Air Quality: EPA's Proposed Ozone Transport Rule, OTAG, and Section 216 Petitions - A Hazy Situation?

98-236 ENR

CRS Report for Congress

Received through the CRS Web

Air Quality: EPA’s Proposed Ozone Transport

Rule, OTAG, and Section 126 Petitions —

A Hazy Situation?

Updated May 14, 1998

Larry Parker and John Blodgett

Specialists

Environment and Natural Resources Policy Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

EPA is currently engaged in a series of regulatory actions to address the transport of ozone

pollution in the eastern United States. This report reviews this situation with respect to an

EPA-proposed Ozone Transport Rule and other activities. It will be updated as events

warrant.

Air Quality: EPA’s Proposed Ozone Transport Rule, OTAG,

and Section 126 Petitions — A Hazy Situation?

Summary

Interstate transport of air pollutants is not a new problem. The 1990 Clean Air

Act Amendments provided the Environmental Protection Agency (EPA) and the

states with new tools to address the problem. These tools permitted EPA to establish

the Ozone Transport Assessment Group (OTAG) to recommend ways of reducing

ozone transport in the northeastern part of the country.

From these

recommendations, EPA may issue rules requiring states to tighten ozone control

measures to prevent ozone transport (commonly known as a SIP call). In addition,

individual states may petition EPA to force other states suspected of contributing to

their compliance problem to reduce offending emissions.

OTAG sent its final recommendations to EPA in June, 1997. Overall, OTAG

sanctioned flexibility, both for the states and for EPA in deciding on how to respond

to the ozone transport issue and how to make necessary reductions. Based on the

OTAG recommendations, EPA proposed the Ozone Transport Rule in November

1997. Although EPA often took the most stringent interpretation of OTAG’s

recommendations in its proposed Ozone Transport Rule, it also has attempted to

include flexibility for states in implementing proposed nitrogen oxide (NOx — a

precursor to ozone) reductions. In particular, the sanctioning and encouragement of

a regional NOx cap and trade program for electric utilities and other major stationary

sources could substantially reduce the cost of compliance with the rule. However,

EPA does not have the authority to make participation in a regional cap and trade

program mandatory, unlike the current acid rain SO2 program. Instead, it is up to the

states to decide whether the economic benefits of reducing emissions across the

enlarged trading area that the model trading program promises are worth the

regulatory conditions EPA would impose.

Implementation may be complicated by a decision by eight northeastern states

to submit petitions to EPA to force midwestern states to reduce NOx emissions

(called section 126 petitions) in August, 1997. Implementation of controls under

section 126 is an EPA-directed affair, in contrast with the state strategies required

under an EPA SIP call. In addition, a section 126 action could raise questions with

respect to the Regulatory Flexibility Act as the controls imposed would clearly come

from EPA and not the states (as is the case with a SIP call). In short, it is unclear

whether the petitions under section 126 will expedite NOx control actions by affected

states, or merely increase litigation on an already litigious issue.

In April 1998, EPA issued a proposed supplemental rulemaking that outlines the

essential components of a model regional NOx trading program, and revised state

NOx emission budgets. At the same time, EPA issued an Advanced Notice of

Proposed Rulemaking for the section 126 petitions in line with a proposed consent

decree that would establish a schedule for EPA action on the petitions. Final EPA

action on the proposed Ozone Transport Rule is currently scheduled for September

1998, with state submission of any necessary SIP revisions required one year later.

Contents

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Ozone Transport Assessment Group . . . . . . . . . . . . . . . . . . . . . . . . . . 1

OTAG Assessment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

OTAG Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Size of Transport Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Utility NOx Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Non-Utility Stationary Source NOx Control . . . . . . . . . . . . . . . . . . . 4

Federal Emission Control Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Specific State Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Trading Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

EPA’s Revised NAAQS for Ozone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Proposed Ozone Transport Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Model NOx Cap and Trade Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Section 126 Petitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

List of Tables

Table 1. Proposed Seasonal NOx Emissions Budget for States Making a Significant

Contribution to Downwind Ozone Nonattainment . . . . . . . . . . . . . . . . . . 10

Table 2. Proposed Schedule for Section 126 and Section 110 Actions

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Air Quality: EPA’s Proposed Ozone Transport

Rule, OTAG, and Section 126 Petitions—

A Hazy Situation?

Background

Interstate transport of air pollutants is not a new problem. However, the 1990

Clean Air Act Amendments (CAAA) provided the Environmental Protection Agency

(EPA) and the states with new tools to address the problem. One of those tools is

section 176A, a provision that permits the EPA, either on its own or by petition from

any state, to establish a transport region to address regional pollution problems

contributing to violations of a primary National Ambient Air Quality Standards

(NAAQS). A commission of EPA and state officials is constituted to make

recommendations to EPA on appropriate mitigation strategies. Based on the

commission’s findings and recommendations, EPA is required under section 110(k)(5)

to notify affected states of inadequacies in their current SIPs and to establish deadlines

(not to exceed 18 months) for submitting necessary revisions (commonly known as

a SIP call).

Besides authorizing administratively-created transport regions, the 1990 CAA

Amendments statutorily created an Ozone Transport Region (OTR) in the Northeast

(section 184). This provision requires specific additional controls for all areas (not

only nonattainment areas) in that region, and establishes the Ozone Transport

Commission (OTC) for the purpose of recommending to EPA regionwide controls

affecting all areas in the region.

In addition, the 1990 CAA Amendments rewrote the provisions of Sec. 126

regarding interstate transport of pollution. Under section 126(b), any state or political

subdivision may petition EPA for a finding that any major source or group of

stationary sources located in another state are emitting pollutants that “significantly

contribute” to the nonattainment of a NAAQS by their state. EPA is to respond to

the petition within 60 days. If the petition is granted, the affected sources must cease

operations within 3 months unless the sources comply with emission controls and

compliance schedules as determined by EPA to bring them into compliance with the

section.

The Ozone Transport Assessment Group

In 1995, EPA issued a planning guidance memorandum for ozone nonattainment

areas classified serious or above. Among its provisions was a call for a 2-year

regional assessment of ozone transport and control strategies. The goal was to reach

consensus between EPA and the affected states on necessary additional regional and

other emission reductions to achieve attainment in ozone transport areas. Based on

CRS-2

results, states would submit plans by mid-1997 for appropriate local and regional

controls to achieve attainment. If no consensus were reached, EPA stated it would

use its authority under the Clean Air Act (CAA) to ensure the required reductions are

achieved (particularly section 126 and/or section 110).1

Following a recommendation of the Environmental Council of the States (ECOS)

for a national work group on ozone, EPA, the 37 easternmost states and the District

of Columbia, industry representatives, and environmental groups formed an Ozone

Transport Assessment Group (OTAG) partnership, which initially met in May, 1995.

The policy arm of OTAG consisted of the state environmental commissioners from

the 37 states and the District of Columbia and senior EPA officials. It was this Policy

Group that voted on the proposals to be included in recommendations to the states

and EPA.

To develop the necessary assessment data, OTAG created three subgroups and

six workgroups to address modeling and assessment issues, strategies and controls,

along with outreach and communications. Each subgroup held open working

meetings to receive input from various stakeholders. The recommendations of these

subgroups were submitted to the Policy Group via joint sessions of the Strategies and

Controls and Modeling and Assessment Subgroups. The final OTAG meeting was

June 19, 1997.2

OTAG Assessment Results

OTAG analytical work began with the development of an improved emissions

inventory from which extensive modeling of ozone transport could be conducted.

Based on that modeling, two workgroups reached several conclusions with respect

to ozone transport and the anticipated benefits from increased nitrogen oxide (NOx)

and volatile organic compound (VOC) control. Among those findings particularly

relevant in light of EPA’s new 8-hour ozone National Ambient Air Quality Standard

(NAAQS)3 are the following:

! The perceived contribution of ozone transport is strongly dependent on how

the ozone “problem” is defined. Local emissions are more important with

respect to peak 1-hour concentrations than with respect to lower concentration

thresholds and concentrations assessed over longer averaging times (8-hour or

seasonal averages), where larger areas and longer distance scales become

increasingly important.

1

Nichols, Mary D. “Ozone Attainment Demonstration,” U.S. EPA: Assistant Administrator

for Air and Radiation, March 2, 1995.

2

Background on OTAG and its final report are available via EPA’s web site at

[http://www.epa.gov/ttn/otag/]

3

For a summary of the new ozone NAAQS, see CRS Report 97-721 ENR, Air Quality

Standards: EPA’s Final Ozone and Particulate Matter Standards. For a longer discussion,

see CRS Report 97-8 ENR, Air Quality: EPA’s New Ozone and Particulate Matter

Standards.

CRS-3

! The central portion of the [37-State] OTAG domain is unique with respect to

ozone and ozone transport. It persistently has elevated ozone levels producing

an “ozone pool.” Transport in any direction from this region has been

implicated with high ozone levels in neighboring areas.

! High ozone levels in the southern portion of the OTAG domain are typically

associated with stagnant [pollutant] transport conditions resulting in shorter

transport scales than on average. In contrast, high ozone levels in the northern

portion of the OTAG domain are more typically associated with higher speed

and persistent transport conditions from inside the OTAG domain across state

lines.

! The proposed 8-hour ozone standard [now finalized] will result in significantly

more closely adjacent nonattainment areas across the OTAG domain. This will

make ozone transport more critical with respect to nonattainment than it is

under the current [now previous] standard.4

OTAG Recommendations5

Of the 37 states that constituted OTAG, 32 voted in favor of the final

recommendations with Alabama, Kentucky, Michigan, Virginia, and West Virginia

voting against. Those recommendations covered numerous areas, ranging from utility

controls to increased research.

Size of Transport Region. Which states should comprise the ozone transport

region was debated continuously during OTAG deliberations. Particularly, states

west of the Mississippi River and some southern states argued that their emissions

had little or no effect on ozone transport. OTAG recommended that these “coarsegrid” states be exempt from OTAG-related controls. These states include North

Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas, Minnesota, Iowa,

Arkansas, Louisiana, Mississippi, and Florida, as well as parts of Maine, New

Hampshire, Vermont, New York, Michigan, Wisconsin, Missouri, Alabama, and

Georgia.

OTAG did recommend that Iowa work with Wisconsin in developing

implementation plans for southwestern Wisconsin; that Kansas work with Missouri

on implementation plans for Kansas City; and, that Oklahoma, Texas, Arkansas, and

Louisiana share modeling results with Missouri.

Utility NOx Controls. Increasing NOx control on utility plants was one of the

most contentious issues within OTAG. The final recommendation reflects this

contention by being wide enough to cover all points of view. Specifically, OTAG

recommended a range in the 26 “fine grid” states between current Clean Air Act

controls (i.e., existing requirements) to the lesser of 85% reduction from 1990 rates

4

Air Quality Analysis Workgroup. OTAG Air Quality Analysis Workgroup Results

Summary. [http://capita.wustl.edu/otag/Reports/ExecSumm/AQASUM3.html]

5

OTAG’s recommendations are attached to EPA’s proposed Ozone Transport Rule as

Appendix B. 62 Federal Register 60376-60379, November 7, 1997.

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or a .15 lb/mmBtu performance standard (a significant increase in stringency). It is

arguable how such a wide range provided any guidance to EPA on implementing

regional controls. Essentially, the range gave EPA a free hand in deciding on

appropriate tonnage levels in its proposed Ozone Transport Rule, discussed later.

OTAG did recommend that any statewide tonnage levels proposed by EPA be

revised if additional subregional modeling or air quality analyses justified it. Likewise,

OTAG recommended that EPA consider any submitted comments and subregional

modeling with respect to proposed statewide tonnage levels prior to finalizing SIP

calls.

Non-Utility Stationary Source NOx Control. OTAG’s recommendations for

non-utility stationary sources mirrored those for the utility sources. Dividing nonutility facilities into medium and large sources, OTAG recommended that large

sources be controlled in proportion to how much utility sources are controlled. If

utility sources are required to reduce 55%, large non-utility sources should be

required to reduce 55%. This parallel requirement weakens as the utility reductions

increase; for an 85% utility source reduction, OTAG recommends only a 70%

reduction for large non-utility sources.

Requirements for medium sources are also based on utility source requirement,

but considerably less stringent. For 55%-65% utility reductions, no medium nonutility control is recommended. For 75%-85% utility reduction, OTAG recommends

that medium non-utility sources be required to install reasonably available control

technology (RACT), a determination made by the states based on EPA guidance. As

with the utility control recommendations, OTAG urges flexibility if additional

modeling and air analyses warrant it.

Federal Emission Control Measures. In OTAG’s view, the federal

government has a major role in assisting states achieve compliance, particularly with

respect to new stationary source control and mobile source control. OTAG outlines

nine specific areas where the federal government should develop, adopt, and

implement stringent national NOx and/or VOC control requirements to assist the

OTAG region in achieving compliance with the ozone NAAQS. These areas include

architectural and industrial maintenance coatings, consumer and commercial products,

autobody refinishing, reformulated gasoline, small engines, heavy duty highway

engines, heavy duty non-road diesel engines, and locomotive engines.

OTAG also recommended that EPA act on some fuel related items. These

recommendations included EPA (1) adopting a rule on an appropriate fuel sulfur

standard to improve long-term performance of emission control devices, (2)

evaluating emission benefits and other effects of cetane adjustments on current diesel

engines and adopting standards as appropriate, and (3) considering and potentially

adopting new diesel fuel standards by the year 2004 through existing deliberative

processes.

Finally, OTAG supported and encouraged adoption of a National Low Emission

Vehicle Program.

CRS-5

Specific State Actions. OTAG also recommended that “fine grid” states

consider adopting enhanced inspection and maintenance (I&M) program in urban

areas with populations greater than 500,000, the continued use of reformulated

gasoline (RFG) in both mandated and opt-in areas, among other provisions.

Trading Program. Part of the controversy over utility source control involved

proposed market-based approaches to implementing such controls. OTAG did

considerable work on market mechanisms and found several benefits to these

implementation approaches, including: (1) lower compliance costs, (2) incentive for

early reductions, (3) incentive for over-control of sources, (4) incentive for

innovation, and (5) administrative flexibility.

However, OTAG was unable to agree on a basic structure for a market

mechanism. Some states, particularly those in the northeast, advocated a “cap and

trade” program. A cap and trade program places a total emission limit (i.e., cap),

expressed in tons of pollutants, on specific emission sources within an area. The

allowable amount of pollution is then allocated to these sources according to an

agreed upon formula. Sources that emit less pollution than their allocation may trade

the unused portion of their allocation to sources that exceed their allocation, or bank

those unused pollution “credits” for use in a future year. A system like this has been

successfully implemented to reduce sulfur dioxide emissions under title IV of the CAA

and is being implemented in the Ozone Transport Region (OTR) to reduce NOx

emissions.

Under a cap and trade system, emissions are not permitted to increase over time.

Thus, new emissions from new sources (or expanded production at existing sources)

have to be offset with reduced emissions at existing sources. Industry groups have

objected to this fixed limit on emissions and argued for an alternative that controls the

rate of pollution emitted, but not the total amount emitted (i.e., no cap). Under a

“rate only” approach, a source could emit as much of a pollutant as it wished, as long

as it did not emit the pollutant at a rate greater than stipulated. If a source emitted at

below the stipulated rate, it would receive credits amounting the difference between

its actual rate and the stipulated rate times its production for a given year. It could

trade or bank the resulting credits. If a source exceeded the rate, it could purchase

emission credits for the excess amount (based on its total production for a year) from

a source that had accumulated credits. Currently, no trading program is based on this

approach.

As was the case with the utility control recommendations, OTAG’s final

recommendation with respect to a trading program encompasses both views. The cap

and trade program, called “Track 1,” and the rate only program, called “Track 2,” are

both identified by OTAG as options for states to adopt in implementing utility (and

possibly other) control measures. OTAG acknowledged several uncertainties with

respect to this recommendation including (1) the need for further work on rate only

approaches to implement them with the same level of confidence and certainty as the

cap and trade system; and (2) how any “cross-track” trading could occur between cap

and trade states and rate only states. OTAG did note that EPA would have an

integral part in overseeing the implementation and integrity of these approaches.

CRS-6

For its part, OTAG recommended a joint state/EPA workgroup address the

issues of implementation of Track 1 and Track 2, along with identifying key design

features that states could select in developing a NOx trading program. OTAG

believed its work in this area provides a sound basis for the workgroup’s task. In

addition OTAG suggested the workgroup address other concerns with respect to

modeling, market systems, and local control requirements.

EPA’s Revised NAAQS for Ozone

On July 16, 1997, the Administrator of the Environmental Protection Agency

(EPA) finalized a new National Ambient Air Quality Standard (NAAQS) for ozone.

Accompanying the NAAQS was a White House memorandum discussing the general

approach EPA was to take in implementing the new NAAQS.6 Recognizing ozone

as a regional pollution problem, the memorandum focuses on regional compliance

strategies for the new NAAQS. In particular, the memorandum cited the work of

OTAG as the basis of this approach. As stated therein:

For the past 2 years the EPA has been working with the 37 most eastern

states through the Ozone Transport Assessment Group (OTAG) in the

belief that reducing interstate pollution will help all areas in the OTAG

region attain the NAAQS.... The OTAG completed its work in June 1997

and forwarded recommendations to the EPA. Based on these

recommendations, in September 1997, the EPA will propose a rule [on

ozone transport] requiring states in the OTAG region that are significantly

contributing to nonattainment or interfering with maintenance of attainment

in downwind states to submit SIPs [State Implementation Plans] to reduce

their interstate pollution. The EPA will issue the final rule by September

1998.

The revised ozone NAAQS was not the trigger for the Ozone Transport Rule

proposed by EPA in November 1997 and discussed in the next section. Existing

nonattainment in the Northeast corridor with the previous, less stringent ozone

NAAQS was the genesis of the OTAG effort and the resulting proposed rule by EPA.

However, EPA drew on the OTAG findings and recommendations as it developed a

flexible implementation strategy for attainment of the new ozone NAAQS, and, where

EPA considered it appropriate, this strategy is integrated with the proposed

requirements of the Ozone Transport Rule.

In particular, the regional NOx control strategy advanced by EPA in the Ozone

Transport Rule as a response to ozone transport under section 110(k)(5) is also an

integral part of the new ozone NAAQS implementation strategy under section

110(a)(1)). In particular, EPA believes that implementation of a regional NOx control

strategy will permit many areas that are (or would be by the year 2000) in attainment

with the previous ozone NAAQS but in non-compliance with the new ozone NAAQS,

to come into compliance with the new standard with little or no additional new local

6

President Clinton. “Implementation of Revised Air Quality Standards for Ozone and

Particulate Matter,” Memorandum for the Administrator of the Environmental Protection

Agency, July 16, 1997.

CRS-7

emission reductions. EPA says that participation by these “transitional areas” in the

regional NOx control program would permit EPA to eliminate unnecessary local

planning requirements for such areas, and to revise its new source review (NSR) and

conformity rules so such transitional areas could comply with only minor revisions to

their existing programs.

Proposed Ozone Transport Rule

On November 7, 1997, the EPA proposed its Ozone Transport Rule.7 The

proposal requires 22 eastern states and the District of Columbia to submit state

implementation plans (SIPs) to address regional transport of ozone.8 In particular,

the proposal calls for increased controls on NOx, focusing particularly on emissions

from electric utilities and large combustion sources. To achieve the necessary

reductions, EPA has proposed emission budgets for each of the affected states, with

each state free to decide on what controls to use to maintain emissions within those

budgets. As discussed in the next section, EPA is also encouraging the formation of

a regional cap and trade program to implement the NOx reductions through a model

program. On April 29, 1998, EPA proposed a supplemental rulemaking that details

a model cap and trade program for states to consider in implementing the Ozone

Transport Rule.9 Among other things, the supplemental rulemaking revises the

statewide NOx emission budgets, outlines state reporting requirements, and addresses

criteria EPA will use in approving SIP revisions.

Under section 110(k) of the Clean Air Act, EPA is mandated to require SIP

revisions for states whose current SIPs are substantially inadequate to mitigate

adequately interstate pollutant transport such as that described under section 176A

(under which OTAG was established). Adequate provisions are defined by section

110(a)(2)(D) as those that prohibit state emissions “which will contribute significantly

to nonattainment in, or interfere with maintenance by, any other state with respect to

any such national primary or secondary ambient air quality standard....” In the

proposed rule, EPA used four criteria for determining whether a state significantly

contributed to, or interfered with, another state’s efforts to achieve the ozone

NAAQS: (1) the emissions level of the upwind area; (2) the upwind area’s

contribution to the downwind nonattainment area; (3) the transport distance between

the two areas; and (4) the geographic extent of the contribution downwind.

7

Environmental Protection Agency. Finding of Significant Contribution and Rulemaking for

Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing

Regional Transport of Ozone. Notice of proposed rulemaking. 62 Federal Register 6031760421, November 7, 1997.

8

The 22 states included are: Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana,

Kentucky, Massachusetts, Maryland, Michigan, Missouri, North Carolina, New Jersey, New

York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Wisconsin, and

West Virginia.

9

Environmental Protection Agency. Supplemental Notice for the Finding of Significant

Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group

Region for Purposes of Reducing Regional Transport of Ozone; Proposed Rule. 63 Federal

Register 25902-25994, May 11, 1998.

CRS-8

Based on the “weight of evidence” from the OTAG modeling process and other

modeling efforts, EPA found that 22 of OTAG’s 37 member states made significant

contributions to downwind nonattainment—the 22 plus D.C. that are addressed by

the rule. For the nine other states,10 EPA found that (1) they made at most a relatively

small contribution to downwind nonattainment areas; (2) most are relatively distant

from many of the downwind nonattainment areas; and (3) most have a relatively low

amount of manmade NOx emission and/or NOx emissions density. Thus, these

states did not meet EPA’s weight of evidence threshold for finding a significant

contribution.

As originally proposed, EPA used OTAG and other modeling efforts to

determine state complicity with respect to ozone transport, but did not use such

modeling to determine its proposed emissions budgets for affected states.11 Instead,

EPA used a cost-effectiveness criterion based on NOx control costs to determine

allocations. Budget components were calculated for five sectors: electric utility

sources, nonutility stationary sources, area sources, nonroad engines, and highway

vehicles.12 In focusing on cost-effective controls, EPA argued that it was following

the recommendations of OTAG. The effect of such an allocation scheme would be

to tilt emission reductions toward states with large stationary NOx sources with

relatively modest controls, and away from states with relatively higher emissions from

other sources. In particular, states with coal-fired electric power plants would

generally have higher percentage reductions required on a statewide basis than states

without such plants.

10

The 9 states not included are: Florida, Kansas, Louisiana, Minnesota, Nebraska, North

Dakota, Oklahoma, South Dakota, and Texas.

11

“The statewide emissions budgets proposed in this rulemaking were not modeled directly to

determine their air quality benefits.” 62 Federal Register 60327. In its April proposed

supplemental rulemaking, EPA included a modeling analysis to show how these proposed

NOx budgets would improve air quality in the eastern U.S. See 63 Federal Register 2595325967, May 11, 1998.

12

For utility sources, EPA used a NOx emission rate of 0.15 lb/MMBtu to determine budget

allocations. However, EPA used different growth factors than those developed by OTAG in

making the necessary 2007 calculations. For area sources, EPA assumed no new controls,

in line with OTAG. For nonutility sources, EPA used a 70% reduction requirement for large

and RACT controls (generally 25%-50% reduction) for smaller sources. This is

approximately what OTAG had recommended. EPA calculated the highway vehicle budget

by assuming implementation of existing SIPs, along with the following federal measures:

national low emission vehicle standards, 2004 heavy-duty engine standards, and revisions to

emissions test procedures. EPA’s method of calculating budgets for this sector differs

somewhat from OTAG’s recommendations. Finally, EPA calculated budgets for nonroad

engines assuming implementation of existing SIPs, along with the following federal measures:

federal small engine standards (Phase II), federal marine Engine standards (diesels >50 hp),

federal locomotive standards, and 1997 proposed nonroad diesel engine standards. EPA used

OTAG growth projections in calculating the budgets for this component. See proposed Ozone

Transport Rule and Appendix B (OTAG Recommendations), 62 Federal Register 6031860420, November 7, 1997.

CRS-9

These budget allocations were revised by EPA in its April 1998 proposed

supplemental rulemaking.13 Modifications were made in response to errors in source

inventories and revised projections of future emissions growth. Specifically, projected

emissions of utility plants were revised downward, while emissions from nonutility

facilities were revised upward. As a result, the revised recommended budget for

allowable utility emissions became a less stringent 563,784 tons (compared with

489,000 tons in November), and the nonutility emission budget became more

stringent, allowing 399,416 tons (compared with 466,158 tons last November). In

addition, EPA proposed an alternative approach for calculating the electric utility

component of state emission budgets. Under the alternative approach, the electric

utility component would be allocated among the States according to total electricity

generation, not only fossil fuel-fired generation.

The revised proposed emissions budget for each state is provided in table 1. All

the states with reduction requirements at 40% or above are from the Midwest. In

contrast, states in the Northeast (except Pennsylvania) have budget allocations below

the nationwide average of 35%.

13

See 63 Federal Register 25904-25911 (May 11, 1998) for further detail on revisions.

CRS-10

Table 1. Proposed Seasonal NOx Emissions Budget for States Making

a Significant Contribution to Downwind Ozone Nonattainment

(Tons of NOx per Ozone Season)

State

2007 Base

Emissions

Proposed 2007

Budget

%

reduction

Alabama

241,564

155,617

36%

Connecticut

52,014

39,909

23%

Delaware

30,568

21,010

31%

District of Columbia

7,978

7,000

12%

Georgia

246,243

159,013

35%

Illinois

350,154

218,679

38%

Indiana

340,084

200,345

41%

Kentucky

263,855

158,360

40%

Maryland

118,065

73,628

38%

Massachusetts

103,445

73,575

29%

Michigan

283,821

199,238

30%

Missouri

185,104

116,246

37%

New Jersey

132,032

93,464

29%

New York

230,310

185,537

19%

North Carolina

234,300

153,106

35%

Ohio

391,012

236,443

40%

Pennsylvania

328,433

207,250

37%

Rhode Island

12,175

10,132

17%

South Carolina

169,572

109,267

36%

Tennessee

291,225

187,250

36%

Virginia

219,835

162,375

26%

West Virginia

158,240

81,701

48%

Wisconsin

142,759

95,902

33%

TOTAL

4,532,790

2,945,046

35%

SOURCE: 63 Federal Register 25910, May 11, 1998

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Model NOx Cap and Trade Program

In its proposed Ozone Transport Rule, EPA announced its intention to develop

and administer an interstate cap and trade program that could be used to implement

the budget limits discussed above. The details of that program are provided in the

supplemental notice of proposed rulemaking issued in April 1998.14

Following the example set by the acid rain trading program, the EPA model NOx

program would be an allowance-based cap and trade program (OTAG’s “Track 1”

recommendation). One allowance would equal one ton of NOx, with each

participating state receiving allowances equal to the emission budgets of those sources

participating in the program.15 Unlike the acid rain program where participation and

individual allowance allocations are mandated by federal law, state participation in the

NOx program would be voluntary, and the allowance allocations to the individual

emissions sources would be determined by the state, not the federal government. The

states would also approve monitoring systems based on federal regulations and

enforce compliance provisions. Beyond approving and overseeing the SIPs, EPA’s

role would be primarily administrative in terms of collecting data, allocating

allowances as prescribed by states, recording trades, and reconciling emissions and

allowance data every year. In particular, EPA would track allowances to facilitate

interstate trading and enforcement.

Although EPA’s model rule would permit states to determine individual source

allowance allocations, it would require certain elements of the individual state

programs to be consistent in order for them to participate in interstate transactions.

These elements include the timing of allowance allocations, monitoring requirements,

and noncompliance penalties. In particular, the program must be a tonnage cap-based

program (i.e., no rate-based program -- OTAG’s “Track 2” recommendation) to be

included in the regional trading system. Indeed, the SIP approvability criteria virtually

ensure that, with respect to large combustion sources, states will have to submit a

tonnage based program to get the necessary approval from EPA.16

Compared with a traditional command and control implementation strategy, EPA

originally projected a regional cap and trade program would reduce compliance costs

14

See 63 Federal Register 25918-25950, May 11, 1998

15

In the proposed supplemental rulemaking, EPA would initially require that participating

sources include existing fossil fuel fired electric generating plants greater than 25 megawatts

and other existing boilers and turbines with a heat input greater than 250 mmBtu/hr. These

core sources represent 80% of the 2007 baseline emissions inventory, 65% of the 2007

emissions cap inventory, and 90% of the required reductions under the proposed rule.

Participation by sources outside these core groups would be determined by the individual

states. 63 Federal Register 25920, May 11, 1998.

16

As explained in the proposed notice of supplemental rulemaking, states may choose one of

three ways for requiring large combustion sources to meet their limitations under the transport

rule: (1) a tonnage limit for each source that adds up to the allowed budget; (2) an emission

rate limit that when multiplied by the maximum capacity for each source adds up to the

allowed budget; and, (3) using alternative method providing equivalent assurance that the

allowed budget will not be exceeded. 63 Federal Register 25912, May 11, 1998

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to the electric utility industry by about one-fourth — from about $2.1 billion to $1.6

billion annually. In its proposed supplemental rulemaking, EPA revised the cost

estimate for electric utilities from $1.6 billion to $1.4 billion annually. In addition,

EPA estimated that a regional cap and trade program would reduce compliance costs

to non-electric generating sources from $1.2 billion to $456 million annually.17

Comparative estimates for other sectors were not available.

Section 126 Petitions

In August, 1997, Connecticut, Maine, Massachusetts, New Hampshire, New

York, Rhode Island, Pennsylvania, and Vermont filed section 126 petitions with EPA.

The petitions ask EPA to make a finding that utilities and/or major sources of NOx

in the Midwest contribute significantly to the ozone nonattainment problem in their

states.18 As noted earlier, if EPA granted the petitions, it would have to establish

federal emission limits for the sources affected by the petitions.

The parallel actions of section 126 and the section 110 SIP call presents

difficulties for EPA as the two provisions are implemented differently. The Ozone

Transport Rule is a proposed SIP call under section 110(k)(5) for revised SIP

provisions meeting the requirements of section 110(a)(2)(D) for the statutory 1-hour

ozone NAAQS. Because of the new ozone NAAQS, this SIP call is coupled with a

proposal under section 110(a)(1) for SIP submissions to meet the requirements of

section 110(a)(2)(D) for the new 8-hour ozone NAAQS. If EPA finds, as proposed,

that individual states contribute significantly to ozone nonattainment downwind, EPA

will require those states to submit SIP provisions to limit NOx emissions to those

levels specified by EPA; the specific means and sources affected would be determined

by the state. Only if a state did not make the required submission would EPA take

enforcement actions, including promulgation of a federal implementation plan (FIP)

for the state.

Section 126 does not work this way. Under section 126, if a petition is granted,

EPA is responsible for devising and implementing control strategies for the affected

sources. Thus, unlike the SIP process where states determine control strategies to

achieve mandated reductions, section 126 requires EPA to select and impose

appropriate controls on a state’s affected emission sources. In effect, section 126

implementation is more like a FIP than a SIP. Also, unlike the SIP process, which can

coordinate strategy across all emitting sectors, section 126 only addresses major

stationary sources.

To reconcile these differences, EPA and the eight petitioning states entered into

a Memorandum of Agreement for EPA action on the section 126 petitions. The

December 1997 agreement harmonizes the time frame for EPA action on the section

17

18

63 Federal Register 25911, May 11, 1998. Estimates are in 1990 dollars.

All the petitions targeted the Midwest; however, some included other sources in the South,

Southeast, and Northeast. A discussion of the petitions are provided in the proposed Ozone

Transport Rule. A copy of the Memorandum of Agreement Concerning Schedule for EPA

Action on Section 126 Petitions is available from EPA’s web site:

[http://www.epa.gov/airlinks/]

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126 petitions with EPA’s proposed schedule for action on the Ozone Transport Rule.

Highlights of that schedule are presented table 2. In line with that schedule, EPA

issued an Advance Notice of Proposed Rulemaking for the section 126 petitions

concurrently with its proposed notice of supplemental rulemaking in April 1998.19

Midwestern states, which would bear the brunt of any reductions imposed if EPA

takes action under the section 126 petitions, have objected to the agreement. They

claim that the northeastern states have not themselves taken adequate actions to

address ozone pollution, that reductions imposed on the Midwest would not solve the

petitioning states’ problems, and that the costs to the midwestern states in reducing

emissions would not be commensurate with benefits. An attempt to block EPA from

acting on the petitions was filed by midwestern utilities in the U.S. Court of Appeals

for the D.C. Circuit. This lawsuit was dismissed by the court on April 28, 1998, since

EPA's actions "do not constitute final appealable orders." (Midwest Ozone Group v.

EPA, D.C. Cir., No. 97-1627, 4/28/98)

On February 25, 1998, the eight petitioning Northeast states asked a federal

court to make the agreement and schedule binding (Connecticut v. Browner, D.C.

SNY, No 98CIV.1376, 2/25/98). In light of the midwestern states objections to the

petitions, additional litigation is a clear possibility before the section 126 process

becomes final.

Legislation is also possible. Midwest legislators have introduced legislation to

delay implementation of both the Ozone Transport Rule and the section 126 petitions.

H.R. 3690, introduced by Representative Wise, would delay promulgation of the final

Ozone Transport Rule for at least two years after enactment while additional

modeling is performed and examined, and delay the effective date of the final rule until

the later of May 1, 2005 or five years after promulgation of the final rule. EPA action

on the section 126 petitions would be delayed until 180 days after promulgation of the

Ozone Transport Rule.

19

Environmental Protection Agency. Findings of Significant Contribution and Rulemaking

on Section 126 Petitions for Purposes of Reducing Interstate Ozone Transport. Advance

Notice of Proposed Rulemaking. 63 Federal Register 24058-24061

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Table 2. Proposed Schedule for Section 126 and Section 110 Actions

Date of Proposed

Action

Proposed Action

April 1998

EPA publishes an advance notice of proposed

rulemaking with respect to the Sec. 126 petitions

September 1998

(1) EPA publishes a notice of proposed rulemaking

with respect to the Sec. 126 petitions;

(2) EPA issues final Ozone Transport Rule

establishing NOx budgets

April 1999

EPA takes final action on Sec. 126 petitions. Action

includes determination of their merit and proposed

remedy, but postpones imposition of controls

September 1999

States submit SIP revisions to EPA in response to

Ozone Transport Rule

November 1999

If EPA chooses, EPA’s April 1999 Sec. 126 action

may be automatically imposed on affected states if

EPA does not propose to approve those states’ SIPs

submitted under the Ozone Transport Rule

May 2000

If EPA chooses, EPA’s April 1999 Sec. 126 action

may be automatically imposed on affected states if

EPA does not approve those states’ SIPs submitted

under the Ozone Transport Rule.

September 2002

States implement SIPs under the Ozone Transport

Rule

SOURCE: Memorandum of Agreement, December 18, 1997

Conclusion

Ozone transport is a complex phenomenon; efforts to alleviate the effects of

transport on downwind states will result in a mix of winners and losers, both in terms

of states having to impose controls and in terms of states complying with ozone

NAAQS. With major stakes involved, it is not surprising that some characterize

OTAG’s final recommendations as vague and ambiguous, where others see needed

flexibility. In any event, OTAG’s work assessing ozone transport moved the debate

along and clarified an issue made more important because of the new 8-hour standard.

Overall, OTAG sanctioned flexibility, both for the states and for EPA in deciding

on how to respond to the ozone transport issue and how to make necessary

reductions. Although EPA often took the most stringent interpretation of OTAG’s

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recommendations in its proposed Ozone Transport Rule, it also has attempted to

include flexibility for states in implementing proposed NOx reductions. In particular,

the sanctioning and encouragement of a regional NOx cap and trade program for

electric utilities and other major stationary sources could significantly reduce the cost

of compliance with the rule. EPA does not have the authority to make participation

in a regional trading program mandatory, unlike the current acid rain SO2 program.

Instead, it is up to the states to decide whether the benefits of reducing emissions

across the enlarged trading area that the model trading program promises are worth

the requirements EPA has imposed.

Implementation is also complicated by section 126 petitions submitted by eight

northeastern states. Implementation of controls under section 126 is an EPA-directed

affair, in contrast with the state strategies required under section 110. In addition, a

section 126 action could raise questions with respect to the Regulatory Flexibility Act

as the controls imposed would clearly come from EPA and not the states (as is the

case with section 110). In short, it is unclear whether the petitions under section 126

will expedite NOx control actions by affected states, or merely increase litigation on

an already litigious issue.