&EPA United States Environmental Protection Agency Air and Radiation (ANR-445) 400/1-91/038 December 1991 Proposed Acid Rain Rules Overview The U.S. Environmental Protection Agency (EPA) has proposed four rules containing the core acid rain require- ments: the Permits Rule (40 CFR Part 72), the Allowance System Rule (40 CFR Part 73), the Continuous Emission Monitoring Rule (40 CFR Part 75), and the Excess Emissions Rule (40 CFR Part 77). EPA will also propose additional rules at a future date. These rules will include requirements for facilities that elect to opt in to the Acid Rain Program (40 CFR Part 74) and for the nitrogen oxide (NOX) control program (40 CFR Part 76). This fact sheet discusses the interdependence of the core acid rain rules. Under Title IV of the Clean Air Act Amendments of 1990, Congress authorized the U.S. En- vironmental Protection Agency (EPA) to establish the Acid Rain Program. The principal goal of this program is to achieve significant environmental benefits through reductions in sulfur dioxide (SOz) and nitrogen oxide (NOX) emis- sions, the primary components of acid rain. To achieve this goal at the Acid Rain Formation Emssxxtt lit mixed with oxygen. ozone, ind wfer to fcxm sulfaric and nitre Kids in tie presence of sunigM Dry Deposition of Acidic Compounds Coal-fired electric utilities and other sources that bum tossil fuels emit sulfur dioxide and nitrogen oxides Vehicles emt nitrogen oxides and hydrocarbons Sulfur dioxide and nitrogen oxide emissions react with water vapor and oxidants in the atmosphere and are chemically transformed into acidic compounds. These compounds are deposited in rain or snow; the compounds also may join airborne particles and fall to earth as dry deposition. lowest cost to society, the program will employ both traditional and innovative market-based ap- proaches for controlling air pollu- tion. In addition, the program will encourage energy conservation and promote pollution prevention. The legislation sets as its primary goal the reduction of annual SOz emissions by 10 million tons below 1980 levels. To achieve these SO2 reductions, the law requires a two- phase approach, involving the trading of annual SO2 emission allowances, that gradually tightens the restrictions placed on fossil fuel-fired power plants. Phase I begins in 1995 and affects 110 mostly coal-burning electric utility plants located in 21 eastern and midwestem states. Phase II, which begins in the year 2000, tightens the annual emissions limits imposed on these large higher emitting plants and also sets restrictions on smaller cleaner plants fired by coal, oil, and gas. All existing utility units with an output capacity of 25 megawatts or greater and all new utility units will be affected by Phase II. Printed on Recycled Paper. ------- U.S. S02 Emissions Distribution-By Source Other Combustion-2.6% U.S. NOx Emissions Distribution-By Source Industrial Combustion-11.6% Transportation-3.7% Industrial/ Manufacturing Processing-12.7% Industrial/Manufacturing Processing-4.6% Industrial Combustion-15. i.6% Other Combustion-3.8% Utilities-69.4% Utilities-32.4% Other 0.6% Transportation-43.0% Other-0.0% Source: U.S. EPA. November 1989. The NAPAP Emissions Inventory (Version 2 -1985 Data). The Acid Rain Program Operating Principles: Workable, Flexible, Accountable The four core acid rain rules propose an integrated, well-orchestrated system for ac- complishing the three primary ob- jectives of the Acid Rain Program: • Achieve environmental benefits through reductions in SOz and NOX emissions. • Facilitate active trading of allowances and use of other compliance options to mini- mize compliance costs, max- imize economic efficiency, and permit strong economic growth. • Promote pollution preven- tion and energy efficient strategies and technologies. Each individual rule fulfills a vital function in the larger program. The allowance trading system creates low cost rules of ex- change that minimize government intrusion and make allowance trading a viable compliance strategy; the permitting process af- fords sources maximum flexibility in selecting the most cost-effective approach to reducing emissions; the continuous emissions monitor- ing system (CEM) provides credible accounting of emissions to ensure the integrity of the market- based allowance system and the achievement of the reduction goals; and finally, the excess emissions rule provides the incentives to en- sure self-enforcement, greatly reducing the need for govern- ment action. Allowance Trading The proposed Acid Rain Program represents a dramatic departure from traditional com- mand and control regulatory methods that establish specific in- flexible emissions limitations with which all affected sources must comply. Instead, the program intro- duces an allowance trading system that harnesses the incentives of the free market to reduce pollution. Under this system, affected utility units will be allocated allowances annually based on their historic fuel consumption and a specific emissions rate. Each allowance permits a unit to emit 1 ton of SOz during or after a specified year. For each ton of SO2 discharged in a given year, one allowance is retired, that is, it can no longer be used. During Phase n of the Acid Rain Program, the Act will set a permanent ceiling (or cap) on total yearly allowance al- locations to utilities at 8.95 million allowances. This cap firmly restricts emissions and ensures that the mandated emissions reduc- tions will be achieved and environ- mental benefits maintained. Allowances may be bought, sold, or banked. Any person may acquire allowances and par- ticipate in the trading system. At the end of the year, utilities are granted a 30-day true-up or grace period, during which SOz allowances may be purchased, if necessary, to cover each unit's emissions for the year. At the end of the grace period, the allowances a unit holds in its com- pliance account must equal or ex- ceed the annual SO2 emissions recorded by the monitoring sys- tem. Extra allowances may be sold or banked for use in future years. Excess Emissions If compliance is not achieved, the owners or operators of delin- quent units must pay a penalty of $2,000 per excess ton of emissions. In addition, violating utilities must offset the excess SO2 emissions with allowances in an amount equivalent to the excess. In essence, by giving up allowances to cover excess emissions, delinquent units will be compelled to reduce emis- sions of SOz • These utilities must submit an excess emissions offset plan to EPA that outlines how these cutbacks will be achieved. ------- Auctions, Sales, and IPP Contingency Guarantee EPA will hold allowance auctions and sales annually. The auctions will help to send the market an allowance price signal, as well as furnish utilities with an additional avenue for purchasing needed allowances. The sales will offer allowances at a fixed price of $1,500. Anyone can buy allowances in the direct sale, but independent power producers (IPPs) can obtain written guaran- tees from EPA stating that they will have first priority. These guarantees, which will be awarded on a first-come, first- served basis, secure the option for qualified IPPs to purchase a year- ly amount of allowances over a 30-year span. This provision enables IPPs to assure lenders that they will have access to the allowances they need to build and operate new units. Impetus to Conserve THhe allowance trading system JL contains an inherent incentive for utilities to undertake conser- vation measures since for each ton of SO2 that a utility avoids emit- ting, one less allowance needs to be retired. Energy-efficient utilities will be able to sell their surplus allowances at a profit. As provided in the Act, EPA has also set aside an allowance reserve to stimulate energy conservation. Those utilities that either imple- ment demand-side energy conser- vation programs to curtail emissions or install renewable energy generation facilities may be eligible to receive bonus allowances from this reserve. The Allowance Tracking System "G"PA will institute an electronic JUrecordkeeping and notification system, called the Allowance Tracking System (ATS) to keep track of allowance transactions and the status of allowance accounts. ATS will be the official tally of allowances by which EPA will determine compliance with the emissions limitations. Any party interested in participating in the trading system may open an ATS account by submitting an applica- tion to EPA. Accounts will contain information on unit account balan- ces, emissions, account repre- sentatives (which must be Phase I Sources During Phase I, 268 units at 110 sources, located primarily in the Midwest and North- east, will be affected by acid rain regulations. During Phase II, the number of affected units will increase to 2,200, as smaller cleaner power plants are included in the regulatory network. appointed by each trading party), and serial numbers for each allowance. ATS will be com- puterized to expedite the flow of data and assist in the development of a viable market for allowances. Designated Representatives Each source must appoint one individual to represent the owners and operators of the source in all matters relating to the holding and disposal of allowances for its affected units. The designated representative also will be responsible for all sub- missions pertaining to permits, compliance plans, emissions monitoring reports, offset plans, compliance certification, and other necessary information. Permitting The designated representative for each source is required to file a permit application for the source and a compliance plan for each affected unit at the source. The permits and compliance plans feature the same flexibility that characterizes the Acid Rain Program as a whole; indeed, they complement the market-oriented allowance system and foster trad- ing. For example, they allow sources to make real-time allowance trading decisions through the use of automatic per- mit amendments. The permits and compliance plans also let sources fashion a compliance strategy that is tailored to their individual needs. The permit stipulates the basic allowance allocation for each af- fected unit at a source. The permit application must certify that each unit account will hold a sufficient number of allowances to cover the unit's SO2 emissions for the year and will comply with the ap- plicable NOX limit. In addition, the compliance plans may specify alternative measures that will be taken to ensure compliance. Per- mits will be subject to public com- ment before approval. ------- Compliance Options: Freedom to Choose The Acid Rain Program allows sources to select their own compliance strategy. For example, to reduce SOz and NOX emissions, an affeeted source may repower its units, use cleaner burning fuel, or reassign some of its energy production capacity from dirtier units to cleaner ones. A source may also elect to install scrubber equipment at one or more units that reduces emissions by 90 percent or more, and possibly receive extra allowances and an ex- tension on Phase I compliance deadlines. Still other sources may decide to reduce electricity genera- tion and compensate for reduced output in one of several ways, in- cluding the adoption of conserva- tion or efficiency measures. Some of the options will afford the unit special treatment, such as a compliance extension or extra allowances. Others, like fuel switching, require ho special prior approval. In either case, the Acid Rain Program allows affected utilities to combine these and other op- tions in any way they see fit in order to tailor their compliance plan to the unique needs of each unit or system. Continuous Emission Monitoring The Acid Rain Program man- dates that each unit be equipped with a continuous emission monitoring (CEM) sys- tem that measures and records emissions hourly. The CEM sys- tem will be required to monitor emissions of SO2 and NOX, as well as measure volumetric flow, opacity, and diluent gas. The CEM system is critical to the Acid Rain Program. It will instill confidence in allowance transactions by cer- tifying the existence and quantity of the commodity being traded. Monitoring will also ensure, through accurate accounting, that the emissions reduction goals are met. Unlike traditional regulatory programs, which measure specific emissions rates, the Acid Rain Program will focus attention on total emissions. The proposed rule also contains provisions for initial equipment certification procedures, periodic quality assurance and quality con- trol procedures, and recordkeep- ing and reporting. Units will electronically report emissions data to EPA on a quarterly basis. The proposed rule also contains procedures for filling in for miss- ing data periods. TH PA established the Acid Rain JLi Advisory Committee (ARAC) to gain broad input into the development of the Acid Rain Program, to promote collabora- tion, and to build consensus. ARAC consisted of repre- sentatives from various stakeholder groups, including utilities, emissions control equip- ment vendors, academia, Public Utility Commissions, state pollu- tion control agencies, and en- vironmental groups. Prior to the proposal of these rules, ARAC convened six public meetings with hundreds of participants. The input received through this process was critical to the development of the core rules of the Acid Rain Program. EPA will maintain this open door policy as it implements the program, and will continue to solicit input from the different par- ties involved. In addition, EPA will evaluate the benefits and effects of the program through economic and environmental studies. The Acid Rain Program is al- ready being viewed around the world as the prototype for tack- ling emerging environmental is- sues. The allowance trading sys- tem capitalizes on the power of the marketplace to reduce SOz emissions in the most cost-effec- tive manner possible. The permit- ting program allows sources the flexibility to tailor and update their compliance strategy based on their individual circum- stances. The continuous emission monitoring system provides the ac- curate accounting of emissions necessary to make the program work, and the excess emissions penalties provide strong incentives for self-enforcement. Each of these separate components contributes to the effective working of an in- tegrated program that lets market incentives do the work to achieve cost-effective emissions reduc- tions. For More Information T7or more information, write to: U.S. EPA Office of Air and Radiation Acid Rain Division (ANR-445) Washington, DC 20460 'If you would like to receive other fact sheets in this series, call the Acid Rain Hotline at (617) 641-5377 or the EPA Public Information Center (PIC) at 202-260-2080. Fact sheets are available on the following subjects: « Allowance System o Continuous Emission Monitoring o Environmental Benefits o Excess Emissions o Permits o Auctions and Sales, and IPP Written Guarantee Regulations ------- |