III. REGULATORY PROGRAMS FOR NOX This Part discusses the standard for nitrogen oxides ( NOX) established under Title IV, with reference to other NOX regulations applicable to sources in northeastern states and to new sources. Title IV's Phase I NOX program has succeeded in many respects. Although litigation delayed the program one year, firms achieved 100% compliance with the standards in every year thereafter. 204 In other ways, however, the program failed to achieve noteworthy results. The standards were relatively weak, and exempted major groups of boilers 201. EPA, Clean Air Markets Div. ( unpublished data, on file with author) ( 2000). 202. Even the 3% of interregional trading showed little directionality, often consisting of transfers between neighboring states that happened to cross a regional boundary. See Swift, supra note 196, at 954 55, 957; U. S. GENERAL ACCOUNTING OFFICE, PUB. NO. GAO/ RCED 00 47 ACID RAIN: EMISSIONS TRENDS AND EFFECTS IN THE EASTERN UNITED STATES ( Mar. 2000), available at http:// www. gao. gov/ archive/ 2000/ re00047. pdf [ hereinafter GAO 2000 EFFECTS]. 203. Data derived from analysis of EPA COMPLIANCE REPORTS 1995 1999. Emissions and allowance totals were calculated by summing the emissions and allocations to Phase I affected units within each plant. 204. EPA 1999 COMPLIANCE REPORT, supra note 1, at 2; EPA, OTC NO X BUDGET PROGRAM: 1999 COMPLIANCE REPORT 2 ( 2000), available at http:// www. epa. gov/ airmarkets/ cmprpt/ otc99/ index. html ( last updated Dec. 11, 2000) [ hereinafter EPA 1999 OTC NOX COMPLIANCE REPORT]. 352 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 from coverage. As contemplated by Congress, the standards led firms to do little more than install retrofits of low NOX burners on most boilers, limiting innovation to one point in time and to methods that reduced the cost of making the retrofits. Title IV established the first regulation of NOX faced by many existing power plants. Most coal fired power plants were built before the Clean Air Act of 1970, and so faced few restrictions on NOX emissions, as Clean Air Act regulation focused on new sources. 205 Although states were authorized to regulate existing sources in areas that had not attained the national ambient standards, these tended to be large urban centers; since most coal plants were located outside such areas, few states imposed significant restrictions. 206 Major state level regulatory activity on NOX did not commence until the 1990s, when scientists began to emphasize the role of NOX in the formation of urban ozone. 207 During the period studied, incentives to firms to make added NOX reductions came primarily from the Ozone Transport Commission ( OTC) cap and trade program established in 1999,208 and from new source NOX standards that apply primarily to gas fired turbines. 209 The OTC program led firms to use a variety of additional technologies to make further NOX reductions, but innovation under the new source standards has focused primarily on end of pipe control technologies. 210 The regulatory system for NOX therefore creates a fragmented set of rate standards that impose different limits and compliance burdens on 205. See Figure 3 4 for data on age of plants. The 1970 Clean Air Act established federal performance standards for new or modified sources, initially establishing New Source Performance Standards, followed by the more complex New Source Review process in the 1977 Amendments. 42 U. S. C. § § 7411, 7503 ( 1994). New Source Performance Standards for NOX for boilers and turbines are found at 40 C. F. R § 61 ( 2000). In contrast, existing power plants were not subject to direct federal regulation until Title IV was passed in 1990. 206. Illinois, for example, only regulated larger existing plants in the Chicago or St. Louis ( IL) major metropolitan areas, and imposed fairly lenient NOx standards. These were 0.46 kg/ MW/ hr ( 0.3 lbs/ mmBtu) for gas or liquid fossil fuels, and 1.39 kg/ MW/ hr ( 0.9 lbs/ mmBtu) for coal. See Existing Emission Sources in Major Metropolitan Areas, ILL. ADMIN. CODE tit. 35, § 217.141 ( 2001). Many other states simply did not develop any standards for existing power plants. See, e. g., 41 KY. ADMIN. REGS. 61 ( 1981). Compare with standards set for new electric utility steam generating units. 41 KY. ADMIN. REGS. 59: 016 ( 1981). States in the Ozone Transport Region typically did not impose NOX standards on existing plants until March 15, 1994. See, e. g., N. Y. COMP. CODES R. & REGS., tit. 6 § 227 2 ( 2001). Earlier standards for stationary sources focused on particulates and opacity. See id. § 227 1. 207. See generally NAT'L RESEARCH COUNCIL, RETHINKING THE OZONE PROBLEM IN URBAN AND REGIONAL AIR POLLUTION ( 1991) ( discussing national policy on the effect of NOx in urban areas). 208. See infra Part III. E. 1; 42 U. S. C. § 7511c ( 1994). 209. See infra Part III. E. 2. 210. See Figure 4 2. 2001] HOW ENVIRONMENTAL LAWS WORK 353 different technologies and far more lenient standards on old versus new sources. This is very unlike the SO2 program in which all sources faced the uniform emissions cap and allowance trading system. 211 A. Background Nitrogen oxide ( NOX) is a criteria pollutant regulated under the Clean Air Act, 212 and plays a major role in a variety of environmental problems, including acid precipitation, the formation of particulates and ozone dangerous to human health, and damage to plants and agricultural productivity. 213 Electricity generating facilities emitted 6.1 million tons of NOX in 1998, 25% of national emissions, with 88% of these emissions from coal fired generation. 214 The combustion process produces NOX in two principal ways. Fuel NOX is created through oxidization of nitrogen in the fuel, with combustion conditions determining the extent of NOX formation. Thermal NOX is created by the reaction of molecular nitrogen and oxygen in the combustion air, and increases with combustion temperature and oxygen content. Fuel NOX can be controlled to a small degree by burning coal with lower nitrogen content, but thermal NOX must be controlled by lowering flame temperature and creating oxygenlean conditions in the combustion process to reduce NOX formation. Low NOX burners control fuel and air mixing to reduce peak flame temperatures, and are an economical way to limit the formation of NOX in electricity generating units. 215 Installing low NOX burners, however, is more difficult in some boiler types than others, and achieves different levels of emissions reductions in different boilers. 216 Because low NOX burners may increase unburned carbon levels, they typically lower boiler 211. See infra Part III. E. 3. 212. 42 U. S. C. § 7409( c) ( 1994). 213. See EPA, PUB. NO. EPA 456/ F 99 006R, TECHNICAL BULLETIN, NITROGEN OXIDES ( NO X), WHY AND HOW THEY ARE CONTROLLED ( Nov. 1999), available at http:// www. epa. gov/ ttn/ catc/ dir1/ fnoxdoc/ pdf. 214. EPA EMISSIONS TRENDS, supra note 8, at 2 2, 3 4. Vehicles contributed 53% of national emissions, while other fuel combustion contributed 17%. Id. 215. Normally, "[ r] etrofitting low NOX burners in wall fired boilers . . . involves removing the existing burners and providing more space for the installation of the low NOX burners" together with modifications to the waterwall and windbox. " For small furnaces, installation of low NOX burners may cause flames to impinge on the opposite wall of the furnace," causing derating of the unit load and corrosion of the waterwalls. EIA, Reducing Nitrogen Oxide Emissions: 1996 Compliance with Title IV Limits, ELEC. POWER MONTHLY, at xv ( May 1998), available at http:// www. eia. doe. gov/ cneaf/ electricity/ nox_ emissions/ contents. html. 216. Id. 354 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 efficiency by a few percentage points. 217 In addition to these " combustion controls" that limit NOX formation, NOX emissions can be destroyed after formation by control technologies. Our research found that utilities struggled with the alternatives available for reducing NOX emissions. Most had limited experience with most of the later generation low NOX burner technology, and there were major concerns over detrimental impacts of low NOX burners on boiler tubes and overall efficiency. Control technologies like Selective Catalytic Reduction ( SCR) and Selective Non Catalytic Reduction ( SNCR) at the time were not well proven on a commercial scale nor for large coal fired units. Also, deregulation was on the horizon and some companies were hesitant to invest capital with a lengthy recovery period. Changing to lower emitting fuels could possibly trigger New Source Review ( NSR) requirements and could adversely affect unit efficiency, driving up production cost and making the unit less competitive. These uncertainties caused firms to delay and minimize expenditures to the extent possible while maintaining their obligation to serve load. 218 B. Title IV NOX Standard and Its Legislative History Title IV was designed to cut NOX emissions from utility boilers by 2 million tons from 1980 levels by the year 2000.219 However, instead of using an emissions cap and allowance trading system as with SO2, Congress established annual average emission limits for coal fired electric utility units based on the use of " low NOX burner technology." 220 Phase I of the NOX program lasted from 1996 through 1999, and applied to the 265 wall fired and tangentially fired boilers221 included in the Acid Rain Program as Table A units, or substitution units active on January 1, 1995.222 The legislation exempts other boiler types from 217. Low NOX burners may increase carbon monoxide and unburned carbon levels, contributing to imbalances in the distribution of air and fuel. Operating low NOX burners with systems that accurately regulate the fuel and air supplies can alleviate these problems. STATE AND TERRITORIAL AIR POLLUTION PROGRAM ADMINISTRATORS & ASSOCIATION OF LOCAL AIR POLLUTION OFFICIALS ( STAPPA/ ALAPCO), CONTROLLING NITROGEN OXIDES UNDER THE CLEAN AIR ACT: A MENU OF OPTIONS 18 ( July 1994) [ hereinafter STAPPA/ ALAPCO 1994]; Acid Rain Program; Nitrogen Oxides Emission Reduction Program, 57 Fed. Reg. 55,632, 55,639 ( Nov. 25, 1992). 218. See Interviews with utility representatives. 219. 42 U. S. C. § 7651( b) ( 1994). 220. Id. § 7651f( b). 221. Most boilers firing pulverized coal are wall fired or tangentially fired. Wall fired boilers produce discrete flames from burners mounted in the boiler wall, or in opposing walls. Tangentially fired boilers have burners at the four corners of the furnace to create a single rotating fireball in the center. See STAPPA/ ALAPCO 1994, supra note 217, at 14. 222. 42 U. S. C. § 7651f( b) ( 1994). 2001] HOW ENVIRONMENTAL LAWS WORK 355 Phase I because low cost combustion controls such as low NOX burner technology were not known to be available for these boilers at the time of passage of the Act. 223 Phase II of the program started in 2000, and includes all other units affected by Title IV. 224 Since the units included in Phase I have already made their boiler modifications, they are permanently grandfathered at the lower Phase I standards and not the more stringent Phase II standards. 225 Figure 3 1 shows the emissions limits applicable to different boiler types in Phase I and Phase II of the program. Phase I limits for wallfired and tangentially fired boilers were 0.50 and 0.45 lb/ mmBtu, a significant reduction from their average uncontrolled emission level of 0.95 and 0.65 lb/ mmBtu respectively. 226 Figure 3 1. Title IV NOX Standards by Boiler Type ( lb/ mmBtu) 227 Phase I Phase II Boiler Type # of Units Standard # of Units Standard Tangentially fired 135 0.45 308 0.40 Dry bottom wall fired 130 0.50 299 0.46 Cell burners 36 0.63 Cyclones (> 155 MW) 55 0.86 Vertically fired 28 0.84 Wet bottom (> 65 MW) 26 0.84 223. These units, known as Group 2 boilers, include cell, cyclone, and wet bottom boilers. Id. § 7651f( b)( 2). 224. Phase II includes both wall and tangentially fired ( Group 1) boilers not covered in Phase I and other types of boilers ( Group 2). Congress authorized the EPA to establish a lower limit for these remaining Group 1 boilers " if the Administrator determines that more effective Low NOX burner technology is available." The EPA made such a finding, and in 1996 established slightly lower limits for Group 1 boilers in Phase II. Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,113 ( Dec. 19, 1996). 225. 42 U. S. C. § 7651f( b)( 2) ( 1994). 226. EPA, PUB. NO. AP 42, COMPILATION OF AIR POLLUTANT EMISSION FACTORS ( 1995); see also ICF CONSULTING, INC., REGULATORY IMPACT ANALYSIS OF THE PROPOSED INTERVENTION LEVEL PROGRAM FOR SULFUR DIOXIDE: FINAL REPORT, PUB. NO. EPA 452/ R 96 14 ( 1996) [ hereinafter ICF RIA 1996]. 227. See Clean Air Act, 40 C. F. R. § § 76.5, 76.6 ( 2000); Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,112 18 ( Dec. 19, 1996). 356 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 In contrast to the intense debate on sulfur standards, there is relatively little legislative history on the NOX standard adopted in Title IV. The NOX reductions were perceived to be an adjunct to SO2 regulation, as the contribution of NOX to acid deposition was confined mostly to western states, and NOX controls were expected to cost far less than SO2 controls. 228 Although the motives for regulating NOX included its contribution to nutrient loading in sensitive waters and in ozone formation, at that time the role of NOX in ozone formation was not perceived to be as important as it is today. 229 The manner in which NOX would be regulated shifted dramatically during the legislative process. As introduced, the NOX provisions required affected units to meet an annual tonnage limit for NOX and provided an allowance trading provision, similar to the SO2 cap andtrade program. 230 However, this was changed radically upon adoption of a substitute provision introduced by Senator Trent Lott of Mississippi that established emission rate standards for NOX set in the traditional manner for each boiler type. 231 The final rate standard was based on what could be achieved using low NOX burner technology, with an explicit recognition by Congress that this would not lead to major costs. 232 Subsequently, Congress added a number of flexibility provisions designed to reduce the costs to affected firms. First, the rate standard is an annual standard, which allows more flexibility in technology use than a daily or monthly standard. 233 Second, companies are allowed to average their units to meet the rate standard, an important tool that most companies would use. 234 Third, the law allows an individual unit to 228. S. REP. NO. 101 228, at 333 ( 1989). 229. See Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase I; Final Rule, 59 Fed. Reg. 13,538 ( Mar. 22, 1994); NAPAP INTEGRATED ASSESSMENT, supra note 3, at 2 4. 230. S. 1630, 101st Cong. § 407 ( 1990). 231. Senator Lott stated that under his amendment, " utilities will not be forced to install unreasonably expensive equipment" and NOX emission limits will be based on " the application of low NOX burner technology, a much more reasonable and cost effective method proven to successfully achieve significant NOX reductions." 136 Cong. Rec. 5044 ( 1990). 232. 42 U. S. C. § 7401( a)( 4) ( 1990) ( current version at 42 U. S. C. § 7401 ( 2000)); S. 1630 101st Cong. § 401( a)( 4) ( 1990). Together with Senator Lott, Senator Lincoln Chafee asserted that the provisions that became section 407 would not force the installation of " unreasonably expensive equipment" and added that " reasonable and cost effective methods have proven to be successful in achieving significant NOX reductions." 136 Cong. Rec. 5044 ( 1990); see also MCLEAN, supra note 191, at 9. " It seems that through the legislative process, the goal shifted from a specific emissions reduction target to specific performance standards to a requirement to use 1 or more technologies. . . ." Id. 233. See 42 U. S. C. § 7651f ( 1994). 234. See id. 2001] HOW ENVIRONMENTAL LAWS WORK 357 obtain an Alternate Emission Limit ( AEL) if it could not meet the standard even after installing a low NOX burner. 235 A final flexibility provision created through the regulations was the Early Election Program that allowed Phase II units an exemption from Phase II standards until 2008 if they voluntarily met Phase I standards by 1997.236 The end result was a rate standard with both flexibility and a waiver provision that ensured firms would not need to do more than install known, relatively inexpensive combustion controls on their units. The limitations of this mandate became apparent when the Court of Appeals for the District of Columbia Circuit subsequently determined that the EPA's initial regulation, which would have required both low NOX burners and " overfire air" ( a related combustion control), exceeded the agency's authority. 237 The court held that only low NOX burners were required. 238 In this sense, Title IV was almost as much a limitation on the EPA's power to regulate NOX emitted by electricity generating units as it was an authorization.

C. Results of Title IV 1. Initial Litigation and Delay The initial result of the Title IV NOX standard was controversy over the meaning of low NOX boiler technology. After much debate, the EPA promulgated regulations establishing NOX emission limits for Phase I units to begin in 1995, based on the combined effect of low NOX burner and overfire air technology. 239 However, industry sued and the United States Court of Appeals for the D. C. Circuit vacated the rule, holding that low NOX burners do not incorporate the combination of low NOX burners and overfire air. 240 Consequently, the EPA reissued a revised final rule in April of 1995 that eliminated the incorporation of overfire air, and delayed the effective date of Phase I by one year to 1996.241 235. Id. § 7651f( d). 236. Clean Air Act, 40 C. F. R. § 76.8 ( 2000). 237. Al. Power Co. v. EPA, 40 F. 3d 450, 456 ( D. C. Cir. 1994). 238. Id. 239. Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase I; Final Rule, 59 Fed. Reg. 13,538, 13,540 ( Mar. 22, 1994). 240. Al. Power, 40 F. 3d at 451 ( vacating Phase I NOX final rule). 241. Acid Rain Program; Nitrogen Oxides Emission Reduction Program: Direct Final Rule, 60 Fed. Reg. 18,751, 18753, 18757 ( Apr. 13, 1995). 358 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 2. Implementation Following the lawsuit, implementation of the NOX program was relatively straightforward, and all 265 coal fired units affected under Phase I met the legal requirements in each year. 242 Most, or 175 units, met the emissions rate limits as expected through the installation of low NOX burners. 243 The rate and tonnage reductions resulting from Phase I are shown graphically in Figures 3 2 and 3 3. Overall, units lowered their average NOX emissions rates to 0.40 lb/ mmBtu during Phase I, 43% below the 1990 average of 0.70 lb/ mmBtu. 244 This reduced NOX emissions by approximately 400,000 tons per year, or 32% below 1990 levels, with overall reductions projected to rise to 2,060,000 tons per year during Phase II, which started in 2000.245 There is less reduction in total tons than in rates because economic growth led to higher utilization of generating units. Unlike the SO2 program, in which emissions are capped, the rate based NOX program will allow NOX emissions to rise with increased utilization. 246 See Figure 3 2. NOX Rate Reductions During Phase I247 See Figure 3 3. NOX Tonnage Reductions During Phase I248 Most of the 265 Phase I units achieved compliance in a straightforward manner, by retrofitting low NOX burners. Overall, 175 units ( 66%) installed low NOX burner technologies for compliance, with most ( 114) of these units coupling the low NOX burners with overfire 242. EPA 1999 COMPLIANCE REPORT, supra note 1, at 2. 243. Data derived from ELI analysis of EPA, ACID RAIN PROGRAM: 1998 EMISSIONS SCORECARD ( 1999), available at http:// www. epa. gov/ airmarkets/ emissions/ score98 ( last updated Dec. 11, 2000) [ hereinafter EPA 1998 EMISSIONS SCORECARD]. This 1998 EMISSIONS SCORECARD was used because the 1999 EMISSIONS SCORECARD, supra note 1, was found to contain errors, notably in recording that 28 Phase I units had switched from low NOX burners to an uncontrolled state, which upon investigation by ELI turned out to be inaccurate. 244. EPA 1999 COMPLIANCE REPORT, supra note 1, app. C 2. The range of emissions rates for the affected boilers also has been reduced, from 1990 baseline emissions ranging from 0.26 to 1.41 lb/ mmBtu to a range from 0.13 to 0.81 lb/ mmBtu in 1999. 245. EPA 1999 COMPLIANCE REPORT, supra note 1, at 12. These 2 million tons are a reduction in what would have been emitted without regulation, as the rate based standard allowed overall emissions to grow with economic growth and increased utilization. See id. at 2. 246. EPA, ACID RAIN PROGRAM: 1998 COMPLIANCE REPORT 13 15 ( 1999), available at http:// www. epa. gov/ airmarkets/ cmprpt/ arp98 ( last updated Dec. 11, 2000). Note the slight reduction in emissions observed from 1998 to 1999 was caused in part by the initiation of the cap and trade NOX budget program for sources in northeastern states. See infra Part III. E. 1. 247. EPA 1999 COMPLIANCE REPORT, supra note 1, exh. 9, at 14. 248. Id. exh. 10, at 15. 2001] HOW ENVIRONMENTAL LAWS WORK 359 air. 249 Many firms also used the ability to average emissions among their plants, creating twenty two averaging plans covering 204 of the 265 units in Phase I. 250 This allowed fifty two uncontrolled units to continue to emit above the limit, and comply by averaging; of the remaining units, twenty three already met the Phase I limits, seven were not operating, and eight used other compliance technologies, principally independent overfire air. 251 Figure 3 4 shows the use of compliance technologies according to the decade in which the plant was built.

See Figure 3 4. Phase I NOX Control Technologies by Age of Plant252 Overall, flexibility provisions in the law, including the annual rate standard and the ability to average emissions among a firm's units, allowed relatively economical compliance. Only ten received interim Alternate Emissions Limits from the EPA when they could not meet their rate limits even after installing low NOX burners. 253 Overall, the EPA estimated that the cost of the Phase I NOX reduction program to the electric power industry was $ 267 million per year. 254 Analysis of the cost of the burner retrofits in Phase I reveal an average per ton reduction cost of $ 412, with an average capital cost of $ 19.75/ kW in 1990 dollars. 255 The two types of boilers represented in Phase I, however, experienced markedly differing costs. Wall fired boilers achieved reduction at $ 161/ ton, whereas tangentially fired boilers cost $ 631/ ton. 256 D. Business Behavior and Title IV The following Subparts discuss business responses to Title IV's NOX program and relate findings to Title IV's regulatory structure. Subsequent sections discuss other NOX regulations affecting electricity generators in the 1990s. Finally, Part IV compares the results of the regulatory programs for NOX with those for SO2.

249. EPA 1998 EMISSIONS SCORECARD, supra note 243. 250. EPA 1999 COMPLIANCE REPORT, supra note 1, exh. 8, at 13, app. C 1. 251. See EPA 1998 EMISSIONS SCORECARD, supra note 243. 252. Data derived from analysis of EPA report. Id. tbl. B1. 253. See id. 254. EIA, supra note 215, at 4. 255. Acid Rain Program; Nitrogen Oxides Emission Reduction Program, 61 Fed. Reg. 67,112, 67142 43 ( Dec. 19, 1996). 256. Id. at 67,141 42. Of the boilers assessed, wall fired boiler retrofits averaged $ 161 per ton of NOX reductions, with a high of $ 382 and a low of $ 37, whereas tangentially fired boilers achieved average costs of $ 631 with a high of $ 2625 and a low of $ 312. The unweighted average of all boilers is $ 282, but a weighted average is $ 412. Id.; see also EIA, supra note 215, at 10 ( noting that capital cost for twenty one wall fired plants varied between $ 9 and $ 44 per kilowatt). 360 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 1. Rate Standards Led to One Time Compliance Using the Expected Technology As can be seen from Figure 3 4, the principal effect of the Title IV rate standards was the one time retrofit of a known compliance technology. Although these standards significantly reduced NOX emissions from baseline levels, thereafter firms made little effort or progress in reducing NOX. This reveals one of the intransigent problems with rate based limits, as they do not encourage continuous efforts by firms to reduce emissions, or provide incentives to go beyond the standard.

2. In Making Pollutant Reductions, Firms Sought First to Optimize Their Process Efficiency, as Regulations Were Sufficiently Flexible to Create Benefits Through Doing So The initial response of plant operators subject to the Phase I NOX program was to optimize boilers by addressing such parameters as air/ fuel mixtures and temperatures to assure the lowest possible NOX emissions prior to investing in additional control technology. 257 Optimization can increase efficiency, and so reduce not only NOX but all other pollutants emitted by the plant as well. Since most units had not been subject to NOX requirements before, 258 the results of optimization were generally positive. Plant operators report that the optimization process achieved NOX reductions of several percent, although some reported gains of 10% to 20%. 259 Vendors of the services and software products involved in optimization claim greater reductions of up to 30%, especially in plants that were previously poorly maintained. 260 257. Note the difference between optimization, or fine tuning boiler process to achieve maximum efficiency, and compliance options that involve purely operational modifications. While the latter may not involve any additional NOX controls, they represent compliance alternatives that reduce NOX further but involve costs or a loss of efficiency. As the OTC capand trade program shows, many firms discovered low cost reductions through operational modifications when subject to a broad and flexible regulatory standard that made them " look everywhere" for reductions, but this differs from optimization. 258. The exceptions were plants built after 1971, and thus already subject to new source standards under the Clean Air Act. See 42 U. S. C. § 7411 ( 1994); see also supra Part III. A. 259. See Interviews with utility representatives; see also ELEC. POWER RESEARCH INST., EPRI PLANT MAINTENANCE OPTIMIZATION SERVICES, Document SO 113427 ( July 1999) [ hereinafter EPRI PLANT MAINTENANCE]; Elec. Power Research Inst., Overhauling the Plant Maintenance Process, EPRI FOSSIL PLANT NEWS ( Winter, 1999). 260. The optimization process has been greatly assisted by the development of new optimization software programs that monitor and develop correlations between parameters, allowing operators to better understand the combustion process and adjust the parameters to yield optimal results ( i. e., low levels of NOX and carbon monoxide, together with best efficiency). The developers of one such program, Boiler Op, report NOx reductions averaging between 20% and 30% at a dozen units implementing their system, with minimum deterioration of heat rate and 2001] HOW ENVIRONMENTAL LAWS WORK 361 The availability of flexibility mechanisms in Title IV, such as averaging and the Early Election Program, prompted widespread use of optimization in the Phase I NOX program. Regulatory design strongly affects the use of optimization, as less flexible rate standards may create few incentives for optimization. For example, a percentage rate reduction standard, like the 1977 SO2 New Source Performance Standard, creates no incentives for efficiency or optimization because it only measures reductions achieved within the stack. Concentration rate standards provide incentives to optimize only to those units that previously exceeded the rate limit by a small amount. All others must install control technology. However, more flexible regulatory systems, such as those that allow averaging or trading, make optimization important for most or all affected units, and thereby promote efficiency as well as lower cost compliance.

3. Firms Heavily Used Flexibility Mechanisms with Low Transaction Costs, Such as Averaging Firms heavily used the two flexibility provisions in the law that provided significant economic benefits with relatively simple procedures. One was the averaging provision, which allowed firms to average the emissions rates of various units under their control. 261 The second was the Early Election Program, which allowed firms to include Phase II units in Phase I, giving them a seven year grace period from more stringent Phase II limits. 262 Both had low transaction costs because they could be implemented through a simple designation by a firm. 263 In contrast to these, the AEL exemption process was complex and could be used only if a unit could not reach the standard even after installing a low NOX burner; it was used for only ten units. 264 other operating parameters. Carlos Romero et al., Field Results from Application of Boiler Op to Utility Boilers, Presentation at EPRI DOE EPA Mega Symposium ( August 1999) ( notes on file with author). Another program uses a sequential optimization process that maintains boiler performance while achieving reduction in NOX. Using this program, without any other add on reduction equipment, reductions in NOX of between 5% and 20% from historical levels were achieved at one unit. Another similar program, GNOCIS, an EPRI collaborative project, monitored twenty five to fifty parameters and achieved about a 10% reduction in NOX. See EPRI PLANT MAINTENANCE, supra note 259; Elec. Power Research Inst., supra note 259. 261. 42 U. S. C. § 7651f( e) ( 1994). 262. Clean Air Act, 40 C. F. R. § 76.8. 263. Id. § § 76.8, 76.11. 264. EPA 1999 COMPLIANCE REPORT, supra note 1, at 12. 362 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 a. Averaging and Uncontrolled Units The Clean Air Act allowed utilities to comply with applicable rate standards by averaging the heat input weighted annual emissions rate of two or more units to meet the applicable rate standard. 265 This allowed large firms with many units to shift the burden of compliance between units, providing flexibility almost equivalent to that of trading. Averaging was a widely used compliance strategy, and twenty two firms included 204, or 80%, of the 265 affected units in averaging plans in a typical year. 266 Averaging plans allowed larger firms to avoid installing low NOX burner technology in some units, and helped to lower compliance costs while maintaining the overall emissions reduction goal. As evident in Figure 3 4, it also allowed a shift in investment to newer facilities, as units built before 1954 were more likely to be uncontrolled than controlled. Interviews addressed the question whether the averaging provision may have allowed firms to extend the life of older facilities, but respondents generally reported using averaging as a flexibility provision, to save on costs they would have otherwise incurred in installing low NOX burners in these plants. 267 Despite allowing greater flexibility, most averaging plans surprisingly resulted in a significant level of over compliance, with the average emissions rates 10% or more below the applicable limits. 268 The results also show that some firms were overly cautious in creating averaging plans, as nine plans, including thirty seven units, actually did not need to average at all since all units met the standard. 269 However, even for these units, inclusion in an averaging plan may have provided firms with greater operational security during the year, providing compliance assurance even if one unit were to fail to meet its rate limit. Averaging allowed fifty two units, typically older ones, to remain uncontrolled despite exceeding the emissions standard. 270 With average emissions of 0.61 lb/ mmBtu, still above the statutory limits, these units 265. 42 U. S. C. § 7651f( e). 266. EPA 1999 COMPLIANCE REPORT, supra note 1, exh. 8, at 13, app. C 1. The list of units included in averaging plans shows that most ( seventeen plans or 77%) involved units in only a single state. 267. TVA, for example, averaged six units of its Johnston plant that marginally exceeded their limit, avoiding a major capital outlay for a small NOX reduction. EPA 1999 COMPLIANCE REPORT, supra note 1, app. C 1, C 4. 268. Id. app. C 1. 269. See EPA 1999 COMPLIANCE REPORT, supra note 1. 270. Fifty two plants are listed as uncontrolled in EPA 1998 EMISSIONS SCORECARD, supra note 243. 2001] HOW ENVIRONMENTAL LAWS WORK 363 can remain uncontrolled due to the flexibility afforded by averaging. 271 Although they remain uncontrolled, the averaging provisions still create an incentive for reductions, such as through optimization, as any emissions reduction helps the overall average. Therefore, these units have reduced their emissions rate from 0.67 lb/ mmBtu in 1990, and the rates of the highest emitters have been reduced from 1.41 lb/ mmBtu in 1990 to 0.81 lb/ mmBtu in 1999. An additional twenty three units, mostly substitution units, are relatively clean plants that are uncontrolled because they meet the required emissions limits anyway, totaling seventy two uncontrolled units in all. Because of averaging incentives, even these plants reduced their emissions, from an average of from 0.45 lb/ mmBtu in 1990 to 0.35 lb/ mmBtu in 1999.272 b. Early Election Units Another widely used flexibility provision designed to promote early NOX reductions was the Early Election compliance option created by the EPA. 273 Under this regulatory program, wall or tangentially fired boilers that would normally not be regulated until Phase II could elect to comply with Phase I emissions limits starting in 1997, and would not be required to meet the more stringent Phase II limits until 2008.274 Two hundred seventy four units in thirty six states participated in the EPA's Early Election Program for NOX, almost half of the 614 eligible units. 275 These participating units reduced their NOX emissions rates by 20%, from an average of 0.46 lb/ mmBtu in 1990 to 0.37 lb/ mmBtu in 1999.276 The Early Election Program resulted in environmental results by achieving net emissions reductions of 435,790 tons, or the difference between additional reductions of 557,491 tons 271. In this paragraph, emissions rate figures are derived from ELI analysis of unit emissions data of these fifty two units using EPA 1999 EMISSIONS SCORECARD, supra note 1. 272. Id. app. C 2. 273. Clean Air Act, 40 C. F. R. § 76.8 ( 2000). 274. There was vigorous debate between the EPA, environmentalists, and industry as to the appropriate number of years of exemption from Phase II limits. The goal was to provide early election units so there would be an incentive for firms to join, but also guarantee net environmental benefits. The final result was a seven year exemption. See id. If a utility failed to meet this annual limit for a boiler during any year, the unit was subject to the more stringent Phase II limit for Group 1 boilers beginning in 2000, or the year following the exceedance, whichever was later. Id. 275. EPA 1999 COMPLIANCE REPORT, supra note 1, at 16. 276. Id. 1990 emission rates for these units ranged from 0.17 to 1.15 lb/ mmBtu. Ten units in the Early Election Program were not operating in 1990: Cliffside 1, 2, 3, and 4; Riverbend 9 and 10; W. H. Zimmer 1; Cross 1; J. K. Spruce 1; and Glen Lyn 52. Reductions for these units were calculated by ELI from their 1995 emissions rates. 364 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 achieved in 1997 1999,277 and the expected higher emissions of 121,701 tons during the period 2000 2007.278 Another environmental benefit was the added value in achieving earlier reductions, which helped ecosystem recovery. Firms also benefited economically from the Early Election Program because it allowed operators to use less expensive compliance methods at certain units that could meet Phase I standards at low cost, and to avoid more costly investments, such as burner retrofits, that would be needed to meet the more stringent Phase II limits. Typical Early Election units had emissions rates slightly above the Phase I standard, and could meet that standard through optimization or other compliance methods that were low in cost, but could only achieve limited reductions. 279 Another business benefit of the program was that it provided greater regulatory certainty over a longer planning horizon for firms. Indeed, many units appeared to have been entered into the early election program as a precaution, as one third, or ninety, of the early election units were already below Phase II limits in 1990, and two thirds, or 201, below them in 1999.280 277. The net benefits total is given for 118 units using unit data presented in EPA COMPLIANCE REPORTS from 1997 1999. The calculations do not include any reductions made by units that were already operating at or below Phase I limits in 1990, nor by the thirty three units located in OTC states that had to comply with lower limits under state law. Early election units in OTC states were located in Connecticut ( one), New York ( nine), Pennsylvania ( seventeen), and northern Virginia ( six), and were required to meet OTC RACT requirements at least as stringent as those of Title IV by 1995. It was also assumed that emissions rates of units emitting at or below Phase I limits in 1990 reflect either unit design or changes made to the unit prior to the development of the Early Election Program, and so would not have risen above Phase I limits during Phase I. 278. Detriments were calculated for seventy two units using unit data presented in EPA COMPLIANCE REPORTS from 1997 1999. The calculations exclude the OTC units and all those whose average 1997 1999 emissions were at or below Phase II levels. The added emissions from these seventy two units in 2000 2007 is the difference between the actual emissions rate achieved during Phase I and the more stringent Phase II emissions rate, multiplied by seven years. However, if it is assumed that these plants would have emitted at a rate 10% below Phase II levels as a typical margin of safety, detriments increase to 483,783 tons, creating net benefits of only 73,708 tons from the program. 279. EPA 1999 COMPLIANCE REPORT, supra note 1. Low cost compliance methods include low excess air and burners out of service, which can achieve only 10% to 20% NOX reduction but cost very little. STAPPA/ ALAPCO 1994, supra note 217, at 16 17. Some operators interviewed report they had never optimized their boilers until Title IV provided the incentive through the Early Election Program. 280. Analysis derived from EPA 1999 COMPLIANCE REPORT, supra note 1, app. C 2. The lateness of the promulgation of Phase II rules may have been a factor that led some firms to designate units that already met the Phase II standard. Although firms had until January 1, 1997, to identify the units they would enter into the Early Election Program, most firms practically had to do so before the Phase II rules were finalized on December 19, 1996. See Clean Air Act, 40 C. F. R. § 76.8 ( 2000) ( Early election for Group 1, Phase II boilers); Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112 ( Dec. 19, 1996). 2001] HOW ENVIRONMENTAL LAWS WORK 365 c. Alternative Emissions Limits ( AELs)

In contrast to the simple procedures for averaging and early election units, a third flexibility option, Alternative Emissions Limits ( AELs), required high transaction costs and was little used. In order to qualify for an AEL, firms had to compile a detailed justification demonstrating that they attempted to install a low NOX burner in a unit and that it still failed to meet the emissions rate limit. 281 Firms filed for AELs for ten units in Phase I. These requests have only been approved on an interim status by the EPA, and are still involved in administrative proceedings four years after the start of the program. 282 4. Businesses Faced with Rate Standards Can Be Expected to Over Comply by 10%

One of the evident characteristics of firm behavior was overcompliance with the NOX standards. For Table A units, average emissions were 0.435 lb/ mmBtu during the four years of the program, 11% below the average limitation of 0.49 lb/ mmBtu. 283 Substitution unit emissions were even lower, averaging 0.37 lb/ mmBtu, partly because many of the substitution units were newer and were therefore already lower NOX emitters. 284 This over control represents several factors. Most firm representatives indicated that 10% over compliance represents a reasonable operating margin to ensure that a particular limit is not exceeded. 285 Since exceeding the limit would bring about a $ 2000 per ton fine and potential criminal penalties, 286 firms tend to design compliance technology that would slightly surpass the limit in case the technology does not perform quite as well as predicted, and operate the equipment to 281. See Clean Air Act, 40 C. F. R. § 76.10 ( 2000). The firm must show that it installed a low NOX burner or equivalent at the unit that was designed to meet, but then could not meet, the applicable emissions limitation, and provide operating data showing it was properly installed and operated in accordance with the design specifications. 282. See Interview with Brian McLean, Director of EPA Clean Air Markets Division, in Washington, D. C. ( July 18, 2000). 283. EPA 1999 COMPLIANCE REPORT, supra note 1, at 14. Emissions rates of Table A units gradually moved lower during Phase I, from 0.45 lb/ mmBtu in 1996, 9% below the average emissions limit, to 0.42 lb/ mmBtu in 1999, 14% below the average limit. Id. 284. Id. Many substitution units had already met New Source Performance Standards that are only moderately higher than the Phase I limits. As a group, the substitution units collectively emitted only 0.52 lb/ mmBtu NOX in 1990, well below the 0.77 lb/ mmBtu emitted by Table A units. Id. 285. See Interviews with utility representatives. 286. Title IV provides for an excess emissions penalty of $ 2000 for each ton emitted in excess of a unit's emissions limitations requirement. 42 U. S. C. § 7651j( a) ( 1994). The Act also provides civil and potential criminal penalties for each violation. Id. § 7413. 366 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 slightly over comply in case a malfunction reduces its efficiency towards the year's end. 287 However, over compliance is also the result of expected business behavior in the face of regulatory uncertainty, which was exacerbated in this case by the delay in promulgating proposed regulations, the subsequent lawsuit, and revisions to the standard. 288 The effects of uncertainty are pronounced in the case of NOX combustion controls, as every low NOX burner must be designed for a specific boiler, and eighteen to twenty four months are needed to design and install the burners. 289 Therefore, during the early stages of the planning process, when the NOX rules were not final, some firms opted to install overfire air technology ( OFA) as called for by the initial regulation, achieving slightly higher levels of emissions reductions. 290 5. Innovation under Title IV's Moderate Rate Standards Was Limited in Scope and Extent A retrospective view reveals that the Title IV NOX standards had only limited effects in leading firms to develop new solutions. The sections below describe technical innovation for the three main boiler types and for overfire air. This assessment also reveals that the Title IV rate standards led firms to identify better or cheaper ways of compliance only at the time the standard took effect, and did not drive continuous improvement.

a. Wall Fired Boilers Innovation significantly reduced the costs of compliance for wallfired boilers. The initial assumption was that Title IV would require firms to replace existing burners with low NOX burners, which was the basis of the EPA's cost estimates in its regulatory analysis. 291 However, manufacturers and users of wall fired boilers found that if the burners were in good condition and of sufficient capacity, removing a line of burners near but not at the top of the boiler would distribute air in a way 287. See Interviews with utility representatives. 288. See supra Part III. C. 289. See Interviews with utility representatives. 290. There are also business reasons to install OFA simultaneously with low NOX burners during the same unit outage, to preclude having to take the unit off line for another extended period of time for installation of the OFA system alone. Simultaneous installation would yield revenue savings and could avoid system reliability problems for the purchaser of the power. See Interviews with utility representatives. 291. See 1992 Acid Rain Program: Nitrogen Oxides Emission Reduction Program; Proposed Rule, 57 Fed. Reg. 55,632 ( Nov. 25, 1992). 2001] HOW ENVIRONMENTAL LAWS WORK 367 that replicates a new low NOX burner. This innovation reduced cost to a small fraction of the cost of installing a new burner, with capital costs on the order of only 25% to 50% of the cost of low NOX burners for comparable NOX control. 292 Some vendors report even lower numbers for some units, with capital cost about $ 1 per kilowatt, compared to the $ 10 to $ 20 per kW cost of a new low NOX burner. 293 b. Tangentially Fired Boilers Low NOX burner technology for tangentially fired boilers differs from that for wall fired boilers, with overfire air playing a more integrated role. 294 Retrofit applications of low NOX burners significantly reduce NOX emissions from tangentially fired boilers, with reductions in emissions between 10% and 48% in one study, and controlled levels ranging from 0.34 to 0.55 lb/ mmBtu. 295 However, contrary to the findings for wall fired and cyclone boilers, no significant innovation reduced the costs for low NOX burner retrofits for tangentially fired boilers. The cost of reductions averaged $ 631 per ton, and capital costs ranged from $ 6 to $ 42 per kilowatt. 296 c. Cyclone Boilers Although cyclone boilers were not included in Phase I, the reasons for this exclusion and the circumstances of their inclusion in Phase II present a good example of business behavior and innovation when 292. Research by General Electric Energy and Environmental Research Corporation and others have found that rather than completely replacing a burner, it may be possible to modify a conventional circular burner to effectively control fuel air mixing . . . . [ S] ince the hardware changes are simple, the retrofit costs for Low NOX Burner Modifications are much lower than for new Low NOX Burners. Usually there is no need to change flame scanning and ignition equipment, electric actuator drives or registers, and no need to modify coal conduits or the windbox. As a result the capital cost is typically on the order of only 25% to 50% of the cost of Low NOX Burners for comparable NOX control. Todd Melick & Roy Payne, Low NOx Burner Modifications for Cost Effective NOx Control, Presentation at EPRI EPA DOE Combined Utility Air Pollutant Control Symposium ( Aug. 1999) ( notes on file with author). 293. Interviews with technology vendors. 294. A commonly applied low NOX burner technology in United States coal fired boilers, the low NOX concentric firing system is specifically designed for tangentially fired boilers. These require the replacement of all fuel and air nozzles; however, no major changes in the structure, windbox, or waterwall are needed. Most of these systems include overfire air. EIA, REDUCING NITROGEN OXIDE EMISSIONS: 1996 COMPLIANCE WITH TITLE IV LIMITS ( 1998), at http:// www. eia. doe. gov/ cneaf/ electricity/ nox_ emissions/ ( last modified Dec. 14, 2000). 295. See Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,142 ( Dec. 19, 1996). 296. Id.; see also EIA, supra note 215, tbl. 3, at 10. 368 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 confronted with rate standards. Cyclone burners are quite different from wall and tangentially fired boilers, firing chunk rather than pulverized coal. Because no low NOX burner technology was known to be applicable to cyclone boilers in 1990, they were exempted from regulation under Phase I. 297 The law did provide, however, that if technology " comparable to the costs" of low NOX burner technology became available, the EPA could issue standards for cyclones and other boilers for Phase II starting in the year 2000.298 The industry made few efforts to identify NOX reduction methods for cyclones until 1995, when the EPA indicated it would regulate them in Phase II because the cost of downstream technologies such as reburn and SCR had become " comparable" to the cost of low NOX burners. 299 The EPA promulgated regulations in 1996 permitting relatively high emissions ( 0.86 lb/ mmBtu), and exempting cyclones less than 155 MW altogether, based on the cost effectiveness of these technologies. 300 The industry then formed the Cyclone NOX Control Interest Group ( CNCIG) under the auspices of the Electric Power Research Institute ( EPRI) in 1995 to commence research and development. 301 This group achieved spectacular results, and by 1997 demonstrated that applying overfire air technology to cyclones could achieve significant NOX reductions, on the order of 50%, at very low cost. 302 This result was 297. 42 U. S. C. § 7651f ( 1994). 298. Id. § 7651f( b)( 2). 299. Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,114 ( Dec. 19, 1996). " For cyclone fired boilers, gas reburning and SCR are the best continuous control systems that are available and meet the cost comparability criteria." Id. 300. Id. at 67,142 43. 301. Elec. Power Research Inst., First Demonstration of Overfire Air on Cyclone Steam Generator Reduces Costs of NOx Compliance, EPRI INNOVATORS 1 ( Oct. 1998) ( on file with author) [ hereinafter EPRI, First Demonstration]; E mail from David O'Connor, Electric Power Research Institute, to Byron Swift, Environmental Law Institute ( Nov. 29, 1999) ( on file with author). 302. The first models were completed in early 1996, and the first successful demonstration of overfire air technology began in 1997. See E mail from David O'Connor, supra note 301; David O'Connor et al., The State of the Art in Cyclone Boiler NOx Reduction, Presentation at EPRI EPA DOE Combined Utility Air Pollutant Control Sympos. ( Elec. Power Research Inst.) ( Aug. 1999) ( notes on file with author); EPRI, First Demonstration, supra note 301. The results have clearly demonstrated the technical and operational feasibility of OFA as a commercially viable NOX control approach for cyclones. The application of the technology on 5 cyclone furnaces . . . showed maximum NOX reductions reaching 50 to 75% from uncontrolled levels using combustion air staging techniques. Preliminary observations and tests . . ., showed no substantial impacts from slagging, fouling, or corrosion of waterwall tubes when fueled by western coal. Elec. Power Research Inst., Report No. TR 113643, NOx Control Field Test Results on Coal Fired Cyclone Boilers   CNCIG Programs ( Sept. 1999) ( on file with author). These articles 2001] HOW ENVIRONMENTAL LAWS WORK 369 unanticipated, as the attempts made in the 1980s to use overfire air were failures, and had led to unacceptable wall wastage or carbon loss. The R& D investment in CNCIG was relatively modest, less than $ 2 million, including full scale demonstrations, and the payback saved the industry a minimum of $ 250 million in the cost of retrofitting cyclone boilers to meet Title IV requirements. 303 Once this group achieved its objective in meeting the Title IV rate limits, however, the research effort was scaled back. 304 Although this technology innovation is now available, it is underused because the regulations do not require reductions beyond the rate limit even if they are inexpensive, and they also exempt cyclone units under 155 MW, which may continue to emit NOX at uncontrolled levels over 1.5 lb/ mmBtu, higher than that of any other boiler type. 305 This example illustrates the problems with rate standards when government regulators fail to accurately predict technology innovation, as well as the sporadic nature of technology research they motivate.

d. Overfire Air Overfire air technology can be combined with low NOX burners to divert about 20% of combustion air at the burner level to air ports above the burner zone, reducing the oxygen availability at the burners. 306 However, although overfire air decreases NOX formation during combustion, it can inadvertently promote waterwall wastage by creating reducing conditions within the burner zone. Wastage has appeared mostly in high temperature supercritical boilers, and in some cases was severe enough to instigate tube failures and forced outages. 307 These indicate that many cyclones could achieve the 0.86 lb/ mmBtu standard using overfire air, especially those firing PRB coal, with baseline emissions of 1.1 to 1.2 lb/ mmBtu. 303. See E mail from David O'Connor, Electric Power Research Institute, to Byron Swift, Environmental Law Institute ( Jan. 15, 2001) ( on file with author). 304. Id. ( noting that current R& D projects for cyclones continue on two fronts: ( 1) further NOX reduction, using a technique called Rich Reagent Injection, and ( 2) improving the operability and results from using overfire air with cyclones, including ongoing corrosion assessments and controls issues). 305. Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,164 ( Dec. 19, 1996). 306. This system results in more complete burnout of the fuel and formation of N2 rather than NOX. Many firms added overfire air technologies to low NOX burners to achieve further NOX reductions. Some did this to gain benefits due to averaging their units, and others did it to comply with the EPA's initial Phase I rule, which would have required the use of overfire air but was later overturned in court. Interviews with utility representatives. 307. EPRI reports that nearly a third of those with overfire air ports initially suffered postretrofit waterwall wastage: Early retrofits of low NOX burners without OFA generally did not increase waterwall wastage, but when low NOX burner systems with OFA ports were introduced to reduce 370 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 problems made many operators reluctant to use the technology in their boilers. An EPRI team discovered that low cost changes in burner settings and operating practices appeared able to cut waterwall wastage significantly in many boilers by reducing the area covered by damaging iron sulfide deposits. 308 E. Other NOX Regulation in the 1990s Title IV applied to both old and new power generation sources, but was significant principally in its effects on older units, most of which had never been subject to NOX regulation. In order to evaluate firm behavior with regard to NOX regulation, ELI reviewed the other major NOX regulations affecting utility plants in the 1990s. These include the Ozone Transportation Commission ( OTC) program for summertime NOX reductions in northeastern states, 309 and the new source standards that affect new plants or major modification of existing plants. Additional reductions of NOX emissions from power plants in eastern states has been proposed by the EPA under its NOX SIP call regulation, but this will not take effect until 2004.310 1. OTC Cap and Trade in 1999 Forced Further Reductions at Existing Plants In the twelve northeast and mid Atlantic states, 311 NOX emissions from large power plants have been controlled not by Title IV, but by NOX emissions further, wastage began showing up throughout the power industry. . . . Of some 150 boilers retrofitted with low NOX burners featuring OFA, as many as 40 have reported increased waterwall wastage, or discovered wastage where there was none before. Elec. Power Research Inst., Guidelines to Ward off Boiler Waterwall Wastage, EPRI FOSSIL PLANT NEWS ( Winter 1999). 308. Id. 309. See infra Part III. E. 1. 310. The EPA has relied on its authority to address the transport of ozone between states to promulgate a " SIP call" that requires a group of at least nineteen eastern states to reduce summertime NOX emissions by 2004. Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone, 63 Fed. Reg. 57,356, 57,380, 57,401 ( Oct. 27, 1998) ( covering twenty two states, and achieving reductions equivalent to a 0.15 lb/ mmBtu rate standard by 2003); cf. Michigan v. EPA, 213 F. 3d 663 ( D. C. Cir. 2000), cert. denied, 121 S. Ct. 1225 ( 2001) ( upholding lower court decision limiting application to nineteen states and extending deadline to 2004). The EPA's rule encourages the states to achieve most of these reductions in the utility sector, through a regional emissions cap and allowance trading program that reduces these emissions from 1.5 to 0.5 million tons. 63 Fed Reg. at 57,434, tbl. III 5. 311. The OTC comprises the states of Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Maryland, Delaware, the northern counties of Virginia, and the District of Columbia. 2001] HOW ENVIRONMENTAL LAWS WORK 371 more stringent state regulations to reduce summertime NOX emissions coordinated under the OTC. The OTC was created under the Clean Air Act Amendments of 1990 to facilitate regional planning of states' efforts to attain the National Ambient Air Quality Standard ( NAAQS) for ground level ozone. 312 In September of 1994, all OTC states but Virginia adopted a Memorandum of Understanding to achieve regional reductions of NOX from power generators starting in 1995.313 In Phase I of the OTC program, states required sources to install Reasonably Available Control Technology ( RACT), a standard roughly equivalent to the Title IV NOX standards but applying almost one year earlier. 314 Pennsylvania required sources to install low NOX burners with separate overfire air, and other states such as New York and New Jersey defined rate standards that were slightly more stringent than the Title IV standards. 315 Most states also allowed averaging among a firm's facilities, creating standards slightly more stringent but similar in nature to Title IV. 316 The result was also similar, with most firms adding combustion controls such as low NOX burners and/ or overfire air to most units. For Phase II, starting in 1999, nine OTC states established a NOX Budget Program creating an emissions cap and allowance trading system similar to the EPA's SO2 Acid Rain Program. 317 The emissions cap 312. See 42 U. S. C. § 7511( c) ( 1994). 313. See Memorandum of Understanding Among the States of the Ozone Transport Commission on Development of a Regional Strategy Concerning the Control of Stationary Source Nitrogen Oxide Emissions ( Sept. 27, 1994), at http:// www. sso. org/ otc/ att2. htm [ hereinafter Memorandum of Understanding]. Phase I included the installation of reasonably available control technology ( RACT). In Phase II, starting in 1999, states adopted an emissions cap and allowance trading program to reduce region wide NOX emissions. The OTC states plan another cut in NOX emissions in 2003. Id. This is consistent with the EPA's plan, generally referred to as the " NOX SIP call," that affects a broader group of at least nineteen states. See Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone, 63 Fed. Reg. 57,356 ( Oct. 27, 1998). 314. See Memorandum of Understanding, supra note 313. 315. Pennsylvania law defines RACT for large coal fired units as " the installation of low NOX burners with separate overfire air." 25 PA. CODE § 129.93( b)( 1) ( 2001). New Jersey requires utility boilers to meet the following standards: Tangentially fired burners: 0.38 lb/ mmBtu; wall fired: 0.45 lb/ mmBtu; and cyclone 0.55 lb/ mmBtu. N. J. ADMIN. CODE tit. 7, § 27 19.4 ( 2000). New York State RACT regulations set standards for dry bottom coal fired tangential plants at 0.42 lbs./ mmBtu, wet bottom coal fired tangential plants at 1.0 lbs./ mmBtu, wall fired dry bottom plants at 0.45 lbs./ mmBtu, and for wall fired wet bottom plants at 1.0 lbs./ mmBtu. N. Y. COMP CODES R. & REGS., tit. 6 § 227 2.4 ( 1997). 316. See supra note 315. 317. See Memorandum of Understanding, supra note 313. The OTC NOX Budget Program was developed in collaboration with the EPA, industry, utilities, and environmental groups. Under the OTC program, budget sources were allocated allowances by their state government. Each allowance permits a source to emit one ton of NOX during the summer period 372 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 required 912 electricity generating units to reduce NOX emissions by 55% to 65% from their 1990 baseline of 417,444 tons. 318 Despite the stringency of the standard, sources over complied, reducing emissions 20% below the cap level in 1999.319 Compliance levels were also very high, with only one source failing to meet its standard by one ton, therefore subjecting it to an automatic penalty. 320 Despite initial expectations that many sources would need to use expensive end of pipe controls such as Selective Catalytic Reduction ( SCR) to achieve these deep reductions, the flexibility afforded by the cap and trade approach led to unexpected results. One was that 126 of the 142 affected coal fired units achieved up to 30% NOX reductions through operational changes alone, without significant capital additions. 321 The cap approach allowed compliance through a number of technologies, described in Figure 3 5, and not only SCR. As a consequence, allowance costs, after initial volatility at the program's start in which prices ranged from $ 3000 to $ 7000 per ton, have settled down to $ 500 to $ 1000, significantly lower than originally estimated. 322 ( May through September). Allowances may be bought, sold, or banked. However, regardless of the number of allowances a source holds, it cannot emit at levels that would violate other federal or state limits ( e. g., federal NSPS, Title IV, or state NOX RACT rules). See EPA 1999 OTC NOX COMPLIANCE REPORT, supra note 204. 318. State Allocations And Emissions in 1999 under the OTC NOX Budget Program ( in tons) were: State 1990 Baseline Emissions 1999 Allocation* 1999 Emissions Connecticut 11,130 6,312 5,830 Delaware 13,510 6,142 6,160 Massachusetts 41,330 19,680 17,293 New Hampshire 14,589 6,788 3,463 New Jersey 46,963 21,292 15,390 New York 85,642 54,276 47,267 Pennsylvania 203,181 103,668 79,166 Rhode Island 1,099 580 274 Total 417,444 218,738 174,843 * Includes early reduction credit allowances of 24,635. See EPA 1999 OTC NOX COMPLIANCE REPORT, supra note 204, exh. 1, at 2, available at http:// www. epa. gov/ airmarkets/ cmprpt/ otc99/ index. html ( last updated Dec. 11, 2000). 319. Id. at 1. 320. Id. at 2. 321. Joel Bluestein, Energy and Environmental Analysis, Inc., OTR NOX Market: Lessons Learned ( 1999) ( unpublished report presented at missions Marketing Associates in Oct. 1999) ( cited in Byron Swift, Command Without Control: Why Cap and Trade Should Replace Rate Standards for Regional Pollutants, 31 ENVTL. L. REP. 10,330 ( Mar. 2001)); GAS RESEARCH INSTITUTE, LOW COST OPTIONS FOR ACHIEVING DEEP NO X REDUCTIONS, at http:// www. gri. org ( Apr. 2000). 322. The EPA estimated the average cost of reductions in the electric power sector to be $ 1468 per ton of NOX. EPA 1998 RIA, supra note 14, at ES 2. Compliance cost is reflected in the price of an allowance, and during the year 2000, allowance prices for 1999 or 2000 tons for 2001] HOW ENVIRONMENTAL LAWS WORK 373 Figure 3 5: Technology Options Available to Existing Coal Fired Plants to Meet Stringent NOx Standards323 Combustion controls are boiler modifications that minimize the formation of NOx in the boiler. In addition to the direct burner modifications required for Title IV, advanced combustion controls can include overfire air and computer controls that enhance mixing of coal and air in the boiler.

Gas Reburn technologies reduce NOx by injecting natural gas above the coal combustion zone. Gas reburn may achieve up to 55% NOx reduction using 15% gas injection, with capital costs of $ 12 to $ 25 per kW and additional operating costs for the relatively more expensive natural gas fuel. Enhanced forms of gas reburn can use reagents such as amine injection to increase NOX reductions to 60%, although these are slightly more expensive.

Selective Non Catalytic Reduction ( SNCR) injects a urea based reagent in the upper furnace to reduce NOX. SNCR achieves about a 35% NOX reduction at a capital cost of $ 5 to $ 20 per kW. Combining re burn with SNCR can get over 70% reductions.

Selective Catalytic Reduction ( SCR) injects ammonia into the boiler, which catalytically reduces the NOX. SCR has the greatest NOX reducing potential, achieving 70% to 90% reductions, but is also the most expensive, with capital costs of $ 50 100 per kW. In addition, SCR has substantial operating costs, uses toxic catalysts that must be replaced, releases ammonia and entails a 0.5% efficiency loss.

It is interesting to view firms' response to the OTC cap, since the affected units were previously subject to rate standards set at levels similar to Title IV standards. Figure 3 6, developed by the Gas Research Institute, shows emissions levels for coal fired units subject to the OTC cap in 1999.

See Figure 3 6: 1999 Ozone Season NOX Emission Rates for OTR Coal Boilers Without Post Combustion Controls324 These results show how different units emit at different levels under a cap and trade system that creates a uniform cost per ton for emissions reductions. This is due to the " step wise" nature of technology choice. In other words, at a given moment in time some firms may find it inexpensive to achieve, for example, a 56% reduction, but very expensive to reach 57% because that would require major new the Ozone Transport Region were in the $ 500 to $ 1,000 range. See, e. g., Cantor Fitzgerald Environmental Brokerage Services Website, at www. cantor. com/ ebs ( last modified Apr. 5, 2001). 323. STATE AND TERRITORIAL AIR POLLUTION PROGRAM ADMINISTRATORS & ASSOCIATION OF LOCAL AIR POLLUTION OFFICIALS ( STAPPA/ ALAPCO), CONTROLLING NITROGEN OXIDES UNDER THE CLEAN AIR ACT: A MENU OF OPTIONS 18 ( July, 1994); GAS RESEARCH INSTITUTE, supra note 321. 324. GAS RESEARCH INSTITUTE, supra note 321, at Fig. 1. 374 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 equipment. Another firm may face this " cost knee" at a higher or lower level. So at an equal cost, firms will want to operate units to emit at slightly different levels. However, over time, firms may find ways to incrementally improve processes or operations to achieve greater reductions, typically at low cost. 325 Systems like a cap and trade approach encourage such differential behavior and the seeking of continuous reductions. A rate standard sets one limit that must be achieved at a certain date, and so eliminates both these possibilities, restricting firm behavior, raising costs, and eliminating incentives for continued incremental improvements.

2. New Source Standards In contrast to existing plants, new plants or significant modifications of existing plants have been subject to NOX standards since the initiation of the Clean Air Act in 1971.326 Today, new sources are subject to a stringent federal New Source Review process, which requires at a minimum compliance with NSPS. 327 Traditional NSPSs establish emissions rate standards for each power generation technology; e. g., coal fired boilers are allowed to emit twice the NOX as oil fired boilers, and three times that of gas fired. 328 In 1998, the EPA established a new, fuel neutral NSPS of 0.15 lb/ mmBtu for major modifications of existing sources, and 1.6 lb/ MWh of electricity generated for new sources, the latter an innovative outputbased standard that provides a benefit to efficient producers. 329 However, this fuel neutral NSPS rarely applies, as the standards created under the New Source Review process are more stringent and therefore control. 330 New Source Review establishes an emissions rate standard set by regulators on a case by case basis based on the specific plant and powergeneration technology, such that more lenient standards are applied to 325. See Nicholas Ashford, An Innovation Based Strategy for the Environment, in WORST THINGS FIRST? THE DEBATE OVER RISK BASED NATIONAL ENVIRONMENTAL PRIORITIES ( A. M. Finkle & D. Golding eds., 1994). 326. 42 U. S. C. § 7411 ( 1994). 327. Id. 328. The initial NSPS for power plant boilers built prior to 1998 established NOX emissions limits of 0.50 0.80 lb/ mmBtu for coal fired boilers, 0.30 lb/ mmBtu for oil fired boilers, and 0.20 lb/ mmBtu for gas fired boilers. Clean Air Act, 40 C. F. R. § 60.44a ( 2000). 329. Id. § 60.44a( d); see also Revision of Standards of Performance for Nitrogen Oxide Emissions from New Fossil Fuel Fired Steam Generating Units, 63 Fed. Reg. 49,442, 49,448 49 ( Sept. 16, 1998). 330. The New Source Review standards, BACT and LAER, establish more stringent requirements that specify NSPS only as a floor. See, e. g., 42 U. S. C. § § 7479( 3) ( describing the standard for Best Available Control Technology), 7501( 3) ( describing the standard for Lowest Achievable Emissions Rate). 2001] HOW ENVIRONMENTAL LAWS WORK 375 dirtier technologies. 331 Sources built after August 7, 1977, in areas that have attained the federal ambient ozone standard set by the EPA must prevent significant deterioration of air quality, and install the Best Available Control Technology ( BACT) for the type of plant proposed considering " energy, environmental, and economic impacts and other costs." 332 New plants in nonattainment areas must meet the even more stringent Lowest Achievable Emissions Rate ( LAER) standard, which excludes considerations of cost. 333 These strict standards are meant to achieve ambient standards, prevent airshed deterioration, and be used as mechanisms to spur the development and application of new technologies.

3. Technology Based Rate Standards for NOX in the 1990s Created an Uneven Regulatory Framework and Varied Economic Signals for Most Business Units As shown in Figure 3 7, power plant NOX regulation in the 1990s created a highly uneven regulatory framework that sent different economic signals to the owners of different technologies. Because rate standards were set at differing levels for the different base technologies, they created a progression in which the dirtier a power generating technology was in terms of NOX emissions, the more lenient the rate standard. This created highly differential costs for NOX reductions for different technologies, in the hundreds of dollars per ton of reductions for higher emitting coal fired units, and up to $ 10,000 per ton for clean gas turbines.

Figure 3 7: Differential Standards for NOX Emissions and Costs from Generating Technologies ( 1996 1999) 334 Old Sources ( Title IV/ RACT) New Sources ( BACT/ LAER)

Cyclone coal Wallfired coal T fired coal New coal New gas large New gas small 331. 42 U. S. C. § 7479. 332. Id. § § 7475( a)( 4), 7479( 3). 333. Id. § 7503( a)( 2). 334. Acid Rain Program; Nitrogen Oxides Emission Reduction Program   Phase II Final Rule, 61 Fed. Reg. 67,112, 67,113 ( Dec. 19, 1996); STAPPA/ ALAPCO 1994, supra note 217, at 24 29; Marvin Schorr & Joel Chalfin, Gas Turbine NOX Emissions Approaching Zero   Is It Worth the Price?, Presentation at Air & Waste Mgmt. Ass'n 92d Annual Meeting, St. Louis, MO ( June 20, 1999) ( notes on file with author); Leslie Witherspoon & Ken Smith, NOX Control Technology Options and Development Activity for Mid Range Natural Gas Fired Turbines ( 1999), Unpublished Presentation ( notes on file with author). 376 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 Uncontrolled NOx ( lb/ mmBtu) 1.50 0.95 0.65 0.50 0.05 0.10 Legal standard ( lb/ mmBtu) none 0.50 0.45 0.15 0.02+ 0.02+

Cost per ton of NOx reduction none $ 161 $ 631 $ 565 ( SCR) $ 2,500 $ 10,000+

The disparities in the regulation of NOX emissions from different technologies, as well as between old and new plants, created strong economic incentives for the use of dirtier technologies and against the installation of new plants. They also imposed high costs on new technologies, despite creating few, if any, net ambient environmental benefits. These standards create a situation in which regulation of NOX may frustrate the economic drivers leading firms to use cleaner energy sources, and fail to capture multi pollutant reductions created by switching to such sources. 335 IV. GENERAL FINDINGS The design of Title IV and other regulatory programs to reduce NOX and SO2 emissions in the electricity generating sector led to dramatically different industry responses. ELI's review of business responses to these programs provides a foundation for looking at how regulatory design affects environmental results, compliance decisions, and innovation. Key distinctions between the programs examined include the difference in the standards ( an equal effort approach using rates versus an equal cost per ton approach using cap and trade); the degree of flexibility allowed in compliance technology; the degree of governmental involvement in firm decision making about compliance; and whether the systems created continuous or one time incentives for firms to reduce their pollution levels. The mass based standards such as cap and trade systems worked better than rate systems in these regards, as they imposed stringent environmental standards while allowing greater integration of environmental parameters into business decision making.

335. See generally Tina Kaarsburg & Julie F. Gorte, Promoting Productivity and Clean Air with Innovative Electric Technologies, NORTHEAST MIDWEST ECON. REV ( Nov./ Dec. 1999). 2001] HOW ENVIRONMENTAL LAWS WORK 377 A. Environmental Standards Have Been Essential to Drive Businesses to Reduce NOX and SO2 Emissions Although economic forces may also lead firms to cleaner production, regulatory standards have clearly been necessary in order to ensure that firms reduced NOX and SO2 emissions. Title IV led firms to make major additional SO2 reductions by building scrubbers and increasing their use of lower sulfur coals. 336 Regulation was even more important in making firms reduce NOX emissions, as NOX controls for coal fired boilers generally involve a loss of efficiency or additional costs. Therefore, virtually no firms reduced NOX emissions at existing boilers before the advent of regulatory standards, and exempted units continue to emit NOX at uncontrolled levels. 337 This indicates the importance of setting standards to regulate firm behavior. The record also shows that economic forces have also played an important independent role in leading firms to lower emissions of both SO2 and NOX. Prior to the advent of Title IV's SO2 standard, firms near the Powder River Basin began to switch to cheaper lower sulfur coals for economic reasons. 338 An analysis by MIT shows that a portion of SO2 reductions in Phase I can be attributed to this economic trend. 339 Regarding NOX, economic forces have cut both ways. Although there are few economic incentives for owners of existing coal boilers to reduce NOX emissions, the situation for new plants is completely different. New combined cycle gas turbines, which emit no SO2 and about a tenth of the NOX of older plants, are more efficient and cheaper than new coal plants, and are forecast to capture over 90% of the market for new plants. 340 Because economic forces also can lead to major pollutant reductions, in some cases to a greater extent than regulatory mandates, good environmental regulation should enhance rather than interfere with such positive economic drivers.

336. See supra Part II. D. 5. 337. See supra Part III. D. 338. ELLERMAN ET AL., supra note 10, at 228 29. 339. Id. ( noting that no cost reductions made by businesses switching to lower sulfur coal that was also cheaper than what they formerly used amounted to approximately 425,000 tons of SO2 reductions per year, out of a total annual reduction of 3,888,000 tons). 340. DOE ANNUAL ENERGY OUTLOOK 2001, supra note 1, at 75, 78 ( noting that advanced natural gas combined cycle technology generates electricity at lower cost than advanced coal). Dramatic technology innovation in developing the dry low NOX turbine has meant that new gas plants both cost less and are far cleaner than coal boilers or older gas technologies, emitting NOX at or below 0.05 lb/ mmBtu ( uncontrolled coal boilers emit at 0.65 to 1.50 lb/ mmBtu); see also Schorr & Chalfin, supra note 334; STAPPA/ ALAPCO 1994, supra note 217, at 22. 378 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 B. It Has Proven Difficult to Set Standards That Properly Align Private with Social Costs, and Both NOX and SO2 Standards Were in Retrospect Too Lenient While standards appear necessary, it has proven difficult to set standards that properly align firms' private costs with social benefits. 341 Ideally, environmental standards should create an economic context that makes private sources perceive costs that reflect a broader social context of costs and benefits. In retrospect, Congress in 1990 both overestimated the costs of compliance with Title IV, 342 and underestimated the harm stemming from NOX and SO2 emissions. 343 For both the NOX and SO2 programs, the cost of control has remained well below current estimates of the social benefits of additional reductions. For NOX, the cost of retrofitting boilers with low NOX burners in Phase I averaged $ 412 per ton, and the results of the OTC NOX cap show that significant added reductions could be made at a cost of around $ 500 to $ 1000 per ton. 344 In comparison, the benefit of added NOX reductions in eastern states is estimated by the EPA to be between 341. Sources would then clean up pollution to the point at which the marginal cost of removing a ton of pollution equals the social benefit from having that ton removed. In this situation, the economic costs perceived by private firms reflect the overall social and economic value of pollution reduction, creating efficiency in attaining social welfare. 342. Although the political process grappled with the cost of the programs in both cases, actual costs of compliance turned out to be far lower than predicted. For the SO2 program, information at the time of the Act's passage in 1990 indicated that costs would be $ 300 to $ 1000 per ton, far higher than the observed cost of allowances at around $ 150. Also, the Direct Sales Reserve provision of Title IV that authorizes sales of allowances at $ 1500 is another indication of the perceived value of additional reductions, and again far higher than the actual costs. See 42 U. S. C. § 7651o ( 1994). Had an accurate understanding of the costs been available, it is quite likely that Congress would have set the SO2 cap lower, suggesting that the current cap is set too high to align private costs with social benefits. 343. Seven northeastern states have petitioned the EPA to strengthen the secondary NAAQS for NOX, SO2 and PM 2.5. The petitioners " suggest that the acid rain provisions in title IV of the CAA do not go far enough to ensure full recovery of sensitive ecosystems." Petition for Secondary National Ambient Air Quality Standards for Nitrogen Dioxide, Sulfur Dioxide, and Fine Particle Matter and Related Request, 65 Fed. Reg. 48,699, 48,700 ( Aug. 9, 2000) [ hereinafter Northeastern States Petition]. The petition cites in support of its assertions the NATIONAL ACID PRECIPITATION ASSESSMENT PROGRAM, BIENNIAL REPORT TO CONGRESS ( May 1998), available at http:// www. nnic. noaa. gov/ CENR/ NAPAP/ NAPAP 96. htm; and EPA, PUB. NO. EPA 452/ R 97 002, NITROGEN OXIDES: IMPACTS ON PUBLIC HEALTH AND THE ENVIRONMENT ( Aug. 1997), available at http:// www. epa. gov/ ttncaaa1/ t1/ reports/ noxtech. pdf; which " document increasing damage caused by acid deposition to the lakes and forests in the Northeastern States and other environmental effects. . . ." Petition for Secondary National Ambient Air Quality Standards for Nitrogen Dioxide, Sulfur Dioxide, and Fine Particle Matter and Related Request, 65 Fed. Reg. at 48,701. 344. See supra notes 256, 322. 2001] HOW ENVIRONMENTAL LAWS WORK 379 $ 1262 and $ 4786 per ton. 345 Similarly, the cost of SO2 allowances in Phase I averaged $ 150, far below current estimates of the social benefits of added SO2 reductions, which exceed $ 5000 per ton. 346 Therefore, for both pollutants, additional reductions would be fairly inexpensive and very beneficial, but are not forced by the standards based approach. This shows the indispensable nature of establishing the overall standard at the correct level of stringency, whether it is expressed as a cap or a rate. Technology based rate standards, and the new source/ old source distinction in the Clean Air Act, both cause an added disadvantage in aligning private with social values because they impose highly differential costs on different technologies. 347 This creates a heterogeneous set of cost signals based on technologies which are not aligned with one another. Under NOX rate regulation, some of the dirtiest technologies faced lenient or no standards even though some could reduce emissions cheaply at prices under $ 100 per ton, whereas the cleanest technologies faced the most stringent standards and were forced to pay thousands of dollars per ton. Clearly, the economic drivers faced by these firms result in little consistency or rationality when compared to each other, or to a social optimum. The cap and trade programs performed better in equating private and social costs because they created a uniform cost faced by all firms, eliminating the inefficiency caused by multiple rate standards that create different economic signals for different technologies. The cap and trade standard is also better in its environmental result over time, since it permanently caps emissions, whereas rate standards can be expected to allow emissions to grow over time along with economic growth. Therefore, while SO2 emissions were capped during Phase I despite increased power generation, NOX emissions grew slightly. The cap and trade system is also more dynamic at the firm 345. EPA 1998 RIA, supra note 14, at ES 6 ( noting that total benefits are between $ 964 and $ 3654 per ton of NOX reductions in 1990, or between $ 1262 and $ 4786 in 1999 dollars). In comparison, costs were estimated to be $ 1468 per ton in 1990. Id. at ES 3. 346. See Figure 2 1. The reduction in sulfate particulate emissions alone is estimated by Resources for the Future to be approximately $ 5335 per ton of SO2 reductions. ELI CLEANER POWER, supra note 14, at 14 ( estimating $ 24.5 billion in benefits from a 4,592,000 ton reduction in SO2 emissions); see also CLEAN AIR TASK FORCE, supra note 14, at 4 5 ( noting that a 75% reduction in SO2 leads to benefits of over $ 100 billion from particulate reductions, or over $ 10,000 per ton of reductions). 347. Although the EPA set these standards based on its best estimates of technology availability and cost, in retrospect these forecasts were not accurate for most technologies, and in particular failed to include unexpected innovation. This is particularly evident for wall fired boilers and for cyclone boilers ( where no reductions were required because of the perceived high costs). In both cases, it turned out that innovations could have provided inexpensive reductions to and below the standards. On the other hand, reductions at tangentially fired boilers cost more than predicted. See supra Part III. D. 5. b. 380 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 level, as firms have continuing incentives to reduce pollution to meet their quota or create additional allowances; in contrast, rate standards simply require a firm to install technology once and then maintain it. However, the cap is set at a fixed amount for the industry as a whole, limiting its dynamic aspect over time. 348 Understanding how different regulatory systems will interact with firm behavior over time is an important element of understanding regulatory design.

C. Standards Based on Rates or an Old Source/ New Source Distinction May Create Conflict Rather Than Alignment Between Regulatory and Economic Drivers for Environmental Quality A central finding of this study is that traditional environmental regulations fail to align the regulatory and economic drivers that lead firms to improve their environmental performance. The lack of alignment appears to be unintentional, and stems both from the new source/ old source distinction in our law, and from the inflexibility inherent in rate based regulatory methods. Examples of the lack of integration created under traditional regulations follow: Example 1: A firm is choosing between continuing to operate an existing coal fired plant, or replacing it with a new gas fired combined cycle plant with no SO2 emissions and 90% to 95% lower NOX emissions. Environmental regulations place few costs or burdens on the firm if it chooses to continue operating the older and dirtier facility, but require the firm to undergo a lengthy New Source Review process and may require it to install expensive controls if it chooses to build the new and cleaner facility. The distinction between new sources and old sources creates economic incentives to firms that strongly favor the older, more polluting technology. Example 2: A firm is deciding between two new generation technologies, one clean, such as natural gas, and the other with far higher emissions, such as coal. There are large social benefits if the firm chooses the clean technology, as total pollution levels are greatly reduced. The NOX rate limits treat each technology separately, and impose proportionately equal burdens on each, and so create no incentive for the firm to choose the cleaner one. Firms may even face lower perton environmental costs in choosing the dirtier technology. 349 Example 3: A firm is choosing between building a new single cycle gas turbine or a combined cycle gas turbine that achieves greater 348. One can imagine that a very different scenario would have developed had Title IV established an allowance auction with a price floor set at $ 300, the lower end of most cost estimates in 1990; far less SO2 would have been released during Phase I. 349. See Figure 3 7. 2001] HOW ENVIRONMENTAL LAWS WORK 381 efficiency. Since emissions rate standards under BACT or LAER are based on parts per million ( ppm), they provide no benefit to the firm in achieving greater efficiency or lowering overall pollution by using the combined cycle unit. Example 4: A firm building a new coal plant must decide on what kind of coal to use. The SO2 cap and trade program encourages it to use cleaner, low sulfur coal. However, the rate based SO2 New Source Performance Standard requires it to use scrubbers, regardless of how clean the coal is. In another example, if a firm builds a new gas fired plant, New Source Review requirements in many states require it to install end of pipe controls for NOX regardless of whether or not it uses very clean process technology. In either case, rate based New Source Performance Standards dictate the installation of control technologies and preclude compliance through cleaner fuels or processes that may cost less and create less overall pollution. One root cause of the conflict may be that regulations are developed on a policy basis, with paramount attention paid to broad political and social considerations, whereas business decisions are made on an economic basis, in which small differences in cost and regulatory design make an enormous difference. Because businesses try to find the lowestcost method to comply with the precise wording of regulatory standards, it makes a huge difference if standards require compliance with rate limits or mass limits ( cap and trade); whether averaging times are hours, days, or months; whether rate standards are set by concentration limits, inputs, or outputs; and whether regulation focuses upstream or downstream in the process. The dramatic differences in the ways in which the precise nature of a standard will affect businesses' economic behavior are often paid inadequate attention when standards are established.

D. Different Regulatory Designs Greatly Affect the Cost of Compliance for Achieving Equivalent Environmental Results Many types of environmental regulations fail to harness the strong business drivers that can lower compliance. This is shown in Figure 3 7 for NOX, where firms are not allowed to pursue least cost approaches to reducing overall NOX levels on an industry wide basis, because each technology is regulated separately. The constraints imposed by environmental laws can be seen even more clearly in SO2 regulation, where we can benefit from a historical analysis of different types of SO2 regulations and their costs. Figure 4 1 shows how the greater flexibility of different environmental regulation of SO2 leads to significantly lowered cost in achieving a similar environmental result. It compares cost estimates for 382 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 achieving equivalent environmental reductions via a technology prescription mandating scrubbers; the 1977 NSPS that required a 70% to 90% reduction in potential emissions; the 1971 NSPS concentration rate standard of 1.2 lb/ mmBtu; and the Title IV cap and trade program with and without the trading element. The Figure shows how different regulatory designs create very different compliance costs, from $ 1.2 billion and $ 7 billion annually for equivalent reductions.

Figure 4 1: Technologies Permitted and Compliance Costs Under Different SO2 Regulatory Systems350 Regulatory Method Technology Prescription Emissions Rate (% Reduction) Emissions Rate ( Concentration) Emissions Cap Without Trading Emission Cap With Trading Technologies Permitted   scrubbers*   scrubbers*   scrubbers*   limited use low sulfur coal   more efficient scrubbers   major use low sulfur coal   fuel blending   demand side management   more efficient scrubbers   major use lowsulfur coal   fuel blending   demand side management   power shifting   trading Estimated Compliance Cost in Billions per Year $ 7 $ 4.5   $ 2.5 $ 1.2 * In addition to limiting compliance options to scrubbing, the scrubber technology permitted under various standards varied. The 1977 rate standard has short averaging periods, which required scrubbers to be significantly over built with redundant modules, greatly increasing their cost. Title IV allowed significant innovation and gains in efficiency in scrubber design.

An encouraging result of this study is that the cost of compliance for both cap and trade programs were greatly below estimates, and several times lower than the cost of equivalent rate based regulatory approaches. In the Title IV SO2 program, allowances cost $ 150 during Phase I, far lower than the $ 300 to $ 1000 initially forecast. Similarly, the OTC NOX cap resulted in allowance prices of $ 500 to $ 1000, or one third of most estimates. The cap and trade approach is less expensive as it helps align economic and environmental incentives by freeing technology choice and creating a uniform incentive for all sources to reduce pollution.

350. U. S. GENERAL ACCOUNTING OFFICE, AIR POLLUTION: ALLOWANCE TRADING OFFERS AN OPPORTUNITY TO REDUCE EMISSIONS AT LESS COST 37 41 ( Dec. 1994); Paul R. Portney, Economics and the Clean Air Act, J. ECON. PERSP. 4( 4), 173 81 ( Fall 1990) ( cost estimate of $ 7 billion based on the Waxman Sikorski bill of the 98th Congress ( H. R. 3400), mandating scrubbers for fifty plants to gain a 10 million ton reduction). 2001] HOW ENVIRONMENTAL LAWS WORK 383 A final observation is that firms' efforts to achieve lower costs of compliance generally have incidental and positive environmental effects. The reason is that lower economic costs typically reflect a lowered use of resources and energy, which is a positive environmental result. Often, lower costs also represent a shift towards pollution prevention in compliance instead of the use of end of pipe controls. Therefore increased flexibility under Title IV led firms to use cleaner coal instead of scrubbing emissions, which wastes about 1.5% of plant energy and creates high waste volumes, and helped to halve the capital cost of scrubbing which represents significant savings in materials used.

E. Rate Standards Were Inflexible, Limiting Businesses' Ability to Develop and Implement Compliance Methods and Technologies One of the chief findings of this study is that rate standards such as those used in the Title IV NOX program and new source standards for both NOX and SO2 proved to be poor performance standards, as they significantly restricted the range of technology choices available for compliance and provided limited incentives for innovation and improvement. In the past, it has been noted that traditional rate based standards established on a technology by technology basis do not encourage shifts to cleaner technology and tend to freeze innovation. 351 351. Historically, pollution standards under the CAA have been established as rate standards measuring the concentration or percentage of a pollution in end of pipe emissions. See, for example, air standards such as Reasonably Available Control Technology ( RACT) for existing sources, Best Available Control Technology ( BACT) for new sources, and Maximum Achievable Control Technology ( MACT) for hazardous pollutants. 42 U. S. C. § § 7502( c)( 1), 7475( a)( 4), 7412( g)( 2)( A) ( 1994). Water standards include Best Available Technology Economically Achievable (" BAT"). See 33 U. S. C. § 1311( b)( 2)( A) ( 1994). The use of rate standards is appropriate when addressing the local concentration of a pollutant, which was of concern in the early years of the CAA. However, they become less and less appropriate in addressing total pollutant loadings and regional issues such as urban ozone formation and interstate transport of NOX. Rate based standards are a major cause of the inflexibility in current environmental laws that is identified in the National Advisory Council for Environmental Policy and Technology ( NACEPT) reports, ELI studies, and other reinvention publications as one of the major environmental regulatory issues. See, e. g., EPA, PUB. NO. EPA 101/ N 91/ 001, PERMITTING AND COMPLIANCE POLICY: BARRIERS TO U. S. ENVIRONMENTAL TECHNOLOGY INNOVATION 39 ( 1991), available at http:// www. epa. gov/ clariton/ clhtml/ pubtitle. html ( last updated Nov. 30, 2000) [ hereinafter EPA PERMITTING]. Specifically, policy makers should reconsider the way ` best available technology' based regulations are now developed and applied. Such regulations use agency established technology based limits and use a technology to demonstrate that the limits are achievable. Even though these are performance based requirements, they have a strong tendency to lock in the technology that is used to demonstrate achievability. To some extent, reliance on ` best available technology' based regulations impedes the development and introduction of innovative technologies. Id.; see ENVTL. LAW INST., BARRIERS TO ENVIRONMENTAL TECHNOLOGY INNOVATION AND USE ( 1998) [ hereinafter ELI INNOVATION]; Debra Knopman & Emily Fleschner, Second Generation of 384 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 The findings of this study reveal four characteristics of rate standards that have limited business ability to develop and implement effective and efficient compliance methods for NOX and SO2 in the power sector, as described below.

1. Emissions Rate Standards Limited Technology Choice As shown in this study, rate based standards inherently limit technology options compared to mass based performance standards because of the very language of the standard. By defining performance as a reduction in rates instead of a reduction in tons, rate standards may limit or even preclude technologies that would reduce amounts but not rates of pollution. This included both the 1971 and 1977 NSPS for SO2, which limited compliance to either a certain quality of coal or to scrubbing. 352 Another is the New Source Review standards for NOX that are defined in " parts per million" ( ppm), and so preclude compliance by increasing efficiency or similar prevention methods. 353 By defining performance as rate reduction, rate standards tend to emphasize end ofpipe controls instead of cleaner fuels or more efficient processes. Figure 4 2 shows the actual use of technology under the rate standards reviewed, compared with the technologies used by firms in the cap and trade programs for NOX and SO2. Technology solutions are divided into the three basic means of compliance: cleaner fuels, cleaner processes, and end of pipe controls. They are further characterized as high tech, low tech or no tech to emphasize that compliance responses do not have to be high tech to create highly effective solutions, since an emissions reduction by any method benefits the environment equally. The Figure shows how weak NOX rate standards in this sector have simply led to retrofits of known technologies ( combustion controls and averaging), and stringent NOX rate standards promoted innovation principally in high tech end of pipe controls ( SCR and SCONOX). 354 In Environmental Stewardship: Improve Environmental Results and Broaden Civic Engagement ( Progressive Policy Inst., ed.) ( May 1, 1999), at http:// www. ppionline. org/ ndol/ print. cfm? contentid= 767 ( arguing that first generation approaches to environmental problems impede innovation while second generation approaches drive innovation and improve accountability); NAT'L ACADEMY OF PUBLIC ADMIN., SETTING PRIORITIES, GETTING RESULTS: A NEW DIRECTION FOR THE EPA 102 ( Apr. 1995); William D. Ruckelshaus & Karl Hausker, Enterprise for the Environment, The Environmental Protection System in Transition: Toward a More Desirable Future 3 ( Jan. 1998), available at http:// www. csis. org/ pubs/ pubse& e. html# env_ trans; THINKING ECOLOGICALLY: THE NEXT GENERATION OF ENVIRONMENTAL POLICY ( Marian R. Chertow & Daniel C. Esty eds., 1997). 352. See supra Part II. A. 353. See infra note 376. 354. Stringent rate standards under NOX New Source Review only allow the use of control technologies such as SCR and SCONOX. " SCONOX" is a trademarked catalytic absorption 2001] HOW ENVIRONMENTAL LAWS WORK 385 contrast, cap and trade systems allow the use of any technology that could reduce emissions, and so promote the application of, refinement, and innovation in the broadest set of potential technologies.

Figure 4 2: Technologies Used to Meet NOX Standards355 High Tech Low Tech No Tech Cleaner Fuels Shift to gas Low NOX coals Cleaner Processes Dry Low NOX Turbine Combustion Controls ( LNB/ OFA) Averaging Load shifting Burners out of service End of Pipe Controls SCR SCONOX SNCR Gas Reburn Technologies used for NSPS in italics; for Title IV underlined; all used for OTC cap and trade A key distinction between new source rate standards versus a cap andtrade approach is in how they treat cleaner new sources. Cap and trade approaches created declining costs for plants as their pollution emissions declined and so encouraged the use of any cleaner technology. However, New Source Review standards differentially placed very high burdens and costs on new technologies, even if they were relatively clean. This has proven particularly important for NOX, as over the past decade, major technological advances in natural gas turbines have reduced uncontrolled NOX emissions from over 100 ppm to the very low 9 to 15 ppm range, ten to thirty times lower than coal fired boilers. 356 While this has achieved a 90% pollution reduction, these reductions often may not count when a regulatory body applies a standard like BACT or LAER. 357 system developed by Goal Line Environmental Technologies, LLC. See CALIFORNIA ENVIRONMENTAL TECHNOLOGY CERTIFICATION PROGRAM, SCONOX: GOAL LINE ENVIRONMENTAL TECHNOLOGIES, at http:// www. calepa. ca. gov/ calcert/ CertifiedTech/ GoalLine. htm ( last modified Dec. 20, 2000) [ hereinafter California Environmental Technology Certification Program]. Many states require SCR even for clean gas plants, and whether or not cleaner fuels or processes such as the dry low NOX burner can be used is the subject of current EPA guidance deliberations. See, e. g., Notice of Availability for Draft Guidance on BACT for NOX Control at Combined Cycle Turbines, 65 Fed. Reg. 50,202 ( Aug. 17, 2000). 355. EPA, RACT/ BACT/ LAER CLEARINGHOUSE ANNUAL REPORT FOR 1998: A COMPILATION OF CONTROL TECHNOLOGY DETERMINATIONS EPA 456/ R 98 0004 ( June 1998). Interviews with federal and state air pollution control officials, representatives of utility companies, vendors of pollution abatement technologies, and environmental organizations. 356. See Byron Swift, Grandfathering New Source Review and NOx   Making Sense of a Flawed System, 31 ENV'T REP. 1538 ( July 21, 2000); STAPPA/ ALAPCO 1994, supra note 217, at 53 54. 357. See 42 U. S. C. § § 7479( 3), 7501( 3) ( 1994). 386 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 Some states applying these rate standards require end of pipe control equipment such as SCR when applying NSR to these very clean sources, and do not count what has been achieved through pollution prevention or process change. 358 The epitome of this tendency may be SCONOX, which doubles the cost of controls to achieve a very small additional reduction. 359 The energy used to run SCONOX itself creates more ancillary pollution than the incremental reductions it achieves, 360 but this may not be able to be considered under a literal interpretation of the inflexible LAER rate standard. 361 Figure 4 3 shows different technologies used under SO2 regulations. The percentage reduction standard of the current NSPS limited technology choice to a single method: scrubbing. 362 In contrast, the SO2 cap and trade approach allowed maximum technology choice, and because it did so, led to unexpected innovation in fuel blending that allowed far greater use of low sulfur coal for compliance, dramatically reducing the cost of compliance. It also created competition for scrubbing that has driven innovation and cost reductions in scrubbing.

358. See, e. g., MASS. REGS. CODE tit. 310, § § 7.00, 7.02 ( 2001); MASS. DEP'T OF ENVTL. REG., CONDITIONAL COMPREHENSIVE PLAN APPROVAL OF MYSTIC STATION 13 ( 2000) ( requiring end of pipe SCR technology to reach 2 ppm in addition to dry low NOX burner), http:// www. state. ma. us/ dep/ energy/ mystic/ mysca. pdf. This problem is addressed in Notice of Availability for Draft Guidance on BACT for NOx Control at Combined Cycle Turbines, 65 Fed. Reg. 50,202 02 ( 2000), suggesting that BACT not require the addition of SCRs on low emitting gas turbines, and arguing that adding costs to such turbines actually increases NOX because the power from the new generation would be expected to displace power from far dirtier facilities. Environmental groups strongly objected to the proposal. See Inside Washington Publishers, Activists Threaten Litigation on Permit, Turbine Policies, 11 CLEAN AIR REPORT 4 ( Sept. 28, 2000). 359. Swift, supra note 196. 360. The variable cost of operating SCONOX is almost double that of SCR for gas turbines, yet SCONOX achieves only a very small marginal reduction of NOX, from 3 ppm to 2 ppm ( equivalent to moving from 0.0100 to 0.0072 lb/ mmBtu, both extremely low). See California Environmental Technology Certification Program, supra note 354; MASS. DEP'T OF ENVTL. REG., supra note 358. If one compares this 1 ppm to the incremental energy used by SCONOX in comparison to SCR, the energy used, were it taken from the grid, leads to emissions of about 1000 pounds of NOX, 2 tons of SO2 and over 100 tons of CO2 for every ton of NOX abated. See DOE ANNUAL ENERGY OUTLOOK 2001, supra note 1, tbl. A8, at 132. If one also considers the embedded energy use in all the other added operating costs of SCONOX, these indirect emissions would be even higher. This example shows how the inflexibility of rate standards leads to perverse environmental results, and prevent cost reductions. 361. Goal Line Envtl. Technologies, L. L. C., SCONOX Available for Gas Fired Boilers, 1 CATALYTIC SOLUTIONS FOR CLEAN AIR, at http:// www. glet. com/ update_ 10 99. htm# SCONOx AVAILABLE ( Oct. 1999). 362. This type of rate standard was motivated by political concerns to assure jobs for miners and others whose jobs depended on continued extraction of high sulfur eastern coals. See ACKERMAN & HASSLER, supra note 4, at 44 45. The 1971 NSPS was also a rate standard, imposing a concentration limit based on Btu input, which was slightly more flexible. See supra Part II. A. 2001] HOW ENVIRONMENTAL LAWS WORK 387 Figure 4 3: Technologies Used to Meet SO2 Standards363 High Tech Low Tech No Tech Cleaner Fuels Low Sulfur Coal: sub bituminous Rail Investment/ Innovation Shift to gas LSC: bituminous Demand Side Management Cleaner Processes Trading Averaging Load shifting End of pipe Controls Scrubbing Allowed under NSPS in italics 2. Emissions Rate Standards Did Not Force a Move Toward Cleaner Technologies Because emissions rate standards under the CAA are individually set for each specific production technology, they create different standards for the kind of fuel used and the specific boiler or turbine technology. 364 This created no incentive for firms to move towards cleaner technologies. The NOX study shows how the use of technologybased rate standards may create perverse results under which the dirtiest sources receive the weakest economic signals to reduce pollution, and clean sources the greatest. As shown in Figure 3 7, rate standards have actually placed differentially greater burdens on cleaner technologies, creating economic signals contrary to those needed to promote cleaner production. 365 3. Rate Standards Promote One Time Compliance Without Incentives for Further Progress One of the strongest drivers firms face is the economic incentive to reduce costs. Environmental regulations can harness these drivers by creating economic benefits from pollutant reductions on a continuing basis. However, fixed rate standards created no incentives for continuous reductions, or for compliance that goes beyond stated limits. Therefore, once firms installed low NOX burners as required by the Title 363. EPA, RACT/ BACT/ LAER CLEARINGHOUSE ANNUAL REPORT FOR 1998: A COMPILATION OF CONTROL TECHNOLOGY DETERMINATIONS EPA 456/ R 98 004 ( June 1998). See Interviews with federal and state air pollution control officials, representatives of utility companies, vendors of pollution abatement technologies, and environmental organizations. 364. See supra Part III. E. 3. 365. This situation is further exacerbated by the new source/ old source distinction under the NOX standards, which is discussed in Part III. E. 2. This distinction in CAA regulation focuses requirements on new sources that are already so clean that reducing their emissions does not significantly reduce total NOX pollution, but by placing high burdens on these clean new sources, may perversely provide economic incentives to keep old plants on line. 388 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 IV rate limits, they took no further action to reduce pollution under Title IV. 366 This limits compliance options to capital or process choices made at the time a plant is built or modified, and eliminates the possibility of compliance through changes in management practices, fuels, or any other operational decisions after a plant is built. Many NOX reduction technologies, such as gas reburn and overfire air, are incremental, and can be adjusted to achieve various rates of NOX control depending on the cost of inputs and other parameters. 367 In contrast, the first year of application of the OTC NOX cap andtrade program revealed that once a market incentive was created to reduce NOX emissions on a continuing basis, firms found ways to lower NOX by 20% to 30% at existing units without significant capital additions. 368 Achieving such NOX reductions through operational changes can be highly effective, and may be essential to reduce NOX to very low levels. Similarly, the Title IV SO2 cap and trade program has encouraged continuing innovation and improvement that has significantly increased scrubber efficiency and steadily lowered the costs of scrubbing and of low sulfur coal throughout Phase I.

4. Rate Standards Created High Transaction Costs Rate based standards typically require significant government intervention in approving the compliance technology chosen by firms, creating significant transaction costs and delay. This is particularly true of New Source Review standards, which require a case by case determination of the required technology by government regulators. 369 However, regulations such as cap and trade systems have created very strict standards in allowing zero growth in emissions without government review and with very low transaction cost.

5. The Design of Rate Based Standards Can Be Marginally Improved The performance of NOX and SO2 regulations also show how the design of rate based standards can strongly affect business compliance alternatives and costs. Making rate standards uniform, annual, and 366. See supra Part III. D. 1. 367. See supra Part III. D. 5. 368. See supra note 321. 369. BACT and LAER require a case by case assessment and approval of compliance technology. See, e. g., 42 U. S. C. § § 7479( 3), 7501( 3) ( 1994); see also supra note 330. For a glimpse of the intensive negotiations about technology choices involved in the application such standards, see Environmental Appeals Board, Formal Opinions; Clean Air Act Prevention of Significant Deterioration ( PSD) Permit Appeals, at http:// www. epa. gov/ eab/ eabpsd. htm ( last updated Apr. 23, 2001). 2001] HOW ENVIRONMENTAL LAWS WORK 389 output based could improve the performance of rate standards, as described below. However, these alternative rate based approaches do not resolve all of the inflexibilities of rate standards, and would not work as well for the economy or the environment as the cap and trade system.

a. Longer Averaging Periods Short averaging periods, such as the thirty day average for the SO2 NSPS, have been shown to limit technology development and increase the cost of compliance. 370 On the other hand, long averaging periods, such as the one year period for the Title IV NOX standards, increased flexibility. 371 Longer averaging periods should be used unless the specific characteristics of a pollutant and the resulting health and environmental problems require the use of shorter averaging periods. 372 b. Uniform Rate Standards A uniform rate standard that does not discriminate between old and new sources, or between technologies, would address the problems identified above that stem from the variability of rate standards between technologies and the distinction between old and new sources. It could also reduce transaction costs by creating a simple, objective parameter. 373 However, such a standard may be perceived as unfair. It would also still suffer from the problems that rate standards experience in restricting technology and compliance choices, not promoting compliance above the limit, and not creating a continuous driver for improvement and innovation.

c. Output Based Rate Standards Another important goal is to change from input based standards such as lb/ mmBtu, or concentration standards such as ppm, to outputbased standards such as lb/ MWh, to reward efficiency. A breakthrough was made in this regard in the EPA's New Source Performance Standard 370. See supra Part II. C. 5. c; Clean Air Act, 40 C. F. R. § 60.43a( g) ( 2000). 371. See supra text accompanying note 233. 372. Rate based standards and short averaging times work best when there is limited dispersion of a pollutant, and the rate is related to the size and output of the source. Therefore, rate standards are likely to perform better with vehicles than with stationary sources, and with pollutants with highly localized effects. The regional nature of the effects of NOX and SO2, and the great variability in size of stationary sources, would indicate the use of long averaging periods for these pollutants. 373. See, e. g., Tim Woolf & Bruce Biewald, Electricity Market Distortions Associated with Inconsistent Air Quality Regulations, 13 ELECTRICITY J. 42 49 ( 2000) ( analyzing the market distortions that exist partially due to varying rate standards for old and new sources and advocating uniform standards), available at http:// www. synapse energy. com/ publications. htm. 390 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 for boilers adopted in 1998, which established a uniform output based NOX standard of 1.6 lb per MWh of electricity generated from new boilers. 374 Unfortunately, NSPS is no longer what determines compliance for new sources, as New Source Review imposes a more stringent standard under BACT or LAER. 375 Currently those standards are based on parts per million, which does not reward efficiency and is a very poor indicator of the actual pollution caused by the plant. 376 d. More Frequent Updating of Rate Standards by Government Another way of improving rate standards would be for government to more frequently update the standards. However, there are practical impediments to this approach in the length of time it takes to promulgate rules. 377 Title IV could be considered a laboratory experiment of this approach, as it created a two phased rate based rulemaking process for NOX, with Phase I starting in 1996 and a more stringent Phase II in 2000. However, the Phase II process occasioned the typical response of lawsuits, a lack of industry focus on achieving reductions until the regulations were imminent, and lack of reductions beyond the standards after they were promulgated. Also, in retrospect the standards failed to predict and capture a major opportunity for emissions reductions in cyclone boilers. Only when the OTC cap and trade program started did firm behavior reveal that an additional 20% to 30% in NOX emissions reductions could be achieved through operational changes at plants. 378 374. Clean Air Act, 40 C. F. R. § 60.44a( d) ( 2000). This final rule was adopted in Revision of Standards of Performance for Nitrogen Oxide Emissions from New Fossil Fuel Fired Steam Generating Units, 63 Fed. Reg. 49,442, 49,444 ( Sept. 16, 1998). 375. See 42 U. S. C. § § 7479( 3), 7501( 3); see also supra text accompanying note 330. 376. EPA, PUB. NO. EPA 456/ R 98 004, RACT/ BACT/ LAER CLEARINGHOUSE CLEAN AIR TECHNOLOGY CENTER ANNUAL REPORT FOR 1998: A COMPILATION OF CONTROL TECHNOLOGY DETERMINATIONS ( 1990 ed., 8th Supp. 1998), available at http:// www. epa. gov/ ttn/ catc/ dir1/ rblc98. pdf. Measurement of ppm varies considerably between technologies due to different test methods, and so is a particularly poor measure of overall pollution. See Clean Air Act, 40 C. F. R. § 60, app. A, method 19 ( showing that ppm varies greatly depending on percent of oxygen in exhaust air). 377. It now takes five to ten years between initiation and implementation of a major rulemaking process, which is a far slower pace than the rate of development of technology change. 378. See GAS RESEARCH INSTITUTE, supra note 321. 2001] HOW ENVIRONMENTAL LAWS WORK 391 F. Emissions Cap and Allowance Trading Programs Allow Greater Integration of Environmental Issues into Business Decision Making Processes, Providing Greater Flexibility and Lowering Costs Without Sacrificing Environmental Integrity This study shows that technology neutral performance standards such as emissions cap and allowance trading systems can rectify the problems caused by rate standards without sacrifice to the environment, by creating more flexible systems and eliminating governmental review of technology choice. 379 Both the Acid Rain Program's SO2 cap and the OTC NOX cap create major emissions reductions and a zero new source standard without any lengthy permitting procedures ( transactions take less than twenty four hours) or case by case conflicts between regulators and regulated. The major benefits of a good cap and trade system are that it enacts a stringent and permanent cap on emissions, which serves society's interest in pollution reductions, while allowing the widest possible breadth of compliance options, hence allowing firms to reduce costs. Cap and trade approaches establish a uniform standard for both old and new plants, and so place no undue burdens on new plants that may be cleaner and more efficient. They also are technology neutral, helping to move compliance away from the end of pipe controls promoted by rate standards toward the use of cleaner technologies. Because any reduction creates economic value to a firm, firms also face a continuous driver to reduce emissions and develop innovative technologies and methods. 380 Cap and trade approaches also remove government from making caseby case decisions about technologies, redirecting business effort away from contesting regulatory authority and towards competing in the marketplace. A more subtle change created by cap and trade programs is that by establishing a price for a ton of additional pollution reduction, they have helped to link environmental with economic decision making within a 379. Note that rate standards under the CAA could be improved to be uniform and outputbased and then would meet some of these objectives. However, even such improved rate standards would suffer from the problems of restricting technology and compliance choices, not promoting compliance above the rate limit, not creating a continuous driver for improvement, and imposing high transaction costs. 380. A system of pollution charges or fees may also provide similar benefits if the charges are set high enough, but such systems have rarely been implemented in the United States. Although such fee based systems are theoretically attractive, studies have shown that in practice, pollutant fees or taxes have almost never been able to be established at levels high enough to affect behavior. See ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, ENVIRONMENTAL TAXES IN OECD COUNTRIES ( 1995). 392 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 firm. 381 One instance of this is that the price of an allowance is regularly entered into firms' dispatching models that determine which generation units are operated. In another, the allowance price has become integrated with the quality of coal so that the price of coal now reflects its sulfur emissions. Both of these create efficiency in merging the environmental quality demanded by society with industry decision making. Another reason that flexible systems such as cap and trade programs may function effectively is that they provide shared benefits. The environment benefits from the permanent emission reductions created by the emissions cap, together with high levels of compliance and a zero new source mandate. Industry benefits from the lower costs of compliance as well as a greater ability to integrate compliance planning with investment cycles, seek out least cost solutions, and save or even make money through trading. In a sense, the cap and trade approach allows firms to apply their entrepreneurial skills to innovate or reduce the costs of compliance, and retain part of the economic gains that result from these efforts. These shared benefits may allow for more stringent standards to be set, while allowing industry to make the most cost effective reductions.

G. Innovation, Investment, and Cleaner Production The different regulatory programs controlling NOX and SO2 emissions elicited dramatically different responses as to the scope, quality, and timing of innovation. As described above, the Title IV NOX rate approach elicited only one time and limited innovation for existing plants, leading principally to the installation of low NOX burners. 382 In contrast, Title IV's SO2 cap and trade program created continuous drivers for innovation that lasted throughout Phase I, as well as a broader effort by firms to seek pollution prevention methods. 383 New Source Performance Standards drove innovation, but only for a limited set of primarily end of pipe control technologies. 384 The lesson learned is that even when applied at moderate levels such as in Title IV, cap and trade 381. Traditional rate based regulations create a dichotomy between environmental compliance and all other aspects of firm behavior that has been referred to as a " green wall" separating environmental compliance from the rest of the firm. See ENVIRONMENTAL STRATEGIES FOR INDUSTRY: INTERNATIONAL PERSPECTIVES ON RESEARCH NEEDS AND POLICY IMPLICATIONS 8 12 ( Kurt Fischer & Johan Schott eds., 1993); Patricia S. Dillon, Implications of Industrial Ecology for Firms, in THE GREENING OF INDUSTRIAL ECOSYSTEMS ( Braden R. Allenby & Deanna J. Richards eds., 1994). The integration achieved by cap and trade programs serves to overcome this division. 382. See supra Part III. C. 383. See supra Part II. C. 9. 384. See supra Part IV. E. 3. 2001] HOW ENVIRONMENTAL LAWS WORK 393 programs can be expected to create significant innovation, whereas ratebased standards limit both the breadth and extent of innovation. 385 1. Cap and Trade Programs Promote Broader Technology Use and Innovation Figures 4 2 and 4 3 show that both SO2 and NOX cap and trade programs promoted broad technology choice, and thereby increased the opportunity for innovation. In particular, the wider breadth of technology choice creates greater opportunity for unexpected innovation to occur that cannot be predicted or captured in a government controlled, rate setting exercise. It is also noteworthy that despite their purpose of helping to force innovation, the new source standards principally promoted innovation in high tech, end of pipe technologies, leaving out many potential technologies and solutions used under the cap and trade programs that could achieve environmental benefits. 386 Possibly the best example of how the flexibility of cap and trade programs promoted innovation and breakthroughs in compliance was firms' increased use of low sulfur western coals under the Title IV SO2 program. 387 Title IV encouraged early experimentation in blending PRB coal precisely because it did not impose a rate based standard. Initially, most firms believed they could not use sufficient amounts of low sulfur subbituminous PRB coals in their boilers to meet a particular rate standard such as a 1.2 lb/ mmBtu. 388 However, since a rate standard was not involved, and all tons of reductions were rewarded, firms began to experiment with blending coals. Unexpectedly, blending worked far better than believed possible, and at lower cost. By the end of Phase I,

385. In the early 1990s, the EPA's National Advisory Council for Environmental Policy and Technology ( NACEPT) recognized that "[ e] nvironmental improvements in process and materials require long term, continuous investment in the development of new, more economically and environmentally efficient technologies which make it possible to leapfrog to a new level of environmental improvement and economic efficiency." EPA, PUB. NO. EPA 100/ R 93 004, TRANSFORMING ENVIRONMENTAL PERMITTING AND COMPLIANCE POLICIES TO PROMOTE POLLUTION PREVENTION 5 ( 1993), available at http:// www. epa. gov/ clariton/ c/ html/ pubtitle. html. NACEPT also observed that the command and control environmental regulatory system severely constrains innovation because government regulators tend to require regulated entities to only use existing technologies that are known to meet the emissions limitations. EPA PERMITTING, supra note 351; see also ELI INNOVATION, supra note 351. 386. See supra text accompanying notes 382 385; see also Figures 4 2, 4 3. 387. See supra Part II. C. 6. a. 388. This rate level is significant because the permanent emissions cap in Phase II was based on multiplying baseline emissions by 1.2 lb/ mmBtu. Therefore most units by Phase II would, on average, have to meet or exceed this rate. 394 TULANE ENVIRONMENTAL LAW JOURNAL [ Vol. 14 blends using as high as 80% PRB coal were common, driving low cost emission reductions. 389 2. Rate Based Systems Were Unfriendly to Innovation Another finding of this study is that rate based systems are unfriendly to innovation due to the same four characteristics that limit business compliance alternatives, described in Part IV( E). By limiting the kinds of technologies used for compliance, rate standards in turn limit the scope for innovation. By limiting compliance to one point in time, they create no incentives for ongoing improvements in operational techniques. 390 Because technology based rate standards impose stricter standards on cleaner technologies, they limit the incentives for business to develop or use cleaner technologies. 391 Finally, by failing to create continuous drivers for improvement, they limit research and development efforts. 392 As described below, these barriers have also contributed to declining funding for environmental technology development.

3. While Innovation Can Be Expected to Occur Broadly, It Is Not Guaranteed for Any Specific Technology One of the reasons that flexible programs such as cap and trade approaches encourage innovation is that innovation can be expected to occur broadly over an industry, but cannot be guaranteed to occur for any particular base technology. For example, under the Title IV NOX program, innovation led to major cost reductions for two of the three major boiler types, wall fired and cyclone boilers, but not tangentially