1. An Emissions Cap Alternative to New Source Review September 27, 1999

2. 2 Overview u EPA is embracing cap and trade programs for many pollutants. u NSR is duplicative and counterproductive on top of a cap. u Replacing NSR with a cap provides the same environmental protection with lower cost and greater environmental benefit.

3. 3 Cap and Trade Use is Growing u EPA is supporting expanded use of cap and trade programs. u The cap provides more secure protection of the environment. –Variation in production, growth, other variability all must come under the cap. –Accurate measurement verifies the results. –All units affected - no grandfathering.

4. 4 Cap and Trade Flexibility is Attractive to Sources u Allows choice of compliance options - new technology, alternate fuels, improved efficiency and pollution prevention, or reduced utilization. u Accommodates fluctuation in production, changes in operation. u Allows for better planning and cost containment.

5. 5 Cap and Trade Reduces Cost of Administration and of Control u Regulators do not have to determine where cuts should be made. u Tradable allowance market finds the lowest cost reductions - typically at older high emitting plants. u Automatically addresses “grandfathering” by creating an economic incentive to clean up old high-emitting plants.

6. 6 Cap and Trade Supports Broad EPA Policy Goals u Explicitly recognizes efficiency improvements and other similar actions taken by sources as pollution prevention - any type of reduction is valuable under the approach. u Output-based approach forces sources to balance the costs of pollution (emissions) vs. the value of the useful product (output).

7. 7 Cap and Trade Provides Technology-Forcing Driver u There is an economic incentive to create cost- effective reductions at every plant. u With growth, there is even stronger pressure to find more effective control technology. SCAQMD shows this clearly. u Private sector support for technology innovation is clearly a benefit of cap and trade.

8. 8 The Cap Paradox u Emissions cannot exceed the cap. u Emissions won’t be below the cap either - allowances not used at one source will be emitted somewhere else. u If you still apply NSR to sources under the cap, other sources will produce the pollution avoided by the source subject to NSR. This will all occur at a higher cost.

9. 9 NSR is the Opposite of Cap and Trade u No flexibility - technology and emissions are specifically determined on a case-by-case basis. u No cost minimization - sources required to apply the newest (most expensive and often unreliable) technology. u No environmental certainty - actual emissions depend on production rate - no absolute cap. u No support for pollution prevention or efficiency - rates are typically input-based, focus on add-on control.

10. 10 NSR Negates Many Benefits of Cap and Trade u NSR forces higher cost reductions from new sources rather than low cost reductions from old sources. u Marginal reductions squeezed out of new sources are simply emitted by other sources. u NSR slows capital turnover and efficiency improvement. u Offsets already handled by cap.

11. 11 If NSR Were Removed for a Capped Sector: u Program emissions would not change. u Compliance, administration and consumer costs would go down. u Capital turnover would accelerate. u Non-capped emissions would decrease. u Costs would go down, environment would be cleaner.

12. 12 Specific Proposal u NSR offset and technology (BACT/LAER) requirements are replaced by an emission cap and trade program covering a particular source category and geographic area. u Local attainment issues still must be addressed separately. u WEPCO-type protection still required for non-capped criteria pollutants.

13. 13 Outcome u Relief from NSR allows the cap and trade program to work effectively and provides incentives for clean growth and capital turnover. u The cap ensures that emissions do not increase regardless of new construction or modifications.

14. 14 Outcome (2) u Technology forcing effects maintained. u Local attainment issues still addressed u Costs are lower and the environment is cleaner.

15. 15 Policy Benefits u Allows efficient, proper operation of the cap and trade program. u Provides incentives instead of mandates: –to states and sources to adopt cap and trade programs –to sources to update or turn over capital stock u Guarantees environmental safeguards, since emission levels will be capped at levels that appropriately mitigate demonstrated health and environmental risks.

16. 16 Implementation u Source type - Would apply to an entire source category within the affected geographic area. Alternative would be company-wide limit. u Geographic - At least at the state level but much more effective if implemented at regional and national levels.

17. 17 Implementation u Size - Start at existing levels (15-25 MW and 250 MMBtu). Might need to go smaller to minimize leakage for new smaller generation technologies. Allow Opt-in for smaller sources as well. u Timing/seasonality - Based on appropriate mitigation requirements. u Cap Size - Based on needed mitigation for appropriate health and environmental goals.

18. 18 Legal Basis u Offsets - Base on EPA communications related to RECLAIM and OTR cap. u BACT/LAER applicability –Build on PAL concepts. –Work from definition of “emissions increase” for a capped source, company or sector.

19. 19 Conclusions u Cap and trade programs are proliferating. u Within a cap, NSR is duplicative and counterproductive. u With proper design, cap can provide the same environmental benefits as NSR at lower administrative and financial cost. u Industry would like to work with EPA to find the proper implementation mechanism.