1. Clean Air Interstate Rule (CAIR) Reducing Regional Transport of Emissions and Helping States Achieve the PM2.5 and Ozone NAAQS Beth Murray Clean Air Markets Division May 2005

2. Areas Designated Nonattainment for Ozone and PM 2.5 NAAQS in 2004 Nonattainment areas for both 8-hour ozone and fine particle pollution Nonattainment areas for fine particle pollution only Nonattainment areas for 8-hour ozone pollution only 126 ozone nonattainment areas with 474 counties 47 PM 2.5 nonattainment areas with 224 counties

3. Electric Power Generation: A Major Source of Emissions Source: SO 2 and NOx data is from EPA’s 2003 National Emissions Inventory. “Other” sources of pollutants include transportation and other mobile sources and industrial sources. SO 2 Emissions Total: 15.9 Million Tons Total: 20.8 Million Tons 10.9 Million Tons 5.0 Million Tons 4.5 Million Tons 16.3 Million Tons NOx Emissions 69% Power Sector Other 31%

4. The CAIR Approach Determine if a significant contribution is projected from individual states on ozone and PM nonattainment in 2010, to define geographic boundaries covered by the rule. Analyze sources of highly cost effective reductions of SO 2 (for PM 2.5 ) and NOx (for PM 2.5 and ozone). Create a two-phase program with declining emission caps for NOx in 2009 and 2015, and for SO 2 in 2010 and 2015 based on application of highly cost effective controls to large EGUs.. Develop an emissions budget for each state that chooses to achieve it emission reduction requirements based on reductions from EGUs. Create parallel emission reduction targets for States that choose to control other source categories. Create an optional cap-and-trade program similar to current Acid Rain Program for SO 2 (Title IV) and the NO x SIP call.

5. Summary of Regionwide Caps and Timing CAIR implements a two-phase NOx and SO 2 emission reduction program with declining caps, affecting a total of 28 States and DC. Regionwide caps are as follows (assuming all States choose to obtain reductions by controlling only EGUs): –SO 2 annual caps: 3.6 million tons in 2010 and 2.5 million in 2015 Affects 23 States and DC –NOx annual caps: 1.5 million tons in 2009 and 1.3 million in 2015 Affects 23 States and DC –NOx ozone season caps: 0.6 million tons in 2009 and 0.5 million in 2015 Affects 25 States and DC

6. CAIR: Affected Region and Emission Caps Emission Caps* (million tons) 2009/2010 2015 Annual SO 2 3.6 2.5 (2010) Annual NOx 1.5 1.3 (2009) Seasonal NOx.58.48 (2009) * For the affected region. States controlled for fine particles (annual SO 2 and NOx) States not covered by CAIR States controlled for ozone (ozone season NOx) States controlled for both fine particles (annual SO 2 and NOx) and ozone (ozone season NOx)

7. Nationwide SO 2 Emissions from the Power Sector Source: EPA * The caps and emissions reflected here, beginning in 2010, reflect region-wide CAIR data. The Title IV cap and emissions (2009 and prior) reflect nationwide data.

8. Ozone and Fine Particle Nonattainment Areas (March 2005) Projected Nonattainment Areas in 2010 after Reductions from CAIR and Existing Clean Air Act Programs Projections concerning future levels of air pollution in specific geographic locations were estimated using the best scientific models available. They are estimations, however, and should be characterized as such in any description. Actual results may vary significantly if any of the factors that influence air quality differ from the assumed values used in the projections shown here. Ozone and Particle Pollution: CAIR, together with other Clean Air Programs, Will Bring Cleaner Air to Areas in the East - 2010 Nonattainment areas for both 8-hour ozone and fine particle pollution Nonattainment areas for fine particle pollution only. Nonattainment areas for 8-hour ozone pollution only 104 ozone nonattainment areas with 408counties 43 PM 2.5 nonattainment areas with 211 counties 14 ozone nonattainment areas 20 PM 2.5 nonattainment areas

9. Ozone and Fine Particle Nonattainment Areas (March 2005) Projected Nonattainment Areas in 2015 after Reductions from CAIR and Existing Clean Air Act Programs Projections concerning future levels of air pollution in specific geographic locations were estimated using the best scientific models available. They are estimations, however, and should be characterized as such in any description. Actual results may vary significantly if any of the factors that influence air quality differ from the assumed values used in the projections shown here. Ozone and Particle Pollution: CAIR, together with other Clean Air Programs, Will Bring Cleaner Air to Areas in the East - 2015 Nonattainment areas for both 8-hour ozone and fine particle pollution Nonattainment areas for fine particle pollution only Nonattainment areas for 8-hour ozone pollution only 104 ozone nonattainment areas with 408 counties 43 PM 2.5 nonattainment areas with 211 counties 5 ozone nonattainment areas 14 PM 2.5 nonattainment areas

10. EPA has designed 3 model rules that States may choose to use to implement the mandated CAIR reductions States can participate in one or more of the EPA- administered cap and trade programs States that wish to participate in the EPA-administered cap and trade programs must use the model rules, with a few exceptions. These exceptions include : –Allocation of CAIR NOx allowances. –Choice to include the model rule individual unit opt-in provision. –Option to include existing NOx SIP Call trading units in ozone season program The model rules parallel the existing NOx SIP Call model trading rule structure and are designed to work with the Acid Rain program CAIR Model Rules

11. General Overview of the Model Rule Requirements Require Part 75 monitoring for all sources for SO2 and NOx emissions –Part 75 was not modified in this rulemaking. All current monitoring options and procedures continue to apply as in the NOx SIP Call and Acid Rain Programs Allowances cannot be traded between annual and ozone season NOx programs and there is no interpollutant trading Allowance transfers, allowance holdings, permitting procedures, etc. are like the NOx SIP Call

12. What elements of the trading programs differ from program- to-program or allow State flexibility? CAIR SO2 Program –Acid Rain Program Changes –Retirement Ratios and Compliance CAIR Ozone-season NOx Program –Applicability and Non-EGUs –Early Reduction Mechanism CAIR Annual NOx Program –Early Reduction Mechanism CAIR NOx Allowance Allocations Differences in the 3 model rules

13. Achieve CAIR SO2 reductions and Preserve integrity of Acid Rain program. Use Acid Rain program allowances for CAIR SO2 trading program and retire allowances at a ratio greater than 1 to 1 in CAIR states –This necessitates coordination/alignment of Acid Rain and CAIR SO2 trading rules Design Goal Solution CAIR SO2 Program: Design

14. Effective 7/1/2006 Many changes throughout rule to allow source-level compliance and eliminate unit accounts Certification language (for submissions) aligned with CAIR Eliminates requirement for compliance certification report Eliminates newspaper notice requirements for DR/ADR selection CAIR SO2 Program and the Acid Rain Program Rule Changes

15. CAIR annual SO2 emission reductions achieved by requiring CAIR sources to retire title IV SO2 allowances at a ratio greater than one. –A “vintage year” is the first year in which an allowance can be used -- it is not the year in which a source uses it. –“CAIR SO2 Allowance” definition specifies different values based upon vintage years: A compliance requirement, not a restriction on trading. Retirement ratios do not apply to title IV sources outside the CAIR region. CAIR SO2 Program: Retirement Ratios and Compliance Vintage year… Authorizes… Implementing a ratio of… Pre-2010 SO2 allowance 1.00 tons of SO2 emissions 2010 – 2014 SO2 allowance 0.50 tons of SO2 emissions 2.00 - to - 1 2015 and Beyond SO2 allowance 0.35 tons of SO2 emissions 2.86 - to - 1

16. Applies to large EGUs only, with exceptions NOx SIP Call States may include all NOx SIP Call trading sources in the CAIR ozone-season NOx program at their NOx SIP Call levels. NOx SIP Call trading program ends in 2009. –NOx SIP Call requirement for States to make emission reductions remains in place. –States not transitioning their non-EGUs into the CAIR ozone- season NOx program would need to achieve these reductions using another approach. CAIR Ozone-season NOx Program: Applicability and Non-EGUs

17. Title IV SO2 allowances may be used for compliance with the CAIR SO2 program. –Pre-2010 vintage years at 1 – to – 1 ratio. CAIR SO2 Program: Early Emission Reduction Mechanism Can sources use NOx SIP Call allowances for compliance? CAIR ozone-season NOx program Yes CAIR annual NOx program No Pre-2009 NOx SIP Call allowances may be used for compliance with the CAIR ozone-season NOx program. CAIR Ozone-season NOx Program: Early Emission Reduction Mechanism

18. Compliance Supplement Pool (CSP) –Patterned after the NOx SIP Call CSP. –200,000* CAIR annual NOx allowances of vintage 2009. –States can distribute CSP allowances based upon early emission reductions or on a “need” basis. –Qualifying early reductions take place in 2007 and 2008. –No restrictions on use of CSP allowances. * 200,000 total allowances includes the 1,503 Allowances that are the NJ and DE share of the CSP CAIR Annual NOx Program: Early Emission Reduction Mechanism

19. Summary of Use of Model Rules Unique aspects –For CAIR SO2 program, Title IV SO2 allowance retirement ratios. –For all programs, Early Emission Reduction Incentives are provided by unique mechanisms. Flexibility –For CAIR ozone season NOx Program, States may include NOx SIP Call trading sources. –For both CAIR NOx programs, States may develop their own approach to allocate NOx emission allowances or use the example approach of the model rule –For any program, States may include the opt-in provisions in the model rules

20. CAIR Implementation Timeline Phase I : CAIR NOx Programs (ozone-season and annual) (09) Phase I : CAIR SO2 Program (10) States develop SIPs (18 months) SIPs Due (Sep 06) CSP Early Emission Reduction Period (annual CAIR NOx program) (07 and 08) NOx Monitoring and Reporting Required (08) SO2 Monitoring and Reporting Required (09) Phase II : CAIR NOx and SO2 Programs Begin (15) Early Reductions for CAIR NOx ozone-season program and CAIR SO2 program begin immediately because NOx SIP Call and title IV allowances can be banked into CAIR Note: Dotted lines indicate a range of time. 050607 08 09101213141115 CAIR Rule signed