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The EPA Speaks Out: The Clean Air Interstate Rule Explained

The Environmental Protection Agency reviews how the multi-pollutant control concept is to work.

Fortnightly Magazine - May 2005
Figure 5 - Annualized Private Cost of CAIR

rule joined the optional cap-and-trade program to lower ozone season NO X emissions.

The emission reductions set forth by CAIR come into effect in two phases. If all states choose to participate in the region-wide cap-and-trade program for the power sector, the first phase begins in 2009 for NO X and 2010 for SO 2 at levels of 1.5 million tons and 3.6 million tons per year, respectively. The second phase begins in 2015 for both pollutants and sets caps of 1.3 million tons and 2.5 million tons per year for NO X and SO 2, respectively. In addition to the annual cap for NO X, a five-month ozone season cap is established for certain states at roughly 580,000 tons in 2009 and 480,000 tons in 2015. State implementation plans that commit a state to the cap-and-trade program or an alternative EPA-approved reduction program are required to be in place by September 2006 to give ample time for affected sources to begin installing the necessary pollution controls.

EPA is responsible for establishing the trading program and market procedures, as well as administering the allowance tracking system. States are responsible for adopting new rules to conform to CAIR and for allocating NO X allowances to power plants.

Figure 6 - Regional Retail Electricity Prices

For SO 2, CAIR relies upon the existing framework of the acid rain program's SO 2 trading program, and requires use of these allowances for CAIR. In order to meet CAIR's objective of implementing a system of allowances representing a 50 percent reduction from the 2010 Title IV emissions cap from 2010 to 2014, and then 35 percent from the 2010 Title IV emissions cap in 2015 and thereafter, EPA has set up requirements for turning in allowances at a ratio of greater than one-to-one. This discount of allowances is applied to the vintage year (the first year that the allowance can be used). In other words, allowances with a vintage year 2010 to 2014 must be used at a ratio of two-to-one (two allowances for every ton of emissions, representing a 50 percent reduction), and allowances with a vintage year of 2015 or beyond must be used at a ratio of 2.86-to-one (representing a 65 percent reduction). Banked SO 2 allowances carried into CAIR in 2010 from the existing acid rain program are allowed at a one-to-one ratio indefinitely.

Power Sector Impacts

When the second phase of the program begins in 2015, the annualized cost of CAIR is predicted to be about $3.6 billion per year. The present value of the capital investment in pollution controls for CAIR, beginning with the first phase of the program through 2020, is estimated to be approximately $16.8 billion ( see Figure 5 ). Much of these costs will be passed along to consumers in cost-of-service power regions, which represent roughly 63 percent of the market for electricity generation in 2004. 5 For the region affected by the rule, EPA expects retail electricity prices to increase roughly by 1.8 to 2.7 percent ( see Figure 6 ).

CAIR recognizes the need for environmental improvement and emission

Figure 7 - Generation Mix