Costs and Benefits of Clear Skies: EPA's Analysis of Multi-Pollutant Clean Air Bills

Order Code RL33165

CRS Report for Congress

Received through the CRS Web

Costs and Benefits of Clear Skies: EPA's

Analysis of Multi-Pollutant Clean Air Bills

November 23, 2005

-name redacted- and Larry B. Parker

Specialists in Environmental and Energy Policy

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Costs and Benefits of Clear Skies: EPA's Analysis of

Multi-Pollutant Clean Air Bills

Summary

The electric utility industry is a major source of air pollution, particularly sulfur

dioxide (SO2), nitrogen oxides (NOx), and mercury (Hg), as well as suspected

greenhouse gases, particularly carbon dioxide (CO2). On October 27, 2005, the

Environmental Protection Agency (EPA) released a long-awaited analysis comparing

the costs and benefits of alternative approaches to controlling this pollution. The

alternative schemes focus on using market-oriented mechanisms directed at multiple

pollutants to achieve health and environmental goals. The new analysis compares

four versions of the Administration-based “Clear Skies” proposal to bills introduced

by Senator Jeffords (S. 150) and Senator Carper (S. 843 of the 108th Congress),

which would impose more stringent requirements.

This report, which will not be updated, examines EPA's analysis and adjusts

some of its assumptions to reflect current regulations. The most important

adjustment is the choice of baseline. The agency’s analysis assumes as a baseline

that, in the absence of new federal legislation, EPA and the states will take no

additional action to control SO2, NOx, Hg, or CO2 emissions beyond those actions

finalized by mid-2004. This baseline is put forth despite three rules recently

promulgated by EPA that limit SO2, NOx, and Hg emissions on a timeframe similar

to that proposed by the Clear Skies legislation.

CRS reexamines EPA's data, producing cost and benefit estimates for each bill

incremental to the costs and benefits of current law and promulgated regulations.

The reanalysis finds that Clear Skies would have negligible incremental costs and

added benefits of $6 billion in 2010 and $3 billion in 2020. For the same years, S.

843 would have annual net benefits 8 and 5 times as great as Clear Skies at annual

costs of $4.2 billion and $3 billion, and S. 150 would have annual net benefits 10 and

16 times those of Clear Skies at annual costs of $23.6 billion and $18.1 billion.

EPA conducted limited sensitivity analyses to examine the effect on cost of

select combinations of assumptions, including (1) the responsiveness of electricity

demand to changes in price; (2) the availability of skilled labor to install control

equipment; and (3) the growth of electricity demand and natural gas prices. However,

some potentially useful combinations of assumptions were not examined. For

example, if EPA had combined a relaxed skilled labor constraint with some

responsiveness of electricity demand to changes in price, the cost of S. 150 and S.

843 would be substantially reduced. CRS also concluded that the Hg control costs

used in the analysis may be substantially overstated because of dated assumptions.

Numerous benefits were not estimated by EPA, partly because of

methodological difficulties. Benefits not estimated include the environmental (as

opposed to health) benefits of controlling the pollutants; the health effects of mercury

control; and any benefits from controlling CO2 emissions. Thus, even though

benefits exceeded costs for each of the options in both EPA's and our analysis, one

should perhaps view the benefit estimates as a floor rather than a best estimate,

particularly for S. 150 and S. 843, which include significant Hg and CO2 reductions.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Why the Focus on Power Plants? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Proposed Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Options Examined in EPA’s Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Discussion and CRS Reanalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Choice of Baseline Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Choice of Benchmark Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Results of the Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Clear Skies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

S. 150 (Jeffords) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

S. 843 (Carper) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Cost Analysis Summary Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Specific Issues Highlighted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Carbon Dioxide Control Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Mercury Control Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Benefits Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

List of Figures

Figure 1. EPA's Four Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

List of Tables

Table 1. Emissions from U.S. Fossil-Fuel Electric Generating Plants . . . . . . . . . 2

Figure 1. EPA's Four Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table 2. EPA 2010 Cost and Benefit Estimates for Three Multi-Pollutant

Proposals, Compared with Existing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Table 3. EPA 2020 Cost and Benefit Estimates for Three Multi-Pollutant

Proposals, Compared with Existing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Table 4. Incremental Cost of Alternative Assumptions Compared with the

CRS Base Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Table 5. EPA Estimates for Carbon Dioxide Allowance Prices –

2010 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 6: Selected Heath Effects Avoided by Proposals Over Baseline . . . . . . . . 15

Costs and Benefits of Clear Skies: EPA's

Analysis of Multi-Pollutant Clean Air Bills

Introduction

The electric utility industry is a major source of air pollution, particularly sulfur

dioxide (SO2), nitrogen oxides (NOx), and mercury (Hg), as well as suspected

greenhouse gases, particularly carbon dioxide (CO2). On October 27, 2005, the

Environmental Protection Agency (EPA) released a long-awaited analysis comparing

the costs and benefits of alternative approaches to controlling this pollution. Called

multi-pollutant proposals, the alternative schemes focus on using market-oriented

mechanisms to achieve health and environmental goals in simpler, more costeffective ways. EPA's new analysis compares four versions of the Administrationbased “Clear Skies” proposal to bills introduced by Senator Jeffords (S. 150) and

Senator Carper (S. 843 of the 108th Congress), which would impose more stringent

requirements.

The Administration has been reluctant to conduct such a study, citing the cost

and difficulty of doing so, but it relented after the Senate Environment and Public

Works Committee, on a tie vote, failed to report the Clear Skies bill (S. 131) in

March 2005. One reason the bill failed to advance, according to its opponents, was

the concern that an analysis comparing its provisions to those of Senator Jeffords' and

Senator Carper's bills had not been conducted. The issue was raised again in April

2005, during confirmation hearings for Stephen Johnson, who was sworn in as EPA

Administrator May 2. As one of his first official acts, he promised to conduct a costbenefit analysis of Clear Skies and the other Senate bills, the results of which have

now been released.

Why the Focus on Power Plants?

Electric utility generating facilities are a major source of air pollution. The

combustion of fossil fuels (petroleum, natural gas, and coal), which accounts for

about two-thirds of U.S. electricity generation, results in the emission of a stream of

gases. These gases include several pollutants that directly pose risks to human health

and welfare, including particulate matter (PM),1 sulfur dioxide, nitrogen oxides, and

mercury. PM, SO2, and NOx are currently regulated under the Clean Air Act, and

1

Particulate matter is regulated depending on the particle size; current regulations address

particles less than 10 microns in diameter (PM10); EPA has promulgated regulations for

particles less than 2.5 microns in diameter (PM2.5) that are in the process of being

implemented. SO2 and NOx emissions could be affected by regulations of PM2.5. Current

concerns about emissions from fossil-fuel electric generating plants do not explicitly address

PM, but could indirectly do so through attention to SO2 and NOx.

CRS-2

EPA has finalized rules to regulate mercury. Other gases may pose indirect risks,

notably carbon dioxide, which may contribute to global warming.2 Table 1 provides

estimates of SO2, NOx, and CO2 emissions from electric generating facilities. As

indicated, SO2 and NOx emissions have declined over the past six years as

regulations resulting from the 1990 Clean Air Act Amendments have taken hold. In

contrast, CO2 emissions, which are unregulated, have continued to rise. In 2003,

fossil-fuel-fired electric generating plants accounted for about 72% of the country’s

SO2 emissions, 24% of its NOx emissions, and 41% of its CO2 emissions. Annual

emissions of Hg from utility facilities are more uncertain; current estimates indicate

about 45 tons (more than 40% of the country’s total Hg emissions) come from

electric generating units.

Table 1. Emissions from U.S. Fossil-Fuel Electric Generating Plants

(thousands of metric tons)

Emissions

1998

1999

2000

2001

2002

2003

SO2

12,509

12,445

11,297

10,966

10,515

10,594

NOx

6,235

5,732

5,380

5,045

4,802

4,396

CO2

2,313,013

2,326,558

2,429,394

2,379,603

2,397,937

2,408,961

Source: Energy Information Administration. Includes emissions from combined-heat-and-power plants.

The evolution of air pollution controls over time and the growing scientific

understanding of health and environmental impacts of power plant emissions have

led to a multilayered and interlocking patchwork of controls. Moreover, additional

controls are now underway, particularly with respect to NOx as a precursor to ozone,

to both NOx and SO2 as contributors to PM2.5, and to Hg as a toxic air pollutant.

Also, under the United Nations Framework Convention on Climate Change, the

United States agreed to voluntary limits on CO2 emissions. The current Bush

Administration has rejected the Kyoto Protocol, which would impose mandatory

limits, in favor of a voluntary reduction program. In contrast to the Administration’s

position, in June, 2005, the Senate passed a Sense of the Senate resolution calling for

mandatory controls on greenhouse gases that would not impose significant harm to

the economy.3

For many years the complexity of the air quality control regime has caused some

observers to call for a simplified approach. One focus of this effort is the “multipollutant” or “four-pollutant” approach. This approach involves a mix of regulatory

and economic mechanisms that would apply to utility emissions of up to four

pollutants in various proposals — SO2, NOx, Hg, and CO2. The objective would be

to balance the environmental goal of effective controls across the pollutants covered

with the industry goal of a stable regulatory regime for a period of years.4

2

Steam-electric utilities produce minor amounts of volatile organic compounds (VOCs),

carbon monoxide (CO), and lead — on the order of 2% or less of all sources.

3

Senate Amendment 866 to H.R. 6, The Energy Policy Act of 2005, (June 22, 2005)

4

CRS Report RL30878, Electricity Generation and Air Quality: Multi-Pollutant Strategies,

(continued...)

CRS-3

To some degree, this new approach already has been incorporated into existing

law with three recently finalized rules: (1) the Clean Air Interstate Rule (CAIR),

promulgated May 12, 2005, that caps emissions of SO2 and NOx in the eastern U.S.;

(2) the Clean Air Mercury Rule (CAMR), promulgated May 18, 2005, that caps

emissions of Hg from coal-fired powerplants; and (3) the Clean Air Visibility Rule

(CAVR), promulgated July 6, 2005, that focuses on SO2 and NOx emissions that

impair visibility surrounding national parks and wilderness areas.

More SO2 and NOx reductions are in the pipeline. With new ambient air quality

standards for ozone and fine particles taking effect nationwide in 2005, emissions of

NOx (which contributes to the formation of ozone) and SO2 (which is among the

sources of fine particles) need to be reduced further. Mercury emissions are also a

focus of concern: 44 states have issued fish consumption advisories for mercury,

covering 13 million acres of lakes, 765,000 river miles, and the coastal waters of 12

entire states. Mercury enters water bodies from air emissions that are either

deposited directly in them or are deposited on land and end up in water through

precipitation run off.

Proposed Legislation

Many in industry, environmental groups, Congress, and the Administration

agree that legislation that addresses power plant pollution in a comprehensive (multipollutant) fashion could achieve health and environmental goals in simpler, more

cost-effective ways. In the 109th Congress, six bills have been introduced that would

impose multi-pollutant controls on utilities.5 Such legislation (the Administration

version of which is dubbed “Clear Skies”) would address SO2, NOx, and Hg from

electric generating facilities on a coordinated schedule, and would rely, to a large

extent, on a system like that used in the acid rain program, where national or regional

caps on emissions are implemented through a system of tradeable allowances. Some

of the legislative proposals include CO2 caps as well.

Key questions in the ensuing congressional debate have been how stringent the

caps should be, how quickly reductions should be mandated, and whether carbon

dioxide should be among the emissions subject to a cap. Regarding the stringency

issue, all bills would eventually require a 70% to 80% reduction of both NOx and

SO2 emissions from 1998 levels. Regarding mercury, the bills eventually would

require reductions of 70%-90%.

The Clear Skies bill (S. 131) would impose the least stringent standards and

would be phased in over the longest period of time. For all three pollutants, the final

Clear Skies deadlines would be 2018, but the actual 70% reduction targets might not

be met for as long as a decade after that. The reason for the delay is the use of what

are called “banking” provisions in the regulatory scheme. Because the deadlines are

far in the future, utilities would be likely to “overcomply” in the early years of the

4

(...continued)

by (name redacted) and (name redacted).

5

For a detailed comparison, see CRS Report RL32755, Air Quality: Multi-Pollutant

Legislation in the 109th Congress, by (name redacted) and (name redacted).

CRS-4

program, building up credits that could be used in place of further emission

reductions in later years. The Administration uses the projected overcompliance as

a selling point for its approach, arguing that it will achieve reductions sooner than

would a traditional regulatory approach with similar deadlines. But overcompliance

in the early years would lead to large holdings of banked emission allowances to be

used in place of actual reductions in later years, delaying achievement of emissions

caps. In its analysis of the Clear Skies bill, EPA does not expect to see the full 70%

emission reductions until 2026 or later.

The Jeffords and Carper bills also allow banking and trading of allowances; but,

with earlier and more stringent caps on emissions, utilities would be unable to bank

so many allowances and, thus, would reach full compliance at least a decade sooner

than under Clear Skies.

With respect to carbon dioxide, Clear Skies would not impose controls on it,

whereas the Jeffords and Carper bills would. The absence of CO2 from the mix

might lead to different strategies for achieving compliance, preserving more of a

market for coal, and lessening the degree to which power producers might switch to

natural gas or renewable fuels as a compliance strategy.

Options Examined in EPA’s Analysis

The cost-benefit analysis released by EPA, October 27,6 examined six options:

four of the six were variants of the Administration's Clear Skies bill or its regulatory

counterparts7; the other two options were Senator Carper's Clean Air Planning Act

(S. 843 in the 108th Congress, but as of the date of the analysis, not yet introduced in

the 109th) and Senator Jeffords' Clean Power Act (S. 150).

The results of the analysis show very little difference between the four Clear

Skies options, so it may be best to think of them as one (for most purposes) and

simplify the discussion to three principal choices: Clear Skies, Carper, and Jeffords.

Of the four Clear Skies options that EPA examined, we have chosen the version most

recently drafted, the Managers' Mark version, which was offered at the Senate

Environment and Public Works Committee markup of S. 131 on March 9, 2005.8

6

Rather than a single document, the agency actually released a group of 45 documents: an

18-page “Comparison Briefing”; a 4-page table comparing the options; separate analyses

of each of the six options; and 37 background documents. We refer to this group of 45

documents as the agency's cost-benefit analysis. The full package is available at

[http://www.epa.gov/airmarkets/mp/].

7

By “regulatory counterparts,” we mean three rules promulgated by the agency in 2005 that

have emission reduction and cap-and-trade provisions almost identical to those of Clear

Skies. These are the Clean Air Interstate Rule (CAIR), promulgated May 12, 2005; the

Clean Air Mercury Rule (CAMR), promulgated May 18, 2005; and the Clean Air Visibility

Rule (CAVR), promulgated July 6, 2005.

8

The Managers' Mark was chosen primarily because it was the most recent legislative

version. When fully implemented, it also would have slightly greater benefits than the other

three Clear Skies alternatives, according to EPA's analysis.

CRS-5

Discussion and CRS Reanalysis

Choice of Baseline Assumptions

EPA’s Multi-Pollutant Regulatory Analysis assumes as a baseline that in the

absence of new legislation, EPA and the states will take no additional action to

control SO2, NOx, Hg, or CO2 emissions beyond those rules, regulations, or

agreements finalized by mid-2004. This baseline is put forth despite three rules

recently finalized by EPA that directly bear on SO2, NOx, and Hg.9

Why EPA chose not to include three finalized rules that clearly delineate EPA’s

current approach to addressing SO2, NOx, and Hg control is unclear.10 Instead, EPA

included the three regulations as a “sixth proposal” for controlling these pollutants

– a curious designation for finalized rules. This report uses that analysis, the

CAIR/CAMR/CAVR11 case, for its baseline because it most accurately portrays the

status of current and future clean air regulation with respect to these pollutants.

Arguably, the uncertainty with respect to those rules (and others) is no more than the

uncertainty about the specific provisions and implementation of any multi-pollutant

legislation. For example, S. 843 was introduced in the 108th Congress. There is no

guarantee that a 109th Congress or later version would maintain the deadlines

contained in the 2003 proposal. Likewise, the Managers' Mark, almost by definition,

was an evolving proposal and could change again if the Committee resumes

consideration of it. Finally, the regulations supporting any passed legislation would

be subject to some of the same uncertainties and delays as the finalized regulations

that were not included in EPA’s baseline. Controlling air pollution is a moving target

and we believe it is important that any analysis work from updated baseline

projections and assumptions when possible.

Choice of Benchmark Analysis

EPA’s cost analysis places special emphasis on three basic parameters:

9

Those are CAIR – the Clean Air Interstate Rule; CAMR – the Clean Air Mercury Rule;

and CAVR – the Clean Air Visibility Rule

10

One explanation might be that, while final, these rules have not yet been implemented and

are being challenged in court. In this respect, however, they are not materially different

from some pre-2004 rules. EPA’s baseline modeling includes finalized, but not

implemented, state rules and negotiated settlements, along with finalized EPA rules for

which serious disputes still exist with respect to implementation (such as the Heavy Duty

Diesel rule). A second possibility is that time constraints prevented EPA from updating its

baseline assumption from 2003. Adjusting the model to incorporate more recent data and

assumptions would have required a substantial commitment of time, delaying completion

of the analysis As discussed later, the grounding of the analysis in 2003 (e.g., Hg control

costs and natural gas supply assumptions) may be leading to unrealistic projections.

11

CAIR – the Clean Air Interstate Rule; CAMR – the Clean Air Mercury Rule; and CAVR

– the Clean Air Visibility Rule.

CRS-6

!

Electric Demand Price Elasticity (Demand Response). EPA

analyzes two scenarios: (1) zero price elasticity (i.e., no demand

response to increasing electricity prices), and (2) a very inelastic

short-term price elasticity (i.e., a very limited demand response to

increasing electricity prices).

!

Assumed Short-term Construction Constraints (Feasibility). EPA

analyzes two scenarios (1) an assumed shortage in boilermaker labor

that limits the amount of SO2 and NOx emissions control equipment

that can be built by 2010, and (2) an assumption that the market will

respond to the demand for new equipment in a timely fashion (i.e.,

no constraint on short-term construction).

!

Assumed Electricity Demand Growth and Natural Gas Supply. EPA

analyzes two scenarios: (1) EPA’s baseline assumption of 1.55%

annual electricity demand growth and baseline natural gas prices of

$3.34 per MMBtu in 2010 (1999 dollars), and (2) the Energy

Information Administration12 (EIA) baseline assumption of 1.83%

annual electricity demand growth and baseline natural gas prices of

$3.62 per MMBtu in 2010 (1999 dollars). Under EPA model, these

prices rise under the impact of proposed legislation.

Based on these parameters, EPA developed four scenarios that include different

combinations of these assumptions (as shown in Figure 1).

!

EPA’s Base Case Scenario assumes zero price demand elasticity,

short-term construction constraints, and EPA electricity demand

growth and natural gas supply assumptions.

!

No Construction Constraint Scenario assumes zero price elasticity,

no short-term construction constraints, and EPA’s electricity growth

and natural gas supply assumptions.

!

EPA Demand Response Scenario assumes very inelastic short-term

price elasticity, short-term construction constraints, and EPA’s

electricity growth and natural gas supply assumptions.

!

Higher Electricity Growth and Natural Gas Scenario assumes zero

price elasticity, short-term construction constraints, and EIA’s higher

electricity growth and natural gas supply assumptions.

This report uses EPA’s Demand Response Scenario as the benchmark analysis.

This choice is a compromise based on the three factors and lack of alternative

combinations. Each of the scenarios raises questions; however, the strongest case can

be made for including a short-term demand response function in the modeling.

12

EIA is the division of the Department of Energy responsible for official projections of

energy supply, demand, prices, etc.

CRS-7

Electricity price elasticities are well established in the literature, particularly shortterm elasticities.13 The short-term price elasticities chosen by EPA to incorporate

Figure 1. EPA's Four Scenarios

Scenario

Elasticity of

Demand

Construction

Constrained?

Electricity

Growth / Natural

Gas

EPA's Base Case

zero

yes

EPA assumptions

No Construction

Constraint

zero

no

EPA assumptions

EPA Demand

Response (used by

CRS)

assumes fairly

inelastic demand

response (but not

zero)

yes

EPA assumptions

Higher Electricity

Growth and Natural

Gas Prices

zero

yes

higher EIA

assumptions

into their Demand Response Scenario (the only scenario to contain the demand

function) are well within the range suggested by the literature. Why EPA did not

choose to include this refinement in all of the scenarios is unclear. However, EPA

only included it in the one, so CRS chose it.

This is not to suggest that the other assumptions incorporated in the Demand

Response Scenario are not debatable, particularly EPA’s assumption with respect to

boilermaker labor. EPA assumes in three of the four scenarios above that there will

be limited boilermaker labor for constructing SO2 and NOx control equipment until

2010, following which unlimited labor would be available.14 This is an assumption

EPA incorporated into its regulatory rulemaking on the Clean Air Interstate Rule

(CAIR), also called the Interstate Air Quality Rule (IAQR). This constraint has been

questioned by some, including the Institute of Clean Air Companies (ICAC), the

trade association that represents the air pollution control industry. During the

rulemaking on CAIR, ICAC conducted their own analysis of boilermaker labor

13

The classic survey of electricity price elasticities is Douglas R. Bohi, Analyzing Demand

Behavior: A Survey of Energy Elasticities, Johns Hopkins University Press (1981). For

more recent examination of residential electricity price elasticities, see Raphael E. Branch,

“Short Run Income Elasticity of Demand for Residential Electricity Using Consumer

Expenditure Survey Data,” 14 The Energy Journal 4 (1993) pp. 111-121 and Yu Hsing,

Estimation of Residential Demand for Electricity with the Cross-Sectionally Corrected and

Time-wise Autoregressive Model,” 16 Resources and Energy Economics (1994) pp. 255263.

14

Environmental Protection Agency, Feasibility of Installing Pollution Controls to Meet

Phase 1 Requirements of Various Multi-Pollutant Legislative Proposals, Office of Air and

Radiation (October 2005)

CRS-8

availability and found no constraint on construction, even if the 2015 deadline of

CAIR was moved to 2010. As stated by ICAC:

In summary, the air pollution control industry has demonstrated that they

are able to install significant amounts of air pollution control equipment

in short periods of time. This has been demonstrated more recently with

the installation of SCRs [selective catalytic reduction controls] for the

NOx SIP call as well as for control installations in both Germany and

Japan. The resources required for the projected installations under the

IAQR will also require a significant number of air pollution control

installations but the resources required to complete them are not expected

to be limiting. Factors such as the use of modular construction methods

and non-union craft labor will reduce the demand for union boilermakers.

This reduction in boilermaker demand combined with the six month

increase in compliance time window will further reduce the demand on

boilermaker labor. In the event of a shortage, additional boilermaker labor

is available through the Canadian boilermaker union as well as from ship

builders’ and iron workers’ labor pools. In conclusion, there will be more

than sufficient boilermaker capacity to carry out the projected IAQR and

control installation for 2010 and 2015. Even more significantly, it will be

possible to complete the 2015 requirements in the 2010 timeframe.15

The assumption of limited boilernaker availability, which only affects the two

most stringent alternatives (S. 843 and S. 150) is included in three of the four

scenarios used by EPA in its analysis. The one scenario that removes this constraint

simultaneously assumes zero price elasticity for electricity demand. Thus, despite

questions with respect to this assumption, one is forced to choose whether to address

it or to address the demand elasticity assumption. CRS believes that given the lack

of an EPA alternative that includes both demand elasticity and no boilermaker

constraint, it is more important to include a demand elasticity function in the

benchmark analysis than to remove the questionable feasibility constraint.16 Thus, we

chose EPA's demand response scenario as our base case.

Finally, there is the important issue of future natural gas supply. There are no

facts about the future and, therefore, sensitivity analysis is very important to

understand the robustness of cost estimates. The natural gas supply curves developed

for the EPA’s model generally project more natural gas availability at lower prices

than the natural gas supply curves developed by EIA. EPA provides one scenario

with the steeper EIA supply curves – Higher Electricity Growth and Natural Gas

Scenario – along with the short-term feasibility constraint and zero short-term price

15

Institute of Clean Air Companies, IAQR Projected 2015 Control Technology can be

Installed by 2010, p. 10.

16

Indeed, not including a demand response would compound the effects of the feasibility

constraint discussed here. With the feasibility constraint and zero price elasticity, the model

continues to build new generation capacity despite price increases, bumping into the

feasibility constraints that further bump up prices that are not responded to. Not including

a demand response function affects only the two non-Clear Skies bills. Including a proper

demand response function into the analysis mitigates this effect to some degree.

CRS-9

elasticity. In the current market climate, it is difficult not to argue that the EIA

curves may be more representative of future supplies than EPA’s estimates.

However, natural gas supply has a long history of volatility and the 15-year time

frame of the analysis leaves plenty of room for debate.

Recognizing serious questions about EPA’s feasibility constraints and the

historic volatility of the natural gas market, this analysis uses the Demand Response

Scenario as the basis of its discussion. Including a short-term demand function is

fully justified based on the literature.

Results of the Analysis

Clear Skies. Clear Skies would cost substantially less than the other two bills,

both in the short- and long-term. As indicated by Tables 2 and 3, Clear Skies' costs

and benefits are minimal compared with the reconstructed baseline case. That Clear

Skies has the lowest cost should not be surprising. Compared to the other bills, it has

less stringent requirements and later deadlines, so, particularly in the early years,

there is a vast difference in the annual costs of the three approaches. In particular, the

provisions with respect to Hg are weak compared with the other two bills and there

are no provisions for CO2. More importantly, as discussed in a previous CRS report,

Clear Skies is principally an attempt to revamp the Clean Air Act's existing structure

with something more cost-effective.17

Clear Skies' benefits would also be substantially less than the Carper and

Jeffords bills, which were designed to reduce pollution faster than existing

requirements. In 2010, the Clear Skies bill would provide $6 billion in annual

benefits, according to EPA, compared to benefits of $51 billion (Carper) and $83

billion (Jeffords). The benefits of Clear Skies almost merge with the baseline

increase in later years, and continue to lag the two other bills, which have benefits of

$19 billion and $66 billion annually in 2020. The higher benefits for the Carper and

Jeffords bills reflect the fact that Clear Skies' required pollution caps are less

stringent, and the implementation schedule is more relaxed.

As noted, EPA compares the three bills' effects to a baseline that does not

include current Clean Air Act requirements. If one adjusts the baseline to reflect

current Clean Air Act requirements (including the CAIR, CAMR, and CAVR rules,

promulgated earlier this year), Clear Skies has essentially no incremental cost. Its

benefits are also relatively small – equal to an additional 10% of the benefits of the

newly promulgated rules in 2010 and only 2% of the benefits in 2020. This result

suggests the success EPA has had in incorporating the market-based regulatory

scheme of Clear Skies into its new regulations. At the same time, the analysis may

bolster the arguments of Clear Skies' opponents, who maintain that the requirements

of current law are at least as good as the Clear Skies requirements.

S. 150 (Jeffords). As indicated by Tables 2 and 3, Senator Jeffords' bill

would have the greatest benefits. In 2010, its benefits would be $83 billion annually,

17

For additional discussion of these points, see CRS Report RL32782, Clear Skies and the

Clean Air Act: What's the Difference? by (name redacted) and (name redacted).

CRS-10

$32 billion more than those of the Carper bill, and about 14 times the benefits of

Clear Skies. In 2020, its benefits continue to exceed those of the other bills: at an

estimated $66 billion annually, they are three-and-a-half times those of the Carper

bill and 22 times those of Clear Skies.

Table 2. EPA 2010 Cost and Benefit Estimates for Three MultiPollutant Proposals, Compared with Existing Law

(in billions of 1999 dollars)

Cost Analysis

Benefit Analysis

EPA Demand

Response Scenario

(including shortterm constraints)

EPA Ozone and

PM2.5 Health

Benefits Estimates

S. 150

+$23.6

+$83

+$59

S. 843

+$4.2

+$51

+$47

Bills

Net Benefits

Compared to

Costs

+$0.2

+$6

+$6

Managers'

Mark

Note: Benefit estimates presented represent the mid-point of the range provided by EPA.

Table 3. EPA 2020 Cost and Benefit Estimates for Three MultiPollutant Proposals, Compared with Existing Law

(in billions of 1999 dollars)

Cost Analysis

Benefit Analysis

EPA Demand

Response Scenario

(including shortterm constraints)

EPA Ozone and

PM2.5 Health

Benefits Estimates

S. 150

+$18.1

+$66

+$48

S. 843

+$3.0

+$19

+$16

Bills

Net Benefits

Compared to

Costs

0

+$3

+$3

Managers'

Mark

Note: Benefit estimates presented represent the mid-point of the range provided by EPA.

S. 150 would also be the most costly bill. As discussed later, more than the

other bills, the Jeffords bill suffers from the short-term construction constraints EPA

imposed on the analysis. EPA maintains that a shortage of skilled labor will limit the

number of scrubbers that can be installed by 2010. Lacking scrubbers, coal-fired

power plants are forced to shut down in the agency's analysis of the bill. The Jeffords

bill would reduce coal production and coal-fired electric generation by about 40%,

according to EPA. Vast numbers of natural-gas-fired and renewable fuel generators

would be required in their place, at great cost: the Jeffords bill would lead to an

CRS-11

additional 65 gigawatts of generation from renewable sources (about 6 times the

amount projected under either of the other options) and nearly 100 gigawatts of

additional oil- and gas-fired capacity. By contrast, coal use would increase under

either Clear Skies or the Carper bill.

While the cost of S. 150 may lead Clear Skies' proponents to characterize it as

too costly, the net benefits of S. 150 (i.e., benefits minus costs) far exceed those of

Clear Skies and S. 843.

S. 843 (Carper). As indicated by Tables 2 and 3, both the benefits and costs

of S. 843 are lower than those of S. 150, but higher than those of Clear Skies. This

is by design, as S. 843 attempts to achieve substantial emission reductions beyond

those currently incorporated in the Clean Air Act, but allow sufficient time to avoid

serious short-term price increases. As discussed later, the more phased-in schedule

of the bill helps mitigate (but does not eliminate) the short-term constraints EPA

imposes on the analysis. In addition, as discussed later, S. 843 develops a limited

and flexible CO2 requirement that achieves some reduction in the increase in carbon

dioxide emissions at a nominal cost.

Sensitivity Analysis

EPA conducted a number of sensitivity analyses on the various bills. As noted

earlier, three variables highlighted by the analyses were (1) price elasticity, (2) shortterm construction constraints, and (3) higher electricity growth and more constrained

natural gas supply. Unfortunately, these variables were not isolated from each other,

but examined in selected combinations. As noted earlier, the benchmark analysis

used for this report assumes limited short-term price elasticity, short-term

construction constraints, and EPA's electricity growth and natural gas supply curves.

The other three combinations that EPA analyzed were:

!

No Construction Constraint Scenario, which assumes zero price

elasticity, no short-term constraints, and EPA’s electricity growth

and natural gas supply curves;

!

EPA Base Case Scenario, which assumes zero price elasticity, shortterm constraints, and EPA electricity growth and natural gas supply

curves; and

!

Higher Electricity Growth and Natural Gas Scenario, which

assumes zero price elasticity, short-term constraints, and EIA’s

higher electricity growth and natural gas supply curves.

The first alternative, the No Construction Constraint Scenario, removes EPA’s

assumed short-term construction constraint assumption contained in the benchmark

analysis but includes a zero demand price elasticity assumption. As indicated in

Table 4, this swap of assumptions is pretty much a wash for S. 843 and the

Managers' Mark. Indeed, in the case of S. 843, the analysis indicates that the shortterm construction assumptions are slightly more important to the cost analysis than

the removal of any price elasticity. However, the assumption of zero demand price

elasticity in this scenario has a substantial impact on the cost of S. 150, both short

CRS-12

(36% increase) and long-term (157% increase), as the removal of any price elasticity

exceeds the saving gained by removing EPA short-term construction constraint

assumptions. This is not surprising, given the significant compliance cost of S. 150

– a cost that, with zero elasticity assumed, results in no demand-side reaction from

consumers.

Table 4. Incremental Cost of Alternative Assumptions Compared

with the CRS Base Case

(in billions of 1999 dollars)

ZERO DEMAND PRICE ELASTICITY COST SCENARIOS

With EPA Assumed Construction

Constraints

Bills

With No Assumed

Construction

Constraints

(Alternative 1)

EPA’s Base Case

Scenario

(Alternative 2)

With EIA Electricity

Growth and Natural

Gas Assumptions

(Alternative 3)

2010

2020

2010

2020

2010

2020

S. 150

+$8.6

+$28.4

+$14.8

+$26.6

+$19.1

+$41.3

S. 843

-$0.3

+$0.1

+$3.6

+$0.4

+$4.5

+$1.2

Managers'

Mark

+$0.1

+$0.1

0

+$0.1

-$0.1

-$0.1

The second alternative, the EPA Base Case Scenario, replaces the short-term

price elasticity estimate of our benchmark analysis with an assumption of zero price

elasticity. The short-term construction constraint assumptions are maintained. This

case confirms the dramatic effect that removal of any short-term price elasticity has

on the costs of S. 150 with increases of 63% in 2010 and 147% in 2020 over the

benchmark analysis, and indicates the relative size of the effect on S. 843. For S.

843, removal of any price elasticity results in a cost estimate 86% higher than our

benchmark estimate for 2010. Along with the first sensitivity analysis, this result

suggests that demand response and short-term construction constraint assumptions

heavily influence EPA’s 2010 cost estimates for S. 843. In contrast, EPA’s

assumptions have little effect on S. 843 cost estimates in the long-term or for the

Managers' Mark.

The third alternative, the Higher Electricity Growth and Natural Gas Scenario,

essentially takes the zero price elasticity estimate and short-term construction

constraint assumptions of the EPA Base Case Scenario and adds EIA’s higher

electricity growth assumptions and steeper natural gas supply curves. Compared with

the benchmark analysis, this case maintains the short-term construction constraint

assumption, removes any demand price elasticity, and employs EIA assumptions for

electricity growth and natural gas supply. Not surprisingly, the combination of zero

demand response, greater demand for electricity, and tighter natural gas supply

results in higher costs, particularly for S. 150. Compared with the assumptions of the

EPA Base Case, the effect of higher growth and natural gas costs in the context of

zero demand response is most pronounced in the case of S. 150 and puts even more

CRS-13

pressure on EPA’s assumption of zero demand price elasticity, particularly for 2020.

The impact on S. 843 is considerably less dramatic and is nonexistent for the

Managers' Mark. However, the sensitivity analysis here is pretty limited and a more

comprehensive analysis of future natural gas availability could be valuable in

determining appropriate targets and timetables for any multi-pollutant legislation.

Cost Analysis Summary Points

!

EPA’s assumption of zero demand price elasticity has a dramatic

impact on the S. 150 short and long-term cost estimates. This effect

is accentuated when EIA higher electricity growth and natural gas

assumption are employed, particularly over the long term. Removal

of EPA’s assumed short-term construction constraints reduces the

effect some in the short-term, but does not overcome it.

!

EPA’s assumption of zero demand price elasticity and assumed

short-term construction constraints appear to have significant and

about equal effects on S. 843 in the short term. Both effects decrease

substantially over the long term, even if EIA's higher cost

assumptions are employed, because of S. 843’s less aggressive time

frame.

!

EPA’s assumptions have little effect on the Managers' Mark cost

estimates, either short or long-term. This is not surprising as the

basis of the Managers' Mark and much of newly-finalized

regulations – Clear Skies – was developed using EPA’s model. That

the Managers' Mark has only an incremental impact on the cost and

benefits of existing law and regulations ensures that its economic

impact is minimal under any conditions compared with those of

existing laws and regulations.

Specific Issues Highlighted

Carbon Dioxide Control Costs

Two of the bills analyzed by EPA, Senator Jeffords' S. 150 and Senator Carper's

S. 843, contain provisions to reduce carbon dioxide emissions. The S. 150 provision

sets an emissions cap of 2.05 billion tons annually beginning in 2010 (about 7%

below 1990 levels). S. 843 would set an emissions cap of about 2.655 billion tons

(estimated 2006 emissions) in 2009, decreasing to 2.454 billion tons (2001 emissions

level) beginning in 2013. As indicated in Table 5, the more modest reduction

requirement, combined with a slower reduction schedule, results in an order of

magnitude lower costs for CO2 allowances under S. 843 compared to S. 150.

The S. 150 reduction requirement and schedule are more representative of the

requirements of the Kyoto Protocol than S. 843. As indicated in Table 5, adjusting

S. 150’s carbon dioxide reduction costs for 2005 dollars and metric tons results in

costs of $19 a metric ton in 2010 and $33 a metric ton in 2020. This estimate range

CRS-14

is within that of the current European Union market prices as the EU ramps up for

meeting its more stringent 8% reduction below 1990 levels required under the Kyoto

Protocol. The current EU price for a metric ton of carbon dioxide reduction is about

$25.18

Table 5. EPA Estimates for Carbon Dioxide Allowance Prices –

2010 and 2020

(per short ton, except as noted)

S. 843 Costs

(1999$)

S. 150

(per metric ton,

estimated 2005$)

S. 150

(1999$)

2010

$1

$16

$19

2020

$2

$27

$33

Mercury Control Costs

Given the short deadline for completing the study, EPA and its contractor did

not develop new data on the cost or cost-effectiveness of control technologies,

instead relying on assumptions used in conducting analyses of the CAIR and CAMR

rules promulgated early in 2005. Those analyses used cost and cost-effectiveness

data collected in 2003. As noted in an earlier CRS report, the effectiveness of

mercury control technology has advanced rapidly since 2003. Thus, we conclude that

the present analysis may overstate the cost of emission controls for mercury by a

substantial margin. The air pollution control industry maintains that the cost of

activated carbon injection (ACI) controls, which the model assumes would be

imposed on about 40% of coal-fired plants under the Carper bill, is now only onefourth what the cost would have been in 2003.19

EPA's Hg control cost assumptions have less of a distorting effect in its analysis

of S. 150, simply because its other assumptions (discussed earlier) lead it to conclude

that 40% of coal-fired plants would be shut down by 2010 under the bill.

Benefits Estimates

EPA's analysis and CRS's reanalysis of the data show benefits substantially

outweighing costs for both S. 150 and S. 843. The benefits represent the monetized

human health effects (principally reduced mortality) from reducing emissions of SO2

and fine particles. Some of these benefits are summarized in Table 6 below.

18

As of November 4, 2005, according to PointCarbon. For current EU prices in euros, see

[http://www.pointcarbon.com/]

19

CRS Report RL32868, Mercury Emissions from Electric Power Plants: An Analysis of

EPA's Cap-and-Trade Regulations, by (name redacted).

CRS-15

Table 6: Selected Heath Effects Avoided by Proposals Over

Baseline

(in annual incidences avoided)

S. 150

S. 843

Managers'

Mark

Health Effect Avoided

2010

2020

2010

2020

2010

2020

Premature mortality

16,000

12,000

10,000

4,000

1,000

1,000

Chronic bronchitis

8,100

5,000

5,100

2,000

600

0

Non-fatal heart attacks

20,000

14,000

12,000

4,000

2,000

1,000

Hospital admissions/ER

visits

22,000

14,000

15,000

5,000

2,000

1,000

Acute bronchitis

19,000

13,000

12,000

4,000

1,000

1,000

Note: These effects are incremental to the effects of the CAIR, CAMR, and CAVR rules.

Three other sets of likely benefits were not estimated, at least in part because of

the methodological difficulty of doing so. First, the analysis makes no attempt to

monetize environmental benefits, which are significant in the case of sulfur dioxide

and mercury controls. SO2 emissions are the primary cause of acid deposition, which

harms aquatic life and affects forest growth, as well as damaging building materials.

Reductions in SO2 emissions could have significant environmental benefits, which

are not estimated in the analysis. The emissions are also a significant factor in the

formation of regional haze, the effects of which were also not monetized. Mercury

deposition, as noted earlier, has led to widespread fish consumption advisories, with

attendant economic impacts. The omission of environmental benefits has its greatest

effect on S. 150 and S. 843 which have more aggressive SO2, NOx, and Hg control

schemes.

Second, the analysis does not model mercury heath effects. Agency analyses of

the economic benefits of reducing Hg health effects have ranged from a few million

dollars per year to several billion dollars per year.20 The impact of omitting these

benefits would be significant if one accepts the latter estimate. Once again, this

omission has its greatest effect on S. 150 and S. 843, which have more aggressive Hg

control schemes.

Finally, the analysis did not attempt to estimate the possible benefits of

controlling CO2 emissions. There is no accepted methodology for making such an

estimate. Still, the absence of such a factor in the analysis may be a significant

omission, which understates the potential benefits of the Jeffords and Carper bills.

The Jeffords bill is the most aggressive of the three in regard to controlling CO2

20

For additional discussion of the benefits of controlling mercury emissions, and EPA's

varied estimates, see CRS Report RL32868, Mercury Emissions from Electric Power Plants:

An Analysis of EPA's Cap-and-Trade Regulations, by (name redacted).

CRS-16

(whereas Clear Skies does not cap CO2 emissions at all). Thus, the Jeffords bill may

be most disadvantaged as a result of this factor.

Conclusion

In reexamining EPA’s analysis, several points stand out in thinking about multipollutant legislation:

!

EPA has been very successful in incorporating the caps of Clear

Skies in now promulgated rules. As a result, after adjusting for

those rules, EPA's analysis finds little cost and a small benefit

associated with passage of Clear Skies legislation. The Jeffords and

Carper bills, however, set more stringent standards than the

promulgated rules. For both bills, the analysis shows benefits far

outweighing additional costs.

!

Carbon dioxide costs depend on the amount and schedule of any

proposed reductions. The modest reduction requirement and relaxed

implementation schedule of S. 843 results in nominal carbon dioxide

reduction costs.

As reduction requirements increase and

implementation schedules tighten, costs rise.

!

Mercury control costs are dependent on the timeliness of the data.

The EPA analysis does not reflect current data on costs of Hg

controls.

!

EPA’s benefit analysis is limited and incomplete, which works to the

disadvantage of alternatives to Clear Skies that include more

stringent standards.

Although it represents a step toward understanding the impacts of the legislative

options, EPA's analysis is not as useful as one could hope. The combination of

assumptions used in the analysis works in favor of the various Clear Skies

alternatives by overstating the Hg control costs of the alternatives, and – through its

assumption of constraints on labor availability – heavily penalizing short-term

pollution reduction schedules. In addition, the analysis does not adequately analyze

the effect that natural gas price volatility may have on implementation strategies and

costs. The analysis suffers from being based on 2003 assumptions, both in terms of

natural gas markets and Hg control costs. The result is an analysis that some will

argue is no longer sufficiently up-to-date to contribute substantively to congressional

debate.

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