Staying ahead of the feds: EPA proposes cap-and-trade to cut back on mercury emissions, but many states think they have a quicker. better solution.

"By making mercury emissions a tradable commodity, the system provides a strong motivation for some utilities to make early emission reductions and for continuous improvements in control technologies."

U.S. ENVIRONMENTAL PROTECTION AGENCY, MARCH 15, 2005.

"This rule inappropriately allows trading of mercury, which is a powerful neurotoxin, rather than requiring state-of-the-art control at each facility."

NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION, MARCH 15, 2005.

Mercury is the lastest, and most contentious, pollutant in the struggle between states and the federal government's environmental policy.

The Environmental Protection Agency announced its long-awaited mercury reduction rule in March, after Congress failed to act on the Bush administration's Clear Skies initiative. The rule is designed to reduce mercury emissions from coal-fired power plants by 70 percent over the next 13 years.

It is "the first time the United States has regulated mercury emissions from power plants," according to EPA Administrator Steve Johnson. "In so doing, we become the first nation in the world to address this remaining source of mercury pollution."

Mercury is a toxic substance that falls from the sky through precipitation into lakes and streams and penetrates fish tissue. People are exposed to unhealthy mercury levels primarily by eating contaminated fish. Pregnant women are most in jeopardy because a developing fetus can sustain neurological damage when a mother eats fish with high levels of mercury.

Coal-fired power plants are the largest man-made American source of mercury emissions released into the atmosphere. On a global scale, however, U.S. power plants account for only 1 percent of total mercury emissions, with all domestic sources responsible for 3 percent of emissions.

The EPA rule aims to reduce mercury emissions from coal-fired power plants by 20 percent by 2010 (from 48 tons to 38 tons), and by 70 percent by 2018 (from 48 tons to 15 tons). The first reduction would be achieved without addressing mercury directly, but through "co-benefit" reductions that accompany cuts in sulfur dioxide and nitrogen oxides under EPA's Clean Air Interstate Rule. EPA proposes to achieve the second level of reductions through a cap-and-trade program.

How will it work? EPA will grant each coal-fired power plant a certain number of emission allowances. A power plant will have to hold one allowance for each ounce of mercury released during the year. Power plants that reduce emissions below allowable levels (meaning they have more allowances than actual emissions) can sell their unused allowances to other power plants that cannot reduce emissions in as efficient a manner. As the emissions cap declines, so do the number of allowances until the reduction goal is reached.

EPA has assigned each state with a coal-fired power plant a mercury emissions budget, and has required them to submit plans on how they propose to keep emissions within their budgets. States may adopt EPA's cap-and-trade program or propose to reduce emissions by some other means (technological controls on smokestacks, for example). This is a critical point for states that want the flexibility to consider other ways to control the pollution that may even achieve greater reductions quicker.

POINTS OF CONTENTION

Considering policies that are more stringent than federal rules resonates with states that believe trading programs create localized "hot spots" when power plants purchase pollution allowances in lieu of reducing emissions themselves. Ten states have sued EPA over the cap-and-trade program, contending that mercury should be regulated through the application of state-of-the-art pollution control technology rather than through emissions trading.

Maryland Delegate James Hubbard, cosponsor of unsuccessful legislation this year that would have reduced mercury in the air, holds that view. He opposes emissions trading for mercury because of the potential for hot spots. He has "no problem with cap-and-trade under the Clean Air Interstate Rule, but mercury is different," he says. "It's toxic." Hubbard doesn't put much credence in numbers that suggest domestic power plants make up a minuscule percentage of the mercury problem. "That may be the case on average," he says, "but in the Chesapeake Bay, 20 percent to 25 percent of the mercury deposition comes from power plants within a 250-mile radius."

Hubbard says it is essential "that EPA and the states consider site-specific demographics when crafting mercury control strategies."

Connecticut, Massachusetts, New Jersey and Wisconsin have adopted mercury policies designed to achieve greater reductions in a shorter time period (although Wisconsin's rule requires it to conform to EPA's rule once it is finalized). At least eight other states have introduced legislation this year to cut emissions beyond the levels envisioned in EPA's rule (although bills are still alive in only two). Still others are looking at combinations of cap-and-trade and source controls.

SEEKING MIDDLE GROUND

Indiana Senator Beverly Gard, chair of the Senate Energy and Environmental Affairs Committee, wants to balance her state's approach to reducing mercury emissions. She'd like to see more research into mercury control technology and wants answers to which types of technology are "most effective in generating energy in the cleanest and most cost effective way.

"Manufacturing is vital to Indiana's economy," Gard says, "and electricity rates are relatively low." A solution would have to balance protection of public health and the environment with a sustainable economy.

Who will take the lead? Senator Gard doesn't think it will be the legislature, "at least not for now." She says lawmakers "normally let the rule-making process proceed with the Air Pollution Control Board, then decide whether to step in." Gard knows the Department of Environmental Management has been mapping potential hot spots, and she envisions "perhaps a combination of emissions trading and regulatory controls on a site-specific basis."

One thing she's adamant about: "Indiana must maintain its options to be more stringent than EPA's rules in all program areas if that is what's necessary."

NEW HAMPSHIRE'S APPROACH

New Hampshire--a state with experience in cap-and-trade in other pollutants--isn't so sure it makes sense for curbing mercury emissions.

Its 2002, Clean Power Act cut sulfur dioxide (S[O.sub.2]), nitrogen oxide (N[O.sub.x]), carbon dioxide (C[O.sub.2]) and mercury emissions through a multi-pollutant approach. The act provides incentives to the state's coal-fired power plants to trade and bank reductions, believing that if plants are allowed to choose the most cost-effective ways to reduce emissions, more can be done in the long run.

It set statewide annual emissions caps for S[O.sub.2], N[O.sub.x] and C[O.sub.2] with a deadline at the end of 2006, but held off on mercury pending the EPA rule and recommendations by the state Department of Environmental Services.

Now state lawmakers are working on a bill that sets two mercury emission caps--from 135 pounds to 50 pounds annually beginning July 1, 2009 (a 63 percent reduction), then to 24 pounds per year on July 1, 2013 (for an aggregate 82 percent cut). The reductions are greater and sooner than those proposed by EPA. The bill would also prohibit power plants from using a trading and banking program. Unlike the federal program, New Hampshire electric utilities will have to use technology to achieve the reduction levels.

Why not use cap-and-trade for mercury? Senator Carl Johnson, Senate president pro tern, chair of the Environment and Wildlife Committee, and the bill's sponsor, not to mention a former pitcher in the Boston Braves' organization, points to constituent concerns "about what's coming out of the smokestack.

"Watershed protection is important in New Hampshire," Johnson says, "and trading mercury allowances may lead to hot spots that could affect our fish and wildlife and ultimately the public's health."

Although imposing tough standards on the state's two coal-fired power plants, Johnson respects the companies' concerns about costs and accepted an amendment that set the compliance date back a year to balance environmental and economic considerations. "Public Service of New Hampshire has been a good partner and has been anxious to work with us on environmental issues," he says. To the criticism that his bill could increase electricity rates, he is quick to reply that "the vast majority of New Hampshire's residents have shown a willingness to pay up to $1 more a month in exchange for cleaner air." The bill passed the Senate in April and is now in the House.

COMPLEMENTARY ROLES?

If mercury were not a toxic substance, the state-federal debate over appropriate control strategies would not be so visceral. Ten states (seven are in the East) have taken EPA to court over the new rule. The Eastern states have often suffered from other states' pollution blown in on prevailing westerly winds. But there are likely to be states that will support EPA's efforts, and others will proceed on their own as the court battles drag on.

Ironically under other federal programs--S[O.sub.2] and N[O.sub.x], come to mind--tougher state policies with shorter compliance deadlines may actually help power plants meet federal standards and earn them more allowances to trade with other utilities. The same logic may not apply in the mercury debate, but it illustrates the capacity of states to assume leadership under a national program and complement, or exceed, federal expectations.

STATE MERCURY REDUCTION POLICIES

Connecticut: The Constitution state is the first to reduce mercury emissions through legislation rather than executive agency rule. A bill passed in 2003 requires coal-fired power plants to use the best available control technology to reduce mercury emissions by 90 percent by 2008. If a facility installs and properly maintains the technology and still fails to meet the emissions rate, it can request an alternative emissions rate from the Department of Environmental Protection.

Representative Patricia Widlitz, one of the law's sponsors, says it would not have passed without compromise between the electric utilities and environmental groups. "The stakeholders reached agreement in advance," she says, "and presented the legislature with a workable solution. We were fortunate." Massachusetts: The Office of Environmental Affairs issued regulations in 2004 calling for two phases of mercury reductions--85 percent by 2006, and 95 percent by 2012.

New Jersey: The Department of Environmental Protection issued mercury reduction rules for power plants, iron and steel smelters, and solid waste incinerators in 2004. They require the state's 10 coal-fired power plants to reduce mercury emissions by 90 percent by 2007. The compliance date may be extended until 2012, however, for power plants that achieve significant additional reductions in sulfur dioxide, nitrogen oxides and fine particulate matter.

Wisconsin: The Department of Natural Resources approved a rule in 2004 that places a cap on mercury emissions from major electric utilities starting in 2008. Mercury emissions must be reduced by 40 percent by 2010, and by 75 percent by 2015. As an alternative to compliance with the initial 40 percent reduction level, the department may enter into an agreement with a power plant to achieve greater reductions in other pollutants. The department must conform its rule to EPA's rule, however, once it is finalized.

EPA'S CLEAN AIR INTERSTATE RULE

The Clean Air Interstate Rule (CAIR) was designed to reduce emissions of nitrogen oxides (NOx) and sulfur dioxide (SO2) that contribute to ozone and particulate matter pollution--smog and soot--in 28 Eastern states and the District of Columbia. Excessive NOx emissions can cause a state to violate EPA's fine particulate matter (PM2.5) and ozone standards, with SO2 also contributing to PM2.5 violations.

CAIR assigns states an emissions "budget" (an allowable level of pollution) and enables them to meet their budgets through participation in an EPA-administered cap-and-trade program or whatever state program they wish to use. CAIR requires that NOx emissions be reduced by 52 percent in 2009 over 2003 levels, and 61 percent by 2015 within the CAIR region. SO2 emissions need to drop by 44 percent by 2010, and by 56 percent five years later.