On Friday of last week, President Obama overruled the stringent new ozone standards proposed by the U.S. Environmental Protection Agency, citing concern about their potentially adverse impact on jobs and overall economic recovery. Just as his predecessor George W. Bush did six years earlier, President Obama rejected the findings of his own Administration's EPA, despite their unanimous recommendation by the agency's independent panel of scientific advisers. In so doing, Obama directed current EPA administrator Lisa Jackson to withdraw the agency's plans for reductions in concentrations of ground-level ozone, the primary component of smog. The stated rationale for this executive decision was to reduce regulatory burdens and uncertainty for businesses at a time of widespread concern about an unsteady economy.

The Obama Administration's initial plan had been to revise the weaker 75 PPM ozone level limits which had been put in place by President George W. Bush over the objections of his Administration's EPA panel of science advisors, who had called for more stringent regulations based on their interpretations of applicable US environmental law.  As recently as July, Obama's EPA advocated overturning that weaker standard, warning that it likely would not survive a legal challenge, because of its failure to satisfy the agency's panel of scientific advisors under either administration.

The history of the issue has its roots in the Clean Air Act of 1970 (CAA) and the Clean Air Act Amendments of 1990 (CAAA) as it concerns the health impacts of ground level ozone and the smog it creates. The decision immediately at hand on the appropriate ozone limit stems back to January 2010, when the current EPA under Administrator Jackson proposed to decrease the concentration of ground-level ozone from Bush Administration levels to somewhere between 60-70 parts per billion. In March of this year, agency advisors, citing "sufficiently certain" scientific evidence, again unanimously declared their conviction that this new standard was essential to protect public health.  In the wake of its decision overruling the EPA last week, the White House defended its decisions, stating that the science behind the new ozone limit itself needs to be updated, and that a new limit will be issued in 2013 based on the most current scientific evidence.

While Friday's decision represents dodging or at least delaying a costly and far-reaching new set of emissions reduction requirements, it will not fundamentally affect most elements of the Cross-State Air Pollution Reduction (CSAPR) rule, which was finalized this summer and goes into effect four months from now in January, 2012. CSAPR's the state-specific caps, unit-specific allowance allocations, associated NOx and SO2 reductions, allowance forfeiture provisions and penalties for non-compliance will all remain in place. These elements were described last month in my blog of August 11.  The NAQQS decision however, does affect key components of the CAA of 1970 and the 1990 CAAA, and in so doing also does has some implications for CSAPR.  Specifically:

• Counties across the country that were expecting CSAPR to re-designate their attainment status will now be in limbo until the new ground level ozone limit is set in 2013;
• Questions about additional new or expanded facilities triggering NSR will accordingly be on hold with the future requirements unknown;
• Strategic repowering and/or retooling to comply with the CSAPR may not trigger NSR requirements that would have been triggered under the revised ozone standards; and
• More stringent and costly emissions reduction and offset provisions under CSAPR initially planned for 2014will be on hold until the Administration signals its intent on the rule.
  

In response expected concern and/or litigation from environmental interests and NGOs, the Obama administration is already positioning CSAPR -- since it is a final rule and will accomplish substantial emissions decreases with or without new Ozone standards -- as accomplishing much of the air quality and health improvements for which the tightened NAQQS ozone standards were intended.

As a final observation, I should point out that the NAAQS decision announced Friday is not having any observable affect on allowance price behavior for the affected CSAPR markets. As a recovering economist, I firmly believe that market behavior trumps analysis.  As of this morning, NOx and SO2 markets for CASPR SO2 are trading around $2,500 per ton; and NOx Seasonal and annual are around the $3,750 level. This market behavior consistent with what our customers have been telling me in recent weeks -- that they expect average NOx allowance prices to be at least three times higher than EPA's initial projections when CSAPR was finalized just two months ago. So while Friday's decision on NAAQs may ameliorate or at least stave off the huge capital investments required by a reduction from 75 PPM to 70 or 65 PPM, it does not remove the incentive for finding the quickest, most cost-effective means for achieving the near-term emissions reductions still required as of January 1 for CSAPR.

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