regulators have been striving to
achieve better economic results, primarily by taking into account
differences in control costs among different categories and
subcategories of sources. Indeed, federal and state regulators
do recognize variations in control costs among industries and
even among some firms in the same industry. For example, the CAA
requires federal and state officials to take costs into account
27} 28)
in setting source-specific standards such as BACT , NSP , and
29)
RACT .
Similarly, the current regulatory approach specifies stricter
requirements for new sources than for old ones (see Table 7 ).
This concept is based on the notion that it will be less ex-
pensive to incorporate pollution controls at the time of a plant's
construction thin it would be to retrofit controls on older
existing ones at a later date.
Furthermore, in their SIPs to implement NAAQSs, states can take
individual existing sources' relative economic ability to control
emissions into account, so long as overall federally mandated
ambient air quality standards will be attained. Therefore-, SIPs
generally first deal with major sources that are easy targets for
regulations and enforcement and whose initial costs of control
are relatively low due to "economies of scale" in reducing a
large amount of emissions. Often stationary source control
measures, together with transportation control measures, admini-
strative and other measures needed to reach NAAQSs ere ranked and
implemented in order of cost-effectiveness. To rive -n example, in
the San Francisco Bay Area 34 stationary source conticl measures
were proposed by the Bay Area Air Quality Management District
{BAAQMD) in its 1982 Air Quality Plan that could result in a
daily decrease of about 7O tons of hydrocarbons. BAAQMD has
-------
- 142 -
Table 7
General Structure of Clean Air Regulation for Stationary Source;
Existing
Sources
New Sources and
Major Modifications
Nonattain-
ment
Areas
Attainment
Areas
RACTa)
&
Offsets
BACTC)
NSPSd)
Higher
Control
Costs
Lovrer
Control
Costs
Lcwer Control Costs
Higher Control Costs
a) RACT = Reasonably Available Control Technology
b) LAER = Lowest Achievable Emission Rate
c) BACT = Best Available Control Technology
d) NSPS = New Source Performan e "Standards
e) In order of relative stringency, the technology
requirements can be arranged as:
LAER > BACT > NSPS > RACT
Source: See M.H. Rosters, Governments Regulation:
Presei?, Status and Need for Reform, in
M.L. Tiachter and S.M. Wachter (ed.),
Toward a New U.S. Industrial Policy?
(Philadelphia: University of Pennsylvania Press, 1981),
p. 331.
-------
- 143 -
ranked these measures to some degree in order of cost-effec-
tiveness (see Table 8) •and expects no more than the first 22
will be needed to reach the NAAQS, of Motor Vehicle Inspection
and Maintenance will be legally authorized and will be as
effective as anticipated. The additional 12 proposals would be
placed on a contingency list to be activated if they are needed
later.
However, even where regulators take costs into consideration
in setting source-specific standards or in developing attainment
strategies, their efforts are not directed explicitly to achieve
a cost-effective result, and it is not clear exactly what the
result is in terms of cost-effectiveness I
For NSPS, for example, the CAP. fails to specify whether EPA should
focus on a firm's ability to pay for controls required by NSPS
or whether more emphasis should be placed on the marginal cost-
effectiveness of a standard. In practice, EPA often uses both
the ability-to-pay and the marginal cost-effectiveness criteria
32)
in trying to determine quantitative cost-effectiveness
With regard to new sources that have to meet more stringent
standards than existing ones, it is not true that prior fitting
of "best-available" control technology is inevitably less costly
than retrofitting I!less-than-best" but adequate controls. More-
over, the argument that prior-fit controls are less expensive
assumes that technology is static and that plants built today
will not have better, more cost-effective technology available
to them in the future33!
Even where regulatory agencies select emission reduction quotar,
for categories of emission sources that promise to be effective
in keeping down the total costs of their attainment strategy,
they use control cost differences in only the crudest way.
-------
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-------
- 145 -
Indeed, by ranking control measures in order of average cost
structures regulators fail to take advantage of the often
substantial differences in marginal costs among sources within
the same source category and among different source categories
emitting the same type of pollutant. In short, the current
regulatory approach will inevitably result in higher than neces-
sary total costs for achieving whatever reductions in total
emissions or levels of ambient quality.
There are several reasons for these systematic economic short-
comings of the traditional regulatory approach. First, the
achievement of cost-effectiveness as such is not an explicit
goal of the^existing regulatory regime. The agency personnel
developing source-specific standards have only a limited legis-
lative mandate and virtually no incentive to take costs into
34)
account . Second, the command-and-control approach is dependent
for its cost-effectiveness on an omniscience that a regulatory
bureaucracy cannot be expected to possess. Even where those
developing the standards are charged with taking costs into
account, defining reasonable effective and economical technology
for a half dozen different pollutants, for thousands of sources,
in hundreds of plants, in scores of industries, in all areas
of tne country is inherently a difficult task . Generally,
government regulators cannot know the technological opportunities,
the alrernative raw materials available, and the control costs
to devise a cost-minimizing plan for every plant in every industry.
They would have to have access to an enormous quantity of infor-
mation cf a sort which would be difficult to assemble for any
regulator not intimately familiar wit'a the scientific, tech-
nical, and economic data that are dispersed throughout the
country. Furthermore, they would have to revise their standards
frequently to accomodate changing costs, new technologies, and
changing economic conditions . In light of the exorbitant
information costs involved to determine a least-cost method of
compliance for each source and the limited resources of regulatory
-------
- 146 -
agencies regulators generally cannot identify and require
controls at the points of emissions with the lowest control
costs per unit of emission.
Third, in addition to the difficulties regulators are facing
in determining least-cost strategies, their technology-based
standards create rather disincentives for firms to voluntarily
seek out low-cost techniques for controlling emissions .
There is sufficient evidence of the "de facto requirement that
new sources of air pollution install specific technology to
38)
abate their pollution" . In many cases, the abatement tech-
nology which is actually being installed is equivalent to the
technology suggested by regulators, rather than being designed
to meet the limitations per se. The plants may reason that if
they do not meet the emission limits, they will be safe from
prosecution, so long as they have made a good faith effort to
achieve the standards by adopting the technology suggested byfj
the regulatory agency. Thus rather than encouraging less costly
innovation or the development of alternative technologies to
meet emission limitation!1, the current command-and-control
approach may encourage & risk-averting strategy of adopting
the suggested technologies even when they may be expected to
generate higher costs compared to those of innovative tech- ,
39)
nol.ogies
Finally, once a source has achieved the level required by the
emission standard, it has no incentive whatever to cut further
its emissions, no matter how low the cost. Indeed, it has a
positive incentive not do $f;< since any. emission reductions
beyond those minimally .required only would add to costs, ".educe
profits, and gain nothing in return. Worse yet, it risk;? making
itself and its industry a target for tighter regulations, since
it may have shown that the innovative control technology is
effective and therefore its industry can do more
-------
- 147 -
Without change, the traditional command-and-control approach
would induce only increased costs for both polluters and
regulators in areas with continuing air pollution problems.
To meet NAAQSs in the nonattairunent areas it would be necessary
to squeeze more emission reductions from sources already regu-
lated, probably at steeply increasing costs per unit of reduc-
tion. To give an example, the incremental emissions reduced
when a source moves from 9O to 95 percent control will almost
always cost much more than the average costs of the emissions
already being reduced. It would also be necessary to seek emis-
sion reductions from ever larger numbers of smaller and smaller
previously unregulated sources - entailing a more complex and
expensive regulatory process for every unit of reduction because
the payoff _from- each interaction is small.
Emissions trading offers opportunities to escape this trap.
Unlike the traditional regulatory approach, the emissions
trading policy aimes at making effective use of economic in-
centives to achieve stated air quality goals at the least cost
to society. "The primary objective of EPA's Controlled Trading
program is to minimize the costs of achieving the goals of the
41)
Clean Air Act" . The policy, therefore, is designed to expand
opportunities for states and industries to meet existing air
quality requirements by using less-costly control approaches.
Instead of requiring sources to meet the uniform emission
limits, the emissions trading policy allows sources the
flexibility to develop lowar-cost compliance strategies so
long as ambient air quality vjill not be degraded. Emission;:?
trading allows firms to create or purchase low-cose emission
reduction credits from on>> point of emission and to use these
reductions to meet or avoid regulatory requirements appli-
cable to other emission points where control costs would be
-------
- 148 -
high. Banking -introduces time flexibility into a firms lower-"
cost compliance strategy since a firm may create surplus
emission reductions when it is most economical (for example,
when installing new control equipment). In short, emissions
trading is giving firms the flexibility to substitute "surplus"
low-cost emission reductions for expensive ones, and to move
to costly controls only after inexpensive options have been
implemented. Such transactions can cover multiple emission points
within a plant or take place between plants owned by the same
or different companies.
By allowing a firm to increase controls where costs are low
in return for relaxing controls where costs are high, use
of the emissions trading program could sharply reduce a
firm's compliance costs. Since control costs tend to vary
even more between firms than between in-plant processes, and
since cost-savings are derived from this control cost dif-
ferential multiplant transactions will generally produce
42)
greater cost savings than intraplant trades
-------
- 149 -
As emissions trading is entirely voluntary and no state or
firm is required to engage in emissions trading, no details
regarding the size of potential cost-savings and how far they
will be realized can be given. There is, however, sufficient
evidence to substantiate the hypothesis that dramatic cost
savings have already been achieved through the use of emissions
43)
trading. According to the bubble statistics provided by EPA ,
EPA has approved 24 and proposed to approve 1O bubbles for
savings of over 2 164 million (non-annualized capital savings,
plus operating savings for the first year only) (see also
Appendix XI). Savings of £ 3 million each are assumed for the
14 bubbles for which figures are unavailable. Moreover, EPA
assumes average cost savings of % 3 million per bubble for the
bubbles already approved under review or development under state
generic trading rules. Including other bubbles under development
in EPA regions, EPA's best estiamte is 179 bubbles approved,
proposed or under development for total savings of $ 608 million.
EPA claims that these examples present only the "tip of the ice-
berg" in terms of ultimate potential for emission reductions and
44)
transactions that will result in significant cost savings
However, the year-end figures for 1982 indicate that the cost-
savings were much less than the $ 1 billion for savings from
bubble trades alone EPA had projected in April 1982 when the
4 "•, \
proposed Emissions Trading Policy was issued . This may be
partly due to the fact that EPA did not anticipate the chilling
effect on existing-source bubbles of NRDC v. Gorsuch, the con
tinued economic slowdown , or certain technical problems in ex-
panding the scope of generic rules ' .
While the bubble policy allows existing sources to reduce their
control costs, the offset and netting programs uervQ an analo-
gous function for new and expanding sources by allowing them to
locate, expand, or modernize cost-effectively in nonattainment
or PSD areas. Since the inception of the offset policy in 1976,
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- 150 -
more than 1.900 successful offset transactions have taken place
that have also .produced considerable cost-savings.
To sum up, there is very much supporting documentation to sub-
stantiate the hypothesis that bubbles, netting out, offsets and
the use of ERCs will significantly lower the direct costs of
meeting emissions standards and other requirements.
However, direct cost reductions are not the only economic
advantage of the emissions trading policy. There are also
significant indirect costs (resulting from delays and uncer-
tainties due to the traditional command-and-control approach)
that can be decreased by the regulatory reforms.
First, emissions trading can reduce delays for firms trying
to expand. Under the regulatory approach, for firms wanting
to expand several unsatisfactory and resource-wanting situa-
tions can raise the costs of building. Firms may suffer if
resources have been expanded, but project construction, com-
pletion and production are delayed. Costs for idle non-pro-
ductive resources and for contracts not met because of in-
sufficient production represent two indirect penalties of
delay. Moreover, firms depending on new plants for sale or
purcha'se of"products may also be negatively affected by de-
lays. The potential inability to quickly expand could also
limit the rapid exploitation of new markets and thus result
in a loss of the full profitability of investments.
The emissions trading policy can reduce such delays for firms
trying to expand and needing emission reductions for use as
offsets. Banking of ERCs would allow them to-create or pur-
chase FxCs in advance of their needs, thereby reducing the
delays attributable to finding and negotiating for offsets.
Even when plans are not yet certain, firms may create or
purchase sufficient ERCs for insurance against potential
delays in the construction or operation of the planned
facilities.
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- 151 -
Second, emissions trading can reduce the risk of firms con-
sidering new investment. Firms considering new investments
make their decisions on the basis of. expected profitability.
And profitability depends upon many factors that are inhe-
rently uncertain such as labor costs,energy costs, interest
rates, markets, equipment failure rates, environmental regu-
lations, etc. Other things being equal, the higher the risk,
the lower the expected profitability, and thus the likelihood
and/or extent of a new investment. By reducing the risk of
being unable to obtain an emission reduction at the time needed,
or at any reasonable price, emission banking and trading will
increase the expected profitability of an investment.'By
lowering the expected indirect costs that are considered in
planning new projects, emissions trading will generate a more
favorable climate for new investments and associated income
benefits and jobs.
It must"be recognized that the cost savings owing to emissions
trading may be somewhat reduced by the financial burden placed
on the agencies to administer and enforce the emissions trading
and banking program the administrative costs incurred by the
47)
applicants '. However, the cost savings for the firms under
the emissions trading approach appear to be considerable even
if the transaction costs are taken into account. Since a firm
must apply for the trade, it can determine for itself whether
the added administrative costs exceed the likely savings or
benefits. At least for all trades reported to date, the savings
in direct and indirect costs of creating or purchasing emission
reduction credits must have been greater than or equal to the
transactions costs associated with the trade.
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- 152 -
3. Economic development
Environmental issues cannot be separated from questions of
regional economic activity and development. In general, any
efficient air pollution control strategy should be flexible
enough to adapt to normal expansion in economic activities
which tend to accentuate air pollution problems. Therefore,
environmental regulators face the problem how attainment
and maintenance of NAAQSs can be reconciled with the desire
for new growth and expansion both in nonattainment and PSD
areas.
To reconcile economic growth and air quality goals, the
traditional regulatory approach aims at specifying ambitious
goals for new or expanding sources so that progress towards
cleaner air occurs as new or expanding facilities replace
older ones. "Technology-forcing" requirements are also based
on the idea that maximum pollution control from new sourc
is necessary in order to provide room for the location of
other sources in the interest of growth and economic develop-
ment. This is particularly true in light of the requirement
for RFP and the indications that emissions from many existing
sources in nonattainment areas will be increasing or remain
constant. In PSD areas the growth potential may be quickly
filled out without techno logy-.torcing requirements, as the
first new source(s) built in an attainment area might absorb
the entire available "non-deterioration increment", "using up"
the assimilative capacity of the area and thus leaving no
capacity for future expansion or growth.
Even though the technology-'oreing requirements of the current
regulatory approach may be growth-protective in theory, tney
have not always been that way in practice^**'. Since controls
on new or expanding sources are much more stringent than tl
on existing ones, new investment and modernization that cou.
result in improved productivity (since never plants usually
•
5U^T
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- 153 -
embody the latest and most productive technology) have been
discouraged to some degree by pollution abatement costs that
are higher than for existing plants. Existing plants are given
a certain degree of protection from competition by strict
technology-forcing requirements for new and expanding sources.
Thus older, less efficient, and more polluting sources tend
to be.kept in operation longer, and shutdowns and geographic
shifts are discouraged. Paradoxically, technology-forcing thus
not only may have inhibited new investment, modernization,
and revitalization of industry, but also may have led to
pollution levels that were higher in the interim than if
the regulatory hurdle for new investment were lower. And as
a result of higher pollution levels, no room for new growth
and expansion could be permitted under the terms of the CAA.
As a matter of fact, by the mid-1970s it became apparent that
progress toward meeting NAAQSs was too slow, so that many
areas failed to meet the statutory deadline. Literally inter-
preted, the CAA required the states to prevent any new con-
struction or modification in areas failing to meet the dead-
line, because new sources would worsen already substandard
air quality and interfere with the attainment of the NAAQSs.
Thus, the current regulatory system would have restricted
economic development and growtn in areas that were behind
schedule in attaining statutory standards.
Since it was not feasible to prohibit growth in the many
nonattainment areas, Congress and EPA granted each state
•chi opportunity to develop and implement new strategies to
allow for new construction and expansion.
Under the terms of the CAA Amendments states now have the
option of a growth-allowance policy which is part of, rather
than an alternative to, direct regulations. They may create a
growth margin in their SIP by requiring more stringent controls
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- 154 -
in excess of those required to attain and maintain NAAQSs.
In these states, the growth "cushion" or margin, fully or
partially, can be used to compensate for emission increases
from new or expanding sources. If the growth allowance is
used up, states have to require offsets.
As a matter of fact, where sizeable growth-allowance allo-
cations were made available to new or expanding sources
{at no cost), firms were highly pleased, especially after
having conducted disappointing searches for external off-
sets. Even had an appreciable cost been charged by the
agency, the companies still might have found the benefit
of certainty (i.e. a definitive outcome on a permit appli-
49)
cation within a circumscribed time) worth the charge
Similarly, in PSD areas the "increment" system, which specifies
allowable increases of emissions for two pollutants (partic^M
late matter and sulfur oxides) will ensure that economic growth
will occur in tLese areas in a manner consistent with the
preservation of existing clean air resources Each new major
facility or modification of a major new source whose emission
increases exceed a de minimis level, may consume a portion of
the increment, so long as total emissions do not exceed the
baseline conc^ntratirn for criteria pollutants, and ths
emissions from al.1 new or modified facilities do not exceed
the increment. The allowable increase in pollutants under the
increment system is about 2 to 5 percent of the NAAQS in class
I areas (i.e. certain national parks and wilderness areas),
25 percent in class xi areas (i.e. all other attaiviment areas),
and 50 percent \;'i class III areas (this designati'jn is not
currently used) ior annual standards. Air Quality Control
Regions, in turn, will translate the'maximum increments into
allowable increments; in other words, emissions space that
can be allocated to existing or new stationary emission so\
Increment-consumption book-keeping must track and record
)iS^£:
-------
- 155 -
portions of the increments consumed by the post-1977 siting
of installations in a PSD area in order to determine how much
of the increment remains available for additional facilities.
Moreover, new major sources and modifications of a major
source are subject to PSD review and must meet BACT require-
ments.
In addition to the growth-allowance provision in nonattain-
ment areas and the increment system in PSD areas, states
were given the option of developing and implementing the
offset policy which now has become a part of the emissions
trading policy. The emissions offset policy was adopted as
part of the 1977 Amendments to the Clean Air Act as a means
for allowing growth and economic development while ensuring
or reestablishing RFP in nonattainment areas or curing an
increment violation in a PSD area.
Under the emissions trading policy, existing as well as new
sources now have several options for expansion and growth:
First, existing facilities expanding or modernizing in PSD
or nonattainment areas may be exempted from new source review
requirements, sc long as the expansion or modernization does
not produce ?. significant "net" increase in plant-wade emissions,
Nettin out is accomplished by assuring that any emission in-
crease is compensated for by "surplus" reductions elsewhere
within the sane plant. By "netting out" of new source review
the new facility may be exempted from the offset requirement
(i.e. to create emission "offsets" for the emissions increases,
that might absorb the entire available "non-deterioration in-
crement"), installation of BACT or LAER control technology,
preconstruction permits and associated requirements, and
applicable bans on new construction. The new source, however,
must still meet applicable NSPS.
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_ 156 -
Second, new major stationary sources and modifications that
cannot "net out" of new source review and whose emission
increases would exceed the increment in PSD areas or would
jeopardize attainment of NAAQSs in nonattainment areas are
required to secure sufficient surplus emission reductions
to "offset" their increased emissions. The offset provision
in a PSD area requires a new major source or major modifi-
cation to offset its net increase in emissions with an equal
reduction in emissions from existing sources. In a nonattain-
ment area, the reductions required must exceed the amount of
emissions added by the new or expanding source.
Third, emission reduction banking allows sources to get
emission reduction credits (ERCs) for surplus reductions and
to "bank" (store) such ERCs in a legally-protected manner.
ERCs can be later used in netting and offset transactions to
allow for expansion, modernization and growth without furth
deterioration of ambient air quality. Under the 1976 Offset
Policy, surplus reductions had to be used immediately in a
transaction with a new source or the credit for reduction was
lost. Creation, and storage of offsets fo^ future use were
not allowed. This discouraged existing sources from creating
surplus reductions at optimal times (for example, when new
control equipment was being install ;J) , anu made it uncertain,
difficult and' expensive to find and secure inexpensive "ex-
ternal" offsets. Banking, by contrast, can encourage the
creation of less costly ERCs at optimal times and create a
pool of readily available credits thciL provides the certainty
needed for firms seeking to locate, «xpar.«.; or modernize in
nonattainment or /attainment areas.
In theory, emissions trading, if properly and widely imple-
mented, will allow for normal expansion in economic activiti
It can significantly facilitate siting and entry of new
sources of pollution as well as expansion and revitalization
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- 157 -
of existing ones. Moreover, emissions trading appears to
offer a means of having the proverbial cake and eating it
too. Air quality is not sacrificed to economic development.
Neither is economic development strangled by environmental
constraints.
In practice, almost all states had incorporated offset pro-
visions in their SIPs. As of October 1982, about 1,90O off-
set transactions have taken place . "Without question, the
principal purpose which the offset policy was designed to
serve has been satisfied: to provide a 'safety velve' permit-
ting legal continuation of economic growth in nonattainment
areas. Had the offset policy not been adopted and implemen-
ted, and had the prior legislatory been fully enforced, most
of the hundreds of external and internal offset cases ....,
either would have relocated to some attainment area, or been
drastically cut back, or hot have been undertaken '".
However, it must be recognized that the gains in terms of
better adaptability to economic development do not go auto-
matically to any state which adopts an emissions trading
system, since the details of the sybtem a state adopts
can significantly affect the amount of offset transactions
it will experience.
For example, there is a great deal of discriminatory power
put in the hands of state and local control agencies who
approve or disapprove offset t.tctdes anc1 vho establish and
administer banking and trading systerra. It has been argued
that offset provisions could be used for a particular kind of
C "* \
economic development to discourage economic growth, rather
than to allow for easy entry of new sources and expansion of
existing ones. That is, the agencies could tighten the regu-
-------
- 158 -
latory screw for new or expanding sources to the limit of
their financial capability by establishing high offset rat!
Finally, administrative delays in the new source application
process due to certain offset provisions could discourage new
development.
But so far it has not happened that way. Some studies show
that in most cases
— LAER was set equal to NSPS,
— offset ratios barely exceeded 1:1/ and
— regulators evidently did not implement systematically
the requirement of state-wide compliance
53)
In short, the offset policy did not inhibit economic develop-
ment.
However, pollution offsets generally are likely to be only
available to accomodate expansion by companies already
operating facilities in the areas where they wish to expend.
Major facilities seeking to locate in certain areas where they
are not currently operating are likely to experience diffi-
54)
culties in obtaining offsets . For example, among the mrmy
hundreds of offset transactions only about 25 were "external"
offsets or interfirm trades. The rest were "internal" offsets
which do not resemble market transactions. That is, f.he market
for inter-firm transactions has been limited. It appears that
companies with existing pollution reduction potential have been
and will be unwilling to lower emissions to create offsets and
sell them to a company wishing to construct a new source or
expand an existing one, especially in cases where Lhe coinpa*.i-=s
55'
•flay eventually r>.-ed offsets for their own expansion ' . Or,e of
the underlying causes for the limited number of interfirm trans-
actions may have been the fact that banking was not available
to help sources find outside emission reductions.
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- 159 -
Generally, it must be recognized that emissions trading allows
expansion by new firms only to the extent that offsets and
cheap ERCs for use in offset and trade transactions are avail-
able and a viable market for ERCs exists.
In the long run, however, it will become more and more diffi-
cult to find suitable sources for offsets in industries that
are already highly controlled '. If RACT is continuously
redefined and made stricter, there are less and less oppor-
tunities to obtain cheap ERCs for offset transactions
Furthermore, the bubble and netting policy will inevitably
reduce the available supply of cheap ERCs from existing sources
which are elementary for the viability of the offset policy.
Bubbles, and especially netting, will increase "internal
trading" and thus will not facilitate siting and entry of
58)
new sources in an area
Moreover, there are some interrelated factors that may be not
favorable to the development of a viable market in ERCs,
namely:
— Uncertainties regarding applicable emission reduction
baselines and the use of certain emission reductions as
a source for ERCs;
— Uncertainties regarding an effective 3n?:orcement that
induces the need for emission reductions and thus creates
the demand for ERCs.
— Uncertainties regarding the success of an area's attain-
ment strategy that may affect the integrity of ERCs created;
— Uncertainties regarding the supply of ERCs, so long as
a strategy of hoarding and consuming Fi\Cs internally,, as
59)
needed, dominates and precludes external offsets
Such uncertainties and market imperfections constitute serious
deterrents to an increasing volume of transactions needed to
permit room for the expansion of new and existing sources.
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- 160 -
On the other hand, there are some factors that indicate th
emissions trading may stimulate a higher volume of trans-
actions/ such as:
As time progresses, replacement of aged plant equipment
with more efficient new plants will increase the demand
for ERCs (because of the PSD and Offset requirements) and
at the same time may generate more supply of ERCs {from
imposing LAER on major modifications replacing old facili-
ties having only SIP minimum controls)..
As regulatory requirements expand to cover more RACT source
categories/ the demand for ERCs will increase to the extent
that credits cna be purchased cheaper than retrofitting new
RACT equipment controls.
As technology for better controls, more efficient processes,
and changes in raw material usage improve, economic choij
with regard to manufacturing profitability will likely
to ERC supply creation.
The cited uncertainties will deminish with time and working
knowledge, thereby reversing their present dampening effects
on ERC supply and demand.
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- 161 -
4. Technological Advancement
Despite new pollution from industrial growth, total air emis-
sions in the U.S.A. have decreased significantly. However,
more pollution control will be needed to assure that Clean
Air Act requirements are met as expeditiously as practicable.
To meet the NAAQS(s) in areas with continuing pollution problems,
it will be necessary to squeeze more emission reductions from
sources already regulated - probably at steeply increasing costs
per unit of reduction. At a time of rising control costs and
shrinking resources, only increased technological innovation
and diffusion could speed continued progress toward clean air,
permit more room for economic growth, and mean improved air
quality a.t reduced - rather than increasing - costs. Therefore,
an efficient air pollution control policy should establish
permanent incentives to develop, install, and operate innovative
pollution control technologies.
The traditional regulatory policy of air pollution control is
primarily based on the idea that government authorities must
always specify ambitious goals for new sources so that progress
towards cleaner air automatically occurs as new plants replace
Oder ones . In part, the "technology-forcing approach" derives
from the idea that maximum pollution control from new sources
is necessary in order to permit maximal room for potential
growth both in PSD and nonattainment areas, as well as to en-
hance the margin of safety in the SIP. It is also based on the
notion that it would be less expensive to incorporate pollution
controls in the design of new plants than it would be to
"retrofit" controls en older existing sources.
Another argument in the defense of "technology-forcing" is that
regulators must guarantee a future market to pollution control
equipment manufacturers . Thus assured, these suppliers will
respond with innovative technologies,,and polluters will be'
-------
- 162 -
unable to. argue that "the required technology does not
Finally, the technology-forcing approach derives from a
general feeling that controls cannot be tightened continually
for air quality improvement if pollution abatement technology
is not moving ahead with them. Thus, new source standards
become tied up in the drive for gradually setting lower and
lower pollution targets ' .
There is little doubt that, during most of the 1970s, when
the United States made great efforts in pollution abatement,
technology-forcing requirements of the CAA encouraged consi-
derable technological innovation and diffusion . But meanwhile
it is appropriate to ask whether the process of tightening
standards for new and existing sources might slow the pace
of technological innovation and diffusion and, in the process.
slow short-term progress toward stated air quality goals
64)
t
First, the Clean Air Act directed the EPA to set standards
thousands of different sources of pollution. Moreover, these
standards are to differ depending upon the-pollutants emana-
ting from these sources, the air quality in the region sur-
rounding it, the age of the source, and its financial condi-
tion. But establishing these standards has been no easy job.
EPA simply ha«: not had the time or the resources to set
all these, standards. -More than .1-3- years after the 197O CAA
amendments EPA has yet to develop standards for a number of
important sources*^). The absence of a standard adds uncer-
tainty to any decision to construct such, a source or signi-
ficantly .modlly an existing one.
A second, and i;iore serious, difficulty besetting the techno-
logy-forcing approach is that its effectiveness in terms of
technological innovation and diffusion clearly depends on
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- 163 -
the informational demands on the regulators^), in establishing
technology-forcing emission standards regulators should
possess much specific technical knowledge and an awareness
of each source's special problems. However, regulators are
likely to be poorly and belatedly informed; they are certain
to be ignorant of the specifics of each case and simply can-
not deal with the enormous variation and flux of case spe-
cifics. A uniform emission standard can never take into account
the age, size, design, degree of use, etc. of any particular
piece of equipment or process. Therefore, even the best-
intentioned bureaucrat cannot, in general, possess the de-
tailed information needed to determine the proper innovative
control technologies. Only those who operate the plant have
this information. Compared to regulatory agencies, plant
operators have undoubtedly far more resources in terms of
case-specific knowledge as well as technical and managerial
expertise to find innovative, more efficient, and more cost-
effective ways of reducing pollution^7^.
Third, the technology-forcing approach only can foster new
control technologies which lower the costs of meeting the
standards. Once a source has achieved the level required by
the emission standard, it has no incentive whatever to cut
further its emissions, no-matter how low the cost. Indeed,
it has a positive incentive not do so, since any emission
reductions beyond those minimally required only would add
to costs, reduce profits, and gain nothing in return. A
firm that develops more effective control measures receives
no reward or credit for doing so, as extra emission reduc-
tions do not generate profitable ERCs that can be traded
for cash.- held for future expansion, or used to offset an
increase in emissions elsewhere in a plant.
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- 164 -
Fourth, it is asserted that the traditional regulatory ap-
proach creates incentives for polluters rather to cease
pollution control research and development of new control
techniques and to hide any technological breakthrough from
CQ\
regulatory authorities . These disincentives exist because'
innovative technologies, once they become known, could be
used by regulators as a basis for setting tighter standards
in the future, thus imposing new costs on a category of
sources'. Innovative firms risk making themselves or their
industry the target for increased regulatory demands by
revealing locations and means by which greater emission
reductions are possible. Thus technology-forcing requirements
tend to freeze rather than promote innovative control tech-
nology.
Fifth, regulators do not legally mandate the type of techn
logy re'quired to achieve compliance with emission standard
Firms are generally free to use alternative technologies to
g q \
meet the established emission limits . However, there is
sufficient evidence of "the de facto requirement that new
sources of air ... pollution ins? tall specific technology to
abate their pollution" . In many cases, the abatement tech-
nology which is actually, being installed is equivalent to
the technology suggested by regulators, rather than being
designed to meet the limitations per se. The plants may
reason that if they do not meet the emission limits, they
will be safe from prosecution and will avoid penalties so
long as they have made a good f aJ tw, effort to achieve the
standards by adoptin9 the t°cV uoJ.ogy suggested by the control
agency. Thus rather than enconraging innovation or the develop-
ment of alternative technologies to meet emission limitatiois,
the current command-and-control approach may encourage a risk-
averting strategy of adopting the suggested technologies e
when they may be expected not to meet the standards
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- 165 -
Sixth, the introduction of innovative control technology is
also discouraged in light of some cases where innovative
equipment had been installed but did not perform as anti-
72)
cipated . In such cases, the firms were generally forced
to remove the innovative equipment and to replace it by
conventional equipment. While Federal law and most state
offset regulations encourage introduction of innovative
control technology and EPA often provides cost sharing
grants for tests of innovative control technology, never-
theless most regional agencies are reluctant to issue
permits incorporating innovations unless the applicant
agrees to replace the innovative equipment in the event
it fails to perform as anticipated. This attitude not only
forces a firm to commit capital for the cost of the innova-
tive equipment, which being innovative typically costs more
than conventional equipment, but also enforces the firm to
budget a contingency for possible total replacement of the
innovative technology by proven technology. Thus, the communi-
ty shares only the benefits of success rather than the risks
of failure/ that would lead to higher pollution for a period
of time.
Finally, since controls on new sources are much more strin-
gent than those on existing sources, companies have had an
incentive to keep their older, less efficient, and more
heavily polluting plants limping along . Paradoxically, this
not only may have inhibited the modernization of industry's
plant and equipment, but also may have increased the total
amount of pollution.
On the other hand, emissions trading promises to produce more
innovations in oollution control technology, faster moderni-
zation, and better industrial productivity, all at signifi-
cantly reduced costs. It could transform existing disincen-
tives into positive and continuous incentives for better control
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- 166 -
- not merely the minimum required - because extra control
will become profitable and produce a valuable commodity
that can be traded for cash. Firms that exceed the legal
minimum now can sell the resulting emission reduction
credits to other firms with higher abatement costs. Unlike
traditional technology-forcing approaches, the emissions
trading policy encourages plant managers to seek low-cost
pollution control strategies. This can put engineers to work
to solve problems instead of lawyers to work litigating
whether problems exist to be solved.
Emissions trading will also provide insurance for innovation,
since it allows shortfalls in new control technologies to be
met by ERCs. Generally, emissions trading will decentralize
compliance decisions to the plant managers whose circumstan-
ces can neither be anticipated. In theory, emissions trading
will thus provide a more dynamic force for innovation in
pollution abatement than the most ingenious "technology-
forcing standard" any regulator could write down in the
Federal Register74}.
Under the emissions trading policy there is generally less
incentive to hide emission reduction possibilities. However,
since the new approach is only a supplement and net an alter-
native to current regulations, emission standards will con-
tinue to be determined by the air pollution control authori-
ties on a case-by-case basis, so to capture any advances
made in air pollution control technology. This may dis-
courage some companies to develop and install innovative
equipment to reduce emissions and thus create and trad-.* ERCs,
if the transaction itself serves as a signalling device
for finding new or more advanced controls and for tighten-
ing future emission standards . If the new equipment
creating an ERC were jedged technical feasible and cost-
effective by the regulators, then such equipment would
immediately become the standard for the industry. Although
firms that actually create the ERCs are most vulnerable,
other firms in the industry with similar pollution control
systems may also face more stringent emission standards.
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_ 167 -
But then who in industry would create an ERG by installing
innovative technology that could be used for setting tighter
emission standards in the future? From industry's standpoint,
such innovations are to be shunned like the plague.
However, firms that actually create the ERCs by employing
innovative technologies are not immediately a target for
extra regulation. For instance, where sources voluntarily
agree to a RACT baseline before RACT has been established
in the SIP for their source category, EPA encourages states
not to impose more control requirements on such sources for
a period of time consistent with the statutory deadlines
for attainment, unless there is no other way to satisfy the
requirements of the CAA . This means that even where the
source category is a top priority for further control, indi-
vidual sources which have agreed to negotiate RACT baselines
to determine surplus reductions should be exempted from
reexamination. As such sources have done more the.n was
required at time, in EPA's view they should not be penalized
for helping the states determine what RACT should be for the
source category at issue.
The obvious link between emissions trading and coirmand-
and-control may have been one of the underlying causes for
the fact that, so far, emissions trading did not substan-
tially motivate industrial firms to develop and install
innovative technology, reduce emissions, and so create
ERC's in the bank?7).
By and large, emission reductions occured because the plant
exchanged currently available controls on some sources for
similar controls on others. Moreover, many ERCs for bubbles
originated from relatively low-cost investments such as fuel
switches, reduced operation already-planned plant and equip-
ment-closures, where the costs directly-attributable to
creating the ERC are insignificant. Other ERCs originated from
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- 168 -
emission reductions obtained as an incidental side-benefit]^^
of projects undertaken for some other economic reason, such
as energy conservation or solvent recovery systems, or plant
innovations.
There are only few cases where firms did make substantial
investments in alternative control strategies that seem
"innovative", either in ways of managing pollution or in
actual controls (e.g., the 3 M Bristol bubble, GM in Defiance,
Ohio).^However, such results should be expected in the early
states of a new program, where regulatory risks to users are
perceived to be high, where the most inexpensive alternatives
would be used first, and where firms would seek to minimize
large research or development costs.
-------
- 169 -
5. Administrability
It is conceptually possible to design a strategy which
sparkles with acceptable environmental results, better
adaptability to economic development, cost-effectiveness in
terms of direct costs (i.e. all costs that are directly
related to reducing emissions, such as control equipment,
operation and maintenance costs), and other desirable
features. However, administrative costs may be of such a
magnitude that the implementation of such a strategy is
not feasible. Therefore, it is important to recognize that
the burdens, both public and private, of administering the
requirements of the air pollution control policy must be
taken into account when examining and comparing alternative
strategies. Their omission from consideration would be
a serious failure in the evaluation of alternative strategies,
The administrative processes for controlling air emissions
under tha traditional regulatory approach are no doubt
complex, resource-intensive, time-consuming, and costly.
Administrative costs, both public and private, incurred in
the process of administering the regulatory requirements
include:
- Information costs; Identification of the emission sources
and determination of their emissions (emission inventory);
determination of attainment/nonattainment status (ambient
monitoring); determination of the impacts of emissions on
ambient concentrations (diffusion modeling); calculation
of po!3.utio:i abatement costs of emitters (as a basis for
setting of standards).
- Administrative costs: Control agency personnel to set
standards, to develop strategies to attain or maintain
ambient air quality standards, to allocate emission re-
ductions to meet ambient standards, to review applications,
-------
- 170 -
to issue and revise permits which embody the allocation,
to record permits and contracts, to submit and revise
SIPs; company staff to apply for permits, to demonstrate
the ambient equivalence of permit applications.
Indeed, the administrative costs of the traditional regula-
tory approach, prove substantial (see Table 9 ).
Under emissions trading much of the burdensome administrative
process associated with the current regulatory scheme will
remain in place. Importantly, the same types of permit con-
ditions would be required. Thus, the administration issues
under either scheme will be by and large identical. There
are, however, some issues of administration that will add
to the administrative burden presently experienced by federal,
state and local agencies. Additional administrative costs
associated with the adoption of emissions trading may inelj
(a) Costs for developing generic rules and running the bank
Where states adopt "generic trading rules" to reduce the need
for .resource-intensive and time-consuming individual SIP
ievisions, additional administrative costs will be involved
in developing such generic rules.
Similarly additional costs are incurred in developing "generic
banking rules" and running the bank. This will include veri-
fying and processing ERC requests, certifying ERCs, tracking,
an^. performing clearinghouse functions, i.e. to track owner-
ship, use, and transfer of all banked ERCs and to serve as
a cl-aringhouse for credits on rleposit, and account for trans-
fers and withdrawals for ERCs.
-------
- 171 -
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- 172 -
Despite some fears of large resource costs for running t
bank the banking systems in operation are not at all examples
of new bureaucratic agencies.
(b) Costs for examining alternative emission reduction plans
Each time a source proposes an alternative approach to emissioi
reduction, some state and local resources will be needed to
review the merits of such an approach. To do so, the agencies
will have to establish reliable procedures for determining
the applicable emissions baseline and ambient impacts.
The process of assessing and confirming the amount of emissions
reduced will inevitably burden the administrative resources
of state and local agencies. Even though this burden can be
reduced when the documentation of emission reductions is in-
corporated into existing permitting and SIP systems, add
nal administrative costs will be associated with the confil
tion of emission reductions. Possible additional costs may
include:
— Engineering analysis of proposed alternative emission re-
duction plans performed by the" agency staff to establish
the applicable baseline and determine the magnitude of the
emission reductions proposed or created;
— Site visits by agency staff to examine the nature of the
change, e.g. installation of additional control equipment,
change in process equipment and/or input, shutdown of a
source or facility; pro^'zction curtailment etc., and
— Monitoring of c-rols; .ions before and after the proposed
change to determine the,.magnitude of the reduction',
created.
-------
- 173 -
Ambient tests are required for most of the proposed trades
in order to ensure that the air quality impact of trades
is equivalent to the impact of the original SIP limits.
Therefore, the Policy Statement in its Technical Issues
Document proposes modeling requirements linked to the likely
ambient effect of a proposed trade. Even though the policy
is designed to limit the role of the agencies to deciding
what kind of demonstration is required and how adequate the
results are, the agencies will still need a great amount of
time and expertise just to review the technical data, check
all the details, and keep the records.
Indeed, the costs to review the merits of an alternative
approach to emission reduction may prove substantial if the
proposal is quite innovative and therefore requires more1
careful consideration, more in-depth information on sources
to establish specific emission limits and operating conditions,
and prolonged regulatory negotiation.
(c) Increased permitting burdens
Implementing the emissions trading policy will inevitably
increase permitting burden. For example, states may have to
issue new permits, if ths sources involved in a transaction
or applying fcr an ERC are not operating under a permit. As
a matter of fact, there are some states without a permitting
system; in other states permits may not have been issued for
all major sources.
The agencies may also have to issue new permits to small and
non-point sources that are involved in ^missions trading
transactions. Since emission reductions from these sources
not historically given much attention by the regulators now
can qualify to be credited, issuing permits to an increasing
number of such sources may substantially increase the admini-
strative costs of the agencies.
-------
- 174 -
Furthermore, states will have to rewrite existing permits
reflect the changes in emissions that will follow a trade or
the creation of an ERC . When changing the terms of a permit
states may have to specify additional requirements to assure
that the permit provides adequate compliance information,
e.g. a reliable method of determining compliance through desigi
standards, operating conditions, production records, input
factors, or similar indirect means. To be enforceable, the
compliance instrument must include not only information on the
effectiveness of the proposed pollution control measures, but
also specify applicable restrictions on hours of operation,
production or input rates, enforceable test methods for deter-
mining compliance, and necessary record-keeping or reporting
'requirements.
To be enforceable, the new policy may even require to expand
the number of design standards in order to deal with a
of new pollution control technologies empleyed under
trading . Rather than being limited to a specific technology
or performance level, each existing source would be free to
adopt any technique which results in emissions equal to or
lower than allowable emissions under the source's permit.
Thus, the variety of technologies employed under emissions
trading will probably be infinitely greatpr than under the
current regulatory approach. Therefore, EPA will either have
to greatly expand the number of its design standards to deal
with the wide range of possible technological adjustments and
to ensure that all performance requirements are met, or develop
more effective techniques to monitor performance directly.
Devising enforceable- design standards for all small and non-
point sources involved in emissions trading transactions appear
to be equally difficult as EPA has not had the time or the
resources to establish standards for major categories of
pollution sources, even though approximately 13 years have
passed since the Clean A'ir Act first directed EPA to do so.
-------
- 175 -
For a few states, agreements and permits currently in use may
be an acceptable means for exercising the necessary authority
over trades and ERCs. For most states, however, existing
permits and procedures will need to be augmented to ensure
that they provide the necessary information to allow states
and EPA to enforce emission limits and compliance plans.
Although such revisions need only occur on a case-by-case
basis when trade applications are submitted, they may nonethe-
less involve substantial resources.
Since bubble applications can be submitted even after enforce-
ment actions are well underway, alternative emission reduction
proposals may lead to prolonged negotiations. Where a bubble
is proposed for a source whose compliance has been the subject
of long regulatory negotiations, agencies may have to extend
negotiations that otherwise might be concluded.
(d) Additional costs for SIP revisions
Trades outside the scope of approved generic trading rules
must continue to be reviewed as individual SIP revisions.
Hence, state agencies will have to commit a significant
portion of staff time to reviewing proposed SIP revisions
and their consistency with the CAA, going through the neces-
sary administrative procedures (including adoption by the
board, public hearing, etc.) and then negotiating with EPA
for final approval. This process is resource-intensive and
may produce lengthy delays.
As bubble, netting, offset and other transactions by defini-
tion include at least two emission points, administrative
requirements will apply to more than one source. Thus trans-
actions will result at least in a duplication of some of
the administrative requirements mentioned above before an
activity following a trade can operate. In light of the
fact, that, in theory, there is no limitation to the number
-------
- 176 -
of emission points that can be included in an alternative
emissions reduction plan or another transaction, the agen-
cies may even face a multiplicity of analytical permitting,
and other administrative tasks.
A glance at Table 10 will show that, in practice, individual
applications for bubbles under New Jersey's Generic VOC
Bubble Rule have included a minimum of 3 sources. But there
are also other applications where VOC controls are traded
among more than 30 sources. In one case alone, New Jersey
approved a bubble that allows DuPont's Chambers Works to
overcontrol T. large stacks to 99 % in lieu of 85 % controls
on 113 petrochemical process-fugitive sources. To ensure
that the emission reductions for 'all sources involved in such
bubbles will not degrade ambient air quality and will .be en-
forceable, the technical information for each of the sources
involved in the transaction must be reviewed and the operating
permits must be revised. Thus emissions trading may indeed
place great demands upon the agencies' administrative capacT
ties.
Hence, there are fears that the implementation of the emissions
trading policy will impose more burdens on the agencies' admini-
strative resources than they can bear. As a matter of fact,
the pollution control agencies in the United States histori-
cally have been underfunded relative to their administrative
needs . And just now, state pollution control agencies are
threatened with staff reductions due to budget cuts and the
"new federalism". Therefore, they will be hard put to take
on new duties. To the contrary, a large number of states have
indicated that they may reduce certain important air program
activities (including the development of emissions trading
systems) proportionately to the proposed reductions in the
level of federal support for their environmental programs or
more (see Table 11 ) .
-------
Table 10
- 177 -
Bubbles Processed under New Jersey's Generic
•
J
Company &
location
Du Pont
Deepwater
Boffman-LaRoche
Nutley
All Purpose
Roll Leaf
Paramus
National Can
Edison
Peraacel
New Brunswick
Dri Print Foil
Rah way
3M Corporation
Freehold
East Coast
Finishing
Fairview
Inmont
Bound Brock
Rexhara
Fleming ton
Keuffel &
Esser
Rockaway
Johnson &
Johnson
East. Surg. Dress.
New Brunswick
Burroughs Corp.
Carlstadt plant
Burroughs Corp.
Park Ridge plant
American Can
Recency plant
Edison
American Can
Daytcn plant
So. Brunswick
Industrial No. of
Catscorv Sources
chemical 119
mfg-
pharn. 4
m^g »
surface coating 36
to produce roll
leaf
Can coating 9
afg. pressure 19
sensitive tape
coating 33
coating of 6
magnetic tape
paper coating 3
paint' mfe. 5
flexible pkg. 8
material mfg.
film & paper 6
coating
coating & 9
misc.
3
3
can coating 7
can coating 3
VOC Bubble Rule
4750 tpy?
438 tpy
628 tpy;
304 t?y
1049 tpy;
NA
164.1 tpy;
32.8 Ib/hr
5376 Ib/hr;
4113 Ib/hr
1588 Ib/hr;
761 Ib/hr
3644 Ib/hr;
1377 Ib/hr
NA
70 trsy;
51 tpy
12703 tpy;
4446 tpy
264 Ib/hr;
NA
848 Ib/hr?
•848 Ib/hr
•
486 Ib/hr;
280 Ib/hr
199 Ib/hr
*199 Ib/hr
83.4 Ib/hr
*83.4 Ib/hr
14.8 Ib/hr
••14.8 Ib/hr
Source: EPA, The Controlled Trader, Vol
D.C. November 1981, p. 3.
1 No. 3, Washington
-------
- 178 -
Table 11
States' Response to a 20% Reduction in Federal Support
Air Programs
Environmental Program
Activity
General Permitting
PSD Permitting
Compliance Determination
Enforcement Against Non-
Compliance Sources
Toxic Emission Control
Ambient Air Quality
Monitoring
Emissions "bubbles"
Emissions "banking"
'82' SIP Development
(Stationary)
'82' SIP Development
(Mobile)
I/M
Other
Eliminate
Activity
Reduce Proportion-
ately to Budget
Number of States
2
11
1
1
7
1
8
10
3
4
4
0
27
21
33
26
14
36
17
14
16
14
8
12
Not Reduce
Activity
12
11
5
» *
9
2
9
4
3
3
6
2
Source: National Governors' Association Committee on Energy and
Environment, The State of the States: Management of En-
vironmental Programs in the 1980s, Washington, D.C., May 1982,
-------
- 179 -
However, there are some factors that may prevent the admini-
strative burden caused by the emissions trading policy from
completely overwhelming the state agencies:
First, by adopting EPA-approved "generic trading rules" the
administrative complexity of compliance with the CAA can be
reduced by exempting transactions from the need for indivi-
dual SIP revision and approval by EPA. Normal SIP processing
generally is extremely uncertain, resource-intensive, and
time-consuming. It often produces lenghty delays and unneces-
sary federal review of routine decisions by state agencies.
Under generic rules, trades which produce no net increase in
emissions and whose ambient impact can be evaluated in a
simple, straightforward manner can be approved by the state.
without case-by-case EPA review. Howeverr EPA will have to
continue to perform its oversight responsibilities under the
Clean Air Act by auditing state applications of these rules
to make sure individual trades remain environmentally accep-
table. In general, it can be assumed that the adoption of
generic rules will substantially reduce the administrative
complexity, uncertainty, delays, and costs associated with
SIP revisions and thus reduce the administrative costs of
EPA, states, and undustry. Based on experience in EPA Region
III normal SIP processing and approval of a bubble application
took about 1O months, whereas concurrent SIP processing time
for a bubble proposal now is only 6 months (see Table 12).
Second, "netting" removes the administrative burden of new
source review requirements from plants expanding or moder-
nizing in PSD areas, so long as any increase in plant-wide
emissions is insignificant. By netting out of review the new
facility may be exempted from preconstruction permits and
associated requirements, including monitoring and modeling.
Thus netting out of NSR has the advantage of reducing per-
mitting and corresponding administrative demands on regula-
tory personnel.
-------
- 180 -
Table 12
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
Ration III - ttti & Walnut Stt.
. 19106
SUMMARY OF REGION III BUBBLE ACTIVITIES3)
1. REGION III BUBBLES
BUBBLES APPROVED - 7. TSP - 2
BUBBLES PROPOSED - 5 TSP - 2
BUBBLES UNDER DEVELOPMENT - 15_ TSP - 5.
TOTAL - 27 9
2. COST SAVINGS
FOR BUBBLES APPROVED
FOR BUBBLES PROPOSED
• $ 41,000,000
•
- $ 38,000,000
so
SO, -
S0« -
4
3
10
FOR BUBBLES UNDKR DEVF.LOP- - $100.000.000
MENT
TOTAL - $179,000,000
3. TIME SAVINGS
NORMAL SIP PROCESSING/APPROVAL TIME - 6 MONTHS/BUBBLE
BUBBLE CONCURRENT SIP PROCESSING TIME -_4 MONTHS/BUBBLE
SAVINGS - 4 MONTHS/BUBBLE
a) As of 2/1/83.
VOC
VOC
VOC
1
0
T_
6
Source: U.S. EPA.
-------
- 181 -
Third, while regulatory agencies may face a multiplicity of
analytical, permitting, and other administrative tasks if
a substantial number of emission points is included in an
alternative emissions reduction approach, enforcement burdens
may sometimes be lessened in such cases. For example, if
abatement efforts under a bubble focus on some major emission
points and ignore minor ones, compliance monitoring require-
ments may be reduced and the enforcement burden lessened.
The approved bubble at the DuPont plant in New Jersey will
reduce VOC emissions by controlling emissions to 99 percent
at seven large stacks in lieu of state-required 85 percent
control at over hundred vents, pumps, and seals. . The bubble
will thus produce easier enforcement, since only seven sources
need be controlled and inspected instead of over 100 smaller
petrochemical process-fugitive sources.
Fourth, while some bubble, applications may extend regulatory
negotiations that otherwise might be concluded, others may lead
to an earlier conclusion of negotiations; and earlier compli-
ance. Moreover, the additional burden placed on regulatory
agencies is likely to be more than offset by gains from lower
compliance costs. Therefore, good-faith efforts to comply less
expensively should be encouraged even if an alternative emission
reduction proposal may lead to prolonged negotiations.
Fifth, while some bubbles and generic rules do require more
up-front agency resources than "standardized" permitting (e.g.,
bubbles involving complex Level III modelling or rules adopting
Level II), the great bulk appear to have required no more
resources than normal permits. This is true even though
most of the "first wave" are prototypes whose processing has
not yet been routinized. It can be assumed that administrative
costs associated with implementing emissions trading will
decline with increasing experience. Furthermore, since the
April 1982 Policy Statement EPA has taken several steps -
-------
- 182 -
including the model rule, audit guidance, and new streamlin|
modelling procedures inter alia incorporating a limited Leve3T
III (2/17/83) - to further reduce potential administrative
costs .
Sixth, EPA has designed the emissions trading policy to mini-
mize the use of state and local resources by placing the
burden of initiating and developing trade proposals as well
as demonstrating the ambient equivalence of the proposed trans-
actions on the regulatee. For trades involving open dust
sources of particulate emissions, the sources must even agree
to postapproval monitoring to determine if predicted air
quality results have been realized. The effects of these
provisions are twofold: The sources proposing a trade or
applying for an ERC will have to bear the initial development
and demonstrating costs, thus reducing the financial burden of
the agencies. Moreover, since the firms have to bear the costs
of developing an alternative compliance strategy and meetinc
the exacting demonstration requirements, transactions for
which these front-end expenses exceed the prospective cost-
savings of benefits would be precluded. As a result, the
administrative burden of the agencies will be reduced since
the number of trade applications to be processed will be
restricted to those cases with prospective self-financing of
administrative costs.
Seventh, some state agencies have received supplemental appro-
priations to implement emissions trading programs because of
their positive effects in promoting economic revitalization
and preserve local jobs. For other state and local trading
programs the resource problem in administering and enforcing
emissions trading could be partly solved by charging permit
fees sufficient to cover the costs of reviewing alternative
emission reduction proposals. In fact, the CAA already re-
quires permit fees so that the costs of pollution control
-------
- 183 -
programs and requirements are covered by the companies. There-
fore, solutions to the funding problem could be that the
states implement the permit fee provision to maintain tech-
nical competence in the permit review process, but also that
EPA makes the implementation of this provision a condition for
allowing the states to take advantage of emissions trading.
Indeed, EPA will probably incorporate a permit fee section in
the final Policy Statement.
To sum up, the administrative burden of emissions trading still .
is far from clear. The costs associated with each administra-
tive function added cannot yet be estimated. Nonetheless, the
demands placed upon the agencies' administrative capacities
by the emissions trading policy appear to present special but
resolvable problems.A good measure of the issue's weight is"
the fact that despite states' claims of large resource costs
for implementing emissions trading the volume of emissions
trading applications, approvals, and states developing generic
rules continues to grow. This may also be due to the fact that
all generic rules and many bubbles will produce substantial
downstream resource savings through clearer decision rules,
avoided litigation, faster compliance, as well as reduced
Federal "second-quessing" of state actions.
When evaluating alternative strategies to control air pollution
it must be recognized that the goal of any policy should not
be to minimize the administrative costs only of the agencies
and to place the costs of the new policy on the regulatee.
Instead, the total administrative costs, both public and private,
must be considered when evaluating the administrability of any
approach.
As a matter of fact, the administrative burden placed on the
regulatee, of complying with the requirements of the emissions
trading policy can be significant.
-------
- 184 -
Additional costs associated with alternative emission reduc;
tion plans may include:
(a) Front-end expenses in developing compliance alternatives
and demonstrating ambient equivalence
While traditional regulations are to be implemented at the
expense of the state (or EPA), alternative compliance strate-
gies can only be realized if the applicants bear the admini-
strative costs of demonstrating ambient equivalence. Thus
a source proposing a trade or applying for an ERG will incur
significant front-end expenses in developing compliance alter-
natives and meeting EPA's or the state's exacting demonstration
requirements.
According to the Policy Statement, ambient tests are required
for most of the proposed trades in order to ensure that the
air quality impact of trades is equivalent to the impact of
the original SIP limits. Therefore, the Policy Statement
in its Technical Issues Document proposes modeling require-
ments linked to the likely ambient effect of a proposed trade.
In Level I of this three-tiered screen, no modeling at all
is required, if the proposed TSP, SO_ or CO trade does not
result in a net increase in applicable baseline emissions,
the relevant sources are located in the same immediate vicinity,
and no increase in emissions occurs at the source with the
lower effective plume height.
In Level II a relatively simple mathematical dispersion mo-
deling is done to predict changes in ambient air quality,
considering only those emission sources involved in the
transaction. This level of analysis requires an expenditure
of relatively small resources, in terms of both work-hours
and computer time. If the net change in air quality deter-
-------
- 185 -
mined by a Level II analysis is less than the level of sig-
nificance defined by the policy, than the need for more
costly refined analysis is removed.
^ Level III analysis is required if either there is a net
emission increase or if there is a net change in air quali-
ty greater than the level of significance as determined by
a Level II analysis. Full dispersion modeling, considering
alls emission points within the impact area of the sources,
whether or not they are involved in the trade, is more time-
consuming and resource-intensive. Such refined analysis
normally requires long records of sequentially recorded
meteorological data (i.e. 1 or 5 Years of hourly data) in
more complex dispersion models (e.g. "sequential" models).
As a matter of fact, the Policy Statement virtually requires
full dispersion modeling for all off-site trades where
emissions increases would be in excess of a few-pounds per
hour. In order to demonstrate ambient equivalence of a
proposed trade, in many cases significant expenditures for
satisfying full-scale ambient tests are to expected.
For trades involving open dust sources of particulate
emissions, the sources must even agree to post-approval
monitoring to determine if predicted air quality results
have been realized. The front-end expenses to meet these
requirements can be significant. For example, Armco Inc.'s
efforts to demonstrate the benefits of the bubble concept
as applied to iron and steel plant fugitive dust sources
at its Middletown, OH Works have-spanned several years
(from late 1977 through March 1981). The major effort in
this bubble proposal was the commitment to proceed with the
alternative compliance strategy at a cost of som $5 6 million,
while having not guarantee of success or acceptance.
There are fears that in some cases the administrative burden
placed on the regulatees may be so great that they will not
find alternative compliance proposals or applications for an
ERC to be worth the trouble. However, where the use of
-------
- 186 -
emissions trading could make a real difference in a source1
compliance costs or could generate significant profits, the
prospective cost savings or profits will probably more than
outweigh the initial development and demonstrating costs.
(b) Search costs
Other transaction costs relevant to the users of emissions
trading are search costs. Search costs pertain to the expense
and time of gathering information on the availability of
potential "surplus" emission reductions for use as offsets.
These costs which are generic to bubble and offset trans-
actions between two or more firms can be, and usually are,
significant, so long as there is no bank in operation.
However, banking can and will improve information on the
availability of ERCs and potential offsets, assist industrial
new-comers and expanding sources who seek low-cost offsets
and thus reduce search costs.
(c) Banking fees
Additional costs that will be incurred by the users of the
emissions banking and trading system are the application fee
and the withdrawal fee for emission reduction credits. To
give an example, the San Francisco Bay Area Air Quality
Management District (BAAQMD) requires for deposits of ERCs on
its emissions bank an application fee of £ 9OO plus $ 15O
per source involved. The withdrawal fee accounts for $ 1OO
per withdrawal. For on-site credits in the informal bank,
there is only a $ 100 application fee, and no withdrawal
fee.
In light of the significant cost-savings or profits from crea-
ting, selling or using ERCs, banking fees cannot be regarded
as a major obstacle for the viability of emissions trading.
-------
- 187 -
6. Enforceability
When an emission source is allowed to be^perated once the
necessary permits are granted, the source can be considered
to be in compliance. However, demonstrating initial compliance
by meeting the permit requirements does not necessarily en-
sure the source's compliance over time. To ensure such
continuous compliance, enforcement activities of the federal,
state and local agencies will generally be necessary, since
voluntary compliance with the emission limits and other regu-
lations has usually proved to be unreliable. Given the SIPs,
the emission standards, the data and control techniques deve-
loped in other functions of environmental regulation, reliable,
effective enforcement is crucial to assure that the legally
required -emission reductions are really made.
A strong and effective enforcement of emission standards will
generally entail
- a system of regular inspection of sources to detect possible
violations
- a system of enforcement actions including violation notices,
abatement orders, civil penalties for violations or court
ordered injunctions.
The effectiveness of any strategy clearly depends on the
vigor and clout of the enforcement mechanism. Violators of
regulations must first be detected. They must then be prose-
cuted, found guilty, and given a substantial penalty. If any
of these steps fails, the violators get away (virtually)
free despite their disregard for the emission limits.
Effective enforcement is not only a necessary precondition to
assure compliance with the legal requirements and thus achieve
the stated air quality goals but also to any cost-effective-
ness argument in favor of a particular control strategy. Fair
comparisons of pollution control costs are not possible if
-------
- 188 -
the alternatives approaches are not equally enforceable and
do not bring about approximately the same ambient air qualit
results.
The traditional regulatory approach addresses the problem of
reaching and maintaining NAAQSs by relying on enforceable
requirements for individual pollution "sources". Enforcing
source-specific emission limits often consists of ensuring
that the mandated control technology or the proper type of
fuel is being Used, or that the source is not operated for
a longer period of time than permitted.
Unfortunately, enforcing source-specific emission limits un-
der the current regulatory approach and assuring continuous
compliance has proved difficult if not impossible. There
is great uncertainty about the extent to which sources ac-
tually comply with their emission limits. Most attainment
projections assume full compliance, but non-compliance is
common, apparently much more so than EPA recotnizes. For 198O,
EPA reported that 90 percent of major air pollution sources ^B
were in compliance with emission limitations (see Table 13 ).
An investigation by GAO, however, challenges EPA's data. GAO
concluded that the national compliance rate was considerably
less and noted that EPA itself had found "out of 921 inspections
of sources supposedly in compliance, 20O or 22 percent, ... in
violation". In two regions GAO visited, it found that 70 per-
cent of sources subject to'enforcement action since 1973 and
reported as complying with their abatement schedules in fact
were not in compliance. In addition, noncomplying sources, as
compared to sources in complicance, produced disproportionately
large amonts of emissions.
There are several reasons for these shortcomings of the tra-
ditional regulatory approach:
-------
- 189 -
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- 190 -
First, control agencies have not had the resources and time
to inspect all sources operating under a permit regularly.
Monitoring techniques for stack emissions are complex and
costly, thus preventing EPA and the states from inspecting
enough sources to assure compliance over time. Moreover, even
the less expensive enforcement methods (i.e. inspections and
opacity readings) are infrequently used. An investigation by
the U.S. General Accounting Office (GAO) concluded that only
"few major air pollution sources have been classified in
compliance as a result of onsite inspections and source tests,
the most reliable methods of determining compliance". According
to GAO "only 25 percent of the major sources were found in
compliance by the most reliable methods" and "72 percent were
certified by the States based on unverified information".
Second, even where compliance tests have taken place, the
methods applied, such as monitoring techniques, 'snapshot'
inspections, use of self-reporting data provided by the
ces, or indirect methods of determining compliance are not
necessarily reliable and thus will not assure adequate compli-
ance.
As a matter of fact, the determination of the compliance
status of most sources with any precision is difficult, if
not impossible. As stated above, monitoring techniques for
stack emissions are complex and imprecise. Moreover, moni-
toring techniques for non-point sources such as wind blown
dust and most other particulates are almost speculative .
According to EPA "snapshot" inspections are not an effective
means to assure compliance over time either. Indeed, many
sources are not visited more often than once a year, although
those inspected tend to be sources with especially high emis-
sions or sources with a past record of frequent noncompliance
Moreover, a significant number of inspections are preannounc
thus allowing potential violators to come into compliance b
-------
- 191 -
the inspection take place. Finally, several studies suggest
that high turnover among inspectors, and consequently a low
level of experience, hampered the effectiveness and credi-
bility of the inspections.
Allowing sources to self-certify their compliance status
appears to be equally questionable so long as there is no
auditing program to complement government inspections and
enforcement. And indirect methods of determining compliance
(by using production or input factors), are also not necessari-
ly reliable.
Third, enforcement actions by EPA and the states against
detected violators generally take a long time and are often
ineffective.
Effective enforcement also plays an important role for the
viability of emissions trading. Strong, effective enforcement
of emission limits is one of the necessary preconditions for
emissions trading to operate effectively. If there is not an
equally strong and certain incentive for sources to comply
with their emission limits, a source will not make the re-
quired emission reductions. It is the individual sources'
need for emission reductions that creates the demand for
ERCs that is an essential, central component in emissions
trading. Unless sources need ERCs, there is no incentive to
seek and buy ERCs. However, without (sufficient) demand for
ERCs there is little incentive for other sources to find
emission reductions and to create ERCs for sale.
Since emissions trading is only a supplement and not an alter-
native to current regulations, under emissions trading much of
the burdensome enforcement process associated with current
regulations will remain in place. Since enforceable compliance
instruments will be required for any transaction under the
emissions trading program, many of the enforcement difficulties
-------
- 192 -
associated with the traditional command-and-control
will equally apply to enforcement under the new scheme. Thus,
the enforcement issues under either scheme will be by and
large identical.
There are, however, some issues of enforcement under the emis-
sions trading policy that will add to the monitoring and en-
forcement problems presently experienced by state and loca
agencies:
First, emissions trading will add to the enforcement burden in
terms of quantities. It will increase the number of sources
that must be monitored and thus may overwhelm resources avail- *
able to assure adequate and continuous compliance with regula-
tions. An examination of some 'of the early trades indicates
that the new policy will involve small and non-point sources
not historically given much attention by the regulators, the
emissions of which have hence not been inventoried or monitoMfcl.
The emissions trading policy requires not only to issue permffs
to those sources not previously subject to regulation- and to
measure their emission reductions, but also to enforce the
terms of the permits to ensure that the trade agreements are
kept. Measuring emissions directly from these sources, especial
ly from the open dust sources, may be extremely difficult and
expensive. Even if the burden of post-approval monitoring to
demonstrate if predicted air results have been realized is
placed on the regulate, it would still take significant re-
sources of the agencies to check the validity of the monitoring
results. However, the post-approval monitoring is a one-time
verification of the effectiveness of control measures. Once
verified, the monitoring is of the measures themselves (e.g.
road paving) which are usually quite easy to check.
-------
_ 193 -
Second, in many cases the (major) point-sources on the inven-
tory will need to be inspected more frequently than under the
existing regulatory approach. For example, state and.local
authorities now often prioritize inspection procedures so that
sources operating substantially below their allowable emission
limitations are only infrequently inspected. However, when
emission limitations for these sources operating below their
allowable emission rates are lowered in exchange for a real
increase in emissions elsewhere, these sources must be in-
spected more frequently, because periods of higher emissions
will be then more cirtical to the overall attainment strategy.
On the other hand, sources will still only agree to limits
which they can meet with a substantial margin of safety to
avoid violations, whether or not the particular emission limit
has been lowered as a result of a trade. Therefore it appears
that exceedance of the new limits under an alternative emission
reduction plan creates neither a greater danger to ambient
attainment, nor a more difficult enforcement problem, than
exceedance where the limits were not re-arranged. Moreover,
in some cases where control activities under a transaction
focus on some major emission points and ignore minor ones,
compliance monitoring requirements may be reduced and the en-
forcement burden lessened (e.g., the Du Pont Chambers works
VOC bubble). Similarly, where emission reductions result from
shutdowns and equipment removal, enforcement of the reductions
becomes a.simple matter.
Since bubble applications can be submitted at any time, and
even after enforcement actions are will underway, the oppor-
tunities to disrupt enforcement programs and to delay compli-
ance may be significant. According to the Policy Statement,
a bubble can be approved even for an individual emission source
which is the subject of a federal enforcement action or out-
standing enforcement order so long a EPA (and where necessary
the appropriate court) approves the proposal and the compliance
-------
- 194 -
schedule it contains. There are well-founded fears that,
practice, the concept will provide recalcitrant polluters
with another means to confound enforcement agencies and to
successfully delay compliance. If. at this late date, a source
has not committed to a compliance schedule, the owners have
probably utilized numerous delaying tactics to avoid making
this commitment. The potential to bubble into compliance pro-
vides yet another opportunity to delay while the proposed
bubble is investigated. However, to the extent that emissions
trading puts engineers to work to comply with emission stan-
dards less expensively instead of lawyers to work fighting
such requirements, it can cut enforcement costs, especially
for litigation.
Finally, while government enforcement responsibilities tend
to expand under the emissions trading program, resources for
enforcement are obviously decreasing. There are a number of
indications that EPA and state and local agencies are redu-
cing their enforcement activities. Although federal, state,'
and local governments share responsibility for enforcement,
EPA is currently emphasizing the state role, and has sent.
significantly- less cases to the U.S. Justice Department for
enforcement and moreover has asked the Justice Department to
drop a number of pending cases. Simultaneously, EPA has re-
duced both its own enforcement budget and the amount of fundes
being made available to state authorities. Since state fun-
ding and personnel levels needed to enforce the conventional
regulatory policy historically have been grossly inadequate,
the implementation of emissions trading can only compound
this resource problem in enforcement. As a matter of fact,
a large number of state agencies have indicated that impor-
tand activities including compliance determination and en-
forcement against non-complying sources will be reduced
at least proportionately to the proposed cuts in federal
support {see Table 11 on p. 178). Therefore, it is not
unreasonable to question whether enforcement will be
-------
- 195 -
sufficient to provide necessary conditions for the viability
and effectiveness of the emissions trading policy. EPA, state
and local agencies can barely manage to enforce existing emis-
sion limits, the presence of a significant number of trades
to be monitored over time could be overwhelming.
-------
- 196 -
7. Legal Feasibility
Emissions trading in its present form reflects the present
administration's commitment to regulatory reform, although
its origins date back to the Carter and even Ford admin-
istration. The offset policy has a firm statutory basis.
Sections 172 and 173 of the Clean Air Act as amended by
the 1977 Clean Air Act Amendments set forth the basic ele-
ments of the offset policy. EPA's authority to carry out
the offset program is undisputed. However, the bubble and
netting policies do not have such a firm statutory basis.
They rest on EPA's interpretation of vague statutory
terms used in connection with preconstruction review and
*
SIP requirements such as "source", "as expeditiously as
78 }
practicable" and "reasonable further progress" . It is
safe to say that EPA has a wide margin of discretion
to carry out the Clean Air Act's mandate to attain the
NAAQSs and to prevent a significant deterioration of air
quality in clean areas. The courts will generally defer
to EPA's expertise and political judgement in carrying
out the Act. However, the consistency of EPA's regulatory
reform program with the objectives as well as clear pro-
visions of the Act will be'scrutinized, the more so since
the emissions trading policy has undergone a considerable
liberalization of prerequisites that were expressly de-
signed to safeguard the policy objectives of the Act. The
US Court of Appeal decision in the recent case Natural Re-
sources Defense Council v. Gorsuch
79 )
demonstrates the
court's determination to have a hard look at EPA's regu-
latory reform program where the court feels that the
basic policy objectives of the Act are at stake. This de-
cision, although limited to netting in nonattainment areas,
contains such broad language that it created uncertainty
about EPA's authority to carry out the whole program or
'at least other important components of it.
-------
- 197 -
a) Consistency of the Netting Program with the Clean
Air Act
From the very beginning of the emissions trading program,
EPA focused on the definition of "source" and "facility"
to match the lack of express authority to carry out the
program. Plants or production lines normally contain two
or more emission points. If source or facility is defined
to mean the whole plant or at least the whole production
line, emissions trading is automatically allowed because
the plant operator can compensate increased emissions
from one point by decreases from another point. If source
or facility is defined in a narrow way to mean a single
emission point/ emission trading requires authority to
QQV
exempt sources from the requirements of the Act ' . There
is no express authority of this kind in the Act. However,
EPA has great discretionary authority to regulate or make
policy for the control of air pollution. Therefore, the lack
of express authority for the netting program does not mean
that the program is inconsistent with the Act. Another effect
of a broad definition of source is that it subjects minor new
facilities within a plant that have emissions above the threshold
of significant modification to new source review while under a
narrow definition they would escape that review. Three highly
Q 1 \
complex and not easily reconcilable decisions of the US
Court of Appeal for the District of Columbia, namely ASARCO
Inc. v. EPA '» Alabama Power v. Costle ' and Natural
Resources Defense Council v. Gorsuch , state the law in
respect of the different control programs that were at issue
in each case.
o c \
ASARCO overturned the definition of "source" the Agency
had chosen for the Sec. 111 NSPS program with respect to
modified existing sources. Sec. 111 (a)(3) of the Clean
Air Act defines source as a "building, structure, facility
or installation" without further explaining these terms.
EPA defined the term "source" as to mean the whole plant
-------
- 198 -
where modifications to individual facilities within a
861
whole plant were concerned . This allowed modernizing
plants to avoid the NSPS if they could compensate in-
creased emissions from the modified facility by decreases
from other facilities (NSPS bubble) . However, the broad
definition of source was not applied to the construction
of a new facility within a plant, or to the construction
87)
of a new plant with several facilities '• The court held
that this dual definition of source was inconsistent, con-
tradicted the plain language of the Act and did not com-
port with the objectives of the NSPS program to enhance
rather than simply maintain air quality. However, it
noted, that EPA had a certain discretion in defining the
notion of "source", suggesting that where a whole plant
was an appropriate unit for emissions control under the
NSPS program, the notion of "source" could be extended
accordingly.
Although the later decision in Alabama Power was general-
ly understood to give EPA more leeway in defining
"source" **' , EPA has until recently never tried to use
the potential of ASARCO to reintroduce a NSPS bubble pro-
gram. Probably, the heavy reliance of the court on tht:
language of the Act deterred the Agency. However, recent-
ly, the reintroduction of modified NSPS bubble programs
(compliance bubbles) is being considered. In the case of
a combination of new facilities within a plant each of
which is subject to NSPS, the plant manager could
be granted discretion to deviate from the applicable
emission limitations as long as the aggregate emissions
of the plant do not change. To comply with the mandate of
ASARCO, Alabama Power and NRDC to consider the basic ob-
jectives of the NSPS program, namely improvement of air
quality through technology forcing, it is being considered
to impose on the combination or group of new facilities
an emission standard that is somewhat stricter than the
Q Q \
aggregate individual emission limitations0^'.
In Alabama Power 9°) the court considered the netting pro-
gram in PSD areas that allowed modernizing existing plants
-------
- 199 -
to avoid PSD new source review by keeping the net emissions
increase below the threshold triggering that review; how-
ever, the applicable regulations limited netting to the
modification of equipment within the plant and excluded
91 V
reconstruction of equipment ' . Technically this was done
by a definition of "facility" (which term is used in the
PSD program in lieu of "source") as to mean any "building,
structure, facility, installation, equipment or operation."
The court, relying on the statutory list of facilities
subject to the PSD program and on its purpose and struc-
ture, held that EPA had latitude to adopt definitions of
"facility" that encompassed the whole plant; it further
held that EPA had unduly restricted the possibility of
netting by excluding reconstruction. The second Alabama
92)
decision even came close to stating that the Act re-
quired a definition of "facility" as to comprise the
whole plant. The court distinguished ASARCO on several
grounds, the most persuasive of which is the distinction
931
of the respective legislative purposes ' : in contrast
to the NSPS program, the PSD program was designed to ap-
ply only where new industrial activity increased pol-
lution in an area. EPA responded to Alabama Power by
adopting regulations that defined "facility" as to mean
the whole plant and allowing netting for all changes
within the plant, including reconstruction54' .
95}
In NRDC , the court considered netting in nonattain-
ment areas. EPA originally had taken the position that
for purposes of the nonattainment program netting should
not be allowed because this was inconsistent with the
objective of the Act to timely attain the NAAQSs. The
1980 nonattainment regulations, therefore, set forth a
"dual" definition of "source"; they defined "building",
"structure" and "facility" as to mean "plant", but de-
fined "installation" as to mean "an identifiable piece of
process equipment"; in a related provision, reconstructed
QC \
facilities were considered to be new sources . This dual
-------
- 20O -
definition allowed minor new sources within a plant to be
subject to new source review while avoiding that modified
sources, by netting plant-wide increases and decreases of
emissions, could escape from that review. In 1981, under
the Reagan administration, EPA changed its position and
equated the source definition of the nonattainment program
to that of the PSD program, focussing on the burdens and com-
plexities of the air pollution control program and the pri-
97)
mary role of the states in air pollution control . This
change was meant to allow "netting out" of new source review
where there was no plant-wide net increase of emissions above
the significance threshold. In a related action, the recon-
Q D \
struction rule was deleted
The US Court of Appeal for the District of Columbia in
NRDC overturned the extension of the netting policy to
nonattainment areas and directed EPA to restore the dual
definition of "source" and the reconstruction rule. The
court tried to reconcile ASARCO and Alabama Power by
strongly relying on the different legislative purposes of
the regulatory programs under consideration, holding that
EPA could define the term "source" differently for dif-
99)
ferent programs to take account of each's purpose
Netting is allowed for programs that are designed merely to
maintain existing air quality, such as the PSD program; it is
inappropriate in programs enacted to improve the quality of
the air, such as the NSPS program. Applying this simple legis-
lative purpose test, which the Court thought was established
by the previous decision and to which is was bound, the Court
concluded that the netting concept in nonattainment areas was
inconsistent with the Act's purpose to ameliorate existing
air quality in these areas in order to achieve expeditious
compliance with the NAAQSs . Given this premise, the Court
did not reach the argument that Congress intended the states
to have the major responsibility in assuring that the NAAQSs
be met by the statutory deadline. The court expressly re-.
jected the argument that since the states were still bound
by the requirement of reasonable further progress and the
attainment deadlines, they could be given flexibility in
allowing netting ;this was inconsistent with the con-
-------
- 201 -
struction moratorium and the nonattainment permit program.
As one commentator ' stated, the court may have reached this
conclusion because it believed that the SIP process alone
could not be expected to produce attainment on its own.
NRDC was a major (although temporary) setback for the whole
emissions trading program103^. At least major changes of the
netting program in nonattainment areas were made necessary.
However, an outright return to the pre-1981 law (that disal-
lowed netting in nonattainment areas) arguably was not re-
quired by the court's holding. It is submitted that the court's
primary reliance on the legislative purpose of the Act would
have allowed EPA to modify the program so as to contribute
to an improvement of existing air quality. This could have
been done by requiring, as in the offset program, a more than
even compensation of increased emissions from modified equip-
ment by plant-wide decreases in nonattainment areas.
b) Consistency of the Bubble Program with the Clean Air
Act
The more serious question was that of the repercussions of
NRDC on other elements of the emissions trading program.
On its face's value, NRDC is limited to netting in non-
attainment areas. However, since the court primarily re-
lied on a simple legislative purpose test and rejected
the argument that the requirement of reasonable further
progress and the attainment deadlines sufficiently en-
sured expeditious attainment, it could not be ruled out that
the bubble policy in nonattainment areas might be affected
in the future. As has been pointed out by one commen-
tator ' a key element of the court's reasoning, namely
that the whole program for nonattainment areas is
designed to improve ambient air quality, is present; how-
ever, it was the intention of Congress to let states de-
,cide how to allocate the burden of reducing emissions
-------
- 202 -
among (existing) source categories ' , Where a state has
an approved -SIP ensuring expeditious attainment and reason-
able further progress, it could be argued that this latter
goal of the Act is paramount and justifies an allocation
of control burdens among existing sources by using the
bubble concept.
The situation might be different where a nonattainment
area lacks an approved SIP. Here too, the court's holding
is not directly applicable because the court said only
"that it was inappropriate to use the bubble to avoid
mandatory federal programs for nonattainment areas, not
that the absence of those programs for other reasons pre-
cludes use of the concept" 06K However, in the light of
the court's concern with the objectives of the nonattain-
ment program to improve air quality and the priority of
this concern over economic considerations, it could be pre-
dicted that the courts would have a hard look at nonattain-
ment area bubbles in areas lacking an approved SIP. Since
these areas have not established reasonable further progress
as expeditiously as practicable, there is no assurance that
the NAAQSs will be achieved timely or at least by the sta-
tutory deadline and that the emission reductions credited
will not be needed for (timely)attainment. It should be
noted that California for exactly this reason disallows
bubbles in nonattainment areas. The problem is that there
is no much statutory guidance as to the interpretation of
the statutory SIP requirements such as reasonable further
progress and attainment as expeditiously as practicable,
and Court decisions are missing . Also, the powers for
the states to create a growth allowance (Sec. 172 (b) (5)
CAA) could be advanced for the proposition that all that
a state needs to do is to ensure attainment by the sta-
tutory deadlines. However, there is no language in the Act
from which one could conclude that a SIP that creates a
growth allowance is dispensed with thenormal statutory SIP
requirements. The growth allowance policy does not generally^^p
empower the state to postpone attainment until the ultimate
-------
- 203 -
statutory deadline; rather, the states must create more emis-
sion reductions than mandated by the requirements of reason-
able further progress and timely attainment to create a growth
margin. Even if this were not the case, the growth allowance
policy is designed to enable economic growth from new or
modernizing existing sources; it is not applicable to bubbles.
The Policy Statement makes the attempt to immunize the bubble
policy in nonattainment areas by carefully worded reservations
that are designed to ensure compliance with the statutory
SIP requirements. Each bubble transaction in nonattainment
areas that have not received an extension must contribute to
s
an improvement of existing air quality (e.g. by requiring a
negotiated RACT baseline), while not compromising the power of
the state to require further reductions in the future, where
necessary to attain the NAAQSs (no "giving away" of RACT).
In areas that have been granted an extension or are non-
attainment with respect to secondary standards, alterna-
tively an actual emissions baseline can be used if the
parties to a bubble transaction commit themselves to
achieve further emission reductions when RACT is defined
for that area; moreover, the states are advised that RACT
definition must occur "as expeditiously as practicable".
It is also true that many arguments that are voiced against
bubbles in nonattainment areas are more political than legal
in nature. For example, the argument that EPA's policy would
perpetuate dirty air or exert a disruptive influence on the
SIP revision process hardly is a legal argument.
Nevertheless, bubbles in nonattainment areas that lack an
approved implementation plan could be challenged as incon-
sistent with the Act. Where use of a negotiated RACT base-
line is allowed, EPA advised the states not to reexamine the
agreed-upon individual emission levels for a period of time
consistent with the statutory deadlines for attainment (i.e.
possibly until 1987), unless there is no other practical
way to satisfy the requirements of the Clean Air Act.
-------
- 204 -
This deferral of additional measures for emission re-
duction arguably violates the requirement of attainment
"as expeditiously as practicable"1O8'. Sources involved
in a bubble transaction are here granted a period of pro-
tection from additional SIP requirements without examin-
ing whether or not an earlier attainment by including
these sources in the state improvement program is pos-
sible.
Where actual emissions are the baseline, the requirement
of timely attainment is met because individual sources
that have effectuated a bubble transaction based on an
actual emissions baseline are subject to future RACT
requirements to the same extent as all other sources. How-
ever, the simple commitment by these sources to comply
with future RACT emission limits without an assurance that
this is at all feasible, seems objectionable. Also, the
emission reductions credited in a bubble transaction may
be needed to ensure "reasonable further progress" towards
attainment. But all told, the use of an actual emission
baseline perhaps comports more with the goals of the Act
than that of a negotiated RACT baseline coupled with a
long protection of sources involved in a bubble trade.
In evaluating the legality of the bubble policy in
nonattainment areas, it must be considered that the
statutory SIP requirements are poorly defined, and EPA
enjoys a wide margin of discretion in approving revised
SIPs. The ultimate decision would seem to depend on
whether one emphasizes one of two conflicting statutory
principles: the right of the states to decide themselves
on the allocation of the burdens of emission reduction
among different sources, or the mandate of the Act to
attain the NAAQSs as timely as possible.
Arguably, EPA could have immunized the bubble policy from
challenges based on NRDC if it would have modified it in
such a way as to ensure a net air quality benefit (as in
the offset program). This could have been achieved by re-
-------
- 205 -
quiring, either generally or limited to nonattainment areas
lacking an approved SIP, a more than even reduction of emissions.
Environmental groups have recently challenged certain non-
attainment area bubbles for inconsistency with the basic
federal requirements of the Act1095. However, in commenting
on the Policy Statement, they have not opposed the bubble
policy in nonattainment areas as a matter of principle but
rather signalled possible agreement with a modification of
the bubble policy in the sense of requiring a net air qual-
ify benefit110'.
c) Consistency of Single Elements of the Emissions
Trading Policywith theClean Air Act
Apart from the issues of consistency of the entire netting
and bubble program with the purpose of the Clean Air Act,
certain elements especially of the bubble program in non-
attainment areas have been asserted to be contrary to the
Act. This is especially true of the use of allowable emis-
sions for determining the baseline where the SIP's demon-
stration of attainment is based on actual emissions, or of.
the use of shutdowns for creating ERCs, either generally
or at least without regard to the useful life of the re-
levant plant111^. These objections cannot be based on NRDC
and the legislative purpose test adopted by the court;
rather, they rest on a strict interpretation of statutory
SIP requirements auch as "reasonable further progress" and
attainment "as expeditiously as practicable".
The requirement of reasonable further progress is so
poorly defined in the Act that it is hard to decide how
significant emission reductions are needed to meet this
requirement and to what extent a delay of attainment
past the date set in the SIP would violate the require-
ment. Arguably, a bubble trade may not result in a set-
back of the area's control efforts towards attainment
of the NAAQS unless this is mandated by overriding econ-
-------
- 206 -
omic considerations inherent in the concept of reasonable
112^
further progress (feasibility of control requirements) '.
Where a SIP in a nonattainment area is based on allowables,
There is no objection based on principle to using them as
a basis for creating ERCs. However, it is more doubtful
whether the restrictive conditions placed by EPA on the
use of allowables for establishing the baseline in nonat-
tainment areas whose SIP is based on actual immissions.
satisfy this test. This would clearly only be the case if
the increased emissions resulting from the bubble trans-
action are compensated by decreases at another place.
The somewhat cryptic language in the Policy Statement^-*) does
not make it clear that the state would in all other cases be
required to make a new reasonable further progress demonstration
in its revised SIP independent of a "substantial inadequacy"
notice by EPA. It seems doubtful whether the remaining restric-
tive conditions established by EPA for the use of allowables
will work. Given the global nature of most SIPs, it may be
difficult to determine whether an emissions trade based on
allowables will contribute to a new ambient violation or pre-
vent the planned removal of an existing violation.
The use of allowables in nonattainment areas whose SIP is
based on actual emissions may also violate the requirement
of timely attainment. This test allows for a balancing of
interests affected by an area's control strategy, including
control costs. However, it is questionable that the grant of
ERCs for use in emissions trades based on mere paper re-
ductions still is a legitimate exercise of the discretion
granted to the states. This method assumes that the sources
have a vested right to the allowable emission limits set by
the state without regard to timely attainment ' and the
method used in the SIP for demonstrating attainment. It is
true that the sources that operate at full capacity can use
their allowables and it might seem fair to permit sources
that do not, to transfer unused allowable pollution units
other sources. However, since the rules for nonattainment
areas do not only require the maintenance but, rather, an
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improvement of actual air quality, the vested-rights argu-
ment is not cogent. At least where use of allowables for
emission trades in areas whose SIP is based on actual emis-
sions reflects a wide-spread practice in an AQCR or AQMA,
this arguably runs counter to timely attainment.
With respect to the use of shutdowns for creating ERCs in
nonattainment areas the basic argument of environmental groups
that crediting such shutdowns will generally impede reason-
able further progress towards timely attaining the standards
does not seem well-founded. Where a plant is shut down "pre-
maturely", especially as a result of an emissions trade,
crediting does not alter the attainment status of the area;
the Emissions Trading Policy is an incentive to such closures.
However, the granting of such ERCs beyond the probable useful
life of tfie source, i.e. the neglect for temporal equivalence of
emission reduction and duration of credit, arguably vio-
lates the requirement of timely attainment1 '. If the ERG.
granted for the shutdown were limited to the useful life
of the relevant source (which, admittedly is not easy to
ascertain), the shutdown would ultimately contribute to
the improvement of the ambient air quality towards the
ultimate goal of attainment. The grant of an indefinite,
marketable ERG to the owner of the affected source is an
unjustified enrichment rather than a measure taken for
cost considerations or for protection of investment-
backed expectations. Existing sources that are signifi-
cantly modified or reconstructed in nonattainment areas
would have to meet new source review requirements with-
out being allowed to net out of these requirements. This
shows that these sources do not have a pre-existing vested
right in the pollution units represented by their permit.
Therefore, the admission of shutdowns as a source of ERCs
beyond the useful life of the relevant source impedes an
improvement of the ambient air quality which would other-
wise be possible. An argument in favor of this method of
creating ERCs is that it encourages the early reconstruc-
tion and replacement of existing sources '. This may
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promote economic growth and productivity in the area and,
due to the imposition of NSPSs on new or modified sources,
may lead to lower pollution per production unit. It does not
contribute to an improvement of ambient air quality where
and insofar as the emission reductions caused by the
shutdown are. fully credited.
The use of shutdowns for creating ERCs meets with other
objections, namely that of double-counting. Where a SIP
has already assumed a certain "turnover".amount of emis-
sion reductions due to shutdowns, EPA requires that this
amount be exceeded before credit can be given. However,
the assumptions in most SIPs are too general, too little
area-specific as to allow the conclusion that a particu-
117^
lar shutdown does not amount to double-counting . Also,
the Policy Statement, in contrast to some generic rules,
does not consider the problem of displaced demand. Other
sources may increase their production {within their allow-
ables) or new minor sources not subject to new source re-
view might locate in the' area as the result of a shutdown.
Here again, double-counting will occur. Double-counting of
emission reductions clearly violates the requirement of
timely attainment and it might compromise the area's
reasonable further progress towards attainment (in nonat-
tainment areas) or its attainment status with respect to
NAAQSs or increments (in PSD areas).
Ultimately, the answer to these questions will again turn
on the extent of discretion granted the states in devising
their control programs for achieving the NAAQSs. If one
stresses the right of states to decide themselves on the
allocation of the burden of emission reduction among dif-
ferent categories of sources, the use of allowables and
shutdowns might be held as still consistent with the Act.
If one stresses the mandate of the Act to attain the
NAAQSs as timely as possible, the answer might be ne-
gative.
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- 209 -
d) Position Taken by EPA in the New Policy Statement of
August 1983 as to the Permissibility of Credits for
Shutdowns in Nonattainment Areas
In the new Policy Statement of August 1983118^EPA, in discuss-
ing the critical comments on the Policy Statement of April
1982 received by the agency, confirms its position that in
principle credits for shutdowns in nonattainment areas with
or without an approved SIP are permissible. However, apart
from a primarily politically, not legally motivated possible
reorientation of the whole bubble policy in case of shut-
downs, EPA in the new Policy Statement concedes that credits
for shutdowns may be legally problematic in a particular
case. This is true of the prohibition of double-counting of
shutdowns which, due to the structure of the SIP, can ap-
parently not be complied with in many AQCRs '. Moreover,
EPA appears to consider credits for shutdowns to be legally
beyond any doubt only in such nonattainment areas that have
demonstrated future attainment of ambient quality standards.
So long as the SIP is not eroded,in EPA's view there is no
reason to compel the state to attain the ambient standards
more expeditiously 120). This view seems to be supported by
the U.S. Supreme Court decision in Union Electric v. EPA
121)
where the court only held that EPA had discretion - but was
under no obligation - to require a more speedy attainment.
With respect to nonattainment areas lacking a demonstration
of attainment, EPA now recognizes that there are valid counter-
arguments against the view previously emphasized that the
granting of credits for shutdowns fostered speedy partial
clean-up of highly polluted marginal facilities. These counter-
arguments are that crediting shutdowns perpetuates a pollution
problem and progress thus achieved is not sufficient to secure
"further reasonable progress" and attainment "as expeditious-
ly as possible". EPA notes that in such a case it can sub-
stitute its own implementation plan for a deficient SIP. As
an alternative it advances the idea also supported by environ-
mental organizations that credits for shutdowns in such non-
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- 210 -
attainment areas should secure a direct and immediate sub-
stantial contribution to the improvement of air quality122)
e) The Decision of the Supreme Court on the Netting Policy
in Nonattainment Areas
In Chevron, U.S.A. Inc. v. Natural Resources Defense Council
the Supreme Court has rejected the legal objections of the
D.C. Court of Appeal.in NRDC against the netting policy in
nonattainment areas.
The decisive difference to the lower court decision is the
scope of review of EPA's interpretation of the CAA. In this
respect, the Supreme Court in contrast to the "activist" lower
court took the view that where the construction of broad sta-
tutory terms by a governmental department required expertise
and political choices, the construction given the statute by
the agency had a considerable weight and that the courts, as
a matter of principle, could not substitute their view for
that of the agency. The court was not empowered to review th
question whether the regulation concerned was appropriate in
the light of the legislative purpose but, rather, whether
EPA's view that it was appropriate was a reasonable one.
On the merits, the Supreme Court held that the statutory
definition of "source" with its overlapping, illustrative
terms was intended to enlarge, rather than confine, the
agency's power to regulate particular sources. Legislative
history did not present any indicia for a limitation of EPA's
discretion. The fact that EPA had changed its construction
of the term "source" several times did not rule out that the
court must defer to the agency's construction. The construction
of the term "source" and thereby of the scope of the netting
program requires, in the opinion of the Supreme Court, a
political accommodation of the economic interest in permitting
capital improvements to continue and the environmental interest
in improving air quality. Congress did not resolve this con-
flict but rather left it to be resolved by the agency. EPA
had considered the matter in a detailed and reasoned fashion
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- 211 -
Plaintiff - NRDC - in reality was not contesting a violation
of the Act but rather the appropriateness of the political
decision of EPA. Such a review of an agency decision was no
judicial task.
With this liberal interpretation of the Act and judicial self-
restraint the Supreme Court has not only saved the netting
program from far-reaching changes. It has also given green
light to a further liberalization of the emissions trading
policy, e.g_. with respect to the NSPSs. By overgeneralizing
the legislative purpose of the offset program and postulating
that economic and environmental interests have generally been
granted equal weight by Congress (for which there is no sup-
port in the language of the Act as well as in legislative
history),- the Supreme Court accords EPA a far-reaching dis-
cretion for political determination of the future shaping of
the emissions trading policy.
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- 212 -
8. Conclusions
a} Main advantages
If the advantages and improvements theoretically to be ex-
pected from the emissions trading policy are contrasted with
the purely regulatory strategy formerly practised, the follow-
ing main advantages emerge:
- Partial, lasting or temporary improvements in environmental
quality
For example, an overcompensation of new emissions is neces-
sary with newly located or expanded plants in non attainment
areas. Limited or final non-utilization of emission reduction
credits also serves to reduce the emission level. The enforce-
ment of regulations is accelerated in an environmentally effec-
tive manner through the approval of alternative, more cost-
effective emission reduction measures.
- A growth-conforming orientation of clean air policy
In the wake of offset policy, growth-promoting new, expan-
sionary or modernizing projects in non attainment and PSD
areas are facilitated.
- Increased cost-effectiveness of clean air measures in the
private sector
Differences in the specific avoidance costs can be utilized
in a manner which cuts across plant, firm and branch of
industry insofar as emissions and immissions do not increase
overall. The opportunity costs of delayed investment are
reduced by the banking policy.
- Greater incentives for environment and productivity oriented
technical progress
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. 213 -
Innovative emission reductions going beyond the minimum
requirements are stimulated by emissions trading since
they can have cost-reducing or profit-increasing effects
for the firms. Shutdown of old, emission intensive pro-
duction plants in favour of new, more productive plants is
not longer inhibited, since the existing emission permits
(in some cases) can continue to be used as credits for a
firm's own projects or projects of third parties.
Partial reduction of administrative costs for clean air
policy authorities and industry
In the framework of "netting out" in modernization and
expansion projects, a simplification of permitting proce-
dures comes about. The acceptance of cost saving alternatives
in the enforcement of regulations will probably serve to
reduce the number of litigation and costly legal actions.
Transactions in the context of emissions trading policy
serve to improve the data situation .for the general regu-
latory strategy of the authorities. In some cases enforce-
ment is also facilitated if, in emissions monitoring, the
authorities can concentrate on a small number of emission-
intensive plants instead of having to deal with a large
number of unimportant individual sources. Finally, the
improved exploitation of the innovation potential of the
plant operators yields the expectation that the administra-
tive costs for the authorities to promote technical en-
vironmental protection measures will be reduced.
Reducing the intensity of state intervention and increasing
the discretionary scope of individual enterprises
Since more environmental protection can become profitable
for enterprises, the innovation potential of the economy is
better exploited; the state can then withdraw from certain
areas of individual regulation with specific proposals for
technical problem solution.
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- 214 -
More planning security for investment dicisions of
individual firms
Investment projects become calculable again due to the
availability of emission reduction credits on the basis
of the banking system.
b) Neutral Effects
In addition to the evaluation criteria of clean air policy,
which as a result of flexible regulatory policy are at least
in some cases producing signs of distinct improvement in
relation to pure regulatory strategy, areas and problems can
be mentioned where, as a result of the new policy instruments,
hardly any changes are to be expected. In certain individual
areas, the new clean air policy will basically yield no ad-
vantages, but also no disadvantages in relation to the tradi-
tional regulatory policy:
- As regards air quality, the individual elements of the
emissions trading policy generally allow no deterioration,
but also do not solve certain problems of pure regulatory
policy
More often than not, only an equivalence and not an improve
ment of the air quality situation must be guaranteed after
a transaction has been made. An abuse of trivial clauses
and also the long-distance transportation of harmful mate-
rials are not excluded by the new concept. Environmental
problems resulting from inadequate measuring techniques and
air quality modeling also exert an effect upon emissions
trading policy.
- The precautionary principle remains in force
New plants and significant modifications to existing plants
continue to be subject to more stringent emission
than existing plants.
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. - 215 -
Most of the administrative tasks and costs of the pure
regulatory system also arise with flexible regulatory
policy
Permitting and continuous supervision of transactions in
emissions trading policy do not differ over wide areas
from traditional regulatory practice.
Negative distributional policy effects are also not
abolished through flexible regulatory policy
The unequal treatment of existing and new plants in the
same branch of industry and of differening sectoral origin
yet producing similar emissions is continued; regional
differences in enforcement are not abolished.
c) Problems, Risks and Weak Points duringImplementation
In addition to the advantageous or neutral effects of the
flexible, market-oriented regulatory strategy in comparison
to traditional regulatory policy, a number of problems, risks
and weak points should be mentioned which may arise during
their implementation:
- A partial deterioration of air quality is not to be
excluded
The prevailing status quo orientation with regard to air
quality effects of transactions can lead to delays in
reaching scheduled clean air policy goals in nonattainment
areas where rapid successes are necessary. Difficulties in
establishing the measurement principles for emission reduc-
tion credits can, in the presence of nominally unchanged
emissions, result in a deterioration of air quality.The
factual, temporal and spatial equivalence of the effects of
immissions in the presence of emission reductions and
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- 216 -
emission increases quantitatively compensating each other
is not present in all cases.
Embedding the new concept in the traditional regulatory
policy might reduce the desired incentives to innovation
Applicants must fear the new technologies used to create
emission reduction credits will be declared by the ein-
forcing authorities to be the state-of-available-techno-
logy and that they will thus attract the disapproval of
competitors in their branch of industry.
A partial increase in the administrative costs for authori-
ties and firms cannot be excluded
Despite individual steps taken to reduce administrative •
costs by means of general guidelines ("generic rules"),
management of the new instrument in some cases will gene-
rate further costs for authorities and firms: among other
things for assessing applications for air quality- modeling^
running the "bank", etc. In enforcement too, changes in
monitoring priorities and application of qualitatively
higher requirements can lead to increased burdens.
The new policy might create new and exacerbate existing
distributional problems
By definition redistribution of emission reduction measures
under cost aspects causes a local shift of emissions and
immissions i.e. ground level concentrations. Areas in an air
quality control region relatively less affected by immission
("cold spots") are thus balanced out by areas subject to a
relatively high degree of immissions ("hot spots"). Appli-
cants who offer more cost-effective solutions both for the
individual enterprises and for the economy as a whole are
"penalized" by the increased administrative costs, while
economically inefficient clean air policy solutions outsi
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- 217 -
of emissions trading are rewarded by having their administra-
tive cost burden shouldered by the state {see also para. 4c).
The existence of a market for emission reduction credit does
not itself guarantee that the cost advantages of emissions
trading can actually be realized and that growth is not
inhibited
There is a risk of monopolization of the supply and of hoard-
ing emission reduction credits, i.e. emission reduction
credits are generated but not passed on to third parties.
d) Conclusions
Whether and to what extent these advantages and disadvantages
of flexible regulatory policy will in fact come about, is ulti-
mately a question of specific clean air policy. Desired.improve-
ments and threatening deteriorations alike do not occur auto-
matically and inevitably. The possible advantages of the emis-
sions trading policy are thus permanently dependent on the
effectiveness and success of the regulatory elements in a com-
bined scheme of application of regulations and 'market-oriented
incentives.
If no effective regulatory policy is pursued with regard to
existing plants, significant modifications or new plants, or
if for example enforcement and monitoring of compliance with
regulations is neglected, hardly any demand will arise in the
economy for additional, more cost-effective emission reduc-
tions. If, however, the demand is missing or if the clean air
strategy (SIP) proves to be inadequate so that all emission
reduction credits are threatened by depreciation or confis-
cation a corresponding supply can scarcely be expected. The
advantages of flexible regulatory policy would then be limited
to a small number of individual cases.
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- 218 -
As regards the problems, risks and weak points of the new
instruments these can in principle be fully overcome without
any necessity for altering the conceptional orientation of
the new clean air policy in the USA. In this respect the EPA,
by allowing choice and by stipulating only general conditions
is already offering sufficient possibilities of avoiding any
negative environmental effects through the medium of tightened
regional regulations. This option has indeed already been used
by the federal states. Furthermore the final policy statement
has taken into account many misgivings expressed by the en-
vironmental groups and regiorial authorities.
Insofar as it may subsequently emerge that transactions in
the context of emissions trading might hinder (timely) attain-
ment of clean air policy goals, the possibility exists, as
before, of creating supplementary ordinances and applying other
measures within the framework of the implementation plan (SII
The increased administrative costs are by no means unusually
high and, as experience increases, will probably take a de-
gressive course anyway. Apart from the rule that transactions
must finance themselves, the regional authority also has re-
course to the possibility, offered by the Clean Air Act, of
charging fees to finance any additional administrative costs
incurred in emissions trading.
The danger of hoarding of emission reduction credits can be
countered by appropriately structuring the temporal modalities
of the credit system (e.g. by imposing a time limit on their
use) .
Generally therefore, it can be concluded that the combination
of market-oriented approaches and regulatory policy as has been
conceived in the USA for clean air policy, if appropriately
designed and implemented promises substantial improvements
relation to traditional regulatory solutions.
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- 219 -
Footnotes (Chapter C)
1) For a discussion of the broad set of criteria that can be
applied in evaluating the advantages and disadvantages of
any environmental policy, see for example W.J. Baumol and
W.E. Dates, The Theory of Environmental Policy (Englewood
Cliffs, New Jersey: Prentice-Hall 1975), pp. 232-42? M.J.
Roberts, Environmental Protection: The Coplexities of Real
Policy Choice, in: N. Swainson (ed.), Managing the Water
Environment (Vancouver: University of British Columbia
Press, 1976), pp. 176-78; B.T. Bower, C.N. Ehler, and A.V.
Kneese, Incentives for managing the environment, Environ-
mental Science & Technology, Vol. 11 (March 1977), pp.253-
54; E.G. Breedlove, Growth with Clean Air: Analysis of the
Emissions Offset Policy (Draft), August 1979, pp.
American Petroleum Institute, Background Paper on the Use
of Economic Incentives for Environmental Protection, Washing-
ton, D.C.: API, 1980) pp.'3-22; R. Liroff, Air Pollution
Offsets: Trading, Selling, and Banking (Washington, D.C.:
The Conservation Foundation, 1980, p. 2; F. Roach, C. Kol-
stad, A.E. Kneese, R. Tobin, and M. Williams, Alternative
Air Quality Policy Options in the Four Corners Region, The
Southwestern Review, Vol. 1, No. 2 (Summer 1981), pp. 37-58.
2) For a discussion of the complaints coming from public offi-
cials, industrialists, and environmentalists, see for exam-
ple Summary & Comments, The Great Clean Air Act Debate"of
1981: Environmentalists, Industry, Air Quality Commission
Take Positions, 11 ELR 30027 (1981).
3) See W.J. Baumol and S.A.B. Blackman, Emission Permits vs.
Effluent Charges (Draft), 1979
4) See Policy Statement, p. 15076 col. 1
5) Ibid.
6) See Policy Statement, p. 15O77 col. 3 - p. 15078 col. 1.
7) See B.R. Raffle, Prevention of Significant Deterioration
and Nonattainment Under The Clean Air Act: A Comprehensive
Review. Bureau of National Affairs, Inc. Monograph ^ 27,
Vol. 10, No. 1 (May 4, 1979), p. 8.
8) See Policy Statement, p. 15O78 Col. 1.
9) See L.S. Ritts, Summary of Comments Emissions Trading Po-
licy Statement & Technical Issues Document, Washington,
D.C., October 1983, p. 59.
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- 220 -
10) Op. cit., p. 61-2.
11). Ibid, p. 59.
12) See, American Petroleum Institute, op. cit.
13) See L.S. Ritts, op. cit., p. 59.
14) Ibd., p. 81.
15) See J.A. del Calvo y Gonzalez, Markets in Air: Problems and
Prospects of Controlled Trading. Harvard Environmental Law
Review 1981, _5 (2), p. 389.
16) U.S. General Accounting Office (Program Analysis Division),
A Market Approach To Air Pollution Control Could Reduce
Compliance Costa Without Jeopardizing Clean Air Goals.
(PAD-82-15), Washington, D.C., March 23, 1983, p. 36.
17) P. Del Duca, The Clean Air Act: A Realistic Assessment of
Cost-Effectiveness, Harvard Environmental Law Review, Vol. 5:
184 (1981), p. 19-0.
18) See National Commission on Air. Quality, To Breathe Clean Air.
Report of the National Commission on Air Quality. Washington,
B.C.: U.S. Government Printing Office, March 1981. See also
B.I. Reffle, op. cit., p. 66.
19) See A. Seltz-Petrash, Marketplace Solutions of Air Pollution,
Civil Engineering, Vol. 50, No. 1, (January 1980), p. 72.
20) See C.R. Courant, Emission Reductions from Shutdowns: Their
Use in Banking and Trading Systems, U.S. Environmental Pro-
textion Agency, Office of Planning and Evaluation, Emission
Reduction Banking and Trading Project. August, 1980.
21) Ibid.
22) Policy Statement, Technical Issues Document, p. 15080 col. 2.
23) See L.S. Ritts, op.cit., p. 28.
24) For a fuller discussion on these issues, see L.S. Ritts, op. cit.
25) For a discussion of the various costs that should be included
when evaluating the cost-effectiveness of any environmental
policy, see American Petroleum Institute, Background Paper on
the Use of Economic Incentives for Environmental Protection,
p. 4-5.
26) EPA Comments to the GAO Draft Report, " A Market Approach to Air
Pollution Control Could Reduce Compliance Costs Without Jeopar-
dizing the Goals of the Clean Air Act. Quoted in: U.S.
Accounting Office, A Market Approach to Air Pollution
Could Reduce Compliance Costa without Jeopardizing Clean
Goals, (U.S.- General Accounting Office, March 23, 1982, ^ PAD-
82-15) , p. 143.
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- 221 -
27) BACT for new sources or modifications in attainment areas
"means an emission limitation based on the maximum degree
of reduction ... which the permitting authority, on a case-
by-case basis, taking into account energy, environmental
and economic impacts ... determines is achievable for such
facility ..." Section 169 (3), 42 U.S.C. 7479 (3). LAER for
new sources or modifications in nonattainment areas "means,
for any source, that rate of emissions which reflects (A)
the most stringent emission limitation ... contained in ...
any (SIP) for such ... category of source, unless the ...
operator ... demonstrates ... such limitations are not
achievable, or (B) the most stringent emission limitation ...
achieved in practice by such ... category of source, which-
ever is more stringent." Section 171 (=0 , 42 U.S.C. 7501 (3).
28) NSPS must reflect "the degree of emission ... reduction
achievable through ... application of the best technological
system of continuous emission reduction which (taking into
consideration ... cost and any nonair quality health and en-
vironmental impact and energy requirements) the Administrator
determines has been adequately demonstrated." Section 111 (a)
(1), 42 U.S.C. 7411(a)(1).
29) RACT can be defined in general terms as a standard that a
particular emission source is capable of meeting by the app-
lication of control technology that is reasonably available
considering technological and economic feasibility.
For RACT, EPA issues Control Technology Guidelines (CTGs),
Each CTG contains recommendations to the states of what EPA
- called the "presumptive norm" for RACT, based on EPA's current
evaluation of the capabilities and problems general to- the
industry that is the subject of the CTG. EPA recommends that
when they include RACT provisions in their SIP revisions states
adopt requirements consistent with the presumptive norm level.
Since the CTGs are based on a general evaluation of industry,
a state may wish to deviate from the EPA recommendations,
since the general guidance may be inappropriate to particu-
lar facilities in the state. However, a state must justify
its deviation to EPA. The role of CTGs is discussed in the
general preamble EPA has adopted to accompany its proposed
rulemaking on approval of state implementation plan revisions
for nonattainment areas. See 44 Fed. Reg. 5361 (17 September
1979). Quoted from R.Liroff, Air Pollution Offsets, p.48.
30) See Association of Bay Area Governments (ed.). Let's Clear
the Air: San Francisco Bay Area 1983, Air Quality Plan Update,
(ABAG: Berkeley, Cal. June 1982).
31) See F.R. Anderson et al., Environmental Improvement Through
Economic Incentives, p. 11.
32) P. del Duca, The Clean Air Act: A Realistic Assessment of
Cost-Effectiveness. Harcard Environmental Law Review 1981,
5 (1), p. 191.
33) See "Will EPA stop Investment?" First Chicago World Report,
May-June, 1978, p. 8.
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- 222 -
34) See M.H. Rosters, Government Regulation: Present Status and
Need for Reform, pp. 333-34.
35) Ibidem, p. 334.
36) See A.V. Kneese, C.L. Schultze, Pollution Prices and Public
Policy. (Washington, D.C.: The Brookings Institution, 1975),
p. 88. See also U.S. General Accounting Office, A Market
Approach to Air Pollution Control Could Reduce Compliance
Costs without Jeopardizing Clean Air Goals, U.S. Gerneral
Accounting Office, March 23, 1982, p. 21.
37) See also A.M. Freeman III, Technology-Based Effluent Standards:
The.U.S. Case, Water Resources Research, Vol. 16, No. 1
(February 1980), p. 25.
38) The Council on Environmental Quality, "Environmental Quality -
1979, The 10th Annual Report", Washington, December 1979,
p. 671. - "Whether done by installing scrabbers or electrostatic
precipitators, or by changing production processes or input
mixessubstitution low- for high-sulfur coal, for one example-
should not matter. Yet technology-based standards do not allow
firms to use certain of these methods for meeting ambient or
performance standards, even though such methods may occasio-
nally be relatively inexpensive. Instead, they can condemn the
nation to spend more to meet its environmental goals than is
necessary." Ibidem.
39) See A.M. Freeman III, Technology-Based Effluent Standards:
The U.S. Case, p. 25.
40) For an excellent discussion of this point, see A.V. Kneese,
Ch.L. Schultze, Pollution', Prices, and Public Policy, p. 63.
See also F.R. Anderson et al., op. cit., pp. 13-14.
41) U.S. EPA, Draft Proposed Controlled-Trading Policy Statement,
July 13, 1981, p. 15.
42) See for example, M.T. Maloney and B. Yandle, Bubbles and
Efficiency: Cleaner Air at lower Cost, Regulation, 4
(May/June 1980).
43) Environmental Protection Agency (Office of Policy and Resource
Management), Emission Trading — End-of-Year Status Report
(Memorandam from J.A. Cannon to the Administrator), Washington,
D.C., April 5, 1983, Appendix A.
44} See Remarks by A.M. Gorsuch, Administrator, U.S.E.P.A., Announ-
cing Signing of EMISSIONS TRADING POLICY, April 2, 1982, p. 1.
45) EPA, Emissions Trading-end-of-Year Status Report, ibidem,
Appendix A. .
46) Ibidem.
47) For a more detailed discussion, see chapters C.4-5.
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- 223 -
48) See M.H. Rosters, Government Regulation. Present Status and
Need for Reform, in: M.L. Wachter and S.M. Wachter (ed.).
Toward a New U.S. Industrial Policy? (Philadelphia: Univ4er-
sity of Pennsylvania Press, 1981), p. 333.
49) See W. Vivian and W. Hall, An Empirical Examination of U.S.
Market Trading in Air Pollution Offsets (University of
Michigan, Institute of Public Policy, 1981).
5O) See EPA, Status report, op. cit.
51) W. Vivian and W. Hall, op. cit.. Chapter 4,,p. 22.
52) See B. Yandle, Alternative Systems for Allocating Air Quali-
ty. The Prevention of Significant Deterioration. Staff Paper
for the Council on Wage and Price Stability. August 1979.
53) See W. Vivian and W. Hall, An Examination of U.S. Market
Trading in Air Pollution Offsets, op. cit., Chapter 3, p. 7.
And "NSPS are often not set at the structest standard avail-
able but somewhere in the middle range of available emission
controls, so that most facilities can comply with them".
See EPA, NSPS Bubble Issues 9 (prepared for discussion at
the National Air Pollution Control Technical Advisory Com-
mittee Meeting, June 16-17, 1982).
See also R.A. Liroff; The Bubble Concept for Air Pollution
Control: A Political and Administrative Perspective.
54) National Commission on Air Quality, To Breathe Clean Air:
Findings and Recommendations, Washington, D.C. March 1981,
p. 2.1-29.
55) Ibidem.
56) See also American Petroleum Institute, Background Paper on
the Use of Economic Incentives for Environmental Protection,
p. 11.
57) Ibidem, p. 13.
58) See S.S. Watson, Banking and Emission Offset Policy: A Market
Approach to Pollution Control (Graduate Study Requirement,
School of Public Policy), University of California, Berkeley.
June 1978, pp. 74-5.
59) See, for example, B.D. Appel, Emissions Banking in a Non-
Attainment Area - A Flawed Concept, Draft, San Francisco,
January 14, 1983.
60) For a broader discussion of technology-forcing arguments,
see R.W. Crandall, Regulatory Reform and Air Pollution
Policy: Recent History and Future Prospects, preliminary
draft, 1981, pp. V - 10 - 11.
61) Ibid.
62) Ibid.
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- 224 -
63) R.A. Liroff, The Bubble Concept for Air Pollution Control:
A Political and Administrative Perspective. Paper (81-53.1
Prepared for delivery, 74th Annual Meeting, Air Pollution
Control Association, June 1981.
64) Ibid.
65) See R. Crandall and P. Portney, The Free Market and Clean Air,
Teh Washington Post, August 20, 1981.
66) See the discussion on cost-effectiveness.
67) See also F.R. Anderson et al., op. cit., p. 14.
68) See, for example, A.V. Kneese and C.L. Schultze, op. cit.,
p. 88.
69) The Council on Environmental Quality, op. cit., p. 671.
70) Ibidem.
71) See also A.M. Freeman III, op. cit., p. 25.
72} See W. Vivian and W. Hall, An Empirical Examination of U.S. '
Market Trading in Air Pollution Offsets (University of
Michigan, Institute of Public Policy, 1981), Chapter 5, p. 5.
73) M.H. Koster, op. cit., p. .333.
74) Remarks of Christopher De Muth at the announcement of EPA's
Emissions Trading Policy (April 2, 1982).
75) See U.S. General Accounting Office, A Market Approach to Air
Pollution Control Could Reduce Compliance Costs without
Jeopardizing Clean Air Goals, U.S. General Accounting Office,
March 23, 1982, ± PAD-82-15; p. 42. See also EPA, Checklist of
Regulatory Alternatives, Washington D.C. July 198O, p. 7-2.
76) See Policy Statement 15080 col. 2.
77) See EPA, Emission Reduction Banking & Trading Update, Vol. 2,
October 1980. See also Appel, Bruce D., Emissions Banking in
a Non-Attainment Area - A 1983 Flawed Concept, Draft, San
Francisco, January 14, 1983, and Appendices X and XII.
78) CAA §§ 111(a)(3), 169(1); CAA §§ 110(a)(A)(i), 172
(a) (2); CAA §§ 171 (1), 172(b) (3)
79) Natural Resources Defense Council v* Gorsuch, 12
Envt'l L. Rep. 20942 (D.C. Cir., Aug. 17, 1982):
see Comment, 12 Envt'l L. Rep. 10089 (1982)
80) See Currie, 128 U. Pa. L. Rev. 1389, at 1397 et seq.
(1980); Comment, 12 Envt'l L. Rep. 10089, at 10090/91
(1982)
81) Rhinelander, 1 Va. J. Nat. Resources L. 177, at 215
(1981); Note, 32 Stanford L. Rev. 943, at 958 et seq.
(1980); Comment, supra note 3, at 10091 et seq.
82) ASARCO v. EPA, 578 F.2d 319 (D.C. Cir. 1978)
-------
- 225 -
83) Alabama Power Co. v. Costle, 636 F.2d 323 (D.C. Cir.
1979), superseding 606 P.2d 1068 (D.C. Cir. 1979)
84) Supra note 2
85) Supra note 5
86) 40 C.F.R. § 60.2(d), 14(d) (1977), 40 Fed. Reg. 58416
(1975)
87) 40 C.F.R. § 60.15 (1977), 40 Fed. Reg. 58416 {1975)
88) Comment, supra note 3, at 10094
89) Cf. New Source Performance Bubble Issues, OAQPS, 1982;
NRDC, Statement on New Source Performance Bubble Issues,
1982; UARG, Comments on Policy Statement, p. 8 et seq.;
Note, supra note 4, at 951 et seq.
90) 606 F.2d 1068
91) 40 C.F.R. §§ 51.24(b)(4), 52.21(b) (4)
92) 636 F.2d 323
93) See Comment, supra note 3, at 10094
94) 40 C.F.R. §§ 51.24(b) (5), (6), 52.2Kb) (5), (6); 45
Fed. Reg. 52676, 52693-96 (1980)
95) Supra note 2
96) 45 Fed. Reg. 52696-98, 52746 (1980)
97) 46 Fed. Reg. 50766 (1981),
98) 46 Fed. Reg. 50766 (1981)
99) Supra note 2, at 20947; see Comment, supra note 3, at
10093
1OO) Supra note 2, at 20947
101) Supra note 2, at 20948
102) Comment, supra note 3, at 10094
1O3) Comment, supra note 3, at 10095
104) Comment, supra note 3, at 10095; see also Connecticut
Fund v. EPA (case III), 13 Envt'l L.Rep. 20151, 20154
(2d Cir., Dec. 1, 1982)
1O5) Train v. Natural Resources Defense Council, 421 U.S.
60, 79/80 (1975); Union Electric Co. v. EPA, 427 U.S.
246, 266 (1976)
106) Comment, supra note 3, at 10095
107) But see the dicta in Train v. NRDC, supra note 28,
at 96/97; Union Electric Co., supra note 28, at 259/
260, 264 n. 13
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- 226 -
108) NRDC, Comments on Policy Statement, p. 8/9. In Union
Electric, supra note 28, at 264 note 13 the Court
stated that where the economic and technical possibi-
lity to make more rapid progress existed, the EPA
could disapprove a SIP; but see Train v. NRDC, supra
note 28, at 96/97 where the court declared that SIP
revisions that postpone attainment in principle are
permissible because the law mandates attainment as
expeditiously as practicable, not as expeditiously
as was thought when devising the original SIP.
109} See SNA Envt.Rep., Curr. Developments, 9 Oct. 1982, p.631
110} NRDC, supra note 31, at 4 et seq.; Ritts, Summary of
Comments on Policy Statement, p. 28 et seq.; see also
Conservation Foundation, State of the Environment, 1982,
p. 71 and 418; note, supra note 4, at 968; cf. del Calvo
y Gonzales, 5 Harv. Envt'l L. Rev. 377, at 420/421 (1981)
111) With respect to the use of allowable emissions: NRDC,
supra note 31, at 16 et seq.; Ritts, Summary of Com-
ments on Policy Statement, p. 28 et seq.; with respect
to shut-downs: NRDC, supra note 31, at 11 et seq.;
Ritts, Summary of Comments on Policy Statement, p. 39
et seq.
112) But see Train v. NRDC, supra note 28, at 96/97
113} The Policy Statement, p. 15080 col. 2 suggests such a
possibility merely by reference to- its part III
114) Cf. Ritts, Summary of Comments on Policy Statement, p.
45
115) NRDC, supra note 31, p. 13 et seq.; Ritts, Summary of
Comments on Policy Statement, p. 41
116) CMA, Comments on Policy Statement, p. 6
117} Ritts, Summary of Comments on Policy Statement, p. 44
118) 48 Fed. Reg. 39580 (1983)
119) Policy Statement supra note 41, at 39581 col. 1/2, at
39584 col. 2/3
12O) Policy Statement supra note 41, at 39581 col. 3, at
39582 col. 1
121} Supra note 28, at 264 note 13
122) Policy Statement supra note 41, at 39583 col. 2/3
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D. Possibilities of Transferring theUS Emissions Trading
Concept into W. German Law
I. The W. German Regulatory System
The W. German regulatory system in the area of air pol-
lution control is grossly comparable to the American sys-
tem. The existing differences are not so fundamental that
a transfer of the Emissions Trading Policy, if advocated
as a matter of policy, would necessitate fundamental
changes of existing law. However, some features of the
German law such as the lack of specific emission standards
for existing sources raise problems with respect to estab-
lishing the baseline for emission reduction credits that
are difficult to overcome.
1. Basic Requirements under the Federal Emissions Control
Act of 1974
a) Ambient Air Quality Standards
Under Sec. 5 No. 1 of the Federal Emissions Control Act
(FECA) major facilities (facilities requiring a permit)
shall be so constructed and operated that harmful environ-
mental effects and other dangers, substantial detriments
and substantial molestations upon the public and the
neighborhood cannot be caused. This requirement is the
central principle of the FECA. It is similar to the
American requirement forbidding the construction of a ma-
jor new facility that would cause a violation of the am-
bient air quality standards.
Sec. 5 No. 1 FECA applies to any pollutant. However, in
order to avoid case-by-case determination of whether a
proposed facility meets the requirement, the Federal
Government is empowered to adopt, with the agreement of
the Bundesrat, administrative guidelines that set forth
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- 228 -
2\
ambient air quality standards. ' Pursuant to this auth-
ority, the Federal Government promulgated in the Techni-
sche Anleitung zur Reinhaltung der Luft (TA-Luft - Tech-
nical Guidelines for the Control of Air Pollution) of
1974 ' both long- and short-term ambient standards for a
number of pollutants considered to be most important from
the point of view of air pollution control, namely dust-
fall, suspended particulates, carbon monoxide, sulphur di
oxide, hydrogen sulfide, nitrogen dioxide, nitric oxide,
hydrochloric acid and chlorine. According to the purpose
of the law as set forth in Sec. 1 and the enabling pro-
vision of Sec. 48 which refers back to Sec. 5 of the Act,
the ambient quality standards are designed to protect
against risks for public health as well as against risks
for public welfare (such as ecological damage, damage to
crops and buildings, simple molestations). However, in
practice, the ambient air quality standards were oriented
only at the protection of public health. The Federal
Government has drawn from this deficiency the conclusion
that the existing health-oriented ambient air quality
standards must be supplemented by a second set of air
quality standards that effectively protect public wel-
fare. The Amendments of 1983 of the TA-Luft (TA-Luft
4)
1983) therefore establish primary and secondary am-
bient air quality standards. Primary standards are estab-
lished for suspended particulates, lead and anorganic
lead compounds in suspended particulates, cadmium and an-
organic cadmium compounds in suspended particulates,
chlorine, hydrochloric acid, carbon monoxide, sulfur di-
oxide and nitrogen dioxide. Secondary standards are
established for dustfall, lead, cadmium and thallium and
their anorganic compounds in dustfall and hydrofluorine
and anorganic gaseous fluorine compounds.
These standards are not comparable to the American pri-
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mary and secondary standards because they have a double
function. The primary purpose of the primary standards is
the protection of public health, as the primary purpose of
the secondary standards is the protection of public wel-
fare. However, the primary standard also is designed to
promote public welfare, and the secondary standard also
has functions in the protection of public health. The
necessary differentiation is achieved by different regimes
of application of these standards. With respect to pro-
tection of public health, the primary standards are man-
datory; they may, in principle, not be exceeded. Com-
pliance with them is sufficient. If the secondary stan-
dards are exceeded, a case-by-case determination as to the
kind and extent of emissions and dangers caused by them is
necessary: With respect of public welfare, compliance with
either the primary or secondary standards is in principle
sufficient. However, where particularly sensitive animals,
plants or buildings are liable to be affected, a case-by-
case determination is necessary, provided specified incre-
ments of pollutant concentration levels are exceeded. If
the secondary standards are exceeded, a new source must
nevertheless be permitted if specified increments are not
exceeded or it is determined that, because of the par-
ticular circumstances of the individual case, no substan-
tial detriments or molestations will be caused. In making
this determination, various factors such as the preexist-
ing use of the affected property, determinations in land-
use plans, restrictions on use agreed by or imposed on
the owner, soil pollution and reduction of emissions from
existing sources must be considered. The long-term stan-
dard basically is an annual arithmetic mean; the short-
term standard must be met by 95 % of the individual moni-
toring results taken over a longer period. According to
the TA-Luft, the standards must be met only within a
limited assessment zone whose area depends on
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stack height and does not extend beyond an area 12,5
by 12,5 kilometers around the source even if the area
of actual dispersion is much larger; within this measuring
zone, monitoring is required for any assessment area of
one by one kilometer. However, there are some recent court
decisions that have required compliance with the ambient
air quality standards within the whole area of actual dis-
persion.
The ambient air quality standards are intended to make
concrete and specific the duty imposed by Sec. 5 FECA not
to cause environmental harm. In contrast to the US, the
ambient quality standards do not have the force of law;
they are administrative guidelines and in principle only
binding upon the administration. However, the Federal Ad-
ministrative Court has held that, since the standards
were based on sound scientific evidence, they could be
considered "anticipatory expert testimony" and were
binding in the absence of new knowledge as to the harm-
ful effects of the relevant pollutants. Thus, the stan-
dards have a "prima facie" effect. This decision was ren-
dered under the TA-Luft 1974 that provided for uniform
standards with virtually no possibilities for case-by-
case determinations. It remains to be seen whether the
structure of the TA-Luft 1983 will permit the courts to
uphold this opinion. It is submitted that the widespread
recourse to case-by-case determinations in the new TA-
Luft will make it difficult to consider the standards as
"anticipatory expert testimony"; probably, only the pri-
mary standards - confined to health effects - will con-
tinue to be considered "prima facie" binding.
The primary instrument to enforce the ambient air quality
standards is the statutory permit requirement. Sec. 4 and
15 FECA provide that major new emitting facilities as well
as significant modifications of existing major facilities
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- 231 -
require a permit. The permit is only granted if the oper-
ator complies with the duty not to cause environmental
harm and, where ambient air quality standards are set
forth, does not exceed these standards.
This concept of the FECA necessitates a case-by-case de-
termination as to whether the ambient air quality stan-
dards are met, although the competent authority may, in
clean areas, be satisfied with a rough estimation of the
ambient impacts of the new source. In contrast to Ameri-
can law, there is no general requirement of setting forth
implementation plans that determine requirements appli-
cable to individual sources or categories of sources to
meet the ambient quality standards. An equivalence to the
American implementation plan only exists in heavily pol-
luted areas, .i.€5. nonattainment areas and areas where the
ambient quality standards may in the near future be ex-
ceeded (pre-nonattainment areas).
The permit requirement is applicable to facilities that
by reason of their construction or operation are especial-
ly apt to cause harmful environmental effects. Regulations
specify nearly TOO kinds of such facilities. '
Apart from new construction, also significant modifi-
cations of major facilities are subject to the permit re-
8 I
quirement. ' The notion of "significant modification" is
very broad. If suffices that a modification (physical
change or change of method of operation or capacity) 9'
is liable to have an impact on the permit prerequisites,
that is, that the modification may cause harmful environ-
mental effects and there is reason to conclude that a new
ambient impact analysis is warranted; whether the modifi-
cation actually causes such effects, will be determined
in the permit procedure,10 The ambient impact analysis is
in principle limited to the modified parts of the facility;
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- 232 -
however, when there are impacts on the emissions of the
unchanged parts of the facility, these impacts also have
to be checked.
modification.
11)
A reconstruction is not considered as a
Existing facilities are not subject to the permit require-
ment. However, the duty arising under Sec. 5 not to cause
environmental harm and to comply with ambient air quality
standards in principle is also applicable to these fa-
cilities if the competent state authority requires so by
"subsequent order". Sec. 17 FECA provides that the com-
petent authorities may issue subsequent orders to fulfil
the duties arising under the Act or regulations made under
the Act, including compliance with the ambient air quality
standards. Where the public or the neighborhood is not ad-
equately protected from harmful environmental effects/
that is, in particular, where the ambient quality stan-
dards are exceeded, the normal discretion the authorities
enjoy in determining whether or not to issue such orders
is reduced. Unless there are paramount countervailing in-
terests, the authorities must issue a subsequent order. '
However, two important conditions limit the availability
of subsequent orders: the order must be achievable by ap-
plying technology that corresponds to the state of the
art, and it must be economically feasible. Economic
feasibility means feasibility for the individual source
operator; however, subsequent orders may also be issued if
the measure is economically feasible at least for the
operator of an average (standard) facility of the same
kind. The prevailing interpretation requires that the
operator of the facility or an average facility must be
able to make a reasonable profit after installing the re-
quired technology. Since it is difficult to-demon-
strate economic feasibility for a fictitious average
source, in practice the individual circumstances are
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- 233 -
controlling. The prerequisite of economic feasibility also
limits the kind of control technology to be applied by
existing sources. In principle, the measures applicable to
new sources, especially compliance with the emission stan-
1 4}
dards, shall be envisaged. ' However, this directive is
subject to considerations of economic feasibility. Thus,
less stringent control technology may have to be installed
on a case-by-case basis. There are no existing source stan-
dards comparable to RACT (except in the framework of the
new regulations on fuel burning facilities). This severely
limits the scope of Sec. 17 and has resulted in quite dif-
ferent regimes for new and existing and among existing
facilities. 1 5)
According to a draft for an amendment of the Federal Emis-
sion Protection Act submitted by the Bundesrat to the Bun-
1 Sal
destag the protection of existing facilities shall be
diminished by substituting the requirement of proportion-
ality.- for that of economic feasibility.
In general, the operator is free to choose the means by
which he will meet ambient standards. The Act does not ex-
clude any particular method. The Federal Administrative
1Q
Court has held that stack gas cleaning, fuel substi-
tution, modified production processes, high stacks and
the modification or shutdown of existing plants all are
acceptable, as long as the ambient standards are met. In
particular, dispersion techniques are an acceptable means
of meeting the standards; however, dispersion is not a
primary method of pollution control as new sources must
meet other, technology-based requirements independent of
the ambient air quality standards which cannot be complied
with by using dispersion techniques.
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- 234 -
b) Emission Standardsand State-of-the-Art
Apart from compliance with the basic duty to prevent en-
vironmental harm and to meet the ambient air quality stan-
dards, Sec. 5 No. 2 FECA provides that all major sources
must take precautions against harmful environmental ef-
fects, in particular by use of emission limitation mea-
sures reflecting the state of the art. This so-called
principle of precaution is the second important principle
of German air pollution control. The interpretation of the
principle is controversial; in particular, it is unclear
whether the duty to use state-of-the-art technology is
conditional on a determination that this is necessary as
a precaution against concrete harmful environmental ef-
fects, exj. in the case where future violations of the am-
bient standards are probable, or whether all emissions
that are avoidable at reasonable cost must be avoided. The
Federal and State governments as well as the lower courts
have taken the latter position; the only limitation to
the principle of precaution accepted in the practice is
that the relation between the emission reduction achieved
181
and the cost incurred must not be disproportionate. '
The Federal Administrative Court, in a recent decision ',
has taken a position that is similar to that of the practice
and the lower courts, but diverges from this position by
requiring proportionality between the measures taken and
the potential risk and by calling for a long-term concept
designed for a uniform and equal implementation.
Sec. 3 (6) FECA defines state of the art as that "state of
development of advanced processes, equipment, or methods
of operation which ensures the practicability of an emis-
sion limitation measure". Practicability means that the
technology must be already proven in operation, although
routine operation is not necessary; moreover, there must
be a reasonable relation between the emission reduction
19)
achieved and the cost incurred. It is clear that this
definition leaves the administrators and the courts much
latitude to determine what is practicable. Therefore, the
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powers granted the Federal Government to issue regulations
or guidelines that specify performance and specification
2C8
standards ' are of particular importance. Accordingly,
the TA-Luft contains emission limitations for a long list
of particulates (having hazardous components) and gaseous
substances (almost 200 substances are covered). in particular,
it contains emission standards and technical require-
ments, for particular facilities or processes; for example,
flue gas desulphurization is declared practicable for lar-
21 \
ger fuel-burning facilities. ' The emission standards are
expressed as concentration values (quantity per cubic meter
of emitted air).
All in all, these provisions only reflect the "average" or
"conventional" and by no means the advanced state of the
art. Nevertheless, they are the most important means of
air pollution control in W. Germany since in practice,
ambient impacts of new sources are normally only considered
where there is reason to conclude that a violation might
occur.
As in the case of ambient air quality standards, the
statutory permit requirement is the primary instrument to
22)
ensure compliance with the state of the art.
The state-of-the-art requirement and emission standards
can also be applied to existing major facilities by is-
suing "subsequent orders" under Sec. 17 FECA. Where the
ambient air quality standards are exceeded, the competent
authority normally must issue such orders; otherwise it
has discretion. In both cases, the requirement of tech-
nical and economic feasibility limits the powers of the
authority. In practice, adjustment of existing sources to
the state of the art is rarely required in clean air
areas. ' However, the TA-Luft 1983 directs the auth-
orities to issue, subject to economic feasibility, such
orders at least where the emissions of existing facilities
exceed certain emission standards or are 200 or 150 per-
24\
cent in excess of certain other emission standards.
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- 236 -
A new regulation, the Regulation on Major Fuel Burning
Facilities25', sets forth rather strict emission standards
for SO- and some other pollutants emitted by such facili-
ties. One of its main purpose is to force existing facili-
ties to either close down or adjust, within a reasonable
period of time, to the requirements for SO2 applicable
to new or modified existing sources (400 milligrams per
cubic meter and 85 percent reduction of the sulphur con-
tent of the fuel; if technically not feasible: up to 650
milligrams per cubic meter; coal-burning facilities between
100 and 300 Megawatt: 1700 or 2000 milligrams per cubic
meter and 60 percent reduction). Large existing facilities
(above 300 Megawatt) that will further operate more than
30000 hours (500 hours roughly being equivalent to a year)
must immediately comply with new source emission standards;
large existing facilities that will further operate between
10000 and 30000 hours are subject to a special emission
standard for S0_ (2500 milligrams per cubic meter); large
existing sources with a lower number of future operation
hours need only comply with the conditions of the exist-
ing permit; smaller existing facilities (50 to 300 Mega-
watt) that operate more than 10000 hours must meet a
special emission standard of 2500 milligrams per cubic
meter. This scheme of phasing out existing fuel-burning
facilities is designed to achieve a major reduction of
total emissions of SO2 that contribute to acid rain and
the ensuing damage to the W.German forests. Moreover,
the regulation provides for stricter emission standards
for PSP, carbon monoxide, nitrogen oxide, and chloride
and fluorine compounds.
The regulation raises some problems of statutory auth-
ority26* since the powers granted in Sec. 7 of the Act ar-
guably do not include a generalized concretisation of
"economic feasibility" in the meaning of Sec. 17 and the
substitution of general regulations for individual sub-
sequent orders; on the other hand, since the statutory
criteria for economic feasibility are generic ones, re-
-------
- 237 -
ferring to the average operator of facilities of the same
category, it may be said that the requirements contained
in the proposed regulation are economically feasible for
existing fuel-burning facilities having a useful life as
set forth in the regulation.
c) Hazardous Pollutant Standards
The FECA does not expressly provide for the establishment
of hazardous pollutant standards. However, in practice
such standards have been established by using the powers
under Sec. 48 of the Act for setting forth emission stan-
dards .
The TA-Luft differentiates emission standards according to
risk categories. There are three risk categories. The most
dangerous substances, such as asbestos, beryllium, cadmium,
and lead, may not exceed 20 milligrams per cubic meter,
while 50 or 75 milligrams per cubic meter are allowed for
less dangerous substances.
The TA-Luft 1983 also introduced a regulation of can-
cerogenic pollutants. Emissions of such substances must be
reduced as far as possible, taking regard to the principle
281 "
of proportionality. ' Here, the reference to the state
of the art is practically eliminated. Apart from that,
the TA-Luft 1983 establishes emission standards for these
substances which are differentiated according to three
risk categories. These standards range from 0.1 mg to 5 mg
per cubic meter. This differentiation of standards can be jus-
tified by recourse to the basic objectives of the Act to
prevent harm to health and the concept of proportionality.
Although Sec. 48 of the Act expressly only allows the de-
termination of technology-based emission standards, it is
believed that the prescribed or necessary control tech-
nology may be the more stringent the higher is the risk
59 \
associated with a particular substance. The authority
.X
-------
- 238 -
for differentiating emission standards according to risk
categories, although somewhat doubtful, has never been
seriously disputed.
2. Nonattainment areas
Contrary to American law, there is no entirely special re-
gime for nonattainment areas. Sec. 5 and 6 FECA provide
that a major new or modified facility may not be construc-
ted if the ambient quality standards are already exceeded
or will be exceeded after putting the new source into
operation. To avoid the ensuing production ban, the TA-
Luft 1974 provided that the operator of the new or modi-
fied source must use technology that reduces emissions
beyond the emission standards, switch to fuels having a
lower pollutant content, reduce the capacity of the fa-
cility or disperse the emissions by constructing a higher
stack. Also, to a certain extent, a compensation of in-
creased emissions from the new-facility by reducing emis-
sions from existing facilities was allowed. Finally, a
temporary violation of the ambient quality standards was
permitted if an air quality maintenance plan ensured
future attainment of the standards. ' The 1983 Amendments
of the TA-Luft no longer mention offsets for meeting the
ambient quality standards. However, this is not intended
to change the law since this offset concept has been con-
firmed by the Federal Administrative Court in the Voerde
decision. There are new provisions somewhat expanding
the possibilities for compensating emissions in nonattain-
ment areas (see infra III) .
Moreover, Sec. 47 of the Act prescribes the establishment
of air quality maintenance plans in heavily polluted
areas. Such plans must be established by the Laender -
with little federal supervision - in areas in which air
pollution occurs or is to be expected that can cause harm-
-------
- 239 -
321
fial environmental effects in especial degree . The pri-
mary objective of the air quality maintenance plan is to
ensure attainment of the ambient air quality standards, al-
though other pollutants for which no such standards have
been set forth are included and some of the existing air
quality maintenance plans actually contain provisions for
such pollutants. The plan must contain a detailed descrip-
tion of the pollution situation, measures for the reduction
of air pollution and precautionary measures. In practice,
the official documents propose rather generic, vague
measures for categories of sources; only the officials
have individual lists of concrete measures for emission
reduction applicable to individual polluters.
In contrast to American law, the air quality maintenance
plans do not have the force of law. They are action plans
binding on the authorities. The measures envisaged can be
carried out only pursuant to powers contained in the Act
elsewhere. In the case of existing facilities, this means
that the plan must be enforced by recourse to the weak
powers under Sec. 17 of the Act to issue subsequent or-
ders.
3. Clean Areas
The FECA does not contain an express non-degradation
policy. However, the basic objective of the Act as ex-
pressed in Sec. 1 to take precautions against the oc-
currence of harmful environmental effect would arguably
allow the development of such a policy. Indeed, the TA-
Luft 1974 as well as the Amendments of 1983 contain cer-
0
tain provisions that may be considered as something like
a non-degradation policy.
With respect to S02, the TA-Luft 1974 provided that in
areas where the ambient air quality was better than 0.06
milligrams per cubic meter (long-term standard) - the
-------
- 240 -
normal standard being 0.14 milligrams - this standard must
be observed unless the Laender authorities granted an ex-
ception; this was only permitted if the exception did not
frustrate the objectives of the Act. ' The Amendments of
34)
1983 set alternative standards of 0.05 or 0.06. ' The
draft of the new TA-Luft had linked the (retained) agency
powers to grant an exception to the concept of a balanced
development of the area. This means that industrialization
of the area was permitted if it .occurred pursuant to sound
land-use and development planning; The Bundesrat rejected
this clause without substantially changing the meaning of
the regulation. The non-degradation standards are not ab-
solutely mandatory; the TA-Luft 1983 merely directs the
authorities to take care that these standards be attained.
This allows the Laender to pursue the policies mentioned
in the draft but accords them somewhat more latitude.
Furthermore, the use of increments for either permitting
emissions in excess of (secondary) ambient quality stan-
dards or requiring a special case-by-case determination
of ambient impact inspite of compliance with (secondary)
ambient quality standards may be considered as to reflect
a non-degradation policy.
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II. General Comparison of Strategies,Instruments and
Implementation of theAir Pollution Control Policy
in West Germany and the United States
1. Strategies
The American and the W. German air pollution control policy
is characterized by a -internationally rare - combination
of ambient- and emissions-oriented strategies. Ambient air
quality standards are designed to secure a pollutant con-
centration level in the air that is so that hazards to human
health and - to a lesser degree - also to plants, animals
and buildings are not to be expected; furthermore, in clean
areas the deterioration of the existing air quality shall
be avoided. The implementation of this ambient-oriented
strategy is achieved by a system of emission limitations
for major facilities. Apart from this, major facilities are
subject to emission limitations set forth for reasons of
precaution or at least having no direct link to the ambient
quality standards. The ambient air quality and emission
standards have an important impact on control and production
technologies, while direct regulation of these technologies
(such as specification and design standards) is rare. Ambient
air quality standards also influence the localization of
industry. Regulation of input materials exists only to a
limited extent.
If one proceeds from this level of global comparison to a
level of more concrete and detailed considerations, it
becomes clear that the differences between the American
and the German air pollution control policy are quite con-
siderable. The following aspects must be emphasized:
- In the American air pollution control policy, attain-
ment of ambient air quality standards is subject to
(sometimes unrealistically) strict deadlines whose ob-
servance shall be secured by the SIP; the German air
pollution control policy theoretically requires the
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ambient air quality standards to be met immediately, but
in practice is more flexible.
In the American air pollution control policy the pro-
hibition of significant deterioration of existing air
quality is an important element of the overall policy,
in the German air pollution control policy the non-
deterioration principle is confined to a single pol-
lutant (S02) and to areas in which a particular non-
deterioration standard is not already exceeded.
In the United States, the enforcement of ambient air
quality standards - in contrast to the prohibition of
significant deterioration - is in principle achieved by
generic emission limitations (emission standards), while
in W. Germany individual emission limitations are used.
In practice, the differences between the two systems
have been blurred to some extent because in W. Germany,
too, the emission standards, although designed as means
of precaution, in part serve to attain and maintain the
ambient air quality standards.
In W. Germany the use of low-pollutant {e.g. low-sulphur)
input materials and the mere dispersion of emissions are
accepted methods of attaining the ambient air quality
standards where a sufficient emission limitation at the
source is not possible. In the United States this is
permissible only to a much more limited extent. The
American air pollution control policy thus is more
oriented at influencing control and production policies.
However, this does not mean that the American emission
standards reflect a higher state of control technology;
arguably, the reverse is true.
In the American air pollution control policy, emission
standards are highly differentiated. With respect to
new and significantly modified existing sources there
are precautionary standards (NSPSs) and emission standards
for attaining the ambient air quality standards (LAER)
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as well as individual emission limitations for the im-
plementation of the prohibition of significant deterio-
ration (BACT); with respect to existing sources in non-
attainment areas, there are special emission standards
for attaining the ambient air quality standards (RACT).
By contrast, in W. Germany, apart from the Regulation
on Major Fuel-Burning Installations which uses a system
of differentiated emission standards, there are uniform
emission standards applicable to new and existing sources,
whose enforcement against existing sources, however,
depends on economic feasibility.
The structure of emission standards is different in that
the United States limit the freight (volume) of pollutants
per unit of input or production, whereas in W. Germany
emission standards fix the permissible concentration level
of pollutants per volume unit of emitted air.
2. Instruments
In the American as well as W. German air pollution control
policy the permit requirement for new and significantly modi-
fied existing facilities is an essential instrument for im-
plementing the ambient air quality and emission standards;
in the case of existing sources, statutory adjustment obli-
gations or agency powers of intervention fulfill equivalent
functions. However, at the level of instruments there are
also considerable differences between the American and W. German
air pollution control policy:
Scope of application and legal effects of implementation
plans are quite different. In the United States the SIP
is the primary instrument for implementing the strategies
of air pollution control; in W. Germany, the air quality
maintenance plan is limited to formally declared nonattain-
ment areas and is no more than an internal action plan
that does not bind the polluters. Therefore, the American
system presents itself as a coordinated, controlled system
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- 244 -
while in W. Germany implementation of air pollution
control policy is carried out in a less coordinated and
controlled fashion.
The different structure of ambient air quality standards
in the United States and W. Germany and the lack of uni-
formity in monitoring methods in the United States has
the result that monitoring data in the United States may
be more accurate temporarily, but certainly less ac-
curate geographically and often are hardly comparable
with one another. On the other hand, the W. German moni-
toring procedures do not necessarily cover the whole
area of dispersion around a particular source.
3. Implementation and Enforcement
In both countries, the federal structure of the political-
administrative system leads to a division of roles between
federal and state (or Laender) agencies which attributes the
latter essential competences and thereby impedes or even ex-
cludes a centralized steering and control of the implemen-
tation and enforcement of air pollution control policy. In
both countries bargaining strategies not provided by the law
- in lieu of imposition of sanctions - play an important role
in the implementation and enforcement process. In both
countries, there seem to be not negligible implementation
and enforcement gaps. Nonetheless, there are a number of
characteristic differences in implementation and enforcement:
The degree of decentralization of the implementation and
enforcement of W. German air pollution control policy
is much greater than that of the United States. Apart
from informal steering methods such as the permanent
Conference of Environmental Ministers and the partici-
pation of the Federal Executive in the Laender Committee
on Air Pollution and Noise Control, in W. Germany the
steering devices of the Federal Executive in practice
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- 245 -
are confined to making regulations and administrative
guidelines. In the United States, EPA has a key role
because it must approve the SIPs and participates in
permit proceedings in PSD areas. To a limited extent,
EPA also exercises influence on implementation and en-
forcement "on the ground". However, it must be noted
that under the Reagan administration there is a tendency
to delegate regulatory powers for the control of air
pollution to the states. The admission of "generic rules"
in the framework of the emissions trading policy also
leads to a weakening of EPA's role in implementation and
enforcement.
The tendency of agencie-s not to use the sanctions pro-
vided in the relevant statutes but rather reach an agree-
ment on required emission reductions by bargaining prob-
ably is stronger in W. Germany than in the United States.
EPA is more politicized than the W. German environmental
administration. Therefore, new environmental policy con-
cepts such as the emissions trading policy will be carried
through with more vigor in the United States than this
could be expected in W. Germany.
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III. Parallels to the American Emissions Trading Concept
under the Federal Emissions Control Act
34a
f
The FECA does not contain any language from which one could
derive that the legislature contemplated something like the
American Emissions Trading Policy in the context of air
pollution control in W. Germany. However, certain elements
of control concepts that are similar to the American off-
set and netting policy are practiced in W. Germany. Contrary
to what is assumed by some authors, this is not just an ex-
pression of "informal administrative behaviour"; rather,
these concepts are a part of the official air pollution
control strategy as laid down in the TA-Luft of 1964 and
1974 and the Amendments of 1983. In the practice also certain
bubble transactions have been effectuated without any formal
authority.
1. Offsets
a) Offsets for Attaining Ambient Air Quality Standards
It is well established that under the FECA offsets to
meet ambient air quality standards ("attainment offsets")
are permitted. The TA-Luft 1974 contained an express pro-
vision allowing such offsets. ' Where nonattainment of
the ambient quality standards was to be expected, the
operator of a major new facility or modified existing
major facility could meet the ambient quality standards,
among others, by reducing the emissions from other, exist-
ing facilities operated by him. If a contemporaneous off-
set was not possible, the operator could be granted a de-
lay of 6 months for reducing the emissions. The offset
clause was limited to sources operated by the same person.
However, since the Voerde decision of the Federal Ad-
ministrative Court, this limitation does not seem to be
valid law. In Voerde, the applicant for a permit for a
new facility proposed to reduce emissions from another
facility owned by an affiliate. The court did not object
to this.
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- 247 -
The requirements for this attainment offset are very lib-
eral. The Federal Administrative Court has held that the
offset concept is a part of the ambient air quality prog-
nosis which has to be made when considering an application
for a permit. Since the future, increased emissions from
the new facility must be considered, it is consequential
that also future emission decreases from other sources
must be included in the prognosis. It is not necessary
that the existing source whose emissions are reduced al-
ready applies control technology reflecting the state of
the art. Only the factual situation counts, .i.e. the re-
ductions must be sufficient to meet the ambient quality
standards (However, the court did not -decide how to treat
existing facilities that had not complied with enforceable
subsequent orders requiring them to meet certain emission
standards). Moreover, a reduction of emissions from the
existing source is not absolutely necessary. The court
also declared an improvement of the dispersion of un-
changed emissions from the existing facility to be suf-
ficient as long as the new facility complied with the
state of the art of control technology and the ambient
air quality standards were attained.
To sum up, an offset to attain the ambient air quality
standards is permitted by reducing emissions from exist-
ing sources operated by the applicant or third parties or
by improving the dispersion of these emissions.
The Amendments of 1983 have not retained the provisions on
attainment offset. However, in view of the Voerde decision,
this is not meant to change the law. It was believed that
that decision provided the necessary clarification and an
express reference in the TA-Luft was no longer needed.
In actual practice, the attainment offset has been used
38)
relatively frequently. It must be noted, however, that
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- 248 -
there are relatively few areas in W. Germany where the
ambient air quality standards are exceeded or about to be
exceeded and the offset clause could have been applied.
b) Offsets in Nonattainment Areas
With respect to "nonattainment" offsets, the W. German law
of air pollution control is rather cautious. The TA-Luft
of 1974 contained provisions allowing offsets inspite of
nonattainment of ambient air quality standards only under
narrowly defined circumstances: Certain netting transactions
(replacement of an existing source) were permitted in non-
attainment areas; furthermore, another provision of the TA-
Luft allowed permits for new facilities where an air quality
maintenance plan ensured future compliance with the ambient
air quality'standards.
In the process of amending the TA-Luft, various proposals had
been made by the Government to expand the possibilities for
offsets in nonattainment areas. The offset provisions that
ultimately became part of the 1983 Amendments are less far-
reaching than many of the proposals. That a certain ex-
pansion of the offset provisions was at all considered,
may be explained by the fact that the 1983 Amendments, by
changing the measurement methods, considerably stiffen the
ambient air quality standards and therefore somewhat ex-
panded possibilities for offsetting increased emissions
from new sources are necessary in order to avoid wide-
spread construction bans.
39)
The new TA-Luft provides that where the ambient air
quality with respect to any pollutant exceeds the long- or
short-term standards (primary standards) in any assessment
40)
area ', the new facility must nevertheless be permitted
where it meets several conditions:
— the additional long-term increment of concentration
levels with respect to the relevant pollutant in any
assessment area is not higher than 1 percent of the
standard;
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- 249 -
— a condition attached to the permit ensures that, nor-
mally within 6 months after putting the new source in-
to operation, clean-up measures, such as shut-down,
dismantling or modification of or in existing facili-
ties of the operator or third parties will be carried
out that are liable to improve the ambient air quality
in the annual mean in any assessment area inspite of
the increased emissions;
— emission reductions in existing facilities pursuant to
orders addressed to the existing source before the ap-
plication are not eligible;
— an improvement of ambient air quality by improving the
dispersion of emissions from existing facilities (high
stacks etc.) can be used for meeting the offset require-
ments only if the existing facility has taken all
measures for the reduction of emissions by applying the
state of the art (even beyond the "conventional" state
jof the art reflected in emission standards) .
The offset provision is very narrow. It only applies where
the contribution of the new source to ambient concentration
levels is minimal and the increased emissions are more
than offset by emission decreases in any one-by-one-kilo-
meter assessment area. However, the rigour of the offset
provision is mitigated by an exception introduced on an
experimental basis which permits offsets also in cases
where the additional long-term increment of concentration
levels exceeds 1 percent of the standard and the improve-
ment of the existing air quality does not occur in all
assessment areas. In order to find out to what extent in
these cases clean-up measures can be carried out to a
larger extent and thereby the ambient air quality be ad-
ditionally improved, offsets are generally permitted in
nonattainment areas where stack height is limited by other
provisions if the ambient air quality is immediately im-
proved in the annual mean and the emissions are limited as
far as possible, taking regard to the principle of proper-
-------
- 250 -
411
tionality. ' This provision is a compromise between the
mandate of the Act to improve the air quality in nonat-
tainment areas and the requirements of an active invest-
ment and industrial location policy. It was thought that
the 1-percent rule might cause operators of existing fa-
cilities to continue operations only because clean-up
measures were not possible. It is especially intended to
apply to West Berlin where the stack height is limited for
the protection of air traffic.
The TA-Luft does not expressly provide that the operator
of the new facility must first exhaust all possibilities
for meeting the ambient quality standards himself by using
state-of-the-art control technology or switching to fuels
that have a lower pollutant content. However, in view of
the objective of the Act to achieve the ambient air quality
standards as soon as possible, this duty would seem to be
implied in the offset concept.
Where the new TA-Luft prescribes a case-by-case deter-
mination of the ambient impact of a new facility, the off-
set concept is built into this determination. One factor
that is to be considered here are clean-up measures car-
ried out, in connection with the proposal, in existing
42)
facilities of the operator or third parties. '
The offset concept also is applicable to the modification
43)
of existing major facilities.
Besides the offset concept, the TA-Luft also provides for
a parallel to the American growth allowance. In areas
where the ambient quality standards are exceeded, a new
facility must be permitted if the increment of air pol-
lution in any reference area with respect to any pollutant
covered by an ambient standard is not higher than 1 per-
cent of the long-term standard and measures provided in an
air quality maintenance plan ensure an improvement of air
44 \
quality in the annual mean within 3 years. ' This pro-
vision does not require an improvement of air quality in
all reference areas. It permits a concentration of
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- 251 -
measures for emission reduction in assessment areas that
are most heavily polluted. On the other hand, it generally
allows the creation of a growth allowance within 3 years.
It is not beyond any doubt that the nonattainment offset
is consistent with the FECA. A dictum by the Federal Ad-
ministrative Court in a decision concerning the modifi-
45)
cation of an existing facility ' could be interpreted in
the sense that such offset is not permitted. However, in
the case decided by the court the new emissions and the
reduced emissions from the existing facility (odors) were
qualitatively different. A lower court decision is very re-
strictive while some commentators take the view that non-
attainment offsets are generally permitted by the Act. '
Although Sec. 5 and 6 of the Act seem to prohibit any new
construction in nonattainment areas, it is thought that «-.
restrictive interpretation of these provisions is apposite
in view of the overriding purpose of Sec. 1 of the Act.
The Act cannot have envisaged the immediate ban on all new
construction in nonattainment areas. Since the offset con-
cept ensures an improvement of the existing air quality,
it would be formalistic to prevent such improvement by
reliance on Sec. 5 and 6 FECA. The difficulty with this
reasoning is that 8 years after the enactment of the FECA
there should have been sufficient time to attain the am-
bient air quality standards throughout the country. This
may explain the reluctance of the Government to consider-
ably expand the offset policy. The.1 percent compensation
clause is officially justified by the argument that a
deterioration of existing ambient air quality by less than
1 percent can hardly be monitored and, therefore, cannot
be attributed to the new facility concerned. However, this
justification is open to doubt. In any case, it should be
noted that the statutory limits of the offset concept are
not clear. Some expansion beyond its present limits ar-
guably is consistent with the Act, especially in respect of
mere welfare impacts (molestations and ecological harm).
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2. Netting
The TA-Luft 1974 permitted netting, .i.e. compensation of
emission increases from a plant modification by reductions
from an existing source within the same plant, only to a
very limited extent and not with the far-reaching pro-
cedural consequences of the American netting concept. The
German netting concept is more of an extension of the off-
set policy. In nonattainment areas, a new facility had to
be permitted where it replaced an existing facility of the
same kind and total emissions as well as ambient concen-
trations were "substantially reduced". If necessary, a
deadline of normally 6 months could be granted to the
operator to reduce emissions from "the existing facility.
This provision also applies to a substantial modification
471
of an existing facility. ' This provision was sometimes
used in practice, even beyond its wording; in particular,
the requirement of "same pollutant" which underlies the pro-
vision was sometimes ignored and reconstructions were per-
mitted that exceeded the ambient quality standards with
respect to a particular, less dangerous or important pol-
lutant but, by replacing an existing source, caused a sub-
stantial reduction of a more dangerous or important pollutant
The 1983 Amendments have modified the compensation rule insofar
as not reconstructed sources but rather only significant modi-
fications of existing sources are privileged. A permit for a
significant modification of an existing facility may not be
refused where the ambient quality standards are already ex-
ceeded in individual assessment areas, but the modification
exclusively or predominantly serves to improve the existing
49)
air quality. ' The formulation "serves" does not mean that
the modification must be intended to improve the ambient air
quality; it is sufficient that it merely has such an effect.
However, it is unclear what is meant by requiring at least
a "predominant" improvement of the existing ambient
quality. The TA-Luft intended to give the competent authori-|
ties the power also to permit a modified facility that con-
48)
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tributed, with respect to a particular assessment area,
to an ambient violation where it "predominantly", jL.e. with
respect to other assessment areas, improved the quality of
the air. It is more doubtful whether also a compensation
of different pollutants, for example a reduction of emissions
of hazardous pollutants accompanied by an increase of emis-
sions of less hazardous pollutants, is permissible.
Whether the netting provision of the 1983 Amendments con-
forms with the FECA, is doubtful. The Federal Adminis-
trative Court ' has held that in the case of significant
modifications the previous air quality is irrelevant, .i.e.
an improvement cannot be used for compensation, where
there is a qualitative change of the air quality due to
the emissions from the modification. This holding at its
face's value only confirms the rule also existing in W.Germany
that any compensation normally requires that the. same pol-
lutant be involved. However, in a dictum, the court also
said that in determining whether the facility caused sub-
stantial molestations in the meaning of Sec. 5 FECA, the
new emissions were (merely) the "starting point" for the
ambient impact analysis; the previous emissions could be
considered in determining whether there was an overall
substantial molestation. While this dictum allows for
some flexibility with regard to pollutants for which no
ambient air quality standard has been set forth, it seems
clear that if the reduced emissions of a modified facility
still exceed the standards, this is not consistent with
Sec. 5 of the Act. The possibilities of qualifying this re-
sult by resort to the constitutional protection of existing
facilities are relatively narrow. Under the caselaw of the
administrative courts, the constitutional protection of
existing sources does not justify causing dangers to health
but, rather, is limited to substantial detriments and sub-
stantial molestation? furthermore, the protection of existing
facilities requires that a significant modification is ac-
companied by no or at most a minimal expansion. Moreover it
is doubtful whether a protection of existing facilities ex-
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- 254 -
tends to reconstruction. Also, Sec. 17 subparagraph 3 FECA
does not justify the netting clause. This provision pro-
vides that the requirements for existing facilities have
priority where a subsequent order addressed to an existing
facility leads to a significant modification. However, this
provision only concerns parts of an existing facility which
must be modified because of a subsequent order; it does not
concern parts of an existing facility that have been modified
voluntarily. At best, the rationale underlying Sec. 17 sub-
paragraph 3 FECA could be applied where the competent agency
could have addressed a subsequent order under Sec. 17 FECA "
to the entire existing facility, this order would have neces-
sitated a significant modification of the facility and the
emission reduction associated with this order would have been
equal to the emission reduction that is achieved, in the frame-
work of the netting clause, by a voluntary modification of
the facility. In other cases support for the netting provision^
therefore, can only be based on the reasoning that in view flB
of the paramount general purpose of the Act an improvement
of the ambient air quality achieved by a modification still
is preferable to the previous situation. However, one com-
mentator has asked whether in determining whether an im-
provement has occurred those emission reductions at the
existing facility which could have been achieved by issuing
a subsequent order to that facility should not be de- .
ducted.
51)
The Federal Administrative Court rejected this
approach with respect to attainment offsets. ' in the case
of nonattainment, the concept would seem to be much more
plausible. It is conceivable to apply the compensation clause
for new facilities (No. 2.2.1.1 b subparagraph 2 TA-Luft)
by analogy; however, this would only have the result that
emission reductions caused by subsequent orders already ad-
dressed to the facility cannot be credited.
Finally, the possibilities under W. German law to use the
netting concept to avoid the whole permit procedure for
modified facilities are slight. First of all, the notion
of "facility" is narrow so that many changes that theor-
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- 255 -
etically could be regarded as a modification are a new
construction and hence subject to the permit procedure ir-
respective of whether or not they are "significant". Sec.
3 (5) FECA defines facilities as workplaces and other sta-
tionary installations. It is recognized that this defi-
nition only broadly describes what can be a facility and
leaves the government some latitude to determine the no-
tion of facility in regulations made under Sec. 4 of the
Act. However/ the regulation concerning facilities re-
quiring a permit of 1974 are not much help, either. Some-
times, they refer to the whole plant; more often, they
simply repeat the statutory notion of facility without
clarifying whether the whole plant or each piece of
equipment is meant. The issue is further complicated by.
the generally held view that certain extensions of the
term "facility" are covered by the Act. Thus, ancillary
facilities may form a part of the principal facility and
are subject to the permit requirement even if, when re-
lommi
55)
541
garded alone, they would not. "Common facilities" are
considered to be a single facility.
The courts have long taken the position that the notion
of "facility" is narrow. In the leading case, the Tunnel-
ofen case, 'the Federal Administrative Court held that a
new kiln of a brick factory that replaced an existing kiln
was not a modification of an existing facility - the brick
plant - but rather a new construction. In another case, '
different production lines in a factory were held to con-
stitute different facilities. This case law has been cri-
581
ticized as extremely narrow ' but, nevertheless, must be
considered valid law.
A judicial pronouncement on the concept of "common facili-
ty" is still missing. A common facility is defined as
several facilities that use a common stack (or common con-
trol equipment, such as a desulphurization installation),
or serve a common purpose and are established in close
59)
vicinity. ' To the extent that this concept is reflected
s
in the Regulation concerning Permit-Requiring Facilities
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- 256 -
or in the Regulation concerning Major Fuel-Burning Facili-
ties/ it is encompassed by the discretion granted the
government to define the notion of facility. The same is
true of supplementary Laender regulations or adminis-
trative guidelines that define the notion, such as the Re-
finery Directive of Northrhine-Westfalia. ' Common facili-
ties are subject to a single emission limitation that con-
siders the total emissions from all equipment within the
plant. This allows for some flexibility in case of
modifications within the plant. However, a reconstruction
of one of its components, or addition of a new unit would
arguably not be a mere modification. The Regulation on
Major Fuel-Burning Facilities provides that where a single
facility is enlarged by adding a new facility in such a
way that the two facilities form a common facility, the
new facility is subject to new source requirements for
facilities having the total capacity of the common facili-
ty; the existing facility remains to be subject to the
6 2 \
previous requirements.
Second, the broad notion of "significant" modification
normally excludes the netting concept as a means to avoid
the permit procedure. Since a modification already is sub-
ject to the permit procedure where it is simply liable to
cause harmful environmental effects, the demonstration
that there is no net increase of emissions normally would
not exempt the facility from new source review; this ques-
tion will be considered in the permit procedure only.
3. Bubbles
Until very recently, the bubble concept has never of-
ficially been accepted in' W. German air pollution control
policy, although empirical studies show that bubbles
between existing sources and, more frequently, between new
and modified sources and existing sources have been ef-
fected in practice.
However, the TA-Luft 1983 contains a provision that, although
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- 257 -
primarily designed for the legal protection of new sources
that have been permitted under the compensation clause, could
be interpreted to allow bubbles for existing sources. ' It
provides that subsequent orders may not be addressed to exist-
ing sources to remedy a violation of ambient air quality stan-
dards where a permit for a new source could not be refused on
this ground under No. 2.2.1.-2.2.3. TA-Luft. This refer-
ence to the provisions concerning new facilities arguably
also comprises the offset and netting provisions of the
TA-Luft. However, it is not easy to conceive-what this
reference actually means. One could argue that an exist-
ing facility required to meet ambient-oriented emission
limitations can comply with these limitations also by re-
ducing emissions from another facility to an extent that
there is an improvement of the ambient quality beyond
what could be achieved by the subsequent order alone,
provided the contribution of the facility to the ambient
violation is not more than 1 percent of the ambient stan-
dard. As in the case of new facilities, emission re-
ductions at the other facility that had already been or-
dered before issuing the subsequent order could not be
used for such a bubble transaction.
The new Regulation on Major Fuel-Burning Facilities al-
lows some forms of bubbles to meet the emission limitations
for S02 laid down in the regulation. The regulation affords
operators of major facilities, mostly power plants, an op-
tion to phase out such plants or to comply with new source
or specific existing source requirements. Facilities with
a remaining useful life of up to 10,000 operational hours
need to comply only with the present permit conditions.
For large facilities having a useful life of 10,000 up to
3.0,000 hours, specific existing source emission limi-
tations are set forth; such facilities with a useful life
or more than 30,000 hours must comply with new source re-
quirements. For smaller facilities having a useful life
above 10,000 hours, a specific, less stringent emission
standard is set.
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- 258 -
Where several existing facilities are part of a common
facility, the operator can specify the remaining useful
life of each facility. Only facilities that are within
the same useful-life class are considered for the purpose
of applying the relevant emission standards. However, by
reducing the remaining useful life of one facility, the
operator cannot bring the common facility within the threshold
for smaller facilities and avoid the emission standards for
larger facilities or even avoid the application of the re-
gulation entirely; in determining total capacity, the com-
mon facility as a whole is the reference unit.
Further possibilities for bubbles are not provided in the
regulation. Theoretically, one could also conceive that a
plant operator having two separate facilities of the same
category, say less than 10,000 hours useful life, could
immediately shut down one facility and be given credit by
allowing .him to operate the other facility for further
20,000 hours with the' emission limitations contained in
the existing permit (remaining useful life bubble). Also,
it is conceivable that a credit be given to the operator
for immediate shutdown of a facility of the first useful-
life category - useful life less than 10,000 hours -
which can be used in the operation of a facility of the
second or third category.
However, the regulation is designed to compel operators
of facilities with a high further useful life to imme-
diately comply with new source or a special existing
source emission limitation, as the case may be. The
reason for this concept is that facilities having a
longer useful life are able to amortize the control
equipment that has to be installed to meet the new re-
quirements. The operator already is given the choice to
determine himself the useful life of the facility. A
further option to meet the relevant requirements by using
the bubble concept was not envisaged by the government
since the regulation is oriented at facilities rather
than plants.
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The only theoretical possibility would be resort to Sec.33
of the regulation that accords the competent authorities
the power to grant exceptions. An exception is possible
where, in regard of the circumstances of the particular
case, it is proven that requirements of the regulation
cannot or can be complied with only at disproportionate
cost. While this prerequisite could arguably be considered
to be met in an appropriate case where a bubble trans-
action is sought, the further prerequisite of Sec. 33,
namely that the state of the art for limiting the emis-
sions must be applied, shows that this provision contem-
plates single facilities and does not take into account a
combination of facilities effectuating a bubble transaction.
Finally, it must be asked to what extent the FECA itself
allows the use of the bubble concept. This question is rel-
evant for determining the consistency of the new TA-Luft
and the Regulation on Major Fuel-Burning Facilities with
the Act and, more generally, for deciding whether sub-
sequent orders may incorporate the bubble concept and
whether new source bubbles are possible beyond the narrow
limitations laid down in the TA-Luft and the regulation.
The prerequisite of "economic feasibility" raises some
problems with respect to introducing the bubble concept
in German air pollution control law. As stated, the test
for economic feasibility is a dual one. Measures that are
feasible for the individual facility can be imposed by the
competent authority. Only if a particular measure is not
feasible for the individual facility, the question arises
whether it is feasible for an average member of the same
category of facilities. Economic feasibility means, according
to the prevailing, although not undisputed, opinion, that the
operator must be able to make an appropriate profit after
installing the required control technology. The reference unit
is the plant, if the facility is equivalent to a plant, or else
the economic unit for which cost and earnings calculations
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can be made. ' It follows from that that the competent
authorities can impose on each facility of a group of fa-
cilities for which a bubble transaction is sought those
measures that are economically feasible for each indi-
vidual facility. Since according to the TA-Luft subsequent
orders shall endeavor to impose on existing sources con-
trol technology that reflects the state of the art, there
may be little room for more stringent emission limitations
at one of two existing sources to compensate for lower re-
quirements at the other facility. However, actual practice
shows that often subsequent orders or agreements made with
existing facilities for adjustment to the state of the art
do not reflect the most recent state of the art. Also,
plant closures and production curtailments may have to be
considered. Assuming that there is a certain potential
for bubble transactions among existing sources, the ques-
tion remains whether the reference unit for determining
economic feasibility can be shifted from the facility to
a- group of facilities; only if this were the case, a fa-'
cility that assumed more stringent controls beyond average
economic feasibility in exchange for less than economi-
cally feasible controls at another facility, could be sure
that this transaction would have to be permitted in any
case.. It is safe to say that the Act mandates that the re-
ference unit for determining economic feasibility be the
facility rather than a group of facilities^chosen by the
operator. The agency could argXie that the assumption of
more stringent controls by one of the two facilities shows
that these controls are economically feasible and could by
force of law be imposed on this facility. This argument is
cogent only insofar as the relevant facility can bear the
additional costs incurred only because these costs are in-
curred in exchange for lower costs at the other facility.
This will not always be the case.
Similar considerations obtain if, as a recent proposal by
the Bundesrat provides, the prerequisite of proportionality
should be substituted for that of economic feasibility.
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Inspite of this, it would seem that Sec. 17 of the Act is
not entirely inimical to bubbles. This provision in prin-
ciple grants the competent authorities discretion for is-
suing subsequent orders. Even if it is determined that
the general public or the neighborhood are not sufficient-
-,
ly protected from environmental harm, in particular if
the ambient quality standards are exceeded, the authority
can, under particular circumstances, abstain from issuing
a subsequent order or impose measures that are less stringent
than those applicable to new facilities. Where existing fa-
cilities only do not comply with emission standards, the
margin of discretion of the competent agency is much broader,
although.the Amendment of the TA-Luft (No. 2.4.2) in principle
obliges the agency to address subsequent orders to operators
who exceed certain emission standards by a certain percentage.
A German emissions trading policy for existing facilities
could focus on this latter area. Generally speaking, bubble trans-
actions that reflect the principle of ambient equivalence,
in principle are within the discretion granted the com-
petent authorities under Sec. 17 of the Act. This is at
least true of transactions whose net ambient impact, geo-
graphically and temporally, is equivalent to that of emis-
sion limitations applicable, .i.e. economically feasible,
for each individual facility. The air quality objectives
of the Act are safeguarded as if each facility would be
subject to requirements individually feasible. Moreover, the
competent agency has a wider margin of discretion where only
emission standards or generally the state of technology is
not complied with; in this area, a gradual adjustment of
existing facilities by using the bubble concept normally is
permissible.
4. New Source Performance Bubbles
As stated supra D, the American law, as a matter of principle,
does not allow the use of emission reduction credits for com-
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plying with technology-oriented requirements for new facilities.
To this extent, the precautionary principle is enforced "ab-
solutely" .
The German draft regulation on major fuel-burning facilities
went one step further; it also provided for a new source per-
formance standards bubble. Major coal-burning facilities
having a capacity between 200 and 400 Megawatt that couple
electric power and heat production only needed to comply with
an emission standard of 2000 milligrams per cubic meter for S0_
and SO., (and not the 60 percent reduction rate) if 50 percent or more
of their heat production were used, within 5 years after the
beginning of operation, in lieu of household heating instal-
lations or other heating installations having small stacks.
This provision was designed to encourage measures of energy
saving; the mitigation of the new source emission limits was,
thought to be appropriate because the replacement of
smaller heating installations by the relevant facilities would
have a positive net ambient impact. However, this proposal
was not retained in the final regulation because it was con-
sidered to be inconsistent with Sec. 5 No. 2 FECA and there
was no assurance for the ambient equivalence of the transaction,
The question whether and to what extent the operator of a new
source can escape the application of state-of-the-art
technology where he effects a reduction of emissions frortr
other sources, largely depends on the interpretation of
the principle of precaution (see supra I 1 b). In nonat-
tainment areas this is not possible. In attainment areas
a new source bubble could be allowable if, contrary to
•the interpretation of the principle of precaution by the
administration and the lower courts, state-of-the-art
control technology could be required only to the extent
that its application contributes, in an ascertainable
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manner, to an improvement of the ambient air quality in
the measurement area around the facility. In such a case
increased emissions from a new source that is subject
to emission limitations that do not reflect the state of
the art could be compensated by equivalent emission re-
ductions from existing sources. However, if the principle
of precaution means that emissions must be as low as pos-
sible, there arguably is no or only little room for new
source performance bubbles because the acceptance of
bubble transactions would interfere with the technology-
forcing purposes of the principle.
The Federal Administrative Court ' has held that the prin-
ciple of precaution requires a preventive protection against
air pollution beyond a concrete calculation of ambient im-
pact. This protection must be proportional to the risk po-
tential of the pollution to be prevented and is to keep
risks that are presented by lack of knowledge on the health
and environmental hazards associated with particular pol-
lutants and by lacking possibilities of attributing ambient
impacts to particular polluters (long-distance transport
of air pollution) as low as feasible according to the
existing control technology. The Federal Administrative
Court has declared the rejection of a "heat production emis-
sion reduction credit" in the Regulation of Major Fuel-
Burning Facilities to be consistent with the Act because
a general reduction of emissions by coupling production
of electric power and heat could not be proven and, more-
over, the long-distance transport of emissions could be
taken into account by the Regulation. It is only a small
step to consider the granting of such a credit as even in
violation of the principle of precaution. Generally speak-
ing, on the basis of the construction of the principle of
precaution advanced by the Federal Administrative Court,
bubbles for complying with new source requirements that
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reflect the principle of precaution seem to be only per-
missible where the risk potential of the pollutants con-
cerned is low and the transaction contributes to an im-
provement of air quality. a'
IV . Necessary Changes of the FECA for Introduction of A
"Pure" American Model!of Emissions Trading
As stated, the structure of the FECA in principle allows
the introduction of an emissions trading policy and exist-
ing regulations and administrative guidelines contain some
elements of such a policy. However, a "pure" model of an
American emissions trading policy, comprising the offset,
metting and bubble programs, could not be introduced with-
out considerable changes of the FECA. The following section
briefly describes the changes of the Act that would be neces-
sary if such a transfer of the American model were intended
as a matter of policy, without discussing, at this point,
the political desireability of such transfer itself.
1. Offsets
The W. German law todate offers few possiblities for non-
attainment offsets. With respect to health effects of air
pollution, this position is mandated by the purpose and the
central provisions of the FECA. With respect to welfare
impacts of air pollution, such as molestations and ecolo-
gical and materials damage, an enlarged offset could argu-
ably be based on case law that interpretes the notion of
"substantiality" of a molestation or detriment (Sec. 3 I,
5 No. 1 FECA) differently according to the preexisting
681
character of the impacted area . However, the limits of
this concept are not clear. An amendment of the Actwould
be needed in order to base nonattainment offsets on a firm
statutory base. Since enlarged possiblities for offsetting
emissions are an exception to the principle laid down in
Sec. 5 No. 1, 6 No. 1 FECA that a permit requires assurance
that no dangers, molestations or detriments will be caused, .
it seems appropriate to amend Sec. 6 FECA by adding a new
subparagraph. A direct reference to ambient air quality
standards as was contained in the Government draft of 1979 '
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that proposed to introduce a "clean-up clause" into the Act
is not advisable because it would require an express refer-
ence to such standards in Sec. 5 FECA itself. In order
to make sure that the nonattainment status of the rele-
vant area will not be perpetuated by application of the
compensation clause, one might, furthermore, consider
to link the compensation clause with the air quality
maintenance plan and its implementation or with other
measures for adjusting existing facilities to the sta-
tutory requirements and their implementation, and to
set a deadline for attainment of ambient air quality
standards.
The following wording of Sec. 6 FECA could be envisaged:
(1) /"former § 6_7
(2) In areas in which it is not ensured that
adverse environmental effects and other
dangers, substantial detriments and sub-
stantial molestations to the public at
large and the neighborhood cannot be cau-
sed, a permit may be granted if
1. clean-up measures taken by existing fa-
cilities substantially improve the am-
bient air quality with respect to any
pollutant in spite of the increased
emissions and
2. measures that are provided with respect to
other existing facilities in an air quality
maintenance plan (§ 47) or' under §§ 17, 21
and probably are enforceable ensure that
adverse environmental effects and other
dangers, substantial detriments and sub-
stantial molestations to the public at large
and the neighbourhood will not be caused
after the end of a period of no more than
3 years.
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2. Netting
The introduction of the American netting concept in its
pure form, .i.e; in the sense that the operator can avoid
substantive and procedur/al new. source review requirements,
is not possible under the Act. Sec. 15 II FECA only pro -
vides that in a netting situation - a significant modifi-
cation will probably not cause additional or other emis-
sions - the competent authority can decide on the permit
application in an informal procedure. The substantive new
source review requirements are not affected. A transfer of
a pure American netting model, therefore, would require a
complete alteration of the structure of Sec. 15 FECA in
such a way that, apart from emission standards under
Sec. 5 No. 2, 48 FECA which cannot be complied with by
using the bubble concept, the requirements of the previous
permit remain valid where additional emissions from the
modified facility are' compensated by emission reductions
achieved within the plant. Technically, this result can
be achieved by a "dual" definition of significant modi-
fication or more simply by modifying the legal consequences
attached to a significant modification.
The foUowing wording of Sec. 15 could be envisaged:
§ 15 Significant modification of permit-re-
quiring facilities
(1) /"former subparagraph (1)_7
(2) The competent authority may only desist from
making the application and the accompanying
documents available to the public and pub-
lishing the proposal if it is not to be ex-
pected that additional or other emissions or
in any other way dangers, detriments or
molestations of the public at large and the
neighbourhood can be caused by the modi-
fication. Sentence 1 also applies if additional.
emissions are offset by decreases of emissions
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from other facilities within the same working
place.
(3) If the prerequisites of subparagraph (2) 2nd
sentence are met/notwithstanding § 5 No. 2
the requirements of the existing permit remain
applicable.
It must be noted that, if the netting concept were con-
fined to attainment areas, the envisaged amendment of
Sec. 15 III FECA would not be appropriate. Since a sig-
nificantly, modified facility must comply with the ambient
air quality standards, in this case only the procedural
relief provided in the proposed Sec. 15 II FECA can be
retained.
The following wording of Sec. 15 could be envisaged.
(2) The competent authority may only desist
from making the application and the accom-
panying documents available to the public
and publishing the proposal if it is not to
be expected that additional or other emissions
or in any other way dangers, detriments or mo-
lestations of the public at large and the
neighborhood can be caused by the modifica-
tion. Sentence 1 also applies if additional
emissions are offset by decreases of emissions
from other facilities within the same working
place.
An alternative to the proposed changes is the simple
modification of the notion of facility. For this a
statutory amendment would not be necessary because
Sec. 3V, IV I FECA grant the government a certain
margin of discretion for defining the notion of facility.
Therefore it would be sufficient to modify the notion
of facility in the framework of the pending amendment
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of the regulation on facilities requiring a permit. A
broader notion of facility has the result that a modi-
fication of a plant will more often than previously be
considered as a significant modification of the facility
rather than a new facility. Procedurally, this has the
result that where the emissions from the modified part
of the facility are increased but are compensated by
emission reductions from existing parts of the facility,
the permit can be granted in the non-public procedure
under Sec. 15 II FECA. Under substantive law, a broader
notion of facility does not have the result that ambient
or technology-oriented requirements would not be applicable
for the modified parts of the facility. However, compliance
with ambient air quality standards can be achieved by com-
pensation. Moreover, in nonattainment areas the "clean-up
clause" has a broader scope of application so that exist-
ing parts of the facility can be used to a larger extent
for compensation and adjusting the whole facility to new
source requirements; in the case of new facilities a com-
pensation would more frequently be frustrated by the 1 per-
cent limitation contained in the relevant compensation
clause of the TA-Luft.
A modification of the notion of facility would also be
possible in conjunction with the envisaged change of Sec.
15 FECA. This would result in an extended applicability
of the relief proposed there for insignificant modifica-
tions.
3. Bubbles
Bubbles for existing sources in principle are permissible
under Sec. 17 FECA. An amendment of the Act, therefore,
is not necessary. However, it is doubtful to what extent
a bubble program could be specified by regulation. Also,
the lack of express powers to set specific existing source
performance standards that contain generic "economic fea-
sibility" requirements may be an obstacle to introducing
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- 269 -
a bubble program. The lack of such standards and the gross-
ly unequal treatment of existing sources in practice makes
the establishment of a baseline very difficult. Therefore,
Sec. 7 FECA could be amended so as to expressly allow the
introduction of a bubble program and the setting of exist-
ing source performance standards.
The following wording of Sec. .7 FECA could be envisaged:
§ 7 Requirements for the establishment, the con-
dition and the operation of facilities requiring
a permit .
(1) ^~unchanged_7
(2) The Federal Government, after hearing of in-
terested persons and groups (§51) and with the
consent of the Bundesrat, is empowered to pre-
scribe by a regulation that, after a permit has
been granted, operators, in order to comply
with the obligations arising under § 5, must
comply with certain requirements in the mean-
ing of subparagraph 1 that are
1. economically feasible for facilities of the
same kind (_ proportionate?, and
2. achievable with control technology that
corresponds to the state of the art.
It may also be prescribed that operators that •
do not reduce their emissions so as to meet
the requirements under § 17 or under this sub-
paragraph can offset these emissions by equi-
valent reductions of emissions from other
facilities that go beyond the requirements
under § 17 or this subparagraph.
Furthermore, Sec. 17 II FECA would have to be adjusted to
the proposal. This provision could read:
(2) Notwithstanding a regulation made under § 7 sub-
paragraph 2 the competent agency may not address
a subsequent order if ...
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Alternatively, one could desist from amending the Act and
simply change the provision of the TA-Luft concerning sub-
sequent orders in such a way that bubbles between existing
facilities -are permissible.
In a new No. 2.2.4.3 - the existing No. 2.24.3 would then
become No. 2.2.4.4 - it could be provided:
The agency can desist from issuing a subsequent or-
der where another facility of the operator or of a
third party makes a substantial contribution to
the reduction of emissions and improvement of air
quality without being obliged to do so by a sub-
sequent order addressed to him.
However, this wording does not take into account possible
emission reductions which could have been required from
the other facility under Sec. 17 II FECA if a subsequent •
order had already been addressed to the operator of this
facility. As stated above, this would lead to an unequal
treatment of existing facilities (problem of an equal base-
line) . Also, the wording does not ensure the ambient equi-
valence of the bubble transaction. In order to comply with
these requirements, the following wording could be con-
sidered:
The agency can desist from issuing a subsequent
order where another facility of the operator or
of a third operator reduces the emissions beyond
the requirements under § 17 subparagraph 2 FECA,
a regulation made under § 7 FECA or No. 2.3 or 3
(alternatively: under 2.2.4.2) and thereby makes
a contribution to the improvement of air quality
with respect to a pollutant that equals that which
under the provisions just mentioned could have
been required from both operators.
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- 271 -
V. Functional Prerequisites for a Successful Application
of the American Model in the Federal Republic of Germany
1. Potential Demand for Emission Reduction Credits
A fundamental prerequisite for the functioning of any emission
trading policy is that there must be sufficient demand for
credits for utilization in complying with the statutory or
administrative requirements. In other words, there must be
a political-administrative pressure on operators of facilities
to reduce their emissions to a larger extent than they do at
present or - in the case of new facilities - than they are
able to do at reasonable cost in applying the conventional
state of the art. In discussing the problem of demand for
credits in the framework of the German regulatory system non-
attainment areas/ clean areas (i.e. areas subject to the pro-
hibition of deterioration of existing SO- concentration levels)
and other areas must be distinguished. Facilities subject to
the Regulation on Major Fuel-Burning Facilities form a special
category.
a) Nonattainment Areas
In areas in which the air quality standards are exceeded or
would be exceeded by additional emissions from new facili-
ties, theoretically there is sufficient pressure to reduce
the emissions from new facilities; this pressure could lead
to a corresponding demand for emission reduction credits.
However., a number of factors will have the result that this
pressure will not be so strong as in the United States. First,
the share of nonattainment areas of the total area of the
Federal Republic of Germany and even of the total urban area
is relatively small (only some areas in the western Ruhr
area, Sarreland and West Berlin). Therefore, new facilities
can to a large extent avoid strict air quality controls by
locating outside nonattainment areas without foregoing the
locational advantages originating from location in an urban
area. The far-reaching possibilities of attaining the air
quality standards by utilization of low-pollution fuels or
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- 272 -
dispersion of emissions will also hamper demand for credits.
More important, the Laender concerned have always tried to
create margins for new growth in nonattainment areas by re-
ducing emissions from existing facilities, if necessary
through grants and subsidies; an instrument for achieving
this goal is, in particular, the implementation plan clause
of the TA-Luft (see above III.1). This is the reason why, in
contrast to the United States, in W. Germany the threat of
a general construction ban in nonattainment areas has never
played a particular role in the political discussion on air
quality problems, although in the framework of the proposed
- but then failed - amendment of the FECA of 1979 this
problem had been taken into account in the proposed "clean-
up clause". Also, beyond the Voerde case there are no re-
ported cases where in nonattainment areas new facilities
were confronted with a construction ban.
With respect to substantial modifications of existing fa-
cilities, the situation is similar. However, there is one
difference, namely that the operators concerned can hardly
"emigrate" in order to avoid strict controls; therefore,
there is more pressure for reducing emissions (often even
beyond the modified pieces of equipment because the authori-
ties often try to achieve a clean-up of the whole facility).
Moreover, extension of the notion of facility would result
in an increase of the number of modifications in relation
to new construction because modifications in a plant which
hitherto were considered as new construction would now be
considered as substantial modifications. This will not by
itself lead to an increase of the demand for emission re-
duction credits since the adjustment pressure remains un-
changed. However, the demand for credits might be higher
than in the case of new construction because the TA-Luft
affords broader options for offsets and netting.
With respect to existing facilities, § 17 subparagraph 1
FECA provides that in nonattainment areas the authorities
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••-.-.- 273 -
shall issue subsequent orders for adjustment of existing
facilities to the state of the art. However, there is no
"automatic" adjustment pressure comparable to that existing
in the United States. There are no special existing source
standards corresponding to RACT; also, the air quality main-
tenance plans do not contain generic emission limitations
for existing facilities. Therefore, the authorities are com-
pelled to orient their requirements at "economic feasibility"
in the individual case. Inspite of the objective criteria of
§ 17 FECA, in practice this amounts to a differentiation on
a case-by-case basis according to the individual situation
of the operator. The favorable bargaining position of oper-
ators has the result that the adjustment pressure exercised
via § 17 PECA, although not negligeable, will be relatively
weak. Therefore, it would seem that even in nonattainment
areas there will be no demand for emission reduction credits
to be used for bubble transactions comparable to that in
the United States. Moreover, it should be noted that the
weak adjustment pressure that may exist is limited to the
few nonattainment areas.
b) Clean Areas (Prohibition of Deterioration of Air Quality)
In areas in which - with respect to SOj - the prohibition
of deterioration of existing ai-r quality is applicable,
the adjustment pressure for new facilities will remain re-
latively weak so long as this prohibition is not a mandatory
rule but only a guideline for administrators and exceptions
are always allowed. In the United States, too, the offset
policy is relatively seldom applied in PSD areas because,
in the absence of increment violations, there is no need for
application.
In the case of existing facilities, in contrast to nonattain-
ment areas the competent authorities in principle have dis-
cretion in deciding whether or not to address a subsequent
order to an existing facility. However, under the TA-Luft
1983, this discretion is limited where particular emission
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- 274 -
standards are exceeded or exceeded by a certain percentage.
Moreover, a limitation of agency discretion would seem to
follow from the general objectives of air quality policy
relating to areas to which the prohibition of deterioration
of air quality is applicable. All told, agency pressure for
adjustment of existing sources to the emission standards or
a more stringent state of the art will be weaker than in
nonattainment areas, while economic infeasibility is equally
available as a defense. Therefore, a particular demand by
existing sources for emission reduction credits cannot be
expected in clean areas.
c) Other Areas
In areas which are neither nonattainment areas nor clean
areas in £he strict sense (meaning areas subject to the pro-
hibition of deterioration), the primary question is whether
existing facilities that do not conform with the state of
the art will demand emission reduction credits, for utiliz- •
ation in bubble transactions. According to what was stated
above, this question must be answered in the negative. The
lack of special existing source standards, the discretion
anjoyed by the authorities in deciding on subsequent orders,
and the reservation of the defense of economic feasibility
have so far had the result that the system of the FECA,
namely that the fundamental obligations arising under § 5
must in principle also be complied with by existing facili^
ties, does not function in practice. (However, there are
some differences of degree in this respect among the several
Laender). In other words, it is relatively rare that exist-
ing facilities in these areas are compelled to adjust to
existing emission standards or a more stringent state of
the art determined on a case-by-case basis. Normally, the
authorities wait until a substantial modification of the
facility becomes necessary; in such a case they may try to
achieve an adjustment of the whole facility (including
the unchanged parts). For these reasons, it would seem that
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- 275
there will not be a strong demand for credits by existing
facilities. However, it should be noted that in the case
of certain emission standards, the TA-Luft 1983 now obliges
the authorities to issue subsequent orders, which, however,
does not dispense them from respecting the defense of econ-
omic infeasibility.
.d) Regulation on Major Fuel-Burning Facilities
Under the Regulation on Major Fuel-Burning Facilities, there
is a direct and immediate adjustment pressure for many exist-
ing power plants. However, this pressure is mitigated by
the option of the operator to choose a lower remaining use-
ful life of the facility and thereby avoid retrofitting or
at least reduce its extent.
2. Potential Offer of Emission Reduction Credits
A second fundamental prerequisite for the functioning of an
exchange of emission reduction credits is that there is an
offer of such credits by facilities located in the vicinity
of the demanding facility, in other words, that other enter-
prises are willing and able to reduce their emissions beyond
the level required under the statutory or administrative
provisions. Without a saving potential, especially in exist-
ing facilities, the emissions trading policy will not func-
tion. Generally speaking, the saving (or reduction) potential
depends on the stringency of the control requirements ap-
plicable to existing sources. On the one hand, the German
requirements, expressed in emission standards or - less
frequently - in case-by-case decisions on the state of the
art, might well be more stringent than the American RACT
standard. This can be concluded from the fact that the
German emission standards are applicable to new and exist-
ing facilities and therefore, although they only represent
a conventional state of the art, do not need to take economic
feasibility for existing facilities into account. This re-
duces the saving potential in comparison to the United States.
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- 276 -
On the other hand, the situation is more favorable than that
in the United States because the authorities in practice
often abstain from fully enforcing the emission standards
or the state of the art against existing facilities, al-
though this would be permissible under § 17 FECA. Insofar
as existing facilities operate below the state of the art,
there is a considerable saving potential - even if varied
according to category of facility and industry. However,
it seems improbable that demand for, and offer of, emission
reduction credits will coincide geographically. In the ab-
sence of sufficient enforcement of the state of the art
against existing facilities, the saving potential is highest
in less polluted areas, whereas there is no or no consider-
able demand for credits (assuming that new source perform-
ance bubbles are in principle not allowed). In nonattain-
ment areas where the demand for emission reduction credits-
is highest, the saving potential at the same time tends to
decrease to the extent to which the state of the art will
be enforced against existing sources or cannot be enforced
because of economic infeasibility. Of course, it must be
stressed that the creation of credits by plant shutdowns
theoretically will always be possible. To what extent
credits are actually granted for shutdowns, depends on the
question whether and to what extent this is admissible as
a matter of policy, in particular, whether the allowable
emissions are the baseline, or hypothetical emission re-
ductions the operator could have achieved anyway according
to the state of the art must be deducted.
A special situation arises once again with respect to fa-
cilities that are subject to the Regulation on Major Fuel-
Burning Facilities. The variation of requirements for exist-
ing facilities according to the remaining useful life laid
down in the regulation is an expression of generic economic
feasibility. Therefore, at least theoretically it must be
assumed that individual facilities are able to reduce their
emissions beyond the requirements under the regulation in
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-.277 -
order to create emission reduction credits. However, in view
of the relatively uniform control technology used for power
plants, some practical reservations must be made.
3. Determination of the Baseline
In an emissions transaction only such emission reductions can
be credited that constitute a "surplus", i.e. that exceed
the statutory or administrative requirements or, where the
latter are lower, the actual emissions. Under American law
the applicable SIP provides a uniform base for determining
the baseline for the entire AQCR (although not beyond this
region). According to the structure of the SIP the allowable
or the actual emissions form the baseline; in the absence
of an approved SIP, the possibility of taking negotiated
PACT requirements as the baseline also provides for a certain
measure of equality between the polluters. Although absolute
(total) emission limitations are not imposed, the structure
of American emission standards that mainly are expressed
as process rates (volume of pollutant per unit of input or
production output) enables the authorities to compute the
total allowable or actual emissions on the basis of (maximum
or actual) production capacity.
Under German law, there is no general base for determining
the emission baseline because, notwithstanding the Regulation
on Major Fuel-Burning Facilities, there are no uniform exist-
ing source standards and the air quality maintenance plans
do not contain mandatory standards. Therefore, the emission
baseline can only be established case by case on the basis
of the requirements of the individual permit or, where these
are lower, the actual emissions. Furthermore, the structure
of German emission standards and individual emission limita-
tions which are expressed in pollutant concentration rates
per volume of emitted air impede the calculation of total
emissions on the basis of production data.
Whether the requirements of the individual permit or the
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actual emissions should be the baseline, is a matter of po-
litical choice. The values of the permit have the advantage
that they provide a relatively secure base and exclude
cheating. The danger of "bargaining down" is no particular
problem inherent in the emissions trading policy. In con-
trast to emission charges that are based on the values of
the permit, the always existing interest of the operator
in bargaining for requirements as lenient as possible will
not be reinforced further. The values of the permit do not
confer on the operator present disadvantages (in the form
of financial sanctions for non-compliance) which go beyond
the compliance costs ; at most, if the operator does not
succeed in "bargaining down", he has less opportunities for
deriving from the permit values future benefits by creating
emission reduction credits. Therefore, his primary interest
will not be the preservation of these opportunities for
future creation of credits but, rather, the reduction of
control costs as such.
Taking the - lower - actual emissions as baseline has the
advantage that the creation of paper reductions is avoided.
On the other hand, administrative costs are higher, the
danger of cheating is greater, and, especially in a reces-
sion, there may be difficult problems of evaluation in de-
termining the reference period.
All told, all these problems are not fundamentally different
from those arising under the American system of air pollution
control. Severe differences only arise insofar as the ab-
sence of generally binding criteria for the determination
of the emission baseline, i.e. the lack of existing source
standards in West Germany, will reinforce the already exist-
ing unequal treatment of existing sources. Efficient facili-
ties that have adjusted to the state of the art normally no
longer are capable of producing emission reduction credits
in order to utilize them for modernization of equipment or
sell them. Efficient facilities that have succeeded in
cheating the authorities about their efficiency, or inef-
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ficient facilities are remunerated because they can easily
produce emission reduction credits.
The danger of unequal treatment of existing facilities could
be excluded if each facility that creates a credit would be
. ; hypothetically subjected to the existing emission standards
or a more stringent state of the art determined ad hoc, in
other words, if one would only grant credits for such emis-
sion reductions that exceed these levels. The administrative
. ' costs of such a procedure should be low. On the other hand,
s. ' the saving potential would be drastically reduced and in
' practice the creation of credits would be limited to plant
shutdowns, which is problematic from an air quality policy
perspective. Similar objections, although to a somewhat les-
•: ser degree, obtain with respect to a possible compromise,
J namely taking those emission standards as the baseline for
which the TA-Luft mandates subsequent orders.for adjustment
. '- of the facility where they are exceeded by a certain per-
centage (150-200 percent according to pollutant). Both methods
would ignore the "statutory requirement of economic feasibility
(Sec. 17 subparagraph 2 PECA) which protects existing facili-
ties against enforcement of emission standards, including
the percentage values, and a more stringent state of the art.
There is only one method of determining the baseline that
conforms with the regulatory system of the FECA, namely,
similar to the American negotiated RACT, taking control
measures and ensuing emissions which would hypothetically
be economically feasible in the meaning of § 17 FECA as the
baseline. However, with this method the deficiencies of § 17
of the Act and of its application in practice would be trans-
ferred to the emission trading policy. If the criterion of
economic feasibility does not function well in practice in
the case of subsequent orders, it cannot be expected that
it will function well in the framework of the emissions
trading policy in determining the baseline. We do not see
a way out of this dilemma between unequal treatment of exist-
ing sources and reduction of the offer of credits, unless
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one would change the entire system and introduce special
existing source standards.
4. The Criterion of Air Quality Neutrality of Transactions
From an air quality point of view, emission transactions may
not deteriorate air quality; in nonattainment areas they must,
at least in the case of new sources, contribute to an improve-
ment of existing air quality. Therefore, the geographic dis-
tance between the sources participating in a transaction is
a crucial question. The American emissions trading policy
has some deficiencies in this respect because its require-
ments do not correspond to the temporary structure of air
quality standards and the monitoring methods are not always
accurate enough and in any case not uniform. The German sys-
tem of measuring and assessing air quality impacts in
1 square kilometer areas is preferable, at least with re-
spect to pollutants having important local impacts such as
SO. and -particulate matter. However, this system would seem jt^
to severely limit the opportunities for emission transactions^^
Also, the limitation of the assessment area to an area of
12.5 by 12.5 kilometers around the source is problematic
because this area does not necessarily correspond to the
actual area of dispersion. However, this is a weakness
already inherent in the traditional control system and which
might be reinforced at most marginally by the emission trad-
ing policy.
5. Administrability
Finally, a severe deficiency of a German system of emissions
trading policy would be that the possibilities for central
steering are minimal. A German emissions trading policy would
in practice develop in quite an uncoordinated manner, even if
the federal government or the Laender would issue implement-
ing rules. This could reinforce the already existing regional
imbalance of the implementation of the German air quality
policy.
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VI. Legal-Political Assessment of the Introduction ofAn
Emissions Trading Policy into German Law
For the reasons stated in section 2., a definitive assess-
ment of the transferability of the American emissions trad-
ing policy or some variant of this policy more geared to
the German legal system to German law is not possible. The
following discussion is subject to this qualification.
• 1. Assurance of the Functioning of a German Emissions
Trading Policy
It was stated in section 2. that the lack of a uniform
baseline.which is due to lacking governmental powers to
establish special emission standards for existing facili-
ties poses particular problems with respect to the func-
tioning of a German emissions trading policy. This is
true of all variants of the emissions trading policy, in-
cluding those that have already been practiced in W.
Germany, since existing facilities are the primary or
even exclusive producers of emission reduction credits.
The solution of the existing compensation and clean-up
clauses which consider each emission reduction that is
not already mandated by an enforcible subsequent order
as suitable sources of a credit, is not acceptable for
the reasons already stated. Also, a further development
of the concept underlying No. 2.4.2 TA-Luft whereby the
competent agency shall issue subsequent orders where an
existing source exceeds the emission standards by a cer-
tain percentage is no solution. These percentage values
do not reflect, in a generic fashion, the requirement of
economic feasibility. Therefore, the barrier of economic
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feasibility remains valid in all cases covered by No.
2.4.2 TA-Luft and, under the Act, must remain valid.
The requirement of a uniform baseline is no purely tech-
nical problem of simply calculating emission reductions,
which, indeed, could be solved relying on No. 2.4.2 TA-
Luft; rather, it is a problem of justice (or in economic
terms: income distribution) between different operators,
industries and regions. It would be no solution, either,
if, in parallel to the American RACT, not each emission
reduction but only such reductions would be credited that
go beyond what is economically feasible in the meaning of
Sec. 17 II FECA. The problems inherent in Sec. II FECA
are the determination and enforcement of economically
feasible control measures; these problems are not-resolved
by referring, in the framework of the emissions trading
policy, to economic feasibility on a case-by-case basis.
General powers to establish existing source standards ap-
pear necessary in order to ensure the functioning of a
future German emissions trading policy. These powers could
be used step by step under ecological efficiency perspec-
tives, i.,e. with respect to critical pollutants and criti-
cal industries (highly-polluting industries), so that the
administrative feasibility of this concept does not be-
come a problem. The advantage of this concept is that a
selective administrative clean-up policy could be sup-
ported by the market-oriented emissions trading policy.
More stringent requirements would be tolerable for the
industries concerned insofar as the operators would have
flexibility in complying with these requirements under
the emissions trading policy.
If this proposal is not followed, at best small steps
towards cautions extension of existing variants of the
German emissions trading policy can be recommended.
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2. Offsets
The conformity of the compensation and clean-up clauses of
the TA-Luft with Sec. 5 No. 1 FECA is not beyond doubt.
Already for this reason, following the proposals made in
section IV 1, 2 this provision of the Act should be changed
in order to create a safe legal basis for a German emissions
trading policy.
Apart from this, the scope of application of the compensation
and clean-up clauses of the TA-Luft is very narrow. The li-
mitation of compensation for new or significantly modified
existing sources in nonattainment areas as a matter of
principle, to an ambient impact below 2 percent reduces
the compensation to a de minimis exception. However, it
must be considered that this clause is supplemented by
broader and more flexible compensation clauses that refer
to the air quality maintenance plan and to case-by-case
assessment of ambient air quality.
In the political discussion on the proposed amendment of
the Act of 1979 a number of environmental objections have
been voiced against the clean-up clause. These objections,
on the one hand, were that the legislature should create
the means for an effective clean-up of existing sources in
the first place; this can only be achieved on the basis
of the proposal made above to introduce special existing
source standards. On the other hand, in keeping with the
objections raised here, it has been pointed out that the
clean-up clause will perpetuate a violation of the ambient
air quality standards. This is so because and insofar as
emission reductions which would have been achieved anyway
or at least within a short period of time (e.g_., because
they are economically feasible or the facility concerned
would have been shut down anyway) are a source of emission
reduction credits; these credits could then be used by a
new or significantly modified existing source during its
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(longer) useful life. It had been proposed to cope with
this danger by introducing the requirement of a substantial
improvement of air quality or - in the framework of the
implementation plan clause - by deadlines for attainment
72)
of the area concerned; some authors rejected the clean-
up clause in nonattainment areas entirely where health
hazards were involved. '
The dangers of the clean-up clause thus accurately described
could partly be coped with by making the creation of emis-
sion reduction credits conditional on restrictive prere-
quisites (e.g., restrictions in case of shutdowns) or by
limiting the use of such credits (e.g_., by the requirement
of over-compensation). This is a general problem of the
entire emissions trading policy. Apart from that, an exten-
sion of the compensation clauses with respect to health-
related ambient air quality standards could only be ad-
vocated if it were ensured that the ambient quality stan-
dards will be met within a foreseeable period of time.
Therefore, one might consider to link the compensation
and implementation plan clauses and in addition, to set a
deadline of, say, 3 years within-which attainment must be
ensured. Of course, the problem is that in contrast to
American law the German air quality maintenance plan is
not mandatory for the operator and the measures provided
in the plan may not be enforceable for lack of economic
feasibility. Therefore, the wording of the clause would
have to include a qualification that attainment within
the deadline on the basis of the implementation plan and
its expected enforcement must be ensured.
Furthermore, the requirement of a substantial improvement
of ambient air quality should be introduced; the regula-
tion of details could be left to administrative rules.
As stated in section II., the ambient impact assessment
method prescribed in the TA-Luft - 1 by 1 kilometer assess-^
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- 285 -
ment areas - limits the potential of a German emissions
trading policy considerably. It is true that this restric-
tion is not applicable in the framework of the Berlin ex-
ception, the implementation plan clause and case-by-
case air quality assessment. The question is whether the
compensation clause could not be liberalized by the re-
quirement that a deterioration of air quality must be ex-
cluded in all 1 by 1 kilometer assessment areas (this
74)
should apply to all clauses) , but a substantial improve-
ment of air quality would only be required in the majority
of assessment areas. With respect to pollutants with ubi-
quitous dispersion such as NO , a system of geographical
Jt
discounting (increase of the compensation rate according to
the distance between the sources involved in a transaction)
would satisfy environmental considerations.
3. Netting
The transfer of the American netting policy cannot be re-
commended. Contrary to the fundamental objectives of the
FECA, the netting concept desists from requiring signifi-
cantly modified facilities to contribute to the clean-up
of nonattainment areas. It is true that under the American
netting concept, the implementation of the principle of
precaution is ensured because the NSPSs are applicable
and, consequently, in case of transfer of this policy to
the German law, the German emission standards would have
to be applicable.
The functional equivalent in German law to the American
netting concept is the clean-up clause under No. 2.2.3.2
TA-Luft. This clause is in practice an important means
of cleaning-up nonattainment areas and, therefore, should
cautiously be extended. The scope of application of
the clean-up clause at present is limited because the
narrow notion of facility under the Regulation on Permit-
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Requiring Facilities has the result that numerous modifi-
cations in a plant are to be considered as construction
of a new facility to which only the (narrower) compen-
sation clause, not the clean-up clause is applicable.
Here, the pending amendment of this regulation offers the
possibility of a- cautious extension of the term of facility.
As stated, this would be covered by the statutory defini-
tion under Sec. 3 V and the powers to make regulations under
Sec. 4 I of the Act. However, an extension of the notion of
facility is no solution for the primary question whether
the clean-up clause is at all consistent with the FECA. To
this extent, as in the case of the compensation clause, a
clarification in the Act is to be recommended.
4. Bubbles for Existing Sources
Bubbles for existing sources are, within certain limits,
consistent with Sec. 17 II FECA. If the proposed change
of the concept underlying Sec. 17 II FECA, namely intro-
ducing existing source standards and supplementary compen-
sation options were not accepted, one might consider to
supplement No. 2.2.4 TA-Luft to the extent that bubbles
between existing sources are admitted in principle.
5. Bubbles for Complying with State-of-the-Art Require-
ments for New Sources
The question whether bubbles for compliance with emission
standards for new sources are consistent with the FECA
arguably should be answered in the negative. The decision
of the Federal Administrative Court on the "heat production
emission reduction credit" has not entirely clarified the
issue because the Court has only held that the Federal
Executive could deny the granting of the credit rather than
that it was impermissible under the Act. However, the
arguments advanced by the Court for a broad construction
of the principle of precaution lend some support to the
proposition that bubbles for compliance with technology-
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based requirementsfor new sources are not permissible. In
any case, the legislature could define the scope of the
principle of precaution and admit bubbles. In view of the
environmental importance of the principle of precaution
which has recently been revived, there are good arguments
for demanding that the rigor of the principle should not
be mitigated even if new source bubbles would be associated
with considerable cost savings. From an environmental per-
spective, the admission of new source bubbles could at best
be considered if in the framework of the pending amendment
of part 3 of the TA-Luft the emission standards would be
conceived as stringent new source performance standards
that reflect a progressive state of the art and if, further-
more, a substantial over-compensation would be required.
6. Modification of the American Model in the Light of
Environmental Requirements
There are no objections based on principle against build-
ing environmentally-motivated restrictions into a German
version of the emissions trading policy. This is parti-
cularly true of the principle of temporary equivalence
between emission reduction and credit, which plays an im-
portant role in admitting shutdowns as a source of credits.
It is technically possible to insert this principle into
the statutory or other provisions that permit or regulate
emissions trading. However, the practicality of this con-
cept is open to doubt'because the presumptive (future)
useful life of a facility which would determine the dura-
tion of a credit produced by a shutdown is not easy to
establish. It remains to be seen whether the system of
presumptions now envisaged by EPA will be workable in
practice. More important, in the practice of the German
variants of the emissions trading policy, shutdowns re-
present the primary source for emission reduction credits.
It is to be anticipated that, if the utilization of shut-
downs for the creation of emission reduction credits were
-------
- 288 -
radically restricted - and the principle of temporary equi-
valence exactly amounts to this -, the functioning of the
emissions trading policy as a whole would be in danger.
As has been stated above, the American emissions trading
policy at best leads to the preservation of the status quo
in air quality. This is demonstrated by the general require-
ment of ambient equivalence of transactions; in the frame-
work of the offset policy, an over-compensation is neces-
sary, but in practice a compensation rate of 1:1.1 is con-
sidered as sufficient so that the extent of improvement
of air quality is small. There are two principal possibili-
ties of putting the emissions trading policy more at the
service of environmental policy:
- making the traditional command-and-control policy more
dynamic by periodically reviewing emission standards,
whereby their implementation would be facilitated by
built-in flexibility in the form of the emissions trad-
ing policy;
- making the emissions trading policy itself more dynamic
by fixing compensation rates that compel operators that
want to use emission reduction credits to substantially
over-compensate new emissions by credits (e.g., by a
compensation rate of 1: 1.5 or 1:2).
In the absence of sufficient experience in the United States
with the latter method it cannot be said that it is superior
to the former. In German law, the requirement of over-com-
pensation already is applicable in the framework of the com-
pensation and clean-up clauses in nonattainment areas. An
extension to existing source bubbles in such areas suggests
itself. However, all told one may conclude that a targeted
and controlled clean-up of existing sources on the basis of
special existing source standards and supplemented by emis-
sions trading might be superior to over-compensation which
always depends on the contingency of voluntary transactions.
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- 289 -
Footnotes (Chapter D)
1) For a comparative analysis of the US and W.German
regulatory systems see Currie, 49 U. Chi. L. Rev.
355 (1982)
2) FECA § 48
3) 1. Allgemeine Verwaltungsvorschrift zum Bundes-Immis-
sionsschutzgesetz - Technische Anleitung zur Reinhal-
tung der Luft - vom 28.8.1974, GMBl. S. 426, ber.
525 (Technical Guidelines for the Control of Air Pol-
lution) No. 2.4
4) Amendment of the TA-Luft of 23.2. 1983 No. 2.5
5) OVG Luneburg, GewA 1981, 341; VG Berlin, UPR 1982,
312
6) BVerwGE 55, 255 - Voerde; cf. Sellner, No. 57
7) FECA § 4; Vierte Verordnung zur DurchfUhrung des Bundes-
Immissionsschutzgesetzes - Verordnung iiber genehmigungs-
bedtirftige .Anlagen - vom 4.2.1975, BGBl. I S. 499, ber.
S. 727, modified by Verordnung vom 27.6.1981, BGBl. I
S. 772 (Regulation on Permit-Requiring Facilities)
8) FECA § 15
9) BVerwG, GewA 1964, 244
10) BVerwGE 6, 294; BVerwGE 50, 49 - Tunnelofen; BVerwG,
. DVB1. 1977, 770; Sellner, No. 300 ' •
11) VG K51n, GewA 1977, 34; Sellner, No. 295 et seq.
12) Feldhaus, § 17 Annot. 5; Sellner, No. 426, 431/432
13) Hoppe, Wirtschaftliche Vertretbarkeit, p. 75 et seq.,
94 et seq.; Feldhaus, § 17 annot. 8. The criterium is
a fictitious, healthy "standard" enterprise, not the
statistical average enterprise; however, in practice
these objective criteria have, proven to be inapplic-
able; see Mayntz, p. 411. More differentiated criteria
are proposed by: Soell, Der Grundsatz der wirtschaftli-
chen Vertretbarkeit im Bundes-Immissionsschutzgesetz,
1980, and R.-B. Schmidt, Wirtschaftswissenschaftliche
Aspekte des Begriffs "Wirtschaftliche Vertretbarkeit"
nach dem Bundes-Immissionsschutzgesetz, Berichte 4/82
des Umweltbundesamts, 1982. These opinions have not
yet become relevant in the administrative practice.
14) TA-Luft No. 2.2.4.3
15) Cf. Mayntz, p. 395 et seq.; with respect to the legal
requirement of equal treatment of comparable existing
sources see Sellner, No. 434/435
15a) Bundestags-Drucksache 10/1862
16) Supra note 6
17) OVG Berlin, DVB1 1979, 159 - Bewag -; VGH Mannheim,
GewA 1980, 197; TA-Luft 1974 No. 2.1.2.4; Landmann-
Rohmer-Kutscheidt, Gewerberecht, vol. 3, Umweltrecht,
§ 1 annot. 7; Kutscheidt, in Salzwedel (ed), Grund-
ztige des Umweltrechts, 1982, p. 251/252, 269/270
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- 29O -
18) OVG Berlin, supra note 17; VGH Mannheim, supra note 17?
Landmann-Rohmer-Kutscheidt, supra note 17, § 3 annot. 3,
19} BVerwGDVBl. 1984, 476 » UPR 1984, 202
20) FECA §§ 7, 48
21) TA-Luft 1974 No. 3.1.1.4; see also infra note 25
22) FECA §§ 5 No. 2, 6
23) See Mayntz, p. 404/405, 480
24) TA-Luft 1983 No. 2.2.4.2
25) 13. Verordnung zur Durchfiihrung des Bundes-Immissions-
schutzgesetzes (Verordnung uber GroBfeuerungsanlagen)
(Regulation on Major Fuel-Burning Facilities)
26) See v. Mutius, Bestandsschutz bei Altanlagen, unpub-
lished paper 4.5.1982, K51n; Statement of the Arbeits-
kreis fvir Umweltrecht, Bonn, of 7.2.1983
27) TA-Luft No. 2.3.3.4, 2.3.4.3
28) TA-Luft 1983 No. 2.2.1.5, 2.3.5
29) Cf. Kutscheidt, in Salzwedel (ed), supra note 17, p.
263; Feldhaus, § 48 annot. 6, annot. to 1 BImSchVwV
2.3.3.4
30) TA-Luft 1974 No. 2.2.1.2-4
31) Supra note 6
32) FECA § 44 II .
33) TA-Luft 1974 No. 2.4.3
34) TA-Luft 1983 No. 2.2.1.4
34a)The following text (III-V) corresponds to the relevant
parts of the German language report with one major ex-
ception: the parts concerning a possible W.German policy
on banking of credits ("reservation" of credits to the
originator of the emission reduction) have been omitted
due to their highly technical nature; see in the German
report at Dili 5, IV 5 and V 6.
35) TA-Luft 1974 No. 2.2.1.2
36) Supra note 6
37) Supra note 6; in the same sense Jarass, § 5 annot. 16
34) TA-Luft 1983 No. 2.2.1.4
35) TA-Luft 1974 No. 2.2.1.2
36) Supra note 6
37) Supra note 6
38) See Mayntz, p. 438
39) TA-Luft 1983 No. 2.2.1.1, 2.2.1.2
40) See supra p. fST|
41) TA-Luft 1983 No. 2.2.1.1, b
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- 291 -
42) TA-Luft 1983 No. 2.2.1.1, b, 2.2.1.2, d in conjunction
with No. 2.2.1.3
43) TA-Luft 1983 No. 2.2.3.2
44.) TA-Luft 1974 No. 2.2.1.4, TA-Luft 1983 No. 2.2.1.1, b, bb
45) BVerwG, DVBl 1977, 770
46) VG Berlin, UPR 1982, 312 (low additional emissions,
substantial net reduction of emissions from several
existing sources of the same operator; the decision
has been appealed); Sendler, UPR 1983, 1, 3 and 5;
Sellner, No. 54; Ule, BB 1976, 447; DreiBigacker/Suren-
dorf/Weber, TA-Luft 1974, p. 35; Feldhaus, annot. to
1. BImSchVwV 2.2.1.3; contra only Bohne, Der informale
Rechtsstaat, 1981, p. 181 et seq.; Jarass, § 5 annot.
16-17, § 6 annot. 6-7.
47) TA-Luft 1974 No. 2.2.1.3, No. 2.2.3.2
48) See Mayntz, p. 436/437
49) TA-Luft 1983, No. 2.2.3.2
50) Supra note 45
51) Sellner, No. 54; reserved with respect to the "clean-up
clause" especially Jarass, § 6 annot. 7
52) Supra note 6
53) Kutscheidt, supra note 17, § 4 annot. 12, 19; Sellner,
No. 14, 15 et seq.
54) VGH Mannheim, NVwZ 1983, 46, 47; OVG Miinster, DVBl
1976, 790 - Voerde; Sellner, No. 18
55) Sellner, No. 19
56) BVerwGE 50, 49 - Tunnelofen (reversing OVG Munster,
DOV 1973, 822)
57) VG Hannover, DVBl 1976, 809; see also OVG Liineburg,
GewA 1975, 275
58) Kutscheidt, DoV 1976, 663; Sellner, No. 10
59) Regulation on Permit-Requiring Facilities, supra note
7, § 2 No. 1; Regulation on Major Fuel-Burning Facil-
ities, supra note 25, §§ 20 VII, 30; Sellner, No. 19;
Kutscheidt, supra note 17, § 3 annot. 25
60) Verwaltungsvorschrift uber Genehmigungsverfahren nach
§§ 6, 15 Bundes-Immissionsschutzgesetz (BImSchG) fur
MineralSlraffinierien und petrochemische Anlagen zur
Kohlenwasserstoffherstellung vom 14.4.1975, MBl. NW
No. 65 vom 31.5.1975 (Refinery Directive), No. 1.1.1
b, 1.2.4 a
61) See authors cited supra note 59; Refinery Directive,
supra note 60, No. 1.2.4 a
62) Regulation' on Major Fuel-Burning Facilities § 30
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- 292 -
63) See Mayntz, p. 432 et seg.
64) TA-Luft 1983 No. 2.2.4.1
65) Supra note 13
66) Draft Regulation on Major Fuel-Burning Facilities
§ 6 II 2,3
67) BVerwG supra note 19, affirming VGH Mannheim BWVBl. 1982,
176
67a) In a broader sense see Jarass, § 5 annot. 17, § 6
annot. 6. The compensation advocated by OVG Liineburg,
GewA 1980, 203, in the case of potentially cancerogenic
substances is designed to ensure compliance with the
prohibition of deterioration of air quality as an ex-
pression of the precautionary principle. Therefore it
does not amount to a qualification of the precautionary
principle. Structurally, it corresponds to the "Voerde
' doctrine" (offset).
68) BVerwG DVBl 1976, 614; OVG Munster, 13.3.1974, VII A
892/71 (unpublished); Sellner, No. 211/212; Feldhaus,
§ '3 annot. 3
69) Bundestags-Drucksache 8/2751 (1979) § 6 b
70) Hansmann, in: Umweltrecht mildern?, 1978, p. 116;
Scharpf, in: Protokoll tiber die offentliche AnhSrung
zum Entwurf eines zweiten Gesetzes zur Anderung des Bun-
des-Immissionsschutzgesetzes, Deutscher Bundestag,
8. Wahlperiode, InnenausschuB, Protokoll Nr. 98, p. 43/<
129/130; contra von Holleben in: Umweltrecht mildern?,
supra p. 119; Vallendar, id., p. 120
71) Kutscheidt, in: Umweltrecht mildern?, supra p. 121, 167;
Vogel, in: AnhSrung id., p. 139/140; Scharpf, id., p. 43/44;
Ziegler, id., p. 143
72) Scharpf supra p. 129; Ziegler supra p. 144
73) Bundesrat, Bundestags-Drucksache 8/2751, p. 12; Ziegler
supra p. 143
74) Contra Sendler, UPR 1983, 1, 3
75) Scharpf supra p. 43, 129
76) The German version of the report also contains a short
part on the possible transfer of the American emissions
trading policy to water pollution and noise control. Since
this part presumably is of less interest to the American
reader, it has been omitted in the English language version.
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APPENDICES
-------
-------
Appendices
APPENDIX I:
APPENDIX II \
APPENDIX III:
Glossary
Federal Register Actions on Emissions Trading
Emissions Trading Policy Statement
(47 FR 15076, April 7, 1982)
APPENDIX IV: Emissions Trading Policy Statement
(48 FR 17O, August 31, 1983)
APPENDIX V;
APPENDIX VI:
APPENDIX VII:
Chevron U.S.A. Inc. v. Natural Resources
"Defense Council, Inc.
(Nos. 82-1005, 82-1247, and 82-1591)
State Local Emissions Trading Programs
(As of 4/7/83)
Comparison of Selected State Generic
Comprehensive Emissions Trading Rules
(Massachusetts, New Jersey, Oregon, and Maryland)
APPENDIX VIII: Comparison of Selected State Emissions
Banking Rules
(Jefferson County, Puget Sound, Bay Area Air
Quality Management District, and Allegheny County)
APPENDIX IX: Emissions Bank Accounting Program of Jefferson
County (As of 6/30/82)
APPENDIX ' X:
Bubble Summary
(As of 4/7/82; by pollutant, industry category,
source of ERCs, and EPA Region)
APPENDIX XI: Bubble Information
(As of 11/1/82? by industry category, source of
ERC, emissions impact, and cost savings)
APPENDIX XII: Description of Representative Bubbles
APPENDIX XIII: Profile of Interviews
APPENDIX XIV: Bibliography
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APPENDIX I
i Glossary
4
Key terms, as used in this report, are defined below.
Actual Emissions
The level of air pollutants emitted by a source (per hour
or per unit of activity). Actual emissions may differ from
"allowable" emissions, which is the level specified in a
source's permit or in the State Implementation Plan (SIP).
Whether allowable or actual emissions are used in deter-
mining the baseline against which emissions reductions are
measured will depend on the manner in which the SIP was
developed.
Air Quality Control Regions (AQCRs)
Geographical areas defined by the U.S. Environmental Pro-
tection Agency (EPA). There are 247 air quality control
regions for which the states must .suUuic plans to attain
and maintain National Ambient Air Quality Standards (NAAQS)
Air Quality Management Area (AQMA)
Subdivision of an Air Quality Control Region (AQCR)
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- 2 -
-4
j
1
Allowable Emissions
The level of emissions permitted by the terms of a source's
permit or in the SIP.
Ambient Air Quality Standard
A standard establishing the maximum allowable concentration
of a given pollutant in the ambient air.
Attainment Area (with respect to a given pollutant)
A geographical area (Air Quality Control Region on Air
Quality Management Area) whose measured air quality meets
the National Ambient Air Quality .Standards (NAAQS) for a
given pollutant.
Banking
See Emissions 'Reduction Banking.
Best Available Control Technology (BACT)
An emission limitation based on the maximum degree of emissic
reduction achievable through the application of available
methods of pollution control, taking into account energy, en-
vironmental, and economic impacts and orher costs. The BACT
determination is made ;on a case-by-case basis, but under no
circumstances may the level of allowable emissions exceed the
permitted as the result of application of a !-Taw Source Perfoi
mance Standard (NSPS). The Clean Air Act requires the appli-
cation of BACT in Prevention of Significant j«-.terioration
(PSD) areas for new activities.
Bubble Policy
EPA's alternative emission reduction option which allows
existing plants to reduce control requirements at one
by increasing controls correspondingly at another. The bubble
can be applied both whithin a single plant and between diffe-
rent plants in the same area. .
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- 3 -
The bubble lets existing plants (or groups of plants) rearrange
their SIP emission limits to control more where costs are low
in exchange for less control at emission sources where costs
are high. Bubbles must be equivalent to the original emission
limits in terms of ambient impact and enforceability.
Clean Air Act (CAA)
The Clean Air Act of 1970 as amended in 1977 is the basic fede-
ral legislation that established National Ambient Air Quality
Standards (NAAQSs) and set deadlines for the attainment of the
standards.
Commandand Control
A regulatory scheme based on rules which apply specific emission
limits - generally based on known feasible control technology -
or other technology-based requirements to every emission point
within a regulated process.
Compliance
To be "in compliance" means that an activity has met the requi-
rements of the relevant air quality control agency. However,- su<
requirements vary from one-time installation of specified end-
ot'-pipe measures to actual continuous compliance with all con-
ditions of a permit.
Continuous Comoliance
An activity is in continuous compliance if, on a day-to-ds.y
or hour-to-hour basis in some cases and/or with respect to some
pollutants, the performance of the activity is within the limits
specified in the permit, e.g., emissions of gaseous or liquid
pollutants are within the limits specified, quality of raw
material input or product output is within the limit specified.
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- 4 -
C ontro1 Te chn i gue Gu i delines (CTGs)
Guidelines issued by the EPA to assist state and local air
quality control agencies in determining Reasonably Available
Control Technology (RACT) for achieving and maintaining air
quality standards through control of existing sources.
Each CTG contains recommendations to the states of what EPA
calls the "presumptive norm" for RACT/ based on EPA's current
evaluation of the general capabilities and problems of the
industry that is the subject of the CTG. EPA recommends that
when they include RACT provisions in their SIP revisions state
adopt requirements consistent with the presumptive norm level.
Since the CTGs are based on a general evaluation of industry,
a state may deviate from the EPA recommendations, because
the general guidance may be inappropriate to particular facili
ties in the state. However, a state must justify its deviation
to EPA.,
Controlled Trading
!\
See "Emissions Trading"
Criteria Pollutants
Any one of air pollutants for which National Ambient Air Quali'
Standards (NAAQSs) have been established by the EPA under '
sections 108 and 1O9 of the Clean Air Act Amendments of 1970
on the basis of criteria documents detailing health or welfare
effects. These pollutants are: airborne lead, carbon monoxide
iCO) , nydrocarbons (HC) , nitrogen dioxide (N02) / ozone (O-j) .
sulfur dioxide (S02), and total suspended particulate matter
(TSP).
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- 5 -
Discount Rate
The percentage reduction in the value of emission reduction
credits (ERCs) at the time of their use, to satisfy ambient
air quality requirements.
Effluent Fee (Charge)
l
i A fee (charge) paid to the government for each pound of pollutan
_~* . emitted into the atmosphere.
|
Emission Factor
The amount of a specific pollutant emitted from each type of
polluting source in relation to a quantity of material
handled, processed, or burned. By using the emission factor
of a pollutant and specific data regarding quantities of
material used by a given source, it is possible to compute
emissions for that source - information necessary for an
emission inventory.
Emission Inventory
A list of air pollutants emitted into an area's atmosphere,
in amounts {commonly tons) per day or year, by type of source.
Emission Reduction Banking
"Banking" lets firms get credit for surplus emission reductions
and store such emission reduction credits (ERCs) in a legally-
protected manner. ERCs can be "banked" (stored) and used in
bubble applications to meet control requirements for existing
plants more flexibly and efficiently, as offsets to support
economic growth in areas not meeting air quality standards, or
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- 6 -
in "netting" to exempt .certain plant expansions or moderrl^B
zations from New Source Review. Banking rules can speed trades
between firms, expand opportunities for bubbles, and encourag*
the production of cheap ERCs at optimal times. Banking systems
also provide the certainty needed for firms to invest in ERCs
when meeting other control requirements, creating a pool of
readily available credits that makes trading easier and speed*
permit issuance.
Emission Reduction Baseline
The level of emissions below which a source must reduce its
emissions in order to qualify for an "emission reduction credj
(ERC). Generally, it is the more stringent requirement of acti
or allowable emissions. But this will depend on how the State
Implementation Plan was developed and on the specific policy c
that state in satisfying the requirements of the Clean Air_Act
Emission Reduction Credit (ERC)
A credit granted to a source operator for surplus emission
reductions is "banked" (stored) and can later be used in bubble
applications to meet control requirements for existing plants
more flexibly and efficiently, as offsets to support economic
growth in area's not meeting MAAQS, or in "netting" to exempt
certain plant expansions.or modernizations from New Source
Review. ERCs are used by being converted back into physical
pollution units, after being discounted (if necessary) to
satisfy ambient air quality requirements.
Emission Standards ••,
Any regulation specifying maximum allowable emissions of a
given pollutant into the atmosphere (per hour or per unit of
activity) and requiring the use of specific types of po
control equipment and/or fuel: these include New Source
formance Standards (NSPS), Lowest Achievable Emission Rate
(LAER), Best Available Control Technology (BACT).
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- 7 -
Emissions Trading (ET)
EPA has been implementing a series of regulatory reforms called
Emissions Trading. These include the bubble policy, the offset
policy, the netting policy and emissions banking and trading.
These policies allow firms to substitute relatively cheap
surplus reductions for expensive reductions at other emissions
points, by overcontrolling where the marginal cost control is
J low in lieu of controls whose marginal cost is high. These
v trades are accomplished by a SIP revision. This condition is
designed to'maintain the SIP's integrity and assure enforce-
ability of alternative emission limitations. Moreorver, under
"generic" trading rules, states and industry can be exempted
from case-by-case SIP revisions for many bubbles or other
trades.
Environmental Protection Agency (EPA)
Established by President Richard M. Nixon, effective December 2,
197O, to administer the Clear Air Act as part of a comprehensive
mandate for controlling environmental hazards.
Equivalent Ambient Impacts
Transactions in ERCs are constrained by the requirement to meet
ambient impact, tests. In nonattainment areas, transactions may
not contribute to a violation of a standard or prevent the
planned removal of an existing violation. In PSD areas, trans-
actions may violate a PSD increment or a NAAQS. Varying degrees
of air quality modeling are required for activities to demon-
strate t-;te ambient equivalence of transactions in ERCs.
Facility:
See "Source"
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- 8 -
Generic Emissions Trading Rules
individualr
EPA approval of a State generic rule means that
bubbles or other trades approved by that State under the rul<
need no longer be submitted as revisions to the State Impleiru
tation Plan (SIP) . This reduces overlapping State and Federal
Review, lets States become full partners in air pollution coi
avoids unnecessary paperwork and delays, and reduces uncerta:
and resource drains for State agencies and industry. Trades
which can not be accomplished under a generic rule may still
implemented as site-specific SIP revisions.
Hazardous Pollutants ,
Air pollutants regulated under section 112 of the Clean Air J
Amendments of T97O governing pollutants hazardous to health J
which no ambient standard is applicable. Under a 1979 EPA
policy, these emission standards are to reflect availabjj«|
control technology with consideration of control costs. ^^
Inspection and Maintenance
A congressionally mandated program for annual inspection of
automobiles in areas that cannot meet national ambient air
quality standards bv 1982.
Lowest Achievable Emission Rate (LAER)
An emission limitation required for new sources in areas
that have not yet- •' LLained National Ambient Air Quality
Standards. Th^»'ietically tougher than New Source Performance
Standards, because cpst .considerations are to be minimized,
LAER must reflect: (a) the most stringent emission limita-
tion which is contained in the implementation p.!an of am
state for a category of sources, unless a permit applica*
-------
can demonstrate that such limitations are not achievable;
or (b) the most stringent emission limitation which is
achieved in practice within an industrial category, which-
ever is more stringent. LAER may not be less stringent than
an applicable NSPS.
Major New Stationary Source
For purpose of implementing the Prevention of Significant Dete-
* rioration (PSD) provisions in the 1977 Clean Air Act Amendments,
any source defined in any of 28 industry categories potentially
emitting up to more than 100 tons/year of any pollutant, or any
other source with emissions of more than 250 tons/year of any
pollutant regulated under the Clean Air Act; for purposes of
implementing the nonattainment provisions of the 1977 Amendments
•» any source potentially emitting up to 100 or more tons/year of
any pollutant covered under the Act. States are empowered to
establish stricter thresholds and impose New Source Review
requirements on sources that emit less the amounts set forth
in the 1977 amendments.
Minor Source
A subcategory of sources with emissions below some threshold
defined by states in their regulations or SIPs (e.g., 25 tons
per year). This subcategory of sources is typically excluded
from permit requirements, and thus lacks a baseline against
which emission reductions can be ascertained.
Mixing Bowl
Refers to the reactivity ^f a given pollutant with other po3lu-
tants in the ambient air; the diripact of the discharge on ambient
concentrations of the pollutant is not affected by the location
of the discharge within the region. This has been assumed to be
valid for HC and NOX- S02, TSP, and CO are considered to be
non-reactive or "non-mixing bowl" pollutants. If a mixing bowl-
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- 10 -
condition exists, the locations of activities do not have to
be explicitly considered in the development of air
management strategies .
Monitoring
The measurement and recording of emissions that occur over
time. The purpose of monitoring is both to obtain a measureme
and to ensure the permanency of the required emissioa reducti
Monitoring can involve in-stack devices which measure emissio
or devices which measure input or output parameters.
National Ambient Air Quality Standards (NAAQS)
Standards governing maximum concentration of pollutants in th
ambient air, typically stated as mic.rograms or milligrams of
pollutant per cubic meter of air or as parts per million.
Promulgated by EPA, these numerical standards are set at
designed to protect human health, including that of the
sensitive people (primary standards!, and visibility, aesthet
materials, and plants and animals (secondary standards).NAAQS
have been established for the seven criteria pollutants. Prim
and secondary standards have been sat for each pollutant. For
CO, NOj/ 0-, HC, and Lead the primary standards are identical
to the secondary standards (see T^ble ). Secondary NAAQSs a.
more stringent for SO. and TSP.
1
Netting
A set of administrative procedures th'.:: exempts plants ••
expanding or modernizing from new source review requirements
long as the expansion or modernization does not produce a
significant "net" increase in plant-wide emissions. Netting i;
accomplished by assuring that any emission increase is c^fc
pensated for by surplus reductions elsewhere within the plant
By "netting out" of new source review the facility may be
exempted from preconstruction permits and related requirement;
-------
including preconstruction monitoring and ambient air modeling,
installation of BACT control technology, the offset requirement,
and applicable bans on new construction. The new source, how-
ever, must still meet applicable NSPS. The term "bubble" often
is used synonymously for netting.
^ New Source Performance Standards (NSPS)
i
1 Emission standards promulgated by EPA, usually determined on
*
I an industry-by-industry basis, for abatement of pollution at
new, modified, and reconstructed sources. The standards are
intended to be technology-forcing and must achieve maximum
abatement while taking into consideration costs, non-air quality
health and environmental impacts, and energy use requirements.
-9
Nonattainment Area (with respect to a given pollutant)
A geographic area not currently meeting a primary standard as
defined in the NAAQS, Nonattainment can occur for any single
pollutant and places an area under more strict emission control
requirements. A major new or expanding source seeking to locate
in a nonattainment area must arrange for sufficient offsets to
ensure that Reasonable Further Progress toward attainment of
NAAQS is achieved.
New Source Review
Administrative procedure applicable to major new sources and
significant modifications of major existing sources that is
designed to ensure that the ambient and tachnologv-sased re-
quirements applicable to these sources are met. -..'ae'se require
merts include preconstruction'permits and related requirements,
such as preconstruction monitoring and ambient air modelling,
installation of NSPS and/or LAER or BACT control technology,
the offset requirement and bans on new construction. See also
Permits.
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- 12 -
Offset Policy
A regulatory device designed to allow economic growth in an
area where a National Ambient Air Quality Standard (NAAQS)
has not been attained. The actual offset is obtained by
securing a decrease in an existing source's emissions to
more than compensate for emissions of a new source that
seeks to locate or an existing source that seeks to expand
in a nonattainment area.
Permit .
The administrative decision that allows the construction
and/or operation of a specific source and places emission
restrictions on it. The permit may specify a specific
emission limit, require a percentage removal of a pollutant,
or require a particular work practice. Where possible, Llie
permit conditions should be used.as the baseline for evalua-
ting emission reductions.
Pollution Controls
The means by which an emission reduction is achieved. Gene-
rally this term is used in reference to the technological
controls installed by a source - scrubbers, electrostatic
precipitators, or other abatement, equipment. However, it
includes any measure taken to achieve .emission reductions.-
shutdowns, production cutbacks, altered work practices, alters
tion of inputs or production processes, etc.
Prevention of Significant Deterioration (PSD)
Provisions of the 1977 Clean Air Act Amendments to prevent
the deterioration of ambient air quality in clean areas. The
Amendments establish three classes of areas where air quality
meets or exceeds the national ambient air quality standa^B,
PSD areas are designated: Class I (large national parks and
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- 13 -
wilderness areas); Class II {very clean areas where mode-
rate industrial growth is permitted); and Class III (Class II
areas designated for industrial development). The purpose of
the PSD program is to prevent existing ambient air quality
with respect to sulfur oxides and total suspended particulate
matter from deteriorating more than an established amount
"1 beyond baseline pollution concentration levels, called a
j PSD increment. With respect to other pollutants regulated
under the Clean Air Act, no increments have been set; however,
^ new and modernizing sources are subject to new source review
requirements and must use BACT.
Primary Standards - See "NAAQS11.
Reasonable Further Progress (RFP)
The requirement under the Clean Air Act that areas designated
nonattainment achieve annual incremental steps toward satisfyin<
ambient air quality standards by the designated deadlines.
Reasonably Available Control Technology (RACT) '.
Required of existing sources in areas that have not achieved
v
4 national ambient air quality standards. Refers to the lowest
emission limit that a particular source is capable of meeting b;
the application of control technology that is reasonably avail-
able considering technological and economic feasibility. For
many categories of sources, EPA provides guidance for technical
definitions of RACT (See "Control Technique Guidelines").
i
Secondary Standards - See "NAAQS".
Source
: Any building, structure, facility, or installation which emits
any air pollutant. A source may include several specific emitti
points, but is limited to those owned by a single legal entity.
-------
- 14 -
the term may be defined differently for different air
quality control programs.
State Implementation Plan (SIP)
The legal mechanism, subject to approval by EPA, by which a
state proposes to achieve and maintain the ambient air quality
requirements of the Clean Air Act. The SIP specifies emission
reductions from stationary and mobile sources necessary to meet
ambient air quality standards in an air quality control region.
EPA may draft and promulgate a SIP or portions of a SIP if the
state privisions are jedged by EPA to be inadequare. A "Condi-
tionally approved SIP" is a SIP that has been approved by EPA
with reservations as to additional measures that may be re-
quired to meet the NAAQS. An "accomodative SIP" imposes un-
equal emission reduction requirements on activities of the
same category within a region.
Trade
The sale or other transfer of ERCs from one legal entity to
another in some kind of market situation subject, to review
and approval by the competent air pollution control agency.
User Fee
Charges levied against sources that make use of the emission
reduction banking system. The charges can be used to defray
operating expenses or to fully fund the operation of the
emission reduction banking program.
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- 15 -
Variance
Temporary permission granted,under stated conditions,
to a source operator to exceed the emission limits
prescribed in a permit or regulation. Usually granted
to allow time for engineering and fabrication of abatement
equipment to bring the operation into compliance.
*
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APPENDIX II
Federal Register Actions onEmissions Trading
Emission Offset Interpretative
Ruling
Revisions to Offset Ruling
Bubble Policy
Revisions to Offset Ruling
PSD, New Source Review and
Offset Ruling Revisions
Approval of New Jersey VOC
Generic Bubble Rule
Federal Enforceability of
Emission Limitations
Change in Definition of Source
Emissions Trading Policy
Statement
Emissions Trading PoT icy
Statement
Dec. 21., 1976 41 FR 55524
Jan. 16., 1979 44 FR 3274
Dec. 11., 1979 44 FR 71779
May 13., 1980 45 FR 313O4
Aug. 7., 1980 45 FR 52676
April 6., 1981 46 FR 20551
July 15., 1981 46 FR 36695
Oct. 14., 1981 46 FR 50766
April 7., 1982 47 FR 15O76
Aug. 31., 1983 48 FR 39580
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APPENDIX III
^
Wednesday
April 7, 1982
Part HI
\
Environmental
Protection Agency
Emissions Trading Policy Statement;
General Principles for Creation, Banking,
and Use of Emission Reduction Credits
-------
15076
Federal Register I Vol. 47. No- 67 / Wednesday. April 7.1982 / Notices
ENVIRONMENTAL PROTECTION
AGENCY
;
s
Emissions Trading Policy Statement;
General Prinetoies for Creation,
Banking, and Us* of Emission
Reduction Credit*
May 12. 1082.
AGENCY: Environmental Protection
Agency.
ACTION: Proposed policy statement and
accompanying technical issues
document.
SUMMARY: It is the policy of EPA to
encourage use of emissions trades to
achieve more flexible, rapid and
efficient attainment of national ambient
air quality standards.
This Policy Statement describes
eiaissim* trading, sets out general
principles EPA will use to evaluate
emissions trades under the Clean Air
Act. and expands opportunities for
states and industry to use these less-
cnstly control approaches. Emissions
trading includes several alternatives to
traditional regulation: bubbles, netting.
and offsets, as well as baakir.s (storage)
of emission reduction credits (ERCs) for
future use. These alternatives do not
alter existing air quality requirements;
they simply give states, and industry
more flexibility to meet these
requirements. EPA endorses emissions
trading and supports its accelerated use
by states and industry to meet the goal*
of the Clean Air Act more quickly and
inexpensively.
This Policy Statement replaces the
original bubble policy (44 FP. 71779. Dec.
11. 1879) and sets forth minimum legal
requirements for creation, storage or use
of emission reduction credits in any
emissions trade, it also provides criteria
for "generic ' SIP rules under which
na'es can approve bubble or other
trades without case-by-case federal SIP
review.
ETA encourages states to continue
adopting generic trading rules and
approving individual trades. Until EPA
takes final action on this proposal it
'•rill evaluate staie actions under the
prisdpies set fcr-rS here and illustrated
in tfl3 accompanying Technical Issues
'Document.
PATE This Polcy Statement
is effective an interim guidance upon
publication. Tnt deadl'ae for submitting
written comment* is July a. 1882.
ADDRESSES: Comments should be sent
in triplicate u possible to: Central
Do=*et Section [A-130). U.S.
Environments! Protection Agency.
Washington. D.C. 20460. Attn: Doc. No.
G-ei-z.
DOCKET EPA has established docket
number G-81-2 for this action. This
docket is an organized and complete file
of all significant information submitted
to or otherwise considered by EPA. The
docket is available for public inspection
and copying between 8:00 a.m. and 4:00
p.m_ Monday through Friday, at EPA's
Central Docket Section. A reasonable
fee may be charged for copying.
FURTHER moumies:
Ivan Tether. Regulatory Reform Staff
(PM-223), U.S. Environmental
Protection Agency. 401 M Street SW«
Washington. D.C 20460. (202) 382-
2765.
or
Leo Stander. Office of Air Quality
Planning and Standards (MD-15),
Research Triangle Park. North
Carolina 27711. (919) 541-5516.
SUPPLEMENTARY INFORMATION: Under
Executive Order 12291. EPA must judge
whether this action is "major" and
therefore subject to the requirement of a
' Regulatory Impact Analysis. This action
is not major because it establishes
policies that are voluntary and can
substantially reduce costs of complying
with the Clean Air Act. Furthermore, it
can reduce administrative complexity
by reducing the number of trades which
must be approved by EPA. can stimulate
innovation in pollution control, and can
allow state and local pollution control
agencies to conserve scarce resources.
This Policy Statement was submitted
to the Office of Management and Budget
for review. Any comments from OMB to
-EPA are available for public inspection
in Docket G-81-2. Pursuant to 5 U.S.G
805(b). I hereby certify that this action
will not have a significant economic
impact on a substantial number of small
entities. As a policy designed to allow
firms flexibility and to reduce
administrative complexity, it will
impose no burdens on either small or
large entities.
L Introduction: Components of
Emissions Trading
This statement details EPA policy on
emissions trading. It presents the
minimum conditions EPA considers
necessary for emissions trades to satisfy
the Clean Air Act It simplifies past
requirements and expands opportunities
to use these more efficient alternatives.
A. What Is Emissions Trading?
Emissions trading consis's of bubbles,
netting, emission offsets, and emission
reduction banking. These alternatives
involve the creation of surplus
reductions at certain emission sources
and use of these reductions to meet
requirements applicable to other
emission sources. Emission trads
provide more flexibility, and ma|
therefore be used to reduce cont
costs, encourage faster compliance, and
free scarce capital for industrial
revitalization. Moreover, by developing
"generic" trading rules (see section 01
below) states' and industry can be
excused from SIP revisions, and
attendant delay and uncertainty, for
many individual bubbles or other trades.
B. The Bubble Policy and Today's
Improvements
EPA's bubble policy lets existing
plants (or groups of plants) decrease or
be excused from pollution controls at
one or more emissions sources in
exchange for compensating increases in
control at other emission sources.
Bubbles give plant managers flexibility
to develop less costly ways of meeting
air quality requirements. Each bubble
must be equivalent to the original
emission limits in terms of ambient
impact and enforceability. Bubbles
cannot be used to meet technology-
based requirements applicable to new
sources.
This Policy Statement replaces the
original bubble policy (Dec. 11,1979; 44
FR 71779) and broadens oppor
for the bubble's use. Major she
include:
• Authorizing generic trading rules for
all criteria poilur!i»cesfury requirements
for detailed a><- quality mor*sling of the
ambient impact of eacL tred*:
• • • Reducing unnec<««ary constraints
on trades involving open dust sources of
paiticulate emissions;
• Allowing VOC and CO sources
more time to implement bubbles under
administrative compliance schedules.
consistent with reasonable further
progress and statutory den^'^es for
attaining ambient Dtan'Vds:
c Allowing f:. -,a to use the bubble
to come into c-*u, h.?nce. instead of
having to b& on a (...rcoliance schedule
with origi-.al SIP Units tc be eligible to
bubble: and
ii, utt a, *n
artunilies
hanjflt
" inciudM «cy entity property delegated
•uthority to •dminiitir relevant pvu of ]
Implementation Plan (SIP? vrdcr the
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Federal Register / VoL 47. No. 87 / Wednesday, April 7, 1982 / Notices
15077
Allowing broader use of emission
These and other changes an
explained below and in the
accompanying Technical luuae
C.NetOag
. Netting removes the burden of new
source review requirements from plants
expanding of modernizing in tmr> «n^
nonattainment areas, so long as any
Increase in plant-wide emissions is
»'-n* By "netting oat" of review
the new facility may be exempted from
preeonatruction permits and associated
requirements, including monitoring and
modeling, installation of BACT or LAER
control technology, the offset
requirement and applicable bans on
new construction, The new facility most
•till meet emission limits established by
new source performance standards
fNSPS) under Section 111 of the Clean
Air Act Rule* governing netting for
•onrces in attainment (PSD] areas wen
published on August 7, 1980 (45 FR
82878) and rules for nonattainment areas
wen expanded on October 14. 1881 (48
FR 50*86).
D. Emotion Offsets
In nonattainment anas, new mafor
stationary sources and modifications
may be required to secun sufficient
surplus emission reductions to more
than "offset" their increased emissions.
This requirement is designed to permit
industrial growth in nonattainment
areas while improving air quality. It is
currently implemented by rules
published at 40 GFR 51.18(j} and 51.18
(Appendix S). as amended by 45 FR
52878 (August 7. 1980) and 46 FR 50768
(October 14,1981).
£ Emission Reduction Banking '
Bj«tri«fl fat* firms itore qualiSed
emission reductions for later use in
bubble, netting or offset transactions.
Banked emission reduction credits
(ERCs) can also be sold to firms seeking
alternate ways to meet regulatory
requirements more quickly flexibly.
EPA's revised offset ruling (40 CFR
51.18. Appendix S) authorized states to
.establish banking rules as part of their
StPs. This Policy Statement and the
Technical Issues Document are EPA's
first detailed articulation of the
necessary component);: of a complete
state banking rule ui^Ier the Clean Air
Act
F. Effect of This Policy Statement
Emissions trading is voluntary. States
are free to adopt generic rules or let
trades continue to be implemented as
individual SIP revisions. They may
adopt rales which Incorporate all or any
combination of these trading
approaches.
EPA is issuing this Policy Statement
aa a proposal because elements of
emissions trading, particularly banking.
raise issues which have not yet been
subject to public comment EPA urges
interest parties to address all relevant
Issues in
However, until final action the
Agency intends to use the principles In
thT« Statement to evaluate trading
activities which become ripe for
decision, inefadhig itate adoption of
generic bubble and banking rules. Many
states an now implementing such rules
sad should continue to do so.
This Policy Statement is accompanied
by a Technical Issues Document for use
by states and industry in further
- understanding emissions trading. The
Document offers more detail on
minimum requirements and available
options under the dean Air Act EPA
also invites comment on any aspect of
the Technical Issues Document
This notice reflects the current Qean
Air Act and existing regulations. A
Policy Statement cannot legally alter
such requirements. However, it
establishes EPA policy in anas not .
governed by applicable regulations and
sets out general principles which states
and industry may use to apply those
regulations in individual cases. Pending
litigation or futon ruiemaking may alter
the general principles outlined hen and
reflected in the Technical Issues
Document, Future federal or state
ruiemaking. such as additional RACT
requirements or changes in ambient
standards, may also affect firms that
have engaged in emissions trading
activities.
I Minimum Legal Raquinments for
Creating, Using, *»M^ HsnUf1!! Emission
Reduction Credits J
A. Cnatiag Emuu'on Reduction Credit*
Emission reduction credits (E£Cs) an
the common currency of all trading
activity. To assure that emissions trades
do not contravene relevant requirements
of the Qean Air Act only reductions
which are surplus, enforceable.
permanent, and quantifiable f*n qualify
'B«c*uM tfaif Policy Statuw! and
•eeanpuytns; Ticiuucai Iuu» Document «fl*ct
ffa*nJ a««n Air Act pnitciplM. MMH «nd
individual MUICM in in* to ibow that * ««unJ
priaoplt dam oat apply to piracuiu cucuaataneu
or could b« MtUfitd using ipprtMchm other «h*n
thou dnenbvd. Sum and toettn B*V« tfaii option
muter current lew. tnd noihtej in thi* Policy
StcMnnt or thi •ccompuiytnn T«ctaic*l IMUM
Document rwtzteu tbni opportunity to outw tuck
ibo*rin|».
as emission reduction credits and be
banked or used in an emissions trade.
1. SarpJuK Only emission reductions
oot currently required by law can be
considered surplus. To define what is
surplus, the state must first establish an
appropriate emissions baseline against
which
calculator
ilus reductions can be
In nanattainaient areas with approved
demonttratiora of attainment, the
hattrliniT must be fflmt'tt*"** with
assumptions used to develop the ana's
SIP. Only reductions not assumed in the
area's demonstration of reasonable
further progress and attainment can be
considered surplus. This generally
means that actual emissions must be the
baseline when actual emissions were
used for such demonstrations, and that
allowable emissions may be the
baseline where allowable emissions
wen used for such demonstrations.
la nonattainment anas Jaduag a
demonstration of attainment, states may
use a variety of baselines which do not
jeopardize attainment by statutory
deadlines. In general, states may use aa
baselines either actual emissions (with
source commitment to future reductions
If needed for attainment) or emission
levels which reflect reasonably
available control technology. However.
where such areas must attain primary
ambient air quality standards by
December 198Z baselines reflecting
reasonably available control technology
for emission sources involved in the
trade must be used.
la attainment anas, to be consistent
with air quality requirements
established in prevention of significant
deterioration (PSD) programs under
Section 110 and Part C of the Clean Air
Act actual emissions would normally be
the baseline. States may use allowable
emissions as the baseline, if proper
ff^?n^lQftrS OOP Ox l&CTGSI&fit flj On ^M I'llP^'i^*fi
is assured.
z> Enforceable: To assure that Clean
Air Act requirements are met each
transaction must be approved by the
state and be enforceable. Enforceable
emission limits may be created through
SIP revisions (see Section IV}, under
generic trading rules (see Section HT),
through new source construction
permits: or through state permits issued
under 40 CFR 51.18. among other ways.
3. Permanent Only perman-nt
reductions in emissions can qualify for
credit Permanence can generally bc«'
assured by requiring changes in «ourca
permits to reflect a reduced l»v*l of •
permissible emissions.
4. Quantifiable: Emission reductions
must be quantifiable in terms of hnth
measuring the amount of the reduction
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15078 Federal Register / Vol. 47. No. 67^ Wednesday. April 7. 1982 / Notices
T
oe
hazardous emissions involved In 'Jw
trade should either remain equr or
should decrease (i.e.. be trader' down).
*. Emission trades cannot he used to
p»*et asflizeble techsalogy-jased
n3uzra7Mnts.'New or expanding
sources cannot use ERCs to meet
•ncrr-e pw-foraaace standards, best
available control technology
requirements in PSD areas, or lowest
achievable emission rate control
technology requirements in
nonattainnent areas.
S. States may allow bubbles in anas
without approved demonstrations of
attainment. States an authorized to
approve bubbles in such areas, so loag
as timely attainment of air quality
standards will not be jeopardized (See
Section HA above and the Technical
Issues Document).
6. Sources may use the bubble to >
achieve compliance. States may allow
souses to use a bubble to achieve rapid
compliance once applicable emission
limits and deadlines are established as
part of a bubble application. .States need
not require sources to develop and go
forward with'detailed plans (including
ordering equipment) to meet original
emission limits when new limits which
will supercede them are pending under a
bubble application.
7. States may extend certain
compliance schedules. States may give
sources more time to implement bubbles
by granting compliance extensions as
part of approvals under generic rd*«,
where (I) the area has received 'an
attainment extension under Section
172(a}(Z) of the Clean Air Act
(applicable to VOC or CO): and (if) the
total amount of reductions required to
satisfy the state's reasonable further
progress demonstration will not be
reduced for each year in question. State*
may grant similar compliance
extensions for VOC or CO bubbles
approved as individual SIP revisions
subject to (i) above, provided the
extension is consistent with reasonable
further progress requirements (See
section IV below).
8. States may approve bubbles
involving open dust sources of
particular emissions, based on
modeling demonstrations. This action
reduces past restrictions on trades
involving open dust sources of .
particulata emissions. Such trades may ,
be approved baaed on acceptable
modeling and/or monitoring
demonstrations, provided sources agree
to post-approval monitoring to
determine if predicted air quality results
have been realized
C Banking Emission Reduction Credits
Only emission reductions that an
surplus, permanent, enforceable, and
quantifiable can be banked To provide
• maximum protection for sources and
avoid future legal problems, state
banking rules should specify the
ownership rights established, the types
of sources eligible to bank ERCs, and
any additional conditions placed on
certifying, holding, or using banked
ERCs.
As a legal minimum, state
rules must establish owne
which an consistent with
requirements, including the requirem
that SIPs provide for attainment and
maintenance of ambient air quality
standards "as expeditiously as
practicable." States have considerab
latitude in meeting this requirement
may guarantee banked ERCs against
any ambient-based reduction in
quantity, so long as that guarantee di
oot interfere with reasonable further
progress and attainment should ambi
standards change or additional emiss
reductions be required
In most states banking will be an
extension of ongoing permit activitiet
The state or its desigoee will accept i
evaluate requests to certify an ERC
maintain a publicly available ERC
registry or similar instrument describ
the quantity and types of banked
credits, and track transfers and
withdrawals of ERC*.
HL State Genetic Trading Rules
Use of emission reduction credits
under state generic rules approved bj
EPA will not require individual SIP
revisions. The Technical Issues
Document explains acceptable generi
rules and procedures which SJSBU me
adopt to reduce the need for
SIP revisions.
, Emissions trades can be approved
without SIP revisions if evaluated one
EPA-approved state procedures that
assure no trade will interfere with
timely attainment and moirn^n''i> o
ambient standards. State generic mlei
are approvable only if their procedure
are sufficiently reph'cable in operation
meet this test By approving the gener
rule, EPA approves ia advance an arr
of acceptable emission Jimits. and no
further case-by-case federal approval
required for individual trades develop
under the rale.
'Any trade under a generic rule will
involve emission increases at some
sources and emission decreases at
others. For trades to be approvable
under a generic rule, the sum of these
increases and decreases (Le~ applicab
net baseline emissions) must be zero c
less. States may adopt generic rules
which exempt from individual SIP
revisions: (1) da minimis trades whose
sum of the emission increases, looking
only at the increasing.sources, totals
less than 100 tons per "year after
applicable control requirements: (2)
trades involving VOC or NO, emlsaiot
(3) trades between SOt i
between CO sources, .
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Federal Register / Vol. 47, No. 67 / Wednesday, April 7, 1982 / Notices
1SJT9
sources, provided thoie sources ire
located in the tame immediate vicinity
and emissions do not increase at the
source with the lower effective plume
height and (4) other SO* CO or TCP
trades which do not increase emissions
and fcr which carefully defined uae of a
icnening model predicts no significant
increase in ambient concentrations. EPA
encounwes states to adopt such rules or
develop alternative approaches that
equally assure attainment and
maintenance of ambient standards.
To the extent state procedures for
raiemaking or permit changes do not
assure reasonable public notice and
opportunity tot comment on proposed
trades, states should incorporate auch
provisions as part of their generic roles.
IV. Trades Not Covered by Cowrie
States and sources may continue to
use the SIP revision process to
Implement trades which are not covered
by a generic role. Because the SIP
revision process can take account of
many more individual variations, trades
which could not be accomplished under
a generic rule may still be implemented
as site-specific SIP revisions.
EPA will take action on generic rales
and individual trades submitted as SIP
revisions as quickly as possible after a
state has adopted a SIP revision and
submitted the action to EPA. EPA
encpuagea "parallel processing" of such
-evisiona, with EPA and the state
unwfaf ting concurrent review so that
boih agendas can propose and take
dna,' action at roughly the same time.
EPA will also publish noncontrovenial
SIP revisions as immediate Snai actions,
converting them to proposals only if
requests to submit comments are
received within 30 days (see 46 FR -
4447* See*. 4. 1881).
This Policy Statement seta out basic
principle* for individual trades and
approvable generic trading rules. EPA
encourages states to use these principles
as a framework and refer to the
acccjspanying Technical Issues
Cocmr,^: Tor further discussion and
i*xrsp:i*. States are encouraged to
issign . jther rales which satisfy these
pnndples but meet their specific needs.
/« a policy statement this notice does
nut est. jliah conclusively how EPA will
resolve issues in individual cases. EPA
will accept public comment on this
proposal as well as on spends SIP
changes submitted under it and will
review individually each geoaric rule
and those emissions trades submitted aa
SIP revisions to determine their
acceptability under the Clean .Mr Act
Interested parties will have full
opportunity to scrutinize application of
these general principles to specific
cases, and to seek subsequent judicial
review of such cases, when particular
generic rules or individual trades are
proposed and approved.
This Statement expands opportunities
to use emissions trading. If implemented
by states it can allow industry to use the
bubble and other trading approaches in
additional circumstances and
geographic areas. The policy will also
reduce adversary tensions, allow states
to benefit from industrial knowledge.
and encourage quicker compliance.
while reducing unnecessary federal
review. It represents important
regulatory reform, for states aa weil a*
industry, hf encouraging greater
flexibility to meeting air quality goals.
Dated: April iJMB.
> TtvBas; Technics!
TABLSOFCONTEtrrS
L Caapanmtt of Ptmittiant Trading
A. Creating Emission Reduction Credits
1. All Reductions Most D« Surplus
2. Alternative Emisaion Limits Must Be
Enforceable
3. All Reduction* Most Be Permanent
4. All Reductions Must Be Quantifiable
& Using Emission Reduction Credits
1. Substantive Principles for Using ERCs
a. Emission Trmdas Must Involve the Seine
Pollutant
b. All Uses of ERCs Must Satisfy Ambient
T*ats
c. Trades Should Not Increase Net Baseline
Emissions
d. Trades Should Not Increase Hazardous
Pmiasicms
a. Trades Cannot Be Used to Meet
Technology-Based Requirements
L Trades Involving Open Dust Cmiasiaa
Sources
2. Procedural Steps for Using ERCs
a. Bubble* Can Be Used to Achieve
Compliance
b. Extensions of Can-pUance Deadlines .
b Pending Enforcement Actions
C Banking Emission Redaction Credits
1. Rules Must L-.'iigeate Administering •
Agency
1 Only ERCs May Be Banked
3. Procedures for Banking
4. Banking Rules Must Estabiiah Ownership
Right!
S- Rule* Must Eitabiinb. An ERC Registry
9. Feasible Enforcement Adjustments to >
EKO
7. PoMib'a Ambient Adjustment to ERCs
IL Trade* Cannd by Generic RuJet
A. General Principles for Evaluating Generic
Rules
B. Scope of Generic Rules
C Applicability To Process Fugitive and
Open Dust Trades
0. Enforcing Emission Limits Under Generic
Rales
B, EPA Oversight of Trades Under Generic
Rsiee
HL Trades not Connd by Connie Sain
Appendix: Regional EPA Emissions Trading
Coordinators
^^adins Technical Issncs
Tins Document offers more detail on
technical issues for firms and pollution
control agencies seeking to implement
individual emission trades or generic
trading rales that meet the principles in
EPA's Emissions Trading Policy
Statement1 It describes both the
nrini^mn legal requirements for
emissions trades under the Clean Air
Act and a range of legal options which
states 'may consider. States and
industry an encouraged to pursue other
approaches consistent with those
discussed here.
Emissions trading is voluntary. States
may implement emissions trades on a
case-by-case basis or develop generic
trading rales covering one or more
classes of transactions. Trades under
approved generic rales will be exempt
from individual SIP revisions. Such rules
can also provide greater certainty by
specifying which trades are quickly
approvable.
Section I of this Document explains
general legal principles governing all
emissions trading. Section H explains
principles governing state generic rules.
Section 01 discusses special
considerations for emission trades
Implemented as individual SIP revisions.
Because these sections reflect general1
Clean Air Act principles, states and
Individual sources remain free to show
that a general principle does not apply
to particular circumstances or can be
satisfied using another approach. States
and sources-have this option under
current law. and nothing in the Policy
Statement or this Document restricts
their opportunity to make such
ihowings. (See Section m below).
' fimminni ttadtos. w«« fenneriy known as
"controlled aiding".
»"Slate«" fachide* any entity praperiy deieseMd
•utfacrity to admiaiiter relevant pans of a State
Implementation pUn (SIP) under the Qaaa Air Act
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15080
Federal Register / Vol. 47. No. 67 / Wednesday. April 7. 1982 / Notices
4
L Components of Emissions Trading
The component* of any emissions
trade are the ovation of an emission
reduction credit (ERG), ib use in a trade,
and its possible storage in a bank.
4. Creating Emission Reduction Credits
States may grant credit only to those
emission reductions that an surplus,
enforceable, permanent, and
quantifiable. Otherwise use of ERC»
might degrade air quality, threaten the
viability of the area's SIP, and result in
more stringent control*.
1. All Reductions Must Be Surplus.
Only surplus reductions not currently
required by law can be substituted for
required reduction as part of an
emissions trade without jeopardizing air
quality goals.
The first step in qualifying a reduction
as "sorpras" is to establish a level of
baseline emissions. The baseline
identifies the level of required emissions
beyond which redactions must occur for
a source to receive eradtt It will
generally b« determined by whether the
area is attainment or nonattainment
and by the war the state developed its
SIP.
a. Use of AcZiaJ or Allowable
Emissions as the Baseline. In attainment
areas the baseline will generally be
actual emissions—«raly reductions
below a source's actual level of
historical emissions can be considered
surplus? Becvvte current regulations
specify actual air quality as the basis for
determining increment nrri siir^p^01*!
these rules noit >*lly require that actual
emissizsis be used for tne ana's
maintc.iBSte itraiegy.^See 46 PR 52717;
Aug. 7.1880). Howe -er, allowable
emissions may be used as the baseline if
proper consideration Is given to
increment uf»g-
In nooattc-r.^ant areas the baseline
may be ei'hr. maximiiir allowable
emissions or actual uistor "al
emissions.* To det^sninc which baseline
is appropriate, the state should examine
me assumptions used IT. developing its
demonstration rf attainment.
In nonattainment ones which used
allowable emission* as the basis for
*heir attaintt,*fii strategy, soarces can
.use their SIP allowable b'ro'ts as the
baseline for rr««tinp L-xCs. Many states
uaed allowable M- Jis 1-j developing their
SO* ani TSV* - l-'inment pl»is.
Other araattA'arant areas vsed
inventories that w*re f^mt
-substantially defkaetUcJ1 based oa
>Sm. « FR SZ79
of B>A'i Au
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Federal Register / VoL 47. No. 67 / Wednesday. April 7. 1982 I Noticea
15081
credited and later used, they could
undermine the ana'* strategy to
maintain air quality.
(ii) Crediting Reductions From
Shutdowns, in general, a state may
credit reductions from shutdowns for
bubble trades if the SIP has not already
assumed credit for these reductions in
' its attainment strategy. So long as
reductions from shutdowns have not
already been counted in developing an
area's attainment strategy, they are an
appropriate source of surplus reductions
for bubble trades.
Many SIPs assumed a set quantity of
reductions from new plant openings and
existing plants shutdowns. These SIPs
incorporated into their attainment
strategy a net "turnover" reduction in
emissions because new sources am
generally cleaner than those that shut
down. Double-counting would occur if a
specific source received credit for
reductions from such a shutdown, since
that reduction was already assumed in
the SIP'S demonstration of attainment.
States have at least three options to
grart sources credit without this kind of
double-counting. First, they may re-
examine any "turnover" credits in their
SIP and decide not to take credit for
these reductions. Alternatively, they
• may allow credit only after the total
quantity of shutdown reductions
assumed in the SIP has occurred.
Finally, they may allow credit for a
percentage of the total emission
reductions realized from a shutdown, if
they can show that such credit is
consistent with the SIP* demonstration
of attainment and reasonable further
progress.
d. Multiple Use ofERCs. Once surplus
reductions are credited, states should
guard against their multiple use. la •
generul. the same ERCs must not be
banked by two different entities or used
to satisfy two different regulatory
requirements at the same time. To
prevent these results, states should
adopt an ERC registry or equivalent
means of accounting for the ovation,
banking, transfer, or use of all ERC*.
(See Section LC-5)
• e. Reductiotnjrom Uninventoried '
Source*. Sources not included in an
area's SIP emission inventory may apply
for credit. In general so long as gran tin j
a edit for reductions {com these
will not jeopardize an area's
demonstration of attainment or
reasonable further progress, there an no
legal restrictions on such credits,
In attainment areas all sources.
regardless of whether they have been
included In an inventory, may create
ERCs using actual emissions as the
baseline. Those emissions flfeed only
have been included in the area's PSD
baseline.
In nonattoinoient anas, whether
sources not on the inventory can create
ERCs will turn on how the SIP'S
demonstration of attainment was
designed.
Some areas first monitored ambient
values to determine- required 6JP
reductions, then required a
proportionate reduction in emissions
from certain source categories in order
to attain. These areas may grant credit
for reductions from unmventoried
sources in at least three ways. First.
they could required the source to use a
RACT baseline and grant credit only for
reductions below that baseline.'
Alternatively, they could require the
same percentage reductions as imposed
on inventoried sources, and grant credit
only for reductions In excess of that
amount Finally, where no
demonstration of attainment exists, they
may use either a negotiated RACT
baseline or (in appropriate
an actual emissions
baseline. (See Section LAifl above)
Other areas developed SIP
demostntions based on ambient air
quality models rather than area-wide
proportionate reductions. To the extent
these DEPt demonstrated ambient
attainment through reductions required
from inventoried sources, reductions
from sources not on the inventory can
be credited using actual emissions at
the baseline.
2. Aliemativo Emission Limit* Must
,1e Enforceable. Each bubble, netting
offset or banking transaction anut be
enforceable and must approved by the
state. Under current EPA regulations
reductions used in bubble, offset and
netting trades must be federally
enforceable.4 This requirement for
enforreabilify can generally be satisfied
either through «""«^ng procedures
(including individual SIP revisions or
state permits issued under 40 CFR 31.18)
or through generic rules, since any
enforceable compliance instrument
imposing emission limits within the
scope of a generic rule is deemed part of
the SEP.
Emission limits estaliabed by a trade
maust also be incorporated in a
compliance instrument which is legally
binding and practicably enforceable.
Trades involving individual SIP
revisions automatically satisfy this
.reauiremdnt
For trades under generic rules, a
compliance instrument could take the
form of an agreement between the
source and state, and operating or
preconstruction permit or a consent
decree. Many State permits and permit
procedures may need revisions to assure
that they provide adequate compliance
information. However, such revisions
need only occur on a case-by-case basis
as individual trades are approved.
Compliance instruments should
assure that enforcement officials do not
have to test simultaneously every
emission source involved in a trade.
This generally means source-specific
emission limits. However, states may
use an overall emission limit that
applies to a group of emission sources
which can be monitored
sumultaneously. This will generally
require a reliable method of determining
compliance through prodEctioa. records.
input factors, or similar indirect means.
(S*e 48 FR 8082* Dec. 8.1980)
The comoliance instrument should.
also specify applicable restrictions on'
hours of operation, production rates or
input rates; enforceable test methods for
determining compliance: and necessary
recordkeeping or reporting
requirements. To be enforceable, these
limits must state the miniminn time
period over which they -vill be averaged
(e.g.. los/hour. Ibs/MMBtu averaged
over 24 hours, production nte/day).
X All Emission Reduction Must Be
PennanmL An emission reduction
credit mnsl be a permanent reduction in
the level of pollution emitted by a.
source. Use of an ERC which fcraot
permanent could adverse!; affect air .
quality by allowing increased emiasioa
from both the »oo.^& creating the ERC
and the source where it is used.*
To receive credit for reductions in
operations (e.g.. a reduction from 3 to 2
workshifts), a source must have its
permit or other compliance instruction
altered to reflect the curtailment in
production. Future increases in
production beyond the permit amount
would generally require compensating
emission reductions.
•to July 19BI EPA adanniatrtdwlr itervd certain
ruin relattn*. to fodml «nfon*ebtnty raoinrwneno
for netttas ad afftetm.« FR 38685 Only IS 1MU
TIiU •tayhu exninri tad haa teat b*m riminni
Requireewnta of eiaatto*. nmUUau aca»*iH*ly
• AJ •" eJtereft .ve. rtitw me) allow trades
whoM •tniwior... taaeiaei ud cauiwion* decnaiM
an eqtul la aVteriaa t*th«r *«n ttnctty permanent
Thit i* the m' rfnam tttfi nMniiremmt under the
Qran Air Ati. but may raqun *Utn to trick
trade* over time ta a«»ar» ambient equivalence.
Permanence OUT present loecial but molvibit
pmbfeiBe for Twracdona £tuiii e&Mil tutur-ej not
rubject to Demit*, offaet nouireoonta. or
production conatninta. Stitei wfcich grant credit
from Ihrw tourc* cit«*ont« thouid addm* (be
pOMibilitf !h*f reduction from on* •euro may be
followed bv ~««l orpsMer ioonMi from jimuiar
mrcea ta *itiu~tt ma.
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15082
Federal Register / Vol. 47. No. 67 / Wednesday. April 7. 1982 / Notices
1
4. All Reductions Matt Be
Quantifiable. Before an emisilon
reduction can b« credited it matt be
quantified. This generally mean* the
state must establish a reliable basis for
Measuring the amount and rate of the
reduction and describing it*
characteristics.
a. Measuring the Reduction. To
quantify ERG*. emissions must be
calculated both before and after the
redaction. Although many different
methods of calculation are available
(e.g.. emission factors, stack tests,
monitored values, production or process
inputs), the same method and avenging
time should generally be used to
quantify emissions before and after the
reduction.
b. Describing the Seduction. If ao ERG
is to be used at me time of creation, only
characteristics necessary to evaluate
that piu^aed use need be described.
When the ERC is to be banked and its '
tiventaalme is not yet known, a man
detailed description is advtaaWe.
& Using Emission Redaction Credit*
This section explains ma substantive •
•ad procedural principles appllcabia to
use ofERCs m bubble, netting or offset ,
' • 3. Stiostaativ* Principle* for Using
MRCs.
*. Emissions Trades Must Involve the
Same Pollutant The dean Afar Act
requires states to develop separate-
plans to attain atw^ maintain the •
national ambieat sir quality standard
for each criteria pollutant Thus, al!
individual bubble, netting or offset cases
M«ft involve the «•"»* pollutant. Only
reductions of pevtipulstes can •ubsllUile
for jocteases of partieabitea. reriMrtians
of SO* for increases in SO* etc,
\LAUUse» of ERCsHost Satisfy'
Ambient Test*, Toe &ett Ate Act • .
requires that afl areas throughout the '
tain* ft*1^ *»i*irj**fa* ambient
standards.- binanattaauaeat anas, use
of ERCs cannot create a new violation
of an ambient standard or prevent thai
ral of an existing
violation. In attainment areas, use of
ERCs cannot violate an increment or.
ambient standard* Toe ambient effect of
• trade generally depends on the
dispersion characteristics of the . .
pollutant involved.
. VOCorttOt Trades. Ambieat • ' -,
considerations will not affect trades *
involving VOC or NOV whose impacts
•jccnr across bread geographic areas.
Within such areas one ton of decreased
emissions is generally equivalent in
ambient effect to one ton of Increased
emissions, since the precise location of
those increases and decreases ordinarily
does not matter. For these pollutants,
"pound for pound" trade* may be
treated as equal in ambient effect
TSP, SOt or CO nodes. Ambient
considerations an critical for trades
involving SO* particulatea, or carbon
monoxide, whose air quality impact may
vary with where the emission increases
aad decreases occur. One hundred tons
of ERCs for these pollutants created at
one site may balance the ambient
impact of a 100-ton increase at a site
nearby, bat may only balance the effect
of an 80-ton increase at a site farther
•way. In addition to distune* between
sources, plume parameters, pollutant
characteristics, meterology. and
topography will also affect the ambient
impact of such a trade.
As a general principle, bubble
applications must demonstrate ambient
"equivalence" and offset transactions
must demonstrate ambient progress.
Such demonstrations have typically
been fflf^it through mathematical
dispersion modeling which predicts the
ambient impact of various TmltffifTHi
This Document authorizes use of a
lluee-tierad screen with the degree of
required modeling linked to the likely
ambient nujMCt of the proposed trade.
The following sections describe use of
this modeling screen to approve many '
trades without full-«cale ambient
mmH»»T»g Use of mis modeling screen to
imrrrr. -^' e.HUctad l&HMCt fa
determining "^dficant" impact states
may -jse tLe svpiific; see levels
established by EPA for determining
when air Duality monitoring is necessity
for PSD canes: 1C pg/m'for the 24-hca*
standard for TSP: 13 pg/m*(M-hr) tat
SO* and 575 ui/ass (8-hr? for CO. [See.
46 PR 5909. Aug. 7.1080). These levels
appropriately identify trades wfeoae
' potential ambient impact need i
further evaluated before ap
(Ul) Lentm: Full dispersion
modeling, considering all sources in the
area of impact is required if net
applicable baseline emissions will
increase as a result of the tnde or if me
trade will have a significant impact on
air quality at the receptor showing
This modeling screen wiO ensure that
the air quality impact of trades is
equivalent to the impact of the
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Federal Register / Vol. 47, No. 67 / Wednesday. April 7, 1982 / Notices
150R3
dose emission points. States may also
approve trades in which reductions in
hazardous emissions compensate for
increases in non-hazardous emissions.
For example, a source may trade
benzene for any non-hazardous VOC. If
tile benzene emissions are decreased
(La- "traded down"].
e. Emissions Trades Cannot Be Used
to Meet Tachnoiogy-Based
Requirements. The Clean Air Act
specifically requires new or expanding
sources to meet technology-based new
source performance standards (NSPS).
regardless of the attainment status of
the area in which they are located This
requirement prohibits use of bubbles to
meet or avoid NSPS. and has been
interpreted to bar use of neb a bubble
to meet new source review requirements
for best available control technology
(BACT) in PSD areas, or lowest
achievable emission ra.te control
technology (LAER) in nonattainment
areas. Thus, new emissions sources
subject to new source review cannot nee
ERC* from existing sources to satisfy
these requirements.
Expanding or modernizing1 sources'
can. how-vet, use internal emission
reductions from within the same plant to
"set out" of new source review. Such
source* still must meet NSPS. but are
not subject to BACT in attainment areas
(45 FR 52878: Aug. 7,1930) or LAER in
nonattainment areas (46 FR 50766; Oct
14.1981). since they are not considered
new sources under Parts C and D of the
dean Air Act.
L Trades Involving Open Dust
Emissions. Trades involving open dust
sources of paniculate emissions may be
approved based on modelled
demonstrations of ambient equivalence.
Sources proposing such trades should be
required to undertake a post-approval
monitoring program to evaluate the
Impact of their control efforts. If the
results of monitoring indicate that initial
open dost controls do not produce the
predicted air quality impact further
enforceable reductions may be required.
States must either require sources to
acknowledge their responsibility for
further reductions, or deem trading
applications to be such an
acknowledgment as a condition of
approval
2. Procedural Steps for Using ERCS.
Emission trades may be implemented
through individual SIP revisions or state
generic rules. This section describes
principles applicable to either
procedure. General principles for
generic rules are discussed in Section H
below. Special considerations for trades
which still require individual SIP
revisions are discussed in Section HL
a. Bubbles Can Be Used to Achievo
Compliance. The bubble policy required
that sources be subject to binding
coicdianca schedules based on original
SIP emission limits before being eligible
to apply for bubbles. This requirement
threatened sources with tight milestones
for the purchase of conventional control
equipment and tended to discourage
both rapid compliance and flexibility.
Under today's Policy Statement state*
may promota rapid compliance by
allowing sources to agree to emission *
limits established as part of their bubble
application, instead of requiring sources
to agree to compliance plans based oa
their original SEP limits before an
application can be filed,
b. Extensions of Compliance
Deadlines. States may extend
compliance deadlines for VOC or CO
sources on a case-by-case basis as part
of bubble approvals. The dean Air Act
limits such extensions to sources which
are located hi areas that have received
VOC or CO attainment extensions until
1987. and whose bubble will be
consistent with reasonable farther
progress requirements. Because this will
usually require a revision of the state's
reasonable further progress
demonstration, such extensions must
generally be submitted as SIP revisions.
However, states may also grant
compliance extensions without case-by-
case SIP revisions as part of bubble
approvals under a generic rule. The rule
should provide that (1) Extensions may
only be granted in areas which have
received attainment extensions to 1967;
and (2] the total amount of reductions
claimed in the state's approved RFP
demonstration will not be reduced for
each year in question. For example, if a
. source wishes to defer 100 tons pei year
of reductions from 1982 to 1985, then as
part of the bubble approval the stats
must show that an additional 100 tons
per year of reductions has already
occurred in 1982. or that provisions for
such additional reductions already exist
c. Pending Enforcement Actions. A '
bubble cannot be approved for an
individual emission source which is
presently the lubject of a federal
enforcement action or outstanding
enforcement order unless EPA (and
where necessary the appropriate court]
approves the proposal and the -
compliance schedule it contains. This
applies to dvil actions Sled under Qf an
Air Act Section 113(b), criminal actions
filed under Section 113(0], a notice -
imposing noncompliar.ee penalties
issued under Section 120, administrative
orders issued under Section H3(a). or a
citizen suit filed under Section 304
where EPA has intervened.
This requirement need not preclude
bubble approvals under generic rules,
provided an appropriate mechanism for
securing and recording EPA approval is
used. Sources should, however, be
aware that such approvals cannot be
finally effective until approved by the
appropriate court
C Banking Emission Reduction Credit*
State SIP roles may include a banking
provision which addresses ownership
and holding of ERCs over time. Without
such a provision, firms risk losing
~ surplus reductions should a major SIP
revision or new set of control
requirements be instituted. Generic
banking rules can afford such ERCs
substantial protection consistent with
the Act's mandate to attain and
maintain ambient standards.
The bank can accept and evaluate
requests to certify an ERC. serve as a
clearinghouse for credits on deposit and
account for transfers and withdrawals
of ERCs. These roles will generally be
performed by the state as part of its
normal permitting activities.
The following sections address both
minimum legal requirements for state
banking rules ""^ issues states should
consider. States- may adopt other
approaches which produce equivalent
results.
1. Banking Rules Must Designate an
Administering Agency. Banking rules
must identify the entity responsible for
specific functions. While the state will
ordinarily be retponsbile for verifying
and processing ERC requests, all or part
of this responsibility may be delegated
to other organizations. Such
organizatiunfsj must possess the
resources and legal authority to
Implement delegated activities.
2. Only ERCa May be Banked. Banked
emission reductions msut be surplus,
permanent, quantifiable and
enforceable. This generally means that
such reductions must be made at the
time (hey are deposited in the bank as-
ERCs. However, if a firm commits to
produce a specific reduction in th«
future, a state may allow a conditional
deposit to be made. In all cases the
reduction must actually be achieved
before it can be used in an emissions
trade.
3. Procedures for Banking ERd
Should be Defined. To speed jmnroval ai
trades and provide greater csramty for
potential ERC creators and users, state
banking rules should clearly identify
which proposed emission T»^uetiana can
qualify to b*«redited and banked, the
information required of snnrcas to
substantiate their claim for credit, and
any required anolication forrw.
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Federal Register / Vol. 47, No. 67 / Wednesday, April 7, 1982 / Notices
4. Banking Rules Must Establish
Ownership Rights. To prevent two
entities from claiming the same ERCs, •
•tate banking rules must specify who
can own ERCs. For example, while the
source creating the ERG will generally
be its owner, the state could, as part of
its rale, reserve ownership of certain
classes of ERCs to itself or local
governments.
5. Banking Rules Must Establish an
ERC Registry or Its Equivalent An ERC
registry or equivalent instrument lets
status track ownership, use, and transfer
of all banked ERCs. Banking rules must
wide that no transfer of title to a
winked ERC will take effect until the
transaction is reflected in the registry."
This tracking system is important to
minim,v» disputes over ownership and
provide a central list of certified ERCs
which may be available. It can also
provide useful information for quickly
evaluating any proposed use of a
banked ERC
Information which may help evaluate
proposed use of a banked ERC should
be recorded at the time of its creation
and entered as part of its banking
record This information should include
the location of the source creating the
ERCa. its stack parameters, the
temperature and velocity of its plume,
particle size, the existence of any
hazardous pollutants, daily and seaonal
emission rates, and any'other data
which might reaoooabiy be necessary to
evaluate future use.
To perform these tracking and
clearinghouse functions the ERC registry
. must be accessible .to the public. Subject
to confidentiality considerations, states
should make copies of the ERC registry
available at convenient locations and
times, and may want to publish a
periodic summary of banked ERCs.
6. Possible Adjustments to ERCs ^
Based on Enforcement Considerations.
To avoid legal problems, banking rules
should clearly state what if any,
changes may occur to ERCs after they
have be«Q banked! Once an ERC has
been used by another source to meet a
permit requirement, any violation of the
conditions under which that ERC was
cr**teH should result in enforcement
against the source producing that
emisftion reduction and not the source.
using the ERCs. If a state attempted to
enforce against the source using
purchased ERCs. a complex set of third-
party lawsuits would ensue. This would
likely discourage sources from .
purchasing ERCs in the Future.
7. 'Possible Adjustments to ERCs
Basfd on Ambient Attainment.
Considerations. To assure the'validity of
its demonstration(s] of attainment a
•tale with a banking rule should assume
that all banked emissions will ultimately
be used. Thus, in evaluating their ability
to attain national standards, states
should add to their inventory or
measured ambient value, all unused
banked reductions at the site at which
they were created.
Additional emission reductions may
be required from sources because of
their area's failure to attain ambient
standards, because of an increment
violation, or because new RACT
requirements are being imposed under a
SIP schedule. The existence of banked
ERCs must not interfere with states'
ability to obtain these additional
reductions. For this reason state banking
rules should specifically address how
ERCs will be treated if additional
reductions are required. Available
options include:
a. ERCs An Absolutely Guaranteed
Against Ad juatzneat. The state would
determine the required quantity of
reductions and assess necessary
controls on the inventory. Sources with
banked ERCs would not be exempt from
any requirement for additional
reductions, bat could satisfy that
requirement by using their banked
ERCs, by reducing emissions elsewhere,
or by purchasing equivalent ERCs.
To effectively implement this option.
it would be particularly important to
state new control requirements in terms
of "RACT-eqnivalent" reductions.
b. Current ERCs An Fully Preserved,
but either their use or future ERC
deposits are suspended until the SIP has
committed to secure reductions
sufficient to reestablish reasonable
further progress or cure an increment
violation. Use of either type moratorium
would be consistent with air quality
objectives while allowing sources to
retain or use their entire quantity of
banked ERCs. However, this option may
DM undesirable because of uncertainty
regarding the moratorium's start
duration, or potential interference with
lanning.
t-Across-the-Board Discounting, •
Under this option, all ERCs in the bank
would be discounted by the same factor.
For example, if a 10% additional
reduction is required from a category of
sources for the SIFi new demonstration
of attainment the state would discount
all banked ERCs from those types of
sources by 10%. Although the quantity of
• ERCs held by a firm will be reduced, the
overall supply of ERCs will decrease,
while demand will increase. Therefore,
the overall value of remaining ERCs is
likely, at Minimum, to remain the same.
Indeed, other sources may purchase
banked ERCs to meet the 10* reductions
required of them.
This option is relatively
straightforward for VOC
SOt or TSP more detailed i
specific modeling would generally
reouired to allocate the discount
necessary to demonstrate attainment
States may adopt any of these
methods of accommodating possible
additional reductions. They may also
adopt any equivalent method which
achieves the same objectives.
IL Trade* Covered by State Generic
This section explains expanded
opoortunities for states to develop
generic rules under which certain
classes of emissions trades will be
exempt from individual SIP revision.
A, General Principles for Evaluating
Generic Rales
*
A generic rule is approvable if it
assures that (1} applicable net baseline
emissions will net-increase; (2)
emissions trades otherwise requiring SIP
revisions under ! } 110(i) and 110(a)(3) of
the dean Air Act will be evaluated
under procedures that are sufficiently
renlici ble in operation: and (3) emission
limits produced under the rule will not
Interfere with ambient attainment and
maintenance. Replicability gene
means that specific modeling ]
are prescribed and that states I
appropriately defined their choice of
models, model inputs, and modeling
techiJques in applying these procedures
to specific trades. Thus, these trades
should ".ot create new ambient
violation or interfere with the planned
removrj ot' existing violations. By
approving juch generic rules EPA
approves in advance an array of
acceptable SIP emission limits, and no
fartiz; case-by-case EPA approval is
B. Scope a' Or»*ric Rules
1 State: iiay u/ie a range of mechanisms
to exempt trades from EPA review as
individual SIP revisions. While several
mechanisms are explained below, states
mav submit other generic rules that
satisfy these basic principles.
1. De Au.irn/s Trades* Trades in
which s'e'. bp^l^e emissions do not
increase n..i !n which the sum of the
ein,:i.' ' :,.* ina eases, looking only at the
iacr,si*ch tht MmagVkK
eonduiicm. For on* examp'* ot * p**«ric ff^^B
iaeofponttav • vny linol* formtii* th*t ^^H&*
tul of rvpiiubiUty. «M 4» FR 20331 (Apr. a, jaw}.
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Federal Register / Vol. 47. No. 87 / Wednesday, April 7, 1982 / Notices
1S08S
SIP revision. Such trades will have at
most a de minimis impact on local air
quality because only minor quantities of
emission* an involved Moreover.
because only trades which produce no
net increase in-emi»aions can be
exempt overall air quality will not
suffer. The Federal resources required to
• evaluate these trades could best be used
to evaluate actions that have a potential
impact on air Quality.7
2. VOC or NO* Trades. All VOC or
NO, trades under a generic rule that
assures no net increase in applicable
baseline emissions may occur without
individual SIP revisions.
The ambient impacts of VOC and NO,
emissions are area-wide rather than
source-specific. All such emissions
within a broad area are considered
comparable, regardless of plume height
topography or related factors. Thus, the
ambient impact of trades involving VCC
or NO, will by definition be equivalent
to that of the sum of the SIP emission
limits for the emission sources involved
In the trade. As long as the sum of these
emission limits is not exceeded, the
limits for each specific emission source
can be reallocated without adversely
affecting air quality. This essentially
arithmetical task is so mechanical that
VOC or NO. trades developed in this
manner cannot reasonably interfere
with ambient attainment and
maintenance.
3. SO, CO. or TSP Trades. For trades
involving SOt CO. or TSP it is more
difficult but by no means impractical, to
develop a generic rule which assures
that valid ERG uses cannot reasonably
interfere with attainment and
maintenance.
The ambient impact of these
pollutant* depends on site-specific
factors such as topography and plume
height which are ordinarily evaluated by
ambient modeling. However, if the
emission sources are located in the
same immediate vicinity and emissions
decrease at the source with the lower
effective plume height, therefore
localized ambient impact,
equal increases and decreases in
emissions from these sources will
ordinarily produce equivalent ambient
effects (See Level I of the Modeling
Screen). As a result trades involving
emission sources within Level I may be
treated in the same manner as trades
invo' -ing VOC or NO, and may be
exempted from individual SIP revisions.
EPA will normally approve generic
rules that define "same immediate
vicinity" as up to 250 meters between
the individual emission sources involved
in a trade. However, where such trades
involve areas with complex terrain,
some modeling might still be required to
assure that ambient impact is properly
considered. Generic rules should specify
criteria for identifying such
circumstances and for defining what
modeling will be required.
4. Other Mechanisms for Exempting
TSP. 5O» or CO Trades from Individual
SIP Revisions. Other TSP. SO, or CO
trades can be exempted from individual
SIP revisions if they occur under state
generic rules which satisfy the
replicability and air quality
requirements stated above.
Possible generic approaches include:
(a) Developing SIP rules which allow
Identified sources to meet an array of
specific emission limits consistent with
ambient attainment and maintenance.
For example, states could approve a
modeled formula for two or more
specific emisson sources which would
both satisfy ambient concerns and let
firms determine particular permit limits
at each emission source. This formula
would have to be adopted as part of the
SIP.1
• (b) Developing criteria for use of
simplified Level H modeling (see section
LB.1.D. above) for specified trades. This-
approach would exempt'trades which
(1) produce no net increase in applicable
baseline emissions. (2) con routinely be
modeled in a predescribed manner, and
(3) will not have significant ambient
impact The generic rule must specify
either the particular model that will be
employed in a given stituation, or
criteria for selecting models in specified
circumstances. To limit variability in
modeling results the rule must also
specify procedures for selecting input
data (e.g., wind speed, stability class.
source emission rate) which are
sufficiently definite to meet the test of
replicability. To determine whether a
trade will have significant ambient
impact these procedures should assess
whether the change in emissions after
the trade from the increasing source has
the potential to cause an increase of
more than 10 ng/ma over at 24-hour
period for TSP, 13 jig/m* (24 hours) for
SO,, or 575 M3/33 (8 hours) for CO at the
receptor of maximum predicted impact
' Although sutei may exempt d* minima trade*
from federal SIP raviiigiu. thefe rede* an Mill
tabwet tr ambient taau. They thould accordingly
b* evaluated by th* Mate under the modeling town
(Sat Stetson L&lb. above) or an equivalent
Approach.
'fat example. the esuiaioa limit* (or the four
itackt at the smart Power Plant la Adams County.
Ohio arc 3.18 pouada at SO, per million 3TU at each
•tack, or at the planfi choice (after notification to
EPA), any limit in ;ouada per BTU which tattfiea
tha following eauanoo; 0.0791 (EL,-rELi-»-Q«if E
U<1. S*« 40 CTR 4.1861(11)-
C Applicability of Generic Rules To
Process Fugitive and Open Dust
Emissions Trades
Trade involving process fugitive
emissions of VOC or NO* may routinely
be approved under generic rules.
However, because of their dispersion
characteristics, it is more difficult to
define generic rules that can be applied
in a sufficiently repiicable fashion to
trades involving process fugitive or open
duKt TSP emissions.
In general TSP trades involving
process fugitive emissions can be
approved under generic rules if: (1)
process fugitive emissions are traded
against similar sources of process
fugitive emissions, or (2) emissions from
point sources are traded against process
fugitive emissions which can reasonably
be represented by a point-source
dispersion pattern. This means that
relevant parameters such as emission
release height must be readily
determinable. Unless such trades fall
within Level I of the modeling screen or
are de minimis, only processes whose
fugitive emissions can be adequately
represented by the dispersion model(s)
specified in an approved generic rule
can be included in a trade under that
rule.
For TSP trades involving open dust
emissions states should be aware that
approvable generic rales which
appropriately limit the choice of
screening models and relevant inputs
(Including acceptable emission factors)
will currently be difficult to formulate.
Accordingly, open dust trades generally
will have to be submitted as individual
SIP revisions.
D. Enforcing Emission Limits Under
Generic Rules
Alternative emission limit* approved
under generic rules are considered by
EPA to be federally enforceable.
Generic rules should specify that such
alternative limits become applicable
requirements of the SIP for purposes of
t § 113 and 304 of the Clean Air Act and
are enforceable in the same manner as
other SIP requirements. To assure that
EPA and citizens know what emission
limits apply, generic rules should also
specify that EPA be informed of
applies bis emission limit* before -ind
after the trade, following anrr ,-/al 'jf the
trade by the state.
£ £P.4 Oversight of Trades of Uadsr
Generic Ruiss
The Clean ASr Act requires EPA to
monitor administration of SIPs.
including juneric rul«. S-e
S 110(a)(;)(K). EPA will audit the
information suEali-d for »ach trade and
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Federal Register / Vol. 47. No. 67 / Wednesday. April 7. 1982 / Notices
1
may request additional relevant
information. Should EPA determine that
approved trades are substantially
inconsistent with generic rules in the
SIP. it will notify the state and specify
any necessary remedial measures.'
F. Public Comment
For trades occuring under generic
rules, existing state statutes or
regulations will generally provide
reasonably adequate notice and
comment opportunities. If these
opportunities an not provided generic
rules should explicitly address this
issue.
To ensure public awareness
consistent with § 304 of the Clean Air
Act. states should also, at a ™™"«™,
publish any changes to emission limits
which result from trades approved
under a generic rule (see 46 FR 20554:
April a, 1981).
HL Trade* Not Covorad by State G«nezic
Rale*
In the absence of a generic rale, states
and sources may continue to use SIP
revisions to effect bubble or external
offset trades. Individual trades may also
fall outside the scope of an approved
generic rale and still be implemented aa
individual SIP revisions, The principles
described in the Policy Statement and
this Document will generally be used to
evaluate theae emission trades.
Because of the ability of the SIP
revision process to take account of
individual variations, many trades
which could not be accomplished under
a generic rule may be acceptable use
individual SIP revisions. Far example.
proposed bubles which produce a net '
SSf rnto ti ool part of »o SIP tad by
demotion *«*•••»* fepiatis Brfflr vala£ 't.i*?ina JlBj4t§
a* 0>f SIP. (SM 48 FR ZBM-& April f. a*n). ]p
fen* cu« EPA mat n*mnm tte rista to «•«•
l*n«dlai •euoe, to tmm ««
BMialauoc*. tndudina ts * tut mart i
of ft, original SIPIMi*.
increase in baseline emissions could
nevertheless be approved through a SIP
revision showing that requirements for
attainment and maintenance were
satisfied In submitting such a bubble
application, the state would have to
revise its reasonable further progress
demonstration to account for the
increase in emissions and EPA would
review the proposal to determine if the
demonstration of attainment and RFP
wen satufactor. Without such a SIP
revision, trades increasing net baseline
emissions would generally be
acceptable only if compensating
additional controls wen already
required in the SIP.
Through the SIP revision process,
states and sources may also
demonstrate that a general principle
discussed an Section I above does not
apply to their particular HTmrmatanff 3.
or that such a principle may be satisfied
in other ways. For example, they may
show that a RACT baseline is
unnecessary for a particular source
because resulting reductions an not
needed for attainment; that despite
general requirements for use of an
actual emissions baseline, an allowable
baseline is acceptable in a particular
situation based on air quality modeling;
or that reductions frum specific
shutdowns or uninvantoried sources can
be fully credited without interfering with
reasonable further progrera and
attainment.
EPA will make reasonable efforts to
take prompt action on SIP trading
proposals after a state has ruled on an
individual application and submitted it
to the Agency. EPA will encourage
"parallel processing" of prooosaJa, with
EPA and state officials conducting
eoncnrrent review so that both agencies
can give public notice of proposed
action at roughly the tarn; time. EPA
can then take prompt final action after
the state completes its proceedings.
provided the state does not substantially
alter the proposal after public i ^
EPA will also publish non-controve
SIP revisions as immediate final actions,
converting them to proposals only if
adverse comments are received within
30 days (see generally 48 FR 44477; Sept
4.1981).
Appendix. Regional EPA r"«i"{""' Trading
Coonunaton
Region L Manas Spink. Stationary Source
Section. Air Programs Branca. John F,
Kennedy Federal Building, Boston.
Massachusetts 02203. (617) 223-4448; FTS
223-4448
Region ft Linda Camera. Permits
Management Division. 26 Federal Plaza.
New York. New York 10007. (212) 261 MM;
FTS 284-1333
Region HL David Arnold. Air Programs
Branch. 6th and Walnut Streets.
Philadelphia. Pennsylvania 18102, (215}
597-7836; FTS 5S7-7936
Region IV: Archie Lee, Air Programs Branch,
945 CourUand Street N£, Atlanta. Georgia
90308. (404) 257-3286; FTS 257-3288
Region V: Dick Dalian. Mary Ryan. Air
Programs Breach. 230 South Dearborn
Street. Chicago, Illinois 60604. (312) 886-
6053; FTS 886-6053
Region VL Michael Mendias. Air Programs
Branch. First international I
Elm Street Dallas, Texas 75270.1
2734: FTS 729-2734
Region VB: Charles Whitmore, Air Support
Branch. 324 East llth Street Kansas City.
Missouri 64106. (816) 374-6525; FTS 758-
B325
Region VQfc Dale Welk. Air Programs
Branch. I860 Lincoln Street Denver.
Colorado 80296, (303) 837-3763; FTS 327-
3763
Region DL Waily Woo, Air and Hazardous
Materials Section. 215 Freemont Street San
Francisco. California 94105. (415) 974-8210;
FTS 454-8210
Region X Dave Bray. Air Programs Branch.
1200 6th Avenue. Seattle. Washington
98101. (206) 442-1352: FTS 399-1352
(rtDoc.1
1
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APPENDIX IV
1
1
Wednesday
August 31, 1983
Part IV
Environmental
Protection Agency
Emissions Trading Policy Statement;
General Principles for Creation, Banking
and Use of Emission Reduction Credits
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39580
Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notices
ENVIRONMENTAL PROTECTION
AGENCY
(PRU-FRL-2381-31
Emission* Trading Policy Statement;
General Prfnetptes for Creation,
Banking, and Us* of Emiaaion
Reduction Crwtftt*
AOCMCY; Environmental Protection
Agency.
ACTION: Request for further comment on
specific issues from previous policy
statement and technical issues
document, proposed April 7. 1982. •
SUMMARY: EPA bas received and
reviewed numerous formal comments on
its interim Emissions Trading Policy (47
FR 1S07S. April 7. 1982). EPA today
requests additional public comment on
specific alternatives that could further
respond to concerns raised. AJternatives
address: (l) The extent to which states
may allow emission reduction credits
(EHCsj from shutdowns to be used in
existifig-source bubble trades.
particularly in nonattainment areas
requiring but lacking demonstrations of
attainment, and (2) whether and under
what conditions existing-source bubble •
trades should be allowed in such areas.
as well as in areas required to attain by
December 31, 1982 which may ultimately
be found not to have attained by that
statutory deadline. For easy reference
this notice generally addresses such
issues first within the context and
structure of the April 7 Policy, which
was drafted long before expiration of
tht 1932 ittainment deadlines (see
Sections (I arls III below), and second
with r**pect to areas where such
deadlines have expired (see Section IV
below). It does not address the use of
creditt from shutdowns for new source
onsets in any such areas.
EPA further requests comment on (1)
appropriate methods for determining
whether and 10 what extent State
fepiementuion Plans rely on reductions
from anticipated shutdowns for their
demonstrations of attainment or
reasonable further progress, and on (2)
what Ic-vsl of reduced operations should
constitute a shutdown for emissions
Environmental Protection Agency.
Washington. D.C 20460. Attn: Doc. No.
purposes.
This !•',:;<.< additionally discusses
currTi. cessions trading policy
. gardint, all the above. It should be
c:5tir- trued in light of the entire April 7
PoJ.c,' Statement and Technical Isiues
DATES: The deadline for submitting
written comments is September 30. 1963.
AUDRESSES: Comments should be sent
in mniirate if possible to: Central
Docket Section (A-130). U.S.
Docket: EPA has established docket
number G-01-2 for this action. This
docket is an organized and complete file
of all significant information submitted
to or otherwise considered by EPA. The
docket is available for public inspection
. and copying between 8:00 a.m. and 4:00
p.m. Monday through Friday, at EPA's
Central Docket Section. A reasonable
fee may be charged for copying. .
KM FURTHER INFORMATION CONTACT!
Ivan Tether. Regulatory Reform Staff
(PM-223), U.S. Environmental Protection
Agency, 401 M Street SW.. Washington.
D.C. 20460. (202) 382-2765. or Brock
Nicholson. Office of Air Quality
Planning and Standards (MD-15).
Research Triangle Park. North Carolina
27711. (919) 541-5516.
supPUMeNTAAV INFORMATION: Under
Executive Order 12291. EPA must judge
whether this action is "major" and
therefore subject to the requirement of a
Regulatory Impact Analysis. This action
is not major because it merely requests
further comment on policies that are
voluntary and can substantially reduce
costs of complying with the Clean Air
Act.
This Notice was submitted to the
Office of Management and Budget for
review. Any comments from OMB to
EPA are available for public inspection
in Docket G-61-2. Pursuant to 5 U.&C.
605(b). I hereby certify that this action
will not have a significant economic
impact on a substantial number of small
entities. As a request for further
comment on specific issues raised by a
previously-issued policy designed to
allow firms flexibility and to reduce
administrative complexity, it will
impose no burdens on either small or
large entities.
Tormtt of Thi* Notic* • *
L Background— The Interim (April ?tb)
EmiMiont Trading Policy
0. Discussion of April Policy: Formal
Comment*. ftRDC v. Gorsuch. and
Additional Rationales
A, Avoiding "Double-Counting"
B. Use of ERCs From Shutdowns for Bubble *
Trades in Nonartamin*nt Areas ( . ''
Requiring but Ladunrj Demonstrations of
Attainment
C Definition of Shutdown
D Conclusion
III. Requests for Comr .enl
A. Avoiding "Dem >ie-Couming"
B. Alternatives: '.se of ERCj From
Shutdowns 01 Other Actions far Bubble
Trades in Nonaitamment Areas
Requiring but Lacking Demonstrauons
C- Definition of Shutdown
IV. Effect of This Notice
A- On Current Trading Generally
B. Where t962 Attainment Deadlines Have
Expired
L Background—The Interim (A
EmtMtoos Trading Policy
EPA's April 7 Emissions Trading
Policy Statement and accompanying
Technical issues Document set forth the
Agency's interpretation of minimum
legal requirements that states ' and
sources must meet to utilize trading
consistent with the Clean Air Act
Under this Policy, states could grant
credit for emission reductions that were
"aurplui." "enforceable." "permanent"
and "quantifiable." Reductions from
shutdowns were generally considered
surplus if the state showed they were
not "double-counted" and an
appropriate baseline had been applied.
This generally meant that: First,
emissions from the shutdown facility
must have been included in the
inventory used to develop the State
Implementation Plan (SIP), so that the
facility's emissions were among the pool
from which reductions were or would be
calculated to produce an approvable
SIP. Second, the state must not have
already taken credit for the shutdown.
directly or indirectly, as part of its plan.
Third, like other emission reductions.
shutdowns were only considered
surplus to the extent the reduct
beyond the required reduction I
baseline. Where an area was to have
attained by December 1982 but lacked a
required demonstration of ambient
attainment this baseline was to consist
of either a reduced level of emissions
• reflecting Reasonably Available Control
Technology (RACT] as defined in the
SIP. or an agreed-upon "negotiated
RACT* level if RACT for the particular
• source or source category had not been
defined in the SIP. Where credit was
sought for a pollutant for which the area
•had received an attainment extension
beyond December 1982 under section
172(a)(2) of the Clean Air Act. stales
could instead use a baseline consisting
of actual emissions, provided the source
committed to find or produce additional
reductions equivalent to RACT. if and
when RACT were subsequently defined
in :he SIP for that source. See generally
47 FR 13077. 15080-91 (April 7.1982J.J
1 -Sta:e» ' include* local air pollution *gene!e* Of
«ny cinef entity property detected authority 10
adsi!nr«ter relevant t:\i ot a State Implementation
Plan :Si?! under the Clean Air Act.
* E\sif*noo of -he July 1982 deadline for
itibT.itrai ot" plans demonstrating, attainment for
tucn *\T*r.»ion *r*«i hm generally limited the
option Jt an actual emtuiona b«»«Ime to *xl«r.»ion
are«i :or wntch EPA has approved To"
SIPi and. wiihm t.iose area*. 10 VOC »ou
sourct catetone* which EPA hat identified
"Cmus ;IJ" Control Technique Guideline* (C
-------
Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notice*
395E
Subject to these requirements the
April Policy allowed, and currently
allows, reductions from shutdowns to be
used in existing source bubbles in the
same manner as any other emission
reduction credit.*
n. Discussion of April Policy: Formal
Comments. NRDC v. Gorauch. and
Additional Rationales
EPA is re-examining emissions trading
with respect to shutdowns, in light of .
formal comments on the April 7 Policy;
\heWRDC v. Gorsuch decision (685 F. 2d
7T8-(D.C Dr. 1982), cert granted. No.
62-1591. May 31.1983); and the need to
further articulate the Policy's approach
in this area. Many comments focussed
on ways states can avoid double-
counting and on whether reductions
from shutdowns should be treated
differently than other types of
reductions for use in exiating-source
bubbles. The possibility of different
treatment if adopted, would make
precise definition of "shutdown"
important.
A, Avoiding Double-Counting. The
April 7th Policy and accompanying
Technical Issues Document noted that
under the Clean Ait- Act states had at
least three options to grant credit for
shutdowns without double-counting.
Where SIPs assumed a fixed quantity of
net "turnover" reductions (more
reductions from shutdowns than
emissions from new plant openings),
and took credit for these reductions as
part of their approved demonstration of
reasonable further progress of
attainment, states cruld: (1) "Re-
examine any 'turnover' credits in their
SIP. decide not take credit for these
reductions," and revise their attainment
and maintenance plans accordingly: (2)
"allow credit only after the totai
quantity of shutdown reductions
assumed in the SIP has occurred": or (3)
"allow credit for a percentage of the
total emission reduction realized from a
and which SUlea arc required 10 control in their
1M2 Plan*, fat fat which EPA hit not yel iMued
fin«l CTCa. SM Alternative ONE. Section Ul 3.
below.
In (tin notice EPA alto requem comment! (««
part (V. 9 below) on continued irtdinj in area* that
may be I'ound not to nave attained deaptte approved
SIP demonstrotiona of attainment, a* well a in
arcat thai require out larit Juch demonstration*.
' Cie of oast !hu:dawnt for new tource or'stls a
ten*r:i!y limited to reflae* i-ent! 'S»e 40 CFR Pan
51. Appendix 5 :'i18'.i| 'Che latter rettnr^on n being
re.eiamned in imptemeni:n^ the settlement
agreement in Cfiewcai .'.Itnufocivren Astoc.anon
v. £?•» D.C. Circuit. \o. rvimi, and ;s noi other-
«u»e -iiscxjH.-d here.
For puraoiet of ihu notice "exisf.n^-source
busbies ' means trades to meet applicable emission
'..mr.anons between source* subiecl neither '0
Federal New Source Review Requirements nor tn
any Federal New Source Performance Standard
promulgated odder Section ill of the Clean Air Act.
shutdown, if they can show that such
credit is consistent with the SIP's
demonstration of attainment and
reasonable further progress." 47 FR
15081.
Comments. Concerned commenters
found these options either too loose or
too restrictive. An environmental group
asserted that despite the options, it was
not possible "to identify what quantity
of shutdowns are above and beyond
those assumed in the plan." Other
commenters. including an industry and a
utility group, asserted that credit should
'be denied only for shutdowns
specifically identified in the plan. EPA
Regions also pointed out that a number
of SIPs use "OBERS" projections of
economic growth, developed by the U.S.
Department of Commerce, as a basis for
projecting emissions growth. Since such
projections reflect net economic growth •
which these SIPs appear to translate
directly into emissions growth, there
seems no straightforward way to
disaggregate the projection into
shutdowns and new plant openings.
Therefore, there seeds no
straightforward way to determine the
extent to which a SIP using "OBERS"
projections relies on shutdowns.
If this conclusion is accurate it may be
difficult or impossible for states whose
SIPs rest on OBERS projections to grant
credit from shutdowns for use in
existing-source bubble trades,
consistent with the Clean Air AcL
B. Use ofERCs From Shutdowns for
Bubble Trades in Nonattainment Areas
Requiring but Lacking Demonstrations
of Attainment.
Comments. A number of comments
questioned the extent to which states
can allow use of shutdown credits in
existing-source bubbles in any area.
consistent with the Clean Air Act A
large percentage of comments on this
issue supported the Policy authorizing
shutdown credits to be used in existing-
source bubbles, so long as shutdowns
were not double-counted and were
. measured against appropriate base-
lines. Other commenten. however.
includng some environmental groups
and pollution control agencies, raised
concerns. These commenters noted that
shutdowns can hasten attainment, and
suggested that EPA's shutdown policy
might not be consistent with the Act's
requirement for attainment "as
expecitiously as practicable." Several of
these commenters maintained ih?t
credit should generally be granted only
for shutdowns undertaken solely to
obtain credit, and then only for the
period before which the source would
otherwise have shut down.
Adverse comments were most critsca
about use of ERCs from shutdowns for
bubbles in areas requiring but lacking
approved demonstrations of attainment
Several commenters said that no
reduction can be surplus without a
demonstration. Accordingly, they woult
not grant credit for any reductions in
nonattainment areas lacking
demonstrations of attainment, including
reductions produced by extra pollution
controls or less-polluting process
changes.
NRDC R Gorsuch. Thejrecent Circuit
Court decision inJVRDC v. 'Gorsuch
raises similar issues indirectly. The
Court decided only the narrow issue of
the validity of EPA's plant-wide
definition of "source" for New Source
Review purposes in nonattainnteni
areas {i.e.. nonaitainment area
"netting"), and ruled that definition
invalid.4 It reaffirmend the validity of
the plant-wide definition for PSD
review. Moreover, the case did not
consider the validity of existing-source
bubbles in nonattainment areas, and th
Court did not decide this issue. The
decision does, however, contain
language which might be read to sugge*
that all emissions trades in
nonattainment areas must, in and of
themselves, produce progress toward
attainment beyond the progress
currently mandated by applicable SIPs
The implied issue for existing-source
bubbles is whether some additional net
benefit beyond the current requirement
of air quality equivalence to applicable
SIP limits (e.g.. a substantial net air
quality benefit from each bubble trade)
might be required by the Clean Air Act.
Discussion—'Nonattainment Areas -
With Demonstrations of Attainment.
EPA does not currently believe the
concerns discussed above warrant any
change in the April Policy's treatment r.
shutdowns or surplus reductions for
bubble trades in nonattainment areas
which are required to have and do Aov<
approved demonstrations of
attainment.1
• • EPA don no! agree with (his ruling. On Marc*
25.1983 th* Solicitor General filed a Petition Tor
Ceruoran taxing ihe U.S. Supreme Court to rev»»
the dec-.s.on. On May 31.1983 the Supreme Ca-jrt
granted :*!* Governments peritrtn, Rudtn!sr.:i:t v
.VflDC. Not. K-1S91 et ai.
1 This -nrlaoej current oior.e of CO exier.s:;n
areas, a «e:l at otner nonit:>mment arras »-»,-
to Decetrsef 31.1982 de»0'.tf.t* ami! such lir.e 41
approve Si?» for the later areai tray be
deteTO.r;o 3> £PA to be :nidequ»;e to aita:n
reSevaKi ameient standard!.
Sources;.- luch ar»:t» iho'nd be aware. ho>*«v<
lh*i f'jtu.-e ^i;!errn:r;e:;ti. and that some naie* may '.mpc»e
requirerr.tr.tt which adversely affect tome sncr
trades. Ses e 9.. 4" FR 1S07T. out cf. n. 1
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395R2
Federal Register / Vol. 48. No. 1TO / Wednesday. August 31. 1983 / Notices
Once • state had demonstrated it will
attain ambient standards by the
applicable deadline, subsequent
emissions trades amount to fairly
routine SIP revisions, which EPA will
approve (either directly or through a
generic rule) as long as these are
enforceable and do not undermine the
demonstration. The state has discretion
to make and maintain its demonstration
through any combination of emission
reductions, including shutdowns, so long
as these are adequate for attainment. '
and cannot be required to do more than
demonstrate timely attainment and
. maintain ambient standards. See. e.g..
1 .via v. NRDC. 421 US 60. 79-80 (1975);
Jttion Electric Co. v. EPA, 427 US. 246
(1976). This is true even where EPA may
suspect that a previously-approved
demonstration is no longer adequate to
assure attainment Until EPA makes a
formal finding of inadequacy, based on
record evidence, the approved
demonstration controls. See Clean Air
Act sections 110(a)(2)(Hl. 110(c)(l).
In short, under the Clean Air Act an
approved attainment demonstration is a
legal and logical stopping point-Since
the state has shown it will attain with
the reductions required by its-current
SQMhere i»no ground to^deny use of
shutdown creoati in .bubbletrades which
meet those'SIP requirements. 30 long as
the demonstration is protected by
assurance that .these credits are not
doubiecounted. that a baseline
consistent with the demonstration is
applied, and-tha* testa of air quality
equivalence are rack-See 47 FrH5077.
15060-81 (April 7.1982). So long as there
is an approved attainment
demonstration, there seems no reason to
treat such shutdowns differently from
trther sources of credit, since they share
the same-legal basis supporting usiTJf
any surplus emission reductions, .
whether from positive controls, pmrras
.changes or other """""* •
-Underihis mterpreration trfdllows
that all .such-reduction*-from shutdowns
Mill be In'excess of those currently
required by law and need to attain.
Moreover, under current pblicy-their use
will not compromise the State's ability to
• secure further reductionsrshould sucli
steps eventually be necessary to restore
progress or maintain attainment See.
' e.g.. 47 FR 15077.15030. 15084 (April 7, .
1932). Indeed, availability of such
reductions for use in bubble trade-, may
encourage faster compliance wnn
applicable SIP limits by reducing the.
cost of compliance and the time needed
to comply.
Discussion—Nonattainment Areas
Which Lack Demonstrations of
Attainment. The situation differs.
however, for nonattainment areas which
require but lack demonstrations of
attainment* In order to attain, such
areas will need more reductions them
their SlPa currently require. Moreover.
the extent of thos additional reductions.
and the sources from which those
reductions will come, are presently
unclear. Finally, the state that lacks a
required demonstration of attaintment
may have more limited flexibility to
choose when ta secure needed
reductions (and consequently to
substitute alternative reductions through
emissions trading), since it has not yet
fulfilled its Clean Air Act
responsibilities. Cf. Clean Air Act
sections 110(a)(2)(AJ and (cj(l). 172.
Nevertheless, to bar existing-source
bubbles in such areas could elimnate
useful partial solution to their air quality
problems. Regulated firms may often be
reluctant to disclose information that
may be used to require retrofits against
them. Even where such emissions
information is obtained, it may not be
sufficiently precise with respect to, e.g.
source-receptor relationships, to allow
EPA and the state to resolve remaining
ambient problems. While one possible
response could be a more aggressive
government search for potential
retrofits, tijat -response is Hkelyjo
collide with the very information
barriers that discouraged a
demonstration of attainment in the first
place. EPA believes the bubble can help
break such deadlocks by allowing
sources to substitute more coat-effective
reductions for required ones, subject to.
conditions—especially use of a RACT
baseline—which enhance the state J
»biliry to secure both improvements
now and further reductions later, if such
further redactions are found necessary
• Some moo* imminent area* do not require fail
denr-.itrsnoM of attainment because lh«ir
^llw'win problem, an pnnihly caused by source*
outside tr* tret. Under fens-srendina; EP.\ policy.
ior euraple. so-called "rurmi lone nonattainnwni
areas" (wane ambient gnelna it. cause hy-up«tflJ
urbai*. enuiten outside the air quality control region)
need only show "thai they h«v» featured RACT
.Contrail for. ill naior sourcei far v«i»eh.EPA h*»
7amU RACT guidance. Upoo suca t ihowln? time
areas have iang been deeir.ed to »nfy P*n Q
Veouirementx. iince they must ultimately rely on
rrauctioni from adjacent areas 10 cure their
• pr".»i requirement ccuia hela dss ire that
'he comr.cvcon ot th-s« unit 'owiroi i, ivms '-ttt
ozane prosirn mnainj current However. finc«
luch aread)ng Poiicy — Teefeaica
memorandum from Sheldon Meyen. Director. Office
•of-Air Qyaiuy -PI) .-.mug-ami S^naat jj -ri-5.-£PA.-(Q
Directan. Air Minagemen'-Otwiioru. EPA Region*
I-X (Feb. 17. 19B3|._ - -.--, '
Under the April 7 Policy Mete* "t noiwi it! Sec:;on i aoove.
e^oi.-r< /oi c- :ne *.!>.C detat-.r.t for uiooiutat of
<.«:-on«.un.«re3 aiidiumeni S!P> hat sucntantiaiiy
have
* li r.»i ~ttn aii-.Tied that soc.e lource
3/»-*ier :ncen:;ve to prtsi for leu
•'neaotiaied R_\CT' limnj in these circ
However. -h:i incentive doe* n
-------
Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notices
395
Thus the bubble may create an
incentive Tor faster compliance, because
sources must do better than comply with
RACT to secure ERCs and because
compliance costs may be reduced by
control strategies the source can tailor
to its operations. The bubble may also
improve air quality planning by
encouraging plant managers to submit
data on emissions, modeling and
unregulated or uninventoried emission
sources in order to create usable ERCs.
It may help states develop new RACT
regulations for categories of sources.
both because of improved information
and because opportunity for trading
reduces those rules' potential cost It
may help states secure additional
reductions from existing sources, which
comprise over 95% of most
nonattainment area emissions.*
The Dupont Chambers Works bubble
for emissions for volatile organic
compounds (VOCa) illustrates several of
these points. New Jersey approved this
bubble in Deep-water, NJ under its
"generic" emissions trading rule. 46 FR
20551 (Apr. 6.1981). As part of that rule.
New 'ersey imposed uniform RACT
reduc:ion requirements (generally 65%
control) on broad categories of sources.
including Oupont's 7 large stacks and
112 smaller fugitive sources (See
Administrative Code of New Jersey.
Title 7. Chapter 27, Subchapter 16
(1881).) The opportunity to meet these
uniform requirements through hubbies
helped New [ersey avoid boih legal
challenge by regulated industries and
thelalirioua task of developing
process >>y-p.roce-s regulations. Dupont
complied by controlling its 7 targe stacks
to over 99V*. enough to meet RACT
requirements for all 119 emission
sources while producing over 2000 tons
per ycif of extra reductions.
Tut 4urh reasons EPA continues to
h«lieve that in general its April 7 Policy
approximately a.-thorizes trading in
^r.c; of ;he Act's mandate that
from that pmcnl in any reiemaking expected to
mull in r.ew reduction requirement* under the AeL
Moreover, in ill nich cues EPA must Hill approve
the i«re«i-ur^ beteiine n equivalent to RACT.
before the trade may be finally aoproved and
implement*:! See. e.g.. 47 FR 15000 al A-Lb. It) and
•UH (April 7. IWZI. • •
• S»s. t.t- C- .*.i«iy. la UK Related to tim data). See generally. Domenici.
"Lmiiuon* Trading: The Subtle Heney."
£/iv/re.iror.<7/£>/w-. Val 1. No. » (Dec. 19821. ?p.
18-Z4. r»>nnied •<; Cangrvsstoaoi Rtford (tl*-
(4).
Notwithstanding these considerations.
while bubble trades in such areas may
yield progress towards attainment, the
area may fall short of "reasonable -
further progress and attainment as -
expeditiously as practicable." Clean Air
Act sections 171-172. In these
circumstances EPA is authorized to
promulgate a Federally-developed SIP
which does demonstrate attainment1-0
However, EPA could also take less '
drastic steps designed to accelerate > —•
ambient progress and enhance the •!>:
state's ability to develop a complete SIP.
For example, EPA could mandate thai
pending a demonstration of attainment.
each existing-source bubble produce a-
substantial nef air quality improvement
A substantial net reduction in emissions
could be a surrogate for such i •
improvement11 Properly structured.-*•
such a requirement should not ~n
discourage environmentally-beneficial"
trading activity to a significant degreii
Indeed, requiring a net air quality '.£
improvement, beyond the current '..'_
'• dtan Air Act teetfoa UOtcHU. The Agency,
haf had difficulty acquiring the detailed kiumMgB
of local condiooaa needed to proomi**ta »ueh SJPs.
" One EPA attempt to promulgate a full Federal SgP
took over four yean to complete. See. e.g_ 37 rtf
10842 11972) (Ohio SO, SIP: propo*al|: 41 Fit 38324
(19781 Hail part of the final rtuai •„£*..•
11 EPA'i Effliaaioa Offiet interpretive Ruling J40
CfR Put 51. Appendix S) ho tioca 1079 declared
oal emiaaioa reductiona an acceptable iurrogateVor
the required poadve net til quality benefit for. £r-
Mveral claaeea of new louree offMU. Similar <-J(;
flexibility, mteodrf "to avoid onneenawy . ,,
conaumptioa of limited, coatly and HUM coniuming
modeling reaoureet." ha* al*o been incorporated-"
into the Effliaaiooa Trading Policy. For example, ??
pound-for-pouBd trade* of VOC or No, may be-. •.
treated ae equal in ambient effect acres, broad.,,.
geographic areaa. Sea 47 FR al ISOSt, lApni r, ISKt).
EPA rcqueati ootnment ro (in extern «o whtca*
tubttann'al eoiatioa reducuoo could aeeure a '•?•'•
(uoaiann'al air quality improvement under Section
111. Alternative* ) and 4 below. Comment ia \y
ipecifically requetted on the extent to which, otjce a
bubble trade'a air quality equivalence ia established
under the Policy'! ambient teita. air quality
improvement fcr all pollutanti oiay be aaaumedit'
baaed on (ubatantial additional eouHion
reduetiona. To t*« extent ibia tauvicna *urrogat(
lor ambient improvement may not be warranled:* '
further comment i* reqnMted on low currently-' • -•
required modeiinif might be nodi .ied to define anil
evaluate rabitaniial air quality >.nprovemeni. Fq]r
example, otse.altemative to a • iirogale approach
could be a direct ambient d* -
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59584
Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notices
"some comraenters' suggestions that
credit be allowed only if credit
availability were a sole or principal
reason for the shutdown, and only then -
for the remaining useful life of the
shutdown facility.
Unfortunately the issue is not this
simple: So long as it has not beeen
double-counted and a proper RACT
baseline is applied, the shutdown does
contribute to air quality progress, since
much less than 100% credit will be
granted.1* Moreover, the opportunity for
credit may improve air quality by
encouraging early shutdown of high- .
polluting facilities that might otherwise
be kept running, either because
replacement is too expensive or to -
preserve credit for future plant
expansion.
In addition, despite their logical
appeal these comments' suggestion of a
test based on subjective motive appears
administratively unworkable. EPA and
states would find it exceedingly difficult
to evaluate or rebut source evidence
that a shutdown was motivated by
credit and that the shutdown facility
would otherwise have operated for
twenty or forty years.1* Thus this
approach would likely result in either de .
facto approval of all such credits
(undermining the reason for the teat), or
a burden of proof so stringent that none
would be approved (penalizing sources
whose shutdowns were elicited by *
trading). More straightforward
approaches might either ban shutdown
bubbles until a demonstration of
attainment, or acknowledge their
uncertain nature by applying a margin of
safety—e.g.. a requirement that such
bubbles produce substantial air quality
improvement—sufficient to compensate
for any uncertainties and protect the
integrity of current or future SIP*.
C. Definition of "shutdown. "The
April Policy and accompanying
Technical Issues Document do not
explicitly define "shutdown." since' • • '
credits from shutdowns for use in
" Thi* CM readily b« *een from the fad thai mott
Hate VOC RACT refutation* require between SO*
and tSK control of uncontrolled emtntont. See. e.g_
46 Fit 3B5t.OSS3 t April 9.19611 'N>w jeney: 85*
control for source* emitting VOC >» (MCT1- thus.
even under (he April Policy only 15* to 3D* of tile
reduction* produced by • thuidown would
orainictly b* «i Jiiolt at a credit far jie in .
bubbles: :h» rr.run:ng 80S to BS*t »!:; toQInbule v '
directly tn 4ir o-jiicy proareit. Even :"*i» credit
wnuiu 4«uerai.'y :!«min«iiori> 01 fact thai csnild
Frequently demanc judicial resolution.
existing-source bubbles are treated no
differently than credits produced by
other means of emission reduction. For
example, the Policy's discussion of
double-counting focusses only on
determining the extent to which a.
particular shutdown is surplus, a
requirement for all credits. Under the
April Policy, so long as the reduction
from a shutdown is enforceable.
quantifiable and permanent, as well as
surplus, it is eligible for credit.
More precise definition is needed only
if shutdowns are to be subject to special
requirements for use in existing-source
bubbles. Issues raised by that potential
approach include whether "shutdowns"
should cover all production cutbacks or
curtailments; whether the shutdown
must be of an entire plant or only
identifiable pieces of process equipment;
and whether credit should turn on
surrender of operating permits or some
bther action. Such distinctions could .
have major functional significance, since
a broader definition would subject more
bubble trades to special requirements.
Thus, the definition offers one potential
way of balancing possible
environmental benefits from special
treatment of shutdown credits for
bubbles, against the administrative
difficulties and negative environmental
effects (e.g- discouraging beneficial
trades) which might result from such
special treatment
To help evaluate the potential effects
of adopting any special treatment 01
shutdowns, tfiis notice requests
comment on the appropriate definition
of a "shutdown." See Section m.C
below.
D. Conclusions. EPA wishes both-tu
strengthen emissions trading and tci
minimize any uncertainty which
alterations to the April 7 Policy might
create. The Poiicy set out minimui.1 legal
requirements for trading in the belie;
that this approach comported with the
broad primary discretion accorded
stales to design and implement SIP*.
E.?.. Clean Air Act section I01(a)(3).
EPA sees merit however, in the
concerns raised by commenters and
wishes to consider alternatives which
might increase ihe environmental
benefits of individual trades.
III. Requests for Comment
-A. Avoiding "Doubie-Co'j*!:.i3"
-, Before emissicr.s trading, use or Oia -J^S
or similar "tu:r.over" projeca/as had .
relatively little impact on (hi integrity of
SIP des-eloprr.ent. Expanded trading has
heightened cor.cern over the extent to
which SIPs may already have taken
credit for shutdowns in their attainment
demonstrations. EPA accordingly
requests assistance in determining
specifically how particular SIPs lake
shutdowns into account either dir,
or indirectly, especially through i
"OBERS" projections or similar mS
EPA further requests suggestions on
how to improve its options for avoiding
double-counting of shutdown credits in
ways which are administratively
workable for stale agencies and which
adequately address these concerns.
Commenters should be aware that
failure satisfactorily to resolve this issue
may endanger continued use of
shutdown credits for existing-source
bubble trades under all SIPs relying on
OBERS (or similar) projections, even in
nonattainment areas for which
demonstrations of attainment have been
or may eventually be approved.
B. Alternatives: Bubble Trades and
Use ofERCs from Shutdowns or Other
Actions for Bubble Trades in
Honattainmen^Areas Requiring But
Lacking Demonstrations. EPA requests
comment on the specific alternatives
outlined below or on other alternatives
for resolving concerns addressedJiere.
Comments will be most useful where
they are based on specific examples
from actual experience in pollution
control and focus on the extent to which
these or other alternatives might
adversely affect overall environmental
quality as well as specific, plann^ '
bubble activities. Commenters sfc
feel free to suggest combinations i
variations of these alternatives, which
should all be considered in addition to
the current Policy's requirements.
1. Where RACT has not already been
defined in the SIP. require a "negotiated
RACT" baseline before shutdowns can
receive .bubble credit in any
nonattainment areas requiring but
lacking complete demonstrations of
attainment—even areas with approved
attainment extensions beyond 1982.
Discussion: For areas which received
att;.I.7ment extensions past 1982. the
• April 7 Policy allowed states and
sources to use either a negotiated RACT
baseline or an actual emissions
baseline. States using "actuals"
baselines could then regulate source
categories other than those involved in t
trade, or could seek further redactions
frc.-.. categories including trading
sources, where future reductions were
needed to assure attainment and .
maintenance. This option rested on the
fact that follow-up SIPs .incorporating
-efficient additional controls to
demonstrate post-1982 attainment "as
expeditiously as practicable" would
have to be developed for such areas
before the end of IS82. Clean Aii
Section 172. These follow-up SIF
-------
Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notices
39585
generally required to .incorporate or
commit to incorporate (a) RACT level
controls for all categories of VOC
sources for which EPA had issued
Control Techniques Guidelines (CTCs),
and (b) RACT-level controls for all other
100-ton VOC sources to the extent prior
SIPs had not required such controls. See
48 FR 7182 (Ian. 22.1981}.
EPA believes that expiration of the
1982 deadline for submittal of such
extension-area attainment SIPs has
effectively limited this option under the
Clean Air Act. Generally, "actuals"
baselines are now appropriate only in
extension areas for which EPA haa
approved follow-up ozone SIPs and.
within those areas, only for VOC
sources which fall within identified
"Group HT Control Techniques
Guideline (CTG) categories but for
which EPA has not yet issued a CTG.M
Under the April 7 Policy, states could
still authorize such sources to trade
using either a "negotiated RACT'
baseline, or an actual emissions
baseline with a commitment to find or
produce further RACIMeveJ reductions
when required. . .
However, where sources in these
categories shut down and seek to secure
credit based on actual emissions before
becoming subject to RACT-level
requirements, their future regulation-will
plainly be more difficult than obtaining
enforceable reductions from sources still
in operation. The source is no longer in
existence, and "revisiting" its former
operator or quantifying what additional
reductions it might have produced may
be imprh jtical. This alternative would
better insc-e enforc sability, SIP integrity
and am'jien' progress by assuming that
all su^h. shutdown sources in
nonattainment areas with approved
demonstrations lacking complete RACT
requirements would eventually have
been suuject to RACT if they continued
in operation It would accordingly
require a RACT bustline as a
precordiuon to credit for such
shutdowns in any bubble trade.
'2. Where RACT has not already been
define J in the SIP. require a "negotiated
RACT' basii other -. j^.es rrgulated by in* SIP v»i(l by
aefir»"'» "• .^hteri to fcACT-level or aiiawmeiM-
ifvr'' r~~ rements. Their "RACT baseline" will
accn.dir.tiy ie defined in the SEP. and me otinon u
is:; longer uuei.. The op'ion may. however, remain
iptn 10 cert.nn mn.jr VOC sources which neither
fall within designated "Croup 111" categories nor
emu 100 tons per veer, tinee these sources may not
be "regulates ti the SIP."
Where EPA has not approved a 1985 follow-up
SIP. all sources involved in bubble trades appear
required to <.»t .it EPA-appraved RACT baseline.
See Alternative Z and Section IV.fl. below.
lacking complete demonstrations of
attainment—even areas with approved
attainment extensions beyond 1982. No
special requirement for bubbles using
shutdown credits.
Discussion: Certain states may never
have had an approved demonstration, or •
may have received an extension which
is not confirmed by an approved 1982
SIP incorporating such a demonstration.
Other states may ultimately be found
not to have attained despite the -
presence of an approved demonstration.
For all such areas RACT-level control at •
minimum appears required under the
Clean Air Act. Use of a RACT baseline
for all sources seeking to use bubble
trades in such areas would better
effectuate the statutory design by
securing immediate RACT-level
emission reductions while strengthening
the state's ability to attain. This
alternative would accordingly confirm .
application of the April Policy's
requirement of a RACT baseline for
bubble trades in non-demonstration
areas required to attain relevant
ambient air quality standards by
December 31.1982, to bubble trades in
ail areas which require but do not
currently possess approved
demonstrations of attainment It would
. also extend that RACT-baseline
requirement to certain additional bubble
trades in nonattainment areas with
approved but incomplete follow-up
SIPs—i.e- even trades involving "Group
OF' sources which are not being shut
down.
3. Require a substantial air quality
improvement, beyond a RACT baseline.
•- from each bubble using shutdown
credits in nonattainment areas requiring
but lacking demonstrations of
attainment. E.g.. require each such
bubble to produce a 20% net reduction in.
emissions beyond RACT equivalence.
Discussion: This alternative would
secure additional air quality p—jzress._
from bubbles using shutdown credits in
areas requiring but lacking attainment
demonstrations. Requiring substantial
progress from each bubble using
shutdowns could accelerate momentum
toward attainment, directly improve air
quality through each trade, and provide
an objective margin of safety, against
uncertainties associated witi some
individual shutdowns, whih" leaving to *
the state the task of final FiP
development?-" It would '.so maintain
11 In light of some cornmer j it u important to
reiterate thai if further reductions arc later required.
trading presents no bar to the state's obtaining men
from these or similar sources. Current policy simply
suggests that the stale look first to other potential
reductions -n the area before revisiting individual
sourcei or source categories which have voluntarily
done more than required by agreeing early to
the incentives within the April. Policy for
industry to shut down high-polluting.
economically-marginal sources.
Comment is specifically requested on
the extent to which a substantial
emission reduction, beyond that
required to demonstrate ambient .
equivalence, could be accepted for
substantial air quality improvement See
Footnote 11 above.
In addition to comments on this
altematative. EPA requests specific
information on the extent to which
particular firms or types of industrial
operations have prolonged, or can
realistically prolong, the minimal
operations of such economically-
marginal facilities (e.g., by placing them
on "hot idle") in order to preserve credit
for future modernization or expansion.
4. Require a substantial air quality
benefit, beyond a RACT baseline, from
all babbles in nonattainment areas
requiring but lacking demonstrations of
attainment. No additional requirement
for bubbles using shutdown credits.
Discussion: Essentially the same as
. for 3 above. The more each existing'
source bubble contributes directly to
accelerated air quality progress, the
stronger the justification for authorizing
creation and use of surplus reductions
for such bubbles in the absence of a
demonstration. Moreover, requiring all
bubbles to produce a substantial air
quality improvement, beyond RACT
baselines and RACT equivalence, could
provide a margin of safety sufficient to
make special treatment of shutdowns
unnecessary. Since many bubbles are
already producing substantial net
reductions in overall emissions, it is not
believed that this alternative will
significantly reduce bubble
opportunities. Indeed, it may be the
most rational and reliable way to
authorize continued trading in such
areas. See Section IV.B. below.
Comment is requested on the use of
substantial net emission reductions to
demonstrate substantial air quality
improvement. See Footnote 11 above.
5. For bubbles using shutdown credits
in nonattainment areas requiring but
. lacking'demonstrations of attainment.
require a substantial air quality
improvement, beyond RACT baselines.
and define that improvement by the
severity of the area's pollution problem.
For example, require each shutdown .
bubble to produce net reductions
proportional to the extent by which the
SIP's design value exceeds the relevant
"negotiated-RACT." and that if the state does
engage in such revisiting, it structure additional
requirements so they too may be met through
trades.
-------
39586 Federal Register / Vol. 48. No. 170 / Wednesday. August 31. 1983 / Notices
ambient standard at the time of the
trade. Other bubble trades in such areas
would simply have to produce a net air
'quality improvement
Discussion: This alternative would
acknowledge that shutdowns may
present special problems absent a
demonstration, due to difficulties of
determining whether they would have
occurred anyway or how much earlier
they occurred because of the
opportunity to trade. It would continue
to authorize use of shutdown credits in
existiog-sourca bubble trades, but would
require that such bubbles contribute a
proportional share of the surplus.
reduction to attainment One potential
problem with this alternative is that it
may require sources to solve a
nonattainment problem which is largely
aot of their making, merely because they
have found ways to meet applicable
requirements less expensively. Another
potential problem is the difficulty of
establishing a workable, objective ratio
of emission reductions iu ambient
concentrations. EPA accordingly
requests specific suggestions, pollutant-
by-pollutant. on how to define a
reasonable and legally defensible
relationship between an area's general
pollution problem and 'is cleanup
responsibility of a parnYular source
engaged in a trade.
& Prohibit use of shutdt wn.credits for
' existing-source bubbles in
Bonaltainment areas requiring but
-.' lacking demonstrations of attainment.
Discussion: Shutdowns produce a
, total reduction pf source emissions.
Prohibiting use of shut-f
-------
APPENDIX I
The United States
LAW WEEK
Supreme Court
Opinions
JUM 28.1M*
TO BUREAU OF NATIONAL AFFAIRS. INC, WASHINGTON. D.C.
Volume 52. No. SO
OPINIONS ANNOUNCED JUNE 25, 1984
The Supreme Court decided:
ENVIRONMENT AND CONSERVATION—Air
Environmental Protection Agency's Clean Air Act "bub-
ble concept" regulations, which allow states that have not
attained national air quality standards to treat all pollu-
tion-emitting devices within existing plant as "stationary
source" of air pollution, thus allowing installation or modi-
fication of such devices without meeting stringen' permit
conditions required by §173 of Act as long as alteration
doe* not increase total plant emissions, is permissible
construction of statutory term "stationary source." (Chev-
ron U.S.A Inc. v. Natural Roourccs Defence Council.
Inc . Nos. 82-1005, 82-1247, & 82-1591) ... Pat-: 48-5
Full Text of Opirions
No*. 82.1005. 82-1247 AMD 82-1591
CHEVRON, U. S. A., INC., PETITIONER
82-1005 tt
NATURAL RESOURCES DEFENSE COUNCIL, INC.,
ETAL.
AMERICAN IRON AND STEEL INSTITUTE, ET AL.,-
PETITIONERS
82-1247 v, ' .
NATURAL RESOURCES DEFENSE COUNCIL, INC.,
ETAL.
WILLIAM D. RUCKZLSHAUS. ADMINISTRATOR,
ENVIRONMENTAL PROTECTION AGENCY,
PETITIONER
82-1591 v.
NATURAL RESOURCES DEFENSE COUNCIL, INC.,
FTAL.
ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
Syllabus
No. 8S-1005. ' Anruei February 29. 19&—Decided Jim. 23, 19#4-
The Clean Air Act Air*r.dn »«* of 197T impox* ctr=in • fairer. T.-.-S on
Suits that have not ach.eved the national air qua!:'.;- *car.Jarri* «.-:ab-
Ibhed by the Envirunn«.'iul Protection Agency pursaa^t *o *^r-
Uer legislation, including the requirement tka: rvH "Bonaf-i.t.:..-- •"
*ro«ethef with No. 32-1217. American Inn X S'tt! lmait\ti .
». .Vofui-i/ Rtsaurtti Drrtntr Council, Inc . tt ai . and Xo. i2-'.S91.
Kuckt'^am. .-Vrfwinnrrutjr. Eminnnxma1. Pmttrtiun ,4je"cy v. Salu-
mi RrsimrtH Dtttnir C-tuncH, Inc.. « at., also OB cer.iorwi :o the saw*
court.
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52 I.W 4846
The United States LAW WEEK
6-26-84
establish * permit program regulating "new at modified major
°f*j* PoUution. Generally, a permit may not be is-
f.f t«S sources unless stringent conditions are met EPA regula-
K-J* promulgated in 1381 to implement the permit requirement allow a
S-ate u> adopt a plantwide definition of the term "stationary source,"
under which an easting ptat that contains several pollution-emitting
Je>ice» may inauD or modify one piece of equipment without meeting
the permit condition* if the alteration will not inertaae the total emis-
lieat ftw» the plant. tbu» allowing a State to treat all of the pollution*
emitting devices within the sane industrial grouping ai though they
were eneaied within a single "bubble." Respondent) filed a petition for
review ia the Court of Appeals, which aet aaide the regulation* embody-
ing the "bubble concept" aa contrary to law. Although recognizing that
the amended Clean Air Act doet not explicitly define what Congress en-
visioned aa a "stationary source' to which the permit program should
apply, and that the issue waa not squarely addressed in the legislative
history, the court concluded that, ia view of the purpose of the nonattaia-
Bent program to improve rather than merely maintain air quality, a
plantwide definition waa Inappropriate," while stating it waa mandatory
in program* designed to maintain existing air quality.
HM: The EPA's plantwide definition ia a permissible construction of the
statutory term "stationary source."
(a) With regard to judicial review of an agency's construction of the
statute which it administers, if Congresa has not directly spoken to
the precise question at issue, the question for the court ia whether the
agency's answer ia based on a permissible construction of the statute.
ib) Examination of the legislation and its history supports the Court
of Appeals' conclusion that Congress did not have a specific intention aa
, to the applicability of the "bubfaje concept" in these eases.
(e) tile legislative history of the portion of the 1977 Amendments
dealing with nonattainment areas plainly discloses that in the permit
program Congress sought to accommodate the conflict between the eco-
nomic interest in permitting capital improvements U> continue and the
environmental interest in improving air quality.
(d) Prior to the 19T7 Amendments, the EPA had used a plantwide
definition of the term "source," but in 1980 the EPA ultimately adopted a
regulation that, in essence, applied the basic reasoning of the Court of
Appeals here, precluding use of the "bubble concept" in nonattainment
States' programs designed to enhance air quality. However, when a
new administration took office 1981, the EPA. in promulgating the regu-
lations involved here, reevaluated the various arguments that had been
advanced in connection with tha proper definition of the term "source"
.. and concluded that the term should be given the plantwide definition in
nonattainment areas. •
(e) Parsing the general terms in the text of the amended Clean Air
Act—particularly the provisions of H302(j) and lll(s)(3) pertaining to
the definition of 'source*—does not reveal any actual intent of Congress
aa to the issue in these eases. To the extent any congressional "in;ent"
can be discerned from the statutory language, it would appear that the
listing of overlapping, illustrative terms was intended to enlarge, rather
than to confine, the scope of the EPA's power to regulate particular
., sources in order to effectuate the policies of the Clean Air Act. Simi-
.. iarly. die legislative history, ia consistent with the view that the EPA
should have broad discretion in implementing the policies of the 1977
Amendments. The plantwide definition is tally consistent with the pol-
icy of ailovjig reasonable economic growth, and the EPA has advanced a
reasonable explanation for its conclusion that the regulations serve envi-
ronmer:ai objectives as well. The bet that the EPA has fnm time to
time charged its interpretation at the term "source" does TIL. lead to the
concision that no deference should be accorded the CPA's interpret*-
'» tion of the statute.- An agency, to engage in informed rulemaJcng, must
• consider varying interpretations and the wisdom of its policy on a con-
tinuirg iMiis. Policy arguments concerning the "bubble concept" should
be addressed to legislators or administrators, not to judges. Ths El A's
intercreu'.ion of the statute here represents a reasonable accommc-
datvn of manifestly competing interests and is entitled to deference.
22 V. S. App. 0. C 268. 683 F. M 718, reversed. - '
STEVENS, j.. delivered the opinion of the Court, in which BVRCER,
C.J.. and BHC.VNAN. WHITS. BIACOUN. and Powtu.. JJ.. joined.
,, t ^ a=d REH«(»"ST. JJ- took no pan in the consideration or deci-
swn oi -.« «»e«. O'CoNNon. J-. took no part in the decision of the cases.
CS STEVENS delivered the opinion of the Court.
In the Clean Air Act Amendments of 1977, Pub. L. 95-95
91 Stat. 6c5, Congress enacted certain requirements appli-
cable to States that had not achieved the national air quality
standards established by Che Environmental
Agency (EPA) pursuant to earlier legislation. The
Clean Air Act required these "nonattainment" States to es-
tablish a permit program regulating "new or modified major
stationary sources"' of air pollution. Generally, a permit may
not be issued for a new or modified major sutionary source
unless several stringent conditions are met.' The EPA
regulation promulgated to implement this permit require-
ment allows a State to adopt a plantwide definition of the
term "stationary source."* Under this definition, an exist-
ing plant that contains several pollution-emitting devices may
install or modify one piece of equipment without meeting the
permit conditions if the alteration will not increase the total
emissions from the plant. The question presented by this
ease is whether EPA's decision to allow States to treat all of
the pollution-emitting devices within the same industrial
grouping as though they were encased within a single "bub-
ble" is based on a reasonable construction of the statutory
term "stationary source."
I
The EPA regulations containing the plantwide definition of
the term stationary source were promulgated on October 14,
1981. 46 Fed. Reg. 50766. Respondents' filed a timely peti-
tion for review in the United States Court of Appeals for the
District of Columbia Circuit pursuant to 42, U. S. C-
*?607(bXl).' The Court of Appeals set aside the regula-
tions. National Resources Diffuse Council, Inc. v.
Gcrsueh. 222 U. S. App. D. C. 268, 685 F. 2d 71? (I9j
The court observed that the relevant part of the
Gear Air Act "does not explicitly define what CongreiSeWYi-
sioned as a 'stationary source, to which the permit program
. .. should apply," ard further stated that the precise issue
was not "squarely addressed in the legislative history." Id..
as 273, 685 F. 2d, at 723. In light of its conclusion '-hat the
legislative history bearing on the question was "at be.'>t
contradictor}-," it reasoned that "the purposes of the
rtona'.tainment program should guide our decision here."
Id., at 276. n. 39, 685 F. 2d. at 726, n. 39.' Based on two of
its precedents concerning the applicability of the bubble con-
cept to certain Clean Air Act programs,' the court .stated
'S*~»ag activities which belong to the same industrial grouping, are
be- ,-i of one or more contiguous or adjacent properties, and are under
•,.ie control of the same person (or persons under common control) except
rJw activities of any vessel.* 40 CFR } 51.1»j)(lxii and lai (1383).
'National P^sources Defense Council. Inc., Citizens for s Better Envi-
rornwit. ",M.. and North Western Ohio Lung Association. Inc.
•Petitioners. Chevron L'. S. A. Inc.. American Iron and Steel Insi::i>.*,
American Petroleum Institute. Chemical Manufacturer* Association. Inc..
General Motors Corporation, and Rubber Manufacturers Association were
granted leave to intervene and argue in support of the reguiati
T7!.« court remarked in this regard:
"We regret, of course, that Congress did not advert speciftcially t
bie concept's application to various Clean Air Act programs, and nut* chat
a ftirther clarifying statutory directive would facilitate the work of the
agency and of the court in their endeavors to serve the legislators' will."
223 U. S. App. D, C.. at 276. n. 39. SSo F. 2d. at 726. n. 39.
•Alabama fvetr Co. v. Ce»rtr. 294 C S. App. D. C. 51. 636 F. 2d 321
(1979): ASAXCO /nc. v. EPA. 1SS Uf S. App. D. C. T7. 578 F. 2d 319
U978>.
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6-26-84
The United States LAW WEEK
52 LW 484?
that the bubble concept was "mandatory" in programs de-
signed merely to maintain existing air quality, but held that
it was 'Inappropriate" in programs enacted to improve air
quality. W., at 276, 685 F. 2d, at 726. Since the purpose of
the permit program—its "ration d'etre," in the court's view-
was to improve air quality, the court held that the bubble
concept was inapplicable in this case under its prior prece-
dents. Ibid. It therefore set aside the regulations embody-
ing the bubble concept as contrary to law. We granted cer-
tiorari to review that judgment, 461 U. S. (1983), and
we now reverse.
The basic legal error of the Court of Appeals was to adopt a
static judicial definition of the term stationary source when it
had decided that Congress itself had not commanded that
definition. Respondents do not defend the legal reasoning of
the Court of Appeals.' Nevertheless, since this Court re-
views judgments, not opinions,' we must determine whether
the Court of Appeals' legal error resulted in an erroneous
judgment on the validity of the regulations.
II
When a court reviews an agency's construction of the stat-
ute which it administers, it is confronted with two questions.
First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of Con-
gress is clear, that is the end of the matter for the court, as
well as the agency, must give effect to the unambiguously ex-
pressed intent of Congress.' If, however, the court deter-
mines Congress has not directly addressed the precise ques-
tion at issue, the court does not simply impose its own
construction on the statute,1* as would be necessary in the
absense of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency's an-
swer is baaed on a permissible construction of the statute."
'Respondents argued below that (hat EPA'j plantwide definition of sta-
tionary Muret is contrary to the terms, legislative history, and purpose* of
the amended Clear Air Act. The court below rejected respondents' argu-
menu bated on the language and legislative history of the Act. It did
•free with respondent! contention that the regulations were inconsistent
with the purposes of the Act. but did not adopt the construction of the stat-
ute advanced by respondents here. Respondents reiy on the arguments
rejected by the Court of Appeals in support of the judgment, and may rely
on any ground that finds support in the record. See Rt/rnon v. United
Sinus. 312 U. S. 405. -108 (1*111: LtTv.ll* v. Seofitld. 308 U. S. 41S. 421
(1940); Ianjn« v. Grrrn, 282 U. S. 531. 533-539 <1931).
•E. 3.. Block v. Cuf!*r Ubontarits, 351 U. S. 292. 297 (1956): /. E.
Rilry tnvntmmt Co. t. Commanontr, 311 U. S. 55. 59 (1940): William*
». .\Vr-J, 12 Wheat. 117. 120 (1827*; McCliutg v. Siltiman, 5 Wheat. £98,
603 (1821).
'The judiciary is the final authority on issues of statutory construction
and moil reject admirJstntive constructions vhich an contrary to ciear
congr«ml Seeurily Board v. .ViratJbo. 327 U. S. 358.
369 '1946); Bunut v. C'ritogo Portrait Co.. 285 U. S. 1. 16 (1932*. Webster
v. Latter, 163 U. $ 331. 342 (16%). If a court, employing traditional
tools of statutory construction, ascertains that Congreaj had an intention
on the precise question at ittue. that intention is the law and must be given
effect.
"See generally. R. Prund, The Spirit of the Common Law 174-175
(1921).
" The court need not conclude that the agency construction was the only
one it permiisibly could have adopted to uphold the construction, or even
the reading the court would have reached if the question initially had arisen
in a judicial proceeding. FEC v. Drmncmtic Senatorial Campaign Com-
mittee, 454 C. S.. at 39: Zenith Radio Corp. v. Vnittd States, 437 U. S.
443, 450 (1978); Train v. Natural Resources Djeiut Council. Int.. 421
U. S. 60, 75 (1975,; L'dn'.l v. Tallman, 380 U. S. 1. 16 (1965): Unemploy-
ment Comprnaaiiin Comm'n ». Angon. 329 U. S. 143. 153 (1946):
XeLonn v. Fleischer. 235 C. 5. 477, 480-481 (1921).
"The power of an administrative agency to administer a
congmsionally created. . . program necessariiy requires the
formulation of policy and the making of rules to 311 any gap
left, implicitly or explicitly, by Congress." Morton v. Ruiz,
415 U. S. 199, 231 (1974). If Congress has explicitly left a
gap for the agency to fill, there is an express delegation of
authority to the agency to elucidate a specific provision of the
statute by regulation. Such legislative regulations are
given controlling weight unless they are arbitrary, capri-
cious, or manifestly contrary to the statute.a Sometimes the
legislative delegation to an agency on a particular question is
implicit rather than explicit. In such a case, a court rmy not
substitute its own construction of a statutory provison for a
reasonable interpretation made by the administrator of an
agency."
We have long recognized that considerable weight should
be accorded to an executive department's construction of a
statutory scheme it is entrusted to administer," and the prin-
ciple of deference to administrative interpretations
"has been consistently followed by this Court whenever
decision as to the meaning or reach of a statute has in-
volved reconciling conflicting policies, and a full under-
standing of the force of the statutory policy in the given
situation has depended upon more than ordinary knowl-
edge respecting th« matters subjected to agency regula-
tions. See, e. g., national Broadcasting Co. v. United
States, 319 U. S. 190; Labor Board v. Hearst Publica-
tions, Inc., 322 U. S. Ill; Republic Aviation Corp. v.
Labor Board, 324 U. S. 793; Securities & Exchange
Comm'n v. Chtnery Corp., 322 U. S. 194; Labor Board
v. Seven-Up Bottling Co., 344 U. S. 344.
".. . If this choice represents a reasonable accommo-
dation of conflicting policies that were committed to the
agency's care by tks statute, we should not disturb it un-
less it appears from the statute or its legislative history
that the accommodation is not one that Congress would
have sanctioned," United States v. Shimer, 367 U. S.
374, 382. 383 (1961). Accord Capital Cities Cable. Inc. v.
Crisp, 467 U. S. , (19S4) (slip op. at
6-7).
In light of theie well-sertlsd principles it is clear that the
Court of Appeals misconceived Uc nature of its role in re-
viewing the regulations at issue. Once it determined, after
its own examination of the legislation, that Congress did not
actually have an intent regarding the applicability of the bub-
ble concept to the permit program, the question before it was
not whether in its view the. concept is "inappropriate" in the
general context of a prog.'STi designed to improve iir quality,
but whether the AdmirJs'wt^'r- view that it is appropriate
in the cr»rvtext of this parr". jfiir program is a reasonable one.
Based on the f.xair.1. ..jn of the legislation and its history
"See, «. ff., Uni'.td St*t: •• Aforton, U. S- ,
(1984) (slip op. at U-l£): SeSii^ir- v. Gnty Panihen. 453 U. S. 34. W
(1981); a«fl*rfon v. Fmncii. 438 C. S. 416. 424-426 U977); American,
Ttlephmt t Ttlrympk Co. v. I'nittd Starts. 299 U. S. 232. 235-237
(1936).
•E. ff.. INS v. Jong Ha Woe.;. 450 f. S. 139. 144 119sl); Train v. .S'otu-
re( Rttmmn'Dtftntt Ou»n'. Inc., 421 U. S.. at 87.
"Aluminum Co. o/Am*n'cii v. Central Lincoln Peoples' L'tit. Dat.. 467
U. S . (1984) (slip op. at 3); Blum v. Bacun. 457 U. S. 132. 141
(1982); Union Eltctrie Co. v. EPA. 427 U. S. 246. 256 (1976); /nv«em**f
Company Institute v. Cawp, 401 U. S. 617. 626-627 (1371): f/nrmpfoy
mrnt Compilation Commtut'on v. Arnqirt. 329 C. S.. at 1&1-134: SLRB
». Htarst Publitatioai. Inr.. 322 U. S. 111. 131 (19*4); .Wftoim v.
Flracbrr, 256 U. S.. at 480-481: Webster v. Luther, 163 U. S., at 342;
Brou.it v. I'nited Stairs. 113 C. 5. S68, 570-571 ilS,<5'-. Lotted S'.att* v.
Jfoore. 95 U. S. 760. 763 (ls7S>: Educnii'Ltuet v. Oa^y. 12 Wheat. 2W,
210(18271.
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52 I.V 4848
The Vnited State* LAW WEEK
6-26-84
which follows, we agree with the Court of Appeals that Con-
?r«" did not have a specific intention on the applicability of
the "bubble concept in these eases, and conclude that the
EP.Vi use of that concept here is a reasonable policy choice
for the agency to make.
Ill
In the 1950's and the 1960's Congress enacted a series of
statutes designed to encourage and to assist the States in
curtailing air pollution. See generally Train v. Natural Re-
louren Defense Council, Inc., 421 U. S. GO, 63-64 (1975).
The Clean Air Amendments of 1970, Pub. L. 91-604,34 Slat.
1676, "sharply increased federal authority and responsibility
in the continuing effort to combat air pollution," 421 U. S., at
64. but continued to assign "primary responsibility for assur-
ing air quality" to the several States, 84 Stat. 1678. Section
109 of the 1970 Amendments directed the EPA to promulgate
National Ambient Air Quality Standards (NAAQS**)" and
S110 directed the States to develop plans (SIP's) to imple-
ment the standards within specified deadlines. In addition,
$ HI provided that major new sources of pollution would be
required to conform to technology-based performance stand-
ards; the EPA was directed to publish a list of categories of
sources of pollution and to establish new source performance
standards (NSPS) for each. Section lll(e) prohibited the
operation of any new source in violation of a performance
standard.
Section lll(a) defined the terms that are to be used in set-
ting and enforcing standards of performance for new station-
ary sources. It provided:
"For purposes of this section:
"(3) The term 'stationary source' means any building,
structure, facility, or installation which emits or may
emit any air pollutant." 84 Stat. 16S3.
In the 1970 Amendments that definition was not only appli-
cable to the NSPS program required by $111, but also was
made applicable to a requirement of § 110 that each state im-
plementation plan contain a procedure for reviewing the loca-
tion of any proposed new source and preventing its construc-
tion if it would preclude the attainment or maintenance of
national air quality standards."
In due course, the EPA promulgated NAAQS's, approved
SIP's. and adopted detailed regulations governing NSPS's
for various categories of equipment. In one of its programs,
the EPA used a plantwide definition of the term "stationary
source." In 1974, it issued NSPS's for the nonferrous smelt-
ing industry that provided that the standards would not
apply to the modification of major smelting units if their in-
creased emissions were offset by reductions in other portions
of the same plant."
Nonattainment
The 1970 legislation provided for the attainment of primary
NAAQS'd by 1975. In many areas of the country, particu-
larly the most industrialized States, the statutory goals were
"Primary standards were defined as those whose attainment and main-
tenance wen necessary to protect the public health and secondary stand-
ards were intended to specify a level of air quality that would protect the
public welfare.
»Se« H UOfax2>(Di and ll, To Breathe
•See Report of the National Coiwnission on
Clean Air. pp. 3.3-20 thru 3.3-33 U9$l>.
•Comprehensive bills did pass both chamoers of Congrest: the Confer-
ence Report wu rejected Ji the Senau. . 122 Cong. Rec. 34373-34403,
34405-34418 U976I.
• for example, it stated:
•Particularly with regard to the orunary NAAQS a. Congress and the
Courts have made clear thai economic considerations mmt be subordinated
to NAAQ5 achievement and maintenance. Whu<. t'.ie ruling allows for
some growth in area* violating a NAAQS if the iut t*.:: -. to insure fur-
ther progress toward NAj»(JS achievem«:tt, the J.;t .toet not allow eco-
nomic growth to be aecommadated at thee -;•-. - uf the public health." 41
Fed. Ret. 53327 (1976).
• In January 1979, the EPA noted that the '97B Ruling was ambiguous
concerning this iasue:
"A number of comnienters indictrM thr need for a n-vre explicit definition
of 'source.' Some readers found that it was undxar under the 1976 Ruling
whether a plant with a number of different proces-ts and eremion point*
would be considered a single source. The changes set forth betewefine a
source as 'any structure, building, facility, equipment, in
ation (or combination thereof) which i» located on one or
or adjacent properties and which is owned or operated by the
(or by persona under common control.' This definition precludes a large
plant from being separated into individual production lines for purposes of
determining applicability of the oflf et requirements.* 44 Fed. Reg. 3276.
•Specifically, the controversy in this ease involves the meaning of the
term "major stationary MURM* in I I72(b*6) of the Act. 42 IT. S. C.
1 7303bK6>. The meaning of the term -proposed source* in i 173(2) of th«
Act. 42 U. S. C. |730Ji21, is not at i**ue.
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The United Stales LAW WEEK
52 LW 4849
ctmber 21,1976. 91 Stat. 745. The deadline for attainment
of the primary NAAQS's was extended until December 31,
1982, and in some eases until December 31, 1987, but the
SIP's were required to contain a number of provision* de-
signed to achieve the goals as expeditiously as possible."
Most significantly for our purposes, the statute provided
that each plan shall:
"(6) require permits for the construction and opera-
tion of new or modified major stationary sources in ac-
cordance with section 173 " 91 Stat. 747.
Before issuing a permit, i 173 requires the state agency to
determine that (1) there will be sufficient emissions reduc-
tions in the region to offset the emissions from the new
source and also to allow for reasonable further progress to-
ward attainment, or that the increased emissions will not ex-
ceed an allowance for growth established pursuant to
J172(b)(5); (2) the applicant must certify that his other
sources in the State are in compliance with the SIP, (3) the
• agency must determine that the applicable SIP is otherwise
being implemented, and (4) the proposed source complies
with the lowest achievable emission rate (LAER)."
The 1977 Amendments contain no specific reference to the
"bubble concept." Nor do they contain a specific definition
of the term "stationary source," though they did not disturb
the definition of "stationary source" contained in S lll(a)(3),
applicable by the terms of the Act to the NSPS program.
Section 302(j), however, defines the term "major stationary
source" as follows:
'Thus, among other requirements. I K2(b) provided that th« SIP'S
11
*(3) require, in the interim, reasonable Anther progre** (as defined in
section 171(1)) including aueh reduction in emissions from existing sources
in the area at may be obtained through the adoption, at * minimum. of res-
flonably available control technology;
"(4) include a comprehensive, accurate, current inventory of actual
•minions from all sources (aa provided by rule of the Administrator) of
•ach such pollutant for each such area which is revised and resubmitted aa
frequently aa may be necessary to assure that the requirements of pan-
graph (3) are met and to asscjs the need for additonal reductions to assure
attainment of each standard by the date required under paragraph (1);
t$) expressly identify and quantify the emissions, if any. of any such
pollutant which will be allowed ;? mult from the construction and opera-
tion of major new or modified miionary sources for each such area;.. .
•(8) contain emission limitations, schedules of compliance and such other
measures as may be necessary to meet the requirements of this section."
•1 Stat. 747.
Section 171(1) provided:
"(1) The term Ytasoiuble further progress' means annual incremental
reductions in emissions of the applicable air pollutant (including substantial
reductions in the early yean fallowing approval or promulgation of plan
provision under this pan art! section 110UX2XI) and regular reductions
thereafter) which are suffici int in the judgment of the Administrator, to
provide for attainment of th .• applicable national ambient air quality stand-
ard by the date required >':. section 172U)," Id., at 746.
"Section 171(3) prorH .1:
"(3) The term low*'.; achievable emission rate' means for any source,
that rate of emission which reflects—
*IA) the most striiigent envssion limitation which is contained in the im-
plementation plan of any State for such class or category of source, unless
the owner or operator of th* proposed source demonstrates that such limi-
tations an not achievable, or
*(B) the most stringent emission limitation which is achieved is practice
by such class or category of source, whichever is more stringent.
•In no event shall the application of this term permit a proposed new or
modified source to emit any pollutant in excess of the amount allowable
under applicable new source standards of performance." Ibid.
The LA£R requirement is defined in terms that make it even more
stringent than the applicable new source performance standard developed
under i 111 of the 1970 statute.
•fj) Except as otherwise expressly provided, the
terms 'major stationary source' and 'major emitting facil-
ity* mean any stationary facility or source of air pollut-
ants which directly emits, or has the potential to emit,
one hundred tons per year or more of any air pollutant
(including any major emitting facility or source of fugi-
tive emissions of any such pollutant, as determined by
rule by the Administrator}.'' 91 Stat. 770.
The legislative history of the portion of the 1977 Amend-
ments dealing with nonattainment areas does not contain any
specific comment on the "bubble concept" or the question
whether a plantwide definition of a stationary source U per-
missible under the permit program. It does, however,
plainly disclose that in the permit program Congress sought
to accommodate the conflict between the economic interest in
permitting capital improvements to continue and the environ-
mental interest in improving air quality. Indeed, the. House
Committee Report identified the economic interest as one of
the two main purposes" of this section of the bill. It stated:
"Section 117 of the bill, adopted during full committee
markup establishes a new section 127 of the Clean Air
Act. The section has two main purposes: (1) to allow
reasonable economic growth to continue in an area while
making reasonable further progress to assure attain-
ment of the standards by a fixed date; and (2) to allow
States greater flexibility for the former purpose than
EPA's present interpretative regulations afford.
"The new provision allows States with nonattainment
areas to pursue one of two options. First, the State
may proceed under EPA's present tradeoff* or 'offset'
ruling. The Administrator is authorized, moreover, to
modify or amend that ruling in accordance with the in-
tent and purposes of this section.
"The State's second option would be to revise its im-
plementation plan in accordance with this new provi-
sion." H. R. Rep. No. 95-294, p. 211 (1977).B
The portion of the Senate Committe Report dealing with
nonattainment areas states generally that it was intended to
"supersede the EPA administrative approach," and that ex-
pansion should be permitted if a State could "demonstrate
that these facilities can be accommodated within its overall
plan to provide for attainment of air quality standards." S.
Rep. 95-127, p. 55 (1977). The Senate Report notes the
value of "case-by-case review of each new or modified major
source of pollution that seeks to locate in a region exceeding
an ambient standard," explaining that such a review "re-
quires matching reductions from 'existing sources against
emissions expected from the new source in order to assure
that introduction of the new source will not prevent attain-
• During the floor debates Congrc!;man Waxman remarked that the leg-
islation struck
"a proper balance between environmental controls and economic growth in
the dirty air areas of America. . . . There is no other single issue which
more dearly poses the conflict between pollution control and new jobs.
We have determined that neither need be compromised. . ..
"This is a fair and balanced approach, which will not undermine our eco-
nomic vitality, or impede achievement of our ultimate environmental objec-
tives.' 123 Cong. Ree. 27076 (1977).
The second "main purpose" of the provisos—allowing the States
•greater flexibility" than the EPA's interpretative ruling—as well as the
reference to the EPA'i authority to amend its ruling in accordance with the
intent of the section, is entirely consistent with the view that Congress did
not intend to freest the definition of iourte contained in the existing regu-
lation into a rigid itatutory requirement.
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S2 LV *850
The United State* LAW WEEK
6-26-84
ment of the applicable standard by the statutory deadline."
Ibid. This description of a case-by-case approach to plant
additions, which emphasizes the net consequences of the con*
struction or modification of a new source, aa well as its impact
on the overall achievement of the national standards, was
not. however, addressed to the precise issue raised by this
ease.
Senator Muakie made the following remarks:
"I should note that the test for determining whether a
new or modified source is subject to the EPA interpreta-
tive regulation (the Offset Ruling]—and to the permit re-
quirements of the revised implementation plans under
the conference bill—is whether the source will emit a
pollutant into an area which is exceeding a national ambi-
ent air quality standard for that pollutant—or precursor.
Thus, a new source is still subject to such requirements
aa lowest achievable emission rate' even if it is con-
structed as a replacement for an older facility resulting
in a net reduction from previous emission levels.
"A source—including an existing facility ordered to
• convert to coal—is subject to all the nonattainment re-
quirements as a modified source if it makes any physical
change which increases the amount of any air pollutant
for the standards in the area are exceeded." 123 Cong.
Rec. 26847 (1977).
VI
As previously noted, prior to the 1977 Amendments; the
EPA had adhered to a plantwide definition of the term
"source" under a NSPS program. After adoption of the 1977
Amendments, proposals for a plantwide definition were con-
sidered in at least three-formal proceedings.
In January 1979, the EPA considered the question whether
the same restriction on new construction in nonattaiment
areas that had been included in its December 1976 ruling
should be required in the revised Sip's that were scheduled
to go into effect in July 1979. After noting that the 1976 rul-
ing was ambiguous on the question "whether a plant with a
number of different processes and emission points would be
considered a single source," 44 Fed. Reg. 3276 (1979), the
EPA, in effect, provided a bifurcated answer to that ques-
tion. In those areas that did not have a revised SIP in effect
by July 1979, the EPA rejected the plantwide definition; on
the other hand, it expressly concluded thaf tV plantwide ap-
proach would be permissible in certain cii^amstar.ces if au-
thorized by an approved SIP. It stated:
"Where a state implementation plan is revised and im-
plemented to satisfy the requirements of Fan D, includ-
ing the reasonable further progress requirement, the
plan requirements for major modifications may exempt
modifications of existing facilities that are accompanied
by intrasource offsets so that there <& no net increase in
emissions. The agency endorser, such exemptions,
which would provide greater fiexit Jity to sources to ef-
fectively manage their air emissions at least cost."
- Ibid*
•la the MAI* ruling, the EPA added: ' •••
The above exemption is permitted under the SIP because, to be approved
under Pan D, plan revisions due by January 1979 must contain adopted
measures assuring that reasonable further prrgms will be made. Fur-
thermore, in most circumstances, the measures adopted by January 1979
Bust be sufficient to actually provide for attainment of the standards by
the dates required under the Act, and in all dmunsunees measures
adopted by 1982 must provide for attainment. See Section 112 of the Act
and 43 2167J-2167T [May 19. 1978). Also. Congress intended under See-
tun 173 of the Act that States would have some latitude to depart from the
strict requirements of this Ruling when the Slate plan is revised and ia
being carried out in accordance with Part D. Under a Pan 0 plan, there-
fore, then is less need to subject a modification of an existing facility to
In April, and again in September 1979, the EPA publif
additional comments in which it indicated that revised
could adopt the plant-wide definition of source'
nonattainment areas in certain circumstances. See id., at
20372, 20379, 51951, 51924, 51958. On the latter occasion,
the EPA made a formal rulemaking proposal that would have
permitted the use of the "bubble concept" for new installa-
tions within a plant as well as for modifications of existing
units. It explained:
"'Bubble' Exemption: The use of offsets inside the
same source is called the "bubble.* EPA proposes use of
the definition of 'source' (see above) to limit the use of
the bubble under nonattainment requirements in the fol-
lowing respects:
"L Part D SIPs that include all requirements needed
to assure reasonable further progress and attainment by
the deadline under section 172 and that are being carried
out need not restrict the use of a plantwide bubble, the
same as under the PSD proposal.
"ii. Part D SIPs that do not meet the requirements
specified must limit use of the bubble by including a defi-
nition of 'installation' as an identifiable piece of process
equipment.""
Significantly, the EPA expressly noted that the word
"source" might be given a plantwide definition for some pur-
poses and a narrower definition for other purposes. It
wrote:
"Source means any building structure, facility, or instal-
lation which emits or may emit any regulated pollutant.
'Building, structure, facility or installation' means
in PSD areas and in nonattainment areas except
the growth prohibitions would apply or where no ade-
quate SIP exists or is being carried out." Id., at
51925."
The EPA's summary of its proposed ruling discloses a flexi-
ble rather than rigid definition of the term "source" to imple-
ment various policies and programs:
"In summary, EPA is proposing two different ways to
define source for different kinds of NSR programs:
"(1) For PSD and complete Part D SIPs, review
would apply only'to plants, with an unrestricted plant-
wide bubble.
"(2) For the offset ruling, restrictions on construction,
and incomplete Part D SIPs, review would apply to both
plants and individual pieces of process equipment, caus-
ing the plant-wide bubble not to apply for new and modi-
fled major pieces of equipment.
LAER and other stringent requirements if the modification is accompanied
by sufficient intrasource offsets so that there is no net increase in emis-
sions.* 44 Fed. Reg. 3277 U9T9).
•Id., at 51936. Later in that ruling, the EPA added: '
•However, EPA believes that complete Part 0 SIPs," which contain
adopud and enforceable requirements sufficient to assure ittainment, may
apply the approach proposed above for PSD. with plant-wide review but no
review of individual pieces of equipment. Use of only a plant-wide defini-
tion of source w»fl permit plant-wide offsets for avoiding NSR of new or
modified pieces of equipment. However, this is only appropriate once a
SIP is adopted that will assure the reductions in existing emissions neces-
sary for attainment. St* 44 PR 3276 col. 3 (January 16. 1979). I£ifce
level of emissions allowed in the SIP is low enough to assure rea
ftuther progress and attainment, new contraction or raodifieatio
enough offset credit to prevent an emission increase should not je
attainment.' Id., at 51933.
•In its explanation of why the use of the bubble concept was especially
appropriate in preventing significant deterioration (PSD) in clean air areas.
the EPA stated: "In addition, application of the bubble on a plant-wide
basis encourages voluntary upgrading of equipment, and growth in produc-
tive capacity.* Id., at 51932.
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The United State* LAW WEEK
52 LW 4331
"In addition, for the restrictions on construction, EPA
is proposing to define "major modification' to as to pro-
hibit the bubble entirely. Finally, an alternative dis-
cussed but not favored is to have only pieces of process
equipment reviewed, resulting in no plant-wide bubble
and allowing minor pieces of equipment to escape NSR
regardless of whether they are within a major plant."
Id., at 51934.
la August 1980, however, the EPA adopted a regulation
that, in essence, applied the basic reasoning of the Court of
Appeals in this case. The EPA took particular note of the
two then-recent Court of Appeals decisions, which had cre-
ated the bright-line rule that the bubble concept should be
employed in a program designed to maintain air quality but
not in one designed to enhance air quality. Relying heavily
on those cases,* EPA adopted a dual definition of "source"
for nonatUinment areas that required a permit whenever a
change in either the entire plant, or one of its components,
would result in a significant increase in emissions even if the
increase was completely offset by reductions elsewhere in the
plant. The EPA expressed the opinion that this interpreta-
tion was "more consistent with congressional intent" than the
plantwide definition because it "would bring in more sources
or modifications for review" 45 Fed. Reg. 52697 (1980), but
its primary legal analysis was predicated on the two Court of
Appeals decisions.
In 1381 a new administration took office and initiated a
"Government-wide reexamination of regulatory burdens and
complexities." 46 Fed. Reg. 16281. In the context of that re-
view, the EPA Devaluated the various arguments that had
been advanced in connection with the proper definition of the
term "source" and concluded that the term should be given
the name definition in both nonattainment areas and PSD
areas
In explaining its conclusion, the EPA first noted that the
definitional issue was not squarely addressed in either the
statute JT its legislative history and therefore that the issue
i volvej an agency "judgment as how to best carry out the
Act." Ibid. It then set forth several reasons for concluding
that the plantwide definition was more appropriate. It
pointed out that the dual definition "can act as a disincentive
to new investment and modernization by discouraging modifi-
catic.is to existing facilities" and "can actually retard
progre.-.<: in air pollution control by discouraging replacement
ui oiihr, dirtier processes or pieces of equipment with new,
cleaner ones." /bid. Moreover, the new.definition "would
simplify EPA's rules by using the same definition of 'source*
for PPD, nonattainment new source review and the construc-
tion moratorium. This reduces confusion and inconsis-
tency." Ibid. Finally, the agency explained that additional
requirements that remained in place would accomplish the
fl'tirfamcntal purposes of achieving attainment with NAAQ's
as fxpeditiously as possible." These conclusions werj
'"The dual definition also is consistent with Alabama Pawr ^nd
ASA^CU. Alabama Paver held that EPA had bread discretion tc Jeftne
the constituent terms of 'source' so as best to effectuate the purpost. of the
statute. Different definition of 'source' tan therefore be used for differ-
ent sections of the statute. . ..
"Moreover, Alabama Fou.tr and ASARCO taken together suggest that
their is a distinction between Clean Air Act programs designed to tnlianet
air quality vd 'June designed only to maintain air quality. .. .
•Promulgation of the dual definition follow: the mandate of Alabama
Povrr; which held that, while EPA could not define •source* aa a combina-
tion of sources, EPA had broad discretion to define 'building,1 •structure,'
•facility,' and •installation' so a* to best accomplish the purposes of the Act."
45 Fed. Reg. 52697 (19eO>.
• It uated:
expresed in a proposed rulemakmg in August 1981 that was
formally promulgated in October. See id., at 50766.
VII
In this Court respondents expressly reject the basic ration-
ale of the Court of Appeals' decision. That court viewed
the statutory definition of the term "source" as sufficiently
flexible to cover either a plantwide definition, a narrower
definition covering each unit within a plant, or a dual defini-
tion that could apply to both the entire "bubble" and its com-
ponents. It interpreted the polities of the statute, however,
to mandate the plantwide definition in programs designed to
maintain clean air and to forbid it in programs designed to im-
prove air quality. Respondents place a fundamentally dif-
ferent construction on the statute. They contend that the
text of the Act requires the EPA to use a dual definition—if
either a component of a plant, or the plant as a whole, emits
over 100 tons of pollutant, it is a major stationary source.
They thus contend that the EPA rules adopted in 1980, inso-
far as they apply to the maintenance of the quality of clean
air, as well as the 1981 rules which apply to nonattainment
areas, violate the statute."
Statutory Language
The definition of the term stationary source in 5 lll(a)(3)
refers to "any building, structure, facility, or installation"
which emits air pollution. See sujm, at 8. This definition
is applicable only to the NSPS program by the express terms
of the statute; the text of the statute does not make this defi-
nition applicable to the permit program. Petitioners there-
fore maintain that there is no statutory language even rele-
vant to ascertaining the meaning of stationary source in the
permit program aside from S 302(j), which defines the term
major stationary source. See supra, at 12. We disagree
with petitioners on this point.
The definition in §302fj) tells us what the word "major"
means—a source must emit at least 100 tons of pollution to
qualify—but it sheds virtually no light on the meaning of the
term "stationary source." It does equate a source with a fa-
cility—a "major emitting facility" and a "major stationary
source" are synonymous under i 302(j). The ordinary mean-
ing of the term facility is some collection of integrated ele-
ments which has been designed and constructed to achieve
some purpose. Moreover, it is certainly no affront to com-
mon English usage to take a reference to a major facility or a
major source to connote an entire plant as opposed to its con-
stituent parts. Basically, however, the language of §302(j)
simply does not compel any given interpretation of the term
source.
Respondents recognize that, and hence point to § Hl(aX3).
Although the definition in that section is not literally appli-
"S. State* will remain subject to the requirement that far all
nonattainment areas they demonstrate attainment of NAAQS as expe-
ditiously as practicable and show reasonable further progress toward such
attainment. Thus, the proposed change in the mandatory scope of
ooruttainment new source review should not interfere with the ftinda-
runtal purpose of Pan D of the Act.
•6. New Source Performance Standards (NSPS) will continue to apply
to many new or modified facilities and will assure use of the most up-to-
date pollution control techniques regardless of the applicability of
nonatuinment area new source re vie v,
"7. In order to avoid nonattainment area new source review, a major
plant undergoing modifcation must show that it will not experience a sig-
nificant net increase in «nu;ions. Where overall emissions increase tig*
nificandv. renew will continue to be- required." 4$ Fed. Reg. 163SU19E1).
• •What EPA may not do. however, is define all four terms to mean only
plants. In the 1980 PSD rules. EPA did just that: EPA compounded the
mistake in the 1981 rules here under review, in which it abandoned the
dual definition.* Brief for Respondents 39. n. 56.
-------
32 I.W 4832
The United State* LAW WEEK
6-26-84
table to the permit program, it sheda as much light on the
meaning of the word .source as anything in the statute.* As
respondents point out, use of the words "building, structure,
facility, or installation," as the definition of source, could be
read to impose the permit conditions on an individual building
that is a part of a plant." A "word may have a character of
its own not to be submerged by ita association. "' Russell
Motor Car Co. v. United State*. 261 U. S. 514, 519 (1923).
On the other hand, the meaning of a word must be ascer-
tained in the context of achieving particular objectives, and
the words associated with it may indicate that the true mean-
ing of the series is to convey a common idea. The language
may reasonably be interpreted to impose the requirement on
any discrete, but integrated, operation which pollutes. This
gives meaning to all of the terms — a single building, not
part of a larger operation, would be covered if it emits more
than 100 tons of pollution, as would any facility, structure, or
installation. Indeed, the language itself implies a bubble
concept of sorts: each enumerated item would seem to be
treated as if it were encased in a bubble. While respond-
ents insist that each of these terms must be given a discrete
meaning, they also argue that J lll(a){3) defines "source" as
that term is used in J302(j). The latter section, however.
equates a source with a facility, whereas the former defines
source as a facility, among other items.
We arc net persuaded that parsing of general terms in the
text of the statute will reveal an actual intent of Congress."
We know full well that this language is not dispositive; the
terms are overlapping and the language is not precisely di-
rected to the question of the applicability of a given term in
the context of a larger operation. To the extent any con-
gressional 'Intent" can be discerned from this language, it
would appear that the listing of overlapping, illustrative
terms was intended to enlarge, rather than to confine, the
scope of the reency's power to regulate particular sources in
order to effectuate Uie policies of the Act.
Legislative
In addition, respondents argue that the legislative history
and policies of the Act foreclose the plantwide definition, and
that the EFA;s interpretation is not entitled to deference be-
cause it represents a sharp break with prior interpretations
of the Act.
Based on our examination of the legislative history, we
• W« note that the EP/. in fact adopted the language of that definition in
it* regulation* under the permit program. 40 CFR ISl.lStjXIXiWii)
(1983).
•Since the regulations give the State* the option to define in individual
unit a* a so^ct. :*« 40 CFR I il.lS'j)'!). petitioner* do not dispute chat
the terms can be read as resoondenu suggest.
"The argument b»'-V on the test of 1 173, which define* the permit re-
quirement for )" , -;u;r jnent are**, is a dauk example of circular reason-
ing. On* nf :•« permi'. requirements is that "the proposed source is re-
quired to con pi) vjth the lowest achievable emission rate" (LA£R).
Although a SUtf itoy subnv* a revised SIP that provides for the waiver of
ano'!.*r requires •«—'••.« 'offset condition" — the SIP may not provide far
a waiver of the LAER condition for any proposed source. Respondent*
argue that the plant-wide defirJtion of the term "source" makes it unnec-
essary for newly constructed units within the plant to satisfy the LAER
requirement if their emissions are offset by the reductions achieved by the
retirement of oUi. equipment. Thus, according to respondents, the
plant-wide definition allows what the statute eipliciLlj prohibits— the
waiver of the LAER requirement for the newly constructed units. But
this argument proves nothing because the statute does not prohibit the
waiver unless the proposed new unit is indeed subject to the permit pro-
gram. If it a not. the statute does not impose the LAER requirement at
all and there is no need to reach any waiver question. In other words,
1 173 of the statute merely deals with the consequences of the definition of
the term "Murce" and does not define the term.
isiblefor
i.^Pn
agree with the Court of Appeals that it is uniUumiti
The general remarks pointed to by respondents "wer
ously not made with this narrow issue in mind and they
not be said to demonstrate a Congressional desire., .."
Jcxtl Ridge Coal Corp. v. Mine Workers, 325 U. S. 161,
168-169 (1945). Respondents' argument based on the legis-
lative history relies heavily on Senator Muskie's observation
that a new source is subject to the LAER requirement."
But the full statement is ambiguous and like the text of ! 173
itself, this comment does not tell us what a new source is,
much less that it is to have an inflexible definition. We find
that the legislative history as a whole is silent on the precise
issue before as. It is, however, consistent with the view
that the EPA should have broad discretion in implementing
the policies of the 1977 Amendments.
More importantly, that history plainly identifies the policy
concerns that motivated the enactment; the plantwide defini-
tion is fully consistent with one of those concerns—the allow-
ance of reasonable economic growth—and, whether or not we
believe it most effectively implements the other, we must
recognize that the EPA has advanced a reasonable explana-
tion for its conclusion that the regulations serve the environ-
mental objectives as well. See supra, at 19-20, and n. 29;
see also supra, at 17, n. 27. Indeed, its reasoning is sup-
ported by the public record developed in the rulemaking
process,* as well as by certain private studies."
Our review "of the EPA's varying interpretations of the
word "source"—both before and after the 1977 Amend-
ments—convince us that the agency primarily responsible_for
administering this important legislation has consister
terpreted it flexibly—not in a sterile textual vacuum,
the context of implementing policy decisions in a technical
and complex arena. The fact that the agency has from time
to time changed its interpretation of the term source does
not, as respondents argue, lead us to conclude that no defer-
ence should be accorded the agency's interpretation of the
statute. An initial agency interpretation is not instantly
carved in stone. On the contrary, the agency, to engage in
informed rulemaking, must consider varying interpretations
and the wisdom of its policy on a continuing basis. More-
over, the fact that the agency has adopted different defini-
tions in different contexts adds force to the argument that
the definition itix L, flexible, particularly since Congress has
never indicated any disapproval of a flexible reading of the
statute.
Significantly, it was not the agency in 19SO, but rather the
Court of Appeals that read the statute inflexibly to command
a plantwide definition for programs designed to maintain
clean air and to forbid such a definition for programs de-
signed to improve air quality. The distinction the court
drew'may veil .be a sensible one, but our labored review of
the probleri has surely disclosed that it is not a distinction
•Sec >v.ii. at —. We note that Senator Musice was not critical of
the EPA , use of the bubble concept in one NSPS program prior to the
W~ IT tndihenta. See luonj, at ——.
. • Set, for example, the statement of the Nev. York State Department of
Environmental Conservation, pointing out that denying a source owner
flexibility in selecting options nude it "simpler and cheaper to operate old,
more polluting sources than to trade up. ..." App. 128-129. ^^^
•"Economists have proposed that economic incentives be lubst^^Hir
the cumbersome administrative-legal framework. The objecti^^B to
make the proflt and cost incentives that work so well in the marketplace
work for pollution control . . . [The "bubble* or "netting' concept] is a first
attempt in this direction. By giving a plant manager flexibility to find the
places and processes within a plant that control emissions most cheaply,
pollution control can be achieved more quickly and cheaply." L. Lave £
G. Omenn. Cleaning the Air Reforming the Clean Air Act 28 (2981) (foot-
note omitted).
-------
6-26-84
The United Stole* LAW WEEK
52 LW 4353
that Congress ever articulated itself, or one that the EPA
found in the statute before the courts began to review the
legislative work product. We conclude that it was the Court
of Appeals, rather than Congress or any of. the
decisionmaken who are authorized by Congress to adminis-
ter this legislation, that was primarily responsible for the
1980 position taken by the agency.
Policy
The arguments over policy that are advanced in the par-
ties' briefs create the impression that respondents an now
waging in a judicial forum a specific policy battle which they
ultimately lost in the agency and in the 32 jurisdictions opting
for the bubble concept, but one which was never waged in the
Congress. Such policy arguments are more properly ad-
dressed to legislators or administrators, not to judges.*
In this case, the Administrator's interpretation represents
a reasonable accommodation of manifestly competing inter-
ests and is entitled to deference: the regulatory scheme is
technical and complex," the agency considered the matter
in a detailed and reasoned fashion,* and the decision involves
reconciling conflicting policies." Congress intended to ac-
commodate both interests, but did not do so itself on the level
of specificity presented by this case. Perhaps that body con-
sciously desired the Administrator to strike the balance at
this level, thinking that those with great expertise and
charged with responsibility for administering the provision
would be in a better position to do so; perhaps it simply did
not consider the question at this level; and perhaps Congress
was unable to forge a coalition on either side of the question,
and those on each side decided to take their chances with the
scheme devised by the agency. For judicial purposes, it
matters not which of these things occurred.
Judges are not experts in the field, and are not part of
either political branch of the Government. Courts must, in
some cases, reconcile competing political interests, but not on
the basis of the judges' personal policy preferences. In con-
trast, an agency to which Congress has delegated poUeymak-
ing responsibilities may, within th? ILruts of that delegation,
properly rely upon the incumbent administration's views of
wise policy to inform its judgments. While agencies are not
directly accountable to the people, the Chief Executive is,
and it is entirely appropriate for thia political branch of the
Government to make .such policy choices—resolving the cori-
peting interests which Congress itself either inadvertently
did not resolve, or intentionally left to be resolved by the
agency charged with the administration of the statute in light
of everyday realities.
When a challenge to an agency constricti<"< •?. a statutory
provision, fairly conceptualized. reiUy cpile^s on the wisdom
of the agency's policy, rather than .•' ..her ii is a reasonable
• Respondents point out if a bnr.>i new faetiry that w£ emit over 100
tan* of pollutants it constructed in * nonatuini.uv/. — ea. that plant must
obtain a permit pursuant to i l^lbl-'S) and in order to do *o, it must satisfy
the 1113 conditions, iaeludirt; the LA£R requirement, ilespondenta
argue if an eld plant containing several larj > emitting units is to be mod-
ernized by the replacement of one or more units emitting over 100 tan* of
pollutant with a new unit emitting less—but stui more than 100 tons—the
result should be no different iur.ply because "it happens to be built not at a
new site, but within a prt-tnvitig plant." Brief for Respondents *.
•See e. g., Aluminum Co. of America v. Central Lincoln Ptopla' Util.
Cist.. 467 U. S.. at (1984')
-------
-------
APPENDIX VI
STRTE/LOCaL EMISSIONS TSADPC PJOSRAMS
Area
of Rule
Pollutant
As of 4/7/83
Connecticut Generic Bubble
VOC
EPA approved 6/7/82
Maine
Massachusetts
Massachusetts
New Hampshire
Emission Trading:
Bubble and Banking
Generic Bubble for
surface coating
Generic Bubble
Generic Bubble
VOC, SO2, & TSP EPA proposed approval on
6/8/81
VDC
VOC
VDC
EPA approved 3/29/82
EPA proposed approval 2/3/83
Under consideration
Rhode Island Generic Bubble for VOC
Surface Coating
Rhode island Emissions Banking VDC
New Jersey Banking
(Middlesex Co.)
New Jersey
Generic Bubble
Proposed approval on 2/3/83
Proposed approval on 2/3/83
VOC, TSP, S02, Under development
CO, & NOx
SO2
EPA proposed approval 2/3/82
New Jersey
Maryland
Generic Bubble
Emission Trading:
Bubble and Banking
Pennsylvania Banking
(Allegheny Co.)
Pennsylvania
Virginia
Alabama
Georgia
Kentucky
Generic Bubble for
Two Source Types
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble and
Banking Rule
Kentucky Banking
(Jefferson Co.)
VOC
EPA approved 4/6/81
VOC, SO2, & TSP Seing reviewed by Region
S02, TSP, Adopted by County
CO, 5 NOX
VDC
EPA approval 1/19/83
VOC, TSP, & SO2 Under consideration
TSP, SC2, Under development
NOX, & CO
*
VOC, a02, TSP, Under development
NOx, & CO
VDC, TSP, SO2, rtfA proposed approval 6/28/82
fc *J° Final being reviewed by EPA
VDC, SO2, TSP Active Program. Generic bubble
rule also under development
-------
Area
North Carolina
South Carolina
Tennesee
Illinois
Indiana
Michigan
Wisconsin
Louisiana
Oklahoma
Indiana
Kansas
Missouri
Arizona
(Pima County)
California
(Kings)
California
(Kern)
California
San Francisco
California
(Ventura)
California
(San Diego)
California
South Coast, LA
California
(Monterey)
Type of Rule
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
(interim compliance)
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
Generic Bubble
Banking
Banking
Banking
Banking
Banking
Banking
Banking
Banking
Pollutant
TOC
WX, S02, TSP,
CD, & Pb
we
WC, S02, TSP,
CO, & NOX
TOC, SO2, TSP,
CO, & NOX
VOC
WC
we
voc
MX, TSP, S02,
& NOx
WC, TSP, S02
we
WC, SO2, TSP,
CO, & NOX
VOC, TSP, S02
CO, & NOX
-WC, TSP, S02
CO, & NOX
WC, SO2, & TSP
WX, TSP, S02
CO, & NOX
VOC, TSP, S02
CO, & NOX
\TOC, TSP, S02
00, & NOX
VX, TSP, SO2
GO, & NOX
Status
EPA approved 7/26/82 '
EPA approved 9/3/82
Under development
Adopted by State
Being reviewed by EPA
Being reviewed by EPA
Under development
Under consideration
Being redrafted
Under development
Public hearing held
Under development
Beiuj reviewed by EPA
Unzfer -jevelopment
Adopted by county "
Under development
Under development
Program iii place
Adopted by county
Under development
Adopted by county
Adopted by county
-------
Area Type of Rule Pollutant Status
Oregon Bnission Trading: TOC, S02, & TSP EPA approved 8/13/82
Bubble and Banking
Washington Emission Trading: TOC, SO2, & TSP Rule being drafted
Bubble and Banking
Washington Banking TOC, 502 / & TSP Active program; numerous
Seattle/Taccna "deposits", no withdrawls" yet
-------
-------
APPENDIX VII
vv
1
COMPARISON OF SELECTED STATE GENERIC
COMPREHENSIVE EMISSIONS TRADING RULES
August 3, 1982
Prepared by Leslie Sue Ritts, Timothy
Henderson, & Alysia Watanabe
Environmental Law Institute
Washington DC
-------
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APPENDIX VIII
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COMPARISON OF SELECTED STATE EMISSIONS BANKING RULES
(Jefferson County, Puget Sound, Bay Area
Air quality Management District, & Allegheny County)
November 5, 1982
by Leslie Sue Ritts, Timothy R. Henderson
and Alysia Watanabe
1
Environmental Law Institute
Washington DC
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APPENDIX IX
Alii POLLITIOX rOVTHOL DlSTHICT
OF JEFFEIISOS COUNTY
914 EAST BROADWAY
LOUISVILLE. KENTUCKY 40204
PHONE: (502) 587-3327
JEFFERSON COUNTY, KY
EMISSIONS BANK STATUS REPORT
DATE: 82/05/30
POLLUTANT J
R
s Run 3
CONTACT
.1 k E Du f f e y
,C. Ho) brook
ailcy Barton
. !"!, Tu.'i ) ) ey
eith i loser
. F ,
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Tom
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TONS/YR
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Mavr i
Detherage
Hunt, F.E.
Var.rjess
Scott
hitidiman
C.D,
PHONE NO.
606-323-4457
216-524-0200
S13-225-42S2
313-323-2S45
502-452
502-
502-
502-
367
357
5S7
-5573
-3225
-3101
-1361
502-566-4216
804-
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271
-3532
774-2341
502-5S7
-3327
AVAILABLE
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7,8
5. C-
33 . 0
•rS.Sf
.0-
.0
. 0
, 7
1.0
.0
306.7
Interested parties may contact:
tf.T. DeBussrhere, P.E. Ai-r PoMution Control District 502-5S7-3327
Stan Bowling,' Loui^vills Chamber of Commerce 502-532-2421
-------
- 2 -
•
'77*
AlR POLUTIOX (\)XTROL DISTRICT
OF JEFFERSOX COUNTY
914 EAST BROADWAY
LOUISVILLE. KENTUCKY 40204
PHONE: (502) 587-3327
EMISSIONS BANKING TRANSACTIONS - PARTICULATEE
REPORT DATE: 82/06/30
XI»?N
ACC
*
7
10
1
1
8'
3
14
">
2
*}
3
13
5
9
6
12
11
4
PLf.T
ft PLNT
35
58
82
32
82
82
82
97
57
97
US
125
171
185
255
255
870
877
CAMT
JOHN
EFG
EFG
EFC
EFG
BFC
I KFD
IHFD
IHFD
LOAN
LCEP
FHMM
P.E'i i
IHPL
I-HPL
CE
CE
TOTAL
ACC TRAN TRAN
STAT COLE DATE
AU
AU
AA
AA
AA
AA
A.A
AA
AA
AA
AA
AA
AA
AA
AA
'AA
AA
AA
•BANKED
ACCUMULATED
31
Dl
Dl
Wl
D2
Wl
D3
Dl
Wi
W2
Dl
**• 1
*J *
u:
Dl
Dl
D2
Dl
Dl
EM
TOT
SI/ 2/ 5
31.' 3/ 9
79/ 3/12
79 / 5/15
SO/ 4/18
SO/ 4/18
32 / 3/22
SO/ 1/17
79 / £/2£
SO/ 5/30
VS/10/12
82 / 2/16
2V 1/28
80/11/20
80/12/11
82 / 1/19
81/10/22
7S/ 12/28
ISSION3 FOR
AL OFF-SET
LAST TRANSACTION:
DATE - -
CO. - -
W
PL#
0
0
0
82
0
82
0
0
97
97
0
0
0
0 .
0
0
0
0
~HIS
EMI SSI
- 82/
- BFC
1IMITL
D/W
28.
107.
.95.
2.
412.
-73.
' 42.
761.
384.
8.
22.
32,
41.
2.
26.
1 .
180.
197.
•?
0
0
4
8
2
5
6
7
5
0
0
^
8
4
5
7
0
POLLUTANT :
ONS:
3/22
TOTAL
D/W
23.7
107.0
95.0
2.9
412. S
87.8
42.5
75 1 , 6
423.2
9.4
22.0
32 , 0
41.2
2.8
25.4
1 .5
180.7
197.0
1 427 .
54.
ACC
BAL
28. 7
107.0
. 0
92. 1
,0
325 . 0
42.5
.0
.0
32S.O
22.0
32,0
41.2
2.S
25.4
1.5
180,7
1 97 , 0
9
5
PL
B
2
10;
45!
32!
*?'
3'
-4
i
*i-
*!/
18!
19;
-------
- 3 -
AlU POLLITIOX COXTIIOL DISTRICT
OF JEFFEIISOX COLXTY
914 EAST BROADWAY
LOUISVILLE. KENTUCKY 40204
PHONE: (502) 587-3327
EMISSIONS BANKING TRANSACTIONS - SULFUR DIOXIDE
REPORT DATE:
82/06/24
ACC PLNT ACC TRAN TRAN
* . * PLNT STAT CODE DATE
35 CAK7 AU
SI/ 2/ 5
1 113 LOGN AA Bl 79/12/10
4 125 LGEP AA I'l S2/ 2/16
2 171 PHW1 AA Dl SO/ 1 /2S
W
PL*
0
0
0
0
INITL
D/W
TOTAL
D/W
ACC
BAL
PLNT
EAL
197.0 197,0 197.0 197,0
36,0 35,0 36,0 35.0
12900.0' 12900,0 12900.0 12300.0
464,3 454.3 454,3 464,3
TOTAL EAPJKED EMISSIONS FOR THIS POLLUTANT; 13597.3
ACCUMULATED TOTAL OFF-SET EMISSIONS: .0
LAST TRANSACTION:
DATE -
CO, -
- S2/ 2/16
- LGEP
-------
_ 4 -
Am POLUTIOX CO.VTIIOL DISTRICT
OF JEFFERSOX COIXTY
914 EAST BROADWAY
LOUISVILLE. KENTUCKY 40204
PHONE: (S02) 567-3327
EMISSIONS BALING TRANSACTIONS - VOLATILE ORGANIC COMPOUNDS
REPORT DATE: 82/06/30
ACC
11
11
4
4
4
1
1
1
1
15
;5
15
15
-
2
2
5
PLNT
28
28
72
72
72
32
32
32
S2
£2
SJ2
82
32
97
a-r
97
S/
PLNT
EORD
BORD
FORD
FORD
FORD
EFG
EFG
EFC
EFC
BFG
£FC
EFC
EFC
IHFN
IHFN
IHFN
IHFN
ACC
STAT
AA
AA
AA
AA
AA
AA
' A A
AA
AA
AA
AA
A A
AA
AA
AA
AA
IA
CODE
Dl
Wl
Dl
Wi
W2
Dl
Wl
W2
W3
D2
Wl
W2
W3
Dl
Wl
W2
Dl-
TRAN
DATE
81 / S/ 1
31/10/21
SO/ 1/30
31/ 7/30
SI/12/ 1
79/ 3/12
73/ 5/15
SO/ 2/ 4
SO/ 4/13
79 / 3/12
79 / 5/15
317 S/ 1
S1 '10/23
79/10/25
79/1 O/ 1
S2/ I/ 1
SO/ 1/17
W
PL»
0
28
0
72
72
0
32
32
32
0
32
23
741
0
70S
S'5
0
INITL
D/W
25.
15.
429.
342.
16.
102,
4,
3,
27.
669,
35,
25.
10,
334,
74.
137.
45.
0
6
0
0
0
0
0
0
7
0
0
0
0
0
p
7
0
TOTAL
D/W
25.
17,
331 ,
359.
17.
102.
4.
3.
30.
659.
39.
25.
10.
334,
81.
206.
45.
0
2
0
0
0
0
4
£
c;
w
0
6
0
0
0
0
5
0
ACC
BAL
.0
7.8
.0
,0
5.0
.0
.0
,0
53.3
.0
.0
.0
594.4
.0
,0
96.5
,0
-------
- 5 -
6 97 IHF
5 171 PHI«!M AA
9 186 P.EY1 AA
10 I8b REY1
7 255 IHPL
7 255 IHPL IA
13 255 IHPL
13 255 IHPL
12 741 ASHT AA
3 572 GEE2
3 372 CEE2
8 373 GEB3
ci i,~3 CEB3
8 873 CEB3
14 876 CEB5
!A
AA
AA
AA
IA
I A
IA
IA
AA
• •
; .'1
!A
I A
IA
IA
AA
5VJKED
.ATED
Wl
Dl
Ul'
D2
Dl
Wl
D2
Wl
Dl
Dl
Wi
D'i
w:
W2
Dl
tTM
*»• t I
TOT
32 /
SO/
30/
SO/
SO/
82 /
S2/
32 /
8l/
7?/
SO/
SO/
80 /
82 /
or> /
W«*« .•'
iSSI
l/
1
1/23
11/20
11/20
12/
I./
I/
I/
11
1
19
19
10/20
1 1 /
1 07
71
10/
3/
5/
CMS
AL OFF-
16
8
19
8
10
3
875
0
0
0
0
875
0
875
0
0
875
0
875
875
0
FOR THIS
SET
£M 1 35
40.
•
*
*
122,
110,
71,
65,
»
10,
33.
33,
30,
21.
7.
33,
9
t
9
1
0
9
5
0
0
8
3
0
5
5
0
45.
«
»
*
122.
122,
71 ,
71.
10,
3E,
33.
30,
21.
8,
33.
POLLUTANT:
IONS:
0
7
5
1
0
0
5
5
0
S
3
0
s*
5
0
tSGS , 7
125. 2
,0
t /*
.5
, 1
.0
,0
, 0
.0
10. 0
.0
.0
.0
.0
.0
33 . 0
'95,5
» /*
,0
1 .0
.0
,0
.0
,0
10,0
.0
,0
, 0
- -•
,0
33 . 0
LAST TRANSACTION:
EATE - - - B2/ 5/ 3
CO, - - - CEB5
-------
-------
APPENDIX XI
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-------
APPENDIX X
Final EPA approval
Proposed EPA approval
Pollutants;
Bubble Summary
Number of Bubbles*
26
9
Source: EPA
(rev. 4/7/83)
*Doeslnot include bubbles
approved or proposed by
states under generic rules.
TSP -
S02 -
Industry Category;
electric utility
steel
aerospace
package mfg.
tape/paper coating
cement
appliance mfg.
greenhouse
paper/pulp mill
distillery
glass/fiberglass mfg.
petrochemical
foundry
meat packing
6
17
10
5
8
1
Source of mission
2
1
1
2
2
1
3
5
2
1
35~
Reduction
Credits:
change in control -
fuel switch
process change -
shutdown -
purchased ERCs -
leased ERCs -
reduced operation -
EPA Region;
I
II
III
IV
V
VI
VII
VIII
IX
X
17 (incl. 1 with reduced operation)
9
4
2
1
1
l!
Approved
Proposed
2
0
6
9
5
1
2
1
0
0
26
4
1
-------
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«. e >
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-------
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-------
Bubbles Under Review at Headquarters
Company
& Location
Monsanto
Texas City, TX
DuPont
Sabine River, TX
Ashland Petroleum
Ken ton Co., KY
U.S. Steel
Jefferson Co., AL
(as of
Region
6
6
4
4
U.S. 'Steel 3
Fairless Hills, PA
U.S. Steel
Lorain, OH
Arm co
Ashland, KY
Packaging Corp of
Wayne Co. , OH
Uniroyal
5
4
America 5
5
4/12/83)
Industry
Category
petrochemical
petrochemical
petrochemical
steel
*»
steel
steel
steel
package mfg.
plastic mfg.
Pollutant
VOC
voc
VOC
TSP
S02
TSP
TSP
VOC
VOC
Ottawa Co., OH
L
-------
APPENDIX XII
EESCKOTTCN OF ItfiPRESEOTRTIVE BUBBLES
September
Bubbles allow existing plants (or groups of plants) to treat all their
emission points as though they were under a giant bubble and reduce or eliminate
pollution controls where costs are high, in exchange for compensating increased
control at emission sources where control costs are low. They give firms great
flexibility to meet' current or future pollution control requirements more
quickly, make innovative control approaches profitable in a balance-sheet sense,
and can save companies millions of dollars over the cost of conventional controls.
As of the above date:
o EPA had issued an Bnissions Trading Policy (47 ER 15076, April 7, 1982) which
. replaces the original bubble policy and streamlines procedures, giving States
an*-industry more opportunities to use bubbles in many more circumstances and
geographic areas.
Specific bubble approvals and proposals include the following.
1. The 3M Company's bubble in Bristol, PA uses solventless coating of tapes
and an innovative manufacturing process to overcontzol VCC emissions at
three coating, lines in return for less control on other lines. The bubble
resulted in ever a thousand tons per year (TFY) reduction beyond what
would have been,.achieved through compliance with the emissions limits
imposed by the state.
Emissions:
o before bubble or controls:
o with conventional controls:
o after bubble:
o benefit from bubble:
16,000 TPY
7,000 TPY
5,921 TPY
1,079 TPY
Cost savings:
$3 million capital cost in 1st year
$1.2 luiilim annual operating cost
2. At McDonnell-Douglas in St. LDuis, MO a bubble allows the company to use
a water-based solvent in the masking used in an etching process, reducing
• TCC emissions over fifty percent below conventionally controlled
emission levels.
Bnissions:
o before bubble or .controls:
o with convention?; controls:
o after bubble (1&'82):
o after bubble (1985):
o benefit from bubble (1985):
35S TPY
260 TPY
174 TPY
125 TPY
135 TPY
Cbst savings: not available
-------
3*. DuPont's Chanters Works bubble in Ceepwater, NJ is producing annual
VOC emissions reductions of over 2,300 tons below conventional controls,
saving several million dollars In operating expense per year in addition
to over 512 million in capital. 2ie bubble allows DuPont to overcontrol
7 large stacks to 99% in lieu of 85% controls on 119 petrochemical
process-fugitive sources. It will also yield faster conpliance
and easier enforcement, since only the 7 sources need be Inspected and con-
trolled. This bubble was the first to become final under New Jersey's
generic bubble rule allowing the state to' approve VCC bubbles without EPA
review.
Bnissions:
o before bubble or controls:
o with conventional controls;
o after bubble:
o benefit from bubble:
4,750 TPY
2,769 IK
438 TPY
Cost savings:
Cver $12 million in capital;
several Billion annual
operating costs
4. Kentucky Utilities' Green River Station will increase controls on several
emission points to compensate for less stringent controls and use of local
higher sulfur coal at larger emission points. The company expects to save
$1.3 million per year as a result of this strategy, without increasing
emissions.
Bnissions:
o same allowable emissions as before the bubble
Cost Savings:
$1.3 million per year
5< General Electric1s bubble in Louisville, K3T uses emission reduction credits
fraa Jefferson County's emission reduction bark to meet RACT conLTD! require-
. . ments.during a two-year period before GE's VCC-«mitting lines are phased
cut.
-------
Armco Inc.'s steel plant in Middletown, OH is reducing 75? emissions through
a bubble allowing controls en storage piles and other sources of open dust
in lieu of controls on fugitive process emissions fron doors, windows and
wants, saving the company over $14 million in capital and $2.5 million in
annual operating costs. Aonco's comprehensive particulate control program
will reduce emissions by approximately 4000 tons per year — six times
more reductions than would be produced by conventional technology. It will
bring the plant area into attainment with air quality standards. It includes
detailed monitoring to verify expected air quality improvements.
Emissions:
o reduction required by cc
o reductions fron bubble:
o benefit from bubble:
nventional controls: 650 TPY
4000 TPX
3350 TPY
Cost savings:
$14 million in capital costs
$ 2.5*3 million annual operating costs
At Narragansett Public Utilities in Providence, RI, a bubble allows one gener-
ating station to burn higher sulfur (2.2%) fuel oil when a second generating
station bums natural gas or does not operate. Considerable cost savings
be realized through reduced oil imparts of 600,000 barrels annually, along
estimated emission reductions of 1,383 tons of S02«
Bnissions:
o benefit fron bubble:
1,388
Cost savings:
S2-S4 million annually fron reduced
oil iflports of 600,000 bbl./yr.
8. Shenango's cteei plant in Allegheny County, PA is reducing TSF emissions
through a bubble involving open dust controls on roads at the plant in lieu
of controls on fugitive casthouse emissions, saving the company $4 million
in capital and reducing particulate -emissions by over 200 tons per year
more than would have resulted from traditional process-fugitive controls.
* V4=iu'.tion fron bubble: ''
"reductions fron conventional'controls:
• bc-nefit from bubble:
297 "&V
f?'J TPY
Jff SPY
Cost savings:
$4 million in capital costs
-------
9. Under an approved bubble at the CwensA approved SIP.
i
Bnissions:
o before bubble:
o after bubble:
o benefit from bubble;
164.88 Ib./hr.
147.70 Ib./hr.
17.7 Ib./hr.
Oast savin
NDt available
10. For a proposed bubble at D.S. Steel's Fairless Hills, FA facilities, TS?
controls would be traded amoving 12 sources in a sinter plant, saving $7 million
in capital while reducing emissions beyond conventional requirements. The
State is also reviewing a potential S02 bubble in which low sulfur fuels
would be burned in furnaces and boilers in lieu of coke gas desulfurization,-
saving $15 million in capital alone.
•
ISP emissions reduction:
• fron conventional controls
• from h»ihhT^
• benefit fron bubble
902 emissions reduction:
• same as before bubble
1544 Ibs/hr
1549 Ibs/hr
5 Ibs/hr
Cost savings:
$7 million from TSP bubble;
$15 million from SO2 bubble.
11. A bubble proposed by Uhion Carbide in Texas City, TX would use credits from
shutting down a low density polyethlene unit instead of controlling VOC
emissions from petrochemical storage tanks. The bubble would save $3 million
in capital while reducing emissions by 14.5 tons per year.
Emissions:
• credits £«« shutd«-**si
• uncontrolled erfii
• benefit from bubble:
243.3
228.8
TPY
TFY
14.5 1PY
Cost savings:
$3 million in capital costs
-------
-------
APPENDIX XIII
Profile of Interviews
As the following profile details, the interviews covered
a mix of industrial, environmental, governmental and
research groups.
Trade Associations
Individual Compa-
nies:
Environmental
Groups;
Professional
Associations:
American Iron and Steel Institute:
Earle F. Young Jr.; American Petroleum
Institute: Elizabeth Sowell; Chemical
Manufacturers Association: Sanford E.
Gaines ;
Utility Air Regulatory Group: Lewis T.
Kontnik;
Rubber Manufacturers1 Association:
Charles F. Lettow.
ARMCO, Washington D.C.: G.R. Van
Schooneveld; ARMCO, Middletown, Ohio:
John E. Barker;
BF Goodrich, Louisville, Kentucky:
Alice Simpson, Bill Yesovitch?
Chevron U.S.A. Inc., Richmond, Calif.:
P.S. Williams;
General Electric, Louisville, Kentucky:
Edward W. Conners, Keith Moser, Jim
Waldrin;
Louisville Gas and Electric Company,
Louisville Kentucky: Robert P. Van Ness
Monsanto, St. Louis, Missouri:
Charles D. Malloch; Neil E. Prange,
Michael F. Weishaar.
Citizens for z. Better Environment,
Chicago: Kevin Greene; Citizens for a
Better Environment, San Francisco,
California: Jeffrey Gabe? Natural
Resources Defense Council, Washington,
D.C.: David Doniger, David G.v Hawkins.
Association of Local Air Pollution
Control Officials, Washington D.C.:
5. William Becker
Association of Local Air Pollution
Control Officials: John A. Paul,
Chairman, New Source Review Committee.
Dayton, Ohio.
-------
Regional and Local
Agencies; Bay Area Air Quality Management
District, San Francisco, Calif.:
Bruce D. Appel;
Jefferson County Air Pollution
Control District, Louisville, Kentucky:
Michael T. De Busschere?
Monterey Bay Unified Air Pollution
Control District, Salinas, Calif.:
Lawrence D. Odle, Douglas Quetin;
Montgomery County Health District,
Regional Air Pollution Control Agency,
Dayton, Ohio: William T. BurJchart,
John A. Paul, D. David Redic;
South Coast Air Quality Management
District, El Monte, Calif.:
Ed Larson.
State Agencies; Maryland Department of Health and
Mental Hygiene, Office of Environmental
Programs, Baltimore, Maryland: George
P. Ferreri, Bill Bonta Massachusetts
Department of Environmental Quality
Engineering, Boston, Mass.:
Kenneth A. Hagg;
' Pennsylvania Department of Natural
Resources; Bureau of Air Quality Control
Harrisburg, PA: Gary Triplett, John
Salvaggio.
Federal Agencies and
Offices
{excluding EPA): U.S. General Accounting Office,
Program Analysis Division, Washington,
D.C.: Charles W. Bausell, Jr.
Office of Management and Budget,
Washington, D.C.:
Ed Clarke, Art Frass, Christina Lund.
Environmental Pro-
tection Agency,
Headquarters:
Joseph A. Cannon, Associate Admini-
strator, Office of Policy and Resource
Management;
Regulatory Reform Staff: Mi^e Levin,
Ivan Tether, Leonhard J. Ileckeustein,
David Foster, John Palmisano,
John Jaksch;
Office of Policy Analysis: Mah*sh K.
Podar, Steven Seidel;
Stationary Source Compliance Section:
Mark S. Siegler
-------
Office of Air Quality Programs and
Standards:
Christina Griffin, Jerry Kurzweg.
Environmental Protec-
tion Agency,
Regional Offices
Research Institu-
tions:
Universities
EPA Region I, Air Programs Branch,
Boston, Mass.: Marcia Spink;
EPA Region III, Air Programs Branch,
Philadelphia, Pennsylvania: David
Arnold, Gregory Ham;
EPA Region V, Air Programs Branch,
Chicago, Illinois: David Kee,
R. Rothfuss, Richard Dalton,
Mary T. Ryan, Dennis A. Trout;
EPA Region IX, Air Management Division,
San Francisco, Calif.: Nancy Harney,
Lucille van Ommering, Bruce Schaller.
American Enterprise Institute for
Public Policy Research, Washington
D.C.: Marvin H. Kosters;
Environmental Law Institute, Washington
D.C.: Phillip Reed, Leslie Sue Ritts,
Timothy Henderson;
Resources for the Future, Washington D.C.;
Allen Kneese, Clifford S. Russel, Walter
0. Spofford, Paul Portney, Alan Krupnick,
Winston B. Harrington, Henry Peskin;
The Brookings Institution, Washington D.C.
Robert W. Crandall;
The Conservation Foundation, Washington
D.C.: Richard A. Liroff, Chris Duerksen.
California Institute of Technology,
Pasadena, Calif.: Roger G. Noll;
Harvard University, Business School:
Marc Roberts;
Law School: Richard Stewart;
School of .Public Administration:
David Harrison and Albert Nichols;
School of Public Health: Robert
Bespetto;
Southwestern University, School of Law,
Los Angeles: Robert Lutz;
University of California, School of Law', _
Los Angeles, Calif.: James Krier;
University of Chicago, School of Law:
David Currie;
University of Rhode Island, Wickford,
RI: Conrad W. Recksiek.
-------
-------
APPENDIX XIV
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-------
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