United States
                         Environmental Protection
                        Air and Radiation
           October 1991
 Proposed Acid  Rain   Rules
                          The U.S.  Environmental Protection Agency  (EPA) has
                          proposed  four rules containing the core acid  rain  require-
                          ments:  the Permits Rule  (40 CFR Part  72),  the  Allowance
                          System Rule  (40 CFR Part  73), the Continuous Emission
                          Monitoring Rule (40 CFR Part 75), and the Excess Emissions
                          Rule (40 CFR Part 77). EPA will also propose additional rules
                          at a future date. These rules will include requirements for
                          facilities that elect to opt in to the Acid Rain Program (40 CFR
                          Part 74) and for the nitrogen oxide (NOX) control program (40
                          CFR Part 76). This fact sheet discusses the interdependence of
                          the core acid  rain rules.
   Under Title IV of the Clean Air
   Act Amendments of 1990,
Congress authorized the U.S. En-
vironmental Protection Agency
(EPA) to establish the Acid Rain
Program. The principal goal of this
      program is to achieve significant
      environmental benefits through
      reductions in sulfur dioxide (SOz)
      and nitrogen  oxide (NOx) emis-
      sions, the primary components of
      acid rain. To achieve this goal at the
                   Acid Rain Formation
                        Emissions are nixed with oxygen,
                       ozone, and water to form sulturic and
                       nitric acids in the presence of sunlight
                                           Acidic Precipitation
                         Dry Deposition of Acidic
       Coal-fired electric utilities and
       other sources that burn fossil
       fuels emit sulfur dioxide and
          nitrogen oxides
Vehicles emit nitrogen oxides
   and hydrocarbons
Sulfur dioxide and nitrogen oxide emissions react with water vapor and oxidants
in the atmosphere and are chemically transformed into acidic compounds. These
compounds are deposited in rain or snow; the compounds also may join airborne
particles and fall to earth as dry deposition.
lowest cost to society, the program
will employ both traditional and
innovative market-based ap-
proaches for controlling air pollu-
tion. In addition, the program will
encourage energy conservation
and promote pollution prevention.
  The legislation sets as its primary
goal the reduction of annual SOz
emissions by 10 million tons below
1980 levels. To achieve these SOz
reductions, the law requires a two-
phase approach, involving the
trading of annual SOz emission al-
lowances, that gradually tightens
the restrictions placed on  fossil
fuel-fired power plants.
  Phase I begins in 1995 and affects
110 mostly coal-burning electric
utility plants located in 21 eastern
and midwestern states. Phase II,
which begins in the year  2000,
tightens the annual emissions
limits imposed on these  large
higher emitting plants and also sets
restrictions on smaller cleaner
plants fired by coal, oil, and gas. All
existing utility units with an output
capacity of 25 megawatts or greater
and all new utility units will be
affected by Phase n.
                                                                 Printed on Recycled Paper.

       U.S. S02 Emissions Distribution-By Source

                          Other Combustion-2.6%
                    U.S. NOx Emissions Distribution-By Source
     Industrial Combustion-11.6%


             Industrial/Manufacturing Processing-4.6%

              Industrial Combustion-15.6%

              Other Combustion-3.8%
                                                                                    Other 0.6%

                  Source: U.S. EPA. November 1989. The NAPAP Emissions Inventory (Version 2 - 1985 Data).
The Acid Rain Program
Operating  Principles:
Workable,  Flexible,
   The four core acid rain
   rules  propose an integrated,
well-orchestrated system for ac-
complishing the three primary ob-
jectives of the Acid Rain Program:
   Achieve   environmental
    benefits through reductions
    in SOz and NOX emissions.
   Facilitate active trading of
    allowances and use of other
    compliance options to mini-
    mize compliance costs, max-
    imize economic efficiency,
    and permit strong economic
   Promote  pollution preven-
    tion and energy  efficient
    strategies and technologies.
   Each individual rule fulfills a
vital  function in  the larger
program. The allowance trading
system creates low cost rules of ex-
change that minimize government
intrusion  and  make allowance
trading  a viable  compliance
strategy; the permitting process af-
fords sources maximum flexibility
in selecting the most cost-effective
approach to reducing emissions;
the continuous emissions monitor-
ing  system  (CEM)  provides
credible accounting of emissions to
ensure the integrity of the market-
based allowance system and  the
achievement of the reduction goals;
and finally, the excess  emissions
rule provides the incentives to en-
sure self-enforcement, greatly
reducing  the need for govern-
ment action.

Allowance Trading
   The  proposed   Acid   Rain
   Program represents a dramatic
departure  from  traditional "com-
mand and control" regulatory
methods that establish specific in-
flexible emissions limitations with
which all  affected sources must
comply. Instead, the program intro-
duces an allowance  trading system
that harnesses the incentives of the
free market to reduce pollution.
  Under  this system, affected
utility units  will be allocated al-
lowances annually  based on their
historic  fuel consumption and a
specific  emissions  rate. Each al-
lowance permits a unit to emit 1 ton
of SOz during  or  after the year
specified  on the allowance.  For
each ton of  SOz discharged in a
given year, one  allowance is
"retired," that is, it can no longer be
used. During Phase n of the Acid
Rain Program, the  Act will set a
permanent ceiling  (or  "cap") on
total yearly allowance allocations
to utilities at 8.95 million allowan-
ces. This cap firmly restricts emis-
sions  and  ensures  that  the
mandated emissions  reductions
will be achieved and environmen-
tal benefits maintained.
  Allowances may be bought,
sold, or banked. Any person may
acquire  allowances and par-
ticipate in the trading  system. At
the end of the year, utilities are
granted a 30-day "true-up" or
grace period, during  which
allowances may be purchase
necessary, to cover each unit's
emissions for the year. At the end
of the grace period, the allowan-
ces a unit holds in its compliance
account must equal or exceed the
annual SOz emissions recorded by
the monitoring system.  Extra al-
lowances   may  be   sold  or
"banked" for use in future years.

Excess Emissions
  If compliance is not achieved, the
  owners or operators  of delin-
quent units must pay a penalty of
$2,000 per excess ton of emissions.
In addition, violating utilities must
offset the excess SOz emissions
with allowances in the following
year in an amount equivalent to the
excess of the previous  year.  In es-
sence, by giving up allowances to
cover excess emissions, delinquent
units will be compelled to reduce
emissions of SOz   These utiliti^
must submit an excess emissiol
offset plan to EPA that outlines how
these cutbacks will be achieved.

Auctions, Sales, and IPP
Contingency Guarantee
T"1 PA will hold allowance auctions
JCjand sales annually. The auctions
will help to send the market an al-
lowance price signal, as well as fur-
nish utilities with an additional
avenue for purchasing needed al-
lowances. The sales will offer al-
lowances at a fixed price of $1,500.
Anyone can buy allowances in the
direct  sale, but independent
power producers (IPPs) can ob-
tain written guarantees from EPA
stating that they will have first
priority. These guarantees, which
will be awarded on a first-come,
first-served basis, secure the op-
tion for qualified IPPs to purchase
a yearly amount of allowances
over  a  30-year  span. This
provision enables IPPs to assure
lenders that they will have access
to the allowances they need to
build and operate new units.

Impetus to Conserve
'T'he allowance trading  system
 JL contains an inherent incentive
for utilities to undertake conser-
vation measures since for each ton
of SO2 that a utility avoids emit-
ting, one less allowance needs to
be  retired. Energy-efficient
utilities will be able to sell their
surplus allowances at a profit. As
provided in the Act, EPA has also
set aside an allowance reserve to
stimulate energy conservation.
Those utilities that either imple-
ment demand-side energy conser-
vation  programs to  curtail
emissions or install renewable
energy generation  facilities may
be eligible to receive bonus
allowances from this reserve.

The Allowance Tracking
T7PA will institute an electronic
Jdrecordkeeping and notification
system,  called the Allowance
Tracking System (ATS)  to keep
track of allowance transactions and
the status of allowance accounts.
ATS will be the official tally of al-
lowances by which EPA will deter-
mine  compliance  with  the
emissions limitations.  Any party
interested in participating in the
trading system may open an ATS
account by submitting an applica-
tion to EPA. Accounts will contain
information on unit account balan-
ces, emissions,  account repre-
sentatives  (which  must  be
appointed by each trading party),
                        Phase I Sources
During Phase 1,268 units at 110 sources, located primarily in the Midwest and North-
east, will be affected by acid rain regulations. During Phase II, the number of affected
units will increase to 2,200, as smaller cleaner power plants are included in the
regulatory network.
and serial numbers for each al-
lowance. ATS will be computerized
to expedite the flow of data and
assist in the  development of a vi-
able market for allowances.

   Each source must appoint one
   individual to represent the
owners and operators of the
source in all matters relating to
the holding and disposal of
allowances for its affected units.
The designated representative
also will be responsible for all sub-
missions pertaining  to  permits,
compliance plans, emissions
monitoring reports, offset plans,
compliance certification, and other
necessary information.

   The designated representative
   for each source is required to
file a permit application for the
source and a compliance plan for
each affected unit  at the source.
The permits and compliance
plans feature the same flexibility
that characterizes the Acid Rain
Program as a whole; indeed, they
complement the market-oriented
allowance system and foster trad-
ing. For example, they allow
sources to  make "real-time"
allowance  trading decisions
through the use of automatic per-
mit amendments. The  permits
and compliance plans  also  let
sources fashion a compliance
strategy that is tailored to their
individual needs.
  The permit stipulates the initial
allowance allocation for each af-
fected unit at a source. The permit
application must certify that each
unit account will hold a sufficient
number of allowances to cover the
unit's SO2 emissions for the year
and will comply  with the ap-
plicable NOX limit. In addition,
the compliance plans may specify
alternative measures that will be
taken to ensure compliance. Per-
mits will be subject to public com-
ment before approval.

Compliance Options:
Freedom to Choose
   The Acid Rain Program allows
   sources to select their own
compliance strategy. For example,
to reduce SOz and NOX emissions,
an affected source may repower
its units, use cleaner burning fuel,
or reassign some  of its energy
production capacity from dirtier
units to cleaner ones.
  A source may also elect to install
scrubber equipment at one or more
units that reduces emissions by 90
percent or more,  and  possibly
receive extra allowances and an ex-
tension on Phase  I compliance
deadlines.  Still other sources may
decide to reduce electricity genera-
tion  and compensate for reduced
output in one of several ways, in-
cluding the adoption of conserva-
tion  or efficiency measures. Some
of the options will afford the unit
special treatment, such as a
compliance extension or extra al-
lowances. Others, like fuel switch-
ing, require no special  prior
  In either case, the Acid Rain
Program allows affected utilities
to combine these and other op-
tions in any way they see fit in
order to tailor their compliance
plan to the unique needs of each
unit or system.

Continuous Emission
HPhe Acid Rain Program man-
 JL dates  that   each  unit be
equipped with a continuous
emission monitoring (CEM) sys-
tem  that measures and records
emissions hourly. The CEM sys-
tem will be required to monitor
emissions of SOz and NOX, as well
as measure volumetric  flow,
opacity, and diluent gas. The CEM
system is critical to the Acid Rain
Program. It will instill confidence
in allowance transactions by cer-
tifying the existence and quantity
of the commodity being traded.
Monitoring will also ensure,
through accurate accounting, that
the emissions reduction goals are
met. Unlike traditional regulatory
programs, which measure specific
emissions rates,  the Acid  Rain
Program will focus attention on
total emissions.
  The proposed rule also contains
provisions for initial equipment
certification  procedures, periodic
quality assurance and quality con-
trol procedures, and recordkeep-
ing  and reporting. Units will
electronically  report emissions
data to EPA on a quarterly basis.
The  proposed  rule also contains
procedures  for "filling in" for
missing periods.

A Model Program
   EPA established the Acid Rain
   Advisory Committee (ARAC)
to gain broad input  into the
development  of the Acid  Rain
Program, to promote collabora-
tion, and to build consensus.
ARAC  consisted of repre-
sentatives    from    various
stakeholder groups, including
utilities, emissions control equip-
ment vendors, academia, Public
Utility Commissions, and en-
vironmental  groups. ARAC con-
vened six public  meetings  with
hundreds of participants. The
input received  through  this
process  was  critical  to the
development of the core rules of
the Acid Rain Program.
  EPA will maintain this open door
policy as  it  implements the
program, and will continue to
solicit input from the different par-
ties involved. In addition, EPA will
evaluate the benefits and effects of
the program through economic and
environmental studies.
  The Acid  Rain  Program  is al-
ready being  viewed around the
world as the prototype for tackling
emerging environmental issues.
The allowance trading system
capitalizes on  the power of the
marketplace  to  reduce  SQfl
emissions in the most cost-effeU
tive manner possible. The permit-
ting program allows sources the
flexibility to tailor and update
their compliance strategy based
on their individual circum-
  The  continuous  emission
monitoring system lends the
credibility necessary to make the
program work,  and the excess
emissions penalties provide strong
incentives for self-enforcement.
Each of these separate components
contributes to the effective working
of an integrated program that lets
market incentives do the work to
achieve cost-effective emissions
For More Information
T7or more information, write to:

  U.S. EPA Office of Air and
  Acid Rain Division
  Washington, DC 20460

  If you would like to receive other
fact sheets in this series, call the
Acid Rain Hotline at (617) 641-5377
or the EPA Public Information
Center (PIC) at 202-260-2080.

  Fact sheets are available on the
following subjects:

   Allowance System

   Continuous Emission

   Environmental Benefits

   Excess Emissions