Costs of alternative policies for the control of nitrogen dioxide in Baltimore

JOURNAL

OF ENVIRONMENTAL

ECONOMICS

AND

MANAGEMENT

13, 189-197 (1986)

Costs of Alternative Policies for the Control of Nitrogen Dioxide in Baltimore’ ALAN J. KRUPNICK Resources for the Future, 1616 P Street, NW, Washington, D. C. 20036

Received March 7,1983; revised June 14,1985

The costs of meeting alternative one-hour nitrogen dioxide standards in Baltimore are simulated for alternative pollution control policies applied to the 200 point sources with the largest emissions and compared to a similar study for the Chicago area. The least-cost (spatially differentiated) policy is found to be quite closely approximated by an effluent fee varying only by source type and a policy that combines features of a regulatory and an economic-incentive policy. The uniform fee (or its market permit analogue) results in relatively high costs because of severe overcontrol. 0 1986 Academic Press. Inc.

A perusal of recent simulations on the abatement costs to industry for meeting a regional air quality standard under alternative pollution control policies* suggests that no one strategy (outside of the least-cost strategy) d o m inates all others. The pollutant being regulated, meteorological conditions, and the type and spatial configuration of e m ission sources affect the relative cost-effectivenessand even the ranking of various policies. If this reading reflects the true state of affairs, there is cause for serious concern. W ithout the benefit of generalizations drawn from theory or e m p irical research,economists may have little to offer policy makers interested in designing and implementing policy, except the uncomfortable notion that each case is unique. However, it is too soon to abandon hopes of generalization. The population of simulation studies is small but growing and, taken as a group, they may yet yield useful e m p irically based generalizations. To broaden the information base on which generalizations may one day be made, the present study focuses on the effects of alternative policies for the control of m a jor point sources of NO, in the Baltimore Air Quality Control Region (AQCR). It uses the same approach and computer software as the Se&in study [15] of NO, control in Chicago except that the effects of an additional control strategy and alternative a m b ient standards are examined. F ive policies ranging from a least-cost to a command and control system are m o d e led. EPA’s AIRMOD system, which has recently been applied to the Chicago area (Cristofaro [5]; Se&in [15]), is used to simulate stationary source compliance costs for meeting alternative, hypothetical short-term (one-hour) a m b ient NO,

‘The author’s research was supported by the Appalachian Regional Commission through the Department of Economic and Community Development, State of Maryland, and a grant from the Sloan Foundation. Thanks are due to Eric Van De Verg, Padraic Fmcht, and Walter Spofford for reviewing various drafts of this paper and to the anonymous reviewers. ‘See Atkinson and Lewis [2], Hahn [7], Hahn and No11 [8], O ’Neil et al. [13], Cristofaro [5], Atkinson and Tietenberg [3], Se&in et al. [15], as well as Spofford [16]. 189 0095~0696/86 $3.00 Copyright 0 1986 by Academic Press. Inc. All rights of reproduction in any form resewed

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standards.3 Such a standard does not yet exist, although at the inception of this study promulgation of such a standard (in the 250-1000 ug/m3 range) appeared likely. Indeed, controversy continues over the appropriateness of an annual standard in light of evidence suggesting that health effects arise primarily from peak exposures (Coffin [4]). The AIRMOD

System

A system of computer models-called AIRMOD-was used to simulate the operation of alternative NO, control policies.4 AIRMOD uses the RAM air diffusion model (Anderson [l]; Novak and Turner [12]), modified to consider the atmospheric conversion of NO, to NO,, to combine emission inventory and meteorological data and calculate “transfer coefficients” (Tij) which link a unit of emissions at a source to NO, concentrations at a maximum of 404 receptor points.5 An integer programming algorithm, developed by Energy and Environmental Analysis, Inc. [6], uses discrete abatement cost functions of up to five different technologies for nine types of emissions sources6 and the transfer coefficients to find the least-cost configuration of control technologies to meet a specified ambient standard. The cost of reducing a unit of NO, concentration at each receptor site for each level of control is calculated for each source. Starting from no control, the sources with the lowest marginal cost per unit of concentration reduction are assigned the initial control level. Firms with higher costs, corresponding to more stringent control, are chosen in turn until the ambient standard is met at each receptor point. If the most stringent controls are applied and some receptors are still in violation of the standards, the problem is termed infeasible. Data The 1980 Maryland Emission Inventory (MDI) was used to choose the 200 major sources of NO, emissions (greater than 100 lb per day) for which data on emissions, stack parameters, and fuel use were complete. These sources account for about 80% of Baltimore’s point source NO, emissions. Table I identifies the distribution of emissions in this sample by source type and by county, along with the three largest sources, which together account for 82% of NO, emissions from the major sources.’ Source types were derived from SIC codes, type of fuel burned, and other information available on the MDI. All sources of a given type are assigned by AIRMOD identical compliance costs per BTU of fuel input to control a percentage of total NO, emissions. In line with Maryland air pollution control agency practice, all sources are assumed to be currently uncontrolled because the Baltimore AQCR is in attainment for annual NO,. Sources are located on a grid 7500 ft on a side. 3The current NO, standard is an annual average of 100 ug/ms. 4See Pechan [14] for a complete description of AIRMOD. ‘Receptor points represent estimated points of maximum concentration. To capture plume overlaps, receptors are also located at twice the distance to the point of maximum concentration from each source. ‘See Anderson er al. [I] and Table I, bottom, for a description ‘See the author for an analysis indicating that a reasonable distribution plan for marketable permits could mitigate possible monopoly problems.

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POLICIES FOR NO, CONTROL

TABLE I of Baseline (Uncontrolled) NO, Emissions by Source Type, Major Source, and County

Distribution

MD1 number 1 2 3 4 5 6 I 8 9

2 3 6 12 13 24

Source type Utility-coal Utility-oil and gas Industrial boiler (coal) Industrial boiler (oil and gas) Utility-gas turbine Internal combustion engine Industrial process unit Nitric acid plants Municipal incinerators

WWW

Percent

188.8 990.6 0 426.2 12.0 0 308.9 0 17.6

9.4 49.4 0 21.3 3.6 0 15.4 0 0.9

Total

2004.1

100.0

Major Sources Baltimore Gas and Electric Bethlehem Steel Glidden-Hawkins

1251.4 243.5 155.5

62.4 12.2 1.2

Total

1639.4

81.8

501.2 153.4 84.9 46.5 4.7 607.3

25.3 31.6 4.2 2.3 0.2 30.3

2004.1

100.0

County Anne Arundel Baltimore County” Carroll Harford Howard Baltimore City Total

-

“Not including Baltimore City.

Four worst case sets of hourly meteorological data for temperature, wind speed, and wind direction were developed from data collected between 1964 and 1968 at Baltimore-Washington International Airport and provided by the National Climatic Center. Morning and afternoon mixing height observations were obtained at Dulles International Airport. The RAM model calculated stability classes from the above data. Using these data and the emissions inventory, worst case concentrations at each receptor for the no control case were simulated. Early morning, winter days with low wind speed and high stability yielded the highest concentrations. Policies

Five types of air pollution control policies are simulated. The least-cost scenario represents the outcomes of an ambient marketable permit policy.* A policy where *Ambient marketable permits would be issued to sources in terms of decrements of pollutant concentrations at specific sites and are allocated to each receptor point in an amount equal to the ambient standard. Polluting firms would be required to hold a portfolio of concentration permits, one permit for each receptor point affected by their emissions and in violation of the standards. A market for

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emissions trading is restricted to sources of the same type (regardless of location) is also analyzed. At the level of detail and sophistication of this analysis, this policy is identical to an effluent charge policy with charges differentiated by source type (type-specific fee). Although this policy is incentive-based, in that every source in a given category faces the same fee, it is similar to the technology-based SIP process where sources of a given type all apply a given abatement technology. In addition, a policy of charging a uniform effluent fee to sources irrespective of their source type or location is analyzed. Next, a command and control policy is represented by two alternative sets of technology standards, termed RACT I (Reasonably Available Control Technology) and RACT II. RACT I is the set of abatement options used by Seskin [15] while RACT II may be termed an “enlightened” RACT policy in that, for each source type, technologies with marginal costs just below the point of sharply increasing costs were chosen. Finally, a hybrid approach--CT/Least-Cost is also examined. This RACT/Least-Cost option combines features of incentive-based and command and control policies. For this analysis, RACT I is applied to all plants in the simulation and then, if the NAAQS are not met, market incentives are used to induce further emissions reductions. The contemporary analogue to this case is the Clean Air Act requirement that the Lowest Achievable Emission Rate (LAER) be met by new sources locating in a nonattainment area and that offsets are to be purchased from existing sources for any emissions remaining after LAER is applied. With well functioning offset (i.e., emission reduction credit) markets, such trades could approximate the “Least-Cost” portion of RACT/Least-Cost. Results Annual compliance costs, charges, emission reductions, air quality information, and number of sources controlled are presented for simulations related to point source control strategies for meeting alternative one-hour NO, standards of 250, 375, and 500 ug/m3 (assuming mobile and area sources have zero emissions). This range is a reasonable one for study because, on the one hand, simulations reveal very high hourly readings at several receptor sites (700400 ug/m3) while on the other hand, stationary sources could not meet a standard set tighter than 192 ug/m3, even at the maximum control levels available using AIRMOD cost functions. these permits would be established for each receptor point with firms buying (and perhaps simultaneously selling) permits in many markets at once. It has been shown (Montgomery [ll]) that ambient- and emissions-based marketable permit systems are equivalent for controlling pollutants in regions characterized as a “mixing bowl.” This term means that a unit of emissions affects air quality equally irrespective of the location of the source or the receptor site measuring concentrations. In contrast, the ambient permit system is superior to the emissions permit system where the location of sources and receptor sites matters, because air quality goals cannot, necessarily, be met exactly by the latter system (Krupnick and Oates [9]). Market permit approaches that take into account locations of sources and receptor sites are termed “spatially differentiated” systems. An emission reduction credit (ERC) system could, in principle, also bring about this regional least-cost outcome (Krupnick et al. [lo]). Note that the elaboration of emission permits into zonal systems [3], and the practical, compromise versions of such systems as they have cropped up at the EPA and in various states, i.e., the “bubble” policy, offsets, and banking as defied in the Emissions Reduction Credit Policy Statement (Federal Register, April 7,1982), are not modeled.

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POLICIES FOR NO, CONTROL TABLE II Scenario Results: Standard (250 ug/m3) Sources controlled Emission reduction Control strategy

o-49 50-99 loo-149 HO-199 200-249 250-399 400-499 500-

lo6 $/year Control costs

lo6 $/year Charges

lo6 $/year Total costs

32

1.663

-

1.663

680.0

34

42 73

1.719 2.200

1.660

841.0 1458.5

14.423

28.833

612.1

34

1.504

1226.1 1009.1

62 51

9.911 5.124

-

Percent

115

51

646.4

115 200

51 100 loo loo loo loo

Regional least-cost (ambient permits) Type-specific fee RACT/Least-Cost Uniform fee RACT I” RACT II RACT III Ambient concentrations Cus/m3)

Percent

Number

200 200 200 200

(g/set)

9.911 5.124

Number of receptors by alternative policiesh Source No Least- category RACT Uniform control cost fee LC fee RACT I’ RACT II 2

111

I 18

68 56

78 64

2 8 23 76 60

2

15

11

110 40

28 107 21

3

1

104 55

10

3.379 2.200 43.256 1.504

0 0 0

0 0 0

39 63 59 4 4

64 105

RACT III

60

100 8 2

“Note that RACT I and III do not meet the ambient standard. “For computational ease only receptors violating a given standard in the no control case are included in the analysis. ’The percentage emission reductions assumed for each RACT by type of source are Source type Policy RACT I RACT II RACT III

1

2

3

4

5

I

22 40 40

40

20 50 50

15 90 50

60 60

40 50 50

59 59

0

where: 1 = Coal-utility; 2 = Oil and gas-utility; 3 = Coal-boiler; 4 = Oil and gas-boiler; 5 = Gas turbine-utility; 7 = Industrial process boiler.

Table II presents the results of scenarios for meeting an ambient standard of 250 ug/m3 while Table III provides results for standards of 375 and 500 ug/m3. The results can be analyzed either across standards for the same policy scenario or across policy scenarios for the same standard. Focusing on the former analysis, compliance costs rise steeply as the standard is tightened, regardless of the policy simulated. In the least-cost case, costs rise by a factor of 25 (from $66,000 to $1.633 m illion per year) when standards are halved (from 500 to 250 ug/m3). This dramatic cost increase results from the necessity of using high level, expensive treatment techniques to meet the more stringent standard. Uncontrolled emissions are reduced by 32% for a standard of 250 us/m3 compared to only a 6% reduction for a 500 ug/m3 standard.

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TABLE III Scenario Results: Standard (375 ug/ms)

Control strategy (1) (2) (3) (4)

Least-cost Type-specific fee RACT least-cost Uniform fee

Ambient concentrations

Sources controlled

Emission reductions

Number

Percent

(g/set)

Percent

$106/year Control costs

71 71 200 196

35 35 99 97

2324 232.4 485.2 963.6

11.6 11.6 24.9 48.1

0.367 0.367 1.185 1.927

Number of receptors by alternative policies” Type-specific fee No control Least-cost

o-99 loo-199 200-299 300-374 3755

Control strategy Least-cost Type-specific fee RACT/Least-cost Uniform fee

Ambient concentrations o-99 loo-199 200-299 300-399 400-499 500-

57 136 68 39

144 84 24 48

57 136 68 39

Scenario results: Standard (500 ug/m3) Sources controlled Emission reduction $106/year Number Percent (g/set) Percent Control costs 10 10 200 69

5 5 100 35

115.8 115.8 721.8 411.6

6 6 36 21

0.066 0.066 1.521 0.224

Number of receptors by alternative policies Type-specific fee No control Least-cost

5 5

5 5

$106/year Charges

$106/year Total costs

11.399

0.367 0.738 1.185 13.326

RACT/LC

Uniform fee

0.371

89 126 75 10

167 132 1 0

$106/year Charges

$106/year Total costs

1.581

0.066 0.230 1.521 1.805

RACT/LC

Uniform fee

0.164

4 4 2

2 4 4

10

“300 receptors only. ‘10 receptors only.

Costs for the RACT/Least-Cost case show only a small increase as standards are tightened because firms forced to adopt RACT have been left little room for further opportunities for cost reduction. The uniform fee policy (or, its equivalent, a single market for trading emission permits) shows the greatest cost increase in response to a tighter standard. In terms of firm participation in any system, more sources adopt controls as the standards are tightened under any of the incentive systems. But, under the least-cost and type-specific fee systems, many high cost sources are left uncontrolled because standards can be met by relying only on lower cost sources. In the introduction, the possibility of rank order changes in the cost-effectiveness of alternative policies was raised. Comparing policy costs across the three ambient standard cases reveals that the rank order of the policies-first, least-cost, followed

POLICIES FOR NO, CONTROL

195

by type-specific fee, RACT/Least-Cost, and uniform charge-is preserved, except that the RACT/Least-Cost policy is more costly than the uniform charge in attaining the 500 ug/m3 standard. This turnabout occurs because the control required of all sources under RACT/Least-Cost is more stringent than the controls applied in response to the low emission charge levied to attain this weak standard. In addition, for the 375 and 500 ug/m3 cases, the pattern of controls that results from a type-specific policy is identical to the least-cost pattern. Focusing now on the policies to meet a 250 ug/m3 standard, the most revealing comparison is between the least-cost approach and a technology-based approach stringent enough to meet the ambient standards. Compliance costs are 83% lower for the least-cost approach, and the emissions reductions are only 52% of those required by RACT II. The least-cost simulation outperforms RACT II because the former approach takes advantage of cost, location, and stack parameter differences among sources to distribute the clean-up cost burden efficiently. Nevertheless, the greater emission reductions for RACT II translate to better overall air quality. However, if the goal is to attain the 250 ug/m3 standard, rather than to improve overall air quality as much as possible within the framework described above, the air quality improvement can be regarded as “excessive.” In addition, if air quality equal to that arising from RACT II is desired, a locationally sensitive economic incentive policy is likely to attain it more cheaply than a technology-based policy. Control costs for the type-specific fee policy (or its market permit analogue, which would allow emissions trading among sources of the same source type) are almost as low as those of the least-cost system. This finding is surprising because observation of NO, isopleth maps of the Chicago area created by the RAM model [5] reveals that the location of emission sources is an important determinant of NO, concentrations at receptor sites. Because source location is also likely to be important for Baltimore, the narrow cost difference found in our simulations between the type-specific fee and the least-cost approach implies that sources in Baltimore are arrayed in such a way that the fee can account for location effects by accounting only for source type. For policy, this conclusion means that if sources of the same type were permitted to trade emissions with one another, at a one-for-one trading ratio, or to engage in a “bubble” without regard to their location, the cost-savings would likely be close to the optimum attained by more complicated, spatially differentiated fee or ambient permit systems. However, the redundant effect of source location and treatment cost differences across source types on the optimal allocation of abatement activity is probably fortuitous. Seskin (see below) finds a much larger cost differential between the least-cost and the type-specific fee policy. RACT/Least-Cost actually outperforms the type-specific fee policy on the criterion of total costs, even though the former policy’s abatement costs are somewhat larger. The fee payment exceeds the efficiency gain obtained with fees. Still, because abatement beyond RACT can be attained through emission reductions using the least costly technologies, RACT/Least-Cost is far cheaper than RACT II or the uniform fee. Finally, RACT/Least-Cost results in emission reductions intermediate to the least-cost and type-specific policies on the one hand and the uniform fee and RACT II policies on the other. The combination of moderate costs, moderate emission reductions, and a design much like the predominant command and control system make the RACT/Least-Cost policy particularly attractive. The most poorly performing incentive system is the uniform fee (or single market emission permit system). In order to impose the same fee on every source, the fee

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must be set high enough to bring the concentration at the worst receptor site to the ambient standard without regard to the location of emission sources. The resulting overcontrol results in excessive compliance costs and excessive air quality improvement. In fact, emission reductions and costs are even greater with the uniform fee than with the technology-based system that meets ambient standards (RACT II). This result points out the danger of applying an ill-conceived incentive approach. Because the location of sources is likely to be important in determining NO, concentrations, incentive systems that force treatment levels to be high enough at each source to meet standards at the worst receptor are likely to lead to excessive costs (except in fortuitous cases, as in the type-specific policy discussed above). The cost savings of a least-cost policy over any other policy will, in general, be larger for weaker standards. The least-cost policies, by definition, allow regions the greatest flexibility in meeting the standard. Uniform fees and technology-based standards force controls on all sources even though weaker standards would, in general, imply that fewer receptor sites would need reductions in their concentrations to meet the standard. Consider the results for the 500 ug/m3 standard. Another RACT set of technologies required to meet the standard (termed RACT III) will cause firms to incur $5.124 million in abatement costs. But, abatement costs for the least-cost policy are only $66,000, a difference of 98.7%. The disparity is large because the technology-based standards require the same emission percentage reduction from each source of a given type. The least-cost policy, which allows controls to be placed on just one or two firms if that is all the control that is necessary to attain the ambient standard at 375 ug/m3, will save 96% over the RACT policy. At 250 ug/m3, the least-cost policy saves 83%. At 192 ug/m3, the two policies would have identical control costs, as that standard is tight enough to require each source to operate at its highest feasible level of emissions removal. In such a situation, the least-cost approach has no advantage in allocating abatement activity to firms with low control costs. Summary and Comparison with Seskin et al. [15] In general, we find that the efficiency of the least-cost policy can be quite closely approximated by several theoretically less satisfying but operationally easier policies (type-specific fee and RACT/Least-Cost). However, a uniform fee, because it fails to account for the effect of source location (or in this case, its proxy-source type) on concentrations, is decidedly less attractive than the other incentive-based policies. Comparison with Se&in’s results is problematical. Se&in’s 250 ug/m3 standard is more stringent than the identical (and most stringent) standard simulated in this study because area and mobile sources are assumed to contribute uncontrollable concentrations to the region in the Se&in study but are assumed to be zero in this one. Nevertheless, comparisons can still be made between the relative costs and emissions reductions estimated in the two studies (Table Iv>. The results of both studies differ in many respects. All of the policies are cheaper relative to the least-cost policy when applied to Baltimore instead of Chicago. In addition, the type-specific fee performs much more like the least-cost policy in the Baltimore study. However, it is encouraging to note that, in spite of the differences in meteorology, spatial distribution of emissions, and numbers and types of sources, the studies are in close agreement in terms of their ranking of alternative policies.

197

POLICIES FOR NOa CONTROL TABLE IV Abatement Costs and Percentage Emission Reductions Relative to Those of the Least-Cost Policy: Se&in [15] vs. This Study

Policy Type-specific fee RACT/Least-Cost Command and control Uniform fee

Abatement cost ratio -_____~~ Se&in This study 1.3 14.4

1.04 1.3 6.0

33.9

8.7

Percentage emissions reductions ratio Se&in 6.0

This study

1.0

1.1 1.3 1.9

28.0

2.3

For instance, in both cities, the uniform fee gives the greatest emission reductions and, consequently, the best air quality, but is the most costly relative to the least-cost policy. Thus, at least for the types of policies studied and these cities, policy designers are confronted with fairly consistent trade-offs between costs and air quality. REFERENCES 1. R. J. Anderson et a/., “An Analysis of Alternative Policies for Attaining and Maintaining a Short-Term NO, Standard,” MathTech, Inc. for Council on Environmental Quality (1978). 2. S. E. Atkinson and D. H. Lewis, A cost-effectiveness analysis of alternative air quality control strategies, J. Enuiron. Econ. Manage., 1, 237-250 (1974). 3. S. E. Atkinson and T. Tietenberg, The empirical properties of two classes of designs for transferable discharge permit markets, J. Environ. Econ. Manage. 9, 101-121 (1982). 4. D. L. Coffin er al., Time-dose response for nitrogen dioxide exposure in an infectivity model system, Environ. Health Perspect. 13, 11-15 (1976). 5. A. Cristofaro, “An Analysis of Market Incentives to Control Stationary Source NO, Emissions. U.S. Environmental Protection Agency and Council on Environmental Quality, draft (1980). 6. Energy and Environmental Analysis, Inc., “Analytical Procedures to Estimate Pollution Control Costs and to Stimulate Markets in Emission and Air Quality Offsets in Non-Attainment Areas,” for the U.S. Environmental Protection Agency, draft (1979). 7. R. W. Hahn, “An Assessment of the Viability of Marketable Permits,” Ph.D. dissertation, California Institute of Technology (1981). 8. R. W. Hahn and R. Noll, “Designing a Market for Tradable Emissions Permits,” unpublished paper, California Institute of Technology (1981). 9. A. J. Krupnick and W. E. Oates, “On the Design of A Market for Air Pollution Permits: The Spatial Problem,” draft (1981). 10. A. J. Krupnick, W. E. Oates, and E. Van De Verg, On the design of a market for air pollution permits: The case for a system of pollution offsets, J. Environ. Econ. Manage. 10, 233-247 (1983). 11. W. D. Montgomery, Markets in licenses and efficient pollution control programs, J. Econ Theory 5, 395-418 (1972). 12. J. H. Novak and D. B. Turner, An efficient gaussian-plume multiple-source air quality algorithm, J. Air Pollur. Control Assoc. 26 (1976). 13. W. O’Neil, M. David, C. Moore, and E. Joeres, Transferable discharge permits and economic efficiency: The fox river, J. Environ. Econ. Manage. 10, 346-355 (1983). 14. E. Pechan, “A Users Manual for the AIRMOD System,” for the U.S. Environmental Protection Agency, draft (1980). 15. E. P. Seskin, R. J. Anderson, Jr. and R. 0. Reid, An empirical analysis of economic strategies for controlling air pollution, J. Enuiron. Econ. Manage. 10, 112-124 (1983). 16. W. Spofford, “Efficiency Properties of Alternative Source Control Policies for Meeting Ambient Air Quality Standards: An Empirical Application to the Lower Delaware Valley,” Resources for the Future Discussion Paper D118 (1984).