EPA 600/5-75-007
April 1975
Socioeconomic Environmental Studies Series
Financial Incentives an
Control: A Case Study
Office of Research and Development
U.S. Environmental Protection Agency
Washington, D.C. 20460
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RESEARCH REPORTING SERIES
Research reports of the Office of Research and Development,
Environmental Protection Agency, have been grouped into five
series. These five broad categories were established to
facilitate further development and application of environmental
technology. Elimination of traditional grouping was consciously
planned to foster technology transfer and a maximum interface
in related fields. The five series are:
1. Environmental Health Effects Research
2. Environmental Protection Technology
3. Ecological Research
4. Environmental Monitoring
5. Socioeconomic Environmental Studies
This report has been assigned to the SOCIOECONOMIC ENVIRONMENTAL STUDIES
series. This series describes research on the socioeconomic impact of
environmental problems. This covers recycling and other recovery
operations with emphasis on monetary incentives. The non-scientific
realms of legal systems, cultural values, and business systems are
also involved. Because of their interdisciplinary scope, system
evaluations and environmental management reports are included in this
series.
This report has been reviewed by the Office of Research and
Development. Approval does not signify that the contents
necessarily reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or commercial
products constitute endorsement or recommendation for use.
Document is available to the public through the National Technical
Information Service, Springfield, Virginia 22151.
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EPA-600/5-75-007
April 1975
FINANCIAL INCENTIVES AND POLLUTION CONTROL;
A CASE STUDY
By
Terry A. Ferrar
Alan B. Brownstein
John D. Simpson
Sally Streiter
Contract No. 68-01-2250
Program Element No. 1HA093
ROAP/TaskNo. 09AFD/7
Project Officer
Dr. Marshall Rose
Washington Environmental Research Center
Environmental Protection Agency
Washington, D.C. 20460
Prepared for
Office of Research and Development
U. S. Environmental Protection Agency
Washington, D. C. 20460
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ABSTRACT
The past decade has witnessed a concerted effort to clean up the en-
vironment. Legislation has been relatively successful in achieving
this objective. Nevertheless, as the recent energy crisis has demon-
strated, legislation is not a panacea and regulations must often be
circumvented. Yet, environmentalists resist even temporary relaxa-
tion of ambient air-quality standards in the face of severe hardships
because they feel "the pressure must be kept on." Economists argue
that applicants for variances from regulations often have financial
incentives to overuse such permission; caught in the middle, public
officials must decide the worthiness of variance applications and how
to assure continuing progress toward compliance with air-quality regula-
tions if a variance is granted.
Confronted with shortages of low-sulfur content residual fuel oil, sev-
eral air-pollution-control authorities in the northeastern states were
forced to relax hard-won air-quality standards during the winters of
1972-73 and 1973-74. The authorities did so by granting variances to
their sulfur-content standards for residual fuel oil. The character-
istics of these variances provide the social test-tube for this analy-
sis.
Extensive investigation of variance strategies have shown that a gen-
eral (uniform) variance structure coupled with a fuel-oil surcharge
represents a desirable variance policy. The report recommends, however,
that a fuel-oil surcharge should be designed to more than compensate
for the price (and/or profit) differentials between conforming and non-
conforming fuel oil. The report also examines alternative policies
such as emission taxes and quantity controls.
This report was submitted in fulfillment of EPA Contract No, 68-01-2250
by the Center for the Study of Environmental Policy at The Pennsylyania
State University under the sponsorship of the Environmental Protection
Agency. Work was completed as of December 31, 1974.
ii
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TABLE OF CONTENTS
Page
Abstract ii
Acknowledgements iv
SECTIONS
I Introduction, Summary and Conclusions 1
Introduction 1
Background 2
New York City Perspective 3
The Regional Perspective 7
Institutional Analysis 10
Design Criteria 10
Analytical Work Plan 11
Definitions 12
Variance Policy Scenarios 13
Conclusions and Policy Recommendations 17
Appendix A 21
II New York City Perspective 27
Background 27
1972-73 28
1973-74 34
Appendix B . 39
III The Regional Perspective : . . . . 41
New Jersey 41
1972-73 41
1973-74 42
Massachusetts 43
1972-73 43
1973-74 44
Connecticut 46
1972-73 46
1973-74 46
Appendix C . 48
iii
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ACKNOWLEDGEMENTS
The authors of this report would like to acknowledge the assistance
of many individuals during its preparation. Dr. Robert Anderson, the
former Director of the Center for the Study of Environmental Policy,
must be recognized for his conception of this research topic. Indeed,
the principal investigator was approached concerning the importance
of this work at least a year, before this effort was funded, and Dr.
Anderson continued to contribute his creative abilities throughout
the working period.
The following is a list of the persons who deserve a special note of
appreciation for contributing both information and insight for this
study: Henry Beal, Geoffrey Bye, Leo Cronin, Lawrence Goldstein,
Joseph Griffin, Joseph Mercandante, Cornelius O'Leary, Martin Sanvito,
and Henry Wortreich.
The editorial insights of James Ford and John Gregor, both research
assistants and Dr. Richard Tobin, research associate with the Center
for the Study of Environmental Policy, are acknowledged with the great-
est appreciation.
Drs. Marshall Rose and Roger Shull of the Washington Environmental Re-
search Center are acknowledged for their support and patience.
The preceding remarks are intended as a note of appreciation; and as
usual, all responsibility for errors in this report resides with the
authors.
Terry A. Ferrar
Principal Investigator
Director
Center for the Study of Environmental.Policy
The Pennsylvania State University
iv
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SECTION I
INTRODUCTION, SUMMARY AND CONCLUSIONS
INTRODUCTION
By most forecasts, a shortage of such energy resources as oil will con-
tinue in the years to come. These shortages are a result of society's
interest in a relatively clean air mass and a continually growing desire
for energy-intensive goods and services. Given this juxtaposition, it
is reasonable to expect that the frequency of shortages of environmental-
ly acceptable fuels will increase.
Because of these probable shortages, it is particularly appropriate to
investigate alternative approaches to the Nation's pressing energy prob-
lems. This report examines one such category—the use of fuel-oil vari-
ances or exceptions to air-pollution-control laws employed during an
energy-environment crisis that occurred in the northeastern United States
during the winters :of 1972-73 and 1973-74. Extensive interviews were
conducted with the central participants from public regulatory bodies and
relevant fuel-oil suppliers and distributors in Connecticut, Massachu-
setts, New Jersey and New York. These interviews allowed the authors to
produce an instructive portrait of the events surrounding the use of the
variances.
Despite the opportunity to interview the principal actors, international
uncertainty and a vacillation of national policy contributed to an un-
usually high degree of confidentiality within the oil industry. This
confidentiality preempted any comprehensive empirical analysis. As a
result, this report provides a qualitative review of the complex and
interdependent political and economic events surrounding the use of var-
iances for the sulfur-content standards of fuel oils. In addition, the
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report provides recommended design criteria for regulatory agencies
should responsive fuel-oil variance policies be needed in the future.
Finally, the report evaluates alternative variance strategies and re-
commends needed reforms for achieving a more efficient variance policy.
BACKGROUND
Ever since A. C. Pigou published The Economies of Welfare, economists
have advocated the use of corrective taxes and subsidies as a means of
modifying the misallocation of resources due to market failures. In
general, a misallocation of resources results when a decision-maker is
insensitive to the total costs and benefits associated with his actions.
In order to correct such misallocations, economists have argued that
activities that exert costs on others be taxed an amount equal to this
cost increment; hence, decisions would be made as if in full cognizance
of the total costs and benefits.
The case for the use of financial incentives as a method to induce pol-
lution abatement relies on these same principles. As pollution is made
expensive relative to pollution control, more pollution abatement will
be selected by the cost-minimizing entrepreneur. Thus, the greater the
degree of pollution abatement desired, the higher the tax or penalty
rate should be in order to provide the desired incentives. This report
attempts to evaluate this argument's applicability to a situation in
which there was a shortage of environmentally acceptable fuel and a de-
sire to maintain previously formed clean-air standards. Such a situa-
tion occurred during the winters of 1972-73 and 1973-74, when the north-
eastern United States experienced a shortage of low-sulfur content fuel
oil at a time of critical concern over ambient concentrations of sulfur
dioxide.
The novel variance approach employed during the winter of 1972-73 and
again in the early part of the following winter by New York City's En-
vironmental Protection Administration (NYC EPA) plays a central role in
the analysis that follows. The decision framework instituted in New
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York City differed significantly from that of the surrounding areas,
and this framework is employed as a base point for this report.
THE NEW YORK CITY PERSPECTIVE
Sulfur emissions in New York City were significantly reduced following
compliance with a series of laws passed since 1967 that mandated the
maximum allowable sulfur-content of residual oil to be 0.3 percent by
weight. By 1972, the City's air quality conformed, in most instances,
to the federal standards. During the early winter of 1972, various
oil suppliers, terminal operators, and distributors were expressing
fears, both formally and informally, of a supply shortage of conforming
(0.3 percent) fuel oil. These fears were later reinforced and partici-
pants involved in supplying fuel oil began to submit formal requests
asking for relaxation of the sulfur content restrictions from 0.3 per-
cent up to the 2.8 percent level.
The importance of these requests for variances or exceptions to existing
air-pollution control laws can only be appreciated when it is recognized
that residual fuel oil represents about fifty percent of New York City's
total annual energy consumption. More than sixty percent of the City's
housing units are heated with residual oil, and it is the primary fuel
used for electrical generation. An average of 110 million barrels of
resid.ual fuel oil are burned annually, and this is divided almost equal-
ly between Consolidated Edison (52 million barrels) which supplies the
City's electricity and direct space-heating applications (58 million
barrels). New York City requires nearly ten percent of all residual fuel
oil consumed in the United States and, without question, the City is
more dependent on residual oil as a proportion of its total_usage than
any other area of the country. Thus, while residual fuel oil represents
only seven percent of the total national usage, it is the lifeblood of New
York City. Hence, a double-edged sword of significant disruptive poten-
tial faced New York City's Environmental Protection Administration in
the early winter of 1972-73. On the one hand, the possibility of
regulation-induced supple shortages of conforming fuel oil could cause
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serious health and economic problems. On the other hand,
high-sulfur oil to meet the supply needs would jeopardize the City's
precarious and hard-won air quality.
To understand the economic incentives that were in effect in New York
City's fuel-oil market during 1972-73, it must be recognized that dis-
tributors purchase residual fuel oil in large quantities from primary
suppliers under contractual agreements that are normally .consummated
months before the heating season. While these contracts can have op-
tion clauses as to amount purchased (since total demand is dependent
upon meteorological conditions), the consumer is indifferent to the
oil's sulfur content. In general, these contractual agreements do not
recognize the oil's sulfur content as a price-relevant item, that is,
once the contract is completed the price per barrel is independent of
the oil's sulfur content. Consequently, only regulatory controls influ-
ence the contractual agreements between the distributor and the supplier
with respect to sulfur content. Thus, significant economic incentives
exist on the part of the fuel-oil suppliers to seek and obtain variances
from sulfur content standards. Higher-sulfur residual fuel oil (i.e.,
two percent) was cheaper than conforming residual fuel oil by approxi-
mately two dollars per barrel and in the million barrel quantities trans-
acted in New York City, large windfall profits would accrue to .those
suppliers and/or distributors who were successful in obtaining variances.
Recognizing this major profit incentive to obtain variances from the
air-pollution-control laws, the local air-pollution administrators were
duly concerned. Aware that their information on the availability of
conforming fuel oil had to be obtained from industry spokesmen, and then
often indirectly after some time lag, the regulatory officials recogniz-
ed that they were in a precarious position and would not be able to
establish the "need" upon which they were mandated by law to base their
variance decisions. Further, the NYC EPA had the authority to grant
either general or specific variances. A general variance allows un-
limited sales and usage of nonconforming fuel oil while a specific var-
iance permits cettain suppliers to sell designated consumers specified
4
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amounts of nonconforming fuel oil over defined periods of time. The
latter procedure was discarded because the potential administrative
workload was beyond the NYC EPA's manpower capabilities. Moreover, a
variance granted specifically to a supplier-consumer couplet would
grant windfall profits to the supplier and effectively protect him
from encroachment on his market share.
Once a decision had been made to use general variances, conditions were
attached to the variance* that required a surcharge be paid to the city
in an amount equal to the number of barrels of nonconforming oil multi-
plied by seventy-five cents for those barrels containing between 0.3
and one percent sulfur, and multiplied by two dollars for those barrels
containing between one and two percent sulfur. In effect, the surcharge
eliminated the incentive to supply only nonconforming fuel oil since the
surcharge tended to remove windfall profits that would have resulted from
the introduction of the higher-sulfur fuel oil. Thus, this general
variance with a fuel-oil surcharge opened the market for nonconforming
oil and prevented a monopoly profit from being granted to the suppliers
who could not conform. Further, this variance strategy promoted sulfur
competition by encouraging the entry of more nearly conforming grades—
an incentive that would not have been present without the surcharge—
while avoiding shortages.
In retrospect, there are indications that this variance strategy did
operate as a pronounced deterrent to the use of nonconforming fuel oils
during the 1972-73 heating season. Although temperatures during the first
three months of 1973 were slightly higher than the previous year, demand
for residual fuel oil had, in fact, been accentuated due to shortages of
*Since the NYC EPA is not a legislative body, it does not have the power
to levy taxes, and since it is not a judicial body, it does not have the
power to fine or penalize behavior. Therefore, the surcharges were de-
scribed as "conditions of variance."
+In order to avoid legal challenges, the surcharge was intended to set
the supply price of nonconforming oil at the same price as the rela-
tively low-sulfur substitutes.
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natural gas and distillate fuel oil as well as general growth in the
economy. By the end of the winter, however, two of the city's major
suppliers, who had originally calculated a need for 2,850,000 and
450,000 barrels of nonconforming residual fuel oil, found it necessary
to supply only 865,796 and 216,603 barrels of such oil, respectively.
Moreover, the variance policy resulted in significant fuel oil borrow-
ing and trading campaigns that reduced the need to bring in additional
amounts of nonconforming residual fuel oil.
The next winter (1973-74) is more difficult to analyze. The heating
season was characterized by high emotional and political overtones be-
cause of the Arab oil embargo, the advent of federal energy policies,
and the interaction of multiple price-control systems that tended to
differentially affect imported versus domestic oils. Moreover, there
was a transfer of the City's mayorality, a shift of New York's governor,
the establishment of the Federal Energy Office in Washington, B.C., and
congressional promulgation of legislation to amend the Clean Air Act of
1970 (that would, in part, authorize delays in meeting clean-air require-
ments) . These simultaneous changes were unprecedented and of a suffi-
ciently severe crisis nature to render impossible any conclusive policy
evaluation. Nevertheless, some insights can be gained from a partial
review of the more significant events.
The East Coast, and New York City in particular, were affected more sig-
nificantly than the rest of the country by the Arab oil embargo because
of this area's extreme dependence on imported fuels. During the early
part of the winter, a general variance with a fuel-oil surcharge, sim-
ilar to that specified during the previous winter, was employed. The
viability of this technique was weakened, however, as these rather cata-
strophic shifts in supply began to develop.
Legal and political considerations required that the surcharge reflect
only the incremental supply-price differential between conforming and
nonconforming fuels and thus was particularly problematic during the
second application. The severe dynamics in the national and international
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markets caused alarming price fluctuations, and this intensified the
difficulty in specifying a surcharge rate that would prevent windfall
profits and yet not alter the suppliers' pre-variance profit levels.
Published price guidelines in Oil Buyers' Guide, for example, lagged
significantly behind the going price, and the market deviation from
posted prices was more intense than normal. Each company (suppliers
and distributors) depending on its supply conditions, was able to de-
liver oil at differing prices, and most buyers obtained what they could
at whatever price. The companies found that they had to ration fuel
among their customers disregarding the oil's sulfur content. A buyer
who had been shortened on his contract and wanted to buy elsewhere
found the prospects quite grim, and the proposed federal allocation pro-
gram published on December 19, 1973, tended to lock the buyer-seller re-
lationship based on historical patterns. Hence, any incentive scheme
to induce consumers to search for environmentally desirable oils tended
to become inoperable even before the federal regulations took effect in
January of 1974.
The essence of the second winter's experience with respect to the use
of fuel-oil surcharges as a variance mechanism indicates that as long
as equality of supply price is a relevant criterion, then significant
dynamics in the price system tend to vitiate such a policy. Moreover,
when demand for all qualities of fuel oil exceeds supply, incentive
systems to encourage the use of one type of nonavailable fuel oil over
another type of nonavailable fuel oil become politically and economi-
cally infeasible. Therefore, the NYC EPA strategically decided to re-
ft5
scind its policy by revoking the surcharges while reserving the right
to reintroduce similar regulatory practices when the markets returned
to more normal conditions.
THE REGIONAL PERSPECTIVE
In contrast with New York City's variance strategy, requests for var-
iances in Connecticut, Massachusetts, and New Jersey which are all heav-
ily dependent on residual fuel oil, were managed by the states' air-
pollution-control agencies on a specific-discretionary basis. The
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predominant factor emerging in the formulation of these variance strate-
gies was their dependence on the judgments of a few individuals. In
effect, these states relied extensively on strong discretionary control
that was contingent upon sparce and often confounding information link-
ages between state authorities and industrial sources.
In Massachusetts, for example, the authorities were convinced of the
authenticity of the claimed shortages in the Boston area during the win-
ter of 1972-73, based primarily on information furnished by oil company
representatives. Although originally attempting to review individual
cases, the State was forced, in the interest of administrative exped-
iency, to opt for a general 30-day variance policy that allowed one per-
cent sulfur-content residual fuel oil into the Boston region (the pre-
variance level was 0.5 percent). It is reasonable to conclude that this
manpower-intensive variance process succumbed to the spector of severe
shortages.
For unknown reasons, only a small quantity of nonconforming fuel oil
actually entered the Boston region. On a strictly speculative basis,
this may be explained by the fact that one percent sulfur-content fuel
oil was also in very short supply. The concurrent events in New York
City are relevant to this situation: since New York City represents a
significant part of the northeastern residual fuel oil market, the City's
fuel-oil surcharge resulted in searching for environmentally desirable
fuels. That is, the nonlinear characteristic of the imposed fuel-oil
surcharge tended to induce consumers and suppliers to seek the lower-
sulfur content nonconforming fuels before resorting to the suppliers of
higher-sulfur content fuel oil. Therefore, New York City's policy
accentuated the demand for one percent fuel oil in the northeastern
market, and, notwithstanding the variance, Boston's suppliers had to
search more intensely for the lower-sulfur oil.
As early as July of 1973, Massachusetts' air-pollution-control authori-
ties again received indications from the major oil suppliers that pre-
dicted availability of conforming fuel for the upcoming heating season
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(i.e., 1973-74) would range between a ten to fifteen percent shortfall.
To appreciate the impact of such a forecasted shortage on Massachu-
setts, the extreme importance of independent oil suppliers in the state
must be recognized. Since these estimates excluded the independents,
which account for approximately forty-five percent of Boston's market,
a shortage anticipated by the major fuel-oil suppliers had to be inter-
preted in a magnified fashion. Consequently, the midsummer forecasts
precipitated extensive public hearings and investigations.
Investigation by the state's air-pollution-control officials tended to
verify the likelihood of short supplies during the coining winter, and
new regulations were adopted for residual fuel oil. The new residual
oil regulations permitted sources using more than 250 BTU (British
Thermal Units) per hour to apply for variances to burn residual fuel up
to 2.7 percent sulfur content; the previous regulations had permitted
only one percent sulfur content oil throughout the state; and 0.5 per-
cent in Bos'ton.
The specification of variances in Boston reflected a joint supplier-
consumer relationship. This procedure was designed to provide detailed
information to the state air-pollution-control officials which they
planned to utilize in order to redistribute conforming fuel oil on the
basis of air-shed sensitivity. In effect, the authorities attempted to
operate an intraregional fuel-oil allocation and distribution program.
The plan's implementation, however, proved to be unworkable since the
authorities were overwhelmed with variance requests, which could not be
effectively handled within the required time constraints and with the
given manpower.
The winter of 1973-74 also posed serious threats to New Jersey's air
quality. In particular, early in the season it was apparent that short-
ages were probable, and a temporary relaxation of the sulfur regulations
was adopted, which differentially relaxed the sulfur-content restrictions
(from 0.2 percent up to one percent) throughout the state on the basis
of air-shed tolerance considerations. In effect, New Jersey allowed a
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general relaxation of environmental standards in anticipation of the
problems the state was likely to confront. Nevertheless, a major
supplier in this state was unable to meet the newly relaxed standards
and 285 of their customers formally requested and were granted variances.
Three full-time administrators granted the variances on a discretipnary
basis. This administrative staff utilized information furnished pri-
marily through petition forms and telephone communications with repre-
sentatives of the various supply firms.
During the winter of 1973-74, Connecticut was also forced into relaxing
the state's sulfur restrictions on fuel oil. The major supplier of re-
sidual fuel oil for the state's utilities alleged a shortfall of conform-
ing oil and asked for a variance to allow 1.25 percent sulfur content re-
sidual fuel oil. Neither the supplier nor the state authorities were
able to certify the shortfall, however, as the winter progressed and pres-
sures mounted, a 120-day variance was issued.
The variance policies employed in New York City, New Jersey, Massachusetts
and Connecticut all appeared to be relatively successful in terms of the
energy-environment tradeoff. That is, serious shortages of fuel oil were
avoided and yet the damage to ambient air quality was minimal. It should
be recognized, however, that a policy's success during one period is in-
sufficient justification to recommend it for reapplication. The following
section will address this issue.
INSTITUTIONAL ANALYSIS
Design Criteria
In light of the experiences of the winters of 1972-73 and 1973-74, this
section will develop a set of design criteria to assist policymakers in
the selection of alternative variance policies. These criteria reflect
an analysis of the events in each of the locations studied as well as
present an instrument for ferreting out the common characteristics that
permeated the northeastern experience. In essence, the design criteria
define the central concerns that must be addressed in the process of de-
signing a variance policy.
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1. The management design must be sufficiently flexible to sus-
tain highly dynamic market conditions. Inherently, variances
are required in periods of unstable supplies. Therefore, any
variance strategy should strive to minimize its dependence on
external information and be able to respond to requests for
exceptions in a rapid and decisive fashion.
2. Since variances can affect profits, it is important that any
institutional framework be as independent as possible from
persuasion by the influenced parties.
3. Since variance strategies can influence public welfare, every
effort should be made to design a regulatory technique that
does not exhibit "yes or no" characteristics. The institu-
tional design should promote the use of low-sulfur fuel oil
rather than prohibit the use of high-sulfur fuel oil.
4. Since manpower is limited in most air-pollution control
agencies, a variance strategy should treat manpower niggardly.
Analytical Work Plan
This section will provide an array of variance policy scenarios which
will be analyzed in terms of the design criteria. In each case, the
advantages and disadvantages are highlighted to illustrate how the
guidelines provided in this report can be employed by policymakers- in
order to analyze any variance procedure. After a brief section devoted
to a refinement of terms, an evaluation will be provided in a conjunc-
tive mode of the two alternative variance structures (general and
specific) and three alternative regulatory mechanisms (emission tax,
fuel-oil surcharge, and quantity controls) which can be employed within
each of these structural frameworks. That is, a variance policy is de-
fined by a structural/regulatory mechanism specification.
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Variance Structure—Definitions-
No established dichotomy exists between specific and general variances.
All variance structures ambody degrees of specificity and generality
with respect to suppliers, consumers, duration, quantities, and regions.
For example, even though New York City's Variance structure was cate-
gorized as general, the plan was still restricted in terms of time; al-
ternatively, in Massachusetts specific variances were issued to partic-
ular regions without regard to quantity. For purposes of the analysis
that follows, a general variance structure indicates that all parties
involved are dealt with in a uniform manner. Conversely, a specific
structure treats participants individually.
Regulatory Mechanisms—Definitions-
Resides the use of fuel-oil surcharges, two other regulatory mechanisms
will be considered. First, an emissions tax, which is a charge assessed
on a polluter that is a function of the output of his environmentally
degrading emissions. Such taxes are assessed on a physical measurement
of the effluent and can be structured in either a linear or progressive
manner. Second, quantity controls which are the direct imposition of
quantity restrictions on the use of nonconforming fuel oil on either a
regional or local allocation basis.
It should be recognized that a fuel-oil surcharge can be established so
as to produce either indifference or preference with respect to supply-
ing and/or consuming nonconforming oil. For simplicity, the variance
policy scenarios discussed below that employ a fuel-oil surcharge would
be interpreted as a penalty which is sufficiently high to provide an
incentive for supplying and/or consuming conforming oil. Thus, if a
fuel-oil surcharge does not achieve this criterion, then the following
arguments must be qualified.
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Variance Pol-icy Scenarios
I. Specific Variance/Fuel-Oil Surcharge
A. Advantages
1. Specific variances enable public officals to exercise a
greater degree of control over the allocation of fuel
oils than do general variances. Officials can designate
areas in which nonconforming oil can be used (i.e., dif-
ferential air-shed management) and adjust the duration
of variances with respect to individual suppliers.
2. A fuel-oil surcharge is relatively simple to administer
since it is based on a quantity measure readily available
from accounting operations (i.e., no equipment or exten-
sive manpower is required for measurement).
3. A fuel-oil surcharge can reduce the possibility of wind-
fall profits since a surcharge alters profit differentials
by favoring conforming over nonconforming fuel oil.
4. A fuel-oil surcharge allows suppliers some latitude in
their decisionmaking processes since the surcharge pro-
motes the use of low-sulfur fuel oil but does not prohibit
the use of nonconforming oil. That is, no supplier is con-
fronted .with rendering a decision as to either furnishing
conforming fuel oil or nothing.
5. A fuel-oil surcharge can encourage technological develop-
ment in desulfurization processes.
6. Revenue is derived from the surcharge.
B. Disadvantages
1. Since specific variances treat individuals separately and
because of their inherent restrictions there is an increas-
ed demand for and dependence upon external information.
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2. Since specific variances inherently confine the consumer-
supplier's discretionary authority, the likelihood of
scattered shortages increases as additional restrictions
are imposed.
3. The setting of a fuel-oil surcharge to alter the price dif-
ferential (hence altering the profit incentive) between
conforming and nonconforming oil is dependent upon know-
ledge of this differential. In static equilibrium, the
manpower necessary for establishing this differential
would be minimal, requiring only the solicitation of mar-
ket information from available sources. In a dynamic sit-
uation, however, the information is difficult to obtain
and analysis and employment of forecasting techniques
would heighten manpower demands. Moreover, the need for
continuous updating of information necessitates increased
reliance upon affected parties.
4. The revenue derived from this policy has the potential of
significantly influencing the rate setting process. That
is, the establishment of a fuel-oil surcharge should not
be influenced by factors other than promoting the use of
conforming oil.
II. General Variance/Fuel-Oil Surcharge
A. Advantages
1. As in I.A.2, I.A.3, I.A.4, I.A.5, and I.A.6.
2. General variances are relatively simple to administer
since all participants are treated uniformly. Thus,
general variances are less manpower-intensive than are
specific variances.
3. General variances reduce the interaction between the
public and private sectors since the process becomes
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more mechanized at the clerical level. Hence, general
variances minimize the involvement and potential inter-
ference by the affected parties.
B. Disadvantages
1. As in I.B.3 and I.E.4.
2. Since a general variance treats all participants equally,
the degree of control (i.e., differential air-shed manage-
ment) is substantially reduced.
III. Specific Variance/Emissions Tax
A. Advantages
1. As in I.A.I and I.A.6.
2. Aa emission tax permits the concerned parties broader dis-
cretionary authority in which to respond. For example,
although a firm may respond to this scheme in the same
manner as a firm would to a fuel-oil surcharge, the range
of response is expanded. In essence, an emissions tax en-
courages a greater range of technological development (in-
cluding desulfurization facilities) of air-pollution con-
trol equipment. Therefore, it is potentially more effi-
cient than the fuel-oil surcharge.
B. Disadvantages
1. As in I.B.I, I.B.2, and I.B.4.
2. The operational characteristics of an emission-tax policy
tend to be costly in terms of manpower requirements since
the emission is inherently more difficult to measure than
fuel-oil surcharge (which is simply an accounting proce-
dure) .
3. Resulting from III.B.2, there exists the greater possi-
bility of legal difficulties which could hinder the imple-
mentation of this policy.
15
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IV. General Variance/Emissions Tax
A. Advantages
1. As in I.A.6, II.A.2, II.A.3, and III.A.2.
B. Disadvantages
1. As in I.E.4, II.B.2, III.B.2, and III.B.3.
V. ' Specific Variance/Quantity Control
A. Advantages
1. As in I.A.I.
2. Once quantity limitations are set, public officials can
establish policy rapidly and decisively and continue to
administer in a neutral manner.
3. This strategy would facilitate the implementation of
either a fuel-switching or fuel-allocation program if
necessary.
B. Disadvantages
1. As in I.B.I and I.B.2.
2. In order to correctly set restrictions on the quantity of
nonconforming fuel oil to be used, extensive information
with respect to the prevailing market supply of oil is re-
quired. Moreover, the implementation of quantity controls
results in extreme centralized decision-making by authori-
ties that also requires extensive external information in
order to assure that the quantity specifications conform
with the availability of fuel oils.
3. Since quantity controls prohibit the use of nonconforming
fuel oil beyond some defined limit, shortages will result
if this limit is incompatible with the available supply of
conforming fuel oil.
16
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4. Quantity controls fail to eliminate windfall profits.
5. Quantity controls provide no technological incentive for
the development of air-pollution control equipment.
VI. General Variance/Quantity Control
A. Advantages
1. As in II.A.2, II.A.3, V.A.2, and V.A.3.
B. Disadvantages
1. As in II.B.2, V.B.2, V.B.3, V.B.4, and V.B.5.
While it is appropriate to provide a taxonomy of considerations to be
addressed when designing a variance policy, the policymaker must ulti-
mately weigh the various attributes of any given scenario at the time
and in the setting of the selection process. That is, the selection of
a single policy must be made with a complete recognition of the social,
economic, and political characteristics in a given region that only the
policymaker,, as opposed to the researcher, can appreciate. This in
depth understanding in conjunction with this report provides a rigorous
instrument for constructing a variance policy.
In light of these qualifications, while this effort must stop short of
advocating a single specific policy, the following section will present
conclusions and policy recommendations reflecting the investigation's
more relevant and important findings.
CONCLUSIONS AND POLICY RECOMMENDATIONS
This investigation has shown that manpower and potential enforceability
of any regulation were of paramount concern in the air-pollution control
agencies during the period under investigation. Thus, a general var-
iance structure seems preferable because of its administrative simplic-
ity and degree of independence between public officials and affected
17
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participants. The recommended regulating mechanism, however, is a
more complex question.
The choice of the optimum regulatory mechanism must be based on a
thorough understanding of the community's social, economic, and politi-
cal structure. Moreover, it should be recognized that both fuel-oil
surcharges and emission taxes permit quantity decisions to be made in
a decentralized manner (i.e., by suppliers and distributors), while
quantity controls result in a very centralized decisionmaking proce-
dure (i.e., by air-pollution authorities). A determination of which
is better obviously depends on who has access to the best information.
Our research has shown, however, that quantity controls, while success-
fully employed on several occasions, should be discouraged due to the
severe degree of responsibility they place on the local pollution-con-
trol authorities. Since misjudgment or poor information* can result in
significant social, economic and political upheaval from a shortage of
fuel oil during the heating season, such controls are clearly a high-
risk option.
-The selection of either a fuel-oil surcharge or an emissions tax also
involves a tradeoff. Emission taxes are conceptually the most efficient
control mechanism since they permit the widest polluter discretion on
abatement alternatives. These taxes, however, are not operational due
to the inherent legal complexities and additional manpower demands with
the assessment of the emissions charges.
*Additional information on regional quantitites of fuel oil would be of
great assistance to air-pollution agencies in establishing their vari-
ance policies. In this respect, the federal government can assist these
agencies by encouraging or implementing the publication of price and
quantity information on a regional basis. It has been apparent that
existing information sources (e.g., Oil Buyers' Guide) are virtually
inoperable for setting a fuel-oil .surcharge when dynamic market condi-
tions exist. Without minimizing the difficulties associated with this
policy, it is advisable that these issues be considered.
+Appendix A reviews an additional consideration that a policymaker should
be aware of concerning the use of an effluent charge strategy.
18
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A general variance coupled with a fuel-oil surcharge, however, presents
a very desirable policy alternative. This variance strategy minimizes
the discretionary and informational demands on the administrator and
does not subject him to the high-risk characteristics that surround
quantity-control allocation programs. Where there are legal and politi-
cal overtones to such fuel-oil surcharge policies, it is expected that
they are not as significant as the inherently more complex regulatory
policy of emission taxes. Moreover, the inherent overtness of the pub-
lished, documented fuel-oil surcharge-rate structure tends to remove
any incentive for outside influence over the regulatory authority. Ob-
viously, there is a risk involved in any policy. If a surcharge is set
too low, the surcharge can cause the introduction of an excess amount
of high-sulfur fuel oil, while if the surcharge is set too high there
exists the possibility of fuel-oil shortages. This was particularly
evident in New York City where rent controls were in effect. Since the
increased costs of fuel oil could not be passed through to the tenants,
the surcharge could induce landlords to either reduce or completely
eliminate heat to residents. Nevertheless, a general variance policy
with a fuel-oil surcharge presents many characteristics that recommend
it for future consideration.
A modification, however, of the general variance with a fuel-oil sur-
charge scheme (as employed by the NYC EPA) is recommended for future
application of this policy. The legally mandated equality requirement
between the price of conforming fuel oil and the price (i.e., with the
surcharge) of nonconforming fuel oil in New York City would, in theory,
lead to indifference between oils containing different levels of sul-
fur and thus leave in question the supplier incentives. It can be in-
ferred that because of the dynamics of market prices (i.e., rapidly
•increasing prices), an incentive did seem to be realized favoring the
supply of low-sulfur oil in New York City, notwithstanding the equality
constraint. This must be interpreted as sheer happenstance, however,
and it suggests the following modification. To assure desirable (as
opposed to neutral) incentive characteristics, a fuel-oil surcharge
19
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policy should be designed to more than compensate for the profit dif-
ferential between conforming and nonconfonning fuel oil That is, the
surcharge rate should be sufficiently high so as to induce consumer-
supplier discrimination against the high-sulfur oils.
20
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APPENDIX A
This appendix analyzes the economic characteristics of an effluent-
charge system whose structure is legally and politically confined as
in New York City . Specifically, it will be demonstrated that such
ethically satisfying restrictions (i.e., equity of effluent charges)
effectively thwart the realization of the efficiency properties as
•
generally conceived in the literature.
Although the affected parties in New York City included firms, house-
holds, hospitals, and schools, the model presented is based on the
theory of the firm for simplicity of exposition. Moreover, in order
to minimize notational complexity, we posit a competitive industry
and focus on two firms whose effluents impinge on each other's costs.
Each firm is assumed to be engaged in the production of only one
good, q. The cost function for the firms are:*
ci = cvV and °2 ^cvV
where C. is the total cost incurred by firm i at output q. and when
subjected to effluent E. from firm j. Also we posit that 9C./3q > 0
and 3C /3E. > 0, for i = 1, 2; i ^ j ; and j = 1, 2. The effluent will be
+ i
viewed as a by-product of the production process, that is, E. = E (q. );
*This analytical construct is analogous to Davis and Winston, "External-
ities, Welfare, and the Theory of Games," Journal of Political Economy,
LXX (June 1962), 241-262.
+This is compatible with the literature on environmental economics.
For example, see D. Ethridge/, "The Inclusion of Wastes in the Theory of
the Firm," Journal of Political Economy, LXXXI No. 6 (1973), 1430-
1441.
21
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where 3Ei/3q1 > 0, i = 1, 2. P denotes the competitive market price of q,
and we assume that there are no externalities in the consumption of q.
By assumption, firm i attempts to choose a q which maximizes
ni = Pqi " ci'V'
which requires that q satisfy
P = aci/3qi, i = 1, 2 (1)
i.e., the firm should set price equal to marginal cost.*
Employing the standard result that in a competitive setting the social
optimum is attained by maximizing the net value of the production effort,
society's objective can be written as:
MAX S = P(q;L + q2) - C1(q1,E2) - C2 (q^) ,
hence, the socially optimal outputs, q * and q * must satisfy
and
where
3C.
•5=- is the marginal damage measure.
oE.
_ .
*The second order sufficient condition- is that « 2 > 0, i.e.:, .the
marginal cost curve must be rising at its point of intersection with
the horizontal price line. Here, and elsewhere in the report, we
assume the second order conditions are satisfied. This assumes the
various functions are traditionally shaped.
22
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As usual, we may observe from comparison of (1) and (2) that in the
presence of cost-effective externalities the competitive market is
socially inefficient; that is,
q± I q.^ and q2 t q2* (3)
Inequalities (3) are the raison d'etre of the classical tax-subsidy
approach, and the reasoning behind this approach is well accepted.
Equation (1) must now be adjusted so that it yields the same solutions
as equation (2). To this end, if Z. is defined as a per-unit-of-ef flu
ent tax on firm i, the firm's maximum profit becomes
MAX n± = Pq± -
fdri= 1, 2; j = 1, 2; i ^ j. The resultant optimizing outputs, q.,
satisfy
1 9E
, i = i, 2 . (4)
Therefore, by setting z. = 3C-'/3E., the equality of q and q * is
assured. Next we impose the equity criterion via the following defini-
tions :
Definition 1-
If we assume that the physical character of the effluents are identical,
the equity criterion can be imposed symbolically by requiring z . to be
equal to z . . Specifically, if the two firms' emissions are identical,
then their tax penalties must be identical (i.e., only the characteris-
tics of the firm's discharge matters, not whether the company's name is
i or j).
Definition 2-
An externality is symmetrically reciprocal if
23
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3C± 3C
3E. 3E
J *^
In other words, effluents inflict damages reciprocally and identically.
Theorem (Necessary Condition for Equity)
A necessary condition for the equity criterion to be satisfied by a
socially optimal effluent-charge system is that the external linkage be
symmetrically reciprocal.
Proof
A socially optimal effluent charge was characterized above by
9C
Zi " 3E±•
The equity criterion requires that z = z., therefore,
3C. 3C±
3Ei = "3E7
Hence, the external linkages must be symmetrically reciprocal by De-
finition 2.
This result demonstrates that the seemingly innocuous equity require-
ment is a severe restriction on the efficiency of effluent charges.
Indeed, the theorem argues that, in general, effluent charges that sat-
isfy this condition will never be efficient since unidirectional extern-
al linkages are prohibited. The fact that there exist established
meteorological patterns precludes this constrained effluent tax from
efficiently guiding production in the Pigouvian tradition.
The objection might be raised that firms produce physically dis-
tinct effluents. Obviously, this objection renders inapplicable the
24
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preceding arguments. Even when effluents differ in physical character,
however, there will tend to be an overriding equity consideration in
the effluent rate setting process, and the potency of this influence
will determine how closely the implications of the above theorem are
approximated. Moreover, it must be recognized that for reasons of
proximity to markets and raw resources, climatic and geographic consid-
erations, firms of the same industry often locate in the same area. Thus,
if symmetric reciprocity does not prevail, an effluent charge policy can-
not yield an optimal resource allocation when subject to the equity
criterion.
As a final note, it is appropriate to mention that a similar analy-
sis could be constructed concerning a jurisdiction wide equity require-
ment for a fuel-oil surcharge or quantity control policy; however, since
these concerns are of a second-order nature, they are not directly
addressed in this report.
25
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BIBLIOGRAPHY
Ayers, R. V. and Kneese, A. V., "Production, Consumption and External-
ities," American Economic Review, LIV, No. 3 (1969), 282-297.
Buchanan, J. M. and Stubblebin, W. C., "Externality," Economica, XXIX
No. 116 (1962), 371-384.
Coase, R., "The Problem of Social Cost," Journal of Law and Economics,
III (October 1960), 1-44.
Davis, Otto H. and Whinston, Andrew B., "Externalities, Welfare and
the Theory of Games," Journal of Political Economy, LXX (June
1962), 241-262.
, "On Externalities, Information and the Government-Assisted
Invisible Hand," Economica, XXXIII, No. 131 (1966), 303-318.
Ethridge, D., "The Inclusion of Wastes in the Theory of the Firm,"
Journal of Political Economy, LXXXI, No. 6 (1973), 1430-1441.
Wellis.z, Stanislaw, "On External Diseconomies and the Government-
Assisted Invisible Hand," Economica, XXXI, No. 124 (1964), 345-362.
26
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SECTION II
NEW YORK CITY PERSPECTIVE
BACKGROUND
By 1972, low-sulfur residual fuel oil represented approximately fifty
percent of New York City's annual energy consumption. Virtually all.
of this residual oil was derived from foreign crude oils and over
ninety percent was imported from Caribbean refineries. New York
City's unique dependence on imported low-sulfur residual fuel oil is
a result of both legal and economic forces. First, since domestic
refineries were heavily capitalized for gasoline and distillate pro-
duction, the production of residual fuel oil is not as profitable as
the other refinery products and, in fact, frequently sold below the
price of the original crude oil. Moreover, since the Mandatory Import
Program* severely restricted crude-oil imports, domestic refineries
did not have a sufficient supply of crude oil necessary to facilitate
expansion. As a result, Caribbean refineries geared ::cr the production
of residual fuel oil were developed (in fact, up to sixty percent of
their output is residual oil as opposed to seven percent for domestic
refineries). Second, environmental laws passed during the mid- to
late-1960s banned the use of high-sulfur fuels and coal, and these
laws caused an increased dependence on low-sulfur residual fuel oils.
*The Mandatory Import Program, established in March of 1959, limits
importation into the U.S. of oil to 12.2 percent of the estimated do-
mestic production of crude oil and natural gas.
27
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There are f.ive primary suppliers of low-sulfur residual fuel oil in
New York City. These suppliers produce their low-sulfur residual
oil either by using "sweet" low-sulfur crude oils, by desulfurizing
in hydrodesulfurization units, or by blending higher-sulfur residual
oils with lower-sulfur distillate oils. The relative scarcity of
sweet crudes and the high cost of desulfurization act as effective
constraints on the supply of low-sulfur oil. On the demand side,
since the use of high-sulfur oil (i.e., fuel oil with a sulfur content
above 0.3 percent) is prohibited, there is a relatively inelastic de-
mand for the higher-cost low-sulfur product.
1972-73
During the early winter of 1972-73, various oil suppliers, terminal
operators, and distributors expressed fears of a shortage of conform-
ing (0.3 percent) residual fuel oil in New York City. As early as
November of 1972, at least one of the City's major terminal operators
had requested federal intervention in order to make additional supplies
of residual fuel oil available from major suppliers in the Caribbean.
The first formal contact in New York City occurred on December 27,
1972, when a major distributor asked New York City's Environmental Pro-
tection Administration (NYC EPA) to relax the City's limitations on
the sulfur content of fuel oil. As a result, the NYC EPA made several
inquiries to federal and state authorities in an effort to assess the
"tightness" of the City's fuels-oil market. These inquiries proved
unavailing. Opinions were diverse, and neither state nor federal of-
ficials could substantiate the existence of a fuel-oil crisis in New
York City. Nevertheless, local officials recognized that a serious
problem '.existed and that the City would have to develop a strategy to
•
cope with the anticipated fuel-oil shortages. This section explores
that strategy.
As the winter progressed, more ominous predictions of the forthcoming
events developed. On January 2, 1973, a major fuel-oil supplier
28
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(Supplier A) who accounts for approximately fifteen percent* of the
City's residual fuel-oil sales (and about thirty percent of the re-
sidual oil used for space-heating), duplicated the previous informal
request for relaxation from the City's Air Pollution Control Code
(and, hence, New York State's Environmental Regulations, which must
also approve any variance request). Supplier A stated that crude-oil
supply disruptions in Nigeria and refinery problems in Curacaco nec-
essitated a variance from the standard 0.3 percent sulfur-content fuel
oil to 2.5 percent content for 1,200,000 barrels in January, to 2.0
percent for 900,000 barrels in February, and 2.0 percent for 750,000
barrels in March of 1973. In view of the many uncertainties regarding
the degree of market tightness and the lack of substantiation from
Supplier A, the City's officials decided on January 11, 1973, to re-
spond to the company in a way that granted no immediate relief, but
left the door open for further informal discussion on the submission
of a formal petition for relief.
A second major supplier (Supplier B), who accounts for approximately
ten percent of the City's residual fuel-oil market, formally petitioned
for a variance on January 18, 1973, only three days after the company
had expressed cautious optimism concerning its supplies of fuel oil.
Supplier B claimed that supply disruptions in the Middle East and de-
lays in completing new desulfurization facilities required relaxation
of sulfur-content standards to 2.8 percent for 450,000 barrels of oil
during the months of January, February, and March. The next day,
Supplier A also submitted a formal petition, modified from its original
request, requesting authorization to use 2.5 million barrels of fuel
oil with a sulfur content of one percent.
•
It was apparent that there was an economic incentive for oil suppliers
to overestimate the extent of their shortfall. The distorted fuel-oil
*The figures on market shares of the City's residual fuel-oil market are
approximations. The five major fuel-oil suppliers account for approxi-
mately seventy to eighty percent of the residual-oil market.
29
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market had led to substantial price differentials between fuel oils of
varying sulfur contents. For instances, the New York City Harbor post-
ings for residual-fuel oil in January of 1973, as reported by the Oil
Buyers' Guide, were $4.80 per barrel for 0.3 percent sulfur oil, $3.95
per barrel for one percent sulfur and $2.45 per barrel for 2.8 percent
sulfur oil. Moreover, based on a survey of jobbers and consumers, it
appeared that few buyers were contractually protected against substitu-
tion of the cheaper higher-sulfur oils for conforming fuel oil.
Thus, it was apparent that the difference in price between conforming
and nonconforming oils would accrue to the suppliers, distributors, and
ultimate consumers of high-sulfur fuel oil in some unpredictable com-
bination, depending on the market leverage of these three groups. Such
economic windfalls accrue at the expense of the citizenry in general,
whose health and well-being ultimately suffers from increases of sulfur
dioxide in the air. Since the cost of relaxing environmental standards
was to be borne by the general public, it seemed only equitable that
economic compensation be accrued by the public in general, rather than
by any particular suppliers, distributors, or consumers. Furthermore,
the existence of an economic incentive for specific individuals or
corporations to burn high-sulfur fuel would logically induce them to
prefer nonconforming oil over conforming oil. For government to allow
such an incentive to exist would be irresponsible and intolerable.
A second major consideration was that if a variance to sell noncon-
forming oil were granted to the petitioners alone, then other companies
who might be able to provide lower-sulfur fuel oil would be unable to
compete in sales. The City had no intention of protecting the peti-
tioner's market shares in view of their alledged inability to provide
low-sulfur oil. Therefore, the NYC EPA decided that both price com-
petition and sulfur competition should be maximized if a variance were
to be granted. In addition, because manpower constraints could hamper
the issuance and implementation of specific variances, the NYC EPA
also decided that a group variance would be granted to all suppliers
to sell nonconforming oil.
30
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On January 24, 1973, the NYC EPA issued a variance to relax the City's
sulfur restrictions. This general variance granted temporary relief
from January 25, 1973, to March 10, 1973, to the petitioners and all
other fuel-oil suppliers to transport, store in aggregated facilities,
offer for sale, and sell residual fuel oil with a sulfur content not
exceeding one percent to authorized buyers.* Moreover, Supplier B and,
subsequently, on February 11, 1973, Distributor X were granted general
variances for two percent residual oil under the same terms as the
January 24th variance. Specifically, Supplier B, which had requested
relaxation of sulfur standards for 450,000 barrels, was issued a vari-
ance for 300,000 barrels after it had been determined that 150,000
barrels of nonconforming oil destined for Consolidated Edison, which
supplies the City's electricity, would not be needed (Consolidated
Edison opted to reduce its inventories). Distributor X was also grant-
efl its entire request for a variance for 455,903 barrels of two percent
sulfur-content residual fuel oil.
In addition to issuing a general variance, the City required that a
surcharge be paid equal to the total number of barrels of nonconform-
ing oil multiplied by seventy-five cents for those barrels containing
between 0.3 and one percent sulfur content and multiplied by two dollars
for those barrels containing between one and two percent sulfur-content
fuel oil. The level of the surcharges attempted to set the price of
*In order to be designated as an authorized buyer, a person or corpora-
tion was required to petition the City's Department of Air Resources
and demonstrate his contractual rights to specific quantities of con-
forming oil, which his supplier had been unable to provide. The
authorized buyer was also required to indicate his current consumption
or resale needs, his inventory of fuel oil, and the anticipated arrival
date of his next shipment of conforming oil from alternate suppliers.
Each applicant was required to contact other fuel-oil suppliers in an
attempt to obtain lower-sulfur oil. To simplify the application pro-
cess, the Department of Air Resources prepared a standard short-form
petition and supporting affidavit (see appendix'B.) which were provided
in quantities to potential applicants and suppliers.
31
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nonconforming oil at the same level as that of the low-sulfur conr
forming residual fuel oil. In essence, the general variance coupled
with a fuel-oil surcharge opened the market for nonconforming oil
while preventing a monopoly profit from being granted to those suppliers
and distributors who could not conform. This variance strategy also
promoted sulfur competition by encouraging the entry of more nearly
conforming grades while avoiding shortages. Since the NYC EPA is not
a legislative body, it does not have the power to levy taxes; and
since it is not a judicial body, the NYC EPA does not have the power
to fine or penalize behavior. Therefore, the surcharges were described
as "conditions of the variance," and these conditions had the effect of
law and were enforceable in the courts. The legal justification for
the surcharges was that the NYC EPA was using a device that enabled
more efficient and equitable exercise of their administrative powers.*
New York State's decision in regard to sales of nonconforming fuel oil
did not include fuel-oil surcharges. The decision, however, did re-
quire that any economic benefits resulting from the use of nonconform-
ing oil accrue to the public. Both the City's and State's attorneys
believed this requirement to be consistent with the condition of the
City's decision. Further, by designating the NYC EPA as the State's
agent for designating authorized buyers in the City, the State was
able to centralize the decision-making process while proceeding in
consonance with the State's regulatory procedures.
Overall, the general variance with the fuel-oil surcharge seemed to
operate effectively. High-level City officials speculated that the
*The City's Air Pollution Control Code sets emission standards and
delegates power to grant variances to the administrator of the City's
EPA. The New York Department of Environmental Conservation sets emis-
sions standards for the State. Any exceptions from the State stand-
ard, which is identical to the City's, standard, have to be made follow-
ing a certification by the New York Public Service Commission of a
shortfall of conforming oil and must be approved by the Federal En-
vironmental Protection Administrator. It has been generally thought
that while the City and State laws have concurrent application, when
both agencies issued a variance, the stricter ruling prevails.
32
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institution of economic conditions in the five boroughs of New York
City, combined with the omission of economic conditions in the three
outlying counties of the metropolitan area, subsequently prompted the
shipment of relatively more nonconforming fuel into the fringe areas
than into the center city. Such an effect was environmentally desir-
able since ambient pollutant concentrations are much higher in New
York City than in neighboring Nassau, Westchester, and Rockland
Counties.
Despite the apparent success of the program, the variance strategy did
cause some problems. Distributor Y, for example, refused to supply fuel
oil to New York City's Housing Authority and Board of Education if the
surcharge were enforced since contracts for the purchase of fuel by
the City's agencies contained clauses that invoked penalties and/or
•
price reductions if nonconforming fuel was supplied. In effect, the
surcharges would have invoked dual compensation to the public. In
order to eliminate this oversight from the original variance scheme,
a supplemental variance was issued on January 31, 1973, that provided
that suppliers and/or distributors who delivered nonconforming oil for
ultimate consumption by public-sector agencies subjected to financial
adjustment would be exempt from the fuel-oil surcharge. Another supple-
mental variance was issued on March 5, 1973, when Distributor Y noti-
fied the Department of Air Resources that it could supply 100,000 barrels
of residual oil with sulfur content of 0.35 percent. The distributor
claimed that it was unfair to pay the entire seventy-five cents per
barrel as required by the January 24th variance because the price dif-
ferentials between 0.3 and 0.35 sulfur content were less than seventy-
five cents. After careful consideration, the City agreed to a sur-
charge of 5.357 cents per barrel for this oil.
By the end of the heating season, Supplier A, which had originally
calculated a need for 2,850,000 barrels and, subsequently 2,500,000
barrels of nonconforming fuel oil, found it necessary to supply only
865,796 barrels of nonconforming residual-fuel oil. Of this total,
33
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501,630 barrels of nonconforming oil were sold to the City's agencies
and 6,095 barrels were sold outside New York City and were exempt
from the seventy-five cents per barrel surcharge. Thus, a total of
358,071 barrels were subject to the surcharge and Supplier A paid
$268,553.25 to the City. Supplier B, which had originally calculated
a need for 450,000 barrels of nonconforming oil, found it necessary
to supply only 216,602.83 barrels of nonconforming residual fuel oil,
all of which was subjected to the two-dollar surcharge. Supplier B
paid $433,205.66 to the City. In total, slightly more than 1,700,000
barrels of nonconforming residual oil were sold in New York City and
•
just over $1,500,000 was collected as a condition of the variance.
1973-74
The winter of 1973-74 was pharacterized initially by the Arab oil em-
bargo on October 16, 1973, by the subsequent "energy crisis," by the
advent of federal energy policies, and by the interaction of multiple
price-control systems that tended to differentially effect imported
versus domestic oils. Moreover, there was an interregnum in the City
and State governments, the establishment of the Federal Energy Office
in Washington, B.C., and congressional legislation to amend the Clean
Air Act of 1970. Therefore, policymaklrig was complicated during the
winter by changes of officials and policies at the City, State, and
Federal levels.
The East Coast, and New York City in particular, was affected more
severely than the rest of the country by the oil embargo because of
the area's heavy dependence on imported fuels. After December 1973,
however, requests for variances declined because of a mild winter and
conservation efforts that resulted in a reduction of fuel usage from
twenty to twenty-five percent. Thus, most questions of policy were de-
cided before the end of 1973.
Consolidated Edison, the City's electric utility, made the first re-
quest for a variance from the sulfur-content regulations. The company
34
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sought to use nonconforming fuel oil at all its facilities and coal
at the utility's Ravenswood Unit No. 3 and Arthur Kill Unit No. 3
(these two units account for approximately twenty-five percent of Con-
solidated Edison's residual fuel-oil usage). On November 12, 1973, a
joint hearing of City and State authorities along with Consolidated
Edison's representatives and the utility's suppliers was held in order
to determine the extent of the shortfall of residual fuel oil.
Consolidated Edison estimated a need for 21.5 million barrels of re-
sidual fuel oil during the five-month period from November 1, 1973, to
March 31, 1974. The utility estimated that during this five-month
period they would receive 1,400,000 barrels from Supplier B, 900,000
barrels from Supplier C, 4,200,000 from Supplier D, and 10,200,000
barrels from Supplier E, for a total of 16,700,000 barrels of conform-
ing residual fuel oil. Since Consolidated Edison had approximately
3,200,000 barrels of conforming fuel oil in reserve (of which about
700,000 accounts for the utility's required inventory), there was an
estimated shortage of between 2,300,000 and 4,800,000 barrels of con-
forming residual fuel oil.
Because of the absence of complete information regarding the demand
and supply conditions during the five-month period, the NYC EPA esti-
mated that the utility would be short 3,000,000 barrels of low-sulfur
residual fuel oil after using 1,800,000 barrels from reserves. On
November 19, 1973, in addition to granting a variance to Consolidated
Edison for the use of 3,000,000 barrels of nonconforming fuel oil, the
City issued a general variance to all suppliers to sell such oil. As
in the previous winter (1972-73), a fuel-oil surcharge was imposed
(in order to eliminate windfall profits), and authorized buyers had
to be designated through a short-form process. The surcharge was
again designed towards equalizing the price differentials between con-
forming and nonconforming fuel oils. Specifically, a supplier had to
pay to the City an amount equal to the total number of barrels of non-
conforming oil multiplied by twenty-five cents for those barrels con-
taining greater than 0.3 and less than 0.5 percent sulfur; one dollar
35
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for those barrels containing more than 0.5 percent and less than one
percent sulfur; two dollars and fifty cents for those barrels contain-
ing greater than one and less than two percent sulfur; and three dol-
lars for those barrels containing greater than two and less than three
percent sulfur. The NYC EPA, however, rejected authorization for the
use of coal since the authorities expected a national, or at least a
regional, plan that would allocate coal to the least environmentally
sensitive areas.
As in the previous year, state officials were required by law to verify
a shortage of fuel oil, and they certified an absolute shortage of both
conforming and nonconforming residual fuel oil. Therefore, on
November 27, 1973, in contrast to the City's decision on coal, the
State issued a variance permitting Consolidated Edison to use coal at
the Arthur Kill Unit No. 3 and Ravenswood Unit No. 3 facilities and 1.5
percent sulfur-content residual fuel oil in unlimited quantities (pro-
vided efforts had been made to secure conforming oil) until March 31,
1974.
Thus, both the public and Consolidated Edison were somewhat confused.
The City took the position, and the State seemed to agree, that both
City and State agencies possessed concurrent jurisdiction and that the
stricter variance prevailed. This resolution meant that coal could
not be used (under the City's variance) and that the sulfur content of
nonconforming fuel oil had to be restricted to 1.5 percent (under the
State variance). Moreover, the United States Environmental Protection
Agency had the right to accept or reject the State's variance because
of their authority to review changes of the State's air-quality imple-
mentation plan under the Clean Air Act of 1970.
Early in December of 1973, a series of meetings between representatives
of the City, State, and Federal governments and officials of Consoli-
dated Edison resulted in the formation' of a plan for the use of coal in
the least environmentally sensitive areas. On December 13, however,
the United States Environmental Protection Agency reversed the State's
36
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variance plan for the Ravenswood unit, but approved the plan for the
Arthur Kill unit. As a result, the City's variance plan was amended
to comply with the United States Environmental Protection Agency's
decision. Moreover, the NYC EPA imposed a surcharge on coal similar
to the fuel-oil surcharge, which was designed to make coal as expen-
sive as conforming fuel oil.*
Later, on December 21, Consolidated Edison obtained an injunction
against the levying of the surcharge. Despite the injunction, the
City's officials were convinced the surcharge would have to be suspend-
ed because market prices were rapidly changing and the rationale for
the surcharge was being undermined. Specifically, although most of
the residual fuel oil entering the City was derived from imported crude
oils, a multitiered market had developed. Supplier E was extremely
short of crude-oil supplies (because of the Libyan embargo) for the
company's Bahamian refinery (which was experiencing technical diffi-
culties) and declared force majure on its contractual obligations.
Normally, a supplier would purchase oil on the spot market in order to
fulfill contractual agreements. The spot price for conforming oil,
however, exceeded twenty dollars per barrel, and it was reported that
some oil was offered as high as twenty-seven dollars per barrel. Since
the price of 0.3 percent sulfur-content oil had been only $4.80 per
barrel earlier in the year, it was evident that the oil market was in
a state of chaos.
Other suppliers were able to deliver oil at various prices depending
on their supply conditions, and most buyers purchased oil despite the
*The determination of the coal surcharge was complicated because of the
absence of a coal publication similar to the Oil Buyers' Guide, and
the City was forced to rely on historical prices (Consolidated Edison
Insisted that the level of the surcharge was so high as to make the use
of coal economically infeasible). In addition, there was no systematic
price difference between grades related to sulfur content. Therefore
no attempt was made to construct a variance differentiating between sul-
fur contents, and an arbitrary upper limit was set on sulfur and ash
contents.
37
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price. Suppliers were thus forced to allocate oil to their regular
customers. Supplier C, for example, also declared force majure, free-
ing the company from its contractual agreements, and it then proceeded
to allocate oil to its customers at the rate of eighty-five percent of
the stated contractual obligation. Moreover, the supply was noncon-
forming oil and the price exceeded the previous month's price of con-
forming residual fuel oil.
Although in December of 1973 it was possible to purchase oil in the spot
market, the spot-market prices of conforming residual fuel oil were ris-
ing so precipitously as to virtually remove this option. Moreover, on
December 12, the Federal government published a proposed allocation pro-
gram that would lock-in the supplier-buyer relationships based on pre-
vious contracts. Thus, once the regulations became effective, there
would be no more "shopping" for oil.
As a consequence of these changes, the rationale for the surcharge was
gone. Searching the market for low-sulfur residual fuel oil was no
longer practical and would soon be legally prohibited. The stability
of the high/low sulfur-content price relationship was disrupted and
the effect of the surcharge was becoming arbitrary. Because oil prices
had more than tripled in a short period and because price controls on
terminal operators and distributors were in effect, it became increas-
ingly difficult to prove to the courts the existence of windfall pro-
fits. In fact, one manufacturing company revealed that it was currently
paying more for higher-sulfur fuel oil ($7.67 per barrel) than it was
paying for lower-sulfur fuel oil ($6.90 per barrel) only ten days ear-
lier. The company also claimed that no fuel-oil supplier was willing
or able to provide the firm with additional supplies of oil. Moreover,
Consolidated Edison argued in their lawsuit that the imposition of the
surcharge was not within the City's authority. Although the City's
lawyers were prepared to defend the City's authority to impose the sur-.
charge, they decided not to contest the injunction. On December 27,
1972, the City revoked the surcharges while reserving the right to re-
impose similar surcharges at a later date.
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APPENDIX B
PETITION AND AFFIDAVIT FORMS
ENVIRONMENTAL PROTECTION ADMINISTRATION
CITY OF NEW YORK
In the Matter of the Application of
for a Variance from the Provisions of
Section 1403.2-13.03 of the Air Code
Pursuant to Section 1403.2-3.11 of the New York City Air Pollution
Control Code, respectfully
for relief from the provisions of Section 1403.2-13.03 of the Code and
for authority to purchase barrels/gallons
of regular grade no. fuel oil with a sulfur content of
percent on a dry weight basis.
The following affidavit is offered in support of said petition.
By
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STATE OF NEW YORK
COUNTY OF . SS.:
being duly sworn, deposes and
says:
1. That petitioner's present inventory is
2. That attached hereto is a true copy of the contract executed
by and between petitioner as purchaser and
as supplier of .
3. That is unable to deliver
of such fuel oil due petitioner under
the terms of said contract.
4. That petitioner's consumption requirements for such fuel oil/
or obligation to delivery such fuel oil for the period from
to are
5. That the next scheduled date for delivery of conforming fuel
oil to the petitioner is •
6. That petitioner has made the following efforts to obtain
conforming fuel oil and/or fuel oil with a lower sulfur content than
that which petitioner seeks relief to purchase:
Sworn to before me this
day of , 19_
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SECTION III
THE REGIONAL PERSPECTIVE
NEW JERSEY
1972-73
Although New Jersey is heavily dependent on residual fuel oil, the
State's policy regarding variance requests was quite different from
that of New York City. Because of the characteristics of New Jersey's
residual fuel-oil market, the state's air-pollution-control authorities
were able to follow a strict, no-variance policy during the winter of
1972-73. Specifically, Supplier D which maintains both refinery and
desulfurization facilities in New Jersey, accounts for approximately
seventy percent of the state's residual fuel-oil market while Supplier
C represents about twenty-five percent, and smaller concerns servicing
the remaining five percent of the market.
During the 1972-73 winter, the two largest suppliers had no serious
difficulties with respect to supplies of conforming residual fuel oil.
There were, however, informal requests for variances from some of the
state's smaller suppliers. Investigations by New Jersey's Bureau of
Air Pollution Control (Department of Environmental Protection) showed
that, if necessary, consumers could obtain oil from alternative
suppliers and consequently all requests for variances were refused.
Hence, the Bureau was able to manage requests for fuel-oil variances
based on informal personal contact between suppliers, distributors,
and consumers.
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1973-74
Events during the winter of 1973-74, however, posed a more serious
threat to New Jersey's air-quality. In October and November of 1973,
in addition to public hearings, a series of investigations were un-
dertaken by New Jersey's Legislature, by the governor's office, and
by other State agencies to determine whether a relaxation of the sul-
fur—content regulations for fuel oil was warranted.
It was determined that shortages were probable and a temporary modi-
fication of the State's sulfur-content regulations was adopted.
From November 20, 1973 until March 15, 1974, the sulfur-content re-
strictions on fuel oil were differentially relaxed throughout the
State on the basis of air-shed-tolerance considerations. The new
regulations relaxed the allowable sulfur content of residual fuel oil
from 0.2 percent to 0.5 percent in urban areas and from 0.2 percent
to one percent in the remainder of the State.
Although these new regulations made fuels available that would have
been otherwise restricted, officials still found it necessary to re-
treat from the S'tate's original variance strategy and to issue var-
iances to the already relaxed restrictions. The variances were neces-
sitated because, unlike the 1972-73 winter in which only a small num-
ber of fuel-oil suppliers requested variances, the 1973-74 winter wit-
nessed Supplier C experiencing a shortage of conforming residual fuel
oil.
All 285 variances formally requested by customers of Supplier C were
granted. The procedure established by the New Jersey Department of
Environmental Protection for issuing a variance involved a petition
from the customer, certification of"the shortage from the supplier,
and a decision from the Department (see appendix C). Specific (i.e.,
individual) variances stating the quality, quantity, and duration of
the relaxed restrictions were issued at the discretion of three full-
time administrators, who utilized information furnished primarily
42
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through petition forms and telephone communication with representa-
tives of the various fuel-oil suppliers.
MASSACHUSETTS
1972-73
Suppliers of residual fuel oil are essential to Massachusetts despite
/i
a State law that prohibits the use of such oil in facilities utilizing
less than three million BTU (British Thermal Units) per hour. In
fact, utilities, hospitals, schools, large industries and large apart-
ment complexes account for the consumption of eighty-four million
barrels of residual fuel oil per year in Massachusetts.
During the latter part of 1972, both the major and independent fuel-
oil suppliers submitted formal petitions for variances to the State's
sulfur regulations. In response to these variance requests, Governor
Francis W. Sargent created a task force to investigate the alledged
fuel-oil shortage and to recommend policy alternatives. Public hear-
ings were also held during January of 1973, to review the petition
submitted by a subsidiary company of Supplier B. Massachusetts' of-
ficials, recognizing the authenticity of the claimed shortages and
the potential seriousness of the problem, decided to issue a general
variance to the State's air-pollution regulations. The decision to
grant a general variance as opposed to specific (i.e., individual)
variances was based on considerations of administrative expediency
(i.e., time and manpower constraints).
The general variance was for a thirty-day period ending February 28,
1973, and it relaxed sulfur restrictions in the Boston area* from 0.5
percent to one percent sulfur content residual-fuel oil. For unknown
reasons, only a small quantity of nonconfonning residual fuel oil
actually entered the Boston area. On a strictly speculative basis,
this result can be explained by the fact that one percent sulfur-con-
tent fuel oil was also in extremely short supply. Specifically, the
*The Boston area is comprised of the City of Boston and twelve sur-
rounding communities.
43
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nonlinear characteristics of the fuel-oil surcharge imposed in New
York City may have influenced the fuel-oil market in Massachusetts.
Since New York City represents a significant portion of the north-
eastern residual fuel oil market, the City's surcharge tended to in-
duce suppliers to use the lower-sulfur-content nonconforming fuel oils
before resorting to the higher--sulfur^content supplies. That is,
because of New York City's variance strategy, the demand for one per-
cent residual fuel oil was accentuated.
Western Massachusetts experienced a different situation from that of
Boston. It should be recognized that because ambient air-quality re-
presents less of a problem in Western Massachusetts than in Boston,
authorities exhibited greater flexibility in dealing with variance re-
quests originating outside of Boston. On November 21, 1972, in re-
sponse to requests for relaxation of sulfur—content standards, a gen-
eral variance was issued for Western Massachusetts permitting the use
of up to 2.2 percent sulfur—content residual fuel oil from April 1,
1973 to October 1, 1973.
1973-74
As early as July of 1973, the major fuel-oil suppliers warned"Massachu-
setts' authorities that the supply of conforming fuel oil for the follow-
ing winter would be ten to fifteen percent short of the anticipated de-
mand. Since these estimates excluded supplies from independent fuel-
oil suppliers, which account for approximately forty-five percent of
the Boston fuel-oil market, pressure mounted for relaxation of sulfur^
content requirements.
Public hearings were held in September of 1973 to determine what policy
should be taken in light of the predicted shortfalls for the upcoming
winter. On November 2, 1973, State authorities adopted new regulations
concerning the sulfur content of fuel oils. Specifically effective
November 15, 1973 until Mary 15, 1974, the new residual fuel oil regu-
lation permitted sources using more than 250 million BTU (British
Thermal Units) per hour to apply for variances to burn residual oil up
44
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to 2.7 percent sulfur content. Moreover, this new regulation
stipulated that a three-day supply of 0.5 percent sulfur content
fuel oil had to be maintained. This reserve would be utilized when
adverse meteorological conditions warranted (as determined by State
officials). In effect, the regulation permitted a discretionary fuel-
switching program to be instituted. The same day, the State's
authorities granted a variance to the New England Power Company to
use 2.6 percent sulfur-content residual fuel oil from January 1, 1974
through October 1, 1974.
Specific variances were issued so that Massachusetts' authorities
could exercise a greater amount of control over the allocation of non-
conforming fuel oil. In essence, the State's officials attempted to
prevent serious degradation in ambient-air quality by allocating non-
conforming oil by location rather than by supplier.
Public response to the implementation of the State's variance strategy
was overwhelming. State officials became swamped with variance re-
quests from consumers. Because administrative consideration of var-
iance requests took between twenty-five and sixty days, it was evident
that modifications were necessary. On December 11, 1973, the regula-
tions were amended in order to expedite the variance process for
sources using as little'as three million BTU per hour. These new reg-
ulations reduced the necessary time for granting variances to five days
and required that consumers provide a statement from both their normal
suppliers and alternative suppliers demonstrating inability to obtain
conforming fuel oil. Although a relatively small number of variances
were issued under this system, the number of requests still proved
cumbersome. State authorities decided to further streamline the var-
iance procedures by allowing suppliers to provide notification that con-
forming oil was not available in behalf of the company's customers (al-
though customers were still required to submit requests in order to be
considered).
45
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Obviously, the success of the allocation scheme depended on the close
and voluntary cooperation between suppliers and State authorities
since no legal authority existed to force suppliers to allocate cer-
tain sulfur content fuel oils to specific customers. In fact, only a
few companies cooperated, most notably the independent fuel-oil sup-
pliers. The suppliers that did not cooperate were refused variances.
In total, 674 variances were issued.
CONNECTICUT
1972-73
During the winter of 1972-73, Connecticut issued no variances to the
State's sulfur-content regulations. There was one informal request
for a variance from Supplier C. When the State's authorities required
the company to certify the short ate, however, Supplier C did not pur-
sue the variance request.
1973-74
In mid-October of 1973, Supplier C informed the State's utilities that
the company would no longer be able to meet contractual obligations
for conforming (0.5 percent) residual fuel oil. Supplier C sells fuel
oil to approximately eighty percent of the State's utilities and they
account for one-half of Connecticut's residual fuel oil consumption.
On October 30, 1973, the utilities officially petitioned for a variance
from the State's sulfur-content regulations.
On November 9, 1973, public hearings were initiated to consider the
variance request. A definitive decision was delayed because of Sup-
plier C's reluctance or inability to supply the State with documented
evidence of a shortage and the State's inability to otherwise certify
the shortage of conforming residual fuel oil.
As the winter progressed, State officials became less demanding in re-
quiring documentation of the fuel-oil shortage since they recognized
46
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the potential public health and safety problems as well as the poli-
tical consequences if shortages actually developed. As a result, on
November 30, 1973, a variance to the State's sulfur regulation was
issued. The variance allowed Northeast Utilities, the State's largest
supplier of electrical power (the company supplies approximately two-
thirds of the State's electricity) to use nonconforming fuel oil with
a sulfur content not exceeding 1.25 percent for 120 days. Moreover,
the variance also allowed the utility to use coal if the utility's
fuel oil supply fell below a twenty-five day inventory. The variance
required that any coal used by the utility must have an average sulfur
content of less than two percent. By the end of the variance period,
the utility had used no coal and only a small amount of nonconforming
residual fuel oil.
On November 27, 1973, Supplier E and a distributor (both located in
Massachusetts) informed State authorities that the companies would no
longer be able to supply their Connecticut customers with conforming
residual fuel oil. On December 19, 1973, public hearings were held
and the companies explained they were confronted with storage rather
than availability problems. State officials granted a variance for
the unlimited use of one percent sulfur content residual fuel oil un-
til May 1, 1974, provided the company's made efforts to either con-
struct or secure storage facilities.
47
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APPENDIX C
PETITION AND CERTIFICATION FORMS
County of ^
State of New Jersey
1. My name is . I am employed
_ as . I
possess to swear to the truth of the representation made in this
certification and to bind _ _ thereto.
2. Due to circumstances beyond any reasonable degree of its
control _ will not be able to
sell or deliver in New Jersey from _
(date)
until _ , No. 5, No. 6 or heavier grade
(date)
fuel oil having a sulfur content conforming to the provisions of
N.J.A.C. 7:1-3.1.
3. On the basis of the most reliable information available to
it at this time, _ will, sub-
ject to available supplies, be able to sell or deliver No. 5, No. 6
or heavier grade fuel oil having a sulfur content not greater than
_ % in the Counties of Union, Essex, Hudson, Bergen and
Middlesex, and not greater than _ % sulfur in any other county
in New Jersey.
4. _ will not sell or deliver
No. 5, No. 6 or heavier grade fuel not conforming to the provisions
of N.J.A.C. 7:1-3.1 to any person not in possession of a valid
variance issued by the Commissioner of the New Jersey Department of
Environmental Protection authorizing the use of No. 5, No. 6 or
heavier grade fuel oil not conforming to the provisions of N.J.A.C.
7:1-3.1.
5. _____ _ will notify the Commissioner
of the Department of Environmental Protection within ten days of any
change in circumstances which will enable _ _____ _
to sell or deliver No. 5, No. 6 or heavier grade fuel oil conforming to
the provisions of N.J.A.C. 7:1-3.1.
6. _ __ makes this certification with
full knowledge that the Department of Environmental Protection relies
on the statements made herein.
48
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7. I certify, based upon information, knowledge and belief,
that the representations made herein are true.
Signed for_
Date:
49
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STATE OF NEW JERSEY
DEPARTMENT OF ENVIRONMENTAL PROTECTION
Application No.
Reference: Administrative Order No. Thirty-Nine
New Jersey Administrative Cost 7:1-3.2
Temporary Variances For No. 5, No. 6 and
Heavier Grade Fuel Oils, Crude Oil and Coal
Dear
Under authority set forth in N.J.A.C. 7:1-3.3, SULFUR CONTENT
IN FUELS the following action has been taken on your application
dated for an Emergency Temporary Variance
for located at
•
»
1. _ Your request dated for a
variance has been disapproved because
2. _ Authorization is granted to burn no more than
per week of .__ have a sulfur
content not in excess of % by weight.
This authorization is subject to the following conditions:
1. (a) ~ Compliance with N.J.A.C. 7:27-3 (formerly Chapter 4
of the New Jersey Air Pollution Control Code) must
be maintained.
(b) ~ Authorization is granted to emit smoke the shade or
appearance of which is: not darker than Number
on the Ringelmann Smoke Chart of greater than %
opacity, exclusive of water vapor.
2. (a) ~ Compliance with N.J.A.C. 7:27-4 (formerly Chapter 5
of the New Jersey Air Pollution Control Code) must
be maintained.
(b) ~ Authorization is granted to emit no more than
Ibs/hr of solid particles
50
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3. _ Changes filed with your variance application will be
acceptable as your standby plans subject to N.J.A.C.
7:27-12 (formerly Chapter 12 of the New Jersey Air
Pollution Control Code).
4. Others
This variance including all conditions is effective from
and terminates on
Failure to comply with the terms of this variance
may result in its cancellation and/or prosecution for violation of
the New Jersey Administrative Code.
51
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
1. REPORT NO.
EPA-600/5-75-007
3. RECIPIENT'S ACCESSION>NO.
4. TITLE AND SUBTITLE
5. REPORT DATE
Financial Incentives and Pollution Control
A Case Study
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Terry A. Ferrar, Alan B. Brownstein,
John D. Simpson, Sally Streiter
8. PERFORMING ORGANIZATION REPORT NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
Center for the Study of Environmental Policy
The Pennsylvania State University
401 Grange Building
University Park, Pennsylvania 16802
10. PROGRAM ELEMENT NO.
1HA093 09 AFD 07
11. CONTRACTJGOSStWXNO.
68-01-2250
12. SPONSORING AGENCY NAME AND ADDRESS
Washington Environmental Research Center
Office of Research and Development
U.S. Environmental Protection Agency
Washington, D.C. 20460
13. TYPE OF REPORT AND PERIOD COVERED
14. SPONSORING AGENCY CODE
15. SUPPLEMENTARY NOTES
16. ABSTRACT
Confronted with shortages of low-sulfur content residual fuel oil, several
air-pollution-control authorities in the northeastern states were forced to
relax air-quality standards during the winters of 1972-73 and 1973-74. The
authorities did so by granting variances to their sulfur-content standards
for residual fuel oil. The characteristics of these variances provide the
social test-tube for this analysis. The report examines alternative policies
such as direct regulation, fuel-oil surcharges, emission taxes and quantity
control.
This report was submitted in fulfillment of EPA Contract No. 68-01-2250
by the Center for the Study of Environmental Policy at The Pennsylvania State
University under the sponsorship of the Environmental Protection Agency. Work
was completed as of December 31, 1974.
17.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b.lDENTIFIERS/OPEN ENDED TERMS C. COSATI Field/Group
18. DISTRIBUTION STATEMENT
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EPA Form 2220-1 (9-73)
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