EPA Adopts New Power Plant Cap-and-Trade Program

Posted on August 23, 2011


The U.S. Environmental Protection Agency (EPA) recently adopted a new emission trading program designed to address ozone and fine particulate matter (PM) nonattainment problems in the eastern United States. The Cross-State Air Pollution Rule (CSAPR) caps sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from power plants in 27 states beginning in 2012; the emission reductions required under the cap will be accomplished through a program that allows interstate trading of NOx and SO2 allowances. The CSAPR replaces the Bush administration’s Clean Air Interstate Rule (CAIR), an earlier cap-and-trade program that was invalidated by a federal court for violating the Clean Air Act (CAA). As discussed in greater detail below, the CSAPR is one of several recent EPA initiatives to reduce emissions from power plants.


For decades, states in the Northeast have complained that they cannot attain the national ambient air quality standard (NAAQS) for ozone and fine PM, in large part, because of emissions from upwind coal-fired power plants. To address this problem, EPA has exercised its authority under the “good neighbor” provisions of the Clean Air Act and issued a series of SIP calls and/or federal implementation plans to compel certain states to reduce emissions believed to be causing or contributing to downwind nonattainment. See CAA § 110(a)(2)(D), 42 U.S.C. § 7410(a)(2)(D). The first such SIP call targeted ozone nonattainment, requiring major reductions in ozone season (i.e., summer) NOx emissions. 63 Fed. Reg. 57356 (Oct. 27, 1998) (codified at 40 CFR Part 96). Although states were free to pursue other options to achieve the necessary emission reductions, all of the SIP call states elected to participate in the NOx Budget Trading Program, a cap-and-trade program targeted primarily at power plants. In 2005, the NOx Budget Trading Program was replaced by the Clean Air Interstate Rule, a 28-state program designed to help eastern states attain and maintain compliance with the ozone and fine PM NAAQS by reducing NOx and SO2 emissions. 70 Fed. Reg. 25162 (May 12, 2005) (codified at 40 CFR Parts 96 and 97). The CAIR required the affected states to reduce NOx and SO2 emissions in two phases. The first reductions occurred in 2009 and 2010 for NOx and SO2, respectively, with additional reductions required by 2015. Under the CAIR, states could either adopt their own rules to reduce emissions by the required amounts or implement a cap-and-trade program based on a model rule developed by EPA. Sources regulated under the CAIR trading program are prohibited from emitting pollutants in excess of the number of NOx and SO2 allowances they hold. As with other cap-and-trade programs, sources can either reduce their own emissions or purchase allowances from other regulated sources to achieve compliance.

Shortly before the first emission reductions required under the CAIR were scheduled to take effect, the Court of Appeals for the District of Columbia Circuit vacated the rule after concluding that key elements of the cap-and-trade program violated the CAA and/or were arbitrary and capricious. In North Carolina v. EPA, 531 F.3d 896, on reh’g in part, 550 F.3d 1176 (D.C. Cir. 2008), the Court of Appeals for the District of Columbia Circuit concluded, among other things, that the CAIR’s regionwide emission trading scheme for achieving the necessary emission reductions violated CAA § 110(a)(2)(D) because it did not target emissions from the specific sources contributing to the downwind nonattainment problem. The court also concluded that EPA ignored language in the CAA that requires SIPs to contain adequate provisions prohibiting sources from “interfering with maintenance” of the NAAQS in downwind states. On rehearing, the court decided to leave the CAIR in place while EPA made the necessary revisions, concluding that “notwithstanding the relative flaws of CAIR, allowing CAIR to remain in effect until it is replaced by a rule consistent with [the] opinion would at least temporarily preserve the environmental values covered by CAIR.” North Carolina v. EPA, 550 F.3d 1176, 1178 (D.C. Cir. 2008). Accordingly, the CAIR took effect January 2009 for the annual NOx program and May 2009 for the ozone season NOx program. The CAIR for SO2 took effect January 2010.

Cross-State Air Pollution Rule

Faced with the court of appeals’ decision in North Carolina v. EPA, the agency was tasked with developing a replacement for the CAIR that ensured that any NOx and SO2 emission reductions ultimately benefit the states with downwind nonattainment and maintenance problems. EPA adopted the Cross-State Air Pollution Rule in August 2011, a year after it was proposed as the Clean Air Transport Rule. 76 Fed. Reg. 48208 (Aug. 8, 2011) (codified primarily at 40 CFR Part 97). The CSAPR calls for limiting emissions of NOx and SO2 from power plants in 27 eastern states with the goal of helping downwind states achieve and maintain compliance with the 1997 and 2006 fine PM NAAQS and the 1997 eight-hour ozone NAAQS. In response to the court’s decision in North Carolina v. EPA, the CSAPR establishes state-specific emission budgets based on EPA’s quantification of each state’s contribution to nonattainment and/or interference with maintenance of the NAAQS in downwind states. The budgets are designed to eliminate downwind nonattainment and/or maintenance problems by the NAAQS attainment deadlines applicable in the downwind states.

To ensure immediate implementation of the emission reduction requirements, EPA adopted a federal implementation plan in each affected state that sets the state’s emission budget, allocates allowances among the affected power plants, and regulates emissions of SO2 and/or NOx from these sources. However, states are free to develop their own plans to achieve the required reductions and may choose which types of sources to control. To achieve the necessary emission reductions, EPA established an emission cap-and-trade system that allows intrastate and limited interstate trading among power plants covered by the program. This trading scheme is intended to address the court of appeals’ concern that the CAIR’s regionwide emission trading scheme lacked reasonable measures to assure that upwind states would abate their unlawful emissions as required by CAA § 110(a)(2)(D).

Under the CSAPR, EPA identified the emission reduction responsibilities for each upwind state found to be significantly contributing to downwind attainment and maintenance problems and then used this information to develop state budgets for emissions from covered units under the rule. It then allocated the state budgets among the covered units in the state based on their share of the state’s historic heat input. To account for year-to-year variability in electric generation, EPA developed variability limits for each state budget that identify the range of emissions that may occur following the elimination of all significant contribution and interference with maintenance. Each year, the owner of an affected facility must hold allowances sufficient to cover the facility’s emissions, with each allowance worth one ton of SO2 or NOx. In addition, the rule includes “assurance provisions” which limit emissions from each state to that state’s trading budget plus the variability limit for that state (i.e., the reasonable assurance level). If a state’s total emissions from covered sources exceed this “reasonable assurance level” in a given year, the rule requires owners of those sources to surrender allowances in accordance with a formula specified in the rule. This requirement ensures that the necessary emission reductions occur in each state covered by the CSAPR.

The required emission reductions will be implemented in two phases. The first phase of the CSAPR starts January 1, 2012 for SO2 and annual NOx reductions (required to address PM nonattainment) and May 1, 2012 for ozone season NOx reductions (required to address ozone nonattainment). In the case of SO2 reductions, EPA divided the states into two tiers with Group 1 states required to achieve additional SO2 reductions beginning January 1, 2014. According to EPA, by 2014, the CSAPR and other state and EPA actions will reduce power plant emissions of SO2 by 73%% over 2005 levels, while NOx emissions will drop by 54%%. EPA anticipates that power plants will meet their emission reduction obligations by maximizing their use of existing pollution control equipment, implementing fuel switching programs, and installing or upgrading pollution controls.

Not surprisingly, the CSAPR has proven extremely controversial. While most environmental advocates support the rule, opponents, including several prominent Republican members of Congress, contend that the rule, when combined with other power plant-related initiatives, will deal a major economic blow to the energy sector and result in extensive job losses.

Other Power Plant Air Initiatives

The CSAPR is one of several controversial EPA initiatives targeted at reducing emissions from power plants.

  • Emission Standards for Hazardous Air Pollutants from Coal and Oil-Fired Power Plants. In May 2011, EPA proposed standards to reduce emissions of mercury and other hazardous air pollutants (HAPs) from coal and oil-fired power plants under the National Emission Standards for Hazardous Air Pollutants (NESHAP) program. CAA § 112, 42 U.S.C. § 7412. Like the CSAPR, EPA proposed the recent NESHAP standard to replace an earlier rule that was vacated by the courts. The proposed rule establishes maximum achievable control technology (MACT) standards for emissions of mercury, hydrogen chloride, and particulate matter (as a surrogate for non-mercury metal HAPs) from new and existing coal and solid oil-fired power plants as well as standards for liquid-fired units. As with other MACT standards, the proposed rule includes extensive work practice, performance testing, monitoring, reporting and recordkeeping requirements. 76 Fed. Reg. 24976 (May 3, 2011) (to be codified at 40 CFR Part 63, subpart UUUUU).
  • New Source Performance Standards for Greenhouse Gas Emissions from Power Plants. Section 111 of the Clean Air Act, 42 U.S.C. § 7411, requires EPA to establish technology-based emission standards for new and modified sources on a source category-specific basis. Although targeted primarily at criteria pollutants such as ozone and PM, in recent years, environmental groups have pushed hard to extend the NSPS program to greenhouse gases (GHGs) in an effort to address global climate change. In December 2010, EPA announced a judicial settlement in which it agreed to establish NSPS for GHG emissions from natural gas, oil and coal-fired power plants.
  • GHG Tailoring Rule. Although not targeted at power plants, the GHG tailoring rule, which was adopted by EPA in 2010, will have a significant impact on electricity generation. 75 Fed. Reg. 31514 (June 3, 2010). The GHG tailoring rule extends the existing Prevention of Significant Deterioration (PSD) program to GHGs and establishes special “tailored” applicability thresholds in recognition of the fact that GHGs typically are emitted in much higher quantities than other PSD pollutants. The rule means certain new or modified major stationary sources will be required to conduct a best available control technology analysis for GHGs before commencing construction. Power plants are commonly subject to PSD permitting requirements and so are likely to be affected by the GHG Tailoring Rule.

EPA’s recent regulatory initiatives have prompted a strong backlash in Congress, leading to the introduction of numerous bills designed to roll back recent rulemakings. Most notably, the Energy Tax Prevention Act of 2011 (H.R. 910) calls for reversing certain recent rulemakings and barring EPA from adopting additional rules regulating emissions of GHGs from power plants and other sources. The bill passed the House of Representatives in April 2011 but is given little chance in the Senate.