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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO JANUARY 1995 NUMBER 89 Chicago Fed Letter Complying with the Clean Air Act Amendments of 1990: A progress report The passage of the Clean Air Act Amendments of 1990 (CAAA) has encouraged states to develop creative im plem entation plans in order to meet the am bient air quality stan dards that the act requires. In re sponding to this challenge, state regu lators throughout the nation and particularly in the Midwest have devel oped a host of new programs de signed to improve air quality while mitigating the economic costs of stricter compliance requirements. These programs range from marketbased trading of emission credits to more traditional regulatory programs of the command-and-control variety. This Chicago Fed Letter examines programs underway to improve air quality in the Midwest and provides an update on the progress of these programs. We discuss some of the initial problems that have surfaced as well as ways in which they are being addressed. In particular, we assess the progress to date in establishing emissions trading markets for point sources—a keen focus of state regula tors in the search for creative ways of reducing emissions. Finally, we briefly explore the potential for devel oping regional, multi-state strategies for attainm ent. How to meet the air standards? One of the key challenges in meeting the requirem ents of the CAAA is de signing programs that reflect the multitude of sources and types of pollutants being targeted for reduc tions. Figure 1 shows the sources of three major types of pollutants— volatile organic compounds (VOCs), nitrogen oxide (NOx), and carbon m onoxide (CO)—for the area sur rounding southern and central Lake Michigan. Pollution is measured in tons emitted per day by source catego ry. T he three main categories distin guished are point sources (for exam ple, a smokestack of a power plant), area or non-point sources (such as bakeries, dry cleaners, or lawnmowers), and mobile sources (such as highway and off-highway vehicles, locomotives, aircraft, and marine engines). An effective strategy' for achieving the required improvements in air quality must reflect this underly ing distribution of pollutants across sources. That explains the wide range of program s states are debating to achieve compliance. In addition, state programs are trying to account for the geographic distribution of pollution as well as the atmospheric conditions that cause pollution prob lems to vary from day to day. ■ ■ ■ pares with $3,000 to $5,000 to achieve the same reduction from point sources. ■; 1. Emissions s< ■ ■' ' ■ - - ■ ■ Lake Michigan region VOCs (3,800 TPD)* NOx (2,400 TPD) P rogram s fo r m obile sources Mobile sources, particularly autom o biles, are major contributors to each of the three classes of pollutants (see figure 1). Programs to address mobile source emissions are only beginning to receive the degree of regulator}' scrutiny and innovative design that point source programs have. Those now being considered include ■ reform ulated gasoline programs to offer cleaner-burning fuels for cars. ■ enhanced state inspection pro gram s to verify periodically that emissions of individual cars are below designated levels. ■ “cash for clunkers,” a program to purchase and remove from service high-em itting cars and trucks built before 1982. Illinois state officials estimate that such a program could elim inate VOCs or NOx at a cost of about $2,500 per ton. That com CO (11,000 TPD) * Tons emitted per day. Source: Lake Michigan Air Directors Consortium, Ozone Modeling in the Lake Michigan Region, January 27, 1994. ■ the employee commute options or ECO program. This program would reduce the num ber of cars on the road during rush hour by working with employers to create new com m uting options for their employees. The program is targeted at large employers (single facilities employ ing more than 100) and aims to increase the num ber of passengers per car from the current 1.09 to an average of 1.36 for the severe nonattainm ent area in northeast ern Illinois by 1998. According to projections, this would reduce the num ber of cars traveling to work at rush hour by 25% from the cur rent num ber. Program s fo r p o in t sources Emissions trading programs use mar ket-based incentives to induce firms to reduce emissions through flexible, firm-specific methods. Such pro grams enable firms to minimize the cost of compliance; they also reduce the regulatory agency’s burden, since the agency need no longer select appropriate technologies for the vari ous industries. Trading programs are designed to reward firms that can reduce emissions beyond what they would achieve by using reasonably available control technology (RACT) or best available control technology (BACT), two standards requiring firms to use very specific technologies. Among Seventh District states, Wis consin has an emissions trading pro gram in place for both VOCs and NOx. Michigan and Indiana are now working to develop similar programs.1 Illinois unveiled a NOx trading pro gram in January 1994. However, in response to evidence from regional airshed m odeling, efforts since then have concentrated on developing a trading program for VOC emissions instead. Shortcomings of proposed programs Mobile source programs to date have proven to have limited effectiveness. Technical standard regulations, such as California’s low-emission vehicle program enacted in 1990, require auto producers to install emissionreducing technologies.2 But the am ount of emissions produced is a function of both the technology of the automobile and the public’s de m and to drive. In fact, increased use of the automobile has outweighed improvements in emissions control technology' for some time. In addi tion, most mobile source reduction programs target a relatively small portion of the driving public, so the resulting reductions in emissions are small and the potential costs to those who must comply are relatively large. For example, the ECO program re quires employers with 100 or more employees in 10 severely polluted regions to design schemes for reduc ing solo driving by commuting em ployees. However, commuting ac counts for only about one-third of miles driven. Furtherm ore, 88% of businesses employ fewer than 100 people.3 So too, the “cash for clunk ers” program, while cost-effective and highly successful, yields a limited reduction in pollutants that will be exhausted once most of the highem itting cars have been retired. Point source regulation still needs to address several issues despite the fact that much effort has been spent on developing large-scale trading pro grams. The primary problem is that the science of pollution formation and the wishes of regulators do not always coincide. Local violations of the federal ozone standards are often the result of complex interactions am ong many different factors. For example, high ozone concentrations are the product of the am ount of sunlight, the extent of regional air transportation, the quality of air com ing into the area, and the relative presence of various pollutants. To determ ine whether reducing a partic ular class of pollutant will help an area achieve compliance with CAAA standards, states have examined the conditions that existed on days when the ozone standard was exceeded. Sophisticated modeling of such data may only begin to answer questions such as how much control of particu lar pollutants from particular sources under particular meteorological condi tions is needed to prevent future ozone exceedances. In the Great Lakes region, the Lake Michigan Air Directors Consortium has conducted what is referred to as th*e Lake Michigan Ozone Study (LMOS). The study’s findings to date dem onstrate the complexity of mesh ing the science of air pollution with the implementation of regulatory' programs. LMOS is examining four different historic episodes in which ozone levels were exceeded in an area that roughly bounds the land adjacent to the lower twro-thirds of Lake Michi gan. Simulations of the effects of re ducing NOx and VOC emissions have been performed for two of the epi sodes. Regulators have been designing program s to implement NOx trading as an innovative method for complying with ozone standards. But in the two LMOS simulations, it was found that a significant reduction (30%) in NOx emissions would not have been enough to prevent the allowable ozone level of 120 parts per billion (ppb) from being exceeded. In fact, in one case, such a reduction would actually have increased the ozone concentra tion over much of the Chicago and southern Wisconsin area. This is be cause once NOx emissions pass a cer tain threshold, they can have a scav enging effect on the atmosphere, that is., reduce the ozone level. Tfiese results suggest that one needs to control both NOx and VOCs in order to achieve compliance with CAAA standards. Instead of the originally developed NOx trading program, Illinois EPA is currently putting the final touches on a program for trading VOC emissions.4 Unfortunately, one cannot simply rewrite the old proposal by substituting one pollutant for an other, since not all types of emissions lend themselves equally well to trad ing. For example, only 15% of VOCs are generated by point sources, with a large percentage coming from socalled area sources, which include such everyday activities as using paint. Fnrther complicating VOC trading, there are different types of VOCs, some of them toxic. This raises the ments of the CAVA of 1990. N one limited to a small num ber of large theless it is clear that many challenges emitters within one nonattainm ent remain. While it is extremely difficult area. This problem could be rem e to address all of the various causes died if firms could trade with other of air pollution, it is im portant to firms in other nearby nonattainm ent A regional solution to a pursue innovative, incentive-based areas. Some have even suggested that regional problem? programs in order to reach the goal under certain conditions, firms Air emissions regulation also must of cleaner air. should be allowed to trade with firms address what is referred to as a bound in attainm ent areas. —Thomas Klier and ary problem —the fact that air is a Richard M attoon Ironically, the disappointing finding transportable element whose quality about the potential benefits of local can be affected by upwind sources. In NOx reductions may actually facilitate An offset program allows new sources to the Chicago area, for instance, the regional cooperation. Illinois’s EPA locate in nonattainment areas only if quality of the inherited air is often director has suggested that a single they can “offset” their emissions by re quite poor. The two ozone-exceed state strategy for meeting ozone at ducing emissions from existing sources, ance episodes examined in LMOS tainm ent would require extreme steps generally by a factor greater than one. found the quality of air coming into such as controlling sources that em it the Chicago area to be only m arginal as little 2Under that program, California also one ton—dry cleaners, for ly below the standard used to indicate instance.as This requires auto manufacturers to sell a is because ozone levels a violation of the federal ozone con certain percentage of so-called zerothe state are already high. centration level. This also means that entering emission, that is, electric, vehicles start By agreeing to adopt a joint strategy ing in 1998. areas that produce little pollution of Midwest states might avoid their own can be in violation of ozone instead, having to regulate very small sources 3Caleb Solomon, “Head-on collision,” standards primarily because they in at considerable cost. States have until Wall StreetJournal, September 8, 1994, herit poor air from elsewhere. A p. Al. Evidence from California’s April 1996 to submit such regional good example of this is the second regulation XV, a ride-sharing program plans. Since many midwestern states episode examined by LMOS. Be implemented in 1988, indicates only missed the November 15, 1994 dead tween July 16 and 19, 1991, Sleeping very small increases in average vehicle line for filing their attainm ent dem Bear Dunes National Lakeshore in occupancy at a cost between $10 and $86 onstrations, regional cooperation central Michigan recorded an ozone per employee (Martin Wachs, “Clean be the best way to avoid the level of 170 ppb even though the area may air and transportation: California’s at penalty of having federal highway tempt to regulate commuter behavior,” has few emissions sources. funds withheld. lecture at Northwestern University, Because air quality does not respect March 4, 1994). Setting up regional structures at this state or municipal boundaries, those time seems particularly im portant if who wish to control it must consider a viable 4A draft proposal was prepared by Illinois lasting market trading EPA with assistance from the volatile regional, multi-state, or even national systemsand are to be established. Markets organic materials trading design team approach. Such an approach was best when rules and regulations and was released in October 1994. chosen on the east coast, where twelve work are clearly defined and understood. states and the District of Columbia multi-state regional market seems have set up a regional body called the Ifanaoption worth pursuing, it makes Ozone Transport Commission in an sense to set up market rules that are effort to establish some shared rules compatible state lines. This HHHHI HIHHHIIHHHHIHHHHHi and criteria to perm it emissions trad may includeacross agreeing such m un David R. Allardice, Vice President and Director ing in a multi-state market. Steps like dane issues as the uniton of emissions to of Regional Economic Programs and Statistics; this may go a long way toward reduc Janice Weiss, Editor. be used for trading purposes, the ing the aggregate cost of compliance, lifespan of reduction credits, and Chicago Fed Letter is published monthly by the the since according to current Clean Air Research Department of the Federal Reserve permissibility of trading or banking Act rules, a downwind state that inher credits. Making sure now that individ Bank of Chicago. The views expressed are its poor quality air nevertheless must the authors’ and are not necessarily those of ual state markets are compatible can the Federal Reserve Bank of Chicago or the rigorously control emissions within its help keep regional markets a viable Federal Reserve System. Articles may be jurisdiction to ensure compliance. reprinted if the source is credited and the possibility. Research Department is provided with copies In regard to emissions trading pro of the reprints. grams, an additional advantage to a Conclusion Chicago Fed Letter is available without charge multi-state regional approach is that it from the Public Information Center, Federal This overview has shown states to be would increase the num ber of poten Reserve Bank of Chicago, P.O. Box 834, inventive in designing programs to tial trading partners for each nonat Chicago, Illinois, 60690, (312) 322-5111. comply with the emissions require tainm ent area. Typically, trading is ISSN 0895-0164 question of whether trading would need to be restricted within specific types of VOCs. ' Midwes Manufacturing output indexes (1987=100) Aug. Month ago Year ago 133.2 MMI IP 119.4 Motor vehicle production (millions, seasonally adj. annual rate) Oct. Cars 6.4 Light trucks 5.0 Month ago Year ago Purchasing managers’ surveys: net % reporting production growth MW U.S. Nov. Month ago 66.8 67.7 64.1 66.1 Year ago 1991 With 1994 drawing to a close, Midwest m anufacturing output continues to expand at a brisk pace. The composite production index for purchasing m anagers’ surveys in Chicago, Detroit, and Milwaukee has been slowly trend ing downward in recent m onths, but only after reaching dramatically high levels in the second quarter. The Chicago survey showed a somewhat faster rate of growth in output in November, while the Milwaukee and D etroit sur veys dipped slightly. However, these diffusion indexes continue to point to vigorous growth in the region’s industrial output, and at a somewhat faster pace than the national average. 1993 1994 Sources: The Midwest Manufacturing Index (MMI) is a composite index of 15 industries, based on monthly hours worked and kilowatt hours. IP rep resents the Federal Reserve Board industrial pro duction index for the U.S. manufacturing sector. Autos and light trucks are measured in annualized units, using seasonal adjustments developed by the Board. The purchasing managers’ survey data for the Midwest are weighted averages of the sea sonally adjusted production components from the Chicago, Detroit, and Milwaukee Purchasing Man agers’ Association surveys, with assistance from Bishop Associates, Comerica, and the University of Wisconsin-Milwaukee. I l l 9~ZZ£ (Zl£) PS80D6909 siouim ‘oSeoiio xog O d J91U33 uopBuiaojiq Diiqnj OOV3IHD iO'HNVS TUI3SM TV33CI33 iD T P q p q j o § U 3 iq 3
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