requires the Agency to set motor vehicle standards applicable to
emissions of GHGs.
    EPA is also faced with the broader ramifications of any regulation
of motor vehicle GHG emissions under the CAA in response to the Supreme
Court's decision. Over the past several months, EPA has received seven
petitions from states, localities, and environmental groups to set
emission standards under Title II of Act for other types of mobile
sources, including nonroad vehicles such as construction and farm
equipment, ships and aircraft. The Agency has also received public
comments seeking the addition of GHGs to the pollutants covered by the
new source performance standard (NSPS) for several industrial sectors
under section 111 of the CAA. In addition, legal challenges have been
brought seeking controls for GHG emissions in

preconstruction permits for several coal-fired power plants.
    The interrelationship of CAA authorities and the broad array of
pending and potential CAA actions concerning GHGs make it prudent to
thoroughly consider how the various CAA authorities would or could work
together if GHG controls were established under any provision of the
Act. Since regulation of one source of GHG emissions would or could
lead to regulation of other sources of GHG emissions, the Agency should
be prepared to manage the consequences of CAA regulation of GHGs in the
most effective and efficient manner possible under the Act.
    Today's notice discusses our work to date in response to the
Supreme Court's decision regarding an endangerment finding and vehicle
standards under section 202 of the Act. It also includes a
comprehensive examination of the potential effects of using various
authorities under the Act to regulate other sources of GHG emissions.
In addition, this notice examines and seeks public comment on the
petitions the Agency has received for GHG regulation of additional
mobile source categories. In light of the interrelationship of CAA
authorities and the pending CAA actions concerning GHGs, the notice
identifies and discusses possible approaches for controlling GHG
emissions under the Act and the issues they raise.
    Today's notice is also part of broader efforts to address the
climate change challenge. Since 2001, President Bush has pursued a
broad climate change agenda that has improved our understanding of
climate change and its effects, spurred development of needed GHG
control technologies, increased our economy's energy efficiency, and
engaged other nations in efforts to foster sensible solutions to the
global challenge of climate change. Building on that success, the
President recently announced a new national goal: to stop the growth of
U.S. GHG emissions by 2025. New actions will be necessary to meet this
goal.
    The President has identified several core principles for crafting
any new GHG-specific legislation. EPA believes these principles are
also important in considering GHG regulation under the CAA, to the
extent allowed by law. These principles include addressing GHG
emissions in a manner that does not harm the U.S. economy; encouraging
the technological development that is essential to significantly
reducing GHG emissions; and recognizing that U.S. efforts to reduce GHG
emissions could be undermined if other countries with significant GHG
emissions fail to control their emissions and U.S. businesses are put
at a competitive disadvantage relative to their foreign competitors.
Throughout this notice we discuss and seek comment on whether and how
these principles can inform decisions regarding GHG regulation under
the CAA.
    In Congress, both the House and Senate are considering climate
change legislation. A number of bills call for reducing GHG emissions
from a wide variety of sources using a ``cap-and-trade'' approach. Many
of the sources that would be subject to requirements under the bills
are already subject to numerous CAA controls. Thus, there is potential
for overlap between regulation under the CAA and new climate change
legislation.
    This ANPR performs five important functions that can help inform
the legislative debate:
     First, in recognition of the Supreme Court's decision that
GHGs are air pollutants under the CAA, the ANPR outlines options that
may need to be exercised under the Act.
     Second, this notice provides information on how the GHG
requirements under the CAA might overlap with control measures being
considered for climate change legislation.
     Third, the notice discusses issues and approaches for
designing GHG control measures that are useful in developing either
regulations or legislation to reduce GHG emissions.
     Fourth, the ANPR illustrates the complexity and
interconnections inherent in CAA regulation of GHGs. These complexities
reflect that the CAA was not specifically designed to address GHGs and
illustrate the opportunity for new legislation to reduce regulatory
complexity. However, unless and until Congress acts, the existing CAA
will be applied in its current form.
     Fifth, some sections of the CAA are inherently flexible
and thus more capable of accommodating consideration of the President's
principles. Other sections may not provide needed flexibility, raising
serious concerns about the results of applying them. EPA believes that
the presentation in this notice of the various potential programs of
the CAA will help inform the legislative debate.
    EPA is following the Supreme Court's decision in Massachusetts v.
EPA by seriously considering how to apply the CAA to the regulation of
GHGs. In light of the CAA's interconnections and other issues explored
in this notice, EPA does not believe that all aspects of the Act are
well designed for establishing the kind of comprehensive GHG regulatory
program that could most efficiently achieve the GHG emission reductions
that may be needed over the next several decades. EPA requests comment
on whether well-designed legislation for establishing a broad GHG
regulatory framework has the potential for achieving greater
environmental results at lower cost for many sectors of the economy,
with less concern about emissions leakage and more effective, clearer
incentives for development of technology, than a control program based
on the CAA alone.

II. Background Information

A. Background on the Supreme Court Opinion

    On October 20, 1999, the International Center for Technology
Assessment (ICTA) and 18 other environmental and renewable energy
industry organizations filed a petition with EPA seeking regulation of
GHGs from new motor vehicles under section 202 (a)(1) of the CAA. The
thrust of the petition was that four GHGs--carbon dioxide
(CO2), methane (CH4), nitrous oxide
(N2O), and hydrofluorocarbons (HFCs)--are air pollutants as
defined in CAA section 302(g), that emissions of these GHGs contribute
to air pollution which is reasonably anticipated to endanger public
health or welfare, that these GHGs are emitted by new motor vehicles,
and therefore that EPA has a mandatory duty to issue regulations under
CAA section 202(a) addressing GHGs from these sources.
    EPA denied the petition in a notice issued on August 8, 2003. The
Agency concluded that it lacked authority under the CAA to regulate
GHGs for purposes of global climate change. EPA further decided that
even if it did have authority to set GHG emission standards for new
motor vehicles, it would be unwise to do so at this time. More
specifically, EPA stated that CAA regulation of CO2 emitted
by light-duty vehicles would interfere with fuel economy standards
issued by the Department of Transportation (DOT) under the Energy
Policy and Conservation Act (EPCA), because the principal way of
reducing vehicle CO2 emissions is to increase vehicle fuel
economy. The Agency also noted in the 2003 notice that there was
significant scientific uncertainty regarding the cause, extent and
effects of climate change that ongoing studies would reduce. EPA
further stated that regulation of climate change using the CAA would be
inappropriate given the President's comprehensive climate

change policies, concerns about piecemeal regulation, and implications
for foreign policy.
    EPA's denial of the ICTA petition was challenged in a petition for
review filed in the U.S. Court of Appeals for the D.C. Circuit.
Petitioners included 12 states, local governments, and a variety of
environmental organizations. Intervenors in support of respondent EPA
included 10 states and several industry trade associations.
    The D.C. Circuit upheld EPA's denial of the petition in a 2-1
opinion (Massachusetts v. EPA, 415 F.3d 50 (D.C. Cir. 2005)). The
majority opinion did not decide but assumed, for purposes of argument,
that EPA had statutory authority to regulate GHGs from new motor
vehicles and held that EPA had reasonably exercised its discretion in
denying the petition.
    In a 5-4 decision, the Supreme Court reversed the D.C. Circuit's
decision and held that EPA had improperly denied ICTA's petition
(Massachusetts v. EPA, 127 S. Ct. 1438 (2007)). The Court held that
GHGs are air pollutants under the CAA, and that the alternative denial
grounds provided by EPA were ``divorced from the statutory text'' and
hence improper.
    Specifically, the Court held that CO2, CH4, N2O, and HFCs fit the
CAA's definition of ``air pollutant'' because they are `` `physical
[and] chemical * * * substances which [are] emitted into * * * the
ambient air.' '' Id. at 1460. The Court rejected the argument that EPA
could not regulate new motor vehicle emissions of the chief GHG,
CO2, under CAA section 202 because doing so would
essentially regulate vehicle fuel economy, which is the province of DOT
under EPCA. The Court held that EPA's mandate to protect public health
and welfare is ``wholly independent of DOT's mandate to promote energy
efficiency,'' even if the authorities may overlap. Id. at 1462. The
Court stated that ``there is no reason to think the two agencies cannot
both administer their obligations and yet avoid inconsistency.'' Id.
    Turning to EPA's alternative grounds for denial, the Court held
that EPA's decision on whether to grant the petition must relate to
``whether an air pollutant `causes, or contributes to, air pollution
which may reasonably be anticipated to endanger public health or
welfare.' '' Id. Specifically, the Court held that generalized concerns
about scientific uncertainty were insufficient unless ``the scientific
uncertainty is so profound that it precludes EPA from making a reasoned
judgment as to whether greenhouse gases contribute to global warming.''
Id. at 1463. The Court further ruled that concerns related to piecemeal
regulation and foreign policy objectives were unrelated to whether new
motor vehicle GHG emissions contribute to climate change and hence
could not justify the denial.
    The Court remanded the decision to EPA but was careful to note that
it was not dictating EPA's action on remand, and was not deciding
whether EPA must find there is endangerment. Nor did the Court rule on
``whether policy concerns can inform EPA's actions in the event that it
makes such a finding.'' Id. The Court also observed that under CAA
section 202(a), ``EPA no doubt has significant latitude as to the
manner, timing, content, and coordination of its regulations with those
of other agencies.'' The Supreme Court sent the case back to the D.C.
Circuit, which on September 14, 2007, vacated and remanded EPA's
decision denying the ICTA petition for further consideration by the
Agency consistent with the Supreme Court's opinion.

B. Response to the Supreme Court's Decision to Date

1. The President's May 2007 Announcement and Executive Order
    In May 2007, President Bush announced that he was ``directing the
EPA and the Departments of Transportation and Energy (DOT and DOE) to
take the first steps toward regulations that would cut gasoline
consumption and GHG emissions from motor vehicles, using my 20-in-10
plan as a starting point.'' The 20-in-10 plan refers to the President's
legislative proposal, first advanced in his 2007 State of the Union
address, to reduce domestic gasoline consumption by 20% by 2017 through
the use of renewable and alternative fuels and improved motor vehicle
fuel economy.
    On the same day, President Bush issued Executive Order (EO) 13432
``to ensure the coordinated and effective exercise of the authorities
of the President and the heads of the [DOT], the Department of Energy,
and [EPA] to protect the environment with respect to greenhouse gas
emissions from motor vehicles, nonroad vehicles, and nonroad engines,
in a manner consistent with sound science, analysis of benefits and
costs, public safety, and economic growth.''
    In response to the Supreme Court's Massachusetts decision and the
President's direction, EPA immediately began work with DOT and the
Departments of Energy and Agriculture to develop draft proposed
regulations that would reduce GHG emissions from motor vehicles and
their fuels. In particular, EPA and DOT's National Highway Traffic
Safety Agency (NHTSA) worked together on a range of issues related to
setting motor vehicle GHG emission standards under the CAA and
corporate average fuel economy (CAFE) standards under EPCA. As a
prerequisite to taking action under the CAA, the Agency also compiled
and reviewed the available scientific information relevant to deciding
whether GHG emissions from motor vehicles, and whether GHG emissions
from the use of gasoline and diesel fuel by motor vehicles and nonroad
engines and equipment, cause or contribute to air pollution that may
reasonably be anticipated to endanger public health or welfare.
    Sections V and VI of this notice provide further discussion and
detail about EPA's work to date on an endangerment finding and new
motor vehicle regulation under section 202 of the CAA.
 2. Passage of a New Energy Law
    At the same time as EPA was working with its federal partners to
develop draft proposed regulations for reducing motor vehicle and fuel
GHG emissions, Congress was considering broad new energy legislation
that included provisions addressing the motor vehicle fuel economy and
fuel components of the President's 20-in-10 legislative plan. By the
end of 2007, Congress passed and the President signed the Energy
Independence and Security Act (EISA). Title II of EISA amended the CAA
provisions requiring a Renewable Fuels Standard (RFS) that were first
established in the Energy Policy Act of 2005. EISA also separately
amended EPCA with regard to the DOT's authority to set CAFE standards
for vehicles.
    With regard to the RFS, Congress amended section 211(o) of the CAA
to increase the RFS from 7.5 billion gallons in 2012 to 36 billion
gallons in 2022. There are a number of significant differences between
the RFS provisions of EISA and the fuels program EPA was developing
under the President's Executive Order. As a result, EPA is undertaking
substantial new analytical work as part of its efforts to develop the
regulations needed to implement the new RFS requirements. These
regulations are subject to tight statutory deadlines.
    With regard to motor vehicle regulations, EISA did not amend CAA
section 202, which contains EPA's general authority to regulate motor
vehicle emissions. However, EISA did substantially alter DOT's
authority to set CAFE standards under EPCA. The

legislation directs the Department to set CAFE standards that achieve
fleet-wide average fuel economy of at least 35 miles per gallon by 2020
for light-duty vehicles, and for the first time to establish fuel
economy standards for heavy-duty vehicles after a period of study.
    In view of this new statutory authority, EPA and DOT have reviewed
the previous regulatory activities they had undertaken pursuant to the
President's May 14 directive and EO 13432. While EPA recognizes that
EISA does not change the Agency's obligation to respond to the Supreme
Court's decision in Massachusetts v. EPA or the scientific basis for
any decision, the new law has changed the context for any action EPA
might take in response to the decision by requiring significant
improvements in vehicle fuel economy that will in turn achieve
substantial reductions in vehicle emissions of CO2.\25\
---------------------------------------------------------------------------

    \25\ The Current Unified Agenda and Regulatory Plan (Regulatory
Plan) available in May 2008 reflects that EPA is addressing its
response to Massachusetts v. EPA as part of today's notice. The
latest Regulatory Plan also contains a new entry for the renewable
fuels standard program EPA is undertaking pursuant to Title II of
EISA (RIN 2060-AO81). The current Regulatory Plan is available at
http://www.reginfo.gov/public/do/eAgendaMain.
---------------------------------------------------------------------------

3. Review of CAA Authorities
    As part of EPA's efforts to respond to the Supreme Court's
decision, the Agency conducted a thorough review of the CAA to identify
and assess any other CAA provisions that might authorize regulation of
GHG emission sources. That review made clear that a decision to control
any source of GHG emissions could or would impact other CAA programs
with potentially far-reaching implications for many industrial sectors.
In particular, EPA recognized that regulation of GHG emissions from
motor vehicles under section 202(a)(1) or from other sources of GHG
emissions under many other provisions of the Act would subject major
stationary sources to preconstruction permitting under the CAA. As
discussed later in this notice, the Prevention of Significant
Deterioration (PSD) program established in Part C of Title I of the Act
requires new major stationary sources and modified stationary sources
that significantly increase their emissions of regulated air pollutants
to apply for PSD permits and put on controls to reduce emissions of
those pollutants that reflect the best available control technology
(BACT). Because CO2 is typically emitted in much larger quantities
relative to traditional air pollutants, CAA regulation of CO2 would
potentially extend PSD requirements to many stationary sources not
previously subject to the PSD program, including large buildings heated
by natural gas or oil, and add new PSD requirements to sources already
subject to the program. This and other CAA implications of regulation
of GHG emissions under the Act are explored later in this notice.

C. Other Pending GHG Actions Under the CAA

1. Additional Mobile Source Petitions
    Since the Supreme Court's Massachusetts decision, EPA has received
seven additional petitions requesting that the Agency make the
requisite endangerment findings and undertake rulemaking under CAA
sections 202(a)(3), 211, 213 and 231 to regulate GHG emissions \26\
from (1) fuels and a wide array of mobile sources including ocean-going
vessels; (2) all other types of nonroad engines and equipment, such as
locomotives, construction equipment, farm tractors, forklifts, harbor
crafts, and lawn and garden equipment; (3) aircraft; and (4) rebuilt
heavy-duty highway engines. The petitioners represent state and local
governments, environmental groups, and nongovernmental organizations.
Copies of these seven petitions can be found in the docket for this
notice.
---------------------------------------------------------------------------

    \26\ While petitioners vary somewhat in their definition of
GHGs, taken together they seek regulation of CO2, CH4, N2O, HFCs,
PFCs, and SF6, water vapor, and soot or black carbon.
---------------------------------------------------------------------------

    These petitions have several common elements. First, the
petitioners state that climate change is occurring and is driven by
increases in GHG emissions; that the mobile sources described in the
petitions account for a significant and growing portion of these
emissions; and that those mobile sources must therefore be regulated
under the CAA. Second, the petitioners assert that EPA should
expeditiously regulate GHG emissions from those mobile sources because
they are already harming the petitioners' health and welfare and
further delay by the Agency will only increase the severity of future
harms to public health and welfare. Lastly, the petitioners contend
that technology is currently available to reduce GHG emissions from the
mobile sources for which regulation is sought.
    Section VI of this notice provides a brief discussion of these
petitions. The section also summarizes information on the GHG emissions
of each of the three mobile source categories, technologies and other
strategies for reducing GHG emissions from those categories, and
potential approaches for EPA to address their emissions. We request
comment on all issues raised by the petitioners.
2. New Source Performance Standards
    The Massachusetts decision also impacts several stationary source
rulemakings. A group of state and local governments and environmental
organizations petitioned the U.S. Court of Appeals for the D.C. Circuit
to review a 2006 decision by EPA not to regulate the GHG emissions of
several types of steam generating units when the Agency conducted the
periodic review of the new source performance standard (NSPS) for those
units as required by CAA section 111. EPA based its decision on the
position it announced in denying the ICTA petition that the CAA does
not authorize regulation of GHG emissions. After the Supreme Court
ruled that the CAA does provide authority for regulating GHG emissions,
the Agency filed a request with the D.C. Circuit to have the NSPS rule
remanded to us for further actions consistent with the Supreme Court's
opinion. Our motion was granted, and this ANPR represents the next step
in our efforts to evaluate and respond to the court's decision.
    Another NSPS affected by the Supreme Court's decision is the
standard applicable to petroleum refineries. Pursuant to a consent
decree deadline, EPA proposed revisions to the NSPS on April 30, 2007,
less than one month following the Supreme Court decision. During the
comment period for the review, EPA received comments calling for the
NSPS to be revised to include limits on GHG emissions. In our final
rule on April 30, 2008, we declined to adopt standards for GHGs at that
time. First, we noted that, in the context of statutorily mandated 8-
year reviews for NSPS, EPA has discretion regarding the adoption of
standards for pollutants not previously covered by an NSPS. We also
explained that the significant differences between GHGs and the other
air pollutants for which we have previously established standards under
section 111 require a more thorough and deliberate process to identify
and fully evaluate the implications of a decision to regulate under
this and other provisions of the CAA before deciding how to regulate
GHGs under the Act. We pointed to this notice as the means for
providing that process. We further noted that the time period available
for proposing NSPS was too short for EPA to evaluate and develop
proposed standards in light of the Massachusetts decision.
    EPA also recently issued proposed revisions of the Portland cement
NSPS in accordance with the schedule of a

consent decree. In its May 30, 2008 notice, EPA decided not to propose
adding GHG emission requirements to the Portland cement NSPS for
essentially the same reasons the Agency gave in deciding against adding
GHG controls to the refinery NSPS.
3. Prevention of Significant Deterioration Permitting
    As noted previously, the CAA's PSD program requires new major
stationary sources and modified major stationary sources that
significantly increase emissions to obtain air pollution permits before
construction can begin. As part of the permit issuance process, the
public can comment on drafts of these permits. Since the Massachusetts
decision, the number and scope of issues raised by public comments on
draft permits has increased.\27\ The main issue that has been raised is
whether EPA should be establishing facility-specific emission limits
for CO2 in these permits as a result of the Court's decision. EPA's
interpretation, discussed in more detail later in this notice, is that
CO2 is not a regulated pollutant under the Act and that we therefore
currently lack the legal authority to establish emission limits for
this pollutant in PSD permits. That interpretation has been challenged
to EPA's Environmental Appeals Board, and we anticipate a decision in
this case later this year.\28\ The Appeals Board's decision could also
affect several other permits awaiting issuance by EPA, and may have
significant implications for the entire PSD program. The broader
consequences of CO2 and other GHGs being classified as a regulated
pollutant are discussed later in this notice.
    EPA has also received other GHG related comments related to other
elements of the PSD program, such as the consideration of GHG emissions
in establishing controls for other pollutants, the consideration of
alternatives to the proposed project, and related issues. EPA is
currently considering these comments in the context of evaluating each
PSD permit application on a case-by-case basis, applying current law.
---------------------------------------------------------------------------

    \27\ Most PSD permits are issued by states under EPA-approved
state rules. Other states without approved rules can also issue
permits on behalf of EPA under delegation agreements. EPA is the
permitting authority in New York, Massachusetts, Washoe Co (Nevada),
Puerto Rico, Guam, American Samoa, and the Virgin Islands. EPA also
issues PSD permits for sources on tribal lands.
    \28\ See, In Re Deseret Power Electric Cooperative, PSD Appeal
No. 07-03 (http://www.epa.gov/region8/air/permitting/deseret.html).
---------------------------------------------------------------------------

4. GHG Reporting Rule
    In EPA's most recent appropriations bill, Congress called on EPA to
develop and issue a mandatory GHG emissions reporting rule by the
middle of 2009.\29\
---------------------------------------------------------------------------

    \29\ The fiscal year 2008 Consolidated Appropriations Act states
that ``not less than $3,500,000 shall be provided for activities to
develop and publish a draft rule not later than 9 months after the
date of enactment of this Act, and a final rule not later than 18
months after the date of enactment of this Act, to require mandatory
reporting of greenhouse gas emissions above appropriate thresholds
in all sectors of the economy * * *.''
---------------------------------------------------------------------------

    Accordingly, EPA is now developing a proposed rule that would
collect emissions and emissions-related information from stationary and
mobile sources. The overall purpose of the rule is to obtain
comprehensive and accurate GHG data relevant to future climate policy
decisions, including potential regulation under the CAA. EPA expects
the rule to provide valuable additional information on the number and
types of U.S. GHG sources and on the GHG emission levels of those
sources.

D. Today's Action

    In view of the interrelationship of CAA authorities and the many
pending CAA actions concerning GHGs before the Agency, EPA decided to
issue this ANPR to elicit information that will assist us in developing
and evaluating potential action under the CAA. In this ANPR, we review
the bases for a potential endangerment finding in the context of the
pending petition concerning new motor vehicles, explore
interconnections between CAA provisions that could lead to broader
regulation of GHG emissions, and examine the full range of potential
CAA regulation of GHGs, including a discussion of the issues raised by
regulation of GHG emissions of mobile and stationary sources under the
Act. The ANPR will help us shape an overall approach for potentially
addressing GHG emissions under the CAA as part of a broader set of
actions to address GHG emissions taken by Congress, EPA, other federal
departments and agencies, state and local governments, the private
sector, and the international community.

III. Nature of Climate Change and Greenhouse Gases and Related Issues
for Potential Regulation

    Much of today's notice is devoted to a detailed examination of the
various CAA authorities that might be used to regulate GHG emissions
and the scientific and technical bases for potentially exercising those
authorities. A key question for EPA is whether and how potentially
applicable CAA provisions could be used to regulate GHG emissions in an
effective and efficient manner in light of the terms of those
provisions. The global nature of climate change, the unique
characteristics of GHGs, and the ubiquity of GHG emission sources
present special challenges for regulatory design. In this section of
the notice, we identify and discuss these and several other important
considerations that we believe should inform our examination and
potential use of CAA authorities. Throughout this notice we ask for
comment on whether particular CAA authorities would allow EPA to
develop regulations that address those considerations in an effective
and appropriate manner.

A. Key Characteristics of Greenhouse Gases

    The six major GHGs of concern are those directly emitted by human
activities. These are CO2, CH4, N2O, HFCs, perfluorocarbons (PFCs), and
sulfur hexafluoride (SF6). GHGs have a climatic warming effect by
trapping heat in the atmosphere that would otherwise escape to space.
    Global emissions of these six GHGs have grown since pre-industrial
times and particularly over recent decades, having increased by 70%
between 1970 and 2004.\30\ In 2000, U.S. GHG emissions accounted for
approximately 21% of the global total. Other major emitting countries
include China, the Russian Federation, Japan, Germany, India and
Brazil. Future projections show that, for most scenarios assuming no
additional GHG emission reduction policies, global atmospheric
concentrations of GHGs are expected to continue climbing for most if
not all of the remainder of this century and to result in associated
increases in global average temperature. The Intergovernmental Panel on
Climate Change (IPCC) projects an increase of global GHG emissions by
25 to 90% between 2000 and 2030 under a range of different scenarios.
For the U.S., under a business as usual scenario, total gross GHG
emissions are expected to rise 30 percent between 2000 and 2020.\31\
---------------------------------------------------------------------------

    \30\ The data provided here come from ``Contribution of Working
Group III to the Fourth Assessment Report of the Intergovernmental
Panel on Climate Change (IPCC)''--Summary for Policymakers.
    \31\ Fourth U.S.Climate Action Report, 2007. http://
www.state.gov/g/oes/rls/rpts/car/.
---------------------------------------------------------------------------

    A significant difference between the major GHGs and most air
pollutants regulated under the CAA is that GHGs have much longer
atmospheric

lifetimes.\32\ Once emitted, GHG can remain in the atmosphere for
decades to centuries while traditional air pollutants typically remain
airborne for days to weeks. The fact that GHGs remain in the atmosphere
for such long periods of time has several important and related
consequences:
---------------------------------------------------------------------------

    \32\ Some pollutants regulated under the CAA have long
atmospheric lifetimes, including those regulated for protection of
stratospheric ozone and mercury.
---------------------------------------------------------------------------

    (1) Unlike most traditional air pollutants, GHGs become well mixed
throughout the global atmosphere so that the long-term distribution of
GHG concentrations is not dependent on local emission sources. Instead,
GHG concentrations tend to be relatively uniform around the world.
    (2) As a result of this global mixing, GHGs emitted anywhere in the
world affect climate everywhere in the world. U.S. GHG emissions have
climatic effects not only in the U.S. but in all parts of the world,
and GHG emissions from other countries have climatic effects in the
U.S.
    (3) Emissions of the major GHGs build up in the atmosphere so that
past, present and future emissions ultimately contribute to total
atmospheric concentrations. While concentrations of most traditional
air pollutants can be reduced relatively quickly (over months to
several years) once emission controls are applied, atmospheric
concentrations of the major GHGs cannot be so quickly reversed. Once
applied, GHG emission controls would first reduce the rate of build-up
of GHGs in the atmosphere and, depending on the degree of controls over
the longer term, would gradually result in stabilization of atmospheric
GHG concentrations at some level.
    (4) GHG emissions have long-term consequences. Once emitted, the
major GHGs exert their climate changing effects for a long period of
time. Past and current GHG emissions thus lead to some degree of
commitment to climate change for decades or even centuries. According
to the IPCC, past GHG emissions have already resulted in an increase in
global average temperature and associated climatic changes. Much of
those past emissions will continue to contribute to temperature
increases for some time to come, while current and future GHG emissions
contribute to climate change over a similarly long period. See section
V for a fuller discussion of the effects of GHG emissions as they
relate to making an endangerment finding under the CAA.\33\
---------------------------------------------------------------------------

    \33\ Another important difference between CO2 and
traditional air pollutants is the high volume of CO2
emissions relative to other pollutants for most sources. The
significance of this difference is discussed later in this section
and in section VII of this notice.
---------------------------------------------------------------------------

    The large temporal and spatial scales of the climate change
challenge introduce regulatory issues beyond those typically presented
for most traditional air pollutants. Decision makers are faced with
many uncertainties over long time frames and across national
boundaries, such as population and economic growth, technological
change, the exact rate and magnitude of climate change in response to
different emissions pathways, and the associated effects of that
climate change. These uncertainties increase the complexity of
designing an effective long-term regulatory strategy.
    Acknowledging that overall risk increases with increases in both
the rate and magnitude of climate change, the United Nations Framework
Convention on Climate Change (UNFCCC), signed and ratified by the U.S.
in 1992, states as its ultimate objective the ``* * * stabilization of
greenhouse gas concentrations in the atmosphere at a level that would
prevent dangerous anthropogenic interference with the climate system.''
In 2007, the U.S. and other Parties to the UNFCCC recognized that ``* *
* deep cuts in global emissions will be required to achieve the
ultimate objective of the Convention * * *'' and emphasized ``* * * the
urgency to address climate change as indicated * * *'' by the IPCC.
    Determining what constitutes ``dangerous anthropogenic
interference'' is not a purely scientific question; it involves
important value judgments regarding what level of climate change may or
may not be acceptable. It is not the purpose of this ANPR to make any
judgment regarding what an appropriate stabilization goal may be. In
the absence of further policy action, the IPCC notes that, ``With
current climate change mitigation policies and related sustainable
development practices, global GHG emissions will continue to grow over
the next few decades.''
    As indicated above, to stabilize GHGs at any level in the
atmosphere, emissions would need to peak and decline thereafter. A
decision to stabilize at lower concentrations and associated
temperature increases would necessarily advance the date by which
emissions would need to peak, and would therefore require greater
emissions reductions earlier in time. According to the IPCC, mitigation
efforts over the next two to three decades will have a large impact on
the ability of the world to achieve lower stabilization levels. For
illustration, IPCC projected that, in order to prevent long-term global
temperatures from exceeding 2.8 [deg]C (approximately 5 [deg]F)
relative to pre-industrial temperatures, atmospheric CO2
concentrations would need to be stabilized at 440 parts per million
(ppm) (current levels stand at about 379 ppm), translating into global
CO2 emission reductions by 2050 of up to 60% (relative to
emissions in the year 2000). Stabilization targets that aim to prevent
even more warming would require steeper and earlier emission
reductions, whereas stabilization targets that allow for more warming
(with higher associated risks and impacts) would require less steep and
later emission reductions.

B. Types and Relative Emissions of GHG Emission Sources

1. Background
    Each year EPA prepares a complete inventory of the anthropogenic
emissions and sinks of all six major GHGs in the United States.\34\
Anthropogenic in this context means that emissions result from human
activities. ``Sinks'' are the opposite of emissions in that they are
activities or processes that remove GHGs from the atmosphere (e.g.,
CO2 uptake by plants through photosynthesis). EPA prepares
the inventory in cooperation with numerous federal agencies as part of
the U.S. commitment under the UNFCCC.\35\ This inventory is derived
largely from top-down national energy and statistical data. As
mentioned previously, EPA is currently developing a proposed GHG
reporting rule that will provide bottom-up data from covered reporters
and thus provide greater detail on the emissions profile of specific
source categories.
---------------------------------------------------------------------------

    \34\ Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-
2006, (April 2008) USEPA 430-R-08-005. http://www.epa.gov/
climatechange/emissions/usinventoryreport.html.
    \35\ See Articles 4 and 12 of the UNFCCC treaty. http://
www.unfccc.int. Parties to the Convention ``shall develop,
periodically update, publish and make available * * * national
inventories of anthropogenic emissions by sources and removals by
sinks of all greenhouse gases not controlled by the Montreal
Protocol, using comparable methodologies * * *''
---------------------------------------------------------------------------

2. Emissions by Gas
    In 2006, total U.S. GHG emissions were 7,054 million metric tons of
CO2 equivalent (MMTCO2e).\36\ Overall, total U.S.
GHG emissions have risen by 14.7% from 1990 to 2006. GHG emissions
decreased from 2005 to 2006 by 1.1 percent (or 76 MMTCO2e).
Figure III-1 illustrates the relative share of each

gas, and trend since 1990, weighted by global warming potential.\37\
All GHG units and percentage changes provided in this section are based
on CO2-equivalency.
---------------------------------------------------------------------------

    \36\ International standards for reporting are established by
the IPCC, which uses metric units. 1 MMTCO2e is equal to
1 teragram (Tg) or 10 12 grams. 1 metric ton is equal to
1.1023 short tons.
    \37\ Emissions of different GHGs are compared using global
warming potentials (GWPs). The GWP of a GHG is the ratio of heat
trapped by one unit mass of the GHG compared to that of one unit
mass of CO2 over a specified time period, which is 100
years for the GWPs estimated by the IPCC used here. The reference
gas is CO2, and therefore GWP-weighted emissions are
measured in teragrams of CO2 equivalent (Tg
CO2 Eq.). The GWP values used in this analysis come from
the IPCC Second Assessment report, consistent with the UNFCCC
reporting requirements for Parties listed in Annex I.
[GRAPHIC] [TIFF OMITTED] TP30JY08.026

    Carbon Dioxide: The primary GHG emitted as a result of human
activities in the United States is CO2, representing approximately 85%
of total GHG emissions. CO2 results primarily from fossil fuel
combustion to generate electricity, power vehicles and factories, heat
buildings, etc. Fossil fuel-related CO2 emissions accounted for
approximately 79% of CO2 emissions since 1990, and increased at an
average annual rate of 1.1% from 1990 to 2006. Changes in CO2 emissions
from fossil fuel combustion are influenced by many long-term and short-
term factors, including population and economic growth, energy price
fluctuations, technological changes, and seasonal temperatures.
    Methane: According to the IPCC, CH4 is more than 20 times as
effective as CO2 at trapping heat in the atmosphere. By 2006, CH4
emissions had declined from 1990 levels by just under 9%, and now make
up approximately 8% of total U.S. GHG emissions. Enteric fermentation
(22.7%) is the largest anthropogenic source of CH4 emissions in the
United States, followed by landfills (22.6%), natural gas systems
(18.4%), coal mining (10.5%), and manure management (7.5%). Smaller
sources such as rice cultivation and incomplete fossil fuel combustion
account for the remainder.
    Nitrous Oxide: While total N2O emissions are much lower than CO2
emissions in terms of mass, N2O is approximately 300 times more
powerful than CO2 at trapping heat in the atmosphere. U.S. emissions of
N2O are just over 5% of total U.S. GHG emissions, and have declined by
4% since 1990. The main anthropogenic activities producing N2O in the
United States are agricultural soil management (72%), and fuel
combustion in motor vehicles (9%). A variety of chemical production
processes and liquid waste management sources also emit N2O.
    HFCs, PFCs, and SF6: These GHGs are often grouped together because
they contain fluorine, typically have large global warming potentials,
and are produced only through human activities (there are no natural
sources), either intentionally for use or unintentionally as an
industrial byproduct. HFCs and some PFCs are increasingly being used--
and therefore emitted--as substitutes for the ozone depleting
substances controlled under the Montreal Protocol and Title VI of the
CAA. The largest source is the use of HFCs in air conditioning and
refrigeration systems. Other sources include HFC-23 emitted during the
production of HCFC-22, electrical transmission and distribution systems
(SF6), and PFC emissions from semiconductor manufacturing and primary
aluminum production. U.S. HFC emissions have increased 237% over 1990
levels, while emissions of PFCs and SF6 have decreased by 71 and 47%,
respectively, from 1990 levels. Combined, these GHGs made up 2.1% of
total U.S. GHG emissions in 2006.
3. Emissions by Sector
    An alternative way to look at GHG emissions is by economic sector.
All U.S. GHG sources can be grouped into the electricity, industrial,
commercial, residential, transportation and agriculture sectors.
Additionally, there are changes in carbon stocks that result in
emissions and sinks associated with land-use and land-use change
activities. Figure III-2 illustrates the relative contributions and
historical trends of these economic sectors.
    Electricity Generation: The electricity generation sector includes
all facilities that generate electricity primarily for sale rather than
for use on site (e.g., most large-scale power plants). Electricity
generators emitted 33.7% of all U.S. GHG emissions in 2006. The type of
fuel combusted by electricity generators has a significant effect on

[[Continued on page 44403]]

]

[[pp. 44403-44452]] Regulating Greenhouse Gas Emissions Under the Clean Air Act

[[Continued from page 44402]]

their emissions. For example, some electricity is generated with low or
no CO2 emitting energy technologies, particularly non-fossil options
such as nuclear, hydroelectric, or geothermal energy. However, over
half of the electricity in the U.S. is generated by burning coal,
accounting for 94% of all coal consumed for energy in the U.S. in 2006.
    Transportation Sector: The transportation sector includes
automobiles, airplanes, railroads and a variety of other sources.
Transportation activities (excluding international bunker fuels)
accounted for approximately 28% of all GHG emissions in 2006, primarily
through the combustion of fossil fuels.\38\ Virtually all of the energy
consumed in this end-use sector came from petroleum products. Over 60%
of the CO2 emissions resulted from gasoline consumption for personal
vehicle use.
---------------------------------------------------------------------------

    \38\ International bunker fuels are used in aviation and marine
trips between countries.
---------------------------------------------------------------------------

    Industrial Sector: The industrial sector includes a wide variety of
facilities engaged in the production and sale of goods. The largest
share of emissions from industrial facilities comes from the combustion
of fossil fuels. Emissions of CO2 and other GHGs from U.S. industry
also occur as a result of specialized manufacturing processes (e.g.,
calcination of limestone in cement manufacturing). The largest emitting
industries tend to be the most energy intensive: Iron and steel,
refining, cement, lime, chemical manufacturing, etc. Overall, 19.4% of
total U.S. GHG emissions came from the industrial sector in 2006.
    Residential and Commercial Sectors: These two sectors directly emit
GHGs primarily through operation and maintenance of buildings (i.e.,
homes, offices, universities, etc.). The residential and commercial
end-use sectors accounted for 4.8 and 5.6% of total emissions,
respectively, with CO2 emissions from consumption of natural gas and
petroleum for heating and cooking making up the largest share.
    Agriculture Sector: The agriculture sector includes all activities
related to cultivating soil, producing crops, and raising livestock.
Agricultural GHG emissions result from a variety of processes,
including: Enteric fermentation in domestic livestock, livestock manure
management, rice cultivation, agricultural soil management, and field
burning of agricultural residues. Methane and N2O are the primary GHGs
emitted by agricultural activities.\39\ In 2006, agriculture emission
sources were responsible for 6.4% of total U.S. GHG emissions.
---------------------------------------------------------------------------

    \39\ Agricultural soils also emit CO2 and sequester carbon. The
fluxes are discussed under the Land-Use, Land-Use Change and
Forestry section because of the integrated nature of methodological
approaches to the carbon cycle, and international reporting
conventions.
---------------------------------------------------------------------------

    Land Use, Land-Use Change, and Forestry: Land use is not an
economic sector per se but affects the natural carbon cycle in ways
that lead to GHG emissions and sinks. Included in this category are
emissions and sequestration of CO2 from activities such as
deforestation, afforestation, forest management and management of
agricultural soils. Emissions and sequestration depend on local
conditions, but overall land use in the U.S. was a net sink in 2006
equivalent to 12.5% of total GHG emissions.
BILLING CODE 6560-50-P

[GRAPHIC] [TIFF OMITTED] TP30JY08.027

C. Advancing Technology

    President Bush, the IPCC, and many other private and public groups
have spotlighted the critical importance of technology to reducing GHG
emissions and the risks of climate change. International, U.S., and
private studies have identified a broad range of potential strategies
that can reduce emissions from diverse economic sectors. Many
strategies, such as increasing energy efficiency and conservation and
employing hybrid and diesel vehicle technologies, are available today.
There is also broad consensus that for many sectors of the economy new
technologies will be

needed to achieve deep reductions in GHG emissions at less cost than
today's technologies alone can achieve.
    In developing potential CAA (or other) controls, one important
question is the extent to which needed technological development can be
expected to occur as a result of market forces alone (e.g., as a result
of increasing prices for oil and other fossil fuels), and the extent to
which government or other action may be needed to spur development.
There are several different pathways for technological change,
including investment in research and development (private and public),
spillovers from research and development in other sectors (e.g.,
advances in computing made hybrid vehicles possible), learning by doing
(i.e., efficiency gains through repetition), and scale economies (i.e.,
aggregate cost reductions from improved process efficiencies). As
further discussed later in this section, market-based incentives that
establish a price (directly or indirectly through a limit) for carbon
and/or other GHGs could continuously spur technological innovation that
could lower the cost of reducing emissions. However, even with such a
policy, markets tend to under-invest in development of new technologies
when investors can only capture a portion of the returns. This is
particularly true at the initial stages of research and development
when risks are high and market potential is not evident. In such cases,
policies to encourage the development and diffusion of technologies
that are complements to pollution control policies may be
warranted.\40\
---------------------------------------------------------------------------

    \40\ Economic Report of the President, February 2007.
---------------------------------------------------------------------------

    This section draws insights from IPCC and other reports on
available and needed technologies. In later sections of this notice, we
explain each potentially applicable CAA provision and consider the
extent to which that provision authorizes regulatory actions and
approaches that could spur needed technology development.
1. The Role of Existing and New Technology in Addressing Climate Change
    The 2007 IPCC report on mitigation of climate change examined the
availability of current technologies and the need for new technologies
to mitigate climate change.\41\ Among its conclusions, the IPCC states:
---------------------------------------------------------------------------

    \41\ IPCC, 2007, ``Climate Change 2007: Mitigation. Contribution
of Working Group III to the Fourth Assessment Report of the
Intergovernmental Panel on Climate Change,'' [B. Metz, O.R.
Davidson, P.R. Bosch, R. Dave, L.A. Meyers (eds)], Cambridge
University Press, Cambridge, United Kingdom and New York, NY.

     The range of stabilization levels assessed [by the
IPCC] can be achieved by deployment of a portfolio of technologies
that are currently available and those that are expected to be
commercialized in coming decades. This assumes that appropriate and
effective incentives are in place for development, acquisition,
deployment and diffusion of technologies and for addressing related
barriers.\42\
---------------------------------------------------------------------------

    \42\ Ibid, ``Summary for Policymakers,'' p. 25.

    According to one study, five groups of strategies that could
substantially reduce emissions between now and 2030 include (1)
improving energy efficiency in buildings and appliances; (2) increasing
fuel efficiency and reducing GHG emissions from vehicles and the carbon
intensity of transportation fuels; (3) industrial equipment upgrades
and process changes to improve energy efficiency; (4) increasing forest
stocks and improving soil management practices; and (5) reducing carbon
emissions from electric power production through a shift toward
renewable energy, expanded nuclear capacity, improved power plant
efficiency, and use of carbon capture and storage technology on coal-
fired generation.\43\ (Note that EPA is not rank-ordering these
technologies by their relative cost effectiveness.) As noted elsewhere
in this notice, there is federal regulatory or research and development
activity ongoing in most of these areas.
---------------------------------------------------------------------------

    \43\ See McKinsey & Company, ``Reducing U.S. Greenhouse Gas
Emissions: How Much at What Cost?'', U.S. Greenhouse Gas Abatement
Mapping Initiative, Executive Report, December 2007. This study
performed an economic assessment of potential control methods based
on a ``bottom-up'' partial equilibrium model, which does not account
for interactions among economic sectors. Bottom-up models include
many more specific technologies than ``top-down'' general
equilibrium models, which account for cross-sector interactions.
---------------------------------------------------------------------------

    Many energy efficiency technologies exist that appear to be
extremely cost-effective in reducing fuel costs compared to other
alternatives. However, they have yet to be adopted as widely as
expected because of market barriers. Such barriers include lack of
knowledge or confidence in the technology by potential users,
uncertainty in the return on investment (potentially due to uncertainty
in either input prices or output prices), concerns about effects of
energy efficiency technologies on the quality of inputs or outputs,
size of the initial capital investment (coupled with potential
liquidity constraints), and requirements for specialized human capital
investments. Some of these costs are lower in larger firms, due to the
increased availability of financial resources and human capital.\44\
Vendor and other projections of cost-savings for energy efficiency
technologies are often based on average pay-back and thus do not
reflect differences among firms that can affect the costs and benefits
of these technologies and therefore the likelihood of adoption. Over
time, as firms gain more experience with these technologies, the rate
of adoption will likely increase if significant cost-savings are
realized by early adopters.
---------------------------------------------------------------------------

    \44\ Pizer, et al., ``Technology Adoption and Aggregate Energy
Efficiency,'' December 2002, December 2002 Resources for the Future
Discussion Paper 02-52.
---------------------------------------------------------------------------

    The IPCC report on mitigation identified technologies that are
currently available and additional technologies that are expected to be
commercialized by 2030, as shown in the following table.\45\ These
include technologies and practices in the energy supply,
transportation, buildings, industry, agriculture, forest, and waste
sectors:
---------------------------------------------------------------------------

    \45\ IPCC 2007, ``Summary for Policymakers,'' p. 14. Figure III-
3

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP30JY08.028

    How much any of the mitigation strategies identified by these
studies would actually be deployed to address climate change is an open
question. It is possible that unanticipated technologies could play a
significant role in reducing emissions. The point of these studies is
to illustrate that potentially feasible technologies exist that could
be employed to mitigate GHG emissions, not to predict the precise role
they will play or to suggest sectors or methods for regulation. The
particular policies pursued by governments, including the U.S. under
the CAA or other authorities, will influence the way in which these
technologies are deployed as well as incentives for developing and
deploying new technologies.
2. Federal Climate Change Technology Program
    The U.S. government is investing in a diverse portfolio of
technologies with

the potential to yield substantial reductions in emissions of GHGs. The
Climate Change Technology Program (CCTP) is a multi-agency planning and
coordination entity that assists the government in carrying out the
President's National Climate Change Technology Initiative. Managed by
the Department of Energy, the program is organized around five
technology areas for which working groups were established. EPA
participates in all of the working groups and chairs the group focused
on non-CO2 GHGs.
    The CCTP strategic plan, released in September 2006, provides
strategic direction and organizes approximately $3 billion in federal
spending for climate change-related technology research, development,
demonstration, and deployment.\46\ The plan sets six complementary
goals, including five aimed at developing technologies to:
---------------------------------------------------------------------------

    \46\ U.S. Climate Change Technology Program Strategic Plan,
September 2006; http://www.climatetechnology.gov/stratplan/final/
index.htm.
---------------------------------------------------------------------------

     Reduce emissions from energy end-use and infrastructure;
     Reduce emissions from energy supply, particularly through
development and commercialization of no- or low-emission technologies;
     Capture, store and sequester CO2;
     Reduce emissions of non-CO2 GHGs; and
     Enhance the measurement and monitoring of CO2
emissions.

The first four of these goals focus on GHG emissions reduction
technologies, and the fifth addresses a key need for developing
comprehensive GHG control strategies. The sixth CCTP goal is to
strengthen the contributions of basic science to climate change
technology development.
3. Potential for CAA Regulation to Encourage Technology Development
    Past EPA efforts to reduce air pollution under the CAA demonstrate
that incentives created by regulation can help encourage technology
development and deployment. As noted in a recent EPA regulatory
analysis, the history of the CAA provides many examples in which
technological innovation and ``learning by doing'' have made it
possible to achieve greater emissions reductions than had been feasible
earlier, or have reduced the costs of emission control in relation to
original estimates.\47\ Among the examples are motor vehicle emission
controls, diesel fuel and engine standards to reduce NOX and
particulate matter emissions, engine idle-reduction technologies,
selective catalytic reduction and ultra-low NOX burners for
NOX emissions, high-efficiency scrubbers for SO2
emissions from boilers, CFC-free air conditioners and refrigerators,
low or zero VOC paints, and idle-reduction technologies for
engines.\48\
---------------------------------------------------------------------------

    \47\ See section 5.4 of Final Ozone NAAQS Regulatory Impact
Analysis, March 2008, EPA-HQ-OAR-2007-0225. The RIA is available at
http://www.epa.gov/ttn/ecas/ria.html#ria2007.
    \48\ Ibid.
---------------------------------------------------------------------------

    One of the issues raised by potential CAA regulation of GHGs is
whether the CAA can help spur needed technological development for
reducing GHG emissions and the costs of those reductions. The
regulatory authorities in the CAA vary in their potential for
encouraging new technology. As discussed later in this notice, some
provisions offer little flexibility in standard-setting criteria,
emission control methods, compliance deadlines and potential for
market-oriented regulation. Other provisions offer more potential to
encourage new technology through market incentives or to establish
standards based on anticipated advances in technology. EPA requests
comment on the extent to which various CAA provisions could be used to
help spur technological development, and on the need for federally
conducted or funded research to promote technological development.

D. Relationship to Traditional Air Pollutants and Air Pollution
Controls

    An issue for any regulation of GHGs under the CAA or other
statutory authority is how a GHG control program would and should
interact with existing air quality management programs. This section
describes the relationships between climate change and air quality and
between GHG emissions and traditional air pollution control programs.
As explained below, those relationships suggest the need for integrated
approaches to climate change mitigation and air quality protection.
Differences between GHGs and traditional air pollutants should also be
taken into account in considering how CAA authorities could be employed
for GHG regulation.
1. Connections Between Climate Change and Air Quality Issues
    Climate change affects some types of air pollution, and some
traditional air pollutants affect climate. According to the IPCC,
climate change can be expected to influence the concentration and
distribution of air pollutants through a variety of direct and indirect
processes. In its recent review of the NAAQS for ozone, EPA examined
how climate change can increase ozone levels and how ozone, itself a
GHG, can contribute to climate change. Similarly, in its reviews of the
NAAQS for particulate matter, the Agency examined the extent to which
some particles help absorb solar energy in the earth's atmosphere and
others help reflect it back to space.\49\ How EPA regulates those
pollutants under the CAA is potentially part of an overall strategy for
addressing climate change, and how GHGs are regulated is potentially an
important component of protecting air quality. For example, it is
likely to become more difficult and expensive to attain the ozone NAAQS
in a future, warmer climate.
---------------------------------------------------------------------------

    \49\ EPA did not have adequate information in these reviews for
impacts on climate change to change the Agency's decision on whether
or how to revise the standards. See, e.g., 71 FR 61144, 61209-10
(October 17, 2006) (PM NAAQS review).
---------------------------------------------------------------------------

    Most of the largest emitters of GHGs are also large emitters of
traditional air pollutants and therefore are already regulated under
the CAA. The electricity generation, transportation and industrial
sectors, the three largest contributors to GHG emissions in the U.S.,
are subject to CAA controls to help meet NAAQS, control acid rain, and
reduce exposures to toxic emissions. Some manufacturers of the GHGs
that are fluorinated gases are subject to CAA regulations for
protection of the stratospheric ozone layer.
    Many measures for controlling GHG emissions also contribute to
reductions in traditional air pollutants, and some measures for
controlling traditional air pollutants result in reductions in
GHGs.\50\ Co-benefits from reduced air pollution as a result of actions
to reduce GHG emissions can be substantial.\51\ In general, fossil fuel
combustion results in emissions not only of CO2 but also of
many traditional air pollutants, including SO2,
NOX, CO and various toxic air pollutants. For many types of
sources, to the extent fossil fuel combustion is reduced, emissions of
all those pollutants are reduced as well. Some control measures reduce
GHGs and traditional air pollutants, including leak detection and fuel
switching. However, some measures for controlling traditional air
pollutants increase GHGs, and some measures for controlling GHGs may
increase traditional air pollutants. For example, controls to decrease
SO2 emissions from industrial sources require energy to
operate and result in reduced process efficiencies and increases in
GHGs, and changing

the composition of transportation fuels to reduce GHGs may affect
traditional air pollutant emissions.
---------------------------------------------------------------------------

    \50\ EPA, OAP, Clean Energy-Environmental Guide to Act, http://
www.epa.gov/cleanenergy/documents/gta/guide_action_full.pdf.
    \51\ IPCC, 2007, Working Group III, Summary for Policymakers.
---------------------------------------------------------------------------

    By considering policies for addressing GHGs and traditional air
pollutants in an integrated manner, EPA and the sectors potentially
subject to GHG emission controls would also have the opportunity to
consider and pursue the most effective way of accomplishing emission
control across pollutants. For example, adoption of some air quality
controls could result in a degree of ``technology lock-in'' that
restricts the ability to implement GHG control technologies for
significant periods of time because of the investment in capital and
other resources to meet the air quality control requirements. Sections
VI and VII below discuss technologies and opportunities for controlling
GHGs in more detail from various sectors, including transportation,
electricity generation, and manufacturing. EPA requests comment on
strategies and technologies for simultaneously achieving reductions in
both traditional air pollutants and GHG emissions.
    In light of the connections between climate change and air quality,
the large overlap of GHG and traditional air pollution sources, and the
potential interactions of GHG and traditional air pollution controls,
it makes sense to consider regulation of GHGs and traditional air
pollutants in an integrated manner. Indeed, the National Academy of
Sciences recommends that development of future policies for air
pollution control be integrated with climate change considerations.\52\
GHG control measures implemented today could have immediate impacts on
air pollution and air quality. Similarly, air pollution controls
implemented today could have near term impacts on GHG emissions and
thus long term impacts on climate. Ideally, any GHG control program
under the Act, or other statutory authority would address GHGs in ways
that simultaneously reduce GHGs and traditional air pollutants as
needed to mitigate climate change and air pollution.\53\
---------------------------------------------------------------------------

    \52\ National Academy of Sciences, ``Radiative Forcing of
Climate Change: Expanding the Concept and Addressing
Uncertainties,'' October 2005.
    \53\ Integration of planning efforts related to air quality,
land use, energy efficiency, and transportation to improve air
quality and reduce GHG emissions is in line with the CAA Advisory
Committee Air Quality Management Subcommittee's Phase II
recommendations (June 2007), and the recommendations of the National
Research Council of the National Academy of Sciences in its January
2004 report, ``Air Quality Management in the United States.'' EPA
has initiated several programs to encourage integrated planning
efforts, including the Sustainable Skylines Initiative, a public-
private partnership to reduce air emissions and promote
sustainability in urban environments, and the Air Quality Management
Plan pilot program for testing a comprehensive, multipollutant
planning approach.
---------------------------------------------------------------------------

2. Issues in Applying CAA Controls to GHGs
    One important issue for regulation of GHGs under some CAA
provisions concerns the emissions thresholds established by the Act for
determining the applicability of those provisions. Several CAA
provisions require stationary sources that emit traditional air
pollutants above specific emission thresholds to comply with certain
requirements. Applying the same thresholds to GHGs could result in
numerous sources, such as space heaters in large residential and
commercial buildings, becoming newly subject to those requirements.
Currently regulated sources could become subject to additional
requirements. This would occur in part because most sources typically
emit CO2, the predominant GHG, in much larger quantities
than traditional air pollutants. Issues related to threshold levels are
discussed in more detail in Section VII below.
    Other important issues for CAA regulation of GHGs are raised by the
different temporal and spatial scope of GHGs compared to traditional
pollutants. Air pollutants currently regulated under the CAA tend to
have local (a few kilometers) or regional (hundreds to thousands of
kilometers) impacts and relatively short atmospheric lifetimes (days to
a month). Historically, this has meant that EPA could identify and
differentiate between affected and unaffected areas and devise control
strategies appropriate for each area. Controls applied within an area
with high concentrations of traditional air pollutants generally have
been effective in achieving significant reductions in air pollution
concentrations within that area in a relatively short amount of time.
The spatial nature of traditional air pollution also has made it
appropriate to place the primary responsibility for planning controls
on state, tribal, or local governments.
    In the years since the CAA was enacted, we have learned that some
traditional air pollutants (e.g., ozone, particulates and their
precursors) are transported across regions of the country and thus have
geographically broader impacts than individual states can address on
their own. Our control strategies for those pollutants have evolved
accordingly. The Nitrogen Oxides (NOX) SIP Call Rule and the
Clean Air Interstate Rule (CAIR) are examples of regional control
programs that significantly supplement local control measures. NSPS and
motor vehicle controls are examples of national measures that also help
improve air quality locally and regionally.
    The global nature and effect of GHG emissions raise questions
regarding the suitability of CAA provisions that are designed to
protect local and regional air quality by controlling local and
regional emission sources.\54\ As noted above, GHGs are relatively
evenly distributed throughout the global atmosphere. As a result, the
geographic location of emission sources and reductions are generally
not important to mitigating global climate change. Instead, total GHG
emissions in the U.S. and elsewhere in the world over time determine
cumulative global GHG concentrations, which in turn determine the
extent of climate change. As a result, it will be the total emission
reductions achieved by the U.S. and the other countries of the world
that will determine the extent of climate change mitigation. The global
nature of GHGs suggests that the programmatic and analytical tools used
to address local and regional pollutants under the CAA (e.g., SIPs,
monitoring networks, and models) would need to be adapted to inventory,
analyze, control effectively and evaluate progress in achieving GHG
reductions.
---------------------------------------------------------------------------

    \54\ It should be noted that international transport of ozone
and particulate matter precursors contributes to NAAQS nonattainment
in some areas of the U.S. Nevertheless, most traditional air
pollution problems are largely the result of local and regional
emission sources, while for GHGs, worldwide emissions determine the
extent of the problem.
---------------------------------------------------------------------------

    EPA seeks information about how differences in pollutant
characteristics should inform regulation of these pollutants under the
CAA. EPA also requests comment on the types of effective programs at
all levels (local, regional, national and international) that may be
feasible to design and implement under existing CAA authorities.

E. Relationship to Other Environmental Media

    An effective GHG control program may require application of many
technologies and approaches that may in turn result in increased
discharges to water, generation of solid materials that require
appropriate disposal, or have other impacts to the environment that may
not be addressed under the CAA. Examples of these impacts include the
potential for groundwater contamination from geological

sequestration of CO2, the generation of spent sorbent
material from carbon capture systems, or the depletion of water
resources and increased nutrient runoff into surface waters from
increased production of bioenergy feedstocks. EPA and other regulatory
agencies at the tribal, state, and local level may need to respond to
such impacts to prevent or minimize their impact to the environment and
public health under authorities other than the CAA.
    Since the nature and extent of these impacts would depend upon the
technologies and approaches that are implemented under a GHG control
program, an important consideration in designing GHG controls is
minimizing or mitigating such impacts EPA seeks comment on how
different regulatory approaches to GHG control under the CAA could
result in environmental impacts to water or land that could require
response under the CAA or EPA's other legislative authorities.

F. Other Key Policy and Economic Considerations for Selecting
Regulatory Approaches

    This section identifies general policy considerations relevant to
developing potential regulatory approaches for controlling GHG
emissions. In developing approaches under the CAA, EPA must first
consider the Act's provisions as well as the Agency's previous
interpretation of the provisions and relevant and controlling court
opinions. Provisions of the CAA vary in terms of the degree of
flexibility afforded EPA in designing implementing regulations under
the Act. To the extent particular provisions permit, EPA believes the
following considerations should guide its choice among available
regulatory approaches. This section also discusses three selected
issues in greater depth because of their importance to designing
effective GHG controls: advantages of market-oriented regulatory
approaches, economy-wide and sector-based regulation under the CAA, and
emissions leakage and international competitiveness. In discussing
these and other policy and economic considerations, EPA is not directly
or indirectly implying that it possesses the requisite statutory
authority in all areas.
1. Overview of Policy and Economic Considerations
    The following considerations are useful in developing potential
regulatory approaches to the extent permissible under the CAA. These
considerations are also generally applicable to the design of GHG
control legislation. EPA is in the process of evaluating the CAA
options described later in this notice in light of these
considerations.
    Effectiveness of health and environmental risk reduction: How much
would the approach reduce negative health and environmental impacts (or
the risk of such impacts), relative to other potential approaches?
    Certainty and transparency of results: How do the potential
regulatory approaches balance the trade-off between certainty of
emission reductions and costs? To what extent can compliance
flexibility be provided for regulated entities while maintaining
adequate accountability for emission reductions?
    Cost-effectiveness and economic efficiency considerations: To what
extent does the approach allow for achieving health and environmental
goals, determined in a broader policy process, in a manner that imposes
the least cost? How do the societal benefits compare to the societal
costs? To what extent are there non-monetizable or unquantifiable
benefits and costs? Given the uncertainties associated with climate
change, to what extent can economic efficiency be judged?
    Equity considerations (i.e., distributional effects): Does the
approach by itself or in combination with other programs result in a
socially acceptable apportionment of the burden of emission reduction
across groups in our society? Does the approach provide adequate
protection for those who will experience the adverse effects of
emissions, including future generations?
    Policy flexibility over time: Does the approach allow for updating
of environmental goals and mechanisms for meeting those goals as new
information on the costs and benefits of GHG emission reductions
becomes available?
    Incentives for innovation and technology development: Does the
approach provide incentives for development and deployment of new,
cleaner technologies in the United States and transfer abroad? Does the
approach create incentives for individual regulated entities to achieve
greater-than-required emissions reductions?
    Competitiveness/emissions shifts: Can the approach be designed to
reduce potential adverse impacts and consequent shifts in production
and emissions to other sectors or geographic areas? Can the policy be
designed to minimize the shifting, or ``leakage,'' of emissions to
other sectors or other countries, which would offset emission reduction
benefits of the policy? To what extent can the approach consider the
degree and nature of action taken by other countries?
    Administrative feasibility: How complex and resource-intensive
would the approach be for federal, state, and local governments and for
regulated entities? Do personnel in the public and private sectors have
sufficient expertise, or can they build sufficient expertise, to
successfully implement the approach?
    Enforceability: Is the approach enforceable in practice? Do
available regulatory options differ regarding whether the government or
the regulated entity bears the burden of demonstrating compliance?
    Unintended consequences: Does the approach result in unintended
consequences or unintended effects for other regulations? Does the
approach allow for consideration of, and provide tools to address, any
perverse incentives?
    Suitability of tool for the job: Overall, is the approach well-
suited to the environmental problem, or the best-suited among imperfect
alternatives? For example, does the regulatory approach fit the
characteristics of the pollutant in question (e.g., the global and
long-lived nature of GHGs, high volume of CO2 emissions)?
2. Market-Oriented Regulatory Approaches for GHGs
    EPA believes that market-oriented regulatory approaches, when well-
suited to the environmental problem, offer important advantages over
non-market-oriented approaches. A number of theoretical and empirical
studies have shown these advantages.\55\ In general, market-oriented
approaches include ways of putting a price on emissions through a fixed
price (e.g., a tax) or exchangeable quantity-based instrument (e.g., a
cap-and-trade program), while non-market-oriented approaches set
performance standards limiting the rate at which individual entities
can emit, or prescribe what abatement behaviors or technologies they
should use.\56\ The primary regulatory advantage of a market-oriented
approach is that it can achieve a particular emissions target at a
lower

social cost than a non-market-oriented \57\ approach (Baumol and Oates,
1971; Tietenberg, 1973).\58\ This is because market-oriented approaches
leave the method for reducing pollution to the emitter, and emitters
have an incentive to find the least cost way of achieving the
regulatory requirement. Efficient market-oriented regulatory systems
provide a common emissions price for all emitters that contribute to a
particular harm, either through the tax on emissions or the price of an
exchangeable right to emit. As a result, the total abatement required
by the policy can theoretically be distributed across all emitters in
such a way that the marginal cost of control is equal for all emitters
and the cost of reducing emissions is minimized.\59\ Non-market-
oriented policies offer emitters fewer choices on how to reduce
emissions, which can lead to higher costs than are necessary to achieve
the overall environmental objective (i.e. emission level).
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    \55\ See EPA (2000), Baumol and Oates (1988), Tietenberg (2006)
and Burtraw et al. (2005) for a detailed description of the
advantages of market-oriented policies, such as the Title IV sulfur
dioxide trading program, over non-market-oriented approaches.
    \56\ Performance standards provide a source flexibility to use
any emission reduction method that meets the performance standard;
they can be coupled with market-oriented approaches such as
emissions trading to promote lower costs and technology innovation,
as described later in this section.
    \57\ Many studies use the term ``command-and-control'' to refer
to non-market-oriented approaches. Here we use the term ``non-
marketed-oriented'' because the term ``command and control'' may be
misleading when used to refer to performance-based emission limits
that allow the regulated entity to choose the control technology or
strategy for compliance.
    \58\ It is important to note that judgments about the
appropriate mitigation approach also may consider important societal
values not fully captured in economic analysis, such as political,
legal, and ethical considerations. For example, different regulatory
forms may result in different distributions of costs and benefits
across individuals and firms. This is a particularly sensitive issue
with policies that raise energy costs, which are known to be
regressive. However, these issues are not discussed at length here.
    \59\ For a standard textbook treatment supporting this finding
see Tietenberg (2006) or Callan and Thomas (2007).
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    As noted previously, it is especially important that any GHG
emission reduction policy encourage the innovation, development and
diffusion of technologies to provide a steady decline in the costs of
emission reductions. Another advantage of market-oriented approaches is
that they generally provide a greater incentive to develop new ways to
reduce pollution than non-market-oriented approaches (Malueg 1989;
Milliman and Prince 1989; Jung et al., 1996). Polluters not only have
an incentive to find the least cost way of adhering to a standard but
they also have an incentive to continually reduce emissions beyond what
is needed to comply with the standard. For every unit of emissions
reduced under a market-oriented policy, the emitter either has a lower
tax burden or can sell an emissions permit (or buy one less emissions
permit). Also, there are more opportunities under a market-oriented
approach for developers of new control technologies to work directly
with polluters to find less expensive ways to reduce emissions, and
polluters are faced with less compliance risk if a new pollution
control technique does not work as expected. This is because they can
either pay for their unanticipated emissions through the tax or by
purchasing emission rights instead of being subject to enforcement
action (Hahn, 1989).
    There are a number of examples of CAA rules in which market-
oriented approaches have been used for groups of mobile or stationary
sources. Usually this has taken the form of emissions trading within a
sector or subsector of a source category, although there are some
examples of broader trading programs. Differences in implications of
sector-specific and economy-wide market-oriented systems are discussed
in subsection below.
    The cost advantage of market-oriented policies can be extended when
emitters are allowed to achieve a particular environmental objective
across multiple pollutants that affect environment quality in the same
way but differ in the magnitude of that effect (e.g., different GHGs
have different global warming potentials). Either a cap-and-trade or a
tax approach could be designed so that the effective price per unit of
emissions is higher for those pollutants that have a greater
detrimental effect. Under a cap, the quantity of emissions reductions
is fixed but not the price; under a tax, the price is fixed but not the
emissions reductions. Some current legislative proposals include
flexible multiple-pollutant market-oriented policies for the control of
GHG emissions.
    Market-oriented approaches are relatively well-suited to
controlling GHG emissions. Since emissions of the major GHGs are
globally well-mixed, a unit of GHG emissions generally has the same
effect on global climate regardless of where it occurs. Also, while
policies can control the flow of GHG emissions, what is of ultimate
concern is the concentration of cumulative GHGs in the atmosphere.
Providing flexibility on the method, location and precise timing of GHG
reduction would not significantly affect the global climate protection
benefits of a GHG control program (assuming effective enforcement
mechanisms), but could substantially reduce the cost and encourage
technology innovation.\60\ However, it should be noted that for GHG
control strategies that also reduce emissions of traditional
pollutants, the timing and location of those controls could
significantly affect air quality in local or regional areas. There is
the potential for positive air quality effects from strategies that
reduce both GHGs and traditional pollutants, and for adverse air
quality effects that may be avoidable through complementary measures to
address air quality. For example, when the acid rain control program
was instituted, existing sulfur dioxide control programs were left in
place to ensure that trading under the acid rain program did not
undermine achievement of local air quality objectives.
---------------------------------------------------------------------------

    \60\ We say ``precise'' timing because the qualifier is
important: The IPCC and others have noted that lower GHG
stabilization targets would require steeper and earlier emission
reductions, whereas stabilization targets that allow for more
warming (with higher associated risks and impacts) would require
less steep and later emission reductions.
---------------------------------------------------------------------------

    As noted previously, broad-based market-oriented approaches include
emissions taxes and cap-and-trade programs with and without cost
containment mechanisms. While economists disagree on which of these
approaches--emissions taxes or cap-and-trade programs--may be
particularly well-suited to the task of mitigating GHG emissions, they
do agree that attributes such as flexibility, cost control, and broad
incentives for minimizing abatement costs and developing new
technologies are important policy design considerations.\61\ For a
description of various market-oriented approaches, see section VII.G.
---------------------------------------------------------------------------

    \61\ These approaches also raise the issue of the potential use
of revenues from collecting a tax or auctioning allowances to emit
GHGs at levels that do not exceed the cap. See Chapter 4 of U.S. EPA
(2000), ``Guidelines for Preparing Economic Analyses,'' EPA 240-R-
00-003.
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3. Legal Authority for Market-Oriented Approaches Under the Clean Air
Act
    The ability of each CAA regulatory authority potentially applicable
to GHGs to support market-oriented regulatory approaches is discussed
in sections VI and VII of this notice. To summarize, some CAA
provisions permit or require market-oriented approaches, and others do
not. Trading programs within sectors or subsectors have been
successfully implemented for a variety of mobile and stationary source
categories under the Act, including the Acid Rain Control Program (58
FR 3590 (Jan. 11, 1993)) and a variety of on-road and non-road vehicle
and fuel rules. Multi-sector trading programs, though not economy-wide,
have been successfully implemented under section 110(a)(2)(D) for
nitrogen oxides (i.e. the NOX SIP Call Rule) and under Title
VI for ozone-depleting substances, and may be

possible among stationary source sectors under section 111. An economy-
wide system might be legally possible under CAA section 615 (if the
two-part test unique to that section were met) or if a NAAQS were
established for GHGs. However, any economy-wide program under either
provision would not stand alone; it would be accompanied by source-
specific or sector-based requirements as a result of other CAA
provisions (e.g., PSD permitting under section 165).
    The CAA does not include a broad grant of authority for EPA to
impose taxes, fees or other monetary charges specifically for GHGs and,
therefore, additional legislative authority may be required if EPA were
to administer such charges (which we will refer to collectively as
fees). EPA may promulgate regulations that impose fees only if the
specific statutory provision at issue authorizes such fees, whether
directly or through a grant of regulatory authority that is written
broadly enough to encompass them. For example, CAA section 110(a)(2)(A)
allows for the use of ``economic incentives such as fees, marketable
permits, and auctioning allowances.'' Under this provision, some states
intend to auction allowances under CAIR (70 FR 25162 (May 12, 2005))
and some have under the NOX SIP Call Rule (63 FR 57356 (Oct.
27, 1998)). By the same token, states have authority to impose
emissions fees as economic incentives as part of their SIPs and collect
the revenues. Similarly, section 110(a)(2)(A) authorizes EPA to impose
fees as economic incentives as part of a Federal Implementation Plan
(FIP) under section 110(c), although EPA has never done so.\62\
---------------------------------------------------------------------------

    \62\ Any such revenues from a FIP would be deposited in the
Federal Treasury under the Miscellaneous Receipts Act, and not
retained and disbursed by EPA.
---------------------------------------------------------------------------

    Section 111 authorizes EPA to promulgate ``standards of
performance,'' which are defined as ``standard[s] for emissions of air
pollutants.'' EPA has taken the position that this term authorizes a
cap-and-trade program under certain circumstances. A fee program
differs from a cap and trade because it does not establish an overall
emission limitation, and we have not taken a position on whether, given
this limitation, a fee program fits the definition of a ``standard of
performance.'' Even so, under section 111 costs may be considered when
establishing NSPS regulations, and a fee may balance the consideration
of assuring emissions are reduced but not at an unacceptably high cost.
Also, there may be advantages of including an emission fee feature into
a cap-and-trade program (i.e., as a price ceiling). The use of a price
ceiling that is not expected to be triggered except in the case of
unexpectedly high (or low) control costs may be viewed differently
under the auspices of the CAA than a stand-alone emissions fee.
    We request comment on what CAA provisions, if any, would authorize
emissions fees to control GHG emissions, and whether there are other
approaches that could be taken under the CAA that would approximate a
fee. Furthermore, we request comments on the use of emission fee
programs under other sections of the Act. We also seek comment on
whether sector-specific programs, or inter-sector programs where
emission fees on a CO2 equivalent basis are harmonized,
might be more appropriate as possible regulatory mechanisms under the
Act.
4. Economy-Wide and Sector-Based Regulation in a Clean Air Act Context
    Several legislative cap-and-trade proposals for reducing GHG
emissions are designed to be nearly economy wide, meaning that they
attempt to reduce GHG emissions in most economic sectors through a
single regulatory system. By contrast, many CAA authorities are
designed for regulations that apply to a sector, subsector or source
category, although broader trading opportunities exist under some
authorities. This section discusses the relative merits of economy-wide
systems and sector-based market-oriented approaches. These
considerations may also be relevant in considering the use of CAA
provisions in tandem with any climate change legislation.
i. Economy-Wide Approach
    Economic theory suggests that establishing a single price for GHG
emissions across all emitters through an economy-wide, multiple GHG,
market-oriented policy would promote optimal economic efficiency in
pursuing GHG reductions. According to the economics literature,
economy-wide GHG trading or GHG emissions taxes could offer
significantly greater cost savings than a sector-by-sector approach for
GHGs because the broader the universe of sources covered by a single
market-oriented approach (within a sector, across sectors, and across
regions), the greater the potential for finding lower-cost ways to
achieve the emissions target. If sources of pollution are
compartmentalized into different sector-specific or pollutant-specific
approaches, including the relatively flexible cap-and-trade approaches,
each class of polluter may still face a different price for their
contribution to the environmental harm, and therefore some trading
opportunities that reduce pollution control costs will be unrealized
(Burtraw and Evans, 2008).\63\ Taking a sector-by-sector approach to
controlling GHG emissions is likely to result in higher costs to the
economy. For example, limiting a market-oriented GHG policy to the
electricity and transportation sectors could double the welfare cost of
achieving a five percent reduction in carbon emissions compared to when
the industrial sector is also included.\64\
---------------------------------------------------------------------------

    \63\ With traditional pollutants there are geographic issues to
consider.
    \64\ William Pizer, Dallas Burtraw, Winston Harrington, Richard
Newell, and James Sanchirico (2006), ``Modeling Economywide versus
Sectoral Climate Policies Using Combined Aggregate-Sectoral
Models,'' The Energy Journal, Vol. 27, No. 3: 135-168.
---------------------------------------------------------------------------

    A second factor that favors making the scope of a market-oriented
system as broad as possible is that the incentive for development,
deployment and diffusion of new technologies would be spread across the
economy. In contrast to an approach targeting a few key sectors, an
economy-wide approach would affect a greater number of diverse GHG-
emitting activities, and would influence a larger number of individual
economic decisions, potentially leading to innovation in parts of the
economy not addressed by a sector-by-sector approach.
    As stated at the outset of this section, there are, first and most
important, CAA authority issues as well as other policy and practical
considerations in addition to economic efficiency that must be weighed
in evaluating potential CAA approaches to GHG regulation. An economy-
wide, market-oriented environmental regulation has never been
implemented before in the U.S. The European Union, after encountering
difficulties in early years of implementation, recently adopted major
revisions to its broad multi-sector cap-and-trade system; this
illustrates that some time and adjustments may be needed for such a
program to achieve its intended effect. Although EPA has successfully
designed and implemented market-oriented systems of narrower scope, a
single economy-side system would involve new design and implementation
challenges, should the CAA make possible such a system. For example --
     Administrative costs may be a concern, because more
sources and sectors would have to be subject to

reporting and measurement, monitoring, and verification requirements.
     Some sources and sectors are more amenable to market-
oriented approaches than others. The feasibility and cost of accurate
monitoring and compliance assurance needed for trading programs
(whether economy-wide or sector-based) varies among sectors and source
size. As a result, there are potential tradeoffs between trading
program scope and level of assurance that required emissions reductions
will be achieved.
     To broaden the scope of cap-and-trade systems, covered
sources could be allowed to purchase GHG emission reductions
``offsets'' from non-covered sources. However, offsets raise additional
accountability issues, including how to balance cost efficiency against
certainty of emissions reductions, how to quantify resulting emissions
reductions, and how to ensure that the activities generating the
offsets are conducted and maintained over time.
     Allocating allowances or auction revenues for an economy-
wide GHG trading system would be very challenging for an executive
branch agency because of high monetary stakes and divergent stakeholder
views on how to distribute the allowances or revenues to promote
various objectives. For example, many economists believe that
auctioning allowances under a cap-and-trade system and using the
proceeds to reduce taxes that distort economic incentives would be
economically efficient, but regulated entities typically favor free
allowance allocations to offset their compliance costs.65 66
---------------------------------------------------------------------------

    \65\ Many economists also suggest that an emissions tax with
proceeds used to decrease distortionary taxes would be economically
efficient; however, the CAA does not authorize such a program.
    \66\ Bovenberg and Goulder (2001) find that freely allocating
20% of allowances to fossil fuel suppliers is enough to keep profits
from falling. When all allowances are freely allocated, profits are
found to be higher than in the absence of the carbon cap-and-trade
policy. Free allocation of allowances or an approach that exempts
particular sectors also raises the specter of ``rent-seeking,'' the
notion that sectors or particular source categories will lobby to
gain preferential treatment and, in essence, be subject to less
regulatory oversight than other sectors or competitors.
---------------------------------------------------------------------------

ii. Sector-Based and Multi-Sector Trading Under the Clean Air Act
    As mentioned above, EPA has implemented multi-sector, sector and
subsector-based cap-and-trade approaches in a number of CAA programs,
including the Acid Rain (SO2) Program, the NOX
SIP Call Rule, the Clean Air Interstate Rule (CAIR), and the
stratospheric ozone-depleting substances (ODS) phase-out rule. In the
case of the acid rain and ODS rules, the CAA itself called for federal
controls. By contrast, the NOX SIP Call rule and CAIR were
established by EPA through regulations under CAA section 110(a)(2)(d)
to help states attain various NAAQS. The two rules and EPA's
accompanying model rules enable states to adopt compatible cap-and-
trade programs that form regional interstate trading programs. The
power sector and a few major industrial source categories are included
in the trading system for the NOX SIP Call, and the trading
system for CAIR focuses on the electricity generation sector.
    In addition to creating cap-and-trade systems, EPA has often
incorporated market-oriented emissions trading elements into the more
traditional performance standard approach for mobile and stationary
sources. Coupling market-oriented provisions with performance standards
provides some of the cost advantages and market flexibility of market-
oriented solutions while also directly incentivizing technology
innovation within the particular sector, as discussed below. For
example, performance standards for mobile sources under Title II have
for many years been coupled with averaging, banking and trading
provisions within a subsector. In general, averaging allows covered
parties to meet their emissions obligation on a fleet- or unit-wide
basis rather than requiring each vehicle or unit to directly comply.
Banking provides direct incentives for additional reductions by giving
credit for over-compliance; these credits can be used toward future
compliance obligations and, as such, allow manufacturers to put
technology improvements in place when they are ready for market, rather
than being forced to adhere to a strict regulatory schedule that may or
may not conform to industry or company developments. Allowing trading
of excess emission reductions with other covered parties provides an
incentive for reducing emissions beyond what is required.
    Based on our experience with these programs, EPA believes that
sector and multi-sector trading programs for GHGs--relative to non-
market regulatory approaches--could offer substantial compliance
flexibility, cost savings and incentives for innovation to regulated
entities. In addition, as discussed below, in some sectors there may be
a need to more directly incentivize technology development because of
market barriers that a sector-specific program might help to overcome.
To the extent sector-based approaches could provide for control of
multiple pollutants (e.g., traditional pollutants and GHGs), they could
provide additional cost savings relative to multiple single-pollutant,
sector-based regulations. Another consideration is that it may be
simpler and thus faster to move forward with cap-and-trade programs for
sectors already involved in, and thus familiar with, cap-and-trade
programs. This raises the question of whether it would make sense to
phase in an economy-wide system over time.
    Sector and multi-sector approaches would not offer the relative
economic efficiency of the economy-wide model for the reasons explained
above. To the extent the program sets more stringent requirements for
new sources than for existing source, a sector or multi-sector approach
could also pose the vintage issues discussed below. It is also
important to keep in mind that the economic efficiency of any CAA cap-
and-trade approach for GHGs, sector- or economy-wide, could be reduced
to a significant extent by the application of other GHG control
requirements (e.g., PSD permitting) to the sources covered by the cap-
and-trade program, if the result were to restrict compliance options.
iii. Combining Economy-Wide and Sector-Based Approaches
    It is worth noting that market-oriented approaches may not
incentivize the most cost-effective reductions when information
problems, infrastructure issues, technological issues or other factors
pose barriers that impeded the market response to price incentives. In
such instances, there may be economic arguments for combining an
economy-wide approach with complementary sector-based requirements
unless these problems can be directly addressed, for instance by
providing the information needed or directly subsidizing the creation
of needed infrastructure.
    For instance, given the relative inelasticity of demand for
transportation, even a relative high permit price for carbon may not
substantially change consumer vehicle purchases or travel demand,
although recent reports indicate that the current price of gasoline and
diesel are inducing an increasing number of consumers to choose more
fuel efficient vehicles and drive less. Some have expressed concern
that this relatively inelastic demand may be related to undervaluation
by consumers of fuel economy when making vehicle purchasing decisions.
If consumers adequately value fuel economy, fuel saving technologies
will come online as a result of market forces. However, if

consumers undervalue fuel economy, vehicle or engine manufacturers may
need a more direct incentive for making improvements or the technology
innovation potential may well be delayed or not fully realized. Beyond
this consumer valuation issue, questions have been raised as to whether
a carbon price alone (especially if the impact is initially to raise
gasoline prices by pennies a gallon) will provide adequate incentives
for vehicle manufacturers to invest now in breakthrough technologies
with the capability to achieve significantly deeper emissions
reductions in the future, and for fuel providers to make substantial
investments in a new or enhanced delivery infrastructure for large-
scale deployment of lower carbon fuels.\67\
---------------------------------------------------------------------------

    \67\ See Kopp and Pizer, ``Assessing U.S. Climate Policy
Options,'' Chapter 12, RFF Press: Washington, DC (2007).
---------------------------------------------------------------------------

    EPA requests comment on how to balance the different policy and
economic considerations involved in selecting potential regulatory
approaches under the CAA, and on how the potential enactment of
legislation should affect EPA's deliberations on how to use CAA
authorities.
5. Other Selected Policy Design Issues
    Another policy and legal issue in regulatory design is whether
requirements should differentiate between new and existing sources.
Because it is generally more costly to retrofit pollution control
equipment than to incorporate it into the construction or manufacture
of a new source, environmental regulations, including under the CAA,
frequently apply stricter standards to new or refurbished sources than
to ``grandfathered'' sources that pre-date the regulation. New sources
achieve high-percentage reductions and over time existing high-emitting
sources are replaced with much cleaner ones. For example, emissions
from the U.S. auto fleet have been dramatically reduced over time
through new vehicle standards. However, some suggest that stricter
pollution control requirements for new or refurbished sources may
retard replacement of older sources, discouraging technology
investment, innovation and diffusion while encouraging older and less
efficient sources to remain in operation longer, thereby reducing the
environmental effectiveness and cost-effectiveness of the regulation.
Others believe that economic factors other than differences in new and
existing source requirements (e.g., capital outlay, power prices and
fuel costs) have the most impact on rate of return, and that
differences in regulatory stringency generally do not drive business
decisions on when to build new capacity.
    A 2002 EPA report on new source review requirements found that NSR
``appears to have little incremental impact on construction of new
electricity generation,'' but also found that ``there were credible
examples of cases in which uncertainty over the [NSR] exemption for
routine activities has resulted in delay or cancellation of projects
[at existing plants]'' that would have increased energy capacity,
improved energy efficiency and reduced air pollution.\68\ To the extent
that a gap in new and existing source requirements affects business
decisions, regulating existing as well as new sources can diminish or
eliminate that gap. In the power sector, the gap has narrowed over
time, in part as a result of CAA national and regional cap-and-trade
systems that do not discriminate between new and existing facilities
(i.e., both new and old power plants must hold allowances to cover
their NOX and SO2 emissions). Another
consideration is that equity issues can arise when applying retroactive
requirements to existing sources. For GHGs, EPA requests comment on the
concept of a market-oriented approach that does not differentiate
between new and existing source controls and, by avoiding different
marginal costs of control at new and existing sources, would promote
more cost-effective emissions reductions. In addition, EPA requests
comment on whether GHG regulations should differentiate between new and
existing sources for various sectors, and whether there are
circumstances in which requirements for stringent controls on new
sources would have policy benefits despite the existence of a cap-and-
trade system that also would apply to those sources.
---------------------------------------------------------------------------

    \68\ ``New Source Review: Report to the President, June 2002,''
U.S. EPA, pp. 30-31.
---------------------------------------------------------------------------

    Another possible design consideration for a GHG program is whether
and how lifecycle approaches to controlling GHG emissions could or
should be used. Lifecycle (LC) analysis and requirements have been
proposed for determining and regulating the entire stream of direct and
indirect emissions attributable to a regulated source. Indirect
emissions are emissions from the production, transportation, and
processing of the inputs that go into producing that good. Section VI.D
describes possible CAA approaches for reducing GHG emissions from
transportation fuels through lifecycle analysis and includes a brief
discussion of a potential lifecycle approach to reducing fuel-related
GHG emissions. In that context, displacing petroleum-based fuels with
renewable or alternative fuels can reduce fuel-related GHGs to the
extent the renewable or alternative fuels are produced in ways that
result in lower GHG emissions than the production of an equivalent
amount of fossil-based fuels. Tailpipe GHG emissions typically do not
vary significantly across conventional and alternative or renewable
fuels.
    EPA recognizes that other programs, such as stationary source or
area source programs described in this notice, could potentially
address at least some of the indirect GHG emissions from producing
fuels. We note that the technology and fuel changes that may result
from an economy-wide cap-and-trade approach would likely be different
from the technology and fuel changes that may result from a lifecycle
approach.
    EPA asks for comment on how a lifecycle approach for fuels could be
integrated with other stationary source approaches and whether there
are potentially overlapping incentives or disincentives. EPA also asks
for comments on whether a lifecycle approach to reducing GHG emissions
may be appropriate for other sectors and types of sources, and what the
implications for regulating other sectors would be if a lifecycle
approach is taken for fuels.
6. ``Emissions Leakage'' and International Competitiveness
    A frequently raised concern with domestic GHG regulation
unaccompanied by comparable policies abroad is that it might result in
emissions leakage or adversely affect the international competitiveness
of certain U.S. industries. The concern is that if domestic firms faced
significantly higher costs due to regulation, and foreign firms
remained unregulated, this could result in price changes that shift
emissions, and possibly some production capacity, from the U.S. to
other countries. Emissions leakage also could occur without being
caused by a competitiveness issue: for instance, if a U.S. GHG policy
raised the domestic price of petroleum-based fuels and led to reduced
U.S. demand for those fuels, the resulting world price decline could
spur increased use of petroleum-based fuels abroad, leading to
increased GHG emissions abroad that offset U.S. reductions.
    The extent to which international competitiveness is a potential
concern varies substantially by sector. This issue is mainly raised for
industries with high energy use and substantial potential

foreign competition. Even for vulnerable sectors, the concern would
depend on the actual extent which a program would raise costs for an
energy intensive firm facing international competition, and on whether
policies to address the competitiveness issue were adopted (either as
part of the rule or in another venue).
    Leakage also could occur within the U.S. if emissions in one sector
or region are controlled, but other sources are not. In this case, the
market effects could lead to increased activity in unregulated sectors
or regions, offsetting some of the policy's emissions reductions. In
turn, this would raise the cost of achieving the environmental
objective. The more uniform the price signal for an additional unit
reduction in GHG emissions across sectors, states, and countries, the
less potential there is for leakage to occur.
    A recent report has identified and evaluated five conceptual
options for addressing competitiveness concerns in a legislative
context; some options might also be available in a regulatory
context.\69\ The first option, weaker program targets, would affect the
entire climate protection policy. Four other options also could
somewhat decrease environmental stringency but would allow for the
targeting of industries or sectors particularly vulnerable to adverse
economic impacts:
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    \69\ Morgenstern, Richard D., ``Issue Brief 8: Addressing
Competitiveness Concerns in the Context of a Mandatory Policy for
Reducing U.S. Greenhouse Gas Emissions,'' in Assessing U.S. Climate
Policy Options: A report summarizing work at RFF [Resources for the
Future] as part of the inter-industry U.S. Climate Policy Forum,
November 2007, Raymond J. Kopp and William A. Pizer, eds.
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     Exemptions
     Non-market regulations to avoid direct energy price
increases on an energy-intensive industry
     Distribution of free allowances to compensate adversely
affected industries in a cap-and-trade system
     Trade-related policies such as import tariffs on carbon or
energy content, export subsidies, or requirements for importers to
submit allowances to cover the carbon content of certain products.

Significantly, the report noted that identifying the industries most
likely to be adversely affected by domestic GHG regulation, and
estimating the degree of impact, is complex in terms of data and
analytical tools needed.
    We request comment on the extent to which CAA authorities described
in this notice could be used to minimize competitiveness concerns and
leakage of emissions to other sectors or countries, and which
approaches should be preferred.

G. Analytical Challenges for Economic Analysis of Potential Regulation

    In the event that EPA pursues GHG emission reduction policies under
the CAA or as a result of legislative action, we are required by
Executive Order 12866 to analyze and take into account to the extent
permitted by law the costs and benefits of the various policy options
considered. Economic evaluation of GHG mitigation is particularly
challenging due to the temporal and spatial dimensions of the problem
discussed previously: GHG emissions have extremely long-run and global
climate implications. Furthermore, changes to the domestic economy are
likely to affect the global economy. In this section, we discuss a few
overarching analytical challenges that follow from these points. Many
of the issues discussed are also relevant when valuing changes in GHGs
associated with non-climate policies.
1. Time Horizon and International Considerations in General
    As discussed earlier in this section, changes in GHG emissions
today will affect environmental, ecological, and economic conditions
for decades to centuries into the future. In addition, changes in U.S.
GHG emissions that result from U.S. domestic policy will affect climate
change everywhere in the world, as will changes in the GHG emissions of
other countries. U.S. domestic policy could trigger emissions changes
across the U.S. economy and across regions globally, as production and
competitiveness change among economic activities. Similarly,
differences in the potential impacts of climate change across the world
can also affect competitiveness and production. Capturing these effects
requires long-run, global analysis in addition to traditional domestic
and sub-national analyses.
2. Analysis of Benefits and Costs Over a Long Time Period
    Since changes in emissions today will affect future generations in
the U.S. and internationally, costs and benefits of GHG mitigation
options need to be estimated over multiple generations. Typically,
federal agencies discount future costs or benefits back to the present
using a discount rate, where the discount rate represents how society
trades-off current consumption for future consumption. With the
benefits of GHG emissions reductions distributed over a very long time
horizon, benefit and cost estimations are likely to be very sensitive
to the discount rate. For policies that affect a single generation of
people, the analytic approach used by EPA is to use discount rates of
three and seven percent at a minimum.\70\ According to the Office of
Management and Budget (OMB), a three percent rate is consistent with
what a typical consumer might expect in the way of a risk free market
return (e.g., government bonds). A seven percent rate is an estimate of
the average before-tax rate of return to private capital in the U.S.
economy. A key challenge facing EPA is the appropriate discount rate
over the longer timeframe relevant for GHGs.
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    \70\ EPA (U.S. Environmental Protection Agency), 2000.
Guidelines for Preparing Economic Analyses. EPA 240-R-00-003. See
also OMB (U.S. Office of Management and Budget), 2003. Circular A-4.
September 17, 2003.
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    There are reasons to consider even lower discount rates in
discounting the costs of benefits of policy that affect climate change.
First, changes in GHG emissions--both increases and reductions--are
essentially long-run investments in changes in climate and the
potential impacts from climate change. When considering climate change
investments, they should be compared to similar alternative investments
(via the discount rate). Investments in climate change are investments
in infrastructure and technologies associated with mitigation; however,
they yield returns in terms of avoided impacts over a period of one
hundred years and longer. Furthermore, there is a potential for
significant impacts from climate change, where the exact timing and
magnitude of these impacts are unknown. These factors imply a highly
uncertain investment environment that spans multiple generations.
    When there are important benefits or costs that affect multiple
generations of the population, EPA and OMB allow for low but positive
discount rates (e.g., 0.5-3% noted by U.S. EPA, 1-3% by OMB).\71\ In
this multi-generation context, the three percent discount rate is
consistent with observed interest rates from long-term investments
available to current generations (net of risk premiums) as well as
current estimates of the impacts of climate change that reflect
potential impacts on consumers. In addition, rates of three percent or
lower are consistent with long-run uncertainty in economic growth and
interest rates, considerations of issues associated with the transfer
of wealth between generations, and the risk of

high impact climate damages. Given the uncertain environment, analysis
could also consider evaluating uncertainty in the discount rate (e.g.,
Newell and Pizer, 2001, 2003).\72\ EPA solicits comment on the
considerations raised and discounting alternatives for handling both
benefits and costs for this long term, inter-generational context.
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    \71\ OMB (2003). EPA (2000). These documents are the guidance
used when preparing economic analyses for all EPA rulemakings.
    \72\ Newell, R. and W. Pizer, 2001. Discounting the benefits of
climate change mitigation: How much do uncertain rates increase
valuations? PEW Center on Global Climate Change, Washington, DC.
Newell, R. and W. Pizer, 2003. Discounting the distant future: how
much do uncertain rates increase valuations? Journal of
Environmental Economics and Management 46: 52-71.
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3. Uncertainty in Benefits and Costs
    The long time horizon over which benefits and costs of climate
change policy would accrue and the global relationships they involve
raise additional challenges for estimation. The exact benefits and
costs of virtually every environmental regulation is at least somewhat
uncertain, because estimating benefits and costs involves projections
of future economic activity and the future effects and costs of
reducing the environmental harm. In almost every case, some of the
future effects and costs are not entirely known or able to be
quantified or monetized. In the case of climate change, the uncertainly
inherent in most economic analyses of environmental regulations is
magnified by the long-term and global scale of the problem and the
resulting uncertainties regarding socio-economic futures, corresponding
GHG emissions, climate responses to emissions changes, the bio-physical
and economic impacts associated with changes in climate, and the costs
of reducing GHG emissions. For example, uncertainties about the amount
of temperature rise for a given amount of GHG emissions and rates of
economic and population growth over the next 50 or 100 years will
result in a large range of estimates of potential benefits and costs.
Lack of information with regard to some important benefit categories
and the potential for large impacts as a result of climate exceeding
known but uncertain thresholds compound this uncertainty. Likewise,
there are uncertainties regarding the pace and form of future
technological innovation and economic growth that affect estimates of
both costs and benefits. These difficulties in predicting the future
can be addressed to some extent by evaluating alternative scenarios. In
uncertain situations such as that associated with climate, EPA
typically recommends that analysis consider a range of benefit and cost
estimates, and the potential implications of non-monetized and non-
quantified benefits.
    Given the substantial uncertainties in quantifying many aspects of
climate change mitigation and impacts, it is difficult to apply
economic efficiency criteria, or even positive net benefit
criteria.\73\ Identifying an efficient policy requires knowing the
marginal benefit and marginal cost curves for GHG emissions reductions.
If the marginal benefits are greater than the marginal costs, then
additional emissions reductions are merited (i.e., they are efficient
and provide a net benefit). However, the curves are not precise lines;
instead they are wide and partially unknown bands. Similarly, estimates
of total benefits and costs can be expressed only as ranges. As a
result, it is difficult to both identify the efficient policy and
assess net benefits.
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    \73\ IPCC WGI. (2007). Climate Change 2007--The Physical Science
Basis Contribution of Working Group I to the Fourth Assessment
Report of the IPCC, http://www.ipcc.ch/. IPCC WGII. (2007). Climate
Change 2007--Impacts, Adaptation and Vulnerability Contribution of
Working Group II to the Fourth Assessment Report of the IPCC, http:/
/www.ipcc.ch/. IPCC WGIII (2007). Climate Change 2007--Mitigation
Contribution of Working Group III to the Fourth Assessment Report of
the IPCC, http://www.ipcc.ch/. U.S. Congressional Budget Office
(2005). Uncertainty in Analyzing Climate Change: Policy
Implications. The Congress of the United States, January 2005.
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    In situations with large uncertainties, the economic literature
suggests a risk management framework as being appropriate for guiding
policy (Manne and Richels, 1992; IPCC WGIII, 2007).\74\ In this
framework, the policymaker selects a target level of risk and seeks the
lowest cost approach for reaching that goal. In addition, the decision-
making process is an iterative one of acting, learning, and acting
again (as opposed to there being a single decision point). In this
context, the explicit or implicit value of changes in risk is
important. Furthermore, some have expressed concern in the economics
literature that standard deterministic approaches (i.e., approaches
that imply there is only one known and single realization of the world)
do not appropriately characterize the uncertainty and risk related to
climate change and may lead to a substantial underestimation of the
benefits from taking action (Weitzman, 2007a, 2007b).\75\ Formal
uncertainty analysis may be one approach for at least partially
addressing this concern. EPA solicits comment on how to handle
uncertainty in benefits and costs calculations and application, given
the quantified and unquantified uncertainties.
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    \74\ Manne, A. and R. Richels (1992). ``Buying Greenhouse
Insurance--the Economic Costs of Carbon Dioxide Emission Limits'',
MIT Press book, Cambridge, MA, 1992. IPCC WGIII (2007).
    \75\ Weitzman, M., 2007a, ``The Stern Review of the Economics of
Climate Change,'' Journal of Economic Literature. Weitzman, M.,
2007b, ``Structural Uncertainty and the Statistical Life in the
Economics of Catastrophic Climate Change,'' Working paper http://
econweb.fas.harvard.edu/faculty/weitzman/papers/
ValStatLifeClimate.pdf.
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4. Benefits Estimation Specific Issues--Scope, Estimates, State-of-the-
art
    Another important issue in economic analysis of climate change
policies is valuing domestic and international benefits. U.S. GHG
reductions are likely to yield both domestic and global benefits.
Typically, because the benefits and costs of most environmental
regulations are predominantly domestic, EPA focuses on benefits that
accrue to the U.S. population when quantifying the impacts of domestic
regulation. However, OMB's guidance for economic analysis of federal
regulations specifically allows for consideration of international
effects.\76\
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    \76\ OMB (2003), page 15.
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    GHGs are global pollutants. Economic principles suggest that the
full costs to society of emissions should be considered in order to
identify the policy that maximizes the net benefits to society, i.e.,
achieves an efficient outcome (Nordhaus, 2006).\77\ Estimates of global
benefits capture more of the full value to society than domestic