Full text of Chicago Fed Letter : Urban Ozone Regulations, No. 71

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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

JU L Y 1993
N U M B E R 71

Chicago Fed Letter
U rban ozone regulations
The 1990 Amendments to the federal
Clean Air Act require that metropoli­
tan areas exceeding allowed levels of
ozone must take corrective action to
come into compliance. In the Mid­
west, the Chicago, Milwaukee, and
northwest Indiana areas have been
designated among the nation’s worst
offenders, rating a “severe” classifica­
tion. The Chicago area, for example,
must reduce its ozone-causing emis­
sions by 15% before 1996 and make
further reductions of 3% per year
through the year 2007. Other Midwest
areas with “moderate” cleanup prob­
lems include Detroit, Lansing, and
Muskegon, Michigan; Sheboygan,
Wisconsin; and East St. Louis, Illinois
(see figure l) .1
The 1990 Amendments specify a vari­
ety of actions that all nonattainment
areas must take towards compliance.
Additionally, by November 1994, states
with nonattainment areas must design
their own plans for achieving further
ozone reductions, if necessary, to come
into compliance. In developing these
plans, states have considerable latitude
to decide which sources and activities
to control.
By the year 2010, all urban areas in the
country must meet air quality stan­
dards as set by the U.S. Environmental
Protection Agency. Because compli­
ance can be costly, the task of meeting
these standards may significantly affect
the economic well-being of an urban
area or region. This Fed Letter outlines
the compliance choices facing the
Midwest as it embarks on this task.
The ozone problem

Urban ozone, an important ingredient
in smog, is created by a photochemical

reaction in the lower
atmosphere involving
nitrogen oxide (NOx)
and volatile organic
compounds (VOCs).
Most NOx is the prod­
uct of burning fossil
fuels (coal, oil, or
gas)—a process that
occurs regularly in elec­
tric utilities, industrial
furnaces, and automo­
biles. VOCs are pro­
duced by auto emis­
sions, vapors released
during auto refueling,
paints, thinners, and
cleaning solvents.
When heat and sunlight
are present, the combi­
nation of NOx and
VOCs produces ozone.
Ozone is the most ubiq­
uitous air pollutant, plaguing scores of
urban areas throughout the world.
Among other effects, high levels of
ozone are known to impair breathing
and to reduce the yields of several
major cash crops.
The federal government first adressed
the problem of urban air pollution in
1970 with passage of the Clean Air Act
(CAA). Since that time, the nation has
made great strides in air improvement.
Of the six common air pollutants regu­
lated by the CAA (sulfur dioxide,
nitrogen oxides, carbon monoxide,
particulates, lead, and ozone), only
ozone remains a problem shared by
most urban areas.
Congress referred to the health effects
of air pollution in explaining the ratio­
nale behind the CAA. That law man­
dates a standard of air quality that
would provide a margin of safety for
the most health-sensitive individuals.
Some argue that such a standard is too

stringent. Expenditures for envi­
ronmental cleanup may be wasteful
if the costs of abatement are greaterthan the benefits produced. Once
some level of air purity has been
attained, it may be more economical
to pursue alternatives to additional
pollution abatement, such as public
health programs.
Regardless of the continuing debate
over air quality standards, Chicago and
other metropolitan areas must now
address three basic questions regard­
ing ozone control. The first is whether
to comply with the law’s stringent
deadlines and standards. Second,
once areas decide to comply, they
must make tough and highly risky
choices as to which type of emission to
control—NOx or VOCs—and which
firms and activities to target in order to
achieve the required emission reduc­
tions. Finally, policymakers must de­
cide how to control emissions, whether
by applying tried-and-true technology

requirements to all industrial processes,
or by trying innovative programs involv­
ing market-based methods such as emis­
sion allowance trading.
Whether to obey

In 1970 and 1977, the federal govern­
ment passed laws establishing clean air
standards and controls for the nation.
Yet noncompliance has been wide­
spread, and target air standards have
not been met. The 1990 Amendments
to the CAA set stringent timetables for
reducing ozone’s precursors, NOx and
VOCs, and this time, the legislation is
designed to ensure greater compliance.
Compared with earlier laws, the federal
government has now been given signifi­
cantly more power to issue sanctions,
impose penalties, and preempt state
implementation plans if they prove
inadequate.
An additional aid to compliance is the
Intermodal Surface Transportation
Efficiency Act of 1991. This Act sets
aside $155 billion for states to use over
the next six years to develop or improve
any forms of surface transportation
systems, including air-friendly mass
transit systems. Of that amount, $6
billion is earmarked for nonattainment
areas to use in planning congestion
mitigation and air quality improvement.
Which sources to target

ropolitan areas continue to grow, these
remedies alone will probably not re­
duce emissions enough to achieve
target air quality standards in many
urban areas. That is why the 1990
Amendments require states with nonat­
tainment areas to develop their own
plans for achieving additional reduc­
tions. The rationale is that a custom­
ized plan can best address local condi­
tions such as industry composition and
expected growth rates.
To produce these plans, states must
make their own decisions about which
sources and activities to control. One
recent study indicates that the choices
can carry widely differing price tags.2
For instance, controlling VOCs would
cost $3,600 per ton emitted at small
dry cleaners, but only $230 per ton at
large dry cleaners. By comparison, the
technology that has been mandated
for vapor recovery at auto gas pumps
will cost an estimated $1,000 per ton of
VOCs. In targeting sources, states will
naturally want to choose those where
abatement costs are lowest, or market­
place pressures are least intense.
A related set of issues stems from the
complexity of atmospheric transport
and chemistry. An urban area’s ozone
problem is affected by the geographic
distribution of facilities. High NOx
emission in a remote location, for
example, may contribute little to the
area’s problem. Sources upwind from
a city may cause more urban ozone
than downwind sources. To plan effec­
tively for air quality, we need to learn
more about the role of these factors,
for example, by using atmospheric
models of the urban air shed. The
states surrounding Lake Michigan have
formed a consortium to produce such
a model, and the results are to be
made available in the near future.

The 1990 Amendments specify a variety
of technologies and processes that emis­
sion sources must adopt in order to
reduce emissions of NOx and VOCs.
In “severe” nonattainment areas like
metropolitan Chicago, sources emitting
as few as 25 tons of NOx and VOCs
per year will now be regulated; previous­
ly, only sources of 100 tons or more
were targeted. Businesses such as com­
mercial dry cleaners, large housepaint­
ing companies, and some auto body
How to comply—flexibility preferred?
shops will thus be included and will face
the complex maze of environmental
High environmental standards form
regulations for the first time.
the underpinning for the CAA and the
1990 Amendments. Given the magni­
Federally required technology controls,
tude of the mandated task, state and
along with mandated measures on mo­
regional policymakers will need all
bile sources such as automotive fuels
possible flexibility. One of the criti­
and tailpipe standards, will presumably
cisms of national pollution control
reduce urban ozone over time. As met­ policy in the past was that it imposed

the same regulatory conditions on areas
with varying industrial conditions and
hence different costs of complying.
The 1990 Amendments responded to
this criticism by allowing some flexibility.
Presumably, if allowed to choose among
a variety of methods for achieving a
given environmental goal, areas will
pursue the least burdensome and most
promising ones.
Examples of the resulting creativity are
proposals now being considered by the
Illinois Environmental Protection Agen­
cy. Under these proposals, firms would
be given tradable NOx emission allow­
ances, any part of which they could buy
or sell to other firms. Variations of this
approach include letting firms “bank”
emission allowances or lease them to
other firms, and allowing interstate as
well as interurban tradability.
Such proposals may sound like attempts
to create loopholes or to legitimize
“rights to pollute,” but in fact they do
not imply any lowering of environ­
mental standards. Rather, a given level
of air quality can often be achieved at
lower cost through flexible plans than
through fixed, across-the-board regula­
tions. Nevertheless, large-scale ozone
allowance schemes remain unproven.
Administrative and enforcement costs
might exceed the possible gains
achieved by flexibility, especially for
small businesses whose record-keeping
costs might be large in relation to poten­
tial benefits.
Despite the flexibility of the 1990
Amendments, some wonder whether
they grant enough local discretion. In
Chicago and other areas, for instance,
ozone excesses typically occur in spells
of one to three days during the late
spring or summer. Yet the law still does
not allow temporal controls that would
prohibit emission activities only during
ozone-sensitive days. Such schemes have
not yet been fully studied, but they seem
very likely to yield considerable savings
in cost.
Mobile source options

Air quality improvements of the past
have largely been achieved through
technological solutions imposed nation-

ally. This is especially true for trans­
portation emission sources. For exam­
ple, as a result of federally imposed
mileage requirements on auto fleets
and technology such as catalytic con­
verters to reduce emissions per gallon,
autos have become much more fuelefficient (as much as 80% since 1970).
Similarly, most vehicles now on the
highway run on lead-free gasoline.
But while public policy has imposed
technological demands on automakers,
it has largely ignored the actual behav­
iors of individuals, local governments,
and firms. These behaviors underlie
an important recent phenomenon, the
steady increase in the number of vehi­
cle miles traveled (VMT). This in­
crease is the result of development
trends such as Chicago’s, where popu­
lation has grown by only 4% since
1970, while developed land has grown
by 55% (see figure 2). Because of
VMT increase, mobile sources now
contribute between one-third and onehalf of the precursor emissions on days
when ozone standards are exceeded.
Indeed, the rise in VMT has offset the
air quality gains achieved by cleaner­
burning vehicles. Facts such as these
suggest that solving the ozone problem
will require looking beyond techno­
logical fixes.
Accordingly, it is not surprising that
the 1990 Amendments contain many
provisions, both mandatory and flexi­

ble, for mobile sources. One example
is the requirement that by 1994, all
employers in “severe” nonattainment
areas must submit plans by which their
employees will increase the average
passenger occupancy per vehicle
(AVO) in commuting trips between
home and work by 25% above the
current local average. At first glance,
this requirement seems squarely in the
tradition of explicitly detailed man­
dates. Yet flexible compliance may be
feasible. For instance, in a proposal
now being considered by the State of
Illinois, employers that could achieve
increases in AVO above the required
level could “sell” the excess in a local
market. Other employers would “pur­
chase” the excess (and thus be allowed
to fall short of their required AVO
increase) if that cost less than compen­
sating employees for changing their
commuting behavior. Such plans
allow an area to reach its clean air
standards through the efforts of em­
ployers to whom it costs least.
Other flexible programs allow choos­
ing between mobile sources such as
automobiles and stationary sources
such as factories in order to reduce
emissions. Unocal Co. of California
reportedly spent $5 million in Los
Angeles to purchase 8,376 old autos
(“clunkers”), scrap them, and thereby
eliminate 13 million pounds of VOC
and NOx emissions annually. It would
have cost the company an estimated
$150 million to realize the same reduc­
tion at its refinery. Illinois has con­
ducted a pilot study to explore a simi­
lar program.
Conclusion

The question of whether to comply
with ozone regulations has been large­
ly foreclosed; states and companies
now face stiff penalties and foregone
rewards if they do not comply. At the
same time, states and cities now have
greater latitude to chart their own
course for achieving mandated clean
air standards. This latitude does not
imply a lessening of responsibility.
Rather, it requires local policymakers
to gather much information, develop
many ideas, and build the consensus

they will need in order to implement
cost-effective environmental controls.3
—William A. Testa and
Donald A. Hanson
^ h e r e are five prim ary categories o f
o zone n o n a tta in m e n t. T h e 1990 A m en d ­
m en ts to th e C lean Air A ct re q u ire areas
with th e m o st o zo n e p o llu tio n to ad o p t
m o re strin g e n t controls, albeit over lo n g er
allowable p erio d s o f tim e. T h e Los A nge­
les a rea is th e only o n e in th e w orst catego­
ry, “e x tre m e .” T h e rem a in in g categories
are “severe,” “serio u s,” “m o d e ra te ,” a n d
“m a rg in a l.” N o areas w ithin th e b o u n d ­
aries o f th e illustrated m ap are classified
“serious.” O n th a t m ap, “m arg in al” areas
are in ten tio n ally n o t indicated.
2 A. J. K rupnick a n d R. J. K opp, The Health
and Agricultural Benefits o f Reductions in
Ambient Ozone in the United States, R esources
fo r th e F u tu re, W ashington, D.C., 1988.
3As a co n trib u tio n to th e re g io n ’s tasks
o f g a th e rin g in fo rm atio n a n d bu ild in g
consensus, th e F ederal Reserve B ank o f
C hicago h e ld a c o n feren ce in J u n e 1993
th a t b ro u g h t to g e th e r th e n a tio n ’s a u th o ri­
ties o n o zo n e p ro d u c tio n an d control,
alo n g with policym akers, public officials,
h e a lth scientists, a n d business re p re se n ta ­
tives. T h e c o n feren ce focused o n costeffective m ean s fo r u rb a n areas to com ply
with CAA o zone req u irem en ts. Discus­
sions also ad d ressed th e costs o f ozone
a b a te m e n t such as jo b losses, as well as the
benefits to h u m a n health . C o n feren ce
p ro ceed in g s, in clu d in g p ap ers an d discus­
sions, will be available in Fall 1993 from
th e D e p a rtm e n t o f Public Affairs, F ederal
Reserve B ank o f C hicago.

Karl A. S cheld, S en io r Vice P re sid e n t a n d
D irecto r o f R esearch; David R. A llardice, Vice
P re sid e n t a n d A ssistant D irecto r o f R esearch;
J a n ic e Weiss, E ditor.
Chicago Fed Letter is p u b lish e d m o n th ly by th e
R esearch D e p a rtm e n t o f th e F ed eral Reserve
B ank o f C hicago. T h e views ex p ressed are th e
a u th o r s ’ a n d are n o t necessarily th o se o f th e
F ed eral R eserve B ank o f C hicag o o r th e F ed eral
R eserve System. A rticles m ay b e r e p rin te d if
th e so u rce is c re d ite d a n d th e R esearch
D e p a rtm e n t is p ro v id ed w ith co p ies o f th e
rep rin ts.
Chicago Fed Letter is available w ith o u t ch arg e
fro m th e P ublic In fo rm a tio n C e n te r, F ed eral
R eserve B ank o f C hicago, P.O . Box 834,
C hicago, Illinois, 60690, (312) 322-5111.

ISSN 0895-0164

Midwest in April and May. This small loss of momentum followed a slowdown in
consumer spending growth in the weather-depressed first quarter. At the same
time, heightened political uncertainty may have led survey respondents to make
gloomier assessments than they would have otherwise.
More recently, automakers have responded to strengthening in consumer de­
mand with significantly increased production plans for the third quarter. The
outlook for the motor vehicle sector, new improvement in some other industries
that have been weak for some time (notably construction and agricultural ma­
chinery) , and a modest revival in consumer spending all point to increased indus­
trial output in the Midwest in the months ahead.

(M M I) is a co m p o site in d e x o f 15 in d u stries,
b ased o n m o n th ly h o u rs w o rk ed a n d kilow att
h o u rs. IP re p re se n ts th e FRBB in d u strial p ro ­
d u c tio n in d e x fo r th e U.S. m a n u fa c tu rin g sec­
tor. A utos a n d lig h t trucks are m e a su re d in a n ­
n u a liz e d physical units, u sin g seaso n al ad ju st­
m e n ts d e v elo p ed by th e F ed eral Reserve B oard.
T h e PMA in d e x fo r th e U.S. is th e p ro d u c tio n
c o m p o n e n ts fro m th e N PM A survey a n d fo r th e
M idw est is a w eig h ted average o f th e p r o d u c ­
tio n c o m p o n e n ts fro m th e C hicago, D etro it,
a n d M ilw aukee PMA survey, w ith assistance
fro m B ishop Associates a n d C om erica.

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