Costs and Benefits of Clear Skies: EPA's Analysis of Multi-Pollutant Clean Air Bills

CRS Report for Congress
Costs and Benefits of Clear Skies: EPA's
Analysis of Multi-Pollutant Clean Air Bills
November 23, 2005
James E. McCarthy and Larry B. Parker
Specialists in Environmental and Energy Policy
Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Costs and Benefits of Clear Skies: EPA's Analysis of
Multi-Pollutant Clean Air Bills
Summary
The electric utility industry is a major source of air pollution, particularly sulfur
dioxide (SO²), nitrogen oxides (NOx), and mercury (Hg), as well as suspected
greenhouse gases, particularly carbon dioxide (CO²). On October 27, 2005, the
Environmental Protection Agency (EPA) released a long-awaited analysis comparing
the costs and benefits of alternative approaches to controlling this pollution. The
alternative schemes focus on using market-oriented mechanisms directed at multiple
pollutants to achieve health and environmental goals. The new analysis compares
four versions of the Administration-based “Clear Skies” proposal to bills introduced
by Senator Jeffords (S. 150) and Senator Carper (S. 843 of the 108^th Congress),
which would impose more stringent requirements.
This report, which will not be updated, examines EPA's analysis and adjusts
some of its assumptions to reflect current regulations. The most important
adjustment is the choice of baseline. The agency’s analysis assumes as a baseline
that, in the absence of new federal legislation, EPA and the states will take no
additional action to control SO², NOx, Hg, or CO² emissions beyond those actions
finalized by mid-2004. This baseline is put forth despite three rules recently
promulgated by EPA that limit SO², NOx, and Hg emissions on a timeframe similar
to that proposed by the Clear Skies legislation.
CRS reexamines EPA's data, producing cost and benefit estimates for each bill
incremental to the costs and benefits of current law and promulgated regulations.
The reanalysis finds that Clear Skies would have negligible incremental costs and
added benefits of $6 billion in 2010 and $3 billion in 2020. For the same years, S.
843 would have annual net benefits 8 and 5 times as great as Clear Skies at annual
costs of $4.2 billion and $3 billion, and S. 150 would have annual net benefits 10 and

16 times those of Clear Skies at annual costs of $23.6 billion and $18.1 billion.

EPA conducted limited sensitivity analyses to examine the effect on cost of
select combinations of assumptions, including (1) the responsiveness of electricity
demand to changes in price; (2) the availability of skilled labor to install control
equipment; and (3) the growth of electricity demand and natural gas prices. However,
some potentially useful combinations of assumptions were not examined. For
example, if EPA had combined a relaxed skilled labor constraint with some
responsiveness of electricity demand to changes in price, the cost of S. 150 and S.
843 would be substantially reduced. CRS also concluded that the Hg control costs
used in the analysis may be substantially overstated because of dated assumptions.
Numerous benefits were not estimated by EPA, partly because of
methodological difficulties. Benefits not estimated include the environmental (as
opposed to health) benefits of controlling the pollutants; the health effects of mercury
control; and any benefits from controlling CO² emissions. Thus, even though
benefits exceeded costs for each of the options in both EPA's and our analysis, one
should perhaps view the benefit estimates as a floor rather than a best estimate,
particularly for S. 150 and S. 843, which include significant Hg and CO² reductions.

Contents
In troduction ......................................................1
Why the Focus on Power Plants?..................................1
Proposed Legislation...........................................3
Options Examined in EPA’s Analysis..............................4
Discussion and CRS Reanalysis......................................5
Choice of Baseline Assumptions..................................5
Choice of Benchmark Analysis...................................5
Results of the Analysis..........................................9
Clear Skies...............................................9
S. 150 (Jeffords)...........................................9
S. 843 (Carper)...........................................11
Sensitivity Analysis...........................................11
Cost Analysis Summary Points..................................13
Specific Issues Highlighted.........................................13
Carbon Dioxide Control Costs...................................13
Mercury Control Costs.........................................14
Benefits Estimates............................................14
Conclusion ......................................................16
List of Figures
Figure 1. EPA's Four Scenarios......................................7
List of Tables
Table 1. Emissions from U.S. Fossil-Fuel Electric Generating Plants.........2
Figure 1. EPA's Four Scenarios......................................7
Table 2. EPA 2010 Cost and Benefit Estimates for Three Multi-Pollutant
Proposals, Compared with Existing Law..........................10
Table 3. EPA 2020 Cost and Benefit Estimates for Three Multi-Pollutant
Proposals, Compared with Existing Law...........................10
Table 4. Incremental Cost of Alternative Assumptions Compared with the
CRS Base Case..............................................12
Table 5. EPA Estimates for Carbon Dioxide Allowance Prices –
2010 and 2020...............................................14
Table 6: Selected Heath Effects Avoided by Proposals Over Baseline........15

Costs and Benefits of Clear Skies: EPA's
Analysis of Multi-Pollutant Clean Air Bills
Introduction
The electric utility industry is a major source of air pollution, particularly sulfur
dioxide (SO²), nitrogen oxides (NOx), and mercury (Hg), as well as suspected
greenhouse gases, particularly carbon dioxide (CO²). On October 27, 2005, the
Environmental Protection Agency (EPA) released a long-awaited analysis comparing
the costs and benefits of alternative approaches to controlling this pollution. Called
multi-pollutant proposals, the alternative schemes focus on using market-oriented
mechanisms to achieve health and environmental goals in simpler, more cost-
effective ways. EPA's new analysis compares four versions of the Administration-
based “Clear Skies” proposal to bills introduced by Senator Jeffords (S. 150) and
Senator Carper (S. 843 of the 108^th Congress), which would impose more stringent
requirements.
The Administration has been reluctant to conduct such a study, citing the cost
and difficulty of doing so, but it relented after the Senate Environment and Public
Works Committee, on a tie vote, failed to report the Clear Skies bill (S. 131) in
March 2005. One reason the bill failed to advance, according to its opponents, was
the concern that an analysis comparing its provisions to those of Senator Jeffords' and
Senator Carper's bills had not been conducted. The issue was raised again in April
2005, during confirmation hearings for Stephen Johnson, who was sworn in as EPA
Administrator May 2. As one of his first official acts, he promised to conduct a cost-
benefit analysis of Clear Skies and the other Senate bills, the results of which have
now been released.
Why the Focus on Power Plants?
Electric utility generating facilities are a major source of air pollution. The
combustion of fossil fuels (petroleum, natural gas, and coal), which accounts for
about two-thirds of U.S. electricity generation, results in the emission of a stream of
gases. These gases include several pollutants that directly pose risks to human health
and welfare, including particulate matter (PM),¹ sulfur dioxide, nitrogen oxides, and
mercury. PM, SO², and NOx are currently regulated under the Clean Air Act, and

¹ Particulate matter is regulated depending on the particle size; current regulations address
particles less than 10 microns in diameter (PM¹⁰); EPA has promulgated regulations for
particles less than 2.5 microns in diameter (PM^2.5) that are in the process of being
implemented. SO² and NOx emissions could be affected by regulations of PM^2.5. Current
concerns about emissions from fossil-fuel electric generating plants do not explicitly address
PM, but could indirectly do so through attention to SO² and NOx.

EPA has finalized rules to regulate mercury. Other gases may pose indirect risks,
notably carbon dioxide, which may contribute to global warming.² Table 1 provides
estimates of SO², NOx, and CO² emissions from electric generating facilities. As
indicated, SO² and NOx emissions have declined over the past six years as
regulations resulting from the 1990 Clean Air Act Amendments have taken hold. In
contrast, CO² emissions, which are unregulated, have continued to rise. In 2003,
fossil-fuel-fired electric generating plants accounted for about 72% of the country’s
SO² emissions, 24% of its NOx emissions, and 41% of its CO² emissions. Annual
emissions of Hg from utility facilities are more uncertain; current estimates indicate
about 45 tons (more than 40% of the country’s total Hg emissions) come from
electric generating units.
Table 1. Emissions from U.S. Fossil-Fuel Electric Generating Plants
(thousands of metric tons)
Emissions 1998 1999 2000 2001 2002 2003
SO² 12,509 12,445 11,297 10,966 10,515 10,594
NOx 6,235 5,732 5,380 5,045 4,802 4,396
CO² 2,313,013 2,326,558 2,429,394 2,379,603 2,397,937 2,408,961
^Source:^En^erg^y^In^f^o^rm^ation^A^d^mⁱⁿⁱ^s^t^ration^.^In^clu^d^es^em^is^sⁱ^on^s^f^r^om^com^bⁱⁿ^ed-^h^eat-^aⁿ^d^-^pow^{er plan}^ts^.
The evolution of air pollution controls over time and the growing scientific
understanding of health and environmental impacts of power plant emissions have
led to a multilayered and interlocking patchwork of controls. Moreover, additional
controls are now underway, particularly with respect to NOx as a precursor to ozone,
to both NOx and SO² as contributors to PM^2.5, and to Hg as a toxic air pollutant.
Also, under the United Nations Framework Convention on Climate Change, the
United States agreed to voluntary limits on CO² emissions. The current Bush
Administration has rejected the Kyoto Protocol, which would impose mandatory
limits, in favor of a voluntary reduction program. In contrast to the Administration’s
position, in June, 2005, the Senate passed a Sense of the Senate resolution calling for
mandatory controls on greenhouse gases that would not impose significant harm to
the economy.³
For many years the complexity of the air quality control regime has caused some
observers to call for a simplified approach. One focus of this effort is the “multi-
pollutant” or “four-pollutant” approach. This approach involves a mix of regulatory
and economic mechanisms that would apply to utility emissions of up to four
pollutants in various proposals — SO², NOx, Hg, and CO². The objective would be
to balance the environmental goal of effective controls across the pollutants covered
with the industry goal of a stable regulatory regime for a period of years.⁴

² Steam-electric utilities produce minor amounts of volatile organic compounds (VOCs),
carbon monoxide (CO), and lead — on the order of 2% or less of all sources.
³ Senate Amendment 866 to H.R. 6, The Energy Policy Act of 2005, (June 22, 2005)
⁴ CRS Report RL30878, Electricity Generation and Air Quality: Multi-Pollutant Strategies,
(continued...)

To some degree, this new approach already has been incorporated into existing
law with three recently finalized rules: (1) the Clean Air Interstate Rule (CAIR),
promulgated May 12, 2005, that caps emissions of SO² and NOx in the eastern U.S.;
(2) the Clean Air Mercury Rule (CAMR), promulgated May 18, 2005, that caps
emissions of Hg from coal-fired powerplants; and (3) the Clean Air Visibility Rule
(CAVR), promulgated July 6, 2005, that focuses on SO² and NOx emissions that
impair visibility surrounding national parks and wilderness areas.
More SO² and NOx reductions are in the pipeline. With new ambient air quality
standards for ozone and fine particles taking effect nationwide in 2005, emissions of
NOx (which contributes to the formation of ozone) and SO² (which is among the
sources of fine particles) need to be reduced further. Mercury emissions are also a
focus of concern: 44 states have issued fish consumption advisories for mercury,
covering 13 million acres of lakes, 765,000 river miles, and the coastal waters of 12
entire states. Mercury enters water bodies from air emissions that are either
deposited directly in them or are deposited on land and end up in water through
precipitation run off.
Proposed Legislation
Many in industry, environmental groups, Congress, and the Administration
agree that legislation that addresses power plant pollution in a comprehensive (multi-
pollutant) fashion could achieve health and environmental goals in simpler, more
cost-effective ways. In the 109^th Congress, six bills have been introduced that would
impose multi-pollutant controls on utilities.⁵ Such legislation (the Administration
version of which is dubbed “Clear Skies”) would address SO², NOx, and Hg from
electric generating facilities on a coordinated schedule, and would rely, to a large
extent, on a system like that used in the acid rain program, where national or regional
caps on emissions are implemented through a system of tradeable allowances. Some
of the legislative proposals include CO² caps as well.
Key questions in the ensuing congressional debate have been how stringent the
caps should be, how quickly reductions should be mandated, and whether carbon
dioxide should be among the emissions subject to a cap. Regarding the stringency
issue, all bills would eventually require a 70% to 80% reduction of both NOx and
SO² emissions from 1998 levels. Regarding mercury, the bills eventually would
require reductions of 70%-90%.
The Clear Skies bill (S. 131) would impose the least stringent standards and
would be phased in over the longest period of time. For all three pollutants, the final
Clear Skies deadlines would be 2018, but the actual 70% reduction targets might not
be met for as long as a decade after that. The reason for the delay is the use of what
are called “banking” provisions in the regulatory scheme. Because the deadlines are
far in the future, utilities would be likely to “overcomply” in the early years of the

⁴ (...continued)
by Larry Parker and John Blodgett.
⁵ For a detailed comparison, see CRS Report RL32755, Air Quality: Multi-Pollutant
Legislation in the 109^th Congress, by Larry Parker and John Blodgett.

program, building up credits that could be used in place of further emission
reductions in later years. The Administration uses the projected overcompliance as
a selling point for its approach, arguing that it will achieve reductions sooner than
would a traditional regulatory approach with similar deadlines. But overcompliance
in the early years would lead to large holdings of banked emission allowances to be
used in place of actual reductions in later years, delaying achievement of emissions
caps. In its analysis of the Clear Skies bill, EPA does not expect to see the full 70%
emission reductions until 2026 or later.
The Jeffords and Carper bills also allow banking and trading of allowances; but,
with earlier and more stringent caps on emissions, utilities would be unable to bank
so many allowances and, thus, would reach full compliance at least a decade sooner
than under Clear Skies.
With respect to carbon dioxide, Clear Skies would not impose controls on it,
whereas the Jeffords and Carper bills would. The absence of CO² from the mix
might lead to different strategies for achieving compliance, preserving more of a
market for coal, and lessening the degree to which power producers might switch to
natural gas or renewable fuels as a compliance strategy.
Options Examined in EPA’s Analysis
The cost-benefit analysis released by EPA, October 27,⁶ examined six options:
four of the six were variants of the Administration's Clear Skies bill or its regulatory
counterparts⁷; the other two options were Senator Carper's Clean Air Planning Act
(S. 843 in the 108^th Congress, but as of the date of the analysis, not yet introduced in
the 109th) and Senator Jeffords' Clean Power Act (S. 150).
The results of the analysis show very little difference between the four Clear
Skies options, so it may be best to think of them as one (for most purposes) and
simplify the discussion to three principal choices: Clear Skies, Carper, and Jeffords.
Of the four Clear Skies options that EPA examined, we have chosen the version most
recently drafted, the Managers' Mark version, which was offered at the Senate
Environment and Public Works Committee markup of S. 131 on March 9, 2005.⁸

⁶ Rather than a single document, the agency actually released a group of 45 documents: an
18-page “Comparison Briefing”; a 4-page table comparing the options; separate analyses
of each of the six options; and 37 background documents. We refer to this group of 45
documents as the agency's cost-benefit analysis. The full package is available at
[ ht t p: / / www.e pa .gov/ a i r ma r ke t s / mp/ ] .
⁷ By “regulatory counterparts,” we mean three rules promulgated by the agency in 2005 that
have emission reduction and cap-and-trade provisions almost identical to those of Clear
Skies. These are the Clean Air Interstate Rule (CAIR), promulgated May 12, 2005; the
Clean Air Mercury Rule (CAMR), promulgated May 18, 2005; and the Clean Air Visibility
Rule (CAVR), promulgated July 6, 2005.
⁸ The Managers' Mark was chosen primarily because it was the most recent legislative
version. When fully implemented, it also would have slightly greater benefits than the other
three Clear Skies alternatives, according to EPA's analysis.

Discussion and CRS Reanalysis
Choice of Baseline Assumptions
EPA’s Multi-Pollutant Regulatory Analysis assumes as a baseline that in the
absence of new legislation, EPA and the states will take no additional action to
control SO², NOx, Hg, or CO² emissions beyond those rules, regulations, or
agreements finalized by mid-2004. This baseline is put forth despite three rules
recently finalized by EPA that directly bear on SO², NOx, and Hg.⁹
Why EPA chose not to include three finalized rules that clearly delineate EPA’s
current approach to addressing SO², NOx, and Hg control is unclear.¹⁰ Instead, EPA
included the three regulations as a “sixth proposal” for controlling these pollutants
– a curious designation for finalized rules. This report uses that analysis, the
CAIR/CAMR/CAVR¹¹ case, for its baseline because it most accurately portrays the
status of current and future clean air regulation with respect to these pollutants.
Arguably, the uncertainty with respect to those rules (and others) is no more than the
uncertainty about the specific provisions and implementation of any multi-pollutant
legislation. For example, S. 843 was introduced in the 108^th Congress. There is no
guarantee that a 109^th Congress or later version would maintain the deadlines
contained in the 2003 proposal. Likewise, the Managers' Mark, almost by definition,
was an evolving proposal and could change again if the Committee resumes
consideration of it. Finally, the regulations supporting any passed legislation would
be subject to some of the same uncertainties and delays as the finalized regulations
that were not included in EPA’s baseline. Controlling air pollution is a moving target
and we believe it is important that any analysis work from updated baseline
projections and assumptions when possible.
Choice of Benchmark Analysis
EPA’s cost analysis places special emphasis on three basic parameters:

⁹ Those are CAIR – the Clean Air Interstate Rule; CAMR – the Clean Air Mercury Rule;
and CAVR – the Clean Air Visibility Rule
¹⁰ One explanation might be that, while final, these rules have not yet been implemented and
are being challenged in court. In this respect, however, they are not materially different
from some pre-2004 rules. EPA’s baseline modeling includes finalized, but not
implemented, state rules and negotiated settlements, along with finalized EPA rules for
which serious disputes still exist with respect to implementation (such as the Heavy Duty
Diesel rule). A second possibility is that time constraints prevented EPA from updating its
baseline assumption from 2003. Adjusting the model to incorporate more recent data and
assumptions would have required a substantial commitment of time, delaying completion
of the analysis As discussed later, the grounding of the analysis in 2003 (e.g., Hg control
costs and natural gas supply assumptions) may be leading to unrealistic projections.
¹¹ CAIR – the Clean Air Interstate Rule; CAMR – the Clean Air Mercury Rule; and CAVR
– the Clean Air Visibility Rule.

^!Electric Demand Price Elasticity (Demand Response). EPA
analyzes two scenarios: (1) zero price elasticity (i.e., no demand
response to increasing electricity prices), and (2) a very inelastic
short-term price elasticity (i.e., a very limited demand response to
increasing electricity prices).
^!Assumed Short-term Construction Constraints (Feasibility). EPA
analyzes two scenarios (1) an assumed shortage in boilermaker labor
that limits the amount of SO² and NOx emissions control equipment
that can be built by 2010, and (2) an assumption that the market will
respond to the demand for new equipment in a timely fashion (i.e.,
no constraint on short-term construction).
^!Assumed Electricity Demand Growth and Natural Gas Supply. EPA
analyzes two scenarios: (1) EPA’s baseline assumption of 1.55%
annual electricity demand growth and baseline natural gas prices of
$3.34 per MMBtu in 2010 (1999 dollars), and (2) the Energy
Information Administration¹² (EIA) baseline assumption of 1.83%
annual electricity demand growth and baseline natural gas prices of
$3.62 per MMBtu in 2010 (1999 dollars). Under EPA model, these
prices rise under the impact of proposed legislation.
Based on these parameters, EPA developed four scenarios that include different
combinations of these assumptions (as shown in Figure 1).
^!EPA’s Base Case Scenario assumes zero price demand elasticity,
short-term construction constraints, and EPA electricity demand
growth and natural gas supply assumptions.
^!No Construction Constraint Scenario assumes zero price elasticity,
no short-term construction constraints, and EPA’s electricity growth
and natural gas supply assumptions.
^!EPA Demand Response Scenario assumes very inelastic short-term
price elasticity, short-term construction constraints, and EPA’s
electricity growth and natural gas supply assumptions.
^!Higher Electricity Growth and Natural Gas Scenario assumes zero
price elasticity, short-term construction constraints, and EIA’s higher
electricity growth and natural gas supply assumptions.
This report uses EPA’s Demand Response Scenario as the benchmark analysis.
This choice is a compromise based on the three factors and lack of alternative
combinations. Each of the scenarios raises questions; however, the strongest case can
be made for including a short-term demand response function in the modeling.

¹² EIA is the division of the Department of Energy responsible for official projections of
energy supply, demand, prices, etc.

Electricity price elasticities are well established in the literature, particularly short-
term elasticities.¹³ The short-term price elasticities chosen by EPA to incorporate
Figure 1. EPA's Four Scenarios
Elasticity ofConstructionElectricity
ScenarioDemandConstrained?Growth / Natural
Gas
EPA's Base CasezeroyesEPA assumptions
No ConstructionzeronoEPA assumptions
Constraint
EPA Demandassumes fairlyyesEPA assumptions
Response (used byinelastic demand
CRS)response (but not
zero)
Higher Electricityzeroyeshigher EIA
Growth and Naturalassumptions
Gas Prices
into their Demand Response Scenario (the only scenario to contain the demand
function) are well within the range suggested by the literature. Why EPA did not
choose to include this refinement in all of the scenarios is unclear. However, EPA
only included it in the one, so CRS chose it.
This is not to suggest that the other assumptions incorporated in the Demand
Response Scenario are not debatable, particularly EPA’s assumption with respect to
boilermaker labor. EPA assumes in three of the four scenarios above that there will
be limited boilermaker labor for constructing SO² and NOx control equipment until
2010, following which unlimited labor would be available.¹⁴ This is an assumption
EPA incorporated into its regulatory rulemaking on the Clean Air Interstate Rule
(CAIR), also called the Interstate Air Quality Rule (IAQR). This constraint has been
questioned by some, including the Institute of Clean Air Companies (ICAC), the
trade association that represents the air pollution control industry. During the
rulemaking on CAIR, ICAC conducted their own analysis of boilermaker labor

¹³ The classic survey of electricity price elasticities is Douglas R. Bohi, Analyzing Demand
Behavior: A Survey of Energy Elasticities, Johns Hopkins University Press (1981). For
more recent examination of residential electricity price elasticities, see Raphael E. Branch,
“Short Run Income Elasticity of Demand for Residential Electricity Using Consumer
Expenditure Survey Data,” 14 The Energy Journal 4 (1993) pp. 111-121 and Yu Hsing,
Estimation of Residential Demand for Electricity with the Cross-Sectionally Corrected and
Time-wise Autoregressive Model,” 16 Resources and Energy Economics (1994) pp. 255-

263.

¹⁴ Environmental Protection Agency, Feasibility of Installing Pollution Controls to Meet
Phase 1 Requirements of Various Multi-Pollutant Legislative Proposals, Office of Air and
Radiation (October 2005)

availability and found no constraint on construction, even if the 2015 deadline of
CAIR was moved to 2010. As stated by ICAC:
In summary, the air pollution control industry has demonstrated that they
are able to install significant amounts of air pollution control equipment
in short periods of time. This has been demonstrated more recently with
the installation of SCRs [selective catalytic reduction controls] for the
NOx SIP call as well as for control installations in both Germany and
Japan. The resources required for the projected installations under the
IAQR will also require a significant number of air pollution control
installations but the resources required to complete them are not expected
to be limiting. Factors such as the use of modular construction methods
and non-union craft labor will reduce the demand for union boilermakers.
This reduction in boilermaker demand combined with the six month
increase in compliance time window will further reduce the demand on
boilermaker labor. In the event of a shortage, additional boilermaker labor
is available through the Canadian boilermaker union as well as from ship
builders’ and iron workers’ labor pools. In conclusion, there will be more
than sufficient boilermaker capacity to carry out the projected IAQR and
control installation for 2010 and 2015. Even more significantly, it will be
possible to complete the 2015 requirements in the 2010 timeframe.¹⁵
The assumption of limited boilernaker availability, which only affects the two
most stringent alternatives (S. 843 and S. 150) is included in three of the four
scenarios used by EPA in its analysis. The one scenario that removes this constraint
simultaneously assumes zero price elasticity for electricity demand. Thus, despite
questions with respect to this assumption, one is forced to choose whether to address
it or to address the demand elasticity assumption. CRS believes that given the lack
of an EPA alternative that includes both demand elasticity and no boilermaker
constraint, it is more important to include a demand elasticity function in the
benchmark analysis than to remove the questionable feasibility constraint.¹⁶ Thus, we
chose EPA's demand response scenario as our base case.
Finally, there is the important issue of future natural gas supply. There are no
facts about the future and, therefore, sensitivity analysis is very important to
understand the robustness of cost estimates. The natural gas supply curves developed
for the EPA’s model generally project more natural gas availability at lower prices
than the natural gas supply curves developed by EIA. EPA provides one scenario
with the steeper EIA supply curves – Higher Electricity Growth and Natural Gas
Scenario – along with the short-term feasibility constraint and zero short-term price

¹⁵ Institute of Clean Air Companies, IAQR Projected 2015 Control Technology can be
Installed by 2010, p. 10.
¹⁶ Indeed, not including a demand response would compound the effects of the feasibility
constraint discussed here. With the feasibility constraint and zero price elasticity, the model
continues to build new generation capacity despite price increases, bumping into the
feasibility constraints that further bump up prices that are not responded to. Not including
a demand response function affects only the two non-Clear Skies bills. Including a proper
demand response function into the analysis mitigates this effect to some degree.

elasticity. In the current market climate, it is difficult not to argue that the EIA
curves may be more representative of future supplies than EPA’s estimates.
However, natural gas supply has a long history of volatility and the 15-year time
frame of the analysis leaves plenty of room for debate.
Recognizing serious questions about EPA’s feasibility constraints and the
historic volatility of the natural gas market, this analysis uses the Demand Response
Scenario as the basis of its discussion. Including a short-term demand function is
fully justified based on the literature.
Results of the Analysis
Clear Skies. Clear Skies would cost substantially less than the other two bills,
both in the short- and long-term. As indicated by Tables 2 and 3, Clear Skies' costs
and benefits are minimal compared with the reconstructed baseline case. That Clear
Skies has the lowest cost should not be surprising. Compared to the other bills, it has
less stringent requirements and later deadlines, so, particularly in the early years,
there is a vast difference in the annual costs of the three approaches. In particular, the
provisions with respect to Hg are weak compared with the other two bills and there
are no provisions for CO². More importantly, as discussed in a previous CRS report,
Clear Skies is principally an attempt to revamp the Clean Air Act's existing structure¹⁷
with something more cost-effective.
Clear Skies' benefits would also be substantially less than the Carper and
Jeffords bills, which were designed to reduce pollution faster than existing
requirements. In 2010, the Clear Skies bill would provide $6 billion in annual
benefits, according to EPA, compared to benefits of $51 billion (Carper) and $83
billion (Jeffords). The benefits of Clear Skies almost merge with the baseline
increase in later years, and continue to lag the two other bills, which have benefits of
$19 billion and $66 billion annually in 2020. The higher benefits for the Carper and
Jeffords bills reflect the fact that Clear Skies' required pollution caps are less
stringent, and the implementation schedule is more relaxed.
As noted, EPA compares the three bills' effects to a baseline that does not
include current Clean Air Act requirements. If one adjusts the baseline to reflect
current Clean Air Act requirements (including the CAIR, CAMR, and CAVR rules,
promulgated earlier this year), Clear Skies has essentially no incremental cost. Its
benefits are also relatively small – equal to an additional 10% of the benefits of the
newly promulgated rules in 2010 and only 2% of the benefits in 2020. This result
suggests the success EPA has had in incorporating the market-based regulatory
scheme of Clear Skies into its new regulations. At the same time, the analysis may
bolster the arguments of Clear Skies' opponents, who maintain that the requirements
of current law are at least as good as the Clear Skies requirements.
S. 150 (Jeffords). As indicated by Tables 2 and 3, Senator Jeffords' bill
would have the greatest benefits. In 2010, its benefits would be $83 billion annually,

¹⁷ For additional discussion of these points, see CRS Report RL32782, Clear Skies and the
Clean Air Act: What's the Difference? by Larry Parker and James E. McCarthy.

$32 billion more than those of the Carper bill, and about 14 times the benefits of
Clear Skies. In 2020, its benefits continue to exceed those of the other bills: at an
estimated $66 billion annually, they are three-and-a-half times those of the Carper
bill and 22 times those of Clear Skies.
Table 2. EPA 2010 Cost and Benefit Estimates for Three Multi-
Pollutant Proposals, Compared with Existing Law
(in billions of 1999 dollars)
Cost AnalysisBenefit Analysis
Bills EPA Demand
Response ScenarioEPA Ozone and
(including short-PM^2.5 HealthNet Benefits
term constraints)Benefits EstimatesCompared to
Costs
S. 150+$23.6+$83+$59
S. 843+$4.2+$51+$47
Managers' +$0.2 +$6 +$6
Mark
Note: Benefit estimates presented represent the mid-point of the range provided by EPA.
Table 3. EPA 2020 Cost and Benefit Estimates for Three Multi-
Pollutant Proposals, Compared with Existing Law
(in billions of 1999 dollars)
Cost AnalysisBenefit Analysis
BillsEPA Demand
Response ScenarioEPA Ozone and
(including short-PM^2.5 HealthNet Benefits
term constraints)Benefits EstimatesCompared to
Costs
S. 150+$18.1+$66 +$48
S. 843+$3.0+$19+$16
Managers' 0 +$3 +$3
Mark
Note: Benefit estimates presented represent the mid-point of the range provided by EPA.
S. 150 would also be the most costly bill. As discussed later, more than the
other bills, the Jeffords bill suffers from the short-term construction constraints EPA
imposed on the analysis. EPA maintains that a shortage of skilled labor will limit the
number of scrubbers that can be installed by 2010. Lacking scrubbers, coal-fired
power plants are forced to shut down in the agency's analysis of the bill. The Jeffords
bill would reduce coal production and coal-fired electric generation by about 40%,
according to EPA. Vast numbers of natural-gas-fired and renewable fuel generators
would be required in their place, at great cost: the Jeffords bill would lead to an

additional 65 gigawatts of generation from renewable sources (about 6 times the
amount projected under either of the other options) and nearly 100 gigawatts of
additional oil- and gas-fired capacity. By contrast, coal use would increase under
either Clear Skies or the Carper bill.
While the cost of S. 150 may lead Clear Skies' proponents to characterize it as
too costly, the net benefits of S. 150 (i.e., benefits minus costs) far exceed those of
Clear Skies and S. 843.
S. 843 (Carper). As indicated by Tables 2 and 3, both the benefits and costs
of S. 843 are lower than those of S. 150, but higher than those of Clear Skies. This
is by design, as S. 843 attempts to achieve substantial emission reductions beyond
those currently incorporated in the Clean Air Act, but allow sufficient time to avoid
serious short-term price increases. As discussed later, the more phased-in schedule
of the bill helps mitigate (but does not eliminate) the short-term constraints EPA
imposes on the analysis. In addition, as discussed later, S. 843 develops a limited
and flexible CO² requirement that achieves some reduction in the increase in carbon
dioxide emissions at a nominal cost.
Sensitivity Analysis
EPA conducted a number of sensitivity analyses on the various bills. As noted
earlier, three variables highlighted by the analyses were (1) price elasticity, (2) short-
term construction constraints, and (3) higher electricity growth and more constrained
natural gas supply. Unfortunately, these variables were not isolated from each other,
but examined in selected combinations. As noted earlier, the benchmark analysis
used for this report assumes limited short-term price elasticity, short-term
construction constraints, and EPA's electricity growth and natural gas supply curves.
The other three combinations that EPA analyzed were:
^!No Construction Constraint Scenario, which assumes zero price
elasticity, no short-term constraints, and EPA’s electricity growth
and natural gas supply curves;
^!EPA Base Case Scenario, which assumes zero price elasticity, short-
term constraints, and EPA electricity growth and natural gas supply
curves; and
^!Higher Electricity Growth and Natural Gas Scenario, which
assumes zero price elasticity, short-term constraints, and EIA’s
higher electricity growth and natural gas supply curves.
The first alternative, the No Construction Constraint Scenario, removes EPA’s
assumed short-term construction constraint assumption contained in the benchmark
analysis but includes a zero demand price elasticity assumption. As indicated in
Table 4, this swap of assumptions is pretty much a wash for S. 843 and the
Managers' Mark. Indeed, in the case of S. 843, the analysis indicates that the short-
term construction assumptions are slightly more important to the cost analysis than
the removal of any price elasticity. However, the assumption of zero demand price
elasticity in this scenario has a substantial impact on the cost of S. 150, both short

(36% increase) and long-term (157% increase), as the removal of any price elasticity
exceeds the saving gained by removing EPA short-term construction constraint
assumptions. This is not surprising, given the significant compliance cost of S. 150
– a cost that, with zero elasticity assumed, results in no demand-side reaction from
consumers.
Table 4. Incremental Cost of Alternative Assumptions Compared
with the CRS Base Case
(in billions of 1999 dollars)
ZERO DEMAND PRICE ELASTICITY COST SCENARIOS
With EPA Assumed Construction
Constraints
With No AssumedWith EIA Electricity
ConstructionEPA’s Base CaseGrowth and Natural
ConstraintsScenarioGas Assumptions
Bills (Alternative 1)(Alternative 2)(Alternative 3)
2010 2020 2010 2020 2010 2020
S. 150+$8.6+$28.4+$14.8+$26.6+$19.1+$41.3
S. 843-$0.3 +$0.1 +$3.6 +$0.4+$4.5+$1.2
Managers'+$0.1 +$0.10 +$0.1-$0.1-$0.1
Mark
The second alternative, the EPA Base Case Scenario, replaces the short-term
price elasticity estimate of our benchmark analysis with an assumption of zero price
elasticity. The short-term construction constraint assumptions are maintained. This
case confirms the dramatic effect that removal of any short-term price elasticity has
on the costs of S. 150 with increases of 63% in 2010 and 147% in 2020 over the
benchmark analysis, and indicates the relative size of the effect on S. 843. For S.
843, removal of any price elasticity results in a cost estimate 86% higher than our
benchmark estimate for 2010. Along with the first sensitivity analysis, this result
suggests that demand response and short-term construction constraint assumptions
heavily influence EPA’s 2010 cost estimates for S. 843. In contrast, EPA’s
assumptions have little effect on S. 843 cost estimates in the long-term or for the
Managers' Mark.
The third alternative, the Higher Electricity Growth and Natural Gas Scenario,
essentially takes the zero price elasticity estimate and short-term construction
constraint assumptions of the EPA Base Case Scenario and adds EIA’s higher
electricity growth assumptions and steeper natural gas supply curves. Compared with
the benchmark analysis, this case maintains the short-term construction constraint
assumption, removes any demand price elasticity, and employs EIA assumptions for
electricity growth and natural gas supply. Not surprisingly, the combination of zero
demand response, greater demand for electricity, and tighter natural gas supply
results in higher costs, particularly for S. 150. Compared with the assumptions of the
EPA Base Case, the effect of higher growth and natural gas costs in the context of
zero demand response is most pronounced in the case of S. 150 and puts even more

pressure on EPA’s assumption of zero demand price elasticity, particularly for 2020.
The impact on S. 843 is considerably less dramatic and is nonexistent for the
Managers' Mark. However, the sensitivity analysis here is pretty limited and a more
comprehensive analysis of future natural gas availability could be valuable in
determining appropriate targets and timetables for any multi-pollutant legislation.
Cost Analysis Summary Points
^!EPA’s assumption of zero demand price elasticity has a dramatic
impact on the S. 150 short and long-term cost estimates. This effect
is accentuated when EIA higher electricity growth and natural gas
assumption are employed, particularly over the long term. Removal
of EPA’s assumed short-term construction constraints reduces the
effect some in the short-term, but does not overcome it.
^!EPA’s assumption of zero demand price elasticity and assumed
short-term construction constraints appear to have significant and
about equal effects on S. 843 in the short term. Both effects decrease
substantially over the long term, even if EIA's higher cost
assumptions are employed, because of S. 843’s less aggressive time
frame.
^!EPA’s assumptions have little effect on the Managers' Mark cost
estimates, either short or long-term. This is not surprising as the
basis of the Managers' Mark and much of newly-finalized
regulations – Clear Skies – was developed using EPA’s model. That
the Managers' Mark has only an incremental impact on the cost and
benefits of existing law and regulations ensures that its economic
impact is minimal under any conditions compared with those of
existing laws and regulations.
Specific Issues Highlighted
Carbon Dioxide Control Costs
Two of the bills analyzed by EPA, Senator Jeffords' S. 150 and Senator Carper's
S. 843, contain provisions to reduce carbon dioxide emissions. The S. 150 provision
sets an emissions cap of 2.05 billion tons annually beginning in 2010 (about 7%
below 1990 levels). S. 843 would set an emissions cap of about 2.655 billion tons
(estimated 2006 emissions) in 2009, decreasing to 2.454 billion tons (2001 emissions
level) beginning in 2013. As indicated in Table 5, the more modest reduction
requirement, combined with a slower reduction schedule, results in an order of
magnitude lower costs for CO² allowances under S. 843 compared to S. 150.
The S. 150 reduction requirement and schedule are more representative of the
requirements of the Kyoto Protocol than S. 843. As indicated in Table 5, adjusting
S. 150’s carbon dioxide reduction costs for 2005 dollars and metric tons results in
costs of $19 a metric ton in 2010 and $33 a metric ton in 2020. This estimate range

is within that of the current European Union market prices as the EU ramps up for
meeting its more stringent 8% reduction below 1990 levels required under the Kyoto
Protocol. The current EU price for a metric ton of carbon dioxide reduction is about
$25.¹⁸
Table 5. EPA Estimates for Carbon Dioxide Allowance Prices –
2010 and 2020
(per short ton, except as noted)
S. 150
S. 843 CostsS. 150(per metric ton,
(1999$)(1999$)estimated 2005$)
2010$1$16$19
2020$2$27$33
Mercury Control Costs
Given the short deadline for completing the study, EPA and its contractor did
not develop new data on the cost or cost-effectiveness of control technologies,
instead relying on assumptions used in conducting analyses of the CAIR and CAMR
rules promulgated early in 2005. Those analyses used cost and cost-effectiveness
data collected in 2003. As noted in an earlier CRS report, the effectiveness of
mercury control technology has advanced rapidly since 2003. Thus, we conclude that
the present analysis may overstate the cost of emission controls for mercury by a
substantial margin. The air pollution control industry maintains that the cost of
activated carbon injection (ACI) controls, which the model assumes would be
imposed on about 40% of coal-fired plants under the Carper bill, is now only one-¹⁹
fourth what the cost would have been in 2003.
EPA's Hg control cost assumptions have less of a distorting effect in its analysis
of S. 150, simply because its other assumptions (discussed earlier) lead it to conclude
that 40% of coal-fired plants would be shut down by 2010 under the bill.
Benefits Estimates
EPA's analysis and CRS's reanalysis of the data show benefits substantially
outweighing costs for both S. 150 and S. 843. The benefits represent the monetized
human health effects (principally reduced mortality) from reducing emissions of SO²
and fine particles. Some of these benefits are summarized in Table 6 below.

¹⁸ As of November 4, 2005, according to PointCarbon. For current EU prices in euros, see
[http://www.pointcarbon.com/]
¹⁹ CRS Report RL32868, Mercury Emissions from Electric Power Plants: An Analysis of
EPA's Cap-and-Trade Regulations, by James E. McCarthy.

Table 6: Selected Heath Effects Avoided by Proposals Over
Baseline
(in annual incidences avoided)
Managers'
S. 150S. 843 Mark
Health Effect Avoided201020202010202020102020
Premature mortality16,00012,00010,0004,0001,0001,000
Chronic bronchitis8,1005,0005,1002,0006000
Non-fatal heart attacks20,00014,00012,0004,0002,0001,000
Hospital admissions/ER22,00014,00015,0005,0002,0001,000
visits
Acute bronchitis19,00013,00012,0004,0001,0001,000
Note: These effects are incremental to the effects of the CAIR, CAMR, and CAVR rules.
Three other sets of likely benefits were not estimated, at least in part because of
the methodological difficulty of doing so. First, the analysis makes no attempt to
monetize environmental benefits, which are significant in the case of sulfur dioxide
and mercury controls. SO² emissions are the primary cause of acid deposition, which
harms aquatic life and affects forest growth, as well as damaging building materials.
Reductions in SO² emissions could have significant environmental benefits, which
are not estimated in the analysis. The emissions are also a significant factor in the
formation of regional haze, the effects of which were also not monetized. Mercury
deposition, as noted earlier, has led to widespread fish consumption advisories, with
attendant economic impacts. The omission of environmental benefits has its greatest
effect on S. 150 and S. 843 which have more aggressive SO², NOx, and Hg control
schemes.
Second, the analysis does not model mercury heath effects. Agency analyses of
the economic benefits of reducing Hg health effects have ranged from a few million
dollars per year to several billion dollars per year.²⁰ The impact of omitting these
benefits would be significant if one accepts the latter estimate. Once again, this
omission has its greatest effect on S. 150 and S. 843, which have more aggressive Hg
control schemes.
Finally, the analysis did not attempt to estimate the possible benefits of
controlling CO² emissions. There is no accepted methodology for making such an
estimate. Still, the absence of such a factor in the analysis may be a significant
omission, which understates the potential benefits of the Jeffords and Carper bills.
The Jeffords bill is the most aggressive of the three in regard to controlling CO²

²⁰ For additional discussion of the benefits of controlling mercury emissions, and EPA's
varied estimates, see CRS Report RL32868, Mercury Emissions from Electric Power Plants:
An Analysis of EPA's Cap-and-Trade Regulations, by James E. McCarthy.

(whereas Clear Skies does not cap CO² emissions at all). Thus, the Jeffords bill may
be most disadvantaged as a result of this factor.
Conclusion
In reexamining EPA’s analysis, several points stand out in thinking about multi-
pollutant legislation:
^!EPA has been very successful in incorporating the caps of Clear
Skies in now promulgated rules. As a result, after adjusting for
those rules, EPA's analysis finds little cost and a small benefit
associated with passage of Clear Skies legislation. The Jeffords and
Carper bills, however, set more stringent standards than the
promulgated rules. For both bills, the analysis shows benefits far
outweighing additional costs.
^!Carbon dioxide costs depend on the amount and schedule of any
proposed reductions. The modest reduction requirement and relaxed
implementation schedule of S. 843 results in nominal carbon dioxide
reduction costs. As reduction requirements increase and
implementation schedules tighten, costs rise.
^!Mercury control costs are dependent on the timeliness of the data.
The EPA analysis does not reflect current data on costs of Hg
controls.
^!EPA’s benefit analysis is limited and incomplete, which works to the
disadvantage of alternatives to Clear Skies that include more
stringent standards.
Although it represents a step toward understanding the impacts of the legislative
options, EPA's analysis is not as useful as one could hope. The combination of
assumptions used in the analysis works in favor of the various Clear Skies
alternatives by overstating the Hg control costs of the alternatives, and – through its
assumption of constraints on labor availability – heavily penalizing short-term
pollution reduction schedules. In addition, the analysis does not adequately analyze
the effect that natural gas price volatility may have on implementation strategies and
costs. The analysis suffers from being based on 2003 assumptions, both in terms of
natural gas markets and Hg control costs. The result is an analysis that some will
argue is no longer sufficiently up-to-date to contribute substantively to congressional
debate.