December 12, 2011

South Coast Launches Major NSR Reform Effort

Posted on December 12, 2011 by Robert Wyman

After several years of rapidly escalating offset prices, the South Coast Air Quality Management District (SCAQMD) has launched a major effort to consider near- and long-term reforms to the offset component of its nonattainment new source review (NSR) program (under 11/15/11 “New Source Review Roundtable Discussion on Emission Offsets” heading).

Congress added the offset requirement as part of the 1977 amendments to the Clean Air Act (CAA).  The idea was to ensure that new economic activity would not thwart progress made by states as they executed their state implementation plans (SIPs).  Under the CAA offset requirement, major new and modified stationary sources are required to offset their projected net emission increases by reducing surplus emissions from other sources.  As predicted during the most recent Congressional overhaul of the Clean Air Act in 1990, however, increased stationary source regulation, tighter major source definitions (e.g., 10 tons per year in the South Coast), and higher (greater than 1:1) offset ratios have finally squeezed some regional offset markets to the point where the offset program now impedes even the cleanest economic growth.

In the South Coast, for example, stationary source emissions have become an ever-diminishing part the overall emissions inventory (e.g., <10% of VOC emissions).  And there are virtually no remaining surplus control opportunities for stationary sources; so the only source of traditional offsets has been the shutdown of existing facilities.  Under the South Coast rules, however, even those reductions are not made fully available as offsets until they are first discounted to current control (i.e., lowest achievable emission rate, or LAER) levels.  The drastically shrinking pool of available offsets has caused the price of offsets to rise to unprecedented levels.  PM10 offsets, for example, hit a peak price in 2009 of $350,000 per daily pound of emissions.  Recent VOC offsets have cost more than $2,400 per pound, NOx more than $50,000 per pound, SOx more than $12,500 per pound and CO more than $5,000 per pound.  All of these numbers far exceed the $10,000 per ton upper bound contemplated as control costs to comply with the EPA’s 1997 standards for ozone and fine PM.  See Presidential Memorandum, “Implementation of Revised Air Quality Standards for Ozone and Particulate Matter (“There is a strong desire to drive the development of new technologies with the potential of greater emission reduction at less cost.  It was agreed that $10,000 per ton of emission reduction is the high end of the range of reasonable cost to impose on sources.  Consistent with the State’s ultimate responsibility to attain the standards, the EPA will encourage the States to design strategies for attaining the PM and ozone standards that focus on getting low cost reductions and limiting the cost of control to under $10,000 per ton for all sources.”).  62 Fed. Reg. 38421, 38429 (July 16, 1997).

The net effect of the scarce offset supply and astronomically high prices has been to slow regional economic development to a crawl.  For example, offsets to support new natural-gas fired power plants, necessary to back up the state’s renewable power program, have been almost impossible to find and have cost from $50 to $200 million per plant.  Other facilities have faced daunting offset costs as well.  The District’s cost estimates include several shocking numbers, including $12-77,000 for emergency backup generation for a police station, $106-234,000 for a gasoline service station, up to $358,000 for a printing facility, $178-435,000 for an auto body shop, in excess of $1 million for a food processing facility (e.g., a tortilla fryer and oven), from $1-2 million for a sewage treatment plant expansion, well over $1 million for a hospital boiler and $78-115 million for landfill gas recovery.  Although California has led the national clean energy investment effort, without material reform the SCAQMD will almost certainly be unable to offset emissions from the desired low-carbon biofuel or biomass-based renewable electricity projects in the region.  The offset requirement thus threatens to prevent much of the cleanest form of economic growth in the region.

The SCAQMD has identified a handful of near-term adjustments to its NSR program that could reduce the demand for offsets.  These include, for example, the use of an annual rather than peak monthly averaging period to calculate the offset need.  Increasing offset supply will be much more difficult, however.  That is because almost all as-yet-untapped strategies (e.g., identifiable mobile and area source reductions) have been identified and targeted as part of the region’s long-term SIP and thus may to some extent be ineligible as a supply of offsets.

The time has long since come for the District to replace the current offset program with an alternative (such as a clean technology fund) that can continue to improve air quality by accelerating, rather then impeding, clean technology development in the South Coast.  In addition to satisfying air quality improvement needs, rapid clean technology development also is needed to employ an ever-growing regional population and to meet the state’s ambitious clean energy and carbon reduction goals.  There is a win-win strategy to be found.  But it will require frank acknowledgement that the Clean Air Act offset program has served its purpose and now impedes, rather than aids, progress.  Most stakeholders are ready to work together to find a better mousetrap to promote rapid investment where and when we most need it.  We need it immediately in Southern California and the South Coast deserves enormous credit for launching this critical and timely reform effort.



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