What's in the forecast? A look at the EPA's use of computer models in emissions trading.

• Author: Otero-Phillips, Camille V.

INTRODUCTION

This paper traces the development of the Clean Air Act ("CAA" or "the Act") from its inception in 1970 through the 1990 Amendments. Significant emphasis is placed on the shift from the traditional command-and-control approach of pollution control to the economic incentive-based programs which are the focal point of Title IV of the 1990 Clean Air Act Amendments ("CAAA").

Title IV utilizes an incentive-based program to reduce the acid rain problem in the United States by establishing a national market in [SO.sub.2] (sulfur dioxide) emission allowances.(1) Title IV's marketable permit scheme is based upon the belief that a nationwide trading program for [SO.sub.2] emission allowances will reduce air pollution in the most cost-effective manner.(2)

Utility companies are the largest emitters of [SO.sub.2] because they burn fossil fuels (primarily coal) for energy.(3) When [SO.sub.2] is released into the atmosphere, a chemical process changes the [SO.sub.2] into sulfuric acid.(4) The air might then transport the sulfuric acid great distances,(5) creating interstate air pollution and acid rain problems. Downwind states often end up paying the price for upwind polluters.(6) The Title IV emission trading program for [SO.sub.2] is one way the Environmental Protection Agency ("EPA") is attempting to reduce these problems.

Although Title IV was enacted as a partial solution to the interstate air pollution problem, it falls short of effectively reducing the environmental degradation caused by emissions of [SO.sub.2] from utility companies. Some industry experts have suggested that the marketable permit scheme utilized in Title IV would be more effective in combating the interstate air pollution problem if the permits were measured in units of environmental degradation instead of in units of emissions.(7) Although this seems like a simple solution to the interstate air pollution problem, the effects of air pollution vary, depending on which resources and which regions are affected. This makes implementation very complex and enforcement costly and unlikely.

The EPA has historically used computer models to establish emissions limitations at specific sources in order to ensure compliance with federal ambient air quality standards.(8) These are the same modeling techniques that the EPA should use to distribute tradable shares under Title IV, basing the number of allowable shares on environmental impact rather than source emission. The success of computer modeling in these areas should therefore be used as a guide in developing a trading program that effectively reduces the environmental impact of [SO.sub.2] emissions on a national basis, rather than on a state or regional basis.(9)

In order to fully understand the ramifications of using computer models in enforcing the CAA, it is necessary to begin with an overview of the early developments of the Act.

1. DEVELOPMENT OF THE CLEAN AIR ACT

   The Clean Air Act was originally enacted in 1963 and was substantially amended in 1970, in 1977, and again in 1990.(10) Congress mandated that the EPA develop regulatory strategies aimed at achieving national ambient air quality standards ("NAAQS") for specific pollutants.(11) NAAQS establish the maximum concentration for pollutants "which may reasonably be anticipated to endanger public health or welfare."(12) These national air quality standards are the foundation of the Clean Air Act.

   By 1970, NAAQS were established for six major pollutants: [SO.sub.2], carbon monoxide, nitrogen dioxide, particulates, hydrocarbons, and photochemical oxidants.(13) Since then, a standard has also been established for lead,(14) and the standard for photochemical The cal oxidants has been changed to the standard set for ozone.(15) statutes provide for both primary and secondary ambient air quality standards.(16) Primary standards were established to protect the public health with an "adequate margin of safety."(17) Secondary standards were established to protect public welfare from "any known or anticipated adverse effects associated with the presence" of a particular pollutant in the ambient air.(18)

   The United States is divided into 247 air quality control regions.(19) Ideally, each region should be in compliance with the NAAQS established by each state in that region. However, this is rarely the case. Instead, it is far more common for regions to be classified as "attainment areas"(20) for certain pollutants and "nonattainment areas"(21) for other pollutants.

   While NAAQS establish the ambient standards,(22) the burden of complying with these ambient standards is allocated to the various sources by means of emission standards.(23)

   1. State Implementation Plans and New Source Performance Standards

      To ensure that each region is in attainment with its ambient standards, the EPA requires each state to establish State Implementation Plans ("SIPs") for existing sources(24) and New Source Performance Standards ("NSPS") for new or modified sources.(25) If a state fails to implement a SIP, or if the EPA is dissatisfied with the SIP, Congress directs the EPA to draft a plan for the state.(26)

      SIPs and NSPS establish emissions standards to help nonattainment areas meet ambient standards (as set by NAAQS). However, the Clean Air Act did not establish requirements for those regions which are already in attainment.(27) Therefore in 1977, the principle of Prevention of Significant Deterioration was adopted as an amendment to the Act to help ensure that attainment areas remain as pristine as possible.(28)

   2. The Prevention of Significant Deterioration Program

      The Prevention of Significant Deterioration ("PSD") applies to any new source(29) that is considered to be a "major emitting facility"(30) located in an attainment area. As stated earlier, an area can be in attainment for one pollutant, but in non-attainment for another pollutant.(31) The PSD program applies only to emissions of pollutants for which the area is in attainment.(32)

      There are two criteria for obtaining a PSD permit. First, the facility must conform to the limitations set by the best available control technology ("BACT") for that pollutant.(33) Second, the PSD program sets limits, called increments, on the maximum permissible increases in ambient concentrations of [SO.SUB.2] and particulate matter.(34) Congress later required the EPA to develop increments for the other criteria pollutants.(35)

      The ambient air quality level of criteria pollutants in an attainment area cannot exceed the baseline concentration(36) plus an increment.(37) The BACT standards that were being imposed on new and modified sources helped to insure that these new sources would not cause the area increments to be exceeded. Complying with BACT standards greatly reduced pollution, which allowed for future growth in attainment areas.(38)

      The 1977 amendments required new sources moving into non-attainment areas to meet the "lowest achievable emission rate" ("LAER")(39) in addition to "offsetting"(40) whatever additional emissions still resulted. Existing sources in non-attainment areas were required to utilize "reasonably available control technology" ("RACT") toward achieving the NAAQS, and attainment was required by the mid-1980s.(41) The EPA has relied very heavily on command-and-control technology-based approaches to achieve the required pollution control. The driving force behind the Title IV 1990 Amendments, however, is the utilization of market-based approaches to reducing emissions. These market-based approaches reduce the cost of pollution control and allow individual point sources to establish the regulatory standards which were formerly set by Congress.

2. TECHNOLOGY-BASED VERSUS MARKET-BASED APPROACHES

   Prior to 1990, the Clean Air Act primarily utilized technology-based, command-and-control techniques in its regulatory process.(42) As the name "command-and-control" suggests, the government told polluters exactly what to do and how to do it.(43) This meant that regulated entities were required to meet the stated technological standards for pollution control. This method of pollution control proved to be extremely costly for industry and greatly hindered technological innovations by not encouraging industry to strive for greater pollution control than the law required.(44) In response to the ineffective technology-based approach to pollution control, the United States began employing a market-based incentive approach.(45)

   Under a market-based incentive approach, the government still uses environmental goals to set broad emission reduction targets, but allows each source to determine the most cost-effective way to achieve these goals.(46) Market-based strategies do not focus solely on technology-based standards to achieve environmental goals. Although the economic incentives provided by these strategies do encourage industries to develop new, innovative technologies to combat pollution, they also encourage industries to develop more efficient manufacturing processes to reduce the discharge of pollutants.(47) If a facility determines that it is too costly to comply with pollution control requirements, it may decide to go out of business and sell its polluting rights to a new source.(48)

   Emissions trading is one of the primary market-based economic incentive programs currently used by the EPA and is the driving force in keeping costs down and achieving emissions reductions under the Title IV acid rain program.

   1. Emissions Trading

   The EPA developed emissions trading to give industry increased freedom and to give society enhanced economic benefits without violating the regulatory requirements imposed by the Clean Air Act. Emissions trading provides a more cost-effective alternative to the technology-based, command-and-control approach by offering incentives to those companies who can achieve greater reductions in pollution than are required by the statute.(49)

   Under Title I of the CAA, emissions trading...