Chicago, Illinois Clean Air Interstate Rule - CAIR

CAIR USEPA published CAIR on May 12, 2005 Regional Cap and Trade Program = Annual SO 2 & NOx reductions in 23 states and District of Columbia; Ozone season NOx reductions in 25 states and District of Columbia Air Pollution can travel hundreds of miles and cause health and environmental impacts on regional or national scales Air Pollution must be addressed in recognition of interstate pollution transport

Overview Reduces sulfur dioxide (SO 2 ) and nitrogen oxide (NO X ) emissions Reduces sulfur dioxide (SO 2 ) and nitrogen oxide (NO X ) emissions Both SO 2 & NOx contribute to fine particulate pollution (PM 2.5 ) Both SO 2 & NOx contribute to fine particulate pollution (PM 2.5 ) NOx contributes to ground level Ozone NOx contributes to ground level Ozone Provides substantial human health and environmental benefits. Provides substantial human health and environmental benefits. Affected States must comply with the federal CAIR Affected States must comply with the federal CAIR

CAIR Timeline Phase 1 - NOx 2009 Phase 1 - SO Phase 2 - NOx and SO

SO 2 & NO X Negative Environmental Effects Air quality impairment Air quality impairment Impact on public health Impact on public health Acidification of lake & streams Acidification of lake & streams Damage to forest ecosystems Damage to forest ecosystems Visibility degradation Visibility degradation Acceleration of the decay of building materials and statues Acceleration of the decay of building materials and statues

Health Effects Increased respiratory symptoms, such as irritation of the airways (e.g., coughing or difficulty breathing) Increased respiratory symptoms, such as irritation of the airways (e.g., coughing or difficulty breathing) Decreased lung function Decreased lung function Aggravated asthma Aggravated asthma Development of chronic bronchitis Development of chronic bronchitis Irregular heartbeat Irregular heartbeat Nonfatal heart attacks Nonfatal heart attacks Premature death in people with heart and lung disease Premature death in people with heart and lung disease

Defining the Problem in Illinois In Illinois, electric generating units (EGUs) are largest source of SO 2 and one of largest sources of NOx In Illinois, electric generating units (EGUs) are largest source of SO 2 and one of largest sources of NOx 59 coal-fired boilers and 170 oil/gas-fired boilers and turbines affected 59 coal-fired boilers and 170 oil/gas-fired boilers and turbines affected

1. Illinois EGUs identified as significantly contributing to downwind States ability (or inability) to attain National Ambient Air Quality Standards (NAAQS) 2. Transported Illinois pollution interferes with other States ability to maintain compliance with NAAQS 3. Substantial reductions in NOx and SO 2 needed in Illinois to attain the 8-hour and PM2.5 NAAQS

CAIR Helps Illinois and its Neighbors Because air emissions travel across state boundaries, reducing the emissions from sources in Illinois also will reduce fine particle pollution and ground-level ozone pollution in other areas of the country. Because air emissions travel across state boundaries, reducing the emissions from sources in Illinois also will reduce fine particle pollution and ground-level ozone pollution in other areas of the country. Illinois sources significantly contribute to fine particle pollution in other states including: Illinois sources significantly contribute to fine particle pollution in other states including: Pennsylvania, Ohio, West Virginia, Indiana, Tennessee, Kentucky, Alabama & Michigan Illinois sources significantly contribute to ground-level ozone pollution in other states including: Illinois sources significantly contribute to ground-level ozone pollution in other states including: Ohio, Wisconsin & Michigan Illinois fine particle air quality will improve because of reductions of SO2 and NOx in: Illinois fine particle air quality will improve because of reductions of SO2 and NOx in: Illinois, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio, Texas & Wisconsin

8-Hour Ozone Nonattainment Areas Jersey, Madison, Monroe, St. Clair Cook, DuPage, Kane Lake, McHenry, Will, Grundy (partial), Kendall (partial)

PM 2.5 Nonattainment Areas Madison, Monroe, St. Clair, Randolph (partial) Cook, DuPage, Kane Lake, McHenry, Will, Grundy (partial), Kendall (partial)

USEPA Estimates CAIR Reduces Illinois Emissions By 2015, CAIR will help Illinois sources reduce emissions of SO 2 by 125,000 tons or 34% By 2015, CAIR will help Illinois sources reduce emissions of SO 2 by 125,000 tons or 34% (tons/yr) SO 2 without CAIR 365,000402,000447,000 SO 2 with CAIR -240,000240,000 (tons/yr) NOx without CAIR 146,000146,000159,000 NOx with CAIR -69,00065,000 By 2015 CAIR will help Illinois sources reduce emissions of NOx by 81,000 tons or 55%. By 2015 CAIR will help Illinois sources reduce emissions of NOx by 81,000 tons or 55%.

CAIR in Illinois * Illinois opting-in to federal cap and trade programs * Capping emissions through three separate emissions trading programs: PM2.5 Annual SO 2 Trading Program Annual NO X Trading Program Ozone Ozone Season NO X Trading Program

CAIR in Illinois (cont.) SO 2 – follow USEPAs Model Rule SO 2 – follow USEPAs Model Rule Cap & Trade based on Acid Rain Program Cap & Trade based on Acid Rain Program NOx – USEPA allows more flexibility NOx – USEPA allows more flexibility Cap & Trade based on NOx SIP Call Cap & Trade based on NOx SIP Call Seasonal & Annual Caps Seasonal & Annual Caps Flexibility: Flexibility: Allocation Methodology Allocation Methodology Set-asides Set-asides

CAIR in Illinois (cont.) o Output based allocations (instead of using heat input) o Allocations occur 3 years in advance of date to be used (instead of 6 years in advance) o Update allocation annually (instead of establishing single, continuing baseline) o Set-aside 5% of allowances for New Sources in both phases (instead of reducing to 3% in phase 2) o Set-aside 25% of allowances for Clean Air Set-Asides (CASA) Use of NOx Flexibility

CASA - NOx Purpose: Encourage energy efficiency, renewable energy, clean technology, and early control EE/RE (Energy Efficiency/Renewable Energy) set-aside of 12% EE/RE (Energy Efficiency/Renewable Energy) set-aside of 12% Clean Technology projects – 11% Clean Technology projects – 11% Includes Clean Coal and Pollution Control Upgrades Includes Clean Coal and Pollution Control Upgrades Above related projects that commence operation early (Early Adopters) – before 2012 – 2% Above related projects that commence operation early (Early Adopters) – before 2012 – 2% CAIR in Illinois (cont.)

The more NOx reduced, the greater the benefits The more NOx reduced, the greater the benefits The NOx CASA expected to result in additional NOx reductions through promotion of EE/RE & clean technology The NOx CASA expected to result in additional NOx reductions through promotion of EE/RE & clean technology Retirement of the NOx Compliance Supplement Pool should result in additional NOx reductions Retirement of the NOx Compliance Supplement Pool should result in additional NOx reductions USEPA modeling in support of CAIR shows that CAIR will not be sufficient for all of Illinois to attain the PM2.5 & Ozone NAAQS USEPA modeling in support of CAIR shows that CAIR will not be sufficient for all of Illinois to attain the PM2.5 & Ozone NAAQS CAIR in Illinois (cont.)

Economic Modeling ICF Consulting modeled incremental impact of Illinois proposed CAIR with set-asides versus model federal CAIR ICF Consulting modeled incremental impact of Illinois proposed CAIR with set-asides versus model federal CAIR Used conservative assumption that all 30% of set-asides were retired – which is not the case Used conservative assumption that all 30% of set-asides were retired – which is not the case Principal Findings include: Principal Findings include: Overall, the implementation of the NOx budget reduction policy has minimal effects, both in Illinois and across the nation…Overall, the implementation of the NOx budget reduction policy has minimal effects, both in Illinois and across the nation… The retail electricity prices and costs across all sectors (residential, industrial and commercial) remain unchanged as a result of the NOx budget reduction. The retail electricity prices and costs across all sectors (residential, industrial and commercial) remain unchanged as a result of the NOx budget reduction. CAIR in Illinois (cont.)

Results Cleaner air & improved health for Illinois and other States Cleaner air & improved health for Illinois and other States Meet federal requirements – including satisfaction of Illinois obligation under Section 110(a)(2)(D)(i) of CAA for transport Meet federal requirements – including satisfaction of Illinois obligation under Section 110(a)(2)(D)(i) of CAA for transport Assist Illinois and downwind states in achieving and maintaining PM2.5 and 8 hour Ozone NAAQS Assist Illinois and downwind states in achieving and maintaining PM2.5 and 8 hour Ozone NAAQS Provide incentives for EE/RE, clean technology, and early controls Provide incentives for EE/RE, clean technology, and early controls CAIR in Illinois (cont.)