December 27, 2011

Interstate Transport of Nitrogen Oxides and Sulfur Dioxide

Proposed Rule
Summary

Score: 39 / 60

Additional details
Agency
Environmental Protection Agency
Regulatory Identification Number
2060-AP50
Agency Name
Environmental Protection Agency
Rule Publication Date
08/02/2010

RULE SUMMARY

EPA proposes to limit the interstate transport of emissions of nitrogen oxides (NOX) and sulfur dioxide (SO2). In this action, EPA proposes to both identify and limit emissions within 32 states in the eastern United States that affect the ability of downwind states to attain and maintain compliance with the 1997 and 2006 fine particulate matter (PM2.5) national ambient air quality standards (NAAQS) and the 1997 ozone NAAQS. EPA proposes to limit these emissions through Federal Implementation Plans (FIPs) that regulate electric generating units (EGUs) in the 32 states.

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
A keyword search turns up the NPRM and RIA in regulations.gov. The NPRM and RIA can also be found via a keyword search on EPA's home page, but a RIN search does not work very well. The NPRM refers to some other alternatives evaluated in technical support documents, not the RIA.
4/5
2. How verifiable are the data used in the analysis?
The RIA provides a link to emissions data. A table in the RIA lists sources for the baseline incidence of health outcomes. Readers are referred to EPA documentation for the models to see the other data, but these are lengthy and dense technical pieces and page numbers are not provided. So the data are likely verifiable, but the reader would have to spend time hunting elsewhere to know for sure.
3/5
3. How verifiable are the models and assumptions used in the analysis?
Links provided to the models used to estimate emissions, health effects, effects on electricity supply and prices, and economy-wide effects. Numerous changes and adjustments to future baseline emissions are simply asserted in the RIA without any documentation to show why they are reasonable or what numbers are used. Health effects of emissions and cost analysis is usually based on peer-reviewed studies that are fully cited but rarely linked.
4/5
4. Was the analysis comprehensible to an informed layperson?
The RIA's 16-page summary does a reasonable job of presenting the basic results. The RIA made very good use of charts and tables to explain what was frequently a very complicated subject. A non-specialist reader would have a hard time with the rest of the document due to jargon and acronyms. It takes a lot of work to fully understand the options the agency analyzed. To fully understand the RIA, a reader would need a graduate background in economics and some knowledge of environmental policy.
3/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
4/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
Primary benefits are premature deaths avoided, reduced illness, fewer lost workdays, reduced school absences, and improved visibility. Mortality accounts for 90 percent of the benefits, and this is obviously an ultimate outcome. A table lists numerous unquantified benefits the RIA claims are likely substantial, such as some health effects, reduced soiling, global climate effects, crop yields, avoided damage to ornamental plants, effects on commercial fishing and forestry, and ecosystem existence values.
5/5
Does the analysis identify how these outcomes are to be measured?
Premature deaths, health effects, effects on human welfare, and visibility are measured and monetized. Total monetized benefits generally range from $100-300 billion annually. Extensive research cited suggesting that the unquantified benefits exist and are significant.
5/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Regulation reduces emissions in most cases. Reduced emissions lower ambient concentrations of PM and ozone, which improves health and reduces other types of damage. (A map-based graphic illustrates steps of the theory starting with the reduction in emissions.) Not clear if the theory incorporates movement of emissions to places where they may have bigger negative health consequences.
4/5
Does the analysis present credible empirical support for the theory?
For quantified outcomes, the agency does a very good job supporting its claims. The NPRM cites evidence that cap-and-trade programs reduce emissions while minimizing transaction costs. Links between emissions and air quality are buried in the BenMAP model. An extensive list of cited studies examine the health effects of PM and ozone.
4/5
Does the analysis adequately assess uncertainty about the outcomes?
Extensive analysis of uncertainty using Monte Carlo analysis and expert elicitation. The RIA contains a list of uncertainties affecting benefit estimates but claims that its results present a reasonable estimate. The RIA presents a range of benefit estimates based on different estimates of PM mortality. A Monte Carlo analysis accounts for uncertainty in cessation lags and income growth. The RIA also provides 12 different estimates based on expert elicitation. The reader is referred to previous RIAs to infer the likely results of uncertainty analyses that were not conducted for this RIA. Tables present benefit estimates along with 95 percent confidence intervals.
4/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
3/5
Does the analysis identify a market failure or other systemic problem?
No explicit market failure is named or discussed in the RIA. The NPRM implies that the interstate transport of emissions raises unique problems because individual states lack incentives to limit emissions that affect attainment in other states. The externality issue involves states' effects on other states' ability to comply with air quality standards.
4/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
The NPRM notes that emissions from several upwind states often affect a downwind state's air quality, and that state's emissions might also affect states farther downwind. This suggests some type of transaction cost that might make federal coordination necessary. A complete theory would explain what prevents states from resolving this issue through bargaining among themselves.
3/5
Does the analysis present credible empirical support for the theory?
EPA's modeling suggests emissions do indeed cross state lines and affect attainment in other states. NPRM refers to a 2004 analysis that concluded local measures alone would not be likely to achieve attainment.
3/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
Significant uncertainties related to PM benefits suggest uncertainty about the size of the problem, but not the existence of the problem. Evidence described under 6C suggests the existence of the problem may be pretty certain.
3/5
7. How well does the analysis assess the effectiveness of alternative approaches?
4/5
Does the analysis enumerate other alternatives to address the problem?
The preferred alternative is a state emissions budget with some intrastate and interstate trading. The RIA assesses alternatives with tighter and looser emission limits than the preferred alternative. The RIA also assesses "direct control" and an option relying exclusively on intrastate trading. The NPRM mentions some other options considered and refers the reader to technical support documents discussing alternative ways of determining a state's "significant" contribution and alternative remedies. These are not in the RIA!
4/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
All alternatives are federal regulations that set ceilings on emissions. Three are different stringency levels. Three offer differing degrees of flexibility on how to meet the requirements— emissions limits on each generator, some intrastate trading, or intrastate plus some interstate trading. The trading schemes are much more flexible than the direct controls. NPRM also says that states will have the option of replacing the federal implementation plans with state rules. The effects of this are not analyzed, but presumably the state plans have to deliver the same benefits. It seems curious that the EPA did not analyze the point at which marginal benefits equal marginal costs, since the analysis constructed both sets of curves. NPRM asserts (with no analysis) that "weighted trading" would have maximized net benefits; providing this analysis could have been useful to Congress.
3/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Health-related benefits are calculated for each of the four alternatives. However, the benefits of the preferred alternative are based on modeled changes in ambient pollution, while the benefits of alternatives use an average benefit per ton approach. So it is not clear how comparable these are, and the RIA does not make an explicit case that they are.
4/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
The baseline is different for costs and benefits (ignores any cost of compliance related to CAIR but assumes CAIR does not exist for calculating benefits). This is somewhat justifiable, but the agency should at least explain why it is doing this and note what the costs would be under different assumptions. The RIA claims the 2014 baseline ("control case") incorporates EIA's 2008 Annual Energy Outlook and effects of all federal and state regulations adopted as of early 2009. It is not clear if other regulations on the way would affect the benefits attributable to this regulation. There is no real analysis of the impact of changes in energy consumption or from a growth in renewable fuels/natural gas use.
3/5
8. How well does the analysis assess costs and benefits?
4/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
Industry compliance costs and overall social costs are calculated for the preferred alternative and the four options. The RIA indirectly explains why social costs are less than compliance costs when it notes that some compliance expenditures contribute to GDP. However, the analysis declines to include about $1.2 billion of annual CAIR compliance costs, even though the benefit baseline assumes CAIR does not exist, and thus the analysis does include the benefits associated with these costs. The NPRM shows that agency has a whole list of possible cost levels for implementation in a technical support document, but this is not mentioned at all in the RIA.
4/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
Utility industry's compliance costs estimated at $3.7 billion in 2010 and $2.8 billion in 2014. Compliance cost is also calculated for the other alternatives. A small paperwork cost is also estimated.
5/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
Electricity prices are projected to increase by 2.5 percent in 2010 and 1.5 percent in 2014, with smaller increases in natural gas prices. These estimates are also presented for alternatives.
4/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
The RIA shows changes in the generation mix. Coal production projected to decrease by 0.3 percent in 2010 and 0.8 percent in 2014, with Appalachia and the west gaining market share at the expense of the interior. GDP and consumption projected to fall by 0.01 percent ($1.6 billion) in 2014. These estimates are also presented for alternatives. Curiously, the RIA does not consider that consumers may substitute alternatives for grid electricity, such as switching to natural gas for cooking/heating, home generation, or purchasing more efficient appliances. Analysis simply says it does not take consumer response to higher electricity prices into account because elasticity of demand is low.
3/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
The RIA lists "uncertainties" affecting costs, but most of these (except for innovation) are simply factors omitted from the analysis, not sources of uncertainty. A separate discussion considers several reasons the analysis might either over or understate costs, concluding that it more likely overstates than understates them.
2/5
Does the analysis identify the alternative that maximizes net benefits?
Net benefits are calculated for all alternatives. These are presented as ranges.
5/5
Does the analysis identify the cost-effectiveness of each alternative considered?
Cost-effectiveness is not calculated but could have been. Since 90 percent of the benefits stem from reduced mortality, it would be reasonable to estimate cost per life saved. The NPRM reveals that EPA considered cost per ton of emissions in setting the state caps, but this is not considered at all in the RIA.
3/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
A table breaks down changes in electricity prices by region for the proposed rule and two alternatives. Extremely detailed general equilibrium analysis is provided. Charts show reduction in GDP by region and increase/decrease in production of various sectors by region. 0.3 percent of coal-fired capacity will be uneconomic to maintain. The RIA concludes that the rule will not have a significant impact on a significant number of small entities because plants under 25 MW are exempt and others can pass their costs to consumers.
5/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
A table shows percentages of the population who will experience various levels of PM reductions. An appendix shows reductions in premature mortality by state.
4/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
Clean Air Act requires that states must prevent emissions that "significantly contribute to nonattainment or interfere with maintenance in a downwind state." Proposed regulation stems from a 2008 remand of the CAIR rule that was supposed to accomplish this. The court said the rule must require elimination of these emissions. So, the decision to regulate emissions was determined by the court, not the RIA. The NPRM says EPA considered each upwind state's effect on a downwind state's attainment, costs in downwind and upwind states, and other factors to establish state-specific limits. This information appears to come from the same air quality and cost models used in the RIA, but this is not the same thing as the RIA's calculation of different stringency levels. So, some of the same modeling and reasoning appears to have affected both the selection of caps and the RIA, but it is not clear that the RIA guided the decisions.
2/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
Ranges of benefit and cost figures imply that the chosen alternative may have the highest net benefits of the alternatives considered (low and high figures in range are usually larger for the preferred alternative). NPRM argues that the chosen option will reduce emissions at lower cost than the direct control option or state budgets without interstate trading. Nowhere does the NPRM discuss the RIA's assessment of tighter or looser emissions caps. It seems odd that the EPA did not calculate and consider setting emissions caps where marginal benefits equal marginal costs, since the analysis did provide cost curves. NPRM asserts (with no analysis) that "weighted trading" would have maximized net benefits, but EPA could not do this under the law.
3/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
NPRM says EPA will revisit these regulations if other proceedings lead to tighter air quality standards. This is not an explicit commitment to evaluate this rule's effects, but it could lead to such an evaluation. The RIA would be a pretty good guide to evaluating some, but not all, outcomes and costs.
2/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
It is clear from the analysis that the EPA has access to data from air quality monitors and will require reporting of emissions data that could be used to evaluate whether emissions have changed and whether that has led to the predicted improvement in air quality. Emissions are an output, but air quality is more of an intermediate outcome.
3/5
 
Total 39 / 60