Stakeholder Analysis &Market Based Clean Air

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Stakeholder Analysis &Market Based Clean Air

Clean Air

Stakeholder Analysis &Market Based Clean Air

The purpose of this report is to present a stakeholder analysis regarding current clean air initiatives in the Houston-Galveston eight county region. It is not an exhaustive report on clean air initiatives, but rather, an overview of policies affecting diesel engines and industries emitting nitrogen oxide (NOx) and particulate matter. This report will discuss the following: 1) Health, social, and economic costs due to NOx, ozone, and PM emissions and 2) Current and potential market-based air pollution policies. The above-mentioned points will be discussed in the context of several stakeholders in the region including the Environmental Protection Agency (EPA), the Texas Natural Resource Conservation Commission (TNRCC), the City of Houston, regional industries, and individual consumers.

The Houston-Galveston region, comprised of eight counties, is currently in non-attainment for ozone under the Clean Air Act (CAA). Because of EPA rules, the area is required to reach attainment in ozone levels by November 15, 2007. However, several challenges prevent the area from reaching attainment status. To comply with federal standards, the TNRCC has developed a State Implementation Plan (SIP) with the intent of lowering NOx emissions sufficiently to comply with the 1 hour ozone standard. NOx emissions must be lowered because they are a precursor to ozone formation when exposed to sunlight and high air temperatures. To deal with this problem, the City of Houston has its own emissions reduction plan to reduce NOx, and therefore reduce ground-level ozone. In its attempts to reduce these pollutants, the City also expects to lower fine particle emissions to ensure compliance with the proposed PM2.5 standard being pressed by the EPA. PM2.5 particles are extremely small dust and soot particles that present serious public health risks. This new standard will come into full effect during the next decade.

In the Houston-Galveston region, the two main sources of NOx and particulates are the ship channel industries and diesel engines. The SIP requires significant reductions from these two sources in the Houston area for the state to be in compliance with ozone standards. The EPA and TNRCC regulate these pollutants to improve public health and increase quality of life in the region. However, such regulation affects not only government budgets and industry bottom lines but also individual consumers. Indeed, current SIP guidelines will have a significant economic impact on regional income and economic growth.

The following analysis will focus on current policy and business positions relating to NOx and PM in the Houston-Galveston region. In doing so, it also highlights the City of Houston’s clean air leadership role in the region and its focus on research and technologies. The report will show that that all stakeholders in the Houston-Galveston region will benefit from the City’s research and technology efforts. The report will also offer opposing viewpoints to status-quo perspectives and recommend that future clean air programs be more purely market based, to more efficiently allocate pollution costs. The most effective and simple of these market based programs is a flexible cap and trade program that can be applied to both relevant pollutants. The City should also push to become an active participant in municipality allowance trading. By eliminating costly command and control measures, pollution will be reduced at lower costs to businesses and consumers. Any pollution reduction program will be costly and there is no panacea in clean air initiatives, but there are several market-based instruments that would be more efficient at tackling air pollution in the Houston-Galveston region.

Stakeholder Analysis & Market-Based Clean Air

The twentieth century brought new perspectives on air pollution, breeding new government regulation and also a new sense of corporate and individual responsibility. These new approaches accompanied a birth of new technologies in every field of study, including influential changes in manufacturing, services, transportation, and energy production. While growth in these sectors of the economy has brought considerable standard of living increases, they have not come without cost. According to classical economic theory, the free flowing markets that create such industry growth maximize society’s “utility.” This massive exchange of goods and services gives rise to a common good for the general public. However, such free enterprise is also prone to market failure, as is the case with air pollution.

Negative externalities are costs “arising from an economic transaction that falls on a third party and that is not taken into account by those who undertake the transaction.” Pollution is the most obvious form of negative externality. In other words, it is an external cost that society incurs that is not reflected in market transactions. Polluters do not pay for the costs they place on others. Society pays in the form of health, environmental, quality of life, and other costs like property damage or the cost of emission control devices. Most of these costs are past on to consumers by industry, and only part of these costs are offset by business opportunities created to clean up these self-generated problems.

Theoretically, the break-even point of pollution in a society will exist where the marginal benefits obtained from pollution equal the marginal costs of cleaning up the pollution. Although air pollution is never in its own right beneficial, the activities that cause pollution could be considered essential or necessary, like energy or transportation. Externalities like pollution can be placed in economic models as variables, but are problematic in that pollution costs and benefits are difficult to measure quantitatively. These costs are often dispersed to consumers through high health care costs or decreased property values. Hence, fairly distributing negative externalities like pollution is a constant challenge. Economic theory would suggest that there is an equilibrium of costs and benefits that will maximize utility within the pollution context, but society as a whole must determine what this balance is.

When asked whether they are for or against clean air, the public will shout in unison for cleaner air. However, the higher intricacies and complications surrounding clean air often lead the public to rational ignorance. In other words, the general public feels that the cost of acquiring additional air pollution information is greater than the benefits this information generates. Therefore, it is rational for the public to be ignorant on air pollution issues. Also, when governments determine environmental policies, they rely on imperfect information, sometimes stemming from uncertain scientific data. This also makes the public uncertain about air pollution policies. Even with imperfect scientific data, the economic and health costs of air pollution are still visible to the community.

THE COSTS: Relevant Criteria Pollutants

The EPA regulates the emissions of many criteria pollutants: ozone, carbon monoxide, sulfur dioxide, nitrogen oxide (NOx), particulate matter, and lead, to name a few. Among these pollutants, the ones of most interest to the Houston-Galveston region are ozone, NOx, and particulate matter. The region is currently in non-attainment status for ozone and runs the risk of becoming a non-attainment region for particulate matter in the future. The Houston Galveston region is currently in compliance for NOx but needs to reduce these emissions to reduce ozone, since NOx is a precursor to ozone.

When determining environmental policy, the EPA’s primary determinant is health. Therefore, the major studies surrounding criteria pollutants revolve around their effect on public health. The Texas Natural Resource Conservation Commission (TNRCC) is the body that regulates and enforces EPA standards for the Houston-Galveston region. Through the State Implementation Plan (SIP), the TNRCC’s goal is to “improve air quality to a degree that is beneficial” for human health.

Ozone is a reactive form of oxygen that exists in two portions of the atmosphere. When it is naturally occurring in the upper atmosphere, it can be beneficial to society, as it protects life from harmful ultraviolet rays from the sun. When it exists in the troposphere (lower levels of the atmosphere), it is called ground-level ozone. At this level, ozone can also protect people from harmful ultraviolet light, but it nevertheless has several adverse effects.

Ground-level ozone is mainly formed by chemical reactions of nitrogen oxides (NOx) and volatile organic compounds (VOCs) in sunlight. Due to sunlight and meteorological effects, high temperature areas like Houston and Los Angeles are prone to higher ozone levels. Presently, the acceptable EPA one-hour ozone standard is 12 parts per million (ppm), obtained by taking an average of one-hour concentration of ozone. Counties must not exceed this threshold more than three times per year to remain in attainment. In 1997, the EPA established a new standard at a threshold of .08 ppm for an eight-hour standard. This standard will be enforced within the next decade, and like the previous standard, ozone level averages must not exceed the standard more than three times per year to remain in attainment. For regions like Houston-Galveston, currently not in attainment, the EPA and TNRCC concentrate on the previous, less stringent standards first. The new rules will eventually bump non-attainment counties in the US from 106 to 335. The Houston-Galveston area is focusing on meeting current rules first.

Volatile organic compounds (VOCs) are important ingredients in the creation of ozone. VOCs are emitted by industrial sources (petrochemical plants, oil refineries, petroleum storage tanks) and also mobile sources (automobiles, trucks, motorcycles, airplanes, construction equipment). Not all VOCs are ozone forming as close to half of VOCs come from biogenic or natural sources like trees and vegetation. For this reason and because of VOC diversity, industries and environmental regions tend to focus more on NOx reductions to reduce ozone. The Texas Air Quality Study recently suggested that NOx reductions would be the most efficient way to reduce ozone in the Houston-Galveston region. Nonetheless, the region’s SIP requires a 25% reduction in VOCs by November 15, 2007 to meet the ozone standard.

Nitrogen Oxides (NOx) are the most significant ingredient in the formation of ozone. NOx is the term used to represent a “group of highly reactive gases, all of which contain nitrogen and oxygen in various amounts.” The pollutant is formed when fuels are “burned at high temperatures”, of which diesel engines and industry fuels are culpable. Since 1970, the emissions of six principle pollutants have decreased but NOx has increased by 10% in this same period due to economic growth.

Since NOx can be transported long distances, the EPA suggests that emissions be dealt with in a regional rather than a local manner. In the Houston-Galveston area, these emissions are dealt with by eight joint counties. In this region, industrial NOx emissions account for 55% of NOx, while motor vehicles are responsible for 44%. This data contrasts significantly from the national average where NOx primarily comes from motor vehicles (49%), and industrial, commercial, residential, and utilities account for 46% of NOx emissions.

NOx and ozone have several adverse effects on society. The primary concerns surrounding NOx emissions are health concerns (asthma & respiratory). In particular, diesel emissions containing NOx and particulates trigger pre-existing respiratory conditions. Ozone also affects lung tissue sufficiently to reduce lung function, contributing to particle inhalation, which occurs “deeply into sensitive parts of the lungs.” These particles “worsen respiratory disease, such as emphysema and bronchitis, and aggravate existing heart disease.” Moreover, while ozone, in and of itself is not carcinogenic, it can aggravate existing health conditions and lower natural defenses. A recent Sonoma study stated that reducing the NOx emissions in the Houston Galveston region would prevent 45 statistical deaths per year.

Critics of national standards argue that the statistical associations used to determine NOx and ozone health effects are weak. However, the Supreme Court clarified in its decision in American Trucking Associations v. EPA that the Clean Air Act is not required to “prove the biological mechanism.” The court ruled that showing a statistical correlation is sufficient. In other words, the Clean Air Act requires the EPA to act with an adequate margin of safety. Causation is not a requirement and caution is the approach. In a ruling against the National Petrochemical and Refiners Association, the DC Court of Appeals stated that the EPA “must err on the side of caution” in deciding pollution levels. The EPA has the right to set “whatever level it deems necessary and sufficient to protect the public health with an adequate margin of safety, taking into account both the available evidence and the inevitable scientific uncertainties.”

Secondary NOx concerns include its contributions to acid rain, deterioration of water quality, and atmospheric visibility. NOx, when reacting with sulfur dioxide forms acid rain, which deteriorates cars, buildings, trees and historical monuments. Acid rain also makes lakes acidic, killing fish and harming water sources. This is turn deteriorates water quality and affects the ecological balance. Along with these effects, the more conspicuous problem is visibility. Particles in NOx block light transmissions that reduce visibility. The ozone haze tends to depreciate land values and decrease the quality of life. These concerns, although secondary to health issues, are also considered when drafting NOx reduction policies.

Currently, the regional State Implementation Plan (SIP) requires industries to lower their NOx emissions by 90%. Industries have lobbied the TNRCC heavily to reduce their NOx standard to an 80% reduction, with the condition that they would lower VOCs by 80% to meet the ozone standard. Industries offer this alternative as a more economically viable option to reduce ozone, and such a revision to the SIP is being considered. John Wilson, executive director of the Galveston-Houston Association for Smog Prevention (GHASP), disagrees with the industry position: “If the science was there to support this, we would have no issue with it . . .What they’re doing is setting policy and then trying to see if the science fits.” A serious problem is with ozone is how much VOCs need to be cut to reach the standard. Since VOCs have been underrepresented in the past, skeptics abound as to whether future monitoring and compliance will be realized. Industries can no longer blame vegetation for the ozone problem and are recognizing that they are the bulk of the problem. If industries can prove ozone reductions through their proposals, the SIP will be revised. If not, they must comply with the SIP as is.

In the Houston-Galveston region, NOx reductions are the key to removing ozone, even though VOC reductions will also help. Recent flyovers by the Texas Air Quality Study indicate that VOCs stemming from the industrial ship channel have been undercounted for years. The recent VOC data adds to mounting NOx evidence that the Houston ship channel is the greatest source of ozone in the area. On a statewide scale, it would take approximately 18 million automobiles to equal the emission output of the “twelve hundred plus grandfathered manufacturing-petrochemical plants in Texas.” In 1996, the Texas vehicle population was approximately 13,486,865 vehicles. Even if all the vehicles in Texas were removed, the state would not remove emissions equal to those emitted by industry, using 1996 numbers. The grandfather clauses, exceptions in the Clean Air Act allowing industries to ignore EPA regulations, are now defunct. As a result, industries, like those found in the ship channel, must now implement technologies to reduce their NOx and VOCs. Additionally, the ship channel must continually be dealt with because even if industries come into compliance in 2007, this will not entirely eliminate ship emissions. Large freight and oil ships must eventually comply with EPA ship regulations but international ship emissions will still create pollution problems.

The addition of new ozone and PM regulations complicates the region’s implementation plan. The State and the region do not want new regulations until the current rules are met. California and much of the Northeast have more stringent state regulations so they approve of the higher standards. These states feel that the new federal standards would level the playing field, placing all at an equal economic disadvantage. The Houston-Galveston region faces much steeper marginal costs due to upcoming compliance deadlines.

The Houston- Galveston region’s ozone problem is “severe,” as classified by the EPA. The region currently generates approximately 1284 tons per day and to come into compliance, they must reduce NOx by 750 tons per day to reach an attainment level of 289 tons per day. Approximately 0.5 % of NOx emissions in the region come from City of Houston sources, such as city vehicles, construction equipment, and stationary sources like boilers and pumps. Although this is only small percentage of total regional pollution, the City’s intent is to reduce these emissions significantly. The City’s source inventory emits an average of 1584.6 NOx tons per year. In 1999, Mayor Lee Brown, through Executive Order 145, ordered the creation of a city emissions reduction plan. This plan consists of NOx reduction targets for city sources, calling for a 75% NOx reduction, or a 1189 ton reduction to reach 395 tons per year. The emissions plan requires the City and its contractors to use the cleanest technologies available for city projects. In addition, all new vehicles purchased must be low emission vehicles (LEV) or alternate fuel vehicles. The City’s reduction plan has many other elements including: eliminating engine idling, instituting bus pass programs, providing car pool subsidies, and many more. The heart of the plan, however, is in retrofitting the diesel fleet and stationary engines. The Mayor believes that this will have the greatest impact, both in terms of NOx and PM reductions. Through the Emissions Reduction Plan, the City of Houston seeks to become a moral authority and a leader in clean air initiatives and technology usage in the region, the state, and the nation.

The City of Houston Emissions Reduction Plan

The City of Houston Emissions Reduction Plan has been viewed as a model for other municipalities. Mayor Lee Brown has stated that clean air is his number one public policy priority and he hopes to establish the high moral ground in the region by reducing city source emissions. By retrofitting their diesel powered vehicles and equipment, the City hopes to present an example to local construction companies. If the City can meet emissions requirements through technology, then local industries should have little excuse for non-compliance.

Funding city retrofit projects is a continual challenge. For this reason, the State, through Senate Bill 5, created several grant vehicles that could fund Houston fleet retrofits. One of these is the Texas Emission Reduction Plan (TERP). TERP funding is provided for cleaner on and off road engines, research and development. Recently, TERP awarded $501,000 to the City to retrofit 33 off-road construction vehicles. If viable technologies come forth, Senate Bill 5, if further funded by the Texas legislature, will provide additional resources for future retrofits of both public and private diesel-powered equipment.

The 2007 ozone deadline creates several difficulties for the Houston-Galveston eight- county region (TNRCC). The timing is not optimal but the state must maintain a SIP that meets ozone compliance. Currently there is an 87 ton per day NOx shortfall to come into ozone compliance. The area has until next year (2004) to find a way to comply through a mid course review. The State must submit its revisions to the SIP, incorporating new strategies and new technologies. The solution will not magically appear but by researching technologies and speeding up retrofits, the city can potentially add to the NOx tons-per-day reductions.

Industry and the State Implementation Plan

As is the case with pollution reduction strategies, the emissions requirements contained in the SIP come with a cost. Some oil refineries and power plants are concerned about the negative impacts on energy production, believing that future standards may create a disincentive to expand output. The 107th Congress validated this concern as they made it the primary question of their debate in 2001-2002. Petrochemical and Refinery Industries in the region feel that the region must be concerned about keeping their comparative advantages. In addition, the American Trucking Association disagrees with new EPA diesel engine rules that are associated with the SIP. Cummins, a significant diesel engine builder, is also concerned that the technology will not be available to reach the new standards. Despite industry opposition, the EPA insists that there is “overwhelming public support” for these new rules, according to the EPA.

Not all industries in the region are opposed to the State Implementation Plan and new EPA diesel rules. Many industries know they must face inevitable environmental rules and would rather know what specific costs they will face in the future. BP petrochemical plants has expressed that “synergies exist to reduce NOx consistent with new growth.” They do, however, feel that these reductions will only come if operations are efficient and technologies become available.

Some critics of EPA rules argue that government regulation and taxes stemming from NOx and ozone standards decrease quality of life and potentially increase mortality rates due to decreasing disposable incomes. Critics of environmental regulation posture that regulation increases taxes or places undue costs on society. Their link to higher mortality rates is harder to argue but cannot be entirely ignored. Taxes or regulation on businesses creates higher consumer prices and taxes on individuals decrease personal incomes. The people most affected by tax increases are those in lower economic classes, and they often cannot afford health care. Disposable income available for health care is shifted to needs like food, clothing, and shelter. Consequently, absent other variables, higher disposable incomes generate greater public health. The challenge is finding the right balance, or an optimal level of government regulation and taxation.

For the Houston-Galveston region to reach compliance for ozone, several costs must be taken into consideration. Since the EPA has set the rules, the area must comply, or else face more severe economic consequences. The urgency of complying with the SIP translates into real dollars. If the region fails to comply with SIP guidelines, the federal government will withhold federal highway funds. The region’s highway funding is close to $1 billion dollars with a “consistently applied multiplier of 4.” City bond ratings will also be affected by EPA’s decisions on the region’s clean air efforts. These costs of non-compliance will be distributed among the general Houston area population. Not complying with the standard could affect the regional economy indefinitely into the future. Therefore, it appears to be in the best interest of the individual consumer to comply with the EPA ozone standard.

Particulate matter (PM) means small particles suspended in the air. Particulates are not easily identified or classified since they are “exceptionally diverse” consisting of “salts, acids, metals, water, organic compounds, and soot-like material.” The EPA identifies these particulates by size, as either PM10 or PM2.5 (as in 10 or 2.5 microns). Particulate matter is not strictly human provoked, as particles come from volcanoes, dust, pollen, and chemical reactions in the atmosphere. Nevertheless, sulfur in fossil fuels is also a major cause of particulates. Due to this, many particulates come from diesel and gasoline combustion as well as power generation and other industrial processes. Another human source of particulates is generated by the movement of dust through construction activities. As is the case with other criteria pollutants, the EPA sets standards for particulates. The standard for PM10 emissions is 150 micrograms in a 24-hour period, averaged over a three-year period.

Some studies suggest that particulate matter can be detrimental to public health. Epidemiological studies state that PM is linked to such illnesses as asthma, chronic bronchitis, and decreased lung function. Some dangerous particulates lodge themselves deep within the recesses of the lungs causing severe problems. Particulates tend to “remain in the lungs and lymph nodes rather than [be] cleared efficiently from the body.” Those most at risk are the elderly, children, and people with lung and heart disease. These groups constitute forty per-cent of the population. The Clean Air Scientific Advisory Committee of EPA’s Scientific Advisory board has agreed with the EPA that PM is probable human carcinogen. Also adding to the concern, of the 38 epidemiological studies done between 1988 and 1996, most of them found a “significant association between . . . particles in the air and deaths from cardiac and respiratory problems.” Of particular concern are particulates emitted by diesel engines, which “spew out 100 times more sooty particles compared to gasoline engines.” The particulates in diesel engines are extremely toxic, including benzene, arsenic, dioxins, and formaldehyde. These toxics are widely recognized as carcinogenic and their association with cardiopulmonary mortality is increasingly evident.

The EPA currently regulates PM10 emissions but in 1997, the EPA set an additional PM2.5 standard. PM2.5 is extremely small and referred to as ‘fine particle’ pollutants. The source of these particles comes from airborne soot, power plants, and diesel engines. The new standard would limit PM2.5 concentration levels to 65 micrograms in a 24-hour period. These new PM2.5 standards are not yet enforced and state implementation plans for these pollutants are not required until 2008. This new standard would push PM non-attainment counties from 41 to 168. If the Houston-Galveston region maintains its current course, it is sure to be among these new areas of non-attainment.

These new standards have been challenged in court but The Supreme Court has generally upheld the EPA in their decision to implement a stricter standard. Despite opposition to the standards, the EPA has stated that many benefits will result from these new standards, including 1) the prevention of tens of thousands of premature deaths from heart and lung disease, 2) prevention of tens of thousands of hospital admissions and ER visits 3) millions saved from school and work absences and 4) greater visibility. While it is hard to argue with such benefits, critics feel that the EPA’s assumptions and actual studies are flawed, arguing that the studies referred to in the new standards have too many variables. Citizens for a Sound Economy, a Washington DC think tank and advocacy group, stated that the new rules are “too hasty a response” for current knowledge. Like in the case with NOx and ozone pollutants, there is no definite causal link to health problems stemming from particulates. However, the EPA feels that the statistical associations between PM2.5 levels and public health data are sufficient to set the new standards. The government’s position is that uncertainties do not justify inaction when public health is concerned. Future studies will attempt to determine whether the associations between particulates and health problems are consistent.

The more stringent PM2.5 standards and health effects are forcing the Houston-Galveston region to act now. Under the new standards, several counties in the region would certainly be in non-compliance, a challenge the City simply cannot afford. Under the City’s emissions reduction plan, Mayor Brown has asked for a 33% reduction in particulates from city sources. The Mayor’s specific strategy includes such elements as reducing overall city vehicle emissions, improving traffic flow, improving scientific understanding of particulates, and controlling construction site dust more effectively. The most important aspect of the Mayor’s plan is diesel engine retrofits. Although the 33% target is not easily reached, using technologies and low sulfur diesel fuels, it is attainable. The two city efforts that will make this possible are the Diesel Demonstration Project and ultra low sulfur diesel (ULSD). These two ventures could significantly reduce both NOx and particulates from diesel trucks, non-road construction equipment, and also stationary sources.

Since diesel engines are responsible for 15% of the nation’s particulates as well as 20% for NOx, much emphasis is given to diesel retrofitting technology. For this reason, the Diesel Demonstration Project is the heart of the Mayor’s Emissions Reduction Plan (Vic slides). The project consists of a contract with the University of Houston (UofH) to test technologies and retrofit diesel engines. The lab is located at the UofH to provide required testing independence. Its main objective is to seek technologies that will reduce vehicle and equipment NOx emissions by 75%. Initially the project is looking for reductions of 50% or greater in NOx and 25% or greater in PM. The testing uses the most advanced emissions testing equipment available and also relies on in-depth analysis from the chemical engineers at UofH. The contract between the City and the University of Houston has sought to take advantage the university’s academic expertise to reduce emissions. The advantage of the expertise and new lab equipment is that UofH will test vehicles in real load conditions and normal operations. Labs like the one proposed in the Diesel Demonstration Project exist solely in Canada, West Virginia, and San Antonio. Each of these projects is a non-profit or private operation with high testing fees. The Diesel Demonstration Project is the “first program of it kind undertaken by a major municipality.”

The Diesel Demonstration Project was created to find the right technologies and implement them at the lowest cost. In April 2000, the City of Houston received $671,057 from CMAQ for the demonstration project for phase I. Phase I funds were used to test a limited number of vehicles and technologies. To fund phase II of the project will require the City of Houston to pay approximately $3.8 million dollars for UofH professional testing services. This phase will purchase the necessary testing equipment and pay for the start-up costs of the lab. The advantages of this initial capital expenditure are immense. By purchasing the lab equipment and paying for lab start-up costs, the city will receive testing and analysis from the university until 2007. This testing will come at no additional costs and avoids close to $18 million in testing costs with alternative testing labs (745 test vehicles * $4000 minimum test cost * 6 tests per vehicle = $17,880,000).

Only three labs exist in North America that can test diesel emission reductions technologies, and the University of Houston seeks to match their testing capabilities. The lab will test technologies that are both EPA approved and not approved. The lab intends

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