Air Quality: EPA’s Proposed Ozone Transport Rule, OTAG, and Section 126 Petitions — A Hazy Situation?

Air Quality: EPA’s Proposed Ozone Transport Rule, OTAG, and Section 126 Petitions — A Hazy Situation?

98-236 ENR
CRS Report for Congress
Received through the CRS Web
Air Quality: EPA’s Proposed Ozone Transport
Rule, OTAG, and Section 126 Petitions —
A Hazy Situation?
Updated May 14, 1998
Larry Parker and John Blodgett
Specialists
Environment and Natural Resources Policy Division
Congressional Research Service ˜ The Library of Congress

ABSTRACT
EPA is currently engaged in a series of regulatory actions to address the transport of ozone
pollution in the eastern United States. This report reviews this situation with respect to an
EPA-proposed Ozone Transport Rule and other activities. It will be updated as events
warrant.

Air Quality: EPA’s Proposed Ozone Transport Rule, OTAG,
and Section 126 Petitions — A Hazy Situation?
Summary
Interstate transport of air pollutants is not a new problem. The 1990 Clean Air
Act Amendments provided the Environmental Protection Agency (EPA) and the
states with new tools to address the problem. These tools permitted EPA to establish
the Ozone Transport Assessment Group (OTAG) to recommend ways of reducing
ozone transport in the northeastern part of the country. From these
recommendations, EPA may issue rules requiring states to tighten ozone control
measures to prevent ozone transport (commonly known as a SIP call). In addition,
individual states may petition EPA to force other states suspected of contributing to
their compliance problem to reduce offending emissions.
OTAG sent its final recommendations to EPA in June, 1997. Overall, OTAG
sanctioned flexibility, both for the states and for EPA in deciding on how to respond
to the ozone transport issue and how to make necessary reductions. Based on the
OTAG recommendations, EPA proposed the Ozone Transport Rule in November
1997. Although EPA often took the most stringent interpretation of OTAG’s
recommendations in its proposed Ozone Transport Rule, it also has attempted to
include flexibility for states in implementing proposed nitrogen oxide (NOx — a
precursor to ozone) reductions. In particular, the sanctioning and encouragement of
a regional NOx cap and trade program for electric utilities and other major stationary
sources could substantially reduce the cost of compliance with the rule. However,
EPA does not have the authority to make participation in a regional cap and trade
program mandatory, unlike the current acid rain SO program. Instead, it is up to the
2
states to decide whether the economic benefits of reducing emissions across the
enlarged trading area that the model trading program promises are worth the
regulatory conditions EPA would impose.
Implementation may be complicated by a decision by eight northeastern states
to submit petitions to EPA to force midwestern states to reduce NOx emissions
(called section 126 petitions) in August, 1997. Implementation of controls under
section 126 is an EPA-directed affair, in contrast with the state strategies required
under an EPA SIP call. In addition, a section 126 action could raise questions with
respect to the Regulatory Flexibility Act as the controls imposed would clearly come
from EPA and not the states (as is the case with a SIP call). In short, it is unclear
whether the petitions under section 126 will expedite NOx control actions by affected
states, or merely increase litigation on an already litigious issue.
In April 1998, EPA issued a proposed supplemental rulemaking that outlines the
essential components of a model regional NOx trading program, and revised state
NOx emission budgets. At the same time, EPA issued an Advanced Notice of
Proposed Rulemaking for the section 126 petitions in line with a proposed consent
decree that would establish a schedule for EPA action on the petitions. Final EPA
action on the proposed Ozone Transport Rule is currently scheduled for September
1998, with state submission of any necessary SIP revisions required one year later.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Ozone Transport Assessment Group . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OTAG Assessment Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
OTAG Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Size of Transport Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Utility NOx Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Non-Utility Stationary Source NOx Control . . . . . . . . . . . . . . . . . . . 4
Federal Emission Control Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Specific State Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Trading Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
EPA’s Revised NAAQS for Ozone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Proposed Ozone Transport Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Model NOx Cap and Trade Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 126 Petitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. Proposed Seasonal NOx Emissions Budget for States Making a Significant
Contribution to Downwind Ozone Nonattainment . . . . . . . . . . . . . . . . . . 10
Table 2. Proposed Schedule for Section 126 and Section 110 Actions
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Air Quality: EPA’s Proposed Ozone Transport
Rule, OTAG, and Section 126 Petitions—
A Hazy Situation?
Background
Interstate transport of air pollutants is not a new problem. However, the 1990
Clean Air Act Amendments (CAAA) provided the Environmental Protection Agency
(EPA) and the states with new tools to address the problem. One of those tools is
section 176A, a provision that permits the EPA, either on its own or by petition from
any state, to establish a transport region to address regional pollution problems
contributing to violations of a primary National Ambient Air Quality Standards
(NAAQS). A commission of EPA and state officials is constituted to make
recommendations to EPA on appropriate mitigation strategies. Based on the
commission’s findings and recommendations, EPA is required under section 110(k)(5)
to notify affected states of inadequacies in their current SIPs and to establish deadlines
(not to exceed 18 months) for submitting necessary revisions (commonly known as
a SIP call).
Besides authorizing administratively-created transport regions, the 1990 CAA
Amendments statutorily created an Ozone Transport Region (OTR) in the Northeast
(section 184). This provision requires specific additional controls for all areas (not
only nonattainment areas) in that region, and establishes the Ozone Transport
Commission (OTC) for the purpose of recommending to EPA regionwide controls
affecting all areas in the region.
In addition, the 1990 CAA Amendments rewrote the provisions of Sec. 126
regarding interstate transport of pollution. Under section 126(b), any state or political
subdivision may petition EPA for a finding that any major source or group of
stationary sources located in another state are emitting pollutants that “significantly
contribute” to the nonattainment of a NAAQS by their state. EPA is to respond to
the petition within 60 days. If the petition is granted, the affected sources must cease
operations within 3 months unless the sources comply with emission controls and
compliance schedules as determined by EPA to bring them into compliance with the
section.
The Ozone Transport Assessment Group
In 1995, EPA issued a planning guidance memorandum for ozone nonattainment
areas classified serious or above. Among its provisions was a call for a 2-year
regional assessment of ozone transport and control strategies. The goal was to reach
consensus between EPA and the affected states on necessary additional regional and
other emission reductions to achieve attainment in ozone transport areas. Based on

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results, states would submit plans by mid-1997 for appropriate local and regional
controls to achieve attainment. If no consensus were reached, EPA stated it would
use its authority under the Clean Air Act (CAA) to ensure the required reductions are
achieved (particularly section 126 and/or section 110).1
Following a recommendation of the Environmental Council of the States (ECOS)
for a national work group on ozone, EPA, the 37 easternmost states and the District
of Columbia, industry representatives, and environmental groups formed an Ozone
Transport Assessment Group (OTAG) partnership, which initially met in May, 1995.
The policy arm of OTAG consisted of the state environmental commissioners from
the 37 states and the District of Columbia and senior EPA officials. It was this Policy
Group that voted on the proposals to be included in recommendations to the states
and EPA.
To develop the necessary assessment data, OTAG created three subgroups and
six workgroups to address modeling and assessment issues, strategies and controls,
along with outreach and communications. Each subgroup held open working
meetings to receive input from various stakeholders. The recommendations of these
subgroups were submitted to the Policy Group via joint sessions of the Strategies and
Controls and Modeling and Assessment Subgroups. The final OTAG meeting was
June 19, 1997.2
OTAG Assessment Results
OTAG analytical work began with the development of an improved emissions
inventory from which extensive modeling of ozone transport could be conducted.
Based on that modeling, two workgroups reached several conclusions with respect
to ozone transport and the anticipated benefits from increased nitrogen oxide (NOx)
and volatile organic compound (VOC) control. Among those findings particularly
relevant in light of EPA’s new 8-hour ozone National Ambient Air Quality Standard
(NAAQS) are the following:
3
! The perceived contribution of ozone transport is strongly dependent on how
the ozone “problem” is defined. Local emissions are more important with
respect to peak 1-hour concentrations than with respect to lower concentration
thresholds and concentrations assessed over longer averaging times (8-hour or
seasonal averages), where larger areas and longer distance scales become
increasingly important.
Nichols,
1
Mary D. “Ozone Attainment Demonstration,” U.S. EPA: Assistant Administrator
for Air and Radiation, March 2, 1995.
2Background on OTAG and its final report are available via EPA’s web site at
[http://www.epa.gov/ttn/otag/]
3For a summary of the new ozone NAAQS, see CRS Report 97-721 ENR, Air Quality
Standards: EPA’s Final Ozone and Particulate Matter Standards. For a longer discussion,
see CRS Report 97-8 ENR, Air Quality: EPA’s New Ozone and Particulate Matter
Standards.

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! The central portion of the [37-State] OTAG domain is unique with respect to
ozone and ozone transport. It persistently has elevated ozone levels producing
an “ozone pool.” Transport in any direction from this region has been
implicated with high ozone levels in neighboring areas.
! High ozone levels in the southern portion of the OTAG domain are typically
associated with stagnant [pollutant] transport conditions resulting in shorter
transport scales than on average. In contrast, high ozone levels in the northern
portion of the OTAG domain are more typically associated with higher speed
and persistent transport conditions from inside the OTAG domain across state
lines.
! The proposed 8-hour ozone standard [now finalized] will result in significantly
more closely adjacent nonattainment areas across the OTAG domain. This will
make ozone transport more critical with respect to nonattainment than it is
under the current [now previous] standard.4
OTAG Recommendations5
Of the 37 states that constituted OTAG, 32 voted in favor of the final
recommendations with Alabama, Kentucky, Michigan, Virginia, and West Virginia
voting against. Those recommendations covered numerous areas, ranging from utility
controls to increased research.
Size of Transport Region. Which states should comprise the ozone transport
region was debated continuously during OTAG deliberations. Particularly, states
west of the Mississippi River and some southern states argued that their emissions
had little or no effect on ozone transport. OTAG recommended that these “coarse-
grid” states be exempt from OTAG-related controls. These states include North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas, Minnesota, Iowa,
Arkansas, Louisiana, Mississippi, and Florida, as well as parts of Maine, New
Hampshire, Vermont, New York, Michigan, Wisconsin, Missouri, Alabama, and
Georgia.
OTAG did recommend that Iowa work with Wisconsin in developing
implementation plans for southwestern Wisconsin; that Kansas work with Missouri
on implementation plans for Kansas City; and, that Oklahoma, Texas, Arkansas, and
Louisiana share modeling results with Missouri.
Utility NOx Controls. Increasing NOx control on utility plants was one of the
most contentious issues within OTAG. The final recommendation reflects this
contention by being wide enough to cover all points of view. Specifically, OTAG
recommended a range in the 26 “fine grid” states between current Clean Air Act
controls (i.e., existing requirements) to the lesser of 85% reduction from 1990 rates
4Air Quality Analysis Workgroup. OTAG Air Quality Analysis Workgroup Results
Summary. [http://capita.wustl.edu/otag/Reports/ExecSumm/AQASUM3.html]
5OTAG’s recommendations are attached to EPA’s proposed Ozone Transport Rule as
Appendix B. 62 Federal Register 60376-60379, November 7, 1997.

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or a .15 lb/mmBtu performance standard (a significant increase in stringency). It is
arguable how such a wide range provided any guidance to EPA on implementing
regional controls. Essentially, the range gave EPA a free hand in deciding on
appropriate tonnage levels in its proposed Ozone Transport Rule, discussed later.

OTAG did recommend that any statewide tonnage levels proposed by EPA be
revised if additional subregional modeling or air quality analyses justified it. Likewise,
OTAG recommended that EPA consider any submitted comments and subregional
modeling with respect to proposed statewide tonnage levels prior to finalizing SIP
calls.
Non-Utility Stationary Source NOx Control. OTAG’s recommendations for
non-utility stationary sources mirrored those for the utility sources. Dividing non-
utility facilities into medium and large sources, OTAG recommended that large
sources be controlled in proportion to how much utility sources are controlled. If
utility sources are required to reduce 55%, large non-utility sources should be
required to reduce 55%. This parallel requirement weakens as the utility reductions
increase; for an 85% utility source reduction, OTAG recommends only a 70%
reduction for large non-utility sources.
Requirements for medium sources are also based on utility source requirement,
but considerably less stringent. For 55%-65% utility reductions, no medium non-
utility control is recommended. For 75%-85% utility reduction, OTAG recommends
that medium non-utility sources be required to install reasonably available control
technology (RACT), a determination made by the states based on EPA guidance. As
with the utility control recommendations, OTAG urges flexibility if additional
modeling and air analyses warrant it.
Federal Emission Control Measures. In OTAG’s view, the federal
government has a major role in assisting states achieve compliance, particularly with
respect to new stationary source control and mobile source control. OTAG outlines
nine specific areas where the federal government should develop, adopt, and
implement stringent national NOx and/or VOC control requirements to assist the
OTAG region in achieving compliance with the ozone NAAQS. These areas include
architectural and industrial maintenance coatings, consumer and commercial products,
autobody refinishing, reformulated gasoline, small engines, heavy duty highway
engines, heavy duty non-road diesel engines, and locomotive engines.
OTAG also recommended that EPA act on some fuel related items. These
recommendations included EPA (1) adopting a rule on an appropriate fuel sulfur
standard to improve long-term performance of emission control devices, (2)
evaluating emission benefits and other effects of cetane adjustments on current diesel
engines and adopting standards as appropriate, and (3) considering and potentially
adopting new diesel fuel standards by the year 2004 through existing deliberative
processes.
Finally, OTAG supported and encouraged adoption of a National Low Emission
Vehicle Program.

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Specific State Actions. OTAG also recommended that “fine grid” states
consider adopting enhanced inspection and maintenance (I&M) program in urban
areas with populations greater than 500,000, the continued use of reformulated
gasoline (RFG) in both mandated and opt-in areas, among other provisions.
Trading Program. Part of the controversy over utility source control involved
proposed market-based approaches to implementing such controls. OTAG did
considerable work on market mechanisms and found several benefits to these
implementation approaches, including: (1) lower compliance costs, (2) incentive for
early reductions, (3) incentive for over-control of sources, (4) incentive for
innovation, and (5) administrative flexibility.
However, OTAG was unable to agree on a basic structure for a market
mechanism. Some states, particularly those in the northeast, advocated a “cap and
trade” program. A cap and trade program places a total emission limit (i.e., cap),
expressed in tons of pollutants, on specific emission sources within an area. The
allowable amount of pollution is then allocated to these sources according to an
agreed upon formula. Sources that emit less pollution than their allocation may trade
the unused portion of their allocation to sources that exceed their allocation, or bank
those unused pollution “credits” for use in a future year. A system like this has been
successfully implemented to reduce sulfur dioxide emissions under title IV of the CAA
and is being implemented in the Ozone Transport Region (OTR) to reduce NOx
emissions.
Under a cap and trade system, emissions are not permitted to increase over time.
Thus, new emissions from new sources (or expanded production at existing sources)
have to be offset with reduced emissions at existing sources. Industry groups have
objected to this fixed limit on emissions and argued for an alternative that controls the
rate of pollution emitted, but not the total amount emitted (i.e., no cap). Under a
“rate only” approach, a source could emit as much of a pollutant as it wished, as long
as it did not emit the pollutant at a rate greater than stipulated. If a source emitted at
below the stipulated rate, it would receive credits amounting the difference between
its actual rate and the stipulated rate times its production for a given year. It could
trade or bank the resulting credits. If a source exceeded the rate, it could purchase
emission credits for the excess amount (based on its total production for a year) from
a source that had accumulated credits. Currently, no trading program is based on this
approach.
As was the case with the utility control recommendations, OTAG’s final
recommendation with respect to a trading program encompasses both views. The cap
and trade program, called “Track 1,” and the rate only program, called “Track 2,” are
both identified by OTAG as options for states to adopt in implementing utility (and
possibly other) control measures. OTAG acknowledged several uncertainties with
respect to this recommendation including (1) the need for further work on rate only
approaches to implement them with the same level of confidence and certainty as the
cap and trade system; and (2) how any “cross-track” trading could occur between cap
and trade states and rate only states. OTAG did note that EPA would have an
integral part in overseeing the implementation and integrity of these approaches.

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For its part, OTAG recommended a joint state/EPA workgroup address the
issues of implementation of Track 1 and Track 2, along with identifying key design
features that states could select in developing a NOx trading program. OTAG
believed its work in this area provides a sound basis for the workgroup’s task. In
addition OTAG suggested the workgroup address other concerns with respect to
modeling, market systems, and local control requirements.
EPA’s Revised NAAQS for Ozone
On July 16, 1997, the Administrator of the Environmental Protection Agency
(EPA) finalized a new National Ambient Air Quality Standard (NAAQS) for ozone.
Accompanying the NAAQS was a White House memorandum discussing the general
approach EPA was to take in implementing the new NAAQS.6 Recognizing ozone
as a regional pollution problem, the memorandum focuses on regional compliance
strategies for the new NAAQS. In particular, the memorandum cited the work of
OTAG as the basis of this approach. As stated therein:
For the past 2 years the EPA has been working with the 37 most eastern
states through the Ozone Transport Assessment Group (OTAG) in the
belief that reducing interstate pollution will help all areas in the OTAG
region attain the NAAQS.... The OTAG completed its work in June 1997
and forwarded recommendations to the EPA. Based on these
recommendations, in September 1997, the EPA will propose a rule [on
ozone transport] requiring states in the OTAG region that are significantly
contributing to nonattainment or interfering with maintenance of attainment
in downwind states to submit SIPs [State Implementation Plans] to reduce
their interstate pollution. The EPA will issue the final rule by September
1998.
The revised ozone NAAQS was not the trigger for the Ozone Transport Rule
proposed by EPA in November 1997 and discussed in the next section. Existing
nonattainment in the Northeast corridor with the previous, less stringent ozone
NAAQS was the genesis of the OTAG effort and the resulting proposed rule by EPA.
However, EPA drew on the OTAG findings and recommendations as it developed a
flexible implementation strategy for attainment of the new ozone NAAQS, and, where
EPA considered it appropriate, this strategy is integrated with the proposed
requirements of the Ozone Transport Rule.
In particular, the regional NOx control strategy advanced by EPA in the Ozone
Transport Rule as a response to ozone transport under section 110(k)(5) is also an
integral part of the new ozone NAAQS implementation strategy under section
110(a)(1)). In particular, EPA believes that implementation of a regional NOx control
strategy will permit many areas that are (or would be by the year 2000) in attainment
with the previous ozone NAAQS but in non-compliance with the new ozone NAAQS,
to come into compliance with the new standard with little or no additional new local
6President Clinton. “Implementation of Revised Air Quality Standards for Ozone and
Particulate Matter,” Memorandum for the Administrator of the Environmental Protection
Agency, July 16, 1997.

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emission reductions. EPA says that participation by these “transitional areas” in the
regional NOx control program would permit EPA to eliminate unnecessary local
planning requirements for such areas, and to revise its new source review (NSR) and
conformity rules so such transitional areas could comply with only minor revisions to
their existing programs.
Proposed Ozone Transport Rule
On November 7, 1997, the EPA proposed its Ozone Transport Rule.7 The
proposal requires 22 eastern states and the District of Columbia to submit state
implementation plans (SIPs) to address regional transport of ozone.8 In particular,
the proposal calls for increased controls on NOx, focusing particularly on emissions
from electric utilities and large combustion sources. To achieve the necessary
reductions, EPA has proposed emission budgets for each of the affected states, with
each state free to decide on what controls to use to maintain emissions within those
budgets. As discussed in the next section, EPA is also encouraging the formation of
a regional cap and trade program to implement the NOx reductions through a model
program. On April 29, 1998, EPA proposed a supplemental rulemaking that details
a model cap and trade program for states to consider in implementing the Ozone
Transport Rule. Among other things, the supplemental rulemaking revises th
9
e
statewide NOx emission budgets, outlines state reporting requirements, and addresses
criteria EPA will use in approving SIP revisions.
Under section 110(k) of the Clean Air Act, EPA is mandated to require SIP
revisions for states whose current SIPs are substantially inadequate to mitigate
adequately interstate pollutant transport such as that described under section 176A
(under which OTAG was established). Adequate provisions are defined by section
110(a)(2)(D) as those that prohibit state emissions “which will contribute significantly
to nonattainment in, or interfere with maintenance by, any other state with respect to
any such national primary or secondary ambient air quality standard....” In the
proposed rule, EPA used four criteria for determining whether a state significantly
contributed to, or interfered with, another state’s efforts to achieve the ozone
NAAQS: (1) the emissions level of the upwind area; (2) the upwind area’s
contribution to the downwind nonattainment area; (3) the transport distance between
the two areas; and (4) the geographic extent of the contribution downwind.
Environmental
7
Protection Agency. Finding of Significant Contribution and Rulemaking for
Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing
Regional Transport of Ozone. Notice of proposed rulemaking. 62 Federal Register 60317-
60421, November 7, 1997.
8The 22 states included are: Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana,
Kentucky, Massachusetts, Maryland, Michigan, Missouri, North Carolina, New Jersey, New
York, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Wisconsin, and
West Virginia.
9Environmental Protection Agency. Supplemental Notice for the Finding of Significant
Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group
Region for Purposes of Reducing Regional Transport of Ozone; Proposed Rule. 63 Federal
Register 25902-25994, May 11, 1998.

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Based on the “weight of evidence” from the OTAG modeling process and other
modeling efforts, EPA found that 22 of OTAG’s 37 member states made significant
contributions to downwind nonattainment—the 22 plus D.C. that are addressed by
the rule. For the nine other states, EPA found that (1) they
10
made at most a relatively
small contribution to downwind nonattainment areas; (2) most are relatively distant
from many of the downwind nonattainment areas; and (3) most have a relatively low
amount of manmade NOx emission and/or NOx emissions density. Thus, these
states did not meet EPA’s weight of evidence threshold for finding a significant
contribution.
As originally proposed, EPA used OTAG and other modeling efforts to
determine state complicity with respect to ozone transport, but did not use such
modeling to determine its proposed emissions budgets for affected states. Instead,
11
EPA used a cost-effectiveness criterion based on NOx control costs to determine
allocations. Budget components were calculated for five sectors: electric utility
sources, nonutility stationary sources, area sources, nonroad engines, and highway
vehicles. In focusing on cost-effective controls, EPA argued that it was following
12
the recommendations of OTAG. The effect of such an allocation scheme would be
to tilt emission reductions toward states with large stationary NOx sources with
relatively modest controls, and away from states with relatively higher emissions from
other sources. In particular, states with coal-fired electric power plants would
generally have higher percentage reductions required on a statewide basis than states
without such plants.
10 The 9 states not included are: Florida, Kansas, Louisiana, Minnesota, Nebraska, North
Dakota, Oklahoma, South Dakota, and Texas.
“The
11
statewide emissions budgets proposed in this rulemaking were not modeled directly to
determine their air quality benefits.” 62 Federal Register 60327. In its April proposed
supplemental rulemaking, EPA included a modeling analysis to show how these proposed
NOx budgets would improve air quality in the eastern U.S. See 63 Federal Register 25953-
25967, May 11, 1998.
For
12
utility sources, EPA used a NOx emission rate of 0.15 lb/MMBtu to determine budget
allocations. However, EPA used different growth factors than those developed by OTAG in
making the necessary 2007 calculations. For area sources, EPA assumed no new controls,
in line with OTAG. For nonutility sources, EPA used a 70% reduction requirement for large
and RACT controls (generally 25%-50% reduction) for smaller sources. This is
approximately what OTAG had recommended. EPA calculated the highway vehicle budget
by assuming implementation of existing SIPs, along with the following federal measures:
national low emission vehicle standards, 2004 heavy-duty engine standards, and revisions to
emissions test procedures. EPA’s method of calculating budgets for this sector differs
somewhat from OTAG’s recommendations. Finally, EPA calculated budgets for nonroad
engines assuming implementation of existing SIPs, along with the following federal measures:
federal small engine standards (Phase II), federal marine Engine standards (diesels >50 hp),
federal locomotive standards, and 1997 proposed nonroad diesel engine standards. EPA used
OTAG growth projections in calculating the budgets for this component. See proposed Ozone
Transport Rule and Appendix B (OTAG Recommendations), 62 Federal Register 60318-
60420, November 7, 1997.

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These budget allocations were revised by EPA in its April 1998 proposed
supplemental rulemaking. M
13
odifications were made in response to errors in source
inventories and revised projections of future emissions growth. Specifically, projected
emissions of utility plants were revised downward, while emissions from nonutility
facilities were revised upward. As a result, the revised recommended budget for
allowable utility emissions became a less stringent 563,784 tons (compared with
489,000 tons in November), and the nonutility emission budget became more
stringent, allowing 399,416 tons (compared with 466,158 tons last November). In
addition, EPA proposed an alternative approach for calculating the electric utility
component of state emission budgets. Under the alternative approach, the electric
utility component would be allocated among the States according to total electricity
generation, not only fossil fuel-fired generation.
The revised proposed emissions budget for each state is provided in table 1. All
the states with reduction requirements at 40% or above are from the Midwest. In
contrast, states in the Northeast (except Pennsylvania) have budget allocations below
the nationwide average of 35%.
13 See 63 Federal Register 25904-25911 (May 11, 1998) for further detail on revisions.

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Table 1. Proposed Seasonal NOx Emissions Budget for States Making
a Significant Contribution to Downwind Ozone Nonattainment
(Tons of NOx per Ozone Season)
2007 Base
Proposed 2007
%
State
Emissions
Budget
reduction
Alabama
241,564
155,617
36%
Connecticut
52,014
39,909
23%
Delaware
30,568
21,010
31%
District of Columbia
7,978
7,000
12%
Georgia
246,243
159,013
35%
Illinois
350,154
218,679
38%
Indiana
340,084
200,345
41%
Kentucky
263,855
158,360
40%
Maryland
118,065
73,628
38%
Massachusetts
103,445
73,575
29%
Michigan
283,821
199,238
30%
Missouri
185,104
116,246
37%
New Jersey
132,032
93,464
29%
New York
230,310
185,537
19%
North Carolina
234,300
153,106
35%
Ohio
391,012
236,443
40%
Pennsylvania
328,433
207,250
37%
Rhode Island
12,175
10,132
17%
South Carolina
169,572
109,267
36%
Tennessee
291,225
187,250
36%
Virginia
219,835
162,375
26%
West Virginia
158,240
81,701
48%
Wisconsin
142,759
95,902
33%
TOTAL
4,532,790
2,945,046
35%
SOURCE: 63 Federal Register 25910, May 11, 1998

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Model NOx Cap and Trade Program
In its proposed Ozone Transport Rule, EPA announced its intention to develop
and administer an interstate cap and trade program that could be used to implement
the budget limits discussed above. The details of that program are provided in the
supplemental notice of proposed rulemaking issued in April 1998.
14
Following the example set by the acid rain trading program, the EPA model NOx
program would be an allowance-based cap and trade program (OTAG’s “Track 1”
recommendation). One allowance would equal one ton of NOx, with each
participating state receiving allowances equal to the emission budgets of those sources
participating in the program. Unlike the acid rain program where participation and
15
individual allowance allocations are mandated by federal law, state participation in the
NOx program would be voluntary, and the allowance allocations to the individual
emissions sources would be determined by the state, not the federal government. The
states would also approve monitoring systems based on federal regulations and
enforce compliance provisions. Beyond approving and overseeing the SIPs, EPA’s
role would be primarily administrative in terms of collecting data, allocating
allowances as prescribed by states, recording trades, and reconciling emissions and
allowance data every year. In particular, EPA would track allowances to facilitate
interstate trading and enforcement.
Although EPA’s model rule would permit states to determine individual source
allowance allocations, it would require certain elements of the individual state
programs to be consistent in order for them to participate in interstate transactions.
These elements include the timing of allowance allocations, monitoring requirements,
and noncompliance penalties. In particular, the program must be a tonnage cap-based
program (i.e., no rate-based program -- OTAG’s “Track 2” recommendation) to be
included in the regional trading system. Indeed, the SIP approvability criteria virtually
ensure that, with respect to large combustion sources, states will have to submit a
tonnage based program to get the necessary approval from EPA.16
Compared with a traditional command and control implementation strategy, EPA
originally projected a regional cap and trade program would reduce compliance costs
14 See 63 Federal Register 25918-25950, May 11, 1998
15In the proposed supplemental rulemaking, EPA would initially require that participating
sources include existing fossil fuel fired electric generating plants greater than 25 megawatts
and other existing boilers and turbines with a heat input greater than 250 mmBtu/hr. These
core sources represent 80% of the 2007 baseline emissions inventory, 65% of the 2007
emissions cap inventory, and 90% of the required reductions under the proposed rule.
Participation by sources outside these core groups would be determined by the individual
states. 63 Federal Register 25920, May 11, 1998.

16 As explained in the proposed notice of supplemental rulemaking, states may choose one of
three ways for requiring large combustion sources to meet their limitations under the transport
rule: (1) a tonnage limit for each source that adds up to the allowed budget; (2) an emission
rate limit that when multiplied by the maximum capacity for each source adds up to the
allowed budget; and, (3) using alternative method providing equivalent assurance that the
allowed budget will not be exceeded. 63 Federal Register 25912, May 11, 1998

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to the electric utility industry by about one-fourth — from about $2.1 billion to $1.6
billion annually. In its proposed supplemental rulemaking, EPA revised the cost
estimate for electric utilities from $1.6 billion to $1.4 billion annually. In addition,
EPA estimated that a regional cap and trade program would reduce compliance costs
to non-electric generating sources from $1.2 billion to $456 million annually.17
Comparative estimates for other sectors were not available.
Section 126 Petitions
In August, 1997, Connecticut, Maine, Massachusetts, New Hampshire, New
York, Rhode Island, Pennsylvania, and Vermont filed section 126 petitions with EPA.
The petitions ask EPA to make a finding that utilities and/or major sources of NOx
in the Midwest contribute significantly to the ozone nonattainment problem in their
states. As noted earlier, if EPA granted the petitions, it would have to establis
18
h
federal emission limits for the sources affected by the petitions.
The parallel actions of section 126 and the section 110 SIP call presents
difficulties for EPA as the two provisions are implemented differently. The Ozone
Transport Rule is a proposed SIP call under section 110(k)(5) for revised SIP
provisions meeting the requirements of section 110(a)(2)(D) for the statutory 1-hour
ozone NAAQS. Because of the new ozone NAAQS, this SIP call is coupled with a
proposal under section 110(a)(1) for SIP submissions to meet the requirements of
section 110(a)(2)(D) for the new 8-hour ozone NAAQS. If EPA finds, as proposed,
that individual states contribute significantly to ozone nonattainment downwind, EPA
will require those states to submit SIP provisions to limit NOx emissions to those
levels specified by EPA; the specific means and sources affected would be determined
by the state. Only if a state did not make the required submission would EPA take
enforcement actions, including promulgation of a federal implementation plan (FIP)
for the state.
Section 126 does not work this way. Under section 126, if a petition is granted,
EPA is responsible for devising and implementing control strategies for the affected
sources. Thus, unlike the SIP process where states determine control strategies to
achieve mandated reductions, section 126 requires EPA to select and impose
appropriate controls on a state’s affected emission sources. In effect, section 126
implementation is more like a FIP than a SIP. Also, unlike the SIP process, which can
coordinate strategy across all emitting sectors, section 126 only addresses major
stationary sources.
To reconcile these differences, EPA and the eight petitioning states entered into
a Memorandum of Agreement for EPA action on the section 126 petitions. The
December 1997 agreement harmonizes the time frame for EPA action on the section
1763 Federal Register 25911, May 11, 1998. Estimates are in 1990 dollars.

18 All the petitions targeted the Midwest; however, some included other sources in the South,
Southeast, and Northeast. A discussion of the petitions are provided in the proposed Ozone
Transport Rule. A copy of the Memorandum of Agreement Concerning Schedule for EPA
Action on Section 126 Petitions is available from EPA’s web site:
[http://www.epa.gov/airlinks/]

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126 petitions with EPA’s proposed schedule for action on the Ozone Transport Rule.
Highlights of that schedule are presented table 2. In line with that schedule, EPA
issued an Advance Notice of Proposed Rulemaking for the section 126 petitions
concurrently with its proposed notice of supplemental rulemaking in April 1998.19
Midwestern states, which would bear the brunt of any reductions imposed if EPA
takes action under the section 126 petitions, have objected to the agreement. They
claim that the northeastern states have not themselves taken adequate actions to
address ozone pollution, that reductions imposed on the Midwest would not solve the
petitioning states’ problems, and that the costs to the midwestern states in reducing
emissions would not be commensurate with benefits. An attempt to block EPA from
acting on the petitions was filed by midwestern utilities in the U.S. Court of Appeals
for the D.C. Circuit. This lawsuit was dismissed by the court on April 28, 1998, since
EPA's actions "do not constitute final appealable orders." (Midwest Ozone Group v.
EPA, D.C. Cir., No. 97-1627, 4/28/98)
On February 25, 1998, the eight petitioning Northeast states asked a federal
court to make the agreement and schedule binding (Connecticut v. Browner, D.C.
SNY, No 98CIV.1376, 2/25/98). In light of the midwestern states objections to the
petitions, additional litigation is a clear possibility before the section 126 process
becomes final.
Legislation is also possible. Midwest legislators have introduced legislation to
delay implementation of both the Ozone Transport Rule and the section 126 petitions.
H.R. 3690, introduced by Representative Wise, would delay promulgation of the final
Ozone Transport Rule for at least two years after enactment while additional
modeling is performed and examined, and delay the effective date of the final rule until
the later of May 1, 2005 or five years after promulgation of the final rule. EPA action
on the section 126 petitions would be delayed until 180 days after promulgation of the
Ozone Transport Rule.

19 Environmental Protection Agency. Findings of Significant Contribution and Rulemaking
on Section 126 Petitions for Purposes of Reducing Interstate Ozone Transport. Advance
Notice of Proposed Rulemaking. 63 Federal Register 24058-24061

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Table 2. Proposed Schedule for Section 126 and Section 110 Actions
Date of Proposed
Proposed Action
Action
April 1998
EPA publishes an advance notice of proposed
rulemaking with respect to the Sec. 126 petitions
September 1998
(1) EPA publishes a notice of proposed rulemaking
with respect to the Sec. 126 petitions;
(2) EPA issues final Ozone Transport Rule
establishing NOx budgets
April 1999
EPA takes final action on Sec. 126 petitions. Action
includes determination of their merit and proposed
remedy, but postpones imposition of controls
September 1999
States submit SIP revisions to EPA in response to
Ozone Transport Rule
November 1999
If EPA chooses, EPA’s April 1999 Sec. 126 action
may be automatically imposed on affected states if
EPA does not propose to approve those states’ SIPs
submitted under the Ozone Transport Rule
May 2000
If EPA chooses, EPA’s April 1999 Sec. 126 action
may be automatically imposed on affected states if
EPA does not approve those states’ SIPs submitted
under the Ozone Transport Rule.
September 2002
States implement SIPs under the Ozone Transport
Rule
SOURCE: Memorandum of Agreement, December 18, 1997
Conclusion
Ozone transport is a complex phenomenon; efforts to alleviate the effects of
transport on downwind states will result in a mix of winners and losers, both in terms
of states having to impose controls and in terms of states complying with ozone
NAAQS. With major stakes involved, it is not surprising that some characterize
OTAG’s final recommendations as vague and ambiguous, where others see needed
flexibility. In any event, OTAG’s work assessing ozone transport moved the debate
along and clarified an issue made more important because of the new 8-hour standard.
Overall, OTAG sanctioned flexibility, both for the states and for EPA in deciding
on how to respond to the ozone transport issue and how to make necessary
reductions. Although EPA often took the most stringent interpretation of OTAG’s

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recommendations in its proposed Ozone Transport Rule, it also has attempted to
include flexibility for states in implementing proposed NOx reductions. In particular,
the sanctioning and encouragement of a regional NOx cap and trade program for
electric utilities and other major stationary sources could significantly reduce the cost
of compliance with the rule. EPA does not have the authority to make participation
in a regional trading program mandatory, unlike the current acid rain SO program.
2
Instead, it is up to the states to decide whether the benefits of reducing emissions
across the enlarged trading area that the model trading program promises are worth
the requirements EPA has imposed.
Implementation is also complicated by section 126 petitions submitted by eight
northeastern states. Implementation of controls under section 126 is an EPA-directed
affair, in contrast with the state strategies required under section 110. In addition, a
section 126 action could raise questions with respect to the Regulatory Flexibility Act
as the controls imposed would clearly come from EPA and not the states (as is the
case with section 110). In short, it is unclear whether the petitions under section 126
will expedite NOx control actions by affected states, or merely increase litigation on
an already litigious issue.