My Comments on the Cross State Air Pollution Rule Update December 2020

This post describes the comments I submitted to the Environmental Protection Agency (EPA) on their latest proposed revision to the Cross State Air Pollution Rule.  I have only posted once since Thanksgiving because I was called out of retirement to help the Environmental Energy Alliance of New York (EEANY) develop their comments on this rule-making but despite all the time I spent on them I was unable to include everything I thought was important.  So, I submitted my own comments.  This is a simple description.  I have prepared  a detailed summary of my comments on updated Cross State Air Pollution Rule that provides more details.

I am a mostly retired air quality meteorologist who was involved in continuous emissions monitoring system compliance reporting at the start of the Acid Rain Program, regulatory analysis of all the subsequent cap and trade programs affecting New York, and several regional ozone modeling efforts.  I was asked to help develop the EEANY comments on this rule because I was the primary author for the last iteration of their comments.  I submitted the comments to expand on some of their arguments and to address additional issues not in their purview.  The opinions expressed in this post and in my comments do not reflect the position of EEANY, any other of my previous employers or any other company I have been associated with, they represent my personal opinion.

Background

CSAPR was promulgated to address Ozone air quality which is the most intractable air quality problem in the United States.  Despite years of effort, ozone regularly exceeds the national ambient air quality standard.  It is formed in a photo-chemical reaction from nitrogen oxides (NOx,) created in any combustion process, and volatile organic compounds, basically anything with an odor.  As a result, there are many sources, both man-made and natural, that must be considered on a regional scale, which complicates the transport and dispersion of the pollution, in order to develop a control program to limit ozone.  Because the pollution crosses state lines this has become a controversy between states.  In the eastern US, the conditions conducive to ozone formation (Hazy, hot and humid heat waves) also drive-up energy demand and increase emissions from the electric generating sector.

This specific rule was amended because a court ruled that previous attempts still do not reduce observed levels of ozone enough.  According to EPA the rule works as follows:

EPA sets a pollution limit (emission budget) for each of the states covered by CSAPR.  Authorizations to emit pollution, known as allowances, are allocated to affected sources based on these state emissions budgets. The rule provides flexibility to affected sources, allowing sources in each state to determine their own compliance path. This includes adding or operating control technologies, upgrading or improving controls, switching fuels, and using allowances. Sources can buy and sell allowances and bank (save) allowances for future use as long as each source holds enough allowances to account for its emissions by the end of the compliance period.

In the proposed rule, like any other emissions trading program, each affected source is required to submit one allowance for each ton emitted during the trading season.  In CSAPR EPA set a cap for each state and then allocated allowances amongst the affected sources.  There is another complicating aspect of the rule related to interstate pollution.  In order to limit a state’s contributions to downwind exceedances the proposed program includes assurance levels that act as a cap on a state’s NOx emissions during the Ozone Season.  The assurance level equals the allowance allocation plus the variability limit that accounts for the year-to-year differences due to weather, electric demand and disruptions.   If a state exceeds their assurance level then sources that exceed their assurance levels within that state will be assessed a 3-to-1 allowance surrender for each ton emitted above the  assurance level.

My concern and that of the EEANY member companies is that the proposed New York emission budget is so limited and New York sources have such limited opportunities for further reductions that the sources will be forced to rely on the market for the allowances needed to operate throughout the ozone season.  However, there are aspects of the proposed rule that are unprecedented and, especially since the program is not finalized but will start on May 1, 2021, that mean that the market may not be as liquid as EPA assumes.  In the following I will explain these issues from a New York-centric position.

Comments

NYS Electric Generating Units (EGUs) have made significant reductions in NOx emissions as shown in the New York State Ozone Season NOx and Operating Parameters Trends table.  There are two implications to the current observed NOx emissions rates in New York.  Firstly, because emissions are so low the pollution control costs for any further reductions will be very high.  Secondly, there may not be many more reductions possible no the matter the cost.  As a result, it is important that EPA allocate the appropriate number of allowances to New York.

The CSAPR update rule is a cap-and-trade air or emissions trading pollution control program.  The first phase in any such program is to establish how many allowances are to be allocated.  In this rule EPA used a three-step methodology:

1. 1. 1. Determine a future baseline that represents the current emissions levels with adjustments for retirements and new sources,
      2. Factor in additional mitigation controls that adjust the baseline to account for reductions available at a specified cost threshold, and
      3. Account for shifts in generation caused by the baseline adjustments and additional controls.

My biggest problem with EPA’s methodology is that EPA does not account for the retirement of nuclear generation.  When the last unit at the Indian Point nuclear generating station retires before the 2021 ozone season that means that 12% of the state’s generation will have to be replaced compared to the baseline that EPA used.  In the short term that means replacing zero-NOx emitting generation with generation that does emit NOx.  The EEANY comments explain that nuclear retirements in the 12-state trading system mean that the baseline should be adjusted.  EEANY shows that the authors of the rule did not understand the implications of the metric used to determine whether further controls are possible at their chosen cost threshold so that means EPA over-estimates potential NOx reductions.  EEANY proposed specific recommendations and suggestions for baseline and control technology changes and suggested incorporating a safety valve to offer a compliance pathway in the face of the uncertainties.

My Comments

EEANY discussed potential issues with the emissions trading market.  I included a description of several broad aspects of cap-and-trade programs to expand on the arguments for improving the chances of market success.  Despite the success of all previous EPA cap and trade programs there are aspects of the proposed action that are unprecedented and could conceivably threaten the viability of this trading program.  My comments illustrated the potential impact of the proposed allocations on New York by way of examples.

In my comments I developed an example ozone season emissions scenario to test the EPA allocations that were based on 2019 emissions.  I simply used the preliminary emission estimates from the 2020 ozone season.  Indian Point Unit 2 retired in April 2020 so last summer’s emissions reflect the additional generation needed to replace that retired energy.  In order to account for the retirement of Indian Point Unit 3 I prorated 2020 ozone season emissions by the ratio of generation produced by Indian Point 3 to the total ozone season generation in 2020. That adds 512 tons of NOx to the baseline.  The preliminary 2020 Ozone Season data available from EPA Clean Air Markets Division air markets program data website is 3,563 tons and would be projected to be 4,075 tons when the replacement power emissions are added.

The next step in the projection is to determine how many allowances are available.  EPA proposes a New York emissions budget of 3,137 tons.  The variability limit is 659 tons.  Recall that is supposed to account for year-to-year differences due to weather, electric demand and disruptions and that if state-wide emissions are greater than the sum of the budget and variability limit, or assurance level, that EPA imposes penalties.  The 5% set-aside for New Sources affects this projection in two ways.  Firstly, 157 tons are taken from the budget and not available to existing sources.  Secondly, in this example, the 94 tons emitted by the new sources in New York during 2020 are covered by this set-aside.  The allowances at the beginning of the ozone season equal the emissions budget plus the allowance bank or variability limit less the 157-ton new source set-aside. As a result, there will be 3,639 allowances available at the start of the Ozone Season on May 1, 2021.

In my example I compared 2020 adjusted emissions to the allowances available.  EPA acknowledges that affected sources set aside a contingency to account for monitoring problems and for sources that have to purchase allowances for compliance. I believe a minimum of 2.5% or 102 tons of the 4,075 emissions expected is appropriate for this contingency.  The correct emissions to compare relative to the 3,659 allowances available is the 2020 adjusted emissions plus the contingency buffer minus the 2020 new source emissions or 4,083 tons.  Note that the difference between the total set-aside and the emissions (63 tons) flows back into New York’s available allowance pool but not until after reconciliation so that means that the allowances available for New York sources are effectively reduced by 63 tons in this example.

The allowance margin represents the difference between emissions and allowances.  The difference between the available allowances and effective emissions is -444.  The negative number means that New York State will have to obtain allowances from the market to meet its compliance obligations and monitoring contingency.  Importantly, because the emissions in this example are 279 tons greater than the assurance level two additional allowances for each excess ton would have to be surrendered for compliance for a total of 558 additional allowances meaning that a total of 4,641allowances would be needed to cover the emissions, the CEMS contingency buffer, and the compliance assurance penalty.  In this example New York sources would have to go outside the state for 1,002 allowances for compliance.

In my comments I included a second example that calculated the numbers on a unit-by-unit basis and then determined the allowances need for each facility.  There are 70 CSAPR Group 3 facilities in New York.  In the analogous example case only 31 of the facilities would be able to comply with the proposed allocations.  Seven facilities would be able to comply without exceeding their assurance levels but 32 facilities would be required to surrender additional allowances.  I concluded that New York facilities would have to get 2,534 allowances from the market.

Unquestionably market-based emissions trading programs have been a success to date.  However, past success does not necessarily ensure future success.  I think market certainty is a primary driver for success and believe that the proposed program has enough uncertainty that success is not assured.

 A successful emissions trading program has a robust and liquid allowance market that allows affected sources to operate as needed while meeting the emissions reductions. There are several conditions that lead to a successful program.  I believe the most important key to success is the ability for some sources to be able to over control.  Sources that can install cost-effective controls and reduce emissions below their allowance allocations, can sell excess allowances to sources with more expensive compliance options. In order for that to work the cap has to be set so that over-control is possible.  In addition, in order to be able to use the allowances produced by sources who can over control, the market must be mature enough that those sources have enough market certainty that they are willing to generate those allowances and sell them.  Most programs have included a substantial time period between the final rule promulgation and start of the program that included credit for early reductions such that additional allowances were generated. Finally, the market must be large enough that other trading considerations don’t influence the market.  Many of the states in the affected region are de-regulated so generating companies compete with each other.  It is not unreasonable to expect that might influence a decision to sell allowances.

The proposed rule may not meet all these conditions.  EEANY’s comments showed that unless the baseline includes an adjustment for nuclear retirements it will be set so low that NY generators who have few remaining options to make further reductions will have to rely on the market to match historic operations.  EEANY also described issues with EPA’s assumptions for potential SCR optimization that mean that even meeting the proposed allocation levels may not be possible.  The short time between promulgation and the start of the trading program prevents any early reductions.  In my comments I described other factors affecting trading decisions.  In my comments I explained that there is a disconnect between market-based program theory and industry reality that leads regulators and academics to believe that emissions trading will be driven by economic considerations.  I believe there are regulatory, corporate, and personal reasons for an affected source to treat allowances as a compliance mechanism rather than a commodity for potential sales profit as presumed by market theory.  I described several other practical issues with emissions trading why the program in the proposed rule may not be as successful as past programs.

I also explained that EPA’s proposed allocations reduce the 12-state baseline, allocations and allowance bank for the five-month Ozone Season in an attempt to reduce emissions are fatally flawed. Ozone exceedances are an episodic feature associated with high energy demand lasting no more than several days and there is no guarantee that emissions during the episode are lowered sufficiently to reduce ozone during episodes using a seasonal trading program.  As it stands a higher emitting unit will incorporate a high price for their energy produced reflecting the scarcity of allowances.  As a result, the unit will not be called on to provide power unless the price is high and because high prices occur when demand is high the higher emitting units will still operate during ozone episodes.  In my opinion the only way to address the episodic nature of ozone episodes with a cap-and-trade program is to have a trading program over a time period consistent with the problem.

There is one final aspect of all this that needs to be mentioned.  The electric generation sector is not the only source of ozone precursor emissions.  Emissions from this sector are an easy target because the ultimate costs to the consumer are buried in utility bills so regulators can “hide” from the ramifications of the added costs.  On the other hand, motor vehicle exhaust is a major source of pre-cursors but any limitations on mobile sources directly impact the public so regulators could not deny their culpability.  My point is that even with all realistic electric sector reductions, that there still is no guarantee that the ozone levels will get below the national ambient air quality standard limits.

Conclusion

Despite the success of cap-and-trade air pollution control programs to date, it is inappropriate to expect that future programs will necessarily succeed as well if the reasons for past success are not considered.  The proposed EPA CSAPR trading programs does not consider those factors in its allowance allocations and schedule.

I have concerns about the level of the cap.  New York State has a remarkable record reducing NOX emissions and has a new regulation that will further reduce emissions with new limits on its peaking units.  Nonetheless, EPA’s proposed cap requires half the state’s facilities to rely on trading to meet their compliance requirements if future emissions equal 2020 emissions.  No sources in New York can over-control and provide sufficient allowances for state compliance which means that the inter-state trading is required and that means that the compliance assurance penalty is a concern.  EPA’s proposed baseline does not account for the fixed increase in emissions due to nuclear retirements over and above the inter-annual variability due to weather, demand or disruptions.  In New York the loss of 12% of the state’s nuclear generation means that this will definitely impact future emissions. The theory of cap-and-trade markets does not recognize the reality of industry practices that all lead to the inescapable conclusion that mark liquidity is a real concern in the proposed program.

Therefore, it would be prudent for EPA to revise the baselines to account for nuclear retirements and correct the SCR optimization reductions for new allocations and variability limits.  Furthermore, because of the aggressive schedule a safety valve which allows the use of Group 2 allowances is a reasonable backstop in the event of unexpected developments.  If adjustments are not made to the allowances available and weather, demand or disruptions increase NOx emissions, then there could be situations where the only compliance option available is to limit operations.