



Introduction 

As recognized by the President's National Energy Plan (NEP), one
of the principal energy challenges facing us is increasing our
energy supplies in ways that protect and improve the environment.
Thus, the President directed EPA to propose legislation that would
significantly reduce SO2, NOx, and mercury emissions from power
generation through a cap and trade program. Such a program, coupled
with appropriate measures to address local concerns, would provide
significant health benefits even as we increase energy supplies and
maintain reasonable electricity rates.
Our work on this issue has given us insight that I believe will
be helpful to you. The more I learn about the cost and
inefficiencies of the current and future regulatory regime to which
power generators will be subjected if we do not have new
legislation, the more I am convinced that we can --and must --
develop a smarter approach that protects the environment and public
health while reducing the cost to consumers and industry and
optimizing the size of both the state and federal government
machinery necessary to achieve that protection. It is possible to
achieve better results at lower costs,
but not if we simply add yet another program on top of all of
the existing regulations.
The current Clean Air Act has been enormously successful, but we
can do better. Significant cost savings can be achieved for power
generators and consumers through a comprehensive legislative
package. I look forward to working with you to develop such an
approach to reduce emissions from power generation. We applaud
Senator Jeffords for tackling this important issue and for
recognizing that a cap and trade program is the best way to achieve
these reductions. However, we have significant concerns with S. 556
as drafted. Our analysis to date suggests that it could increase
consumers' electricity rates by as much as 50%, which we believe is
unacceptable. In addition, the combination of emission reductions
and timing is not feasible and could threaten the reliability of
electricity supply. We are concerned that S. 556's short timeframes
for installation of controls could lead power plants to be taken
off-line at important times, which could lead to electricity
shortages.
In addition, there are a number of issues that Congress should
consider that S. 556 does not address. As drafted, S. 556 would
make some existing requirements unnecessary, but would not
eliminate them. Rather than add yet another layer of environmental
regulations on top of the existing ones, we believe that S. 556
should eliminate those unnecessary existing requirements. S. 556
also does not have an allocation scheme. One lesson we should learn
from the success of the Acid Rain cap and trade program is that
when certain key issues can be resolved through clear legislation,
we can avoid years of litigation, business uncertainty and costs,
and delayed environmental protection.
Finally, and most importantly, the Administration strongly
opposes including CO2 reductions in any multi-pollutant bill. The
CO2 provisions in S. 556 will cost consumers too much and endanger
our energy security by causing too much electricity generation to
switch from coal to natural gas. Greenhouse gas emissions should be
addressed in the context of climate change, which is being
undertaken by the President's Cabinet level working group. For all
of these reasons, the Administration must oppose S. 556. In my
testimony today I will elaborate further on these key points.


Background 

Over the last 30 years, we have made substantial progress
towards improved environmental quality under the Clean Air Act.
During this time, gross domestic product has increased almost 160%.
At the same time, we have reduced emissions of six key air
pollutants by 29%, while coal consumption has increased 77% and
energy consumption has increased 45%. Eleven years ago President
George H. W. Bush signed into law the most far reaching amendments
to the Clean Air Act since its enactment in 1970. Included in those
amendments was the Acid Rain cap and trade program, the first
program tailored specifically to the utility sector, which is
achieving significant environmental and public health benefits at a
fraction of the initial cost estimates and with relatively little
government bureaucracy. It is time to revisit and update the Clean
Air Act once again in order to achieve the additional reductions
needed to address public health and environmental problems in the
most cost effective manner.
The Acid Rain Program is achieving its emission reduction goal
at a fraction of the estimated costs because it allows and
encourages innovative thinking and long range planning.1 The
existing program establishes a cap on SO2 emissions to ensure that
the environmental goal is met, and employs an innovative
market-based allowance trading program to achieve the goal at
lowest cost. Allowances are the currency with which compliance with
the SO2 emissions requirements is achieved. Sources, rather than
government, decide the most cost-effective way to use available
resources to comply. Units that reduce their emissions below the
number of allowances they hold may trade allowances with other
units in the system, sell them to other sources or save them for
future use. There are neither restrictions on trading nor
government second-guessing.
Allowance trading provides incentives for energy conservation
and technology innovation that can both lower the cost of
compliance and yield pollution prevention benefits. Simply, the
allowance market puts a price or value on each ton of SO2 not 
emitted. The association of a monetary value
with reduced emissions encourages innovation: in the 1990's,
scrubber costs decreased by approximately 40% and scrubber sulfur
removal efficiencies improved from 90% to 95%, and experimentation
led to the blending of fuels to lower emissions. To ensure that the
cap is met and to provide credibility, sources also are required to
install systems that continuously monitor and report emissions.
The Acid Rain Program has proven to be an excellent model for
cap and trade programs. Compliance with the program has been nearly
100 percent and annual emissions of SO2 from power plants have
already been reduced over 6 million tons (about 35 percent) from
1980 levels. Greater reductions earlier than expected have lowered
risks to human health and provided benefits to the environment
sooner. Acid rain levels were dramatically reduced over large areas
of the U.S. and trading did not result in geographic shifting of
emissions, or "hot spots", as some feared.
Despite the significant progress we have made under the Clean
Air Act, air emissions from power generators are still contributing
to serious public health and environmental problems. Administrator
Whitman addressed these concerns extensively in her testimony
before you on July 26, 2001. Rather than reiterate her testimony, I
will emphasize just a few of her key points. Problems associated
with sulfur dioxide (SO2), nitrogen oxides (NOx), and mercury
emissions are of national and international significance, and the
interstate and long range transport of emissions continue to play
significant roles in the nature and magnitude of the problems.
Emission and deposition of SO2, NOx, and mercury and their
transformation byproducts are known to have a wide range of adverse
effects on human health and the environment, including:
• SO2 and NOx emissions contribute to fine particles, which are
associated with premature mortality, aggravated chronic bronchitis,
hospitalizations due to cardio-respiratory symptoms, emergency room
visits due to aggravated asthma symptoms, and acute respiratory
symptoms.
1 Governor Whitman's July 26, 2001, testimony before this
Committee contains a detailed discussion of the success of the Acid
Rain cap and trade program.
Fine particles formed from power plant emissions as well as
mobile source emissions are of
concern. • NOx emissions contribute to ground-level ozone,
which aggravates respiratory illnesses and causes lung
inflammation, particularly for at-risk populations such as
children, the elderly and those afflicted with asthma, emphysema,
and other respiratory ailments.
• Mercury emissions contribute to mercury deposition in water.
Children born to women who consume large amounts of
mercury-contaminated fish while pregnant may be at risk for
neurodevelopmental defects.
• SO2 and NOx emissions contribute to atmospheric sulfate and
nitrate concentrations that cause visibility impairment, including
impairment in many national parks and wilderness areas.
• SO2 and NOx contribute to acid deposition, which damages
lakes and streams, adversely affecting the fish and other species
that live in them, and leaches nutrients from the soil.
• NOx emissions contribute to nitrogen deposition that may lead
to eutrophication of estuaries and near-coastal waters and can
damage forested watersheds.
EPA, states, and industry, working together, have made important
strides in addressing the adverse impacts of fossil fuel combustion
by the electric power industry since the passage of the Clean Air
Act in 1970. Despite significant improvements in air quality
throughout the country however, emissions from power generation
continue to result in serious health, environmental and economic
impacts. In 1999, the electric power industry was responsible for
67% of sulfur dioxide emissions, 25% of nitrogen oxide emissions,
and 37% of mercury emissions in the United States.


Business as Usual 

The President's flexible, market-based approach to reducing
emissions from power generators stands in sharp contrast to the
complex web of existing regulations which currently confront the
industry. Over the years, Congress, EPA and the States have
responded to specific environmental and public health problems by
developing separate regulatory programs to address the specific
problems. Each individual program uses its own approach on its own
timeline to serve its own purpose. Absent changes to the Act, EPA
and states will be forced to follow the same approach in future
regulations. It is time to consolidate and simplify to achieve our
clean air goals. A comprehensive legislative approach with
mandatory caps could replace a good portion of the current
regulatory requirements with a system that will reduce the
administrative burden on industry and governments, use market-based
approaches to lower compliance costs, reduce consumers' costs, and
increase national energy security by providing the industry with
more certainty about its future regulatory obligations. By enacting
such an approach, we can achieve environmental and public health
protection more effectively and at less cost. If we do it the
President's way, it will be a win-win.
There are many regulations in place that will reduce air
emissions from electric power generation. These regulations include
both federal and State requirements that address a variety of
emissions including SO2, NOx, CO, PM10, and a number of hazardous
air pollutants. These programs
include the National Ambient Air Quality Standards for SO2,
particulate matter and ozone, the section 126 and the NOx SIP Call
rules, the Acid Rain Program, new source review, new source
performance standards, and the regional haze rule.
But the regulation of power generators does not end with
existing regulations. EPA is obligated by a settlement agreement to
issue by the end of 2004 a Maximum Achievable Control Technology
(MACT) standard to require source-specific controls of mercury and
other hazardous air pollutants from electric utilities. Emissions
reductions are required by the end of 2007. States will also be
requiring utilities to comply with Best Available Retrofit
Technology (BART) programs (either source-specific standards or a
trading program) to meet requirements to reduce regional haze.
It is expected that the existing fine particle and ozone
standards now in place will also result in further regulation of
power generators. Modeling shows that when full implementation of
existing regulations such as the acid rain program, the NOx SIP
Call, the Tier II standards for cars and trucks, the heavy duty
diesel engine standards, and the low sulfur gasoline and diesel
fuel rules are taken into account, additional reductions will be
needed to bring areas into attainment. States will be required to
develop plans for these areas. In addition, NOx and SO2 reductions
are also needed to reduce continuing damage from acid rain and
nitrogen deposition.
Because states and EPA will have to find some way to
significantly reduce NOx and SO2 emissions, it is probable that
power generators will be required to reduce their emissions
significantly. Power generation accounts for a significant
percentage of these emissions, and our analysis shows that there
are significant reductions available at lower cost than from other
sources. Additionally, states know that if they do not get the
reductions from power generators, they will have to impose
significant reduction requirements on other local industrial and
commercial sources or impose local transportation control
measures.
Under current law, the necessary reductions would be achieved
through the development of individual state plans. States will not
just control their own sources, however. They will be reaching out
to control power generators and large industrial facilities in
other states because transport from other states contributes to
both ozone and fine particle pollution in many areas. This is what
has happened in the eastern part of the country when states
realized that emissions from sources in other states were
significantly contributing to their 1-hour ozone non-attainment
problems. Under section 126 of the Clean Air Act, a state can
petition EPA and request that EPA require reductions from sources
outside the petitioning state's borders. The petitioning state is
entitled to relief if EPA finds that the sources are significantly
contributing to the petitioning state's nonattainment problem.
EPA's requirement, adopted in response to section 126 petitions,
that sources in a number of eastern states reduce NOx emissions was
recently upheld by the Court of Appeals for the District of
Columbia Circuit. Since states now know that EPA has authority to
address transport pollution through responses to 126 petitions or
by issuing a rule like the NOx SIP Call, we anticipate that states
will be turning to these types of control approaches early in the
SIP process. Although those of us who are
traveling that path with the current 126 petitions and NOx SIP
Call believe it will eventually take us to our environmental goal,
it has been -- and still is -- a very rocky road for industry,
environmentalists, the states, EPA and other stakeholders.
This one-at-a-time, uncoordinated series of regulatory
requirements for the power industry is not the optimal approach for
the environment, the power generation sector, or American
consumers. With most plants needing to install control equipment to
meet these requirements, it is likely that this approach would lead
to installation of controls that become obsolete and stranded
capital investments as additional requirements are promulgated.
Further, the attainment efforts of individual States and localities
not only impose costs on these entities, but also can increase
complexity for companies which face differing requirements when
operations cross state lines. These factors are exacerbated by
limited timeframes that may constrain available compliance options
and thwart long range planning. These and other inefficiencies
point to the need for a nationally coordinated approach that could
reduce cost while improving environmental progress and
accountability.


Changing the Way We Do Business: Certainty, Flexibility,
Accountability and Innovation 

We believe there is a better way, one that could cost American
consumers and industry far less than under current law and ensure
protection of the air we breathe in a far more certain,
straightforward manner. I know that many members of this Committee
share that belief and are also working to develop such an approach.
It would provide power generators with more certainty about their
regulatory future and thus allow them to make wiser decisions about
investments in new technology, which would improve energy security.
This Administration is developing such a proposal. It will build on
the successes of the Acid Rain cap and trade program. It would
establish national cap-and-trade programs for NOx, SO2 and mercury
emissions from power generators (with appropriate measures to
address local concerns). Such an approach will benefit the power
generation industry, the economy, and the states, while improving
public health and the environment.
Up-front knowledge of future requirements for multiple
pollutants would lead firms to follow significantly different and
less expensive compliance strategies at individual plants, compared
with compliance choices which must be made as requirements are
addressed in a sequential manner under the current law. The savings
come from the opportunity to make cost-effective plant investment
and retirement decisions with full knowledge of upcoming SO2, NOx
and mercury requirements, rather than investing in "add-on" control
equipment to meet the requirements of each regulation. Integration,
advance knowledge, and certainty regarding environmental
requirements will have even greater value over the coming decade as
the electric power industry undergoes further structural changes.
An integrated package of measures that addresses both the existing
regulatory requirements as well as many future environmental needs
would provide the greatest degree of certainty and flexibility for
the industry, while achieving the necessary emission reductions at
lower cost than under current law.
In exchange for flexibility in methods to control emissions, a
full accounting of emissions through
continuous monitoring and reporting is essential, as well as
significant consequences for failing to comply. Such provisions
have been critical to the success of the Acid Rain Program,
encouraging individual sources to find the most cost-effective
means of compliance with the collective emission reduction
goal.
Flexibility stimulates technological innovation, fuels economic
activity and reduces cost to industry and consumers. Strategies and
technologies for the control of SO2, NOx and mercury emissions
exist now, and improved methods are expected to become available
over the next several years. The air pollution control and
monitoring technology industry is expected to continue to respond
with cost-effective compliance solutions just as they have done for
the past 30 years. A predictable demand for such jobs over the next
15 years is preferable to the boom and bust cycle created by the
current regulatory approach.
This approach also would reduce states' administrative burdens
and obligations. A national cap and trade program with appropriate
caps for NOx and SO2 could provide the emission reductions
necessary to bring a significant number of areas into attainment
with the ozone and fine particle standards. Even those areas that
would not be brought into attainment by these caps would need
significantly fewer emission reductions to come into attainment.
Our approach would significantly reduce the state resources needed
to conduct modeling, planning and regulatory activities to attain
the standards. Additionally, the Acid Rain cap and trade program is
administered with a relatively small staff relying on strong,
state-of-the-art data tracking and reporting capabilities. Thus,
well-designed national cap and trade programs can help use
government resources and taxpayer dollars more efficiently at both
the state and federal level.
Caps ensure that environmental goals are met. A cap that
represents significant reductions of emissions protects the
environment by reducing overall loadings. Consideration of local
concerns is important in conjunction with trading provisions.
Therefore, the National Energy Plan recommended that the
Administration's approach include appropriate measures to address
local concerns, such as the unlikely occurrence of an SO2 "hot
spot" or area of concentrated emissions. Significant reductions
will go a long way towards addressing local concerns. In addition,
EPA will be conducting modeling that will predict where emissions
reductions will occur. Under the Acid Rain cap and trade program,
we have not seen local hot spots because the highest emitters are
often the most cost-effective to control and therefore, the most
likely to control.
As I mentioned, EPA and the Administration are still in the
process of developing our proposal. Several guidelines are shaping
our efforts. These guidelines may provide a valuable basis as you
weigh the proposals before you. They will also guide our assessment
of other proposals, including S. 556. These principles are
structured to ensure consistency with the NEP objectives. The NEP
goals of increasing energy supplies, accelerating the protection
and improvement of the environment, and increasing our nation's
energy supply must be advanced. Towards that end, energy diversity,
the preservation of electricity generation and transmission
reliability, and improvement of energy
9 efficiency/energy intensity of the electric power industry
should be a key consideration. In particular, to prevent the
reoccurrence of energy shortages and price volatility, a diverse
mix of fuel sources should be maintained.


Specific Comments on S. 556 

We share the desire expressed in S. 556 to significantly reduce
and cap emissions of SO2, NOx and mercury from power generation. We
applaud your acknowledgment of market-based incentives,
particularly cap and trade systems, as a powerful tool in
environmental protection. In this way, S. 556 builds on successful
elements of the Clean Air Act.
We do, however, oppose S. 556 because of concerns with the bill
-- both with some provisions that are in the bill and with some
that are missing. We believe the emission reductions and timing in
the bill will be too costly for consumers and will endanger
national energy security. We believe the bill is missing some
provisions -- it should address the allocation scheme and
integration with existing programs. Finally, we oppose inclusion of
CO2 in this bill.
First, let me explain some of our specific concerns about the
SO2, NOx, and mercury provisions in the bill. We are concerned that
the significant emissions reductions are required too quickly. We
do not believe it is reasonable to expect all the control
technology installations to be completed in that time frame without
very high costs and electricity reliability problems. To meet these
deadlines, facilities may need to be taken off-line during critical
periods. Reliability problems could arise as large amounts of
capacity are taken out of service for extended periods of time to
install the control equipment necessary to meet the emissions
reduction requirements. The abbreviated time frame would force many
generators to make these retrofits simultaneously. This would
significantly reduce the amount of generating capacity available to
meet consumer' electrical needs.
We have not modeled the specific provisions in S. 556, but
useful information is provided by comparing the analyses EPA and
EIA conducted to respond to a request from Senators Smith,
Voinovich and Brownback with the analyses responding to a request
from Senators Jeffords and Lieberman. In the
Smith/Voinovich/Brownback analysis, when we analyzed SO2 and NOx
reduction levels similar to S. 556, mercury reduction levels more
modest than S. 556 and no CO2 reductions, we did not find
significant impacts on coal production or electricity prices.
However, in the analysis responding to the Jeffords/Lieberman
request that had NOx, SO2, mercury and CO2 reduction levels similar
to S. 556, we found significant ramifications: approximately a
20-30% decline of coal generation and a 30-50% increase in
electricity prices compared to the reference case (depending on
assumptions of energy technology penetration).
The 90% source-specific control for mercury is also problematic.
We have not seen anything that demonstrates that every coal-fired
power plant would be able to achieve 90% source-specific controls
for mercury by 2007, without considerable fuel switching, which
would be very disruptive to our economy and undermine energy
security. In addition, requiring the same level of reduction at
a
plant that emits 0.1 pounds of mercury and a plant that emits
2000 pounds of mercury - regardless of cost - is neither efficient
nor necessary.
We are also very concerned about the "outdated power plant"
provision. Requiring every plant over 30 years old to meet New
Source Performance Standards and New Source Review modification
requirements seems unnecessary and could undermine the benefits of
the cap and trade approach. Allowing sources to make reductions
where it is most economical to do so is one of the reasons cap and
trade programs should be less costly than command-and-control
programs that achieve the same or even fewer reductions. When you
have a hard cap, as you would under S. 556, requiring emission
reductions at a specific source does not reduce the overall level
of pollution, it just limits industry's flexibility about where to
make the reductions. Layering additional requirements, such as the
"outdated power plants" provision, on top of a cap and trade
program is very likely to increase costs without providing
significant environmental benefits.
Second, we have concerns about what is not in S. 556. Comparing
our experience on the Acid Rain Program with the NOx SIP Call and
the Section 126 petitions demonstrates the benefit of having
certain key issues decided by Congress rather than left to Agency
rulemakings. Congressional resolution of key issues simplifies
whatever Agency rulemaking is needed and decreases the
opportunities for the program to get tied up in protracted
litigation.
Perhaps the most important program element not addressed in the
bill is integration of this new program with the existing Clean Air
Act provisions. An effective market-based approach would make some
existing provisions of the Clean Air Act unnecessary. For example,
depending on the ultimate cap levels chosen by Congress, this type
of legislation would obviate the need for Best Available Retrofit
Technology requirements, mercury MACT, and new source review
case-by-case technology requirements for power generators.
Also missing from S. 556 is the scheme for allocating
allowances. Developing an allocation scheme requires answering
numerous questions. Should the allowances be auctioned off or be
handed out for free? If they are not auctioned, should they be
allocated based on heat input or electrical and steam output?
Should power generators that do not emit air pollutants (e.g.,
hydropower facilities) be given allowances? Should allowance
allocations be updated, and if so, how frequently? Should
allocations be fuel neutral? Imbedded in these and other questions
are important environmental and energy policy choices with
significant equity consequences. It may not be efficient for EPA to
make these choices in rulemaking.
There are other issues as well that this Committee should
consider, such as coordination with existing state and regional
programs like the Western Regional Air Partnership and the NOx
reduction programs in the east. The Committee may also wish to
consider provisions to track environmental progress to evaluate the
efficacy of the program this bill would establish.
Finally, the Administration strongly opposes including
reductions for CO2 in S. 556 or any multi-pollutant bill. Pursuing
sharp reductions in CO2 from the electricity generating sector
alone would cause a dramatic shift from coal to natural gas and
thus would run the risk of endangering national energy security,
substantially increasing energy prices and harming consumers.
The Administration will not support any legislation that would
cause a significant decline in our nation's ability to use coal as
a major source of current and future electricity. At the same time,
the Administration will not support any legislation that does not
enhance the cleanliness of coal-fired electricity generation and
promote a future for clean coal technologies. In short, the
Administration supports a clean coal policy as a critical component
of our nation's energy and environmental policies, recognizing that
other sources of energy also have a critical role to play.
Additionally, as Governor Whitman said when she testified before
you in July, including CO2 in this bill will slow down, if not
prevent, the consensus necessary for passage of legislation to
control multiple emissions from power plants. Governor Whitman and
I both believe consensus on the appropriate levels and timing for
reductions of NOx, SO2 and mercury is achievable relatively soon.
We should not delay the public health and environmental benefits
from reduction of these emissions while we wait for consensus to
develop on CO2.
We agree that climate change is a serious issue we need to
address. However, CO2 has never been regulated as a pollutant under
the Clean Air Act and does not pose any direct threat to human
health unlike NOx, SO2 and mercury. The current body of scientific
knowledge does not provide information regarding atmospheric
concentrations of CO2 or reduction levels necessary to prevent
dangerous interference with the climate system.
In April, the President convened a Cabinet-level policy review
of this issue and was provided with initial recommendations that he
accepted and announced on June 11. In that regard, the
Administration is implementing two major initiatives on climate
science and advanced energy and sequestration technologies. The
United States now spends $1.6 billion annually on climate science
to reduce uncertainties - a commitment unmatched by any other
nation. The "National Climate Change Technology Initiative" will
accelerate priority research and the application of advanced energy
and sequestration technologies, recognizing that the real answer to
addressing climate change in the long term lies in the development
and global introduction of such technologies in this century. And
the cabinet-level policy review is ongoing. Finally, as greenhouse
gas emissions are projected to grow exponentially in the developing
world in the next two decades, we must evaluate the costs of
imposing domestic reductions as a very high cost against
potentially low-cost opportunities for mitigating and sequestering
carbon emissions in the developing world.
We appreciate the role of S. 556 in generating important
discussions and emphasizing the importance of a new approach to
controlling emissions in the power sector. I look forward to the
additional hearings you will need to address these important issues
and to working with the Committee
to develop an approach that the President can support.
The history of Clean Air Act legislation is one of great
accomplishments made possible by bipartisan efforts. I thank you
for the opportunity to work with you to continue that great
tradition.



