The arcane subject of "New Source Review" (NSR) under the Clean Air Act has been thrust front and center again by a sensational recent cover story in the New York Times Magazine ("Changing All the Rules," April 4, 2004). The story sheds more heat than light on this complicated subject and offers a good case study of both policy confusion and poor media coverage of environmental topics. Moreover, it appears that NSR is going to be the red herring environmental issue for this year's presidential campaign.
"New Source Review" (NSR), an arcane aspect of the Clean Air Act of 1977, is the issue that will not die. NSR is a misnomer, as it applies to old sources of emissions, especially coal-fired power plants, which generate half of America's electricity. When strict new power plant emissions standards were being written into the Clean Air Act of 1977, Congress recognized that requiring all existing plants to meet the tough new emission standards would be prohibitively costly and would have imposed massive rate hikes on electricity consumers (i.e., voters), since power plant costs are passed along to ratepayers. It was assumed, however, that there would eventually be large gains as new power plants with the latest emissions-reduction technology replaced the old coal plants over the next twenty to thirty years. It was also thought this would make air quality upgrades affordable by spreading out the massive capital costs. Hence, existing power plants were "grandfathered," or exempted from meeting the new standards that would apply to all newly built power plants. (Being "grandfathered," however, is misleading, as most coal-fired power plants have employed various emission control technologies as a means of complying with declining emissions caps of the acid rain provisions of the Clean Air Act of 1990.)
Interpreting New Source Review
In the real world, however, the electric utility industry has found ways of extending the life of old power plants through equipment upgrades, fuel switching, and other techniques. These changes generally do not increase emissions; to the contrary, in most cases greater plant efficiencies reduce emissions. NSR is supposed to provide regulatory oversight to this dynamic evolution: if a power plant is merely performing "routine maintenance," its "grandfathered" status remains in place, but if it engages in "substantial modifications," then it trips the threshold to be considered a "new source" and therefore must meet the strict new source emissions standards.
This sounds simple and straightforward, but it has proved in practice to be anything but. To the contrary, applying NSR has been so complicated that the EPA has issued over four thousand pages of guidance on NSR compliance, which ought to be the first sign of a bureaucratic morass. Take the simplest example: if a power plant replaces an old, worn out turbine with a newer, more efficient model that increases power output (probably with lower emissions), does that constitute "routine maintenance," or does that constitute a "substantial upgrade"? The answer is not clear, and that leads to the perverse outcome that existing power plants may be better off by not buying new, more efficient components to replace worn out parts.
Environmentalists make the cogent argument that a lenient interpretation of NSR could allow coal-fired power plants to rebuild facilities by degrees from the inside out by calling it "routine maintenance," and thereby to evade complying with strict new source emissions standards. On the other hand, retrofitting existing power plants to meet the full new emission standards can be very costly, running sometimes into the hundreds of millions of dollars for a single power plant. In some cases, applying new source emission standards would compel a plant to shut down (which may have been the real object of the Clinton administration's NSR policy). It is understandable that power companies would resist falling into the maw of NSR, especially given the reluctance of many state public utility commissions to approve the rate hikes necessary to amortize the capital cost. The NSR process has become extremely cumbersome, requiring an average of eight months to process through the EPA.
Almost no one besides environmental policy geeks had ever heard of NSR before George W. Bush became president, but in fact there has been longstanding general unhappiness with NSR, so much so that several of the changes the Bush administration is making were first developed early in the Clinton administration. In 2001, the Progressive Policy Institute, the think tank arm of the Democratic Leadership Council, published a study that called for abolishing NSR completely and replacing it with an emissions-trading program that sounds more or less like President Bush's Clear Skies proposal. And the recent National Academy of Sciences report, Air Quality Management in the United States, concluded among other things that air quality policy should "emphasize results over process, create accountability for results," "dynamically adjust and correct the system as data on progress are assessed," and "expand use of performance-oriented, market-based multi-pollutant control strategies," which sounds roughly like what is proposed in Clear Skies.
Starting in 1999, the EPA changed course dramatically and decided to adopt a narrow interpretation of NSR, and began suing electric utilities for supposedly having evaded the law for more than twenty years. Suddenly the EPA took the position for the first time that actions previously regarded as "routine maintenance" were now considered "substantial upgrades" that tripped NSR; for example, the EPA now claimed that replacing turbine blades constituted an "upgrade." Lawsuits against about twenty utility companies were filed; one of the EPA's targets, notably, was the Tennessee Valley Authority, not an investor-owned utility but a not-for-profit arm of the federal government. That a power-generating unit of the federal government ran afoul of NSR and resisted the EPA should be additional evidence that NSR is not a simple, black-and-white issue. In addition to filing lawsuits, the EPA extended its new interpretation retroactively, arguing that the utility industry had been evading the law that the EPA had not hitherto defined in such a way for more than twenty years, and threatened millions of dollars in retroactive fines if the industry did not settle on the EPA's terms. This would seem to be the regulatory equivalent of Luca Brazzi saying, "Nice little industry you have here--shame if anything happened to it." The disputes and litigation over NSR might well be considered the environmental equivalent of the protracted antitrust litigation against big firms such as IBM in the 1960s and 1970s, which the federal government largely abandoned as it became clear these antitrust actions were unproductive.
Hyperbolic Response to Proposed Changes
Environmentalists are in high dudgeon over the Bush administration's proposed changes to NSR, emitting breathless claims--pun intended--that the Bush administration is virtually repealing the Clean Air Act. (In fact, NSR statutory language amounts to no more than a few pages out of hundreds comprising the various iterations of the Clean Air Act and was long considered an ancillary feature of the Act. Several other provisions of the Clean Air Act include progressively declining emission caps that the industry must observe.) This kind of hyperbole is to be expected from activist groups. For some unfathomable reason, what should be a narrow controversy of regulatory policy has become a subject of immense fascination with the media, and the media have generally served as a megaphone for the environmentalist complaint rather than applying the usual discount rate to activist group claims. Meanwhile, the proposed changes are in limbo owing to an injunction from a federal judge, pending the outcome of a lawsuit from several northeastern states.
The latest installment in this saga was Bruce Barcott's article, "Changing All the Rules," in the New York Times Magazine on April 4. A more accurate title would have been, "Changing All the Rules, Ignoring All the Facts." The trouble with the piece begins with the cover photo, which showed a smokestack of a coal-fired power plant in Cheshire, Ohio, belching forth an enormous cloud of steam. To be sure, coal-fired power plants can emit large amounts of sulfur dioxide (SO2) and nitrogen oxides (NOx), but these emissions come out of smokestacks mostly clear--chiefly because of other basic emission control requirements in effect--which would not make for a captivating magazine photo. (The steam in the photo is the water vapor run through the power turbines.)
The article, like most covering NSR and other air quality controversies, fails to provide any context about air pollution trends. It never mentions that both emissions from the electric utility industry and ambient levels of SO2 and NOx have been falling steadily over the last fifteen years, during the same period that Barcott says electric utilities were systematically evading the law. In fact, coal-fired power plant emissions of SO2 fell 35 percent between 1990 and 2002, while NOx emissions fell 33 percent--impressive numbers for a bunch of scofflaws. Preliminary EPA data report that SO2 emissions rose slightly in 2003, which has already been taken by environmentalists as proof that the Bush administration is backtracking on air quality. (NOx emissions, it should be noted, continued to decline in 2003.) Yet SO2 emissions rose for three years in a row under President Clinton in the late 1990s, and there was no outcry about "backtracking" or undermining the Clean Air Act. (See Figures 1 and 2.)
Figure 1: Sulfur Dioxide Emissions, 1900-2003
Figure 2: Nitrogen Oxides Emissions, 1900-2003
Nor does the article give any information about basic emission controls that nearly all power plants have incorporated, such as electrostatic precipitators and "baghouses" to capture particulates and ash, low-NOx burners, catalytic reducers, and several different kinds of "scrubbers." The nub of the issue is contained in the distinction between several acronyms of the air quality trade: RACT, BACT, and LAER: RACT stands for "Reasonably Available Control Technology"; BACT stands for "Best Achievable Control Technology"; and LAER stands for "Lowest Achievable Emission Rate." All sources located in a designated air quality "non-attainment" area (where air quality fails to meet Clean Air Act ambient standards) are required to adopt RACT control measures; any potential source of new emissions, such as a new factory or power plant, will have to utilize BACT control measures, depending on whether it is in a non-attainment area, while modifying an existing source triggers LAER through NSR. In essence, the heart of the argument over the NSR lawsuits is whether EPA enforcement should be tightened from imposing RACT to LAER on existing power plants when they change components.
Blizzards of acronyms make for bad magazine copy, to be sure, but it is misleading to convey to readers the impression that many coal-fired power plants have incorporated no emissions controls of any kind. Yet this is the impression Barcott's article gives by omitting any background on emissions trends or the basics of emissions control techniques. To the contrary, Barcott goes out of his way to suggest that utilities have sat on their hands. Barcott notes, for example, that the Southern Company was resisting the EPA's dictates, while enjoying profits of $1.3 billion in 1999. Barcott does not tell readers that the Southern Company spent $4 billion on emissions controls during the 1990s.
Barcott apparently did not speak with any non-industry critics of NSR. While administration officials declined to speak with Barcott, there are numerous academic and public sector critics of NSR, including the team that produced the report of the National Academy of Public Administration that detailed the dysfunctions of NSR. Instead, Barcott's article adumbrates a favorite story line of environmental activists: namely, that the Bush administration's changes to NSR amount to "gutting" the Clean Air Act, as if NSR was the sum total of the Clean Air Act. Barcott leaves the impression that more than mere subversion, the Bush NSR changes represent a reversal of the bold action of the Clinton EPA that was just about to produce major results; immediate across-the-board emissions reductions of 50 percent were expected by the advocates Barcott interviewed. Barcott writes: "The problem was that [NSR] was about to work all too well--in the way, finally, that it was designed to when it was passed by Congress twenty-five years ago." This precious claim should be ranked as the environmental equivalent to Herbert Hoover's infamous declaration that "prosperity is just around the corner."
While failing to mention any contextual data or the criticisms of disinterested observers, some of the facts Barcott did include appear to be wrong or inconsequential. One of the most curious statistics in the story is this: "The EPA's own documents, however, show that from 1997 to 1999 alone, the [NSR] program reduced emissions nationwide by a total of more than four million tons." Not bad for a program supposedly being evaded; Barcott says the reductions would have been much larger were it not for industry flouting the rules. The trouble is that the "four million ton" figure is certainly wrong. According to EPA's published emissions inventory, the combined emissions reductions from all sources for SO2 and NOx for the years 1997 to 1999 was 2.3 million tons; from coal-fired power plants the reduction was 1.2 million tons. There is no data from subsidiary EPA data sets that show large emissions reductions in the electric utility sector were offset by emissions increases in another sector. So where could Barcott's figure of four million tons have come from? The "EPA documents" referenced in the story are not identified, but anyone with rough familiarity with the EPA's air quality database would have known something was amiss with this figure.
Barcott's story should be turned on its head. Rather than asking why the Bush administration moved to simplify the NSR mess, it might be asked why the Clinton administration decided upon an about-face and adopted an unprecedented narrow interpretation of NSR. The media never entertains the possibility that excess regulatory zeal could be commensurate with industry greed. Unmentioned in all the commentary about what occurred during the Clinton administration's about-face on NSR is the possible role of the climate change controversy in the decision to change NSR policy. By the time the Clinton EPA decided to crack down hard on the electric utility industry in 1999 and 2000, it was clear that achieving the Kyoto protocol target of a 10-percent reduction of carbon dioxide (CO2) emissions below our 1990 level by 2010 would be unattainable at a reasonable cost to the economy, even if the protocol could gain Senate ratification. The Energy Information Administration, a unit of the Department of Energy, estimated that compliance with Kyoto would cost between $46 and $102 billion a year, shave as much as 2 percent off economic growth, and require, among other steps, an 85-percent increase in electric utility rates and a 50-percent increase in the price of gasoline. No administration is going to commit the United States to these kinds of costs. However, a large immediate reduction in SO2 emissions, especially if it meant the premature shutting down of a number of coal-fired power plants, would provide a backdoor means of reducing CO2 emissions rapidly. Could this have been the hidden agenda behind the about-face on NSR?
One reason to suspect that the EPA's motives might have been less than transparent is the irony that the EPA and many state regulators, such as the California Air Resources Board, resist applying to the auto fleet the same policy they now wish to apply to coal-fired power plants. It is well-known that large air quality gains are on the way through turnover of the automobile and truck fleet to newer, cleaner models. These gains could be accelerated through various means, from incentives to scrap older cars to remote sensing in order to target gross emitters on the road, yet proposals for such measures meet fierce resistance from regulators. Odd, then, that many of the same regulators would wish to speed up the turnover of the electric utility industry capital stock with the ratchet of a tougher NSR process.
While the role of climate change in the NSR deliberations of the Clinton EPA will remain obscure, one aspect of this controversy is obvious: New Source Review is going to serve as the proxy for Texas in the 2004 presidential campaign. In the 2000 campaign, the environmental activist mantra, which the news media accepted and repeated uncritically, was that Texas had the nation's worst air pollution. This claim could be easily checked against the data, but almost no one in the media did so. It was not true; in fact, in 1998 and 1999 Tennessee cities had more exceedences of the EPA's threshold for unhealthy air than Texas cities did, and California cities had the highest levels of several pollutants, but no one took note of this. In the latest American Lung Association annual State of the Air report, not one Texas city appears in the list of the twenty-five most polluted cities; in past years' reports, only one or two Texas cities appeared on the list. The same kind of misinformation and exaggeration about NSR can be expected to be a major talking point of the fall campaign.
Meanwhile, the tradable-emissions alternative to NSR, whether in the form of the Bush Clear Skies proposal or some variation, languishes in Congress, a victim of a both-sides-against-the-middle coalition. Some conservatives are not sure they want it (the electric utility industry is not enthusiastic about a tradable emissions program), while liberals do not want to hand President Bush a political victory on a piece of landmark environmental legislation in an election year. There is a lot more at stake than just air quality policy and the election. If emissions trading for air pollution is expanded (it exists already for SO2 under the acid rain provisions of the 1990 Clean Air Act), the next frontier for using tradable emissions permits will be water quality. An embryonic EPA program to try out tradable permits for water pollution has already been scaled back. Opponents of market-oriented environmental policy would therefore like to draw a line in the sand on air quality. The environment is the loser.
1. Environmental Policy Outlook has examined this issue before, in "Making Sense of 'New Source Review,'" July-August 2003.
2. Available at www.nap.edu/openbook/0309089328/html.
3. In the case of turbine blades, identical replacement equipment is no longer manufactured, and replacement components available today are typically more efficient than the old models. The EPA is using the fact that replacement turbine blades are not identical to the original equipment to claim that such replacements constitute a "substantial upgrade."
4. The original Clean Air Act of 1970 was substantially amended twice, in 1977 (when the original NSR language was added) and again in 1990, where several new features such as declining emission caps and tradable permits under the Acid Rain program made NSR partially obsolete.
5. The rise in SO2 emissions during the late 1990s and again in 2003 is likely due to the dynamics of the 1990 Clean Air Act's "banking" provisions, under which industrial sources were allowed to "bank" future emissions credits with overcompliance in the early years of the emissions reduction schedule. The banking provision had the effect of speeding up emissions reductions ahead of schedule; the progressively declining overall cap on emissions will cause "banked" emission credits to expire by 2009.
6. There are, for example, at least nine different types of "scrubbers" in use by industrial sources. Technical information and cost estimates for basic power plant emissions controls can be found at www.epa.gov/ttn/catc/products.html#misc.
7. A Breath of Fresh Air: Reviving the New Source Review Program (Washington DC: National Academy of Public Administration, April 2003), available at www.napawasg.org. NAPA concluded, among other findings, that "NSR has not been very successful in linking environmental improvement to on-going capital investments by the industrial sectors responsible for the largest amounts of air pollution."
8. An Excel spreadsheet of the EPA's emissions inventory can be downloaded at www.epa.gov/ttn/chief/trends/.
9. Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, Energy Information Administration, (SR/OIAF/98-03), October 1998, available at http://tonto.eia.doe.gov/FTPROOT/environment/environment.htm.
10. See Joel Schwartz, No Way Back: Why Air Pollution Will Continue to Decline (American Enterprise Institute, 2003).
11. The only notable exception we are aware of was Gregg Easterbrook in The Atlantic Monthly.
12. The claim that Texas had the worst air pollution was based on the fact that for a single year, Houston experienced a higher peak one-hour ozone level than Los Angeles, and on a willful distortion of the Toxics Release Inventory.
Steven F. Hayward is the F. K. Weyerhaeuser Fellow at AEI and the author of the Index of Environmental Indicators.