m
UniteaStates
Environmental Prote
Agency
Radiation
(ANR-445)
EPA/400/1-91/01
April1991
t
PA's Acid Rmfi Program
rting-^ New CoLjjrse in
v i FG n m e nlafffotect i o n
EMISSIONS
REDUCED
10 MILLION TONS
V.- »'*f
-—\
2
EMISSIONS
MONITORS
INSTALLED
&
EMISSIONS
REDUCED
5 MILLION TONS
ALLOWANCE
SYSTEM AND
PERMIT RULES
-------
Making Markets Work
for Environmental Protection
In July of 1989, President Bush submitted to Congress a
comprehensive package of Clean Air Act amendments. The center-
piece of this initiative was an innovative program to harness the
power of the marketplace to combat acidic deposition using
tradeable allowances and free market incentives. The Acid Rain
Program subsequently enacted by Congress last November makes
use of these approaches to facilitate significant reductions in sulfur
dioxide, the main component of acidic deposition. This use of economic
incentives to achieve environmental goals is already seen around the
world as a prototype for tackling other environmental issues in the
years to come.
We believe that economic incentives have significant advan-
tages over traditional "command and control" regulations. For exam-
ple, we are confident that the Acid Rain Program will demonstrate that
creating ways to "let the market do the work" will result in tapping the
creative talents of industry to bring about the most cost-effective pollu-
tion reductions possible.
Making the Acid Rain Program work efficiently and to the
benefit of all Americans will take our best efforts. With that in mind,
we want to share with you our vision of the way in which we intend to
develop and implement this program.
We look forward to working with all interested parties to make
it a success.
William K. Reilly
Administrator, U.S. EPA
Michael ]. Boskin
Chairman, Council of Economic Advisors
Background
Since the Clean Air Act was passed in
1970, the United States has made impres-
sive strides in improving and protecting
the quality of our air. Nonetheless,
formidable challenges still remain. To
address these challenges, Congress
amended the Clean Air Act in November
of 1990. This landmark legislation includes
provisions for reducing and controlling
acidic deposition (often referred to as acid
rain), which is a serious environmental
concern in many parts of the country.
The 1990 amendments to the Clean
Air Act mandate reductions in sulfur
dioxide (SO?) and nitrogen oxide (NOS)
emissions, the primary components of
acidic' deposition. To achieve these
reductions, the U.S. Environmental
Protection Agency (EIPA) is implementing
an innovative market-based Acid Rain
Program that uses economic incentives to
acheive cost-effective emissions
rod net ions.
Acid Rain
Program Goals
EPA has set three goals for the Acid
Rain Program:
• Achieve a 10-million-ton reduction of
SO2 and mandated reductions of NO,.
• Facilitate active trading of allowances to
minimise compliance costs, maximize
economic efficiency, and permit strong
economic growth.
• Promote the development and use of
pollution prevention and energy-
efficient strategies and technologies.
The articulation of these goals was
influenced by the heightened awareness
of and expectations for the program.
Consideration of these goals illustrates
their strong interdependence. Clearly, the
legislation charges the Agency with the
responsibility for achieving a 10-million-
ton reduction of SO2 and significant
reductions of NO, annually, beginning in
the year 2000. Our primary goal is to
ensure that these mandated reductions
are achieved.
Tf this goal is to be accomplished
cost-effectively, our next two goals follow
directly: we will need to have an active
emissions allowance trading program,
and ensure that interested parties have
the information, regulatory flexibility, and
incentives necessary to make the trading
system work. We also will need to see the
implementation of policies and applica-
tion of technologies that use energy in the
most efficient manner possible.
Accomplishing these goals will keep costs
down and ensure that allowances are
available to allow for strong economic
growth. Finally, closely linked to our
primary goal of achieving the mandated
numerical reductions is an objective that
lies at the heart of the Agency's mission—
we must be committed to assessing the
achievement of environmental results.
Acid rain causes loss of fish
and other aquatic life, and
damages high-elevation
forests.
-------
Acid Rain
Program Principles
As we develop the regulatory frame-
work necessary to achieve our program
goals, we are committed to carrying out
our actions in accordance with the follow-
ing principles.
• Keep our eyes on the prize,
Develop a precise and accountable
program to ensure that the 10-million-
ton SO; and mandated NO, reductions
are achieved, progress is evaluated, and
benefits are measured.
• Let the market
do the work.
Maintain a simple, flexible, and
predictable program to promote the
development and operation of the
market for allowances.
• Consult, communicate,
and strive for consensus.
Understand and consider the views
and definitions of success for all of the
parties involved in implementing the
program, develop and communicate
easily understandable information to
key audiences, and attempt to build a
consensus on major policy and imple-
mentation issues.
• Promote regulatory efficiency.
Consider the program's integration
with existing and required regulatory
elements to avoid redundancy and
achieve efficiencies both within the
Agency and among EPA, the Public
Utility Commissions (PUCs), and other
regulatory agencies.
Program Highlights
Allowance Trading
The centerpiece of the Acid Rain Program
is an innovative market-based approach for
bringing about significant reductions in SO:.
f^( This approach, which calls for free
trading of emissions allowances, sets a
precedent in environmental regulation. It
envisions a shift from EPA's historic mode
of command and control regulation to one
that harnesses the incentives of the free
market to reduce emissions. As noted
above, it is primarily this program compo-
nent that will help to ensure that reduc-
tions are achieved at a lower cost.
This market-based approach is being
viewed as a model for future environmen-
tal programs, and it is on this program
component that many will judge the
success or failure of the entire Acid Rain
Program. For this reason, we believe that
the definition of success of this program
must go beyond its ability to achieve man-
dated reductions. A successful program
also must ensure our ability to meet the
nation's future energy needs and achieve
the reductions in compliance costs that we
believe will result through the use of this
market-based approach. Since robust
allowance trading would help to ensure
the accomplishment of these goals, we
must work collaboratively to demonstrate
both the feasibility and desirability of
allowance trading. However, given some
of the legislative encouragement devised
to foster trading (e.g., auctions and sales)
and the potential that further actions may
burden a "free market" and have unin-
Acid Rain Formation
Emlitlonc are mixed with oxygen,
ozone, and water to form sutfuflc and
nitric acid* in the presence ol sunlight
Dry Deposition
ol Acidic Compounds
\ i i
Coal-tired electric utilities and other
sources that burn fossil fuels emit
sulfur dioxide and nitrogen oxides
Vehicles emit
nitrogen oxides
and hydrocarbons
Sulfur dioxide and nitrogen oxide emissions react with water vapor and oxidants in the atmosphere
and are chemically transformed into acidic compounds. These compounds are deposited in rain or
snow; the compounds also may join dry airborne particles and fall to earth as dry deposition.
2
tended inhibiting consequences, our meth-
ods for encouraging trading should be as
unobtrusive as possible. Without question,
the most important thing EPA can do to
promote trading is to facilitate the flow of
essential information and develop a sim-
ple, flexible program that provides poten-
tial traders with a sense of certainty about
the regulatory consequences of trading
decisions. Rules must be clear and unam-
biguous, drafted to minimize bureaucratic
interference, and issued in a timeframe
that will allow all parties to conduct requi-
site planning.
To fulfill this role, the Agency must
actively seek out the views of interested
parties early during the regulatory devel-
opment stage, and take into account the
expressed concerns and interests of all of
the players in the complicated regulatory
network. Finally, sharing information
with the interested public and creatively
demonstrating the potential gains of
trading will go a long way toward
engendering an understanding that it is in
the mutual interest of all parties to make
use of the trading provisions.
Permits and
Compliance Plans
Permits and compliance plans should
complement the allowance system and foster
trading by providing sufficient flexibility to
allow sources to make real-lime allowance
trading decisions.
Our challenge in this critical program
area is to develop permit and compliance
plan requirements that maximize flexibili-
ty while providing information for the
market, certainty and predictability for
sources, and accountability in
achieving mandated emissions
reductions.
To afford affected sources
maximum flexibility in reducing
emissions, the legislation autho-
rizes a wide range of compliance
methods. The compliance plan,
which is developed by the source
and submitted with its permit
application, is the vehicle for a
source to articulate its choice to
rely on one or more of the
authorized compliance methods.
The information required to be
included in a plan should be care-
fully tailored to the statutory
requirements underlying a
chosen compliance strategy. For
example, compliance schedules
-------
and demonstrations would not be
required for units that will simply meet
their emissions limitation by the statutory
deadline, but would be required for Phase
I or repowering extensions.
While crafting an accountable system
that does not require a fixed level of
emissions reductions for any source
seems to create a policy dilemma, the leg-
islation's primary mechanism to ensure
compliance — the $2,000 per ton excess
emissions fee and offset requirements for
sources that do not have "balanced books"
for each year — creates strong market
incentives to ensure compiiance. We
therefore believe that the market will do
much of the work of ensuring compliance
with the SO: and NO, reduction require
ments, and that we can craft regulatory
requirements that will ensure sources
maximum flexibility to minimize the
cost of compliance.
Finally, an integral part of permits
will be their provisions governing
continuous emissions monitoring, record-
keeping, and reporting of quality-assured
data. For these permit components, our
goal is to provide clear guidance on what
is required, and certainty and predictabili-
ty of the consequences for failure to
comply. As our overall program goal can-
not be evaluated without information that
is as accurate as possible, and our program
credibility rests on our ability to accurately
track emissions, we must require strict
adherence to permit commitments in
these areas.
Energy
Efficiency/Pollution
Prevention
efficiency and (he use of renewable
energy wi trees can not only help mitigate
i-mfss/wjs of acidic deposition precursors in an
expeditious and cast-effective manner, they can
D/SO further the environmental goal of pollu-
tion prevention.
The legislation contains special incen-
tives for encouraging the use of renewable
energy or energy conservation through the
allocation of additional allowances to
certain sources that make use of these
strategies. The legislation also provides
incentives for the use of clean coal technolo-
gies. Additionally, the market-based
allowance system provides its own efficien-
cy incentive: a ton of SO; reduced through
conservation or energy efficiency is one less
allowance that will have to be used in meet-
ing allowable emissions levels. We believe
that this fact will go a long way toward
fostering the use of integrated resource
management.
In addition to relying on the
market and carrying out the legislation's
efficiency-related provisions, we have a
role to play in promoting pollution pre-
vention activities. First, we expect sources
that are required to reduce their emissions
will want to consider energy-efficient con-
trol options. Therefore, we want to work
with all interested parties to identify and
address any regulatory impediments or
disincentives to least-cost strategies, which
include active demand-side energy effi-
ciency programs. We believe that such a
cooperative examination would be most
fruitful given increased public support for
environmental protection, increased com-
petition in the utility industry, the advent
Acid rain corrodes stone, metal, and other
substances.
3
EPA is involved in an interagency effort to
monitor acidic deposition and study the
effects of acid rain on various media,
including high-elevation forests.
of high efficiency end-use technologies,
and the requirements of this legislation
that will undoubtedly alter the "cost calcu-
lus" for utilities.
Finally, we are committed to promot-
ing energy conservation and efficiency
through collaboration with energy stake-
holders. We will use and distribute the
wealth of relevant information being
developed in both the public and private
sectors to ensure that sources have the
necessary information on the availability,
viability, and advantages of using these
measures as control options.
Program Evaluation
While much of the focus of Congressional
discussions has been on the numerical goal of
the acid rain legislation—that is. the '10-mil-
lion-ton reduction of SO, and mandated reduc-
tions ofNOx> the underlying goal is obviously
the reduction of acidic deposition and its nega-
tive environmental consequences.
We are committed to a coordinated
environmental monitoring and assessment
effort to measure reductions in acid rain
and resulting environmental benefits. We
also are committed to producing timely
and complete information sufficient to
meet program evaluation and communica-
tion needs.
Continued on page 4 •*
-------
ontour and Selected Station Map of pH in
Rain Over the United States (1985)
We also will work with interested
parties to define indicators of success in
the context of specific regulations, and
develop feedback mechanisms so that
progress can be regularly assessed and
necessary corrective actions taken.
Building a new program will provide us
with a unique opportunity to consider and
then integrate success indicators into the
program, and obtain valuable feedback on
such issues as the extent to which trading
is occurring and how conservation and
energy efficiency methods are being used
to achieve reductions.
Communication
Because of the precedent-setting nature of
the Acid Rain Program and the high public
profile of acid rain issues, EPA should take a
strong leadership role in building consensus
and in supplying technical assistance.
While the public's immediate expecta-
tions will be high, our ability to accurately
demonstrate environmental benefits will
necessarily follow program implementa-
tion by several years. Additionally, we
must reach out to those areas of the coun-
try that are expected to face economic
dislocations as a result of the legislation.
Finally, unlike many other programs that
the Agency deals with, the allowance trad-
ing component cannot work without the
cooperation of and between a wide variety
of groups and sources including state
PUCs, the affected utilities, and state and
local agencies.
The development of a new regulatory-
program that will facilitate cooperation
and take into account the various needs
of numerous stakeholders will require a
significant communication effort that will
involve EPA in both disseminating infor-
mation and building consensus. While
both of these components are critical to
program success, our regulatory timelines
are such that we must begin consultation
on regulatory issues as soon as possible.
These consultations are needed to craft a
workable program to which all parties will
commit. One significant forum for consul-
tation regarding both program develop-
ment and implementation will be the
federally chartered Acid Rain Advisory
Committee.
The Agency also will have a signifi-
cant role in developing and disseminating
information. For the program to be
effective, all parties must have a clear
understanding of their responsibilities; in
this regard, we must make easily under-
standable information readily available.
However, considering our program goals,
we must go much further. We also must
work with all parties to create a clear
understanding of the benefits that
would result from free allowance trading,
thoughtful planning, and energy conserva-
tion. Finally, public education on the
benefits of the Acid Rain Program and
the linkage between energy efficiency and
reducing SO3, NO,, and other pollutants
will foster public support and ease imple-
mentation of the program for all parties.
An International Prototype
Implementation of the acid rain provi-
sions of the Clean Air Act amendments
presents significant challenges and oppor-
tunities for all stakeholders in the abate-
ment of acidic,deposition. The innovative
market-based components of the program
are already being viewed around the
world as the prototype for tackling emerg-
ing environmental issues in a more cost-
effective manner. As a consequence, the
success of this program and its ability to
achieve its goals will be closely monitored
both in and out of government. We look
forward to collaborating with all interest-
ed parties to ensure the realization of the
promise of this important new program.
Surface waters that have a tow buffering capacity cannot neutralize acidic deposition effec-
tively. In these cases, the deposition may increase the acidity of the water, reducing much
or all of its ability to sustain aquatic life.
PRINTED ON RECYCLED PAPER
-------
U.S. EPA Region 1
John F. Kennedy
Federal Building
Room 2203
Boston, MA 02203
U.S. EPA Region 2
Jacob K. Invite
Federal Building
26 Federal <
New York, N'Y 1.0278
U.S. EPA Region 3
'hestmit Building
Philadelphia, PA 19107
U.S. EPA Region 4
345 Courtland Stree:
Atlanta, GA3f'
U.S. EPA Region 5
230 S. Dearborn Streel
Chicago, 11,6061)4
U.S. EPA Region 6
First Interstate Bank Tower
1445 Ross Avenue, 12th Floor
Suite 1200
Dallas, TX 75202-2733
U.S. EPA Region 7
726 Minnesota Avenue
Kansas City, KS 66101
U.S. EPA Region 8
999 18th Street, Suite 500
Denver, CO 80202-2405
U.S. EPA Region 9
75 Hawthorne Street
San Fraru '4105
U.S. KPA Region 10
1200 Sixth Avenue
Seattle, WA 98101
For more information about EPA's Acid Rain
Program, contact:
Acid Rain Division (ANR-445)
U.S. Environmental Protection Agency
401 M Street. SW.
Washington, DC 20460
Sulfur dioxide and nitrogen oxide emissions form
sulfates and nitrates in the atmosphere that can
impair visibility. These two photographs show a
reduction in the visual range in Shenandoah
National Park from 43 to 6 miles, primarily due
to sulfates.
------- |