Clean Air Act Recommendations

I. INTRODUCTION

 

The scope of this memo is limited to a comparison between U.S. and Czech legislation controlling emissions of sulfur dioxide (SO) from stationary sources. A broader comparison between all sections of the U.S. and Czech Clean Air Acts would be, while very interesting, a full summer project. If you would like, I can certainly focus my attention on such a task.

 

Complex atmospheric chemical reactions transform source emissions of So, and nitrous oxides (NO) into products containing sulfates, nitrates, sulfuric acid, “and nitric acid. - These chemicals can fall to earth near the source (if the facility has a short stack), or travel hundreds of miles before returning to the surface as acid rain, snow, or fog. These acidic compounds can produce adverse effects on ecosystems, man-made materials, and human health. Electric utilities are the largest single SO, emissions source in both the U.S. and the Czech Republic, producing approximately 70 percent of national so, emissions in the use and 82% of all son emissions in the Czech Republic.3

 

The U.S. and Czech Clean Air Acts attempt to limit emissions of sulfur dioxide in markedly different ways. The U.S. legislation utilizes market forces to provide individual plant managers with financial incentives to voluntarily reduce so, emissions below that plant's historic emissions level.4 The market system governs emissions by allowing individual plants to emit than their historic amounts of So, if the total amount of so, emitted within a geographic area (i.e., the United States) remains constant. The Czech legislation, on the other hand, utilizes a system of "command and control" regulations whereby the federal government mandates emission limitations to individual power plants depending on the type of fuel the plant consumes and how large the plant is.' Command and control regulations govern emissions by requiring all sources to achieve specified emission limits without regard to the efficiency or ability of a source to reach that limit.' Which system works best is a matter of some debate, although it is certain that the command and control system failed in the U’s in relation to controlling s02 emissions.

 

Prior to the 1990 amendments to the USCAA, the U.S. Congress elected to curb so, emissions through command and control regulation so like those now employed by the Czech Republic. The command and control theory are predicated on the notion that administrative agencies (ministries) are insulated from Congress (parliament) and industry and are therefore in the best position to provide external regulations adequate to mend market imperfections. The theory gained wide support in the U.S. during the New Deal, in the era of "Big Government". However, because administrative agencies are no longer insulated in the U.S., this approach to regulating So, emissions from stationary sources did not work well. The pre-1990 USCAA was too detailed in mandating the actions of the use Environmental Protection Agency (EPA). Indeed, the Act became "agency-forcing" by requiring the EPA to establish hopelessly optimistic emission goals, which in turn led utilities to repeatedly miss compliance deadlines. Further, the law unrealistically expected the EPA to obtain the information necessary to restrict emissions on a plant-specific basis in the most cost-effective manner. In short, the CAA prior to 1990 failed to provide the right tools by which the EPA could effectively enforce the reduction of SO2 emissions around the U.S.

The U.S. Clean Air Act (USCAA or Act) underwent a fundamental change in 1990 when the U.S. Congress shifted from a "command and control" system to a market-based system for regulating SO, NOx emissions from stationary sources. The new system of so, emission regulations utilizes market forces and financial incentives to keep emissions to mandated levels. The Czech Republic, on the other hand, has chosen a command and control approach to its air pollution problems despite the negative U.S. experience with this type of legislation. Nevertheless, the command and control theory have a greater chance of success in the Czech Republic than it did in the United States. Further, using market incentives to induce compliance with so, and NO emissions probably would be ineffective here. There are, however, potential amendments to the Czech CAA which might provide source managers with more flexibility in devising compliance strategies for reducing SO2 emissions.

II.TITLE IV: THE ACID DEPOSITION AMENDMENTS OF 1990

Title IV of the 1990 amendments to the USCAA utilizes a market-based system to reduce annual SO, emissions by 10 million tons from 1980 emission levels. The emission reductions will result from the distribution of a limited number of "Allowances" to the various sources of emissions. An allowance is an authorization by the EPA for a source to emit 1. ton (2,000 lbs.) of so, in one specified colander year. The allowance may be used for, current emissions, sold, or held in reserve for future use." Allowances may not, however, be used in a year prior to that year for which it is allocated. 14 Unused allowances are to be identified so that they may be carried forward and

added to allowances in subsequent years. 15 If a source emits S02 in an amount that exceeds the emission limitation requirement of the source for that year (as determined by allowances held), the owner or operator of said source is liable for a financial penalty calculated as the number of excess tons SO, emitted multiplied by 2,000.16 The EPA allocates the allowances to specific sources based on the historic fuel consumption of that source (the larger the source, the more allowances awarded). Allowances may also be purchased by interested parties at annual auctions and sales or may be allocated to emission sources through several bonus programs. 18 For example, a source may obtain bonus allowances from the EPA if it uses Phase I technology, which is defined in $ 7651c(d)(1) as technology which reduces 2 emissions by 90%. The allowances are freely transferable, 19 and the market system is predicated on the fact that overall so, emissions are capped, and allowances limited.

Under Title IV, emission reductions are to take place in two phases. Phase I begins on January 1, 1995 and reduces SO, emissions through the direct allocation of allowances to 110 of the largest and dirtiest utilities in the U.S.24 Source allowance allocations are limited and correspond to the annual quantity of fossil fuel consumed by an affected unit.4 After the start of Phase I, each affected plant may not emit so, in a given year in excess of the amount of allowances that facility holds, unless it qualifies for bonuses, substitutions, or otherwise obtains more allowances to cover its emissions,

• Phase II of the Acid Reduction Program begins on January 1 2000 and involves several additional categories of utilities.24 Phase II regulates almost every power generating unit in the United States, Affected sources (sources to which the legislation pertains) under Phase II will be allocated allowances based on a fraction of their historic fossil fuel consumption, thereby requiring plant managers to reduce emissions even further than under Phase 1.25 Additionally, more plants will be competing for available allowances as more sources are incorporated into the program. In total, it is estimated that Phase II will involve almost 700utility plants. 26 However, under the Opt-In program, more allowances may become available, thus providing utilities with extra allowances with which to increase emissions. Of course, these emissions would be offset by reductions in emissions from the new opt-in participants. Because allowance allocations are capped at approximately 8.9 million tons annually starting in 2000, any source built after that year will have to obtain its allowances from the direct sales or auctions."

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The first allowance auction took place on March 29, 1993, and the second on March 28, 1994.49 The first direct sale also took place in 1993. The auctions and direct sales are supplied by an allowance reserve funded through a provision whereby the EPA withholds 2.8% of the allowances it would otherwise allocate to affected sources under Title IV.30 The proceeds of the sales and auctions are transferred, on a pro rata basis, to the owners of

the affected sources from whom the allowances were originally withheld." These annual auctions and sales promote a market in allowances and, in turn, help fuel the market-based system of

SO2 control.

The market-based system will shift the responsibility of making management decisions on how to comply with the Act from the government to individual plant managers. According to the EPA, shifting emission reduction responsibilities to the polluting parties will result in the most cost-effective sharing of the emissions control burden, and further provides for compliance opportunities. For example, to meet the level of emissions reduction required through the initial allocation of allowances, utilities with lower marginal costs may choose to reduce emissions through control technology, thereby generating excess allowances which could be sold. On the other hand, utilities with higher marginal costs (utilities which find it more expensive to meet reductions through technology) may choose not to reduce emissions but instead may choose to buy allowances

to comply with the Act.32

III. ACID DEPOSITION CONTROL IN THE CZECH REPUBLIC

Atmospheric pollution is one of the most serious environmental problems facing the Czech Republic. Air Pollution is controlled in the Czech Republic (C.R.) through Federal Legislation (legislation which binds both the Czech Republic and Slovakia) and Czech Republic legislation (legislation which is not binding on Slovakia). There are three federal and nine C.R. laws which are pertinent to air pollution in the Czech Republic. Indeed, these twelve pieces of legislation define air pollution control in the Czech Republic.

There are three basic son emission reduction schemes in the Czech legislation. First, affected sources may not exceed a prescribed concentration of the named pollutant in the source's flue gas. This is described as an emissions limitation. Second, affected sources must pay a charge for every (metric) ton of the named pollutant they emit per year. third, ambient air concentration limits have been set for several pollutants, including son. These limits are known as the Ambient Air Quality standards (AXQS). Through this legislation, the C.R. has chosen an innovative command and control strategy to regulate the emission of So, from affected sources. The three means of control will be examined one at a time.

First, the Czech and Slovak Federal Republic (CSFR), through the Federal Committee for the Environment (FCE), has set certain flue-gas so, concentration limitations to which affected sources must adherÄ“.54 However, sources are not required to meet the mandated emission concentration limits until December 31, 1998.39 Nevertheless, the establishment of emission limits by the FCE is authorized by the Czech Republic clean Air Act (CRCAA), Act No. 309/1991, § 5 paragraph 4, as amended. “So

authorized, the FCE set emission limits for various pollutants in Appendix 3 of Act 84/1991, Measures on Air Pollution. The CRCAA § 7(1)(b) then provides that operators of large and medium sources must abide by CRCAA $ 5(4), thus mandating that those operators also abide by the emission limitations established by the FCE. If operators of large and medium sources fail in their obligation to comply with the emissions limitation by the end of 1998, the air protection authorities must impose a financial penalty ranging from 30,000 to 10,000,000 Czech Crowns (Ky)." If a repeat violation for which a penalty has already been issued should occur within one year of the issuance of the penalty, and the operator has failed to secure a remedy for the problem, the air protection authorities will issue a second penalty of up to double the amount of the original penalty. The authority to issue a penalty expires after. three years from the date when the emission limit was exceeded.

Section 10 of the CRCAA provides that the Czech and Slovak National Councils may determine which Air Protection Authorities are empowered to enforce the emission standards and levy fines relating to those standards. 40 By authority of $ 3(1)(a) of Act 389/91, State Administration of Air Protection and Charges for The Pollution of Air, the Czech National Council appointed the Environmental Inspectorate (Inspectorate) as the body authorized to observe and enforce the emission limits defined in Appendix 3 of Act 84. Act 389 $ 3(2)(f) also permits the Inspectorate to levy the fines mandated under § 18 of the CRCAA and discussed in the preceding paragraph. 41 The amount of the fine depends on the size of the source, the seriousness of the violation, and the amount and type of the pollutant. The Inspectorate may also restrict or stop the operation of a source if that source exceeds emissions limitations and fails to secure a remedy ordered by the air protection authorities designed to eliminate the air pollution.

Emission concentration standards in the Czech Republic are the same as those concentrations adopted in Act 84, the Federal Measures on Air Pollution. Maximum allowable pollutant concentrations vary depending on what type of fuel is burned, the thermal capacity of the affected source, which pollutant is being monitored, and what type of industry the source is involved with.43 Relevant to ÄŒEZ is Act No. 84/1991, as amended by Act 84/1992, Appendix No. 3, section A: Emission limits for selected pollution agents in selected technologies and equipment. Section 1.1.1.1 concerns solid fuel combustion (coal), and § 1.1.1.1.2 concerns the emission limits for so, at. large sources involved in the power industry. Emission concentration limits vary according to thermal output of the source. 44 For the purpose of so, emission limits at electric power stations burning solid fuels, there are three concentration limits which may not be exceeded without financial penalty or source output restrictions. 45 Operators of large and medium sources are required by federal law to monitor their own emissions and provide the technical data the relevant authorities any data required by regulation."

Monitors within each block of an affected source concentration of so, within the flue gas twenty times each 1/2 hour.47 These individual measurements are then averaged to obtain a "mean leu", a single concentration value for each half-hour.40 In order to avoid any financial penalties, source operators must meet the following three conditions: a) the average of all mean values in a 24 hour period may not exceed the specified limit, b) 95% of all mean values cannot exceed 120% of emission concentration limits, and c) no single mean value may exceed 200% of the limitations.

The second component of the so, reduction program is that affected sources must pay an annual emissions charge for polluting the air, even if that plant's emissions are within the emission concentration limitations. This effluent charge is the main economic incentive used by the CRCAA to reduce atmospheric pollution of so, the charge varies according to the quantity and type of discharged pollutant.50 This charge is essentially a tax on pollution and serves as an incentive for plant managers to reduce their emissions. The charges are set out in Appendix B of Act 389 and are levied according the tons of pollutant emitted per year. For every ton of sulfur. dioxide a source emits in a year it will be charged 1,000 Ky.

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Pollution charges are authorized by section 17 of the CRCAA.” On September 10, 1991 the Czech National Council utilized the authority it was given under § 17 and passed Act 389, establishing the pollution charges.53 Part 1 of Act 389 (SS 1 - 5) provides for the responsibilities of four administrative bodies responsible for carrying out different aspects of the CRCAA.” As noted, Act 389 $ 3(2)(b) authorizes the Environmental Inspectorate to determine the amount of the charge levied on pollution sources. Part II ($S 6 - 8) of Act 389 concerns the administration of the charges themselves. Section 6.1, for example, mandates that operators of large, medium, and small sources pay the charges. Section 6.2 provides that the Environmental Inspectorate retains jurisdiction over issuing and collecting the charges for operators of large sources. This paper will focus on large sources of air pollution since all traditional power plants owned by CEZ have thermal capacities greater than 5 MW.

As mandated under $ 7(1)(d) of Act 309/1991 (CRCAA), operators of large and medium sources must determine the amount of pollutants the source discharges. The operator must then calculate charges owed in respect of emissions from the source to the Environmental Inspectorate by February 15 of each year, together with data from the previous year. The Inspectorate then verifies the data submitted by the operator and issues a decision pin regards to the amount charged and conditions for payment.5' Full payment of charges will be phased in gradually; 30% of the issued charge must be paid in 1992 and 1993, 60% in 1994 and 1995, 80% in 1996, and 100% in 1997 and beyond." The Inspectorate can temporarily defer or permanently waive up to

40% of the issued charge if the operator demonstrates work progressing towards the reduction of pollution emissions from the source

Appendix A to Act No. 389 lists 88 pollutants subject to emission charges. These pollutants are divided into categories as follows: 5 "Main Pollutants" (including so,), 10 Class I Pollutants, 43 Class II Pollutants, and 30 Class III Pollutants. Appendix Establishes the charge rates for the various categories, with so, charges set at 1,000 Ky per ton per year." Finally, Appendix c describes the method operators are to use in computing the charges, including a 50% surcharge to be added if the pollution source does not observe the emission concentration limits authorized under $ 5 of the CRCAA and promulgated by the Ministry of the Environment in Act 84/1991.

The third scheme for reducing so, pollution is using the Ambient Air Quality standards (AAQS). These standards determine the admissible concentrations of pollutants in the ambient air and are like the NAAQS established under the USCAA.6As with the NAAQS of the USCAA, the Czech AAQS are health-based. The establishment of these limits is authorized by Act 309/1991, as amended, § 5 paragraph 4. The AAQS were established by the Ministry of the Environment in Appendix No. 4 of Act 84/1991. As with the flue-gas concentration limits, the AAQS do not go into effect until 1998, as authorized by Act 309/1991, § 5 paragraph 7, as amended. The air quality standards are measured in maximum yearly, daily, hourly, and half-hourly average concentrations of the 9 specified pollutants."

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III. CHVALETICE: CONSEQUENCES OF SO, EMISSIONS UNDER THE USCAA

AND THE CRCAA

The purpose of this section is simply to compare the financial consequences of So, emissions at power plant Chvaleticeite (operating capacity: 800 MW) from the point of view of the USCAA and the CRCAA. Such a hypothetical comparison may help explain how each act works and the differences between them. Comparisons will be done using 1992 and 1993 data.

First, Chvaleticeite will be examined as if it were operating under a market based regulatory system like the USCAA, and as if the regulatory scheme was already in place. S Using 1985, 86, and 87 data to determine Chalice’s "Baseline", the source would have received 42,696 allowances in 1992, thus permitting the source to emit 42,696 tons so, in that year without penalty. Yet Chvaleticeite emitted 73,375 tons of so, (66,705 tons metric) in the same year.65 Thus, the source would have had to buy 30,679 allowances in order not to incur the financial penalty mandated under 42 U.S.C. $ 7651j. At the market price of $156/allowance (4,212 Ky), the operator of Chalice would have had pay $4,785,924 (129, 219,948 Ky) to obtain these extra allowances. In 1993, Chvaleticeite emitted 68,610 tons of SO, (62,379 metric),

or 25,914 more tons than the source's allowances provided for. Buying those additional allowances would have cost $4,042,520 (109,149,768 Ky). Thus, over a two-year period the operator of Chvaleticeite would have had to pay out 238,369,716 Ky ($8,828,444) to buy enough allowances to avoid financial penalties.

In our hypothetical, the charges and penalties to Chvaleticeite would be considerably less under the Czech regulatory scheme, at least in the short term.67 In 1992 and 1993, Chvaleticeite was charged 1,000 Ky for every ton of so, it emitted.68 Thus, charges amounted to 66,705,000 Ky in 1992 and 62,379,000 Ky in 1993. However, according to Act 389 $ 7(3), only 30% of a charge must be paid in both 1992 and 1993. Thus, the operator at Chvaleticeite only paid 20,011,500 Ky ($667, 050) in 1992 and 18,713,700Kč ($623,790) in 1993. Although the average annual concentration of So, in the flue gas exceeded 4750 mg/Nm (the limit is set at 500 mg/Nm), Chvaleticeite is not required to pay a fine since the limits don't take effect until 1998. Therefore, the total amount the operator of Chvaleticeite would have to pay in the hypothetical, would be 38,725,200 Ky ($1,434, 267).

As is evident from the above calculations, Chvaleticeite would be required to spend over 600% more to comply with the U.S. Clean Air Act in 1995 than with the Czech Clean Air Act. This large financial discrepancy results from the relative costs associated with discharging so, into the atmosphere; each ton of SO, emitted under the USCAA above allowance limitations costs the operator 4,212 kick ($156), while under the CRCAA the cost per ton is only 300 Ky ($11.10). If Chvaleticeite continues to emit so, on its present scale, and if it is not fined for high concentrations of so, in the flue-gas, financial cost will be less under the CRCAA than the USCAA. Only when emissions of so, are reduced through flue-gas desulfurization technology will sources benefit financially from a market system. After the installation of such equipment, sources may have excess allowances to sell under the USCAA, thereby helping the source to recoup the substantial amount of money spent on the technology. Under the CRCAA, a source must still pay charges for emissions after the installation of desulfurization technology, just less of them since there will be less overall emissions.

IV. RECOMMENDATIONS FOR AMENDMENTS TO THE CURRENT CLEAN AIR ACT

The current structure of Czech Clean Air Legislation, with its emphasis on reductions of so, in flue-gas, stack emissions, and ambient air concentration, encourages the development and implementation of technologies which will achieve those limits, not exceed them. The legislation thus encourages the retrofitting of old plants with new technology. Such legislation demands high initial investments in pollution control technology without guaranteeing long-term compliance. 'O Emission limits could change and become more stringent. Indeed, such a scenario is legislated in Act 309 § 5, paragraph 7. It is possible that in the advent of

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such new regulations, existing FGD technology could be rendered obsolete in the coming decades. This is a scenario which should be prevented as ÄŒEZ could once again be forced into spending substantial sums of money on environmentally friendly technology. Therefore, the development of technology capable of surpassing current emission standards, thus assuring future compliance, should be encouraged through positive financial incentives.'

The USCAA helps provide such incentive to existing and future sources by encouraging the sources not only to meet emission standards but also to surpass them. As detailed in section II of this memo, sources can sell so, emission allowances on the open market if they emit fewer tons of so, then allowances held. As the price received for allowances increases, so will the incentive to reduce emissions even further. Nevertheless, a full market system of so, reduction would probably fail in the Czech Republic for one simple reason: there would not be enough competition for the reduction allowances. There are simply not enough sources to form a competitive market for allowances. For any market to work effectively, there needs to be many buyers and sellers. These individuals create dynamic forces of sales and transactions. In turn, these sales produce a liquidity without which a market stagnates, which leads to market failure. Amendments providing economic incentives for the development of technology is important, but such incentives must take on a different form from the USCAA. For example, an amendment could be made to Act 309 S 18 ("Penalties") whereby a source which emitted pollutants at a rate or concentration substantially less than that mandated by regulation would be exempt from certain charges or taxes. This amendment would be designed to stimulate new technology which could withstand the more stringent pollution limits of the future.

Perhaps the best way to solve the potential problem of ever-stricter emission limits would be to put a national cap on So, emissions, while simultaneously setting emission limits for each source. For example, total emissions of sulfur dioxide could be capped at, say, 1 million tons in the Czech Republic after the year 2000, and Chalice’s son emissions could be limited to 15,000 tons/yr. Utilities could then rely on a set figure and may adjust accordingly. Chvaleticeite and other plants could lower or increase their own emissions as long as there was a corresponding increase or decrease at another facility.' In our example, if Chvaleticeite could get its emissions down to 10,000 tons/year, then another source could emit 5,000 more tons of $0, /year than allocated by law. In this way, total so, emissions would stay at the federally desired level while ÄŒEZ would have a great deal of flexibility in determining where to reduce emissions and where to increase emissions.

Other proposed amendments in the Czech Republic could be targeted at providing incentives for new sources, not simply retrofitting existing systems. The phase-in of new sources, such as sources using Integrated Gasification Combined Cycle

technology (IGCC), assures CEZ the use of the latest technology to produce electricity. Such technology is, presumedly, more efficient than earlier technology and should provide ÄŒEZ with long-term financial benefits and savings. The problem is that initial investments would be prohibitively expensive, especially considering the substantial amount of money ÄŒEZ is already investing in emissions reduction technology. By providing tax breaks, perhaps including breaks on charges relating to the emission of pollutants at existing plants, and government guaranteed loans, the CRCAA could serve as a leader for legislation designed to promote new technology like IGCC. Legislation providing these types of incentives could help ÄŒEZ develop technology and build sources assured of complying with any potential changes in existing legislation.

ÄŒEZ will most likely be in a continuous process of upgrading its existing grid; transformers, cables, steam delivery tubes, and other components of the grid need attention. Amendments providing positive financial incentives for utilities to make existing infrastructure more efficient would therefore be a benefit to ÄŒEZ. Such incentives should be designed to reward ÄŒEZ for improving the efficiency, not designed to penalize ÄŒEZ if they fail to improve the efficiency of these systems.

As Czech coal reserves dwindle in the coming decades, a new emphasis will be placed on alternative sources of energy. These sources include hydro, solar, wind, and nuclear energy. Retroactive amendments, whose contents would not become effective for several years, could be passed to assure government subsidies and sponsorship for programs aimed at developing these sources of energy. If the Czech government agreed to such a program, ÄŒEZ could save money during the development of these technologies.

The entire utility industry is at a disadvantage if the government can make emission standards more stringent at any time. Section 5(7) of Act 309 may, over time, prove to be quite expensive for utilities forced to comply with ever stricter emission standards. An amendment limiting the ability of the Ministry of the Environment to change these standards would put CEZ in a more secure position. Such an amendment is unlikely, however, as Act 218 amending the original Clean Air Act (Act No. 309) was passed only two years ago.

 

V. CONCLUSIONS

The U.S. and Czech Clean Air Acts are very different in the way they approach controlling emissions of So. market mechanisms as incentives to reduce emissions, while the Czech Republic essentially uses command and control regulations. The Czech legislation additionally includes a sulfur emissions charge, the rate being dependent on how many tons of so, are emitted. Because of the lack of market liquidity, a market system of So, reductions are not suited to the Czech Republic. Further, the ability of the government to change the emission standards makes investment in FGD technology potentially risky. An amendment creating a national emissions cap and providing individual sources with the ability to increase or decrease emissions (if corresponding decreases and increases were secured from other sources) would provide ÄŒEZ with sufficient stability and flexibility to meet both the energy and environmental concerns of the coming decade.