On August 8, 2011, the core of the new Transport Rule was published in the Federal Register (76 FR 48208), approximately one year after the main rule proposal (75 FR 45210) (covered in the Fall 2010 Environmental Quarterly, Federal Transport Rule — the “New CAIR” Round 1). The new rule is known by two names. In press releases and on the EPA website, the rule is referred to as the Cross-State Air Pollution Rule (CSAPR, pronounced like Casper, the friendly ghost). In the regulation itself, EPA instead refers to the Transport Rule (TR), which is the name used in this article.
The rule is long and has emissions allocations based on EPA’s many complex assumptions and projections of specific actions that each emissions unit in each state may take, both from an emissions control standpoint and, using EPA’s Integrated Planning Model (IPM), also from a utilization perspective. The new TR becomes effective January 1, 2012 (for annual limits), making 2011 the final year of its predecessor, CAIR.
Given the complexity of the rule and EPA’s ambitious schedule for implementation, it is perhaps not surprising that revisions to the rule are already needed. At the time of publication of this article, EPA has proposed two revisions. The first revision (76 FR 40622) was published prior to the core rule (on July 11) and seeks to add ozone budgets for six states, five of which were included previously for PM2.5 in the core rule.1 The second revision (76 FR 63860) has been recently published (October 14, 2011) and would make numerous corrections to the bases for EPA’s allocations for specific units and postpone implementation of the assurance provisions until 2014.2
More revisions are anticipated, although the timetable is not clear. In the most recent rule proposal, EPA specifically asked sources to identify any other corrections that are needed. Further, as with the proposed rule, there are many states that contribute to ozone maintenance or nonattainment problems in Baton Rouge or Houston for which the ozone NOx budget is only a first step, with further reductions planned.3
Lastly, the final TR only addresses upwind pollution that “significantly contributes to or interferes with maintenance of” the 1997 ozone NAAQS, the 1997 annual PM2.5 NAAQS, and the 2006 24-hr PM2.5 NAAQS. Each of these NAAQS is due to be updated. The ozone NAAQS was recently re-scheduled for review in 2013, and EPA anticipates a proposed revision to the PM2.5 standards in late 2011. EPA designed TR to be applicable to newly issued NAAQS, and new budgets should be expected following the promulgation of new NAAQS. Generally, EPA expects to propose revised TR requirements approximately one year following new NAAQS designations, with a final rule one year later.
Why Address Transport?
Congress has long recognized the potential for transported emissions to impact local air quality, and so called “good neighbor” provisions date to the 1970 Clean Air Act Amendments (CAAA). The original requirement was amended and is now contained in §110(a)(2)(D) of the Act, which requires each state, in its state implementation plan (SIP), to prohibit:
… any source … within the state from emitting any air pollutant in amounts which will contribute significantly to nonattainment in, or interfere with maintenance by, any other state with respect to any [NAAQS]….
Prior to CAIR, EPA regulated transport through the NOx SIP Call, which addressed emissions contributing to ozone generally east of the Mississippi River. CAIR built upon the approach used in the NOx SIP Call with both an expanded group of states and more stringent NAAQS (both ozone and PM2.5). Despite its grounding in the prior NOx SIP Call, in an unexpected 2008 ruling, the court found CAIR so fundamentally flawed that it vacated the rule in its entirety. As a result of petitions regarding the lack of any requirement for additional emissions reductions while EPA developed a new rule, the court amended its vacatur of CAIR to a remand, which the current TR seeks to address.
Changes from CAIR
Utilities and some industrial sources have several years of experience with CAIR, and thus CAIR provides a good benchmark for examining the new provisions. At a conceptual level, CAIR and TR are intended to address the same problem. Therefore, in the aggregate, CAIR and TR require many of the same emissions reductions. How the reductions are achieved in CAIR and TR differs substantially.
- Regions - under CAIR, all states were part of one region. Under TR, NOx is one region, while SO2 is divided into two regions. Group 2 states are those that can eliminate their contribution to maintenance or nonattainment based on $500/ton cost effectiveness, and Group 1 states are those that need a higher $2,300/ton cost effectiveness. Group 1 and Group 2 allowances cannot be traded with each other, but can be traded within each group.
- Phases - like CAIR, TR has two phases, however, the TR phases are based on different underlying assumptions. For TR, EPA first considered the timing of already announced changes in controls, consent orders, and impending state regulations to develop 2012-2013 budgets. Additionally, for Group 1 states, the 2014+ SO2 budget assumes that some units add scrubbers prior to 2014.
- Trading - CAIR allowed unlimited interstate trading within the region. The final core TR allows very limited interstate trading due to the assurance provisions, however, the most recent proposal would allow unlimited trading in 2012-2013 (within each grouping) with limited interstate trading 2014+ after the assurance provisions become effective. TR does allow unlimited intrastate trading.
- Banked credits - CAIR allowed some carryover of Acid Rain Program (ARP) credits. TR allows none. Any banked CAIR credits are essentially worthless.
- Impact on Acid Rain Program credits - CAIR devalued ARP credits, but TR has nearly eliminated them. 2009 ARP credits are trading at approximately $1/ton, while 2015 credits are trading at approximately $0.20/ton. States outside of those in TR will see greatly reduced ARP costs.
- Credit values - few trades have occurred to date. Averaging bid/ask prices, values for 2012 TR credits are in the $600 range for SO2 (either group), the $1,400 range for annual NOX, and the $1,800 range for ozone season NOX.
- Total allowance budgets - based on the final core rule and the July 2011 proposal, ozone season budgets are higher under TR than CAIR, while annual budgets are lower under TR than CAIR. However, all TR budgets are within approximately 15% of overall CAIR values.
- Non-electrical generating units (EGU) - CAIR allowed non-EGU industrials to participate in CAIR to meet prior NOx SIP Call requirements. EPA eliminated this option in TR, and while EPA recognizes the problem this change has created for the orphaned industrial units, no solution has been identified.
- Applicability date - CAIR, like ARP, was based on a November 15, 1990 applicability date. TR changes that date to January 1, 2005.
- Cogeneration/waste combustion exemptions - these are essentially identical to CAIR, including the biomass exclusion that modified the original CAIR rule.
- FIPs - in TR, EPA allocated credits to specific units via a Federal Implementation Plan for 2012-2013. States may apply for limited re-apportioning of allowances in 2013 and may apply for full authority to implement via state implementation plan (SIP) in 2014.
- Basis for allocations and fuel type - unlike CAIR, under TR EPA determines each existing unit’s share of state allowances based on heat input with no differentiation for fuel type. The approach under TR favors units with emissions lower than the average MMBtu/hr and disfavors other units. (For new sources using the set-asides, allocations are based on emissions, not heat input).
- Definition of “fossil fuel” for applicability - under TR, EPA has clearly defined “fossil fuel” as any item of fossil origin and not just those intended as fuel. For example, plastics, tires, creosote-coated crossties, and many other fuels would be “fossil fuel” for applicability (for the solid waste combustion exemption, the traditional definition of fossil fuel still applies when calculating the 80% threshold).
Assurance Provisions: 1 ton = 1 allowance, or 1 ton = 3 allowances?
One of the biggest changes from CAIR is the limited interstate trading allowed. To ensure that only limited trading is allowed, EPA developed assurance provisions. For a given allocation period, if emissions in a state exceed the allocation by more than 18% (annual) or 21% (ozone season), some sources in that state will be required to submit additional allowances as a penalty. Consider this example.
State Allocation - 1,000 tons
Assurance (Penalty) Threshold - 1, 180 tons (annual)
Actual Emissions - 1,250 tons
Penalty Emissions - 70 tons
Penalty Allowance to be Submitted = 140 tons (2 times excess)
To determine which sources in that state must provide the penalty allowances, actual emissions are compared to the assurance threshold levels at the Designated Representative (DR). For each DR grouping that has actual emissions above the penalty emissions, extra penalty allowances must be submitted at a 2 for 1 ratio.
Thus, any source (rolled up to the DR level) which emits more than 1.18 (or 1.21) times the allocation level could be at risk for having to pay triple for each ton of emissions abovethe assurance threshold. EPA believes that the chance of reaching the assurance threshold is small, but based on the allocations in the final core rule (which are proposed for revision), some states with large differences in actual and allocated emissions are at real risk of this occurring.
Litigation over the TR rule is widespread— 64 groups have filed challenging the rule and 8 have filed in support. In addition to electric utilities, coal providers, their trade groups, industrial associations, and the United Mine Workers union, 13 of the 27 states covered have challenged the rule: Alabama, Florida, Georgia, Indiana, Kansas, Louisiana, Michigan, Mississippi, Nebraska, Oklahoma, South Carolina, Texas, and Virginia. Those supporting EPA include traditional environmental advocacy groups (EDF, NRDC, Sierra Club, ALA) as well as three utilities with low emitting fleets: Exelon, Calpine, and PSEG Fossil.
All court filings have been consolidated into a single case, EME Homer City Generation, L.P. v. EPA, # 11-1302.
The recently signed proposed rule invites additional scrutiny of emissions budgets for technical corrections, and will have a comment submittal deadline of potentially as short as 30 days after Federal Register publication. Other key upcoming dates follow:
January 1, 2012 -TR begins for annual SO2and NOx
May 1, 2012 - TR begins for ozone season NOx
December 1, 2012 -allowance transfer deadline for ozone season NOx
March 1, 2013 -allowance transfer deadline for annual SO2 and NOx
August 1, 2013 - EPA publishes states/units triggering assurance penalty provisions (proposed to be postponed until August 1, 2015)
EGUs subject to TR should carefully review the unit-specific allocation details promptly to provide further comments to EPA during the pending public comment period. Further, EGUs should begin assessing the potential for their state to reach the assurance threshold and base any planned usage of allocations on the potential of reaching that level. Orphan industrials must stay in touch with federal and state regulators to identify how to meet ongoing NOx SIP Call obligations that are currently unresolved.
1 These six states are Iowa, Kansas, Michigan, Missouri, Oklahoma, and Wisconsin.
2 Proposed rule signed on October 14, 2011.
3 Alabama, Arkansas, Georgia, Illinois, Indiana, Kentucky, Louisiana, Mississippi, Tennessee and Texas.