United States
                         Environmental Protection
                                          Air and Radiation
           December 1991
                  Proposed  Acid  Rain  Rules
                          The U.S.  Environmental Protection  Agency  (EPA)  has
                          proposed  four rules containing  the core acid rain require-
                          ments:  the Permits Rule  (40  CFR Part 72), the  Allowance
                          System Rule (40 CFR Part 73), the Continuous Emission
                          Monitoring Rule (40 CFR Part 75), and the Excess Emissions
                          Rule (40 CFR Part 77). EPA will also propose additional rules
                          at a future date. These rules  will include requirements for
                          facilities that elect to opt in to the Acid Rain Program (40 CFR
                          Part 74) and for the nitrogen oxide (NOX) control program (40
                          CFR Part 76). This fact sheet discusses the interdependence of
                          the core acid  rain rules.
    Under Title IV of the Clean Air
    Act  Amendments  of 1990,
Congress authorized the U.S. En-
vironmental Protection Agency
(EPA) to establish the Acid Rain
Program. The principal goal of this
                        program is to achieve significant
                        environmental benefits through
                        reductions in sulfur dioxide (SOz)
                        and nitrogen  oxide (NOX) emis-
                        sions, the primary components of
                        acid rain. To achieve this goal at the
                   Acid Rain Formation
                        Emssxxtt lit mixed with oxygen.
                       ozone, ind wfer to fcxm sulfaric and
                       nitre Kids in tie presence of sunigM
                         Dry Deposition of Acidic
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%


            Industrial/Manufacturing Processing-4.6%

              Industrial Combustion-15.
              Other Combustion-3.8%
                                                                                   Other 0.6%

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

Allowance Trading
   The  proposed   Acid  Rain
   Program represents a dramatic
departure  from  traditional  com-
mand and control regulatory
methods that establish specific in-
flexible emissions limitations with
which all  affected  sources must
comply. Instead, the program intro-
duces an allowance trading system
that harnesses the incentives of the
free market to reduce pollution.
  Under  this system,  affected
utility units will  be allocated
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
"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.

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

   The designated representative
   for each source is required to
file a permit application for the
source and a compliance plan for
each affected unit at the source.
The permits and  compliance
plans feature the same flexibility
that  characterizes the  Acid  Rain
Program as a whole; indeed, they
complement the market-oriented
allowance system and foster trad-
ing. For example, they allow
sources   to  make  real-time
allowance  trading decisions
through the use of automatic per-
mit amendments. The  permits
and  compliance  plans also let
sources fashion  a compliance
strategy that is tailored to  their
individual needs.
  The permit stipulates the 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
  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
    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-
  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-

For More Information
T7or more information, write to:

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

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

  Fact sheets are available on the
following subjects:

   Allowance System

  o Continuous Emission

  o Environmental Benefits

  o Excess Emissions

  o Permits

  o Auctions and Sales, and IPP
    Written Guarantee