Sulfur Dioxide Emissions and the 1990 Clean Air Act: Will Title Iv Help Stabilize So2 Emissions?

I. The Failure of the 1977 Clean Air Act To control so, Emissions

Complex atmospheric chemical reactions transform source emissions of sulfur dioxide (S02) and nitrous oxides (SO2) into products including sulfates, nitrates, sulfuric acid, and nitric acid. These chemicals can fall to earth near the source, or can travel hundreds of miles before returning to the surface as acid rain, fog, or snow.? These acidic depositions can produce adverse effects on ecosystems, man-made materials, and human health.5 Electric utilities are the largest single so, and NOx emission sources in the u.s., producing approximately 70 percent of national so2 emissions and 37 percent of national so2 emissions..

Prior to the 1990 amendments to the Clean Air Act (CAA, or Act),'Congress elected to curb so, emissions through command and control regulations. * The command and control theory is predicated on the concept that insulated administrative agencies are in the best position to provide external regulations adequate to mend market imperfections.' The theory gained wide support during the New Deal, in the era of 'big government'.10 Because administrative agencies are no longer insulated, however, this approach to regulating so, emissions from stationary sources did not work well as applied to the Clean Air Act.11 In fact, this theory of environmental protection produced regulatory measures in the CAA which led to a demand for dirty coal2 and inefficiently high costs for the operation of stationary sources burning clean coal.

As Congress applied this theory of environmental regulation to the CAA in regulating emissions of SO2, existing stationary sources such as coal-fired power plants were subject to regulation through various provisions of the Act, depending on where the plant was situated and on whether it was new or old.15 Additionally, new emission sources were subject to the New Source Performance Standards (NSPS) in § 7411. Unlike the NAAQS, these standards are based on controlling emissions through the "best system of emission controls."16 Thus, if a local municipality needed to increase its electrical output due to increasing population pressures, the local utility would face expensive NSPS if it decided to increase output by building a new facility.

For the foregoing reasons, this command and control system of regulation might have deterred a utility from building a newer, cleaner facility, and in fact might have encouraged the facility to increase output in its dirty, older facilities. This is an example of why the 1977 amendments failed to provide incentives for utilities to control s0, emissions through the use of newer, more efficient technology. By creating incentives for utilities to rely on older' facilities to meet increasing demands, the CAA prior to 1977 can be viewed as a failure in reducing so, emissions and in its mission to be "technology-forcing". 28

II. Title IV: The Acid Deposition Control Amendments of 1990

In light of the failure of the 1977 CAA to adequately control s02 emissions from stationary sources, the 1990 amendments were strenuously if not eagerly passed by both the Senate and the House of Representatives, the amendments into law on November 15, 1990. Ironically, the fight to start revisions of the 1977 CAA began with industry, which wanted to eliminate the Act's health-based standards. 21 Unfortunately for industry, what they got was a more, not less, comprehensive law.

Title IV of the 1990 amendments utilizes a market-based allowance system to reduce national annual so, emissions by 10 million tons from 1980 emission levels. 22 The emission reductions will result from the distribution of allowances to the emission's source. 23 These allowances will be allocated by the EPA to that specific source according to its historic fossil fuel consumption. 24 Allowances may also be purchased by interested parties at annual auctions and sales, 25 or may be allocated to emission sources through a number of bonus programs. 26 The allowances are freely transferable, although an allowance may not be used before the year for which it was allocated. 27 The market system is predicated on the fact that overall so, emissions are capped and allowances are limited. 28

Under Title IV, so, reductions are to be achieved in two Phases. Phase I begins on January 1, 1995 and reduces so, emissions through the direct allocation of allowances to 110 of

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the largest and dirtiest utilities in the country. 29 Source allowance allocations are limited and correspond to a unit's "baseline"30 multiplied by 2.5 lbs/mmBtu divided by 2,000. After the start of Phase I, each plant may not emit so, in a given year in excess of the amount of allowances that facility holds, unless it qualifies for bonuses, substitutions, or otherwise obtains more allowances to cover its emissions.

Phase II of the Acid Reduction Program begins on January 1, 2000 and involves several additional categories of utilities. Affected Phase II sources will be allocated allowances equal to their baseline multiplied by 1.2 lbs/mmBtu divided by 2,000.35 Therefore, each source affected by Phase I will be allocated less allowances under Phase II, thereby requiring plant managers to reduce emissions even further than under Phase I. Additionally, more plants will be competing for available allowances as more sources are incorporated into the program. 36 However, through the Opt-In program, 37 more allowances may become available, thus allowing utilities to increase emissions. Because allowance allocations are capped at approximately 8.9 million tons annually starting in 2000, any source built after that year will have to obtain its allowances from direct sales or allowance auctions.

The first allowance auction took place on March 29, 1993, and the second on March 28, 1994.“ Auctions are to continue each year at the end of March. The first direct sale also took place in 1993, and the second sale will continue from June 1, 1994 to January 31, 1995." The auctions and direct sales are supplied by an allowance reserve funded by the EPA'S withholding 2.8 percent of the allowances it would otherwise allocate to sources under Title IV.“ The proceeds of the sales and auctions are transferred, on a pro rated basis, to the owners or operators of the affected sources from whom the allowances were originally withheld.45 These annual auctions and sales promote a market in allowances and, in turn, help fuel the market-based system of so, control.

The market-based system will shift the responsibility of making management decisions on how to comply with the Act from the government to the individual plant managers. According to the EPA, shifting reduction responsibilities to the polluting sources results in the most cost-effective sharing of the emissions control burden, 47 and provides flexibility in compliance planning opportunities. * For example, in order to meet the level of emissions reductions required through the initial allocation of allowances, utilities with lower marginal costs may choose to reduce emissions through control technology, thereby generating excess allowances which can be sold. On the other hand, utilities with higher marginal costs (utilities which find it more expensive to meet reductions through control) may choose not to reduce emissions but instead may choose to buy allowances to comply with the Act.

III. Initial Results and Future Prospects For the Acid Deposition Program

In anticipation of the first auction and sale in March, 1993, Government agencies, market analysts, and industry executives held different opinions about how successful the allowance trading system would be. Generally, the EPA was overly optimistic about the program, while market and industry officials were more realistic about trading activity and allowance prices. The first so, allowance auction took place on March 29, 1993. A total of 150,010 allowances were sold for a total of $21,450,314. The average price utilities received from the EPA for the sales of their withheld allowances was $156 for year 1995 allowances and $136 for year 2000 allowances. Utilities accounted for 52 percent of the bidders and 95 percent of the actual purchasers of the allowances sold.

In the spot auction of Phase I allowances (allowances to be used in 1995), a total of 145,010 allowances were offered for sale: 50,000 withheld from the utilities by the EPA and 95,010 contributed for sale by the utilities themselves." The Chicago Board of Trade (CBOT), designated by the EPA to be the environmental exchange, received 106 bids requesting 321,354 year 1995 allowances.  Thirty-six bids were successful and 10 allowances were sold. After all 50,000 EPA allowances sold, only 10 of the 95,010 allowances offered by the utilities were sold.63 So few utility allowances were sold because the utilities set such high minimum prices on the allowances they offered." The average price for Phase I allowances was $439, with a low successful bid of $131 and with a high bid of $450. The auction of allowances to be used in 1995 generated a total of $7,831,684.

In the advance auction (allowances for Phase II year 2000 allowances), a total of 130,500 allowances were offered: 100,000 by the EPA that were withheld from the utilities pursuant to 42 U.S.C., 5.76510(b)(2), and 30,500 offered by utilities.  CBOT yog received 65 bids requesting 283,406 year 2000 allowances. 68 30 In 19e bids were successful, with 100,000 allowances sold; no utility offered allowances were sold. The average price for Phase II allowances was $273.70. The successful bids ranged from a low of $122° to a high of $310.?! In total, proceeds from the advance auction totaled $13,618,630.72

By most accounts, the first allowance auction was a market success despite only 10 utility allowances having been sold. The CBOT reported that the auction went beyond their expectation because there were so many bidders involved.73 Carolina Power and Light Co., the largest single purchaser of allowances with 96,365 purchases, was similarly pleased because the auction and allowances provide them with flexibility on how to comply with the CAA. Such flexibility also saved the consumer money since

C.P. & L. could avoid more expensive options like installing scrubbers.75 The use of allowances as a cost-effective way of preventing pollution was. echoed by other utilities as well.76 Trade analysts were also impressed with how much activity there was, saying that interest in the allowance market was surprisingly high.” However, some environmental groups were disheartened by the auction's results. Greenpeace demonstrated against the auction in Chicago, criticizing the EPA for allowing utilities to buy their way out of emission reductions.78 The Environmental Defense Fund, However, supported the market system approach, and replied that these complaints do not take into account the size of the emission reductions midwestern utilities must make under the Act.79 In sum, the first auction was a success and, despite some emotional concerns, worked to provide environmental protection through market incentives.