Policy Documents

No. 99 - New Source Review: An Evaluation of EPA’s Reform Recommendations

Joseph L. Bast, Jay Lehr, Ph.D., and James Taylor –
July 10, 2002

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On June 13, 2002, the Environmental Protection Agency released New Source Review: Report to the President, describing the need to reform that part of the Clean Air Act regulating emissions from new or substantially modified factories and power plants. EPA followed the report with seven reform recommendations. We believe these reforms represent progress in bringing one of the nation’s least effective environmental regulations up-to-date.

1. Origins of the controversy

“New Source Review” (NSR) refers to a permitting program whose basic requirements were established in 1977 under Title 1 of the Clean Air Act. According to EPA, the purpose of the program is to ensure that when new sources are built or existing sources undergo major modifications: (1) air quality improves if the change occurs where the air currently does not meet federal air quality standards; and (2) air quality is not significantly degraded where the air currently meets federal standards.”

The NSR program attempts to achieve its mission by requiring best available control technology (BACT) or lowest achievable emissions rate (LAER) technology be installed when new units are built or when major modifications are made to existing plants that would lead to a significant increase in emissions.

Since 1980, EPA has released some 4,000 pages of “guidance” and produced many (often conflicting) letters and several proposals for NSR revision, none of them finalized. Some commentators contend EPA has frequently and substantially changed its enforcement policies without going through the formal (and legally required) rulemaking procedure.

2. What the Report to the President says

EPA’s Report to the President summarizes extensive public comments and previous EPA reviews of NSR enforcement policies, and it summarizes case studies showing how current NSR enforcement policies have had negative effects on businesses, workers, consumers, and the environment. EPA identified three areas where reform is needed:


  • EPA’s uncertain and increasingly narrow interpretation of the “routine maintenance, repair and replacement” exclusion. Consistent with Congress’s intent, EPA until 1999 generally excluded “routine maintenance, repair and replacement” (RMR&R) activities from the NSR permitting process. As early as 1988, though, EPA began to challenge the meaning of “routine,” subjecting or threatening to subject more activities to NSR than before.


The Report to the President concludes that “concern about the scope of the routine maintenance exclusion is having an adverse impact on [utility] projects that affect availability, reliability, efficiency, and safety.” Concerning nonutility companies, EPA says “concern about the scope of the routine maintenance exclusion is having an adverse impact on industries outside the energy sector. It also is credible to conclude that projects have been discouraged that might have been economically and/or environmentally beneficial without increasing actual emissions.”


  • EPA’s substitution of “actual-to-future-potential” for “actual-to-future-actual” in estimating likely changes in emissions. In 1996, EPA changed the way it estimates the effect of facility modifications on emissions for nonutility emitters from “actual-to-future-actual” to “actual-to-future-potential,” which means the decision to apply NSR is determined by the emitter’s “potential to emit” rather than the actual change in emissions likely to occur.


In its Report to the President, EPA concluded “the current NSR program is having an adverse impact on energy efficiency by discouraging projects that may improve energy efficiency, or may increase capacity and reliability without actually increasing pollutant emissions. In some cases it may be discouraging projects that decrease emissions because of the ‘actual-to-potential’ test used for these industries.”


  • Emissions from de-bottlenecking and aggregation. Originally, EPA ruled that only the direct effect on emissions from the unit being modified would be considered in determining whether an NSR permit was required. More recently, EPA has moved to a more expansive definition under which ancillary increases in emissions from unmodified but “de-bottlenecked” units must be included. EPA is also combining separate projects and claiming the aggregate effect on emissions is sufficient to trigger NSR.


3. EPA’s reform recommendations

When it released its Report to the President, EPA also issued seven recommendations for NSR reform. The first four were proposed by the Clinton administration in 1996 but never implemented:


  • Plantwide Applicability Limits (PALs). Regulated emitters would be allowed to modify their plants without obtaining a major NSR permit provided their emissions do not exceed a plantwide cap based on an actual emissions baseline. Such “Plantwide applicability limits” (PALs) would effectively expand the RMR&R exclusion and resolve conflicts over de-bottlenecking.



  • “Clean unit” exclusion. Regulated emitters who achieved federal BACT or LAER control levels or comparable state minor source BACT since 1990 would be entitled to a “clean unit exclusion” from NSR. A clean unit would trigger NSR only if permitted allowable emissions increase.



  • Exclusion for pollution control and prevention projects. Modifications that result in a net overall reduction in air pollutants, including when an emitter switches to a cleaner-burning fuel, would be excluded from NSR, subject to certain conditions. Caps on emissions under the National Ambient Air Quality Standards program and other programs would remain in place.



  • Return to actual-to-future-actual methodology. The “actual-to-future-potential” emissions test would be replaced with the previously used (and still used for utilities) “actual-to-future-actual” test, which is a more realistic calculation of future emissions. Only emission increases caused by a given modification would be considered. The baseline for calculating current actual emissions would be the highest consecutive 24-month period within the immediately preceding 10 years.


Three additional reforms of NSR recommended by EPA would need to go through the formal rulemaking procedure (including public comment) before being implemented. They are:


  • More objective definition of the RMR&R exclusion. EPA proposes to set cost-based thresholds below which projects would automatically qualify for the RMR&R exclusion. The thresholds would be set on an industry-by-industry basis and would exclude costs incurred for installing and maintaining pollution control technology.



  • De-bottlenecking. EPA proposes to clarify that, when calculating actual emissions associated with a modification, emitters generally will need to look only at the unit undergoing the change. Emissions from units “upstream” or “downstream” of the unit being changed would be considered only when the permitted emissions limit of the upstream or downstream unit would be exceeded or increased.



  • Aggregation. EPA proposes to consider modifications to be separate and independent projects unless they are dependent upon another project to be economically or technically viable or the project has been intentionally split from other projects to avoid NSR. EPA says it “generally would defer to the States to implement the Agency’s aggregation rule.”


4. Evaluation of EPA’s recommendations

EPA’s proposals would fix some of the biggest problems encountered by an aging, inefficient, and expensive environmental regulatory program. Replacing the program outright as it affects utilities with the “Clear Skies Initiative,” as also proposed by the Bush administration, would be a further step in the right direction, though judgment must be reserved until legislation for the Initiative is made public.

Case studies summarized in EPA’s Report to the President present clear evidence that NSR needs to be improved. Uncertainty over the scope of the routine maintenance exclusion, for example, is discouraging plant modifications that would improve efficiency of energy and resource use and often benefit the environment. Such projects ought to be outside the scope of NSR.

The NSR policy changes recommended by EPA, if put into practice, would not compromise air quality. We are skeptical that NSR has had a major positive effect on air quality since 1977, so predictions that EPA’s proposed reforms would result in substantial increases in emissions strike us as partisan rhetoric, not analysis. The air quality goals and standards for protecting public health and the environment remain intact, and those aspects of the current program that unintentionally increase emissions by discouraging investments in energy efficiency would be avoided.

The country would be better served if NSR were changed to clarify and make more certain the scope of the routine maintenance exclusion and the method used to measure future emissions. Even better would be a move away from the costly and often counterproductive style of end-of-the-pipe regulation represented by NSR.

5. Conclusion

The failure to apply common sense to the New Source Review program has burdened American consumers and American industry with higher economic costs and higher levels of pollution than were envisioned by Congress when it wrote the Clean Air Act amendments of 1977. It is entirely appropriate, at this time in U.S. history, to re-examine the rules and regulations known to be ineffective or damaging to the manufacturing sector of the country’s economy. EPA’s recommendations and the Bush administration’s “Clear Skies Initiative” are good places to start, but they do not mark the end of the need for reform.

Based on Joseph L. Bast, Jary Lehr, Ph.D., and James Taylor, "New Source Review: An Evaluation of EPA's Reform Recommendations," Heartland Policy Study #99 (Chicago, IL: The Heartland Institute, July 2002). Printed copies of the 24-page study are available from The Heartland Institute for $10 each; the full text is also available on The Heartland Institute's Web site in HTML and Adobe Acrobat PDF formats.


Copyright 2002 The Heartland Institute. Nothing in this Heartland Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of legislation. Permission is granted to reprint or quote from this Executive Summary, provided appropriate credit is given.

Questions? Contact The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000; fax 312/377-5000; email think@heartland.org; Web http://www.heartland.org.