Clean Air Act
EPA Should Use Available Data to Monitor the Effects of Its Revisions to the New Source Review Program Gao ID: GAO-03-947 August 22, 2003A recent Environmental Protection Agency (EPA) final rule changing the Clean Air Act's New Source Review (NSR) program--a key means to protect public health and enhance air quality--has been under scrutiny by the Congress, industry, environmental groups, state and local air quality agencies, and the courts. GAO was asked to determine the basis of EPA's conclusions that (1) the rule's economic impacts would not be significant enough to merit a detailed analysis and (2) the NSR program, prior to the rule, discouraged some energy efficiency projects. GAO, among other things, reviewed EPA's analysis of the rule and its impacts, as well as guidance from EPA and the Office of Management and Budget (OMB) on analyzing such impacts. GAO also met with industry and environmental stakeholders.
Consistent with agency guidance, EPA used a limited screening analysis that relied on staff's professional judgment and public comments from earlier reform proposals to conclude that the final rule would decrease emissions and health risks and not impose significant costs. EPA determined that neither the rule's benefits nor its costs would exceed a $100 million threshold that triggers requirements to conduct a more comprehensive assessment. EPA issued the rule to streamline the NSR permitting process and provide flexibility to industry. For example, the rule provides a mechanism for companies to develop plantwide emissions limits, which would allow them to make changes in one part of a facility's operations as long as they offset emissions increases with decreases elsewhere within the facility. While OMB agreed with EPA's conclusion that the rule would not have significant economic effects, it determined that the rule was significant for policy reasons. Therefore, OMB asked EPA if it could better quantify the rule's potential impacts, but the agency lacked the necessary data to do so. EPA lacked comprehensive data on the program's economic impacts, and could not predict how many facilities would use the rule's optional provisions. Several states and environmental groups disagree with EPA's conclusions, claiming that it will enable facilities to increase their emissions. These parties have filed suit against EPA challenging the rule and also have petitioned EPA to reconsider the rule. We did not identify any comprehensive assessments that contradicted or supported EPA's conclusions or the assertions of those who oppose the rule. Because of the data limitations, it was not possible to verify EPA's conclusions about the rule's effects. Because it lacked comprehensive data, EPA relied on anecdotes from the four industries it believes are most affected by NSR to conclude that the NSR program (prior to the rule) discouraged some energy efficiency projects, such as upgrades to industrial boilers, including some that would have decreased emissions. Because the information is anecdotal, EPA's findings do not necessarily represent the program's effects across the industries subject to the program. Several environmental groups disputed EPA's findings. One such group said that factors other than NSR, such as economic downturns, discouraged the projects. Furthermore, EPA's conclusion that some projects would have decreased emissions assumed that facilities would not increase production after performing the projects. However, according to EPA and the executive director of an industry group, companies often expand production after implementing energy efficiency projects because it is advantageous to maximize production at the most efficient facilities. Such expansions could increase emissions and related health risks, although EPA asserts that this would be offset by decreased production and emissions at less efficient facilities.
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Director: Team: Phone:GAO-03-947, Clean Air Act: EPA Should Use Available Data to Monitor the Effects of Its Revisions to the New Source Review Program
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
August 2003:
Clean Air Act:
EPA Should Use Available Data to Monitor the Effects of Its Revisions
to the New Source Review Program:
GAO-03-947:
GAO Highlights:
Highlights of GAO-03-947, a report to the Ranking Minority Member of
the Committee on Environment and Public Works, U.S. Senate, and
another requester
Why GAO Did This Study:
A recent Environmental Protection Agency (EPA) final rule changing the
Clean Air Act‘s New Source Review (NSR) program”a key means to protect
public health and enhance air quality”has been under scrutiny by the
Congress, industry, environmental groups, state and local air quality
agencies, and the courts. GAO was asked to determine the basis of
EPA‘s conclusions that (1) the rule‘s economic impacts would not be
significant enough to merit a detailed analysis and (2) the NSR
program, prior to the rule, discouraged some energy efficiency
projects. GAO, among other things, reviewed EPA‘s analysis of the rule
and its impacts, as well as guidance from EPA and the Office of
Management and Budget (OMB) on analyzing such impacts. GAO also met
with industry and environmental stakeholders.
What GAO Found:
Consistent with agency guidance, EPA used a limited screening analysis
that relied on staff‘s professional judgment and public comments from
earlier reform proposals to conclude that the final rule would
decrease emissions and health risks and not impose significant costs.
EPA determined that neither the rule‘s benefits nor its costs would
exceed a $100 million threshold that triggers requirements to conduct
a more comprehensive assessment. EPA issued the rule to streamline the
NSR permitting process and provide flexibility to industry. For
example, the rule provides a mechanism for companies to develop
plantwide emissions limits, which would allow them to make changes in
one part of a facility‘s operations as long as they offset emissions
increases with decreases elsewhere within the facility. While OMB
agreed with EPA‘s conclusion that the rule would not have significant
economic effects, it determined that the rule was significant for
policy reasons. Therefore, OMB asked EPA if it could better quantify
the rule‘s potential impacts, but the agency lacked the necessary data
to do so. EPA lacked comprehensive data on the program‘s economic
impacts, and could not predict how many facilities would use the
rule‘s optional provisions. Several states and environmental groups
disagree with EPA‘s conclusions, claiming that it will enable
facilities to increase their emissions. These parties have filed suit
against EPA challenging the rule and also have petitioned EPA to
reconsider the rule. We did not identify any comprehensive assessments
that contradicted or supported EPA‘s conclusions or the assertions of
those who oppose the rule. Because of the data limitations, it was not
possible to verify EPA‘s conclusions about the rule‘s effects.
Because it lacked comprehensive data, EPA relied on anecdotes from the
four industries it believes are most affected by NSR to conclude that
the NSR program (prior to the rule) discouraged some energy efficiency
projects, such as upgrades to industrial boilers, including some that
would have decreased emissions. Because the information is anecdotal,
EPA‘s findings do not necessarily represent the program‘s effects
across the industries subject to the program. Several environmental
groups disputed EPA‘s findings. One such group said that factors other
than NSR, such as economic downturns, discouraged the projects.
Furthermore, EPA‘s conclusion that some projects would have decreased
emissions assumed that facilities would not increase production after
performing the projects. However, according to EPA and the executive
director of an industry group, companies often expand production after
implementing energy efficiency projects because it is advantageous to
maximize production at the most efficient facilities. Such expansions
could increase emissions and related health risks, although EPA
asserts that this would be offset by decreased production and
emissions at less efficient facilities.
What GAO Recommends:
Because of the lack of data and uncertainties about the rule‘s
impacts, we recommend that EPA determine what data are available to
monitor the rule‘s effects, identify additional data needs and ways to
fill them, and use the monitoring results to determine whether the
rule has created adverse effects that the agency needs to address. EPA
agreed with GAO‘s conclusions and recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-03-947.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact John Stephenson at stephensonj@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
EPA's Economic Analysis of the Final Rule Complied with EPA and OMB
Cost-Benefit Analysis Requirements, but Some Stakeholders Have Sought
to Have EPA Reconsider the Rule:
EPA Relied Primarily on Anecdotes from Industries Most Affected by NSR
to Conclude That it Discouraged Some Energy Efficiency Projects:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Table:
Table 1: Chronology of the New Source Review Program:
Figure:
Figure 1: Percentage of Total U.S. Emissions Released by Industrial,
Transportation, and Other Sources in 2001:
Abbreviations:
DOJ: Department of Justice:
EPA: Environmental Protection Agency:
NAPA: National Academy of Public Administration:
NSR: New Source Review:
OMB: Office of Management and Budget:
WEPCO: Wisconsin Electric Power Company v. Reilly:
United States General Accounting Office:
Washington, DC 20548:
August 22, 2003:
The Honorable James M. Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate:
The Honorable Joseph I. Lieberman
United States Senate:
Recent changes to the Clean Air Act's New Source Review (NSR) program-
-one of the act's key mechanisms for maintaining air quality to protect
public health--have been the subject of congressional debate and have
drawn scrutiny from numerous stakeholders, including representatives of
industry, environmental groups, and state and local air pollution
control authorities. While some industry officials describe the
existing program as costly and characterized by uncertainty,
environmental groups and a coalition of state attorneys general assert
that it is, and has been, an important component of the Clean Air Act.
In recent years, the program has become increasingly controversial, as
the Environmental Protection Agency (EPA) has taken enforcement action
against companies in several industries, including some electricity
producers, forest products manufacturers, and petroleum refineries,
alleging noncompliance with the program. Some of the affected companies
have agreed to settlements that will cost hundreds of millions of
dollars and require emissions reductions, while others are in various
stages of litigation.
The NSR program, which seeks to protect public health, maintain
compliance with air quality standards, and preserve and enhance air
quality in national parks and scenic areas, requires companies that are
major sources of air pollution to install pollution controls in their
facilities when constructed. The program also requires companies to
install such controls in existing facilities when making physical or
operational changes--such as the addition of new production equipment-
-that cause a significant increase in air emissions.[Footnote 1] Such
changes are called "major modifications." Congress believed that
incorporating pollution controls into the design and construction of
new and modified air pollution sources was generally an efficient way
of controlling air pollution from large industrial sources. Congress
also excluded existing facilities from NSR requirements until they made
changes that increased their emissions. Companies that want to make
major modifications in existing facilities must apply to state or local
agencies for an NSR permit and then install the controls. The cost of
installing controls varies but can reach hundreds of millions of
dollars for some facilities, according to an EPA program manager.
However, companies can qualify for exemptions from these requirements
if, for example, (1) a modification is considered "routine maintenance
and repair," (2) the company agrees not to significantly increase its
emissions after making a physical or operational change to its
facility, or (3) the company offsets any emissions increases resulting
from a change in a facility with emissions reductions achieved
elsewhere within that facility.
EPA has long recognized a need to revise the NSR program and began a
reform process in 1992 that resulted in proposed changes to the program
in 1996 and 1998. The agency received wide-ranging comments from the
public on how the program should be revised and held meetings with the
public and other stakeholders, but did not develop final rules by the
time the new administration took office in 2001. In May 2001, as part
of its proposed national energy policy, the Vice President's National
Energy Policy Development Group recommended that EPA report to the
President on the NSR program's impact on energy efficiency investments,
among other things. In response to this recommendation, EPA concluded
in its June 2002 NSR Report to the President, that NSR had discouraged
some energy efficiency investments at existing industrial facilities.
After completing this report, EPA modified certain of the proposed 1996
NSR revisions and finalized them as a rule in December 2002 (hereafter
referred to as the NSR final rule). According to EPA, the rule will,
among other things, provide greater certainty for facilities regulated
under the program and streamline the NSR permitting process while
ensuring the current level of environmental protection. As part of this
process, EPA analyzed the rule's anticipated economic effects, such as
its impacts on emissions, health risks, the costs of installing and
maintaining pollution control equipment, and administrative costs
incurred by government agencies. Under Executive Order 12866 and the
Unfunded Mandates Reform Act of 1995, agencies must perform detailed
assessments of economically significant rules--those rules that may
have an annual effect on the economy of $100 million or more. If a
rule's impacts are not expected to exceed this threshold, a more
detailed economic analysis is generally not required. According to the
Office of Management and Budget (OMB), the agency responsible for
overseeing agency compliance with Executive Order 12866, agencies may
use their discretion when conducting a screening analysis to determine
whether a rule's economic impacts may reach the $100 million threshold
and require a more detailed assessment. EPA's Office of Air Quality
Planning and Standards has developed a guidance document that the
agency uses to analyze the impacts of air quality rules, which
discusses how to conduct a screening analysis.[Footnote 2]
You asked us to determine the basis of (1) EPA's analysis of the
economic impacts of the final rule and its conclusion that the rule
would not create significant enough benefits or costs to require a more
detailed analysis and (2) EPA's conclusions that the NSR program (prior
to the final rule) discouraged some energy efficiency projects. You
also asked us to provide information on several other aspects of the
final rule and proposed revisions to the definition of routine
maintenance and repair under NSR, which we will address in subsequent
reports.
To respond to these objectives, among other things, we used OMB and EPA
guidance to review EPA's screening analysis of the final rule's
economic impacts. We also met with the NSR program manager within EPA,
other senior EPA officials within the agency's Office of Air Quality
Planning and Standards, and senior OMB staff within the Office of
Information and Regulatory Affairs who were responsible for reviewing
EPA's analysis. In addition, we reviewed the information that EPA
relied on in preparing its findings on the NSR program's effects on
energy efficiency projects. We also met with representatives of
industry and an environmental group. Appendix I provides a more
detailed description of our scope and methodology.
Results in Brief:
EPA relied primarily on the professional judgment of agency staff and
comments it received on earlier NSR revision proposals to conclude in
its screening analysis that the final rule would not generate benefits
or costs of more than $100 million and, therefore, that it could
proceed with the rule without a detailed economic analysis. In taking
this approach, the agency complied with its guidance for conducting
economic analyses, which states that, to focus resources on those rules
that will have a large impact, a screening analysis of benefits and
costs may be qualitative or rely on limited data. From this screening
analysis, EPA concluded that the rule would encourage energy efficiency
projects while reducing emissions and related health risks without
imposing significant economic impacts. Senior OMB staff responsible for
reviewing the analysis said that while OMB concurred with EPA's
conclusion that the rule was not economically significant, it
considered the rule significant for policy reasons. As a result, OMB
sought to determine whether EPA could quantify the final rule's
potential effects, but concluded that the agency lacked the necessary
data to do so. For example, EPA does not maintain comprehensive
information on the economic impacts of the NSR program, and the agency
could not model how often or when companies would decide to use any of
the voluntary provisions of the rule. EPA later conducted two
additional analyses of some of the rule's impacts to provide the public
with more information and to satisfy requirements of the Paperwork
Reduction Act, but these were not comprehensive assessments of the
final rule. Attorneys general from 10 Northeastern states and several
environmental organizations have filed suit against EPA in a challenge
to the final rule, asserting, among other things, that the rule will
allow companies to increase their emissions. If these claims prove
correct, EPA's screening analysis would have underestimated the rule's
impacts because it did not account for costs associated with increased
emissions, such as adverse public health effects. Because of the data
limitations, it was not possible to verify these parties' or EPA's
conclusions. As a result, the rule's effects are uncertain. Therefore,
we are recommending that EPA identify the data it has available, as
well as additional data it needs and could obtain, to monitor the
effects of the final rule and use the monitoring results to determine
whether the rule has created adverse effects that the agency needs to
address.
EPA relied primarily on anecdotal information from the industries most
affected by NSR in concluding that (prior to the final rule) the
program discouraged some energy efficiency projects, including some
that would have reduced air emissions. EPA staff responsible for this
analysis said they relied on anecdotal information from industry
sources such as electricity producers, chemical and forest products
manufacturers, and petroleum refiners because they lacked comprehensive
data on the number of projects that did not go forward as a result of
NSR, such as upgrades to industrial boilers. These anecdotes suggested
that the NSR program posed several barriers that discouraged some
energy efficiency projects, such as the high costs of installing
pollution controls and delays in obtaining permits that in turn delayed
project construction. Several environmental groups, however, disagreed
with industry's claims. Because EPA based its conclusion that NSR
discouraged some energy efficiency projects on anecdotal information
rather than a comprehensive survey or representative sample of
industries subject to the program, its findings are not necessarily
representative of the program's effect on energy efficiency projects
throughout the industries subject to the program. In addition, EPA's
finding that some forgone energy efficiency projects would have reduced
air emissions was based on the assumption that facilities would not
increase their production levels after performing the projects.
However, facilities' future levels of production and emissions are
uncertain because they may fluctuate in response to economic
conditions, and other factors. For example, according to EPA and the
executive director of an industry group, companies often expand
production after implementing energy efficiency projects because it is
advantageous to maximize production at the most efficient facilities.
Such expansions could increase emissions and related health risks,
although EPA asserts that this would be offset by decreased production
and emissions at less efficient facilities.
Background:
Under the Clean Air Act, EPA establishes health-based air quality
standards that the states must meet and regulates air pollutant
emissions from various sources, including industrial facilities and
mobile sources such as automobiles and other transportation. Figure 1
compares the emissions of key pollutants from industrial facilities to
those from transportation and other sources.
Figure 1: Percentage of Total U.S. Emissions Released by Industrial,
Transportation, and Other Sources in 2001:
[See PDF for image]
Note: Percentages for carbon monoxide, nitrogen oxides, and sulfur
dioxide do not total 100 due to rounding.
[End of figure]
EPA has issued health-based air quality standards for six primary
pollutants--carbon monoxide, lead, nitrogen oxides, ozone,[Footnote 3]
particulate matter, and sulfur dioxide--that have been linked to a
variety of health problems. For example, ozone can inflame lung tissue
and increase susceptibility to bronchitis and pneumonia. In addition,
nitrogen oxides and sulfur dioxide contribute to the formation of fine
particles that have been linked to aggravated asthma, chronic
bronchitis, and premature death. In 2001 (the most recent year for
which data were available), 133 million Americans lived in areas with
air pollution levels above at least one of the health-based air quality
standards, according to EPA.
The New Source Review program was established in 1977 and is intended
to protect public health, as well as national parks and wilderness
areas, from additional air pollution when new industrial facilities are
built and existing ones expand. The fundamental logic of the program,
according to EPA, is that industrial facilities should install modern
pollution controls at the time of construction or when making physical
or operational changes, such as adding new production equipment, that
cause a significant increase in air emissions. Subject to EPA's
oversight, state and local air quality agencies generally administer
air quality programs, including the NSR program. In recent years, EPA
has taken enforcement action against companies in several industries,
including some electricity producers, forest products manufacturers,
and petroleum refineries, alleging noncompliance with the program. Some
of these parties settled these cases soon after the enforcement actions
were filed, although electricity producers assert that the actions are
inconsistent with the Clean Air Act, according to the U.S. Department
of Justice (DOJ). In January 2002, however, DOJ concluded that the
enforcement actions are consistent with the act.
Recognizing the need for revisions to the NSR program, EPA began a
reform effort in 1992 and 1993 when it held workshops with stakeholders
and established a federal advisory committee in 1993. Largely on the
basis of this committee's recommendations, EPA issued proposed NSR
revisions in 1996 that were intended to reduce costs imposed on
companies that undergo NSR permitting without interfering with efforts
to attain air quality goals. EPA solicited public comment on the
proposals at that time and again in 1998, when it sought additional
information on an alternative method for determining whether a facility
modification should be subject to NSR. The agency received numerous
comments that provided wide-ranging views on how the program should be
revised. Despite additional public meetings and discussions with
stakeholders on NSR reforms, EPA had not developed final rules by the
time the new administration took office in 2001.
In May 2001, when the Vice President's National Energy Policy
Development Group issued its proposed national energy policy, it
recommended that EPA report to the President on the NSR program's
impact on investments in new utility and refinery generation capacity,
energy efficiency, and environmental protection. In response to this
recommendation, and given that EPA does not maintain such information,
the agency solicited public input on how the NSR program had affected
the ability of companies to undertake energy efficiency projects in
their existing facilities. EPA defined energy efficiency projects as
those that would have produced greater output per unit of fuel input
(e.g., more electricity per ton of coal burned), regardless of the
effect on emissions. In its June 2002 NSR Report to the President, EPA
concluded, among other things, that NSR had not affected investments in
new power plants and refineries but had discouraged some energy
efficiency projects at existing facilities, including some that would
have reduced air emissions.
After completing this report, EPA modified the 1996 proposed NSR
revisions to provide regulatory flexibility to industrial facilities so
that they could pursue energy efficiency projects, among other things.
EPA assessed the economic impacts of implementing these revisions, and
finalized them as a rulemaking--hereafter referred to as the "final
rule"--in December 2002. Table 1 provides a chronology of the NSR
program.
Table 1: Chronology of the New Source Review Program:
Date: 1970; Description: Clean Air Act became law.
Date: 1972; Description: EPA created the Prevention of Significant
Deterioration Program by rulemaking. This program implemented NSR in
areas that meet air quality standards.
Date: 1977; Description: Clean Air Act Amendments of 1977 became law.
Date: 1990; Description: Clean Air Act Amendments of 1990 became law.
Date: 1992-1994; Description: EPA issued notices of violation to
companies in the plywood and wood products industry.
Date: 1993; Description: EPA convened a federal advisory committee to
address policy and technical issues associated with revising NSR.
Date: 1996; Description: EPA issued a NSR Simplification Proposal to
streamline permitting, relieve regulatory burden, and provide states
with flexibility. EPA also began investigating coal-fired electricity
producers, petroleum refiners, and the pulp and paper industry for
violations of NSR rules.
Date: 1998; Description: EPA solicited further public comment on NSR
revisions.
Date: 1999; Description: DOJ filed lawsuits against seven electricity
producers charging that 17 power plants made major modifications
without installing required pollution control equipment.
Date: 2000-2003; Description: EPA settled several NSR cases with
electricity producers and refiners.
Date: May 2001; Description: The administration's proposed energy
policy called for EPA and the Department of Energy to review the
implementation of NSR regulations, and for DOJ to review existing NSR
legal actions. DOJ later reported that the actions were consistent with
the Clean Air Act.
Date: June 2001; Description: EPA issued a NSR background paper as a
partial response to recommendations in the energy plan.
Date: June 2002; Description: EPA issued New Source Review: Report to
the President and recommendations for improving the NSR program.
Date: December 2002; Description: EPA issued the NSR final rule and
nine northeast states filed suit challenging the final rule.
Date: January 2003; Description: A tenth northeast state filed suit
challenging the rule, and these states, California, and four California
air quality agencies petitioned EPA to reconsider the final rule.
Date: July 2003; Description: EPA announced that it would reconsider
parts of the NSR final rule.
Source: EPA and National Academy of Public Administration.
[End of table]
Specific revisions in the final rule include the following:
* a revised method for determining a facility's baseline emissions
level that a company would use as the starting point for determining
whether any changes in emissions resulting from a planned physical
change or change in the method of operation subjected the company to
NSR;
* a revised test that a company would use after establishing a
facility's baseline emissions level to determine if a physical or
operational change would increase emissions beyond the NSR threshold;
* exemptions from the program if companies demonstrate that (1)
equipment qualifies as a "clean unit" because they already use state-
of-the-art pollution control equipment or (2) a proposed modification
specifically controls air pollution and achieves an environmental
benefit; and:
* a mechanism for companies to work with state or local permitting
authorities to develop plantwide emissions limits, which would allow
companies to make changes in one part of a facility's operations as
long as they offset any emissions increases with decreases elsewhere
within the facility.
In addition to the final rule, EPA has proposed further NSR revisions
that the agency believes will provide greater certainty about
activities that are considered routine maintenance, repair, and
replacement. According to a NSR program manager, the agency is
reviewing public comments on this proposal and expects to finalize the
rule by December 2003.
EPA's Economic Analysis of the Final Rule Complied with EPA and OMB
Cost-Benefit Analysis Requirements, but Some Stakeholders Have Sought
to Have EPA Reconsider the Rule:
EPA relied primarily on the professional judgment of its staff, as well
as public comments on the agency's prior proposal to revise the NSR
program, in concluding from its screening analysis that the final rule
would not create benefits or costs beyond the $100 million threshold
that triggers requirements for a more detailed economic analysis. EPA's
approach, while limited, is consistent with agency guidance for
assessing the economic impacts of proposed rules. In addition, EPA
would have had difficulty conducting a more quantitative analysis
because of data limitations. OMB agreed that the rule would not have a
significant economic impact but was significant for policy reasons. OMB
asked EPA if it could better quantify impacts and was convinced that
the agency lacked the necessary data to do so. EPA did later conduct
two additional analyses of some of the rule's costs and benefits, but
they also were not comprehensive economic assessments. Some
stakeholders have formally asked EPA to reconsider the rule, arguing,
among other things, that it will enable facilities to increase their
emissions. Because of the limited data on the NSR program, it was not
possible to verify agency or stakeholder conclusions about the rule's
anticipated economic impacts.
EPA's Reliance on Professional Judgment Was Consistent with Agency
Guidance for Screening the Economic Impacts of Rules:
EPA's screening analysis of the final rule's anticipated effects was
consistent with the agency's guidance for conducting economic analyses.
According to senior OMB staff, the office does not have guidance for
agencies to use when conducting a screening analysis to determine
whether a rule will impose significant economic impacts and, thus,
merit further analysis. Therefore, agencies have latitude in
determining how best to conduct a screening analysis. EPA's Office of
Air Quality Planning and Standards has developed a guidance document
that describes the process agency economists should use when analyzing
air quality rules. Recognizing the need to focus agency resources on
rules that have a large impact, the guidance states that a screening
analysis of benefits and costs may be qualitative in nature or rely on
limited data.
According to a NSR program manager in EPA, agency staff relied
primarily on their professional judgment in estimating the rule's
economic impacts, such as its effect on air pollutant emissions and the
costs companies incur when they install pollution controls, as well as
public comments the agency received on its 1996 and 1998 NSR revision
proposals. For example, several industry trade associations submitted
information asserting that the ability to use plantwide emissions
limits would reduce costs for industry and provide other benefits
without compromising air quality.[Footnote 4] On the basis of this
information, EPA staff determined that the rule would lead to overall
economic and environmental benefits by encouraging energy efficiency
projects, reducing emissions and related health risks, and providing
economic benefits to companies affected by the NSR program, according
to the NSR program manager. For example, EPA forecasted that the rule
would encourage companies to implement energy efficiency projects that
would reduce emissions, such as upgrades to boilers used to generate
power.
In its screening analysis, EPA assumed that the final rule would not
impose significant economic costs on companies because the rule created
voluntary options and companies would most likely only elect to use
them if they thought the provisions would achieve an overall economic
benefit. Therefore, the agency assumed that any time a company opted to
use one of the provisions, the benefits to the company would outweigh
any costs incurred. In addition, because EPA concluded that the rule
would decrease emissions, it did not forecast any increases in public
health costs resulting from the final rule, such as increased incidence
of asthma or other respiratory problems. Consistent with its guidance,
EPA then concluded that, because the rule was not expected to create
$100 million in benefits or costs, the agency could proceed in
finalizing the rule without a more quantitative and comprehensive
analysis.
EPA Lacked Data to Conduct a More Comprehensive Analysis of the
Economic Impacts of the NSR Final Rule:
Even if EPA had been required to conduct a more detailed economic
analysis, it would have had difficulty doing so because the agency is
not required to systematically collect comprehensive data on the
economic effects of the NSR program.[Footnote 5] Regarding the benefits
of the program, EPA does not maintain comprehensive data on the number
and type of facilities that obtain NSR permits, or the reduced air
emissions achieved after facilities install pollution controls,
according to a senior agency economist. In 2001, EPA attempted to
estimate the emissions reductions at facilities that obtained NSR
permits; however, senior agency officials responsible for the analysis
acknowledged that it had several limitations.[Footnote 6] For example,
these officials said the analysis included only facilities that were
located in areas that met federal air quality standards, thereby
excluding a large portion of the universe of affected facilities. In
addition, EPA had incomplete data on facilities located in EPA region
6, which includes Arkansas, Louisiana, New Mexico, Oklahoma, and Texas.
Furthermore, the analysis did not distinguish between benefits that
resulted from the installation of pollution controls at new facilities
and those at existing facilities, which are the focus of the final
rule. With respect to costs, EPA is not required to maintain
comprehensive information on the costs of the NSR program, and would
therefore have had difficulty quantifying all of the costs of the rule,
according to a NSR program manager.
In addition to EPA's lack of data on the NSR program's benefits and
costs, a senior agency economist said that uncertainty about the extent
to which companies might elect to use the NSR alternatives provided in
the final rule also limited EPA's ability to estimate the rule's
impacts. For example, the economist said that the final rule allows
companies to develop a plantwide emissions limit as an alternative to
NSR, but only those companies that find this provision advantageous are
likely to use it and EPA could not accurately determine how many
companies this might include. According to EPA, companies' decisions
about whether to pursue voluntary options are case-specific and
dependent on a number of factors. Therefore, the agency was unable to
model how often and when the final rule's options would be used. In
contrast, most of the other rules EPA develops generally impose new
requirements on a known universe of companies, according to a NSR
program manager. In these cases, it is much easier to determine the
costs and benefits of a rule because the agency can gather information
from the affected companies. For example, if EPA required all companies
within a particular industry to install certain pollution controls, it
could gather information on the average costs of such equipment and the
anticipated reductions in air emissions. Because of these data
limitations we identified, it was not possible to conduct our own
assessment of the final rule's possible effects and verify EPA's
analyses and conclusions.
OMB Concurred with EPA's Analysis and Conclusions and Determined That
Data Limitations Precluded More Quantitative Analysis:
According to senior EPA and OMB staff, OMB agreed with EPA's finding
that the final rule was not economically significant because it was not
expected to impose costs or provide benefits beyond the $100 million
threshold that triggers requirements to conduct a more thorough
analysis. Nevertheless, according to senior OMB staff responsible for
reviewing the analysis, while the office found EPA's analysis--which
was presented in an oral briefing but not documented--persuasive, OMB
determined that the final rule was significant for policy reasons.
Under Executive Order 12866, rules that "raise novel legal or policy
issues arising out of legal mandates, the President's priorities" or
other criteria can be categorized as significant. According to the
Executive Order, when rules fall into this category, the agency issuing
the rule must provide OMB with an assessment of the potential costs and
benefits of the regulatory action, but the order does not elaborate on
the form of the assessment. The senior OMB staff said that EPA's
screening analysis satisfied this requirement. Nevertheless, OMB staff
asked EPA if it would be possible to conduct an analysis that
quantified the rule's effects. However, as we previously discussed, EPA
identified numerous data limitations that it claimed prevented its
staff from conducting such an analysis, and OMB acknowledged these
limitations and concurred with EPA.
EPA Conducted Two Additional Analyses of the Rule's Effects, but They
Did Not Comprehensively Assess Economic Impacts:
In November 2002, EPA issued a supplemental analysis intended to
provide the public with additional information on the rule's potential
environmental effects. According to EPA, this analysis was not intended
as a comprehensive economic analysis of the rule's benefits and costs
and was not used to make decisions about the rule. Like the screening
analysis, it relied primarily on qualitative information and arrived at
similar conclusions. For example, EPA asserted that the exemption for
companies that use state-of-the-art pollution controls would save
companies NSR permitting costs. EPA also asserted that this provision
would induce facilities to voluntarily install controls to avoid NSR,
thereby reducing emissions.
While the supplemental analysis was qualitative, it used some data from
a limited number of facilities to estimate the effects of some of the
rule's provisions on a wider universe of facilities. Specifically, the
analysis considered the experiences of six companies that had used
regulatory options similar to those provided for in the final rule to
determine that such limits would lead to emissions reductions. For
example, on the basis of these six case studies, EPA stated that if 75
percent of facilities in three industry sectors opted to use plantwide
emissions limits, emissions of volatile organic compounds could be cut
by up to 17,000 tons annually (less than 1 percent of the total
volatile organic compounds emitted in 2001, the most recent year for
which data were available). EPA also said that the emissions reductions
would be greater if the analysis was extended to other industry sectors
and pollutants.
However, EPA did not use statistically valid methods to identify the
six companies on which it based this portion of its analysis.
Therefore, the experiences of these companies may not be representative
of how plantwide limits will affect emissions at other industrial
companies that may opt to use this provision. In addition, the
Secretary of the Delaware Department of Natural Resources and
Environmental Control--the state in which one of the six companies was
located--wrote the EPA Administrator cautioning against using the
experience of the Delaware company to support the final rule. The
Secretary noted that the regulatory option used by that company
provided for emissions reductions as a prerequisite for participation,
while EPA's plantwide emission limit does not.
As noted above, EPA could not determine with any certainty the number
of facilities that would opt to use the final rule's voluntary
provisions, or the changes in the number of NSR permits, amount of
emissions, or other effects that would result. However, EPA was
required under the Paperwork Reduction Act to assess some of the costs
and benefits that would accrue to companies and government agencies
under the final rule. Specifically, the act requires agencies to
estimate the record keeping burden associated with a rule and report
this information to OMB. Therefore, EPA relied on limited available
data and its professional judgment to make estimates necessary to
satisfy this requirement. In February 2003, after issuing the final
rule, EPA estimated that it would impose about $6.5 million in annual
burden on state and local air quality agencies, which include legal and
other costs associated with incorporating the final rule into the
state's air pollution control plan, collecting public comment on the
changes, and obtaining state legislatures' approval of the
changes.[Footnote 7] This analysis also estimated that 14 facilities
would use the final rule's provisions during each of the first 3 years
of implementation, reducing the previous annual burden by $650,000.
This analysis, like the screening analysis, found that the rule would
impose less than $100 million in annual costs on companies and
government agencies. However, a senior EPA economist said this was a
limited analysis intended to identify information collection and record
keeping requirements that the final rule would impose. In addition,
this analysis does not comprehensively address all of the costs that
are likely to result from implementation of the rule.
Some State Attorneys General and Environmental Organizations Question
EPA's Conclusions and Assert That the Final Rule Will Increase
Emissions, Harming Public Health:
Nine northeast states filed a petition in the U.S. Court of Appeals for
the District of Columbia Circuit on December 31, 2002--the day the rule
was finalized--disagreeing with EPA's conclusions about the rule's
effects.[Footnote 8] They asserted, among other things, that the final
rule violated the Clean Air Act and would enable companies to increase
their emissions because, by using the provisions to opt out of NSR,
they will no longer be required to install pollution control
equipment.[Footnote 9] According to New York's Attorney General, the
final rule will lead to more smog, asthma, and respiratory disease. In
addition, Earthjustice--acting on behalf of a coalition of
environmental and public health advocacy groups--filed similar
petitions for review, also in the U.S. Court of Appeals for the
District of Columbia Circuit. According to the American Lung
Association, one of the groups represented by Earthjustice, the final
rule creates loopholes that allow companies to increase their emissions
without installing pollution controls. Similarly, Environmental
Defense, another group represented by Earthjustice, claims that the
final rule will enable thousands of factories, power plants, and other
industrial companies to pollute more.[Footnote 10] On February 6, 2002,
the nine Northeast states, along with Pennsylvania, filed a motion,
which the court denied, seeking to halt implementation of the final
rule pending a ruling on the earlier petitions.
While these parties do not support the final rule, several states,
including Indiana, Kansas, Nebraska, North Dakota, South Carolina,
South Dakota, and Utah, as well as the American Petroleum Institute and
other industry groups, have filed petitions with the court in support
of the final rule. In July 2003, EPA responded in part to the petitions
for reconsideration by requesting public comment on six limited issues
in the final rule. The agency said that the decision to reconsider
these issues did not mean that EPA had decided to change any aspect of
the rule and that the agency would make that decision after the comment
period closed.
Our review did not identify any comprehensive assessments of the final
rule's effects that contradicted or supported the results of EPA's
analysis or the assertions of those who oppose the final rule. As a
result, the economic impacts of the final rule are uncertain. Two
studies commissioned by the Environmental Integrity Project of the
Rockefeller Family Fund and performed by Abt Associates, an EPA
contractor, focused on facilities that obtained NSR permits and
installed emissions controls prior to the final rule. The studies found
that the facilities would not have been required to install pollution
controls if they had made their modifications after implementation of
the final rule, and could have increased their emissions. However,
because these analyses focus on just two facilities and only one of the
four provisions of the final rule, their results may not be
representative of the rule's overall environmental effects. In
addition, EPA asserts that these studies were based on an incorrect
interpretation and application of the final rule's provisions.
EPA Relied Primarily on Anecdotes from Industries Most Affected by NSR
to Conclude That It Discouraged Some Energy Efficiency Projects:
EPA relied primarily on anecdotal information from industry in
concluding that the NSR program, prior to the final rule, discouraged
some energy efficiency projects--such as upgrades to industrial
boilers--including some projects that would have reduced air emissions.
The anecdotes, which were provided primarily by four of the industries
most affected by the NSR program, suggested that the program imposed
several barriers that deterred energy efficiency projects, including
delays in obtaining permits and the high costs of installing pollution
controls. Several environmental groups disputed EPA's findings, and a
representative of one group cited other factors, such as poor economic
conditions and a lack of willingness to control air pollution, as the
barriers to energy efficiency projects, although EPA program managers
said that the agency found industry's claims to be more persuasive.
Nonetheless, because EPA relied on anecdotal information rather than a
statistically valid sample or industrywide survey, the agency's
findings do not necessarily represent NSR's effect on energy efficiency
projects throughout the industries subject to the program.
EPA's Conclusion That NSR Discouraged Energy Efficiency Projects Was
Based Primarily on Anecdotes from Four of the Industries It Believes
Are Most Affected by the Program:
According to EPA officials responsible for the NSR Report to the
President, during development of the proposed NSR revisions, the agency
received information regarding the program's effect on energy
efficiency projects from numerous stakeholders. This input included
written responses to EPA's request for information, as well as case-
specific anecdotes and supplemental documents. In assessing this
information, the agency defined any project that included a facility
modification that would directly result in greater output per fuel
input (such as more electricity generated from each ton of coal burned)
as an energy efficiency project. Although EPA based its conclusion
about NSR's impact on such projects on the total available information,
it relied heavily on anecdotes describing cases in which chemical
manufacturers, electric utilities, forest products manufacturers, and
petroleum refineries--four of the industries EPA identified as most
affected by the program--had decided not to pursue energy efficiency
projects because of NSR. While EPA also received comments from several
environmental organizations and state and local air quality agencies
that disputed industry's claims, an EPA program manager said that the
specific examples provided by industry were convincing.
After obtaining the anecdotes submitted to EPA by the parties the
agency identified as its primary data sources--including trade
associations, individual firms, and other business interests--and
removing those that did not address energy efficiency or contain
complete information, we reviewed 69 anecdotes that described how NSR
deterred companies from making energy efficiency investments. We
determined that these anecdotes generally went through two rounds of
review. First, trade associations said that their members reviewed and
discussed the anecdotes before submitting them to EPA. After receiving
the submissions, EPA program managers said they used their expertise
and judgment to evaluate the credibility and reliability of the
anecdotes. According to these managers, they paid specific attention to
whether (1) the project described in an anecdote was technically
feasible; (2) an anecdote's conclusions about how NSR discouraged a
project were consistent with EPA's understanding of how the NSR
provisions would apply to that project; and (3) the conclusions were
based on "real-life," rather than hypothetical, situations. EPA program
managers found the anecdotes to be generally credible. While some may
have been more relevant than others (e.g., "real life" examples were
more relevant than hypothetical ones), none was dismissed for failing
to meet these criteria, according to an EPA program manager. Agency
staff familiar with the NSR program then compiled, reviewed, and
synthesized this information and concluded that complying with NSR may
have deterred some investments in energy efficiency projects, including
some that may have reduced air emissions. It is important to note that
the energy efficiency findings in the Report to the President were not
the basis of the analysis of the economic impacts of the final rule,
which found that the final rule would encourage energy efficiency
projects, according to an EPA manager of the NSR program.
The anecdotes generally cited three ways in which these industries
believe complying with NSR discouraged energy efficiency projects,
including concerns that (1) EPA would subsequently determine that
projects companies initiated as routine maintenance, repair, and
replacement without an NSR permit were actually major modifications
subject to NSR and enforcement action; (2) the test used to measure the
emissions impacts of company modifications was not fair; and (3) the
NSR permitting process caused unanticipated project delays and
increased costs.
The first barrier, concerns about possible enforcement actions, stemmed
from recent EPA enforcement litigation against certain electricity
producers in which EPA contested industry's claims that certain
projects were exempt from NSR because they qualified as routine
maintenance. EPA maintained that these projects were in fact major
modifications that should have triggered NSR. According to senior
industry representatives, this meant that EPA could consider
potentially thousands of projects that industry had previously
completed without an NSR permit under this exemption as NSR violations,
including some that state and local air quality agencies had approved
and confirmed did not trigger NSR. This prompted some industry
officials to allege that EPA was reinterpreting what could be
considered routine maintenance exempt from NSR. EPA's Office of
Enforcement, however, maintains that the agency is correctly
interpreting and enforcing the program.
According to senior representatives of the electric utility and
refining industries, this litigation has produced substantial
uncertainty for companies pursuing facility modifications. Part of this
uncertainty may stem from what industry officials describe as a lack of
clear policy guidance on what qualifies as routine maintenance. EPA has
never explicitly defined routine maintenance since the exclusion was
established, although some clarification has grown out of EPA
enforcement, most notably in the case of Wisconsin Electric Power Co.
v. Reilly (WEPCO). This court decision upheld EPA's consideration of
the nature, extent, purpose, frequency, and cost of facility
modifications, as well as other relevant factors, when determining
whether a project qualifies for the routine maintenance and repair
exemption. EPA maintains that it takes a case-by-case approach to
determining whether a modification constitutes routine maintenance, and
has cited WEPCO as support for its recent enforcement actions.
However, industry comments submitted to EPA claim that the agency's
enforcement actions, combined with what they regard as a lack of clear
guidance, make it difficult for them to reliably predict when their
projects will trigger NSR, especially when EPA may later disagree with
state and local NSR determinations. Companies are therefore reluctant
to perform projects that could trigger NSR or possible enforcement
litigation, including, they assert, energy efficiency projects.
According to EPA, the agency's proposed rule on the routine maintenance
exemption would address some of these concerns by changing its
definition. EPA expects to issue the rule by the end of 2003.
Several environmental groups disputed EPA's findings. For example, an
environmental advocacy group involved in NSR issues claimed that the
proposed rule would simply broaden the exemption in violation of the
Clean Air Act. One alternative in the proposed rule would allow
companies to claim as routine maintenance any modifications as long as
they cost less than a certain percentage--depending on the industry--of
the total cost of the polluting unit, such as a boiler, or the entire
facility. Another alternative would allow companies to invoke the
routine maintenance exemption if they are replacing equipment that
performs the same function as its predecessor and does not alter the
basic design of a facility. Environmentalists assert that these
exemptions will allow companies to falsely treat major plant
modifications as routine maintenance, avoid NSR requirements, and
increase emissions.
The second barrier cited in the anecdotes was the test used to
determine whether a modification would increase emissions beyond the
NSR threshold. Under the program prior to the final rule, companies
making physical or operational changes that did not qualify for
exemptions, such as the routine maintenance exemption, had to undergo
this test to gauge the changes' effects on emissions. Before the final
rule, a company was to compare a facility's emissions during the
previous 24 months to its future potential emissions if its facility
was run at maximum capacity or the highest capacity allowed by the
existing NSR permit after making the change, even if the facility had
not run at this level before, or did not plan to in the future. If the
expected future emissions resulting from the change were more than 40
tons per year higher after making the change, the project qualified as
a significant emission increase and triggered NSR.[Footnote 11]
Companies (except electric utilities) could request that the permitting
agency allow the use of any different two-year period based on a
demonstration that it is more representative of normal operation.
Electric utilities may use any 2-year period in the previous 5 years as
their actual emissions baseline.
Industry submissions to EPA on the NSR program asserted that having to
assume maximum capacity biased the test and significantly overstated
the true emissions impact of a project. They cited cases where they
expected a project to reduce emissions, but the test showed that it
would increase them. For example, a refinery planned to implement a
project that it expected would improve the energy efficiency of a
furnace by 5 percent. While the furnace was permitted to emit 45 tons
of air pollution per year, it was not operating at full capacity and
was therefore only emitting 35 tons per year. According to the
facility's submission, the project would decrease annual emissions to
32 tons per year through more efficient fuel combustion while running
at the same capacity. However, the emissions test required the refinery
to compare its historical emissions--35 tons per year--with its future
potential emissions running at full capacity--45 tons per year. Because
the facility was located in an area where a 10 ton per year increase
triggers NSR requirements, the facility would have had to obtain an NSR
permit for the modification.
Likewise, a pulp and paper mill planned to install an air flow system
that would allow its boiler to more efficiently burn natural gas,
creating annual savings of $1 million. By using less fuel, the project
was also expected to reduce future emissions of carbon monoxide,
nitrogen oxides, and volatile organic compounds. However, the facility
had been operating below its maximum capacity during the 24 months
preceding the planned installation. Therefore, when managers compared
the facility's actual emissions during this period to its future
potential emissions, assuming it would operate at maximum capacity
after the modification, the projected emissions increase qualified as a
major modification, even though the project was expected to reduce
emissions. If the company proceeded with the project under NSR and
installed the best available pollution controls, it would incur $17
million in total costs, making the project cost-prohibitive, according
to the industry submission.
While these anecdotes assert that having to assume maximum capacity
under this test was unfair, the NSR program required facilities to
assume that the changed equipment would operate at the maximum level
allowed in its operating permit unless the owners or operators of the
facility made a legally binding commitment to operate at lower
production levels, according to EPA. Otherwise, EPA and state and local
air quality agencies would have no way of ensuring that companies would
not have a significant increase in emissions under the NSR rules after
making a physical change, according to EPA. In addition, EPA
acknowledged in its Report to the President that performing an energy
efficiency project can provide an economic incentive to increase
production levels at more efficient facilities, potentially resulting
in increased emissions. However, EPA's new final rule now gives a
company the option to compare a facility's previous emissions to its
projected actual emissions, instead of its maximum potential emissions.
EPA believes that this new test will remove disincentives that
discourage facilities from making the types of changes that improve
operating efficiency, implement pollution prevention projects, and
result in other environmentally beneficial changes. In addition, EPA
asserts that the new record keeping and reporting measures required
with this option will provide the information necessary for reviewing
authorities to ensure that such changes are made consistent with the
Clean Air Act.
The anecdotes also identified a third barrier. According to industry,
unpredictable delays associated with the NSR process disrupt a
project's planning and construction timetables, increasing project
costs. Program managers and technical directors representing forest
product companies, chemical manufacturers, refineries, and utilities
commented on this issue, stating that the NSR permitting process can
last anywhere from 6 to 24 months, thereby delaying or disrupting
project planning and construction. Petroleum refinery representatives
claimed to be uniquely affected by this, asserting that NSR permitting
delays made it difficult for them to meet federal mandates and
deadlines for producing cleaner-burning gasoline, potentially
subjecting them to fines and enforcement actions. Industry officials
also claimed that project delays they attributed to NSR permitting
resulted in equipment wearing out, increasing replacement costs, and
raising safety issues. They also stated that certain repair projects
required quick decisions and turnaround, both of which are not
compatible with the amount of time it takes to obtain an NSR permit and
install the appropriate pollution controls. An EPA NSR program manager
confirmed that permitting delays could hinder energy efficiency
upgrades in emergency situations where a company needs to quickly
replace broken or worn out machinery and would like to install more
efficient equipment. However, the program manager said such situations
are rare and that the timelines for planned facility upgrades are
generally compatible with the NSR permitting schedule. In addition to
permitting delays, some of the anecdotes also asserted that, if a
project triggered NSR requirements, the costs of installing pollution
controls would have outweighed the anticipated benefits of the project.
The National Academy of Public Administration and Environmental
Stakeholders Reached Different Conclusions about NSR's Effects on
Energy Efficiency:
In an April 2003 report to the Congress on the NSR program, the
National Academy of Public Administration (NAPA) stated that while a
lack of data prevented the organization from determining the extent to
which NSR has impeded energy efficiency improvements, NSR might indeed
have discouraged some industrial sources from undertaking economically
and environmentally sound maintenance and energy efficiency projects.
However, according to NAPA, some facilities continue to operate without
modern pollution controls because of widespread noncompliance with NSR
or flaws in its implementation. NAPA said that these facilities have an
advantage over their competitors because they have not incurred the
costs of controlling emissions, and that such facilities have little
basis to complain that NSR has adversely affected the efficiency of
their operations. An EPA manager for the NSR program took exception to
NAPA's findings, stating that EPA and the states have enforced the
program over the years. The official also said that facilities only
trigger NSR when they make physical changes in, or changes in the
method of operation of, their facilities that significantly increase
emissions. Therefore, if the facilities NAPA refers to have not
undertaken such modifications, they have complied with the program,
according to the official.
Several environmental groups experienced in NSR issues disagreed with
industry's claims about the NSR program's effects on energy efficiency.
A representative of one such group, who has testified before the
Congress on NSR, pointed out that if companies truly wanted to avoid
NSR, they could accept an emissions limit in their operating permit and
make a formal commitment to not emit above the NSR threshold. Companies
that agree to such limits may make any modifications they want without
triggering NSR, provided they do not exceed the limit. With this option
available, the representative asserted that the NSR process could not
deter energy efficiency projects that were expected to reduce emissions
because they would not trigger NSR, since they would not increase
emissions above the program threshold. For example, a source with an
operating permit limit could make a physical or operational change
without an NSR permit and increase emissions by 39.9 tons per year
(where the threshold is 40 tons per year) and not trigger NSR. The
environmental representative cited other factors, such as poor economic
conditions and a lack of willingness to control air emissions, as the
primary factors hindering companies from pursuing these projects,
rather than compliance with NSR.
Representatives of the chemical, forest products, and electric utility
industries disagreed with this position and said that companies are
reluctant to accept an operating permit limit because they would be
giving up their flexibility to increase production in response to
changing economic and market conditions, just for the sake of one
energy efficiency project. A trade association representing the
chemical industry also told us that the lengthy and protracted process
for obtaining an operating permit makes it impractical to renegotiate a
permit limit every time a company wants to undertake an energy
efficiency project.
The Anecdotes Do Not Necessarily Represent NSR's Effect on Energy
Efficiency Projects Industrywide or Their Overall Impact on Emissions:
As EPA notes in its Report to the President, its conclusions about the
effect of NSR on energy efficiency projects are based on anecdotal
information because the agency lacked comprehensive data on the number
of projects that did not go forward as a result of NSR, according to
EPA program managers. Because EPA based its conclusions on anecdotes,
the agency's findings do not necessarily represent NSR's effect on
energy efficiency projects within the industries that provided the
anecdotes or across all industries subject to the program. Reaching
such conclusions about the program's broader effects on energy
efficiency projects would have required gathering information from
either a statistically valid sample of companies subject to the program
or a comprehensive survey of affected industries. Conducting such an
analysis, however, would have required substantial resources.
In addition, EPA's conclusion that the NSR program had discouraged some
energy efficiency investments that would have reduced emissions was
based on the assumption that the companies would not increase their
production after completing the energy efficiency project, according to
an EPA official responsible for the analysis. Under this assumption, 23
of the 69 anecdotes predicted that the proposed projects would decrease
emissions, 11 predicted an increase, 2 predicted no change, and 33 (or
48 percent) did not include sufficient data to determine the emissions
impact.[Footnote 12] However, facilities' future production levels and
air pollutant emissions may fluctuate in response to changing economic
conditions and other factors. In addition, performing an energy
efficiency project can provide an economic incentive to increase
production levels at more efficient facilities, potentially increasing
emissions and related health risks.
The executive director of one industry trade association stated that it
would make economic sense to increase production at more efficient
facilities. The representative "could not imagine a utility spending
money on extra capacity, and then not utilizing it." In addition,
according to EPA, production at more efficient facilities could
supplant that at less efficient and higher-emitting facilities.
Therefore, even in cases where an energy efficiency project was
expected to reduce emissions, future increases in production after
implementing a project could possibly increase emissions, as well as
related health risks, past the NSR threshold.
On the other hand, according to an EPA official responsible for the
agency's energy efficiency analysis, the agency expected that if a
company increased production at its more efficient facilities, it could
decrease production at its less efficient facilities. Therefore, any
emissions increases due to higher production levels at more efficient
facilities would be offset by decreased production elsewhere. In
addition, a facility's emissions could decrease more than expected
after implementing an energy efficiency project if the facility
decreased production, for example, due to poor economic conditions. An
EPA program manager said that the agency has not analyzed the air
pollution impacts of shifts in production that facilities make after
implementing energy efficiency projects.
Conclusions:
While EPA determined that the final rule would lead to overall economic
and environmental benefits, these effects are uncertain because of
limited data and difficulty in determining how industrial companies
will respond to the rule. Consistent with the relevant executive order
and guidance, EPA conducted a limited analysis that determined that the
rule was not economically significant, and OMB concurred. In addition,
EPA identified data limitations that prevented the agency from
conducting a more quantitative analysis. Some stakeholders disagree
with EPA about the rule's effects, contending that the rule will allow
companies to increase air pollutant emissions, resulting in adverse
public health effects. If these stakeholders are correct, the final
rule could exacerbate existing air pollution problems--133 million
Americans already live in areas with air pollution levels above at
least one of the health-based air quality standards--and impose
negative economic impacts that EPA did not account for in its analysis
of the rule.
Recommendations for Executive Action:
Because of the lack of data and uncertainties about the NSR final
rule's impacts, we recommend that the EPA Administrator:
* determine what data are available that the agency could use to
monitor the emissions impacts of the rule,
* work with state and local air quality agencies to identify any
additional data needs and possible ways to fill them, and:
* use the monitoring results to determine whether the rule has created
adverse effects that the agency needs to address.
Agency Comments:
We provided EPA and OMB with a draft of this report for review and
comment. We subsequently received comments from both agencies. EPA said
that the report was accurate and that the agency agreed with our
conclusions and recommendation. OMB said that the report was accurate
but raised several questions about EPA's potential implementation of
the recommendation. Specifically, OMB said it would be difficult for
EPA to gather data to monitor the rule's effects and that attributing
emissions changes to the final rule would pose challenges. For example,
OMB said that it would be difficult to determine the level of emissions
facilities would have released in the absence of the final rule. EPA,
however, said that the recommendation acknowledges these challenges and
provides flexibility for the agency to work with state and local
agencies to identify data collection strategies. EPA and OMB also
recommended a number of technical changes to the report, which we have
incorporated into this report as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 10 days
from the report date. At that time, we will send copies to the EPA
Administrator, the Director, Office of Management and Budget,
interested congressional committees, and other interested parties. We
will also make copies available to others upon request. In addition,
this report will be available at no charge on GAO's Web site at http:/
/www.gao.gov.
If you or your staffs have any questions, please call me at (202) 512-
3841. I can also be reached at StephensonJ@gao.gov. Key contributors to
this report are listed in appendix II.
John B. Stephenson
Director, Natural Resources and Environment:
Signed by John B. Stephenson:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Ranking Minority Member of the Senate Environment and Public Works
Committee and Senator Lieberman asked us to determine the basis of (1)
EPA's analysis of the economic impacts of the final rule and its
conclusion that the rule would not create significant enough benefits
or costs to merit a more detailed analysis and (2) EPA's conclusions
that the NSR program (prior to the final rule) discouraged some energy
efficiency projects.
To respond to the first objective, we used OMB and EPA guidance to
review EPA's screening analysis of the final rule's economic impacts.
EPA issued its guidance to ensure that its economic analyses comply
with the Unfunded Mandates Reform Act of 1995 and Executive Order
12866. These directives require federal agencies to analyze the
economic effects of rules that may impose annual costs on the
government or private entities of more than $100 million. In addition
to reviewing EPA, OMB, and other federal requirements and guidance on
conducting economic analyses of proposed rules, we reviewed two
additional EPA analyses of the final rule's effects, as well as
documents from environmental groups, industry trade associations, and
other interested parties related to the costs and benefits of the final
rule. Furthermore, we met with the NSR program manager within EPA and
other senior officials within the agency's Office of Air Quality
Planning and Standards. We also met with senior OMB staff responsible
for reviewing EPA's analysis within the Office of Information and
Regulatory Affairs.
To respond to the second objective, we reviewed information provided to
EPA by outside organizations that the agency relied on in preparing its
findings on the NSR program's effects on energy efficiency projects at
industrial companies. This information consisted of written comments,
case-specific examples of foregone energy efficiency projects, and
supplemental documentation submitted to EPA by individual firms,
industry trade associations, and environmental advocacy groups during
EPA's public comment period. We obtained documents through the EPA
public docket A-2001-19, and directly from those companies and
organizations who submitted information to EPA. We also obtained
documents or conducted interviews with parties identified by EPA as the
primary data sources underlying its energy efficiency findings,
including representatives of the American Chemistry Council, the
American Forest and Paper Association, the American Petroleum
Institute, the American Public Power Association, British Petroleum,
Detroit Edison, Duke Energy, the Edison Electric Institute, Excel
Energy, Exxon Mobil, the National Coal Council, and the National
Petrochemical & Refiners Association. Once we obtained anecdotes
provided by the parties EPA identified as its primary data sources, we
removed those that did not pertain to the NSR program's effects on
energy efficiency as well as those that did not provide sufficient
information for analysis. We then reviewed the 69 remaining anecdotes
to assess their anticipated effects on emissions. We did not
independently verify the factual basis of the anecdotes. We also spoke
with the Natural Resources Defense Council, a national environmental
advocacy organization that disputed EPA findings. Finally, we spoke
with the NSR program manager within EPA and another official within the
agency's Office of Air Quality Planning and Standards who were
responsible for the Report to the President.
We conducted our work between August 2002 and August 2003 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix I: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
John B. Stephenson (202) 512-3841 Eileen R. Larence (202) 512-6510:
Acknowledgments:
In addition to the individuals named above Tim Guinane, David Hancock,
and Michael Hix made key contributions to this report. Nancy Crothers,
Karen Keegan, Jeffrey Larson, Judy Pagano, Lisa Turner, and Laura
Yannayon also made important contributions.
FOOTNOTES
[1] The thresholds for these so-called major modifications--physical or
operational changes that cause a significant increase in emissions--
vary by pollutant and the air quality status of the area in which a
facility is located.
[2] OAQPS Economic Analysis Resource Document, U.S. Environmental
Protection Agency, Office of Air Quality Planning and Standards
Innovative Strategies and Economics Group, April 1999.
[3] Ozone forms when nitrogen oxides react with volatile organic
compounds in the presence of heat and sunlight.
[4] EPA also relied on an analysis of flexible permitting programs as
part of the basis for the agency's findings regarding the benefits of
plantwide emissions limits.
[5] Under section 312 of the Clean Air Act, EPA periodically reports on
the overall costs incurred and benefits achieved under the act.
However, in fulfilling this requirement, the agency generally provides
a comprehensive assessment of such impacts and does not provide a
breakout of the costs and benefits of individual programs under the
act.
[6] This analysis was summarized in an October 2001 EPA memorandum,
Benefits of the Prevention of Significant Deterioration Program.
[7] During the first 3 years of implementation, the final rule will
only affect regulatory agencies and companies in jurisdictions that
meet the federal air quality standards. According to EPA, about 10 to
12 percent of all affected companies are located in such areas. Other
jurisdictions are not required to revise their NSR programs to
accommodate the final rule until 2006. Therefore, the final rule is not
expected to impose costs on regulatory agencies and companies in these
areas until 2006.
[8] According to DOJ, EPA has also received eight formal petitions
seeking to have EPA reconsider the NSR final rule. In addition to the
parties identified above, four air quality agencies within the state of
California, and the state itself have formally requested that EPA
reconsider the final rule.
[9] Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Rhode Island, and Vermont were the original
petitioners. A tenth state, Pennsylvania, filed a petition for review
on January 28, 2003.
[10] This report does not address the merits of the claims made by the
litigants in these cases.
[11] Forty tons per year is the threshold for emissions of nitrogen
oxides, sulfur dioxide, and volatile organic compounds in areas with
good air quality, but the level can be lower in areas with poorer air
quality.
[12] The anecdotes did not always include sufficient information to
determine the magnitude of anticipated emissions changes after
completing an energy efficiency project.
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