New Source Review

Few environmental policies and response to them are as caricatured as new source review. Earlier this week the EPA finalized the changes to new source review that it proposed in December 2002. Basically, this ruling clarifies what kinds of equipment replacement will and will not trigger new source review, and it allows firms (typically power plants, refiners, etc.) certain equipment replacements without triggering new source review.

To hear some of the “environmentalist” and media folks talk about this, it’s like the EPA has repealed all air quality regualtions and we’ll be soon plummeted into a universe of dark, sooty skies. But how realistic an opinion is that? Not very, in my view. First, new source review and the stringent treatment of equipment upgrades has induced firms to stick with older, less efifcient, more polluting technology than they might otherwise have implemented. What the Chicken Litlle crowd often forgets is that fuel costs for these companies are a substantial portion of their budgets, so if power plants and refineries can get more bang for their fuel buck by installing new technology, they would like to. Furthermore, these newer technologies are cleaner burning, and therefore less polluting than the grandfathered ones. But if installing these new technologies will trigger a long, extensive, bureaucratic review, at the end of which you will be subject to more stringent emission regulation, are you going to want to go through all of that as long as you can avoid it? Certainly not. [NOTE: always remember and never forget that arguments like these are marginal arguments, that I am claiming at the margin that NSR induces less technology upgrading than we would see otherwise]

So the complaint about the NSR changes seems to be that the companies will be allowed to upgrade their equipment without being forced to decrease their emissions. OK, so … how does this make us worse off than we have been in the situation in which they choose not to upgrade at all? They will still be held to the same Clean Air Act regulations.

In looking at the histrionic claims from, for example, the American Lung Association, Mother Jones, and the states like Pennsylvania, Illinois, and New Jersey that may fight the EPA on this one, I have yet to see a compelling argument for how allowing companies to upgrade without triggering NSR will increase pollution.

I’m more inclined to agree with my colleague Joel Schwartz, who argues that this change will not harm air quality.

Schwartz notes that the NSR changes won’t affect air pollution emissions, because a wide range of other regulations require large pollution reductions in coming years, and/or set hard, declining caps on pollution that can’t be exceeded, regardless of NSR. For example:

— EPA’s “NOx SIP Call” regulation will reduce eastern power plant and industrial boiler nitrogen oxide emissions by 60 percent next year during the May-September “ozone season.” This is a hard, system-wide cap that can’t be exceeded and is not affected by NSR. The acid rain program for sulfur dioxide sets a similar declining cap that is reducing year-round emissions by a total of 50 percent between 1995 and 2010.

— EPA has also issued more than 70 air toxics rules for industry-including petroleum refineries and chemical plants-that require “Maximum Achievable Control Technology” (MACT) and that are unaffected by NSR changes.

— EPA standards require a 90 percent reduction in new-car and new diesel-truck emissions during the next few years, which will eliminate almost all mobile-source pollution during the next two decades as the fleet turns over.

“NSR needs to be reformed, as the current regulations actually slow progress on air pollution by creating perverse incentives to keep older plants running,” said Schwartz. “Those who attack NSR reform display a profound ignorance of the factors that really affect future air pollution and a disregard for the harm to consumers of unnecessarily expensive regulations like New Source Review.”

Joel thinks more carefully about air quality and the well-being of real people tyring to live fulfilling lives than anyone I’ve ever met.

Another colleague, and sometime co-author of mine who thinks carefully about such things is Ed Reid. Ed sent me a good analysis via email, and has permitted me to post his thoughts here.

Much of the angst regarding the revisions to the NSR process flows from a lack of perspective. Perhaps an example of the EPA’s revised approach to NSR applied to a residential scenario will help “clear the air”.

The owners of an older home notice that their water heater has begun to leak and must be replaced. While shopping for a new water heater, they discover that new water heaters of the same storage capacity and energy input are available with higher efficiencies than their old unit and that these higher efficiency water heaters would thus use less energy to produce the same amount of hot water and cost less money to operate. They decide to purchase one of the more efficient water heaters.

However, the salesman then hands them a copy of an EPA document entitled “Homeowners’ Guide to NSR Compliance”. The homeowners read the guide and learn that, if they replace their old water heater with a more efficient water heater of the same storage capacity and energy input, they will also be required to bring all other aspects of their home and its energy using equipment into compliance with current codes and standards. This would involve replacing their existing heating and cooling system with a new system which meets the minimum efficiency standards established by the National Appliance Energy Conservation Act (NAECA) and perhaps also their current clothes washer and dryer, range, refrigerator, etc. It would also require that they replace their current windows or add storm windows, increase the insulation levels in their walls and ceilings, renew caulking and weather stripping and take other energy conservation measures required by the codes in their state and/or city.

On further reflection, the homeowners decide that the extra operating cost of the new, but lower efficiency, water heater is not so bad compared with the cost of bringing their entire home into compliance with current codes and standards all at once. This decision does not make their home less energy efficient than it was before, but it does leave it less efficient than it might otherwise have been, at least until the next time the water heater requires replacement.

Those are the pernicious incentives embedded in New Source Review.