Grantee Research Project Results
Final Report: Encouraging Innovation Through Umbrella Permitting
EPA Grant Number: R824562Title: Encouraging Innovation Through Umbrella Permitting
Investigators: Heller, Katherine B. , Gallaher, Michael , Bingham, Tayler
Institution: Research Triangle Institute
EPA Project Officer: Hahn, Intaek
Project Period: October 1, 1995 through September 1, 1997
Project Amount: $239,998
RFA: Incentives and Impediments to Pollution Prevention (1995) RFA Text | Recipients Lists
Research Category: Sustainable and Healthy Communities , Pollution Prevention/Sustainable Development
Objective:
To evaluate the behavioral, technical, economic, and environmental effects of changing from source-specific air permitting approaches to facility-wide or flexible permitting. Source-specific air permitting increases the cost of changing plant operations, including process modifications that result in pollution prevention. Source-specific permitting may also result in incentives that distort firm decisions on pollution control approaches, resulting in inefficient resource use. Because of the uncertainties associated with obtaining approval for permit modifications, source-specific permitting may also discourage firms from making investments in new plant and equipment, including pollution prevention technologies.In their March 1995 position paper, Reinventing Environmental Regulation, President Clinton and Vice President Gore note that " ?Command-and-control' prescriptive regulations can be inflexible [and] can discourage technological innovation that can lower the costs of regulation or achieve environmental benefits beyond compliance." To "promote both lower-cost environmental protection and innovation in pollution control and prevention technology," they include innovative multi-media "one-stop" permitting as one of the recommended 25 High Priority Actions. To examine how environmental permitting could be made less burdensome and more effective, the Environmental Protection Agency instituted a Permits Improvement Team in July 1995. The team recommended, among other improvements, instituting flexible, facility-wide permitting, requiring permit modifications only if facility-wide emissions of a pollutant increase. Their goals included increasing the efficiency of environmental protection, and developing a permitting process that is more certain and understandable, including the establishment of timelines for decisionmaking.
Traditional source-specific permitting requires facilities wishing to modify their plant and equipment, or their plant operations, to obtain permit modifications authorizing the changes. This not only increases the cost of innovation, but also increases the uncertainty about that cost and the timing of the investments. Recent research in investment economics indicates that increased uncertainty in the timing or magnitude of the return on an investment may cause potential investors to postpone the investment and wait for more information. When investments (new capital equipment) or significant changes in operations would make production processes more efficient, postponing them may not only reduce profitability, it may also have undesirable environmental consequences. Thus, a flexible permitting approach that requires permit modifications only if a plant-wide emissions limit (as opposed to a source-specific limit) will be exceeded as a result of a change in equipment or operations not only reduces costs for the firm and the permitting agency, but may encourage pollution prevention.
We employed the following two-pronged research approach to investigate the economic and environmental impacts of replacing source-specific air permitting approaches with flexible, facility-wide environmental permitting:
Case studies. We conducted case studies of flexible permitting programs in Texas and New Jersey, which included a series of indepth interviews with facilities operating under flexible permits and with regulators, to identify impacts of switching to a flexible permitting approach, including both costs and benefits to the firms and to the permitting agencies.
Simulation of firm investment decisions under various permitting structures. Using a linear programming model of a gulf coast oil refinery based on a model developed by the U.S. Department of Energy, we examined plant operations, costs and profits, and willingness to pay for pollution abatement under different permitting structures.
Summary/Accomplishments (Outputs/Outcomes):
In the case studies, the Research Triangle Institute (RTI) contacted permitting agencies in New Jersey and Texas to gather information about their flexible permitting programs, and to obtain a contact for facilities currently operating under flexible permits. While the administrative costs of issuing flexible permits were sometimes high, the programs overall were successful in reducing the costs and uncertainties associated with permit modifications; thus, encouraging firms to make economically and environmentally sound process changes. The flexible permit, which sets emissions limits for a large part of the facility, also encouraged the facilities to examine their operations holistically, seeking ways to reduce emissions from some processes so that they could expand others without exceeding their emissions cap. Interviewees stated that the flexible permit "unleashed a lot of creativity," and changed their compliance focus from achieving limits to reducing emissions.In addition to encouraging pollution prevention, flexible permits give plants operating flexibility, so that they can move production around in the facility or make other changes that do not result in increased plant-wide emissions, without pre-approval from the permitting agency. The fact that they can avoid the pre-approval paperwork means that small changes, "tinkering" as one interviewee put it, may make economic sense. Another advantage mentioned in several interviews was that the flexible permits are written clearly and are easy to comply with. Because the permits give the plants greater operating flexibility, they may enable them to compete more effectively in markets where getting new products to market quickly is critical. Overall, both the permitting agency and the permit holders were satisfied with the program, and felt that for all but small, simple facilities, the additional cost required to obtain a flexible permit was justified by the benefits of operating under it.
RTI demonstrated some of these cost savings and changes in incentives through simulating the operation of a Gulf Coast oil refinery under both source-specific and flexible permits. A linear programming model adapted from the U.S. Department of Energy's Petroleum Market Model was used to examine several different scenarios under both permitting structures. The scenarios included a base run with no pollution controls, and model runs under source-specific and flexible permitting for the plant with and without the Atmospheric Cracking Unit (ACU). In addition, we performed model runs holding output constant at the base run "process-specific" levels, both with and without the ACU. These runs addressed the concern that allowing the output vector to vary freely across the three policies might not be consistent with the actual market structure for a 400,000 barrel/day refinery. Finally, the model was run without the ACU and with outputs fixed at the base case unregulated level.
We examined several effects of different permitting structures. First, we estimated the cost savings to the refinery from operating under a flexible permit. "Costs" were defined as the reduction in profits, comparing regulations under each permitting structure to the unregulated base case. The cost savings ranged from 36 percent in the base-run scenario with the ACU included in the analysis to 72 percent in a scenario that fixed outputs at the base run's process-specific policy output levels. Four of the five scenarios resulted in cost savings in excess of 50 percent.
Next, we examined the willingness to pay (WTP) for pollution abatement under the various operating and permitting scenarios. Willingness to pay was measured as the difference between the profit (for unconstrained output scenarios) or costs (for fixed output scenarios) under the reduced emission rate, and the profit or costs without the emissions rate reduction. As the ACU is a bottleneck and the largest source of emissions, the plant has the greatest WTP for abatement at the ACU under both permitting policies. Because the ACU must achieve its prescribed reductions under the process-specific policy, the WTP for abatement is greatest in that case. When the ACU is removed from analysis, interesting differences in WTP under the two permitting approaches appear. The process at which the plant has the greatest WTP for abatement under the process-specific permitting approach has the least appeal under the flexible approach, and vice versa. This implies that incentives to reduce emissions are being distorted by the permitting structure. Also interesting was the fact that under the process-specific permitting approach, incentives to reduce emissions evaporate as the level of emissions reductions increases, because bottlenecks are created elsewhere in the plant that make it impossible for the firm to benefit from further reductions at the non-bottleneck processes. Under the flexible permits, on the other hand, there is almost always an incentive to further reduce the emissions rate beyond the 60 percent reduction point.
Supplemental Keywords:
air pollution, flexible permitting, facility-wide permitting, innovation, case studies, simulation modeling, linear programming, petroleum industry, Gulf coast, pollution prevention, willingness-to-pay., Scientific Discipline, Sustainable Industry/Business, cleaner production/pollution prevention, Economics, Social Science, behavioral effects, cleaner production, quantitative comparison of environmental performance, facility investment, innovative technology, pollution prevention, umbrella permittingProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.