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The Clean Air Act, the primary federal statute controlling air pollution in the United States, was last amended in 1977, Recently, a comprehensive set of amendments was approved by the Senate Subcommittee on Environmental Protection. The five titles of the proposed bill would address compliance with the national ambient air quality standards for ozone; limit emissions of pollutants causing acid rain; impose new controls on mobile sources of air pollution; redefine units of measurement for the national ambient air quality standards; and limit routine and accidental emissions of air toxics.

This staff working paper considers the potential economic effects on the electric utility industry of Title II of the proposed amendments, designed to control acid rain. The modelling effort that supports this paper was initiated at the request of Senator Stafford, the ranking minority member of the Senate Committee on Environment and Public Works, for whom a more detailed analysis is underway. A forthcoming study will assess the economic implications of Title V. This paper was prepared at the request of Senators Bingaman, Boren, Byrd, Cochran, Conrad, Dixon, Ford, Garn, Gramm, Hatch, Hefim, Helms, Lugar, McConnell, Murkowski, Nickles, Pressler, Pryor, Quayle, Rockefeller, Sanford, Shelby, Simpson, Stevens, Symms, Trible, Wallop, and Warner. In keeping with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, the report makes no recommendations.

Marc Chupka of CBO's Natural Resources and Commerce Division wrote the report under the supervision of Roger C. Dower and Everett M. Ehrlich. Bob Friedman of the Office of Technology Assessment and Larry Parker of the Congressional Research Service provided valuable assistance and comments--complementary analyses of the proposed amendments are being prepared by these organizations. The paper was edited by Francis S. Pierce, and the manuscript was typed and prepared for publication by Patricia Z. Joy.
 

Edward M. Gramlich
Acting Director
September 1987
 
 

INTRODUCTION AND SUMMARY

Title II of the current Senate proposal to amend the Clean Air Act contains a set of provisions to control emissions of sulfur dioxide (SO₂) and oxides of nitrogen from utility and industrial sources. The heart of any acid rain bill and the subject of this working paper is SO₂ emission reductions from electric utilities. The proposal offers the states a set of choices in order to achieve by 1996, and maintain subsequently, a 12-million-ton reduction in SO₂ emissions from 1980 levels. The statewide emission targets defined in the bill would apply to emissions from all sources, not only from existing utilities but from nonutility combustion sources and from new utility sources built under the New Source Performance Standards (NSPS). Should states fail to submit an acceptable plan conforming to the emission targets, they would be directed, as a default requirement, to implement uniform standards on a plant-by-plant level set at 0.9 pounds of SO₂ per million Btus of fuel burned (based on a monthly average). After 1996, a state could choose either to maintain the assigned aggregate emission target (disallowing any emission growth) or to phase in the uniform 0.9 pound standard on all plants as they reach 30 years in operation. Superimposed on the targets and standards is a "precompliance cap," requiring all states to remain at or below their 1980 emission levels.

Every state would thus initially face two major choices: either to meet the assigned statewide emission target, allocating the emission reductions among the various sources within the state, or to abide by the uniform plant standard and operate in default. In order to capture the potential range of state responses to this proposal, Congressional Budget Office (CBO) researchers performed three simulations with the National Coal Model (NCM7), developed by the Department of Energy and modified for this purpose by CBO. They simulated utility emissions, utility costs, and the effects on coal markets. These simulations form the basis for this report.

The report analyzes three possible responses to the bill's requirements:

• Target 1, which specifies a set of state emission targets on electric utilities assuming that industrial sources would account for 1.5 million tons of the total SO₂ reduction. Under these targets, national utility emissions would not exceed 7,0 million tons of SO₂ in 1996;
  
  
• Target 2, which specifies a more rigorous set of state emission targets on electric utilities by assuming that industrial sources would not contribute at all to the total SO₂ reduction. This target would approximate the overall cost of the bill (under the target approach) if non-utility emitters could be assumed to face the same SO₂ abatement costs as utilities. Under these targets, utilities would reduce their aggregate emissions by the full 12 million tons from 1980 levels, so that national utility emissions would not exceed 5.5 million tons of SO₂ in 1996; and
  
  
• The Default Case, which assumes that all states would select the plant-by-plant standard (applied to all sources) of 0.9 pound of SO₂ per million Btu monthly as the default requirement for 1996, and would continue to adhere to the new uniform plant-by-plant standards as the only emission requirement.

In order to conform with the basic structure of the NCM7 model, the simulations imposed policy effects in the 1995 target year, and maintained them for the year 2000. The precompliance cap limiting states to the observed 1980 emission levels was imposed on the 1990 solution to determine what effect, if any, the cap would have on intermediate emission levels.

This preliminary analysis analyzes the effects of the bill by examining distinct alternatives. In reality, a more likely outcome would be a combination of emission targets in some states and default standards in others. The results presented here suggest that important regional differences--in electricity generation, fuel use patterns, current emission controls, and prospects for economic and industrial expansion--will determine the cost of the bill's provisions to the states. These regional differences will dictate the incentives that states face for attaining the emission targets or accepting the default provisions, and for selecting the appropriate strategy after 1996.

In Western and Gulf states, the combination of relatively low-emitting electric generating plants and projected growth in electricity demand means that the precompliance cap constitutes the binding requirement. This is captured in the Target 2 scenario; any reduction requirement for these states gives 1980 emissions as a target. The compliance cost for the regions of Texas, Arkansas, Oklahoma, and Louisiana alone is estimated under this cap to be $2 billion annually by 2000, If these states were allowed to default--and avoid the cap--annual costs would be less than $400 million. The overall cost of the cap is lower in Western states, but continues to determine the costs and emissions reductions.

In the East, the reductions from 1980 emission levels required by the 12-million-ton targets are so large that the precompliance cap would be irrelevant in the foreseeable future. Here, the choices between meeting the reduction requirement or operating in default are influenced more by the actual level of the target applied to utilities (i.e. Target 1 or Target 2), as well as the long-term impact of the postcompliance options of maintaining the target or phasing in the 0.9 standard as plants reach age 30. Illinois, Indiana, Michigan, Missouri, and Wisconsin, for example, may incur higher costs attaining, and subsequently maintaining, their emission levels, as opposed to the default situation (where the post-1996 30-year plant standard is already in place for all sources). In cases where the annual costs are similar, the initial complexity of formulating individual standards for sources in 1996 that would achieve the target economically, combined with the long-run problem of providing emission offsets from old sources in order to accommodate the emissions from new sources, may still encourage states to accept the uniform plant standard for 1996, and thus avoid additional emissions controls from existing sources.

The results of the CBO simulations provide a range of possible costs (in 1985 dollars) to electric utilities of Title II. By assuming 1995 as a compliance deadline, Target 1 would cost utilities $6.2 billion annually, rising to $7.9 billion by 2000 as the targets become more expensive to maintain. Additional emission reductions, and costs, would be expected from nonutility emitters. Attributing all of the emission reductions and costs to utilities under Target 2 would cost $8.5 billion in 1995 and rise to $10.7 billion in 2000. To the extent that utility and nonutility emission reduction costs are similar, these figures approximate the cost of the entire bill if the precompliance cap and emission reduction targets are maintained.

Under the scenario that all states default (and are allowed to exceed the precompliance cap in some cases) by controlling existing sources down to the monthly standard of 0.9 pounds of SO₂, annual costs in 1995 are $7.3 billion, and remain constant in 2000. Emissions would grow between 1995 and 2000, from 7.9 million tons to 9.4 million tons per year. If states are not allowed to exceed the precompliance cap through default, the costs to electric utilities of the bill rise substantially--to $8.5 billion annually in 1995 (when emissions would be 7.1 million tons) and $9.3 billion in the year 2000 (when emissions would be approximately 1.4 million tons greater).

Table 1 displays the estimated overall emission and utility cost effects of the three cases modelled, as well as of the default scenario with the precompliance cap. These estimates apply only to electric utilities.
 

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