EM EMForum Forum Forum invites authors to share their opinions on environmental issues with EM readers. Opinions expressed in Forum are those of the author(s), and do not reflect official A&WMA policy. EM encourages your participation by either responding directly to this Forum or addressing another issue of interest to you. How An Environmental Law Encourages Pollutiont I x i F o t w o And H by Susan Helms and Jennifer Sullivan 26 EM May 2001 A few little-known stipulations of the Clean Air Act may actually encourage some companies to emit more pollution than they normally would. According to the authors of this article, however, an alternative to these “perverse” incentives can be found in a creative EPA experiment called Project XL, which could turn out to be the commonsense blueprint for air permits of the future. BACKGROUND The first Clean Air Act (CAA) with guts was enacted in 1970 to clamp down on pollution by setting emissions limits for many categories of new stationary sources (unlike the Clean Water Act, which requires pollution-limiting permits from all new and existing sources and requires them to be updated regularly, the CAA only requires pollution-limiting permits for new or modified sources, and once permits are issued, they are never revisited), setting health-based ambient levels of criteria pollutants, establishing national emission standards for some existing sources of hazardous air pollutants, and requiring vehicle emissions reductions of 90% by the 1976 model year. The 1977 amendments subsequently imposed additional new source standards, such that facilities built or modified in an area in nonattainment with the National Ambient Air Quality Standards (NAAQS) had to meet stricter standards than those built or modified in areas that were in attainment. Specifically, facilities in attainment areas were subject to the Prevention of Significant Deterioration (PSD) program designed to keep such areas in attainment by installing Best Available Control Technologies (BACT), while those states with areas in nonattainment had to impose stricter limitations on new or modified sources (Lowest Achievable Emission Rates, or LAER) and use tools such as Reasonably Available Control Technology (RACT) on existing sources to achieve attainment. In 1990, new amendments created the national operating permit program, known as Title V, which requires all “major sources,” new and existing, to pay fees based on the size of their emissions and to undergo periodic monitoring. (Some consider this permit toothless in that it does not limit emissions; limits are imposed by the still-applicable New Source Review [NSR] program.) During its 30 years of existence, the CAA has worked wonders. Note the dramatic effect it had on emissions of criteria air pollutants (with the exception of nitrogen oxides) between 1970 and 1990 as illustrated in Figure 1.1,2 Despite such progress, however, certain preferential conditions built into the CAA create incentives for some companies to emit even more than they would without the law. How did this come about? And how can the law be fixed so that it does not actively encourage pollution? “PERVERSE” INCENTIVES There are three “perverse” incentives in the CAA that result in unnecessary emissions (see Table 1). These incentives have been reported to us both by people working for regulatory agencies who observe them firsthand and by people working in industry who have taken advantage of them. The extent to which these loopholes are exploited is not known for the obvious reason that such activities happen below the U.S. Environmental Protection Agency’s (EPA) radar. However, the fact that they exist at all raises the question of how proactive EPA is about pollution prevention. Pollution prevention should be EPA’s rallying cry, not an idea undermined by archaic policies. What are the three incentives? First, because all existing equipment was grandfathered or exempt under the original Clean Air Act, firms today tend to keep such older equipment running rather than replacing it with new, nonexempt 120 100 NOx SOx 80 VOCs CO TSP 60 40 1989 1989 1987 1987 1985 1985 1983 1983 1981 1981 1979 1979 1977 1977 0 1975 1975 20 1970 1970 Index value (1970=100) Index 140 NOx = nitrogen oxides; SOx = sulfur oxides; VOCs = volatile organic compounds; CO = carbon monoxide; TSP = total suspended particulates Figure 1. Trends in U.S. air emissions of five criteria pollutants following enactment of the CAA. May 2001 EM 27 EM Forum equipment. The advantages of purchasing more efficient and more cost-effective equipment are offset by the costs and delays associated with needing to apply for a new permit, which then has the added disadvantage of bringing that source under the regulatory umbrella for new and modified sources (i.e., the NSR program). Why does this situation persist? Some of the most polluting sources are coal-burning power plants and small coal-fired boilers. We know that EPA would prefer to have fewer coal-burning boilers around. Nationally, emissions from coal-burning power plants comprise 32% of all carbon dioxide (CO2), 67% of all sulfur dioxide (SO2), and 30% of all nitrogen oxides (NOx) emissions.3,4 Coal boilers operated by nonpower-producing plants create the same emissions, though on a smaller scale. The power industry prefers, however, to keep coal relatively unregulated. The industry’s efforts 30 years ago, when enormous amounts had been invested in coal-burning power plants, created the grandfather clause, allowing existing plants to be exempt from many clean air laws applicable to new and modified sources. It was asserted that the shift to cleaner production would be inordinately costly to the power industry and that the technology would change over time without legal mandates as equipment became more efficient. But energy-efficient technology has not been adopted by many coal burners,5 and the fact that other sources of pre-1970 vintage, including smaller coal boilers, do not trigger NSR standards either (unless substantially modified), keeps them immune to cleaner technology requirements. A second loophole involves companies that have been known to operate existing equipment so that emissions stay close to their existing allowable pollution limits even if they technically could lower their emissions through pollution prevention or idling unnecessary equipment. The reasoning here is that in areas of nonattainment, Significant Net Emission Increase standards kick in when the difference between actual and projected emissions is above a certain threshold. When this difference is high, the facility will have to purchase emissions credits from other sources and will be subject to the very strictest emissions standards (i.e., LAER). However, when this difference is less dramatic, it may not trigger these stringent standards. Thus, companies are faced with a “use it or lose it” proposition. Either they use their existing pollution allocation or they suffer the consequences the next time they expand. Thus, to err on the side of caution, some companies have an incentive to over-emit today so that future modifications appear to add only a relatively small amount of pollution. Third, some large companies have been known to ship a product back and forth, sometimes even across state lines, during the production process in order to take advantage of plants and processes that are already permitted rather than expand the capacity of one plant to make it more versatile, and which may trigger NSR standards. The root cause underlying the 28 EM May 2001 excess shipping practice is that obtaining those incremental permits and complying with NSR standards is often more costly and more time-consuming than making an end run around the permitting process by shipping unfinished products from plant to plant. One EPA representative told us during an interview that Merck Pharmaceuticals used to legally ship products from one state to another during the manufacturing process to avoid having to get a new permit at any one site, thereby avoiding a permitting process that could take up to a year.6 Such behavior, according to this EPA representative, is not unique to Merck, but routine among regulated companies. Facilities that need the flexibility to make production decisions quickly, like pharmaceutical companies, may be more likely to engage in this practice. This results in greater air pollution from trucks, trains, or planes needlessly shipping a steady stream of products back and forth. Further, it is a disincentive to invest in newer, potentially cleaner technology, because new technology will always be subject to stringent regulations. Even if these loopholes have a small environmental impact in the grand scheme of things, shouldn’t EPA take the stance of actively encouraging pollution prevention rather than actively encouraging pollution or, at best, demonstrating indifference? Given these unwanted outcomes of an otherwise sound environmental law, how can EPA remove the incentive to pollute? The proposed changes that follow would, we believe, help EPA achieve this shift. REPLACING NEGATIVE INCENTIVES WITH POSITIVE ONES There are good solutions to each of these disincentives, many of which are illustrated in the permit designed under the Merck Pharmaceuticals Project XL completed in 1997. Project XL, which stands for “eXcellence and Leadership” and is one of the flagship projects of EPA’s reinvention effort, is a pilot program aimed at promoting and testing environmental innovations. The agreements reached between EPA and participants—who can include industrial facilities, local governments, and states—can actually bend existing environmental laws slightly, as long as the project results in a “superior environmental performance.” The project at Merck’s Stonewall Plant in Elkton, VA, was launched on March 16, 1995, to demonstrate that a smarter permit can result in a cleaner environment.7 Through site-specific rulemaking and enforceable permit conditions, the facility agreed to replace its coal-burning boilers with substantially cleaner natural gas ones in exchange for sitewide emissions caps (as opposed to the standard source-specific caps). This multimillion-dollar technology upgrade to natural gas boilers is not otherwise required by regulations and was not necessary from an operational standpoint, yet it resulted in an estimated reduction of more than 900 tons per year (tpy) of criteria air pollutants. Table 1. The sources and solutions for CAA loopholes. Incentives to Pollute Why Does Incentive Exist and Persist? What Behavior Does Incentive Encourage? Which Items in Merck Permit Directly Address this Incentive? Grandfather Exemption Facilities prefer to keep inefficient sources that are grandfathered because new sources would be subject to stiffer emissions limits Keep inefficient equipment longer than would otherwise XL agreement allowed Merck to trade outdated equipment for flexible permit; facilitywide caps encourage firm to minimize all emissions to make room for future expansion; less pollution is rewarded with less monitoring and reporting Over-emit to Make Actual-toPotential Difference Small Facilities fear being subject to stricter requirements if proposed expansion appears to increase emissions substantially Deliberately pollute up to allowable limit Lifetime limits that cannot be changed even if firms expand; lower emissions are rewarded with less monitoring and reporting Incentive to Transport Product Excessively Getting new permits is too costly and time-consuming Ship product back and forth in course of manufacturing to take advantage of existing emissions limits; do not invest in newer technology that might be cleaner Facilitywide caps allow expansion at site without additional permit modifications The facility’s total emissions of criteria pollutants (not including lead) was capped below the level at which the plant had operated over recent years (approximately 1500 tpy). As a result, Merck reduced its total emissions cap by 20%, thereby permanently retiring at least 300 tpy of criteria pollutant emissions. Within the sitewide total emissions cap, the facility is subject to individual pollutant caps, or subcaps. Merck reduced the pollutant-specific subcaps for SO2 and NOx by 25% and 10%, respectively. The subcap for particulate matter under 10 microns in diameter (PM10) was maintained at the same level as before.8 The new permit did not penalize Merck for updating its boilers, but instead created a facilitywide emissions cap that encouraged the company to buy the cleanest, most efficient equipment. Any savings in emissions that Merck reaped from its boilers could then be shifted, like an internal emissions trade, to another process that might otherwise be exceeding compliance. But because the net result is far lower emissions, changes at the facility that might otherwise be considered to result in emissions increases would no longer need prior approval by the permitting authority under the PSD program or minor NSR.9 As one Merck representative put it, because of the plant’s proximity to a pristine Class I air quality area, Merck used to have to apply for a PSD permit for every little modification, even to put in a small backup pump “a little bigger than a lawn mower” that operates once or twice per year.10 Under the new permit, the company avoids such requirements. Another feature of the Project XL permit is that the emissions caps are fixed for the life of the plant; they cannot be raised or lowered. This removes the incentive to emit right up to the limit for fear of triggering stricter controls during the next permit round. As an alternative to the current PSD permitting system, the total emissions cap and subcap system provides an incentive for Merck to identify and promptly implement ongoing emission reductions at the facility to make operating room under the cap for future modifications and expansions.11 As long as Merck operates under this PSD permit, it will no longer be able to obtain permits to increase emissions above the cap, since an exceedance of the total emissions cap is a basis for termination of the permit. Under the current permitting system, Merck would not be constrained by a sitewide emissions cap, and could continue to increase emissions as long as the proper permits were obtained.12 Lower emissions are further encouraged in that the less Merck emits, the less it is required to report. In other words, if emissions are far below the emissions cap, then there is less need for precise and frequent monitoring. This system of “tiered” monitoring, record keeping, and reporting requirements provides Merck with another built-in incentive to minimize emissions and to find opportunities to implement emission reductions.13 Note that Merck is still subject to existing and future rules that are not included in this agreement, such as lead emissions standards and Maximum Achievable Control Technology (MACT) standards for the pharmaceutical industry. IMPLICATIONS FOR REGULATORS In one fell swoop, the Merck project dismantled all three CAA loopholes. While this was a monumental achievement, it is clearly impractical for EPA, state agencies, and facilities to write a site-specific rule in the Federal Register for every plant with old boilers to upgrade. While Merck and EPA representatives May 2001 EM 29 EM Forum have said they believe they are seeing a reduction in maintenance costs under Merck’s new permit system, they also note that the initial negotiation period of the permit was expensive, calling it an “incredibly time-intensive process.”12 Yet the solutions themselves—facilitywide caps, long-term permits, and less reporting for lower emissions—are workable options on a wider and more economical scale. To recap, EPA can act to make the following practices the norm: • Facilitywide caps that allow within-facility trading. Permits that involve facility-level caps pool all the equipment that emits a pollutant under one cap regardless of the technology used. The Merck permit, as well as some other experimental permits, such as EPA’s Pollution Prevention Pilot Program (P4) permits, include pollutant-specific caps for a facility as a whole. Facilitywide limits set up a system of internal pollution credits trading, whereby, for example, a facility has the flexibility to increase emissions from Stack A, as long as it decreases emissions of the same pollutant from Stack B. Such a change may prove economical for the facility, both in terms of technology requirements and because it avoids the costly NSR process. Of course, such a system requires careful implementation. Regulators need to be prudent about where they set facilitywide caps. If they are set by summing current permit limits, which are often well above actual emissions, then emissions caps could simply be a license to pollute more. If, however, they are set closer to potential emissions achievable through better technology, then the agency gains something in return for the flexibility it offers, namely, an incentive for firms to prevent pollution. • Lifetime limits. Most permits have a life of five years. But absent a technical error in the sampling or analysis approach (or the company’s decision to voluntarily lower a cap in lieu of meeting a new requirement) none of the principal partners can raise or lower the cap. Permits that last indefinitely not only save facility and agency staff time by avoiding repeated renewal processes, but they guarantee that the total emissions from the facility will not exceed that cap as long as the permit is valid. The environmental benefit in this case is that, in order to grow, the facility must reduce emissions per unit of product—a direct incentive for pollution prevention. • Monitoring and reporting requirements that decrease as emissions decrease. The Merck permit sets up a protocol whereby, as the facility’s emissions approach the cap, increased monitoring and reporting is required. When emissions are very low, precise information is not needed to ensure that a violation does not take place. Less precise, but also less time-consuming practices, such as annual emissions estimates rather than monthly 30 EM May 2001 or daily, suffice. Not requiring detailed monitoring if emissions are low eliminates an unnecessary burden. In addition, it is a powerful and effective incentive to stay far below the cap, which in turn is another incentive for pollution prevention. Other creative solutions may exist, but, in our opinion, EPA should, at a minimum, aggressively seek the three policy changes described above and summarized in Table 1.2 IMPLICATIONS FOR INDUSTRY The benefits of these changes to industry are the flexibility they allow and the savings in time and money they provide from less red tape. Administrative requirements at this point include operating permit reviews every five years and a tedious application process each time a new piece of equipment is introduced or the use of an existing piece changes. It could be argued that these changes would reward industry for dragging its feet in replacing old, inefficient equipment. However, this view does not take into account that industry has simply responded to the incentives that the system put into place, and that the benefits of these changes to the public would be at least as large as those accruing to industry. On the other hand, if lawmakers and agency personnel want to reward only responsible corporate citizens, they may consider introducing such changes incrementally, beginning only with the good actors—those without a history of emissions violations—who have more plainly earned the flexibility of facilitywide caps. Merck was one such facility, as all Project XL participants are required to be. IMPLICATIONS FOR THE PUBLIC While EPA, state environmental agencies, and industrial facilities would benefit from reduced paperwork and the decreased emissions resulting from these permit changes, the public stands to gain perhaps the most of all. Because air emissions are associated with respiratory disease, poor visibility, and damaged ecosystems through acid rain and ground-level ozone (which is known to damage vegetation), incentives that actively reduce emissions improve the quality of life for everyone. Whether it is EPA or Congress that should take the lead depends on the change in question. For example, it would take an act of Congress to extend the life of the permit or eliminate the grandfather clause and a decision by EPA to shift reporting requirements. Criteria pollutants have been demonstrated to have a significant adverse effect on the environmental quality of the Shenandoah National Park, near the Merck plant. Merck’s conversion from coal to natural gas boilers, however, achieved an up-front reduction of these pollutants: SO2 emissions decreased by approximately 94% and NOx emissions decreased by 87% from baseline actual emission levels.13 In addition, the total CONCLUSION It has been 10 years since Congress passed sweeping changes to the CAA, and no one harbors any illusions that new changes would be easily approved. But the nature of the changes proposed here to stop encouraging pollution and to achieve reductions in red tape for business and agencies are just the kind of issues that could rally bipartisan support. The key lies in the creative solutions outlined in Merck’s Project XL agreement and committed leadership from EPA and Congress. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. able at the enviroNET Web site, http://environet.policy.net/cleanair/more/ (accessed February 2001). Interview with Cecil Rodriguez, attorney for U.S. Environmental Protection Agency (EPA) Region 3, September 9, 1999. Reinvention Pilot Programs. Fed. Regist. 1995, 60 (99), 27282 (60 FR 27282 ). Ibid. Ibid. Interview with Merck representative (prefers anonymity), September 9, 1999. 60 FR 27282 (1995). Ibid. Ibid. Interviews with Merck representative (prefers anonymity) and Cecil Rodriguez, attorney for U.S. Environmental Protection Agency (EPA) Region 3, September 9, 1999. 60 FR 27282 (1995). OTHER SOURCES About the Authors Susan Helms ([email protected]) is an associate scientist and Jennifer Sullivan is a research associate, both of Tellus Institute, Boston, MA, who analyze and design environmental policies at the local, state, and federal level. They recently completed a study of innovative permitting programs for the National Academy of Public Administration as part of NAPA’s report to Congress, entitled Learning from Innovations in Environmental Protection. Helms holds a Master’s degree in Environmental Studies from the Yale School of Forestry and Environmental Studies, and Sullivan holds Masters degrees in Environmental Engineering and Technology and Public Policy from MIT. • • • • • • Crow, M.; Pfeiffer, A.; Susskind, L. Seeking Operational Flexibility and Pollution Prevention Under Title V of the Clean Air Act: ETP99-02; U.S. Environmental Protection Agency’s P4 Program; Environmental Technology and Public Policy Program; Massachusetts Institute of Technology, Department of Urban Studies and Planning: Boston, MA, 1999. Helms, S.; Sullivan, J.; White, A. The Potential and the Pitfalls of Innovative Permits: Learning From New Jersey’s Facility-Wide Permitting Program. Submitted to National Academy of Public Administration: Washington, DC, May 2000. Percival, R.C.; Miller, A.S.; Schroeder, C.H.; Leape, J.P. Environmental Regulation: Law, Science and Policy; Little, Brown & Co.: New York, NY, 1992. National Air Pollutant Emission Trends, 1900-1998; EPA-454/R-00-002; U.S. Environmental Protection Agency; Office of Air Quality: Research Triangle Park, NC, 2000. EPA Project XL, Fact Sheet: Merck Stonewall Plant, September 1998; EPA-100F-98-020; U.S. Environmental Protection Agency: Washington, DC, 1998. EPA Project XL, Progress Report: Merck Stonewall Plant, March 1999; EPA-100-F-99-007; U.S. Environmental Protection Agency: Washington, DC, 1999. May 2001 EM 31 Photograph courtesy of the U.S. National Park Service. emissions cap and subcaps will ensure a continuing, permanent reduction of these pollutants, as well as provide an ongoing incentive to minimize actual emissions to preserve the operating margin under the caps. Besides the significant reduction in criteria pollutants resulting from the project, the conversion to natural gas also was projected to result in a reduction of approximately 65% of hazardous air pollutants (HAPs), specifically hydrogen chloride and hydrogen fluoride, which result from the burning of coal. These two HAPs are also associated with the formation of acid rain; thus, reducing the emissions of these chemicals is contributing to efforts Blue Ridge Mountains, Shenandoah National Park, VA, located near the Merck plant. to improve air quality in the Shenandoah National Park and REFERENCES 1. 21st Annual Report; Council on Environmental Quality: Washington, DC, the surrounding community. 1991; Table 39. In addition, the year-plus permit process included numer2. National Air Quality & Emissions Trends Report, 1990; U.S. Environmental Protection Agency: Washington, DC, 1991. ous opportunities for public input. EPA, Merck, and the Com3. National Summary Percent Contribution by Unit Fuel Type, 1998; Acid Rain Program; U.S. Environmental Protection Agency: Washington, DC; availmonwealth of Virginia believed that the outcome would be able at the U.S. Environmental Protection Agency Web site, http://www. useless if it were not supported by its citizens. This element is epa.gov/acidrain/emission/us_sum.htm (accessed February 2001). 4. National Air Quality and Emission Trends Report, 1997; U.S. Environmental crucial to maintain in any successful large-scale changes in Protection Agency: Washington, DC, 1998; Tables A-4, A-8; pp 114, 117. 5. Clean Air FAQs; National Environmental Trust: Washington, DC; availthe future.
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