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Executive Summary #1518 on Energy and Environment

February 21, 2002

Executive Summary: Why the New Source Review Program Needs Reform: A Primeron NSR


The Bush Administration is expected to introduce much-needed reforms of the New Source Review (NSR) program, the federal program that controls air emissions from industrial facilities. The Administration's ability to restructure the program and reform its perverse incentives will determine how rapidly the nation can meet its growing energy needs while controlling air pollution.

NSR was enacted in 1977 under the Clean Air Act to control air pollutants from newly built or reconstructed industrial facilities, including electric utilities, oil refineries, paper mills, and steel mills. The law requires new or reconstructed plants to go through extensive permitting requirements and install top-technological pollution control equipment. Because Congress recognized that applying these regulations to existing plants would be an extreme and unnecessary cost burden, the law was written to hold existing plants to NSR requirements at the time they underwent "major modifications"--defined under NSR as any change resulting in a "significant" increase in air emissions. Activities involving routine maintenance, repair, and replacement within the plant did not fall under the NSR requirements.

Under the Clinton Administration, however, the Environmental Protection Agency (EPA) adopted a new and extreme interpretation of the law, imposing NSR rules on modifications made by existing plants even if the changes actually decrease emissions, improve energy efficiency, or increase the safety of operations. Under this new application, companies would have little incentive to upgrade and modernize their plants or even make routine changes and repairs.

Among the adverse effects of the NSR program are the following:

  • Confusion and complexity. New Source Review was mired in confusion and complexity even before the Clinton Administration expanded its reach. While the initial ruling is only 20 pages long, the EPA has released over 4,000 pages of guidance documents and memos that detail and revise the requirements. In many cases, the newer documents contradict the agency's earlier guidance text, compounding the confusion.
  • Permitting delays and disruption in operations. Facilities now wait one to three years while the EPA and/or states process their applications for construction permits, even though the EPA is required by statute to issue a permit within a year of the application. The new NSR interpretation would increase the number of permit reviews by the thousands for every industry, creating a permanent backlog. In the meantime, plants that need even the most basic repairs could shut down or suffer disruptions, with productivity and revenue losses rippling across industries that depend on them.
  • Adverse environmental impact . Such a far-reaching program would have devastating effects on the environment, as modifications that improve energy efficiency and reduce industrial emissions would be delayed or even avoided altogether.
  • Diminished innovation. Industries that otherwise would adopt state-of-the-art technologies to improve the plant's operation and reliability and consume less fuel would delay upgrades to avoid NSR--putting them at a competitive disadvantage in the global market.
  • Threatened energy supply. Utilities could be forced to choose between avoiding modifications that improve operations--risking blackouts and higher costs--or closing a facility for up to three years while the permit is being processed and technology installed. Limited sources of energy could have grave repercussions on the elderly, for example, who face severe health problems should they lose or try to conserve expensive heat in the winter or air conditioning in the summer. Moreover, oil supplies could be jeopardized since modifications to upgrade refineries also would be subject to exhaustive NSR rules. No refineries have been built since the 1970s, and many aging refineries have shut down, placing an enormous burden on remaining refineries to meet growing demands for petroleum.

Restructuring New Source Review.
The Bush Administration, working with Congress, should end the perverse NSR incentive structure that discourages efficiency, safety, and environmental improvements in industry. To ensure that facilities do not increase air pollution as they expand or rebuild, the government should require facilities to meet an overall emissions cap after a fixed amount of time, rather than at the time a modification is made. Other market incentives should be introduced over time, such as allowing facilities to trade credits on emissions. Such an incentive-based approach relies on flexibility and accountability, not punitive and costly measures, to promote clean air.

Dana Joel Gattuso is Washington liaison with the Bozeman, Montana-based Political Economy Research Center (PERC) and an adjunct scholar with the Washington, D.C.-based Competitive Enterprise Institute.

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