4
Institutional and Regulatory Frameworks

In both the United States and China, air quality management (AQM) developed as a response to health concerns, and typically began with research before progressing to regulatory actions. Today, the United States has an extensive AQM framework which has been successful in addressing serious air quality problems, but still faces challenges such as developing a more integrated, multipollutant approach, as well as an airshed-based approach (NRC, 2004). China’s AQM history is comparatively short, but in recent years, as other state agencies were reduced in size, environmental agencies and organizations have enlarged their mandate. While China is still focusing on strategies to control criteria pollutants (defined below) such as PM10 and SO2, it is at the same time seeking to prevent future pollution, control other criteria pollutants, and help more cities improve air quality to emulate the gains Beijing and a few other key cities have made. The following chapter traces the progression of AQM in each country and explains the roles of current institutions and regulatory frameworks. It will detail the related roles of research institutions and non-governmental organizations (NGOs) and their influence on policy and practice. The chapter concludes with a section on energy policy in the United States and China and its relations to air quality goals.

ORGANIZATION OF AIR QUALITY MANAGEMENT IN THE UNITED STATES AND CHINA

United States

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4 Institutional and Regulatory Frameworks In both the United States and China, air quality management (AQM) devel- oped as a response to health concerns, and typically began with research before progressing to regulatory actions. Today, the United States has an extensive AQM framework which has been successful in addressing serious air quality problems, but still faces challenges such as developing a more integrated, multipollutant approach, as well as an airshed-based approach (NRC, 2004). China’s AQM history is comparatively short, but in recent years, as other state agencies were reduced in size, environmental agencies and organizations have enlarged their mandate. While China is still focusing on strategies to control criteria pollutants (defined below) such as PM10 and SO2, it is at the same time seeking to prevent future pollution, control other criteria pollutants, and help more cities improve air quality to emu- late the gains Beijing and a few other key cities have made. The following chapter traces the progression of AQM in each country and explains the roles of current institutions and regulatory frameworks. It will detail the related roles of research institutions and non-governmental organizations (NGOs) and their influence on policy and practice. The chapter concludes with a section on energy policy in the United States and China and its relations to air quality goals. ORGANIZATION OF AIR QUALITY MANAGEMENT IN THE UNITED STATES AND CHINA United States The U.S. government is comprised of three co-equal and independent branches—the legislative branch, the executive branch, and the judicial branch. 

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 ENERGY FUTURES AND URBAN AIR POLLUTION All three of these branches of government play critical roles in the development and administration of environmental policy. Environmental laws such as the Clean Air Act (CAA) originate in the U.S. Congress. Under the American political sys- tem, only the elected national legislature can impose such broad and far-reaching limitations on economic activity, which could competitively disadvantage particu- lar industrial sectors or regions of the country. The executive branch is responsible for implementing these laws, and develops regulations for this purpose through authority that is delegated from the legislature. The judicial branch performs the role of enforcing laws enacted by the legislative branch, including ensuring that the executive branch acts within its statutory authority. In addition, courts in the United States play a major role as arbiters of disputes between citizens, which sometimes involve liability for environmental damage. In the United States, “judge-made” or “common law” liability rules represent an important forerunner of, and adjunct to, statutory environmental law or regula- tion. In particular, through a private lawsuit based on the common law claim of nuisance, an injured party can either seek payment for property damage, or try to enjoin the activity that is causing harm. Alongside an extensive framework of environmental regulation, nuisance suits are still employed today to address dam- age caused by air or water pollution, especially in situations where government regulation has proven to be inadequate. However, prevailing in a nuisance suit is not easy. Private litigation is costly and time-consuming, and the injured party must generally prove that the defendant engaged in an “unreasonable” activity that “substantially” interfered with the enjoyment of his or her property (Powell, 1992). It may be especially difficult for someone injured by air pollution to show that a particular defendant caused quantifiable harm (Diamond v. General Motors Corp., 1971). This point was driven home in 1969 by a class action lawsuit filed on behalf of seven million residents of the Los Angeles area. The suit named almost 1,300 defendants and simply asked the court to “do something about the air.” Therefore, while the right to use private lawsuits to address environmental damage is a vital principle of American law, government regulation is generally viewed as a more efficient mechanism for protecting public health and the envi- ronment, with the critical advantage that it can be used proactively to prevent harm before it occurs. Prior to 1970, state, county, and municipal governments in the United States undertook most air pollution regulation. Municipal smoke ordinances in the United States date back to the 19th century. State and local efforts to address air pollution intensified in many areas after World War II, in response to rapid growth in industrial activity that occurred during the war and continued afterwards. These state and local efforts are exemplified by those efforts undertaken in Pittsburgh and Los Angeles in the 1950s and 1960s, which are discussed in Chapters 8 and 10. The federal government also began to address air pollution after World War II, but began with a comparatively modest focus on research and technical assistance. The National Air Pollution Control Administration was created within

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS the Department of Health, Education, and Welfare (HEW) in 1955, in response to several air pollution crises that occurred in the previous decade, including a 3-day pollution episode in 1948 in the small town of Donora, Pennsylvania, where pollution from steel mills and stagnant meteorological conditions combined to cause a score of deaths and thousands of illnesses (Davis, 2002). The 1963 CAA 1 required HEW to develop air quality criteria by studying relationships between air pollution levels and health and welfare effects; but these criteria were largely advisory and could be enforced only in cases where pollution directly endangered health or welfare. The 1963 Act also authorized the Secretary of HEW to ask the Justice Department to bring suit against polluters, under specified circumstances. Up until 1970, however, only a single enforcement action was taken (Stewart and Krier, 1978). The federal role in air pollution regulation was gradually strength- ened through the 1960s, culminating with the passage of the CAA amendments of 1970 (see timeline, Figure 4-1). The Enironmental Protection Agency The year 1970 is widely recognized as the watershed year for national envi- ronmental regulation in the United States. In addition to the CAA amendments, the U.S. Environmental Protection Agency (EPA) was established as an indepen- dent agency. The mission of the EPA is to establish and enforce environmental standards across the air, water, and soil media, conduct research on environmental problems and their solutions, and assist the president’s Council on Environmental Quality in developing recommendations for new environmental policy initiatives (Lewis, 1985). The EPA was largely assembled from programs that already existed at other departments, including the National Air Pollution Control Administration at HEW. EPA now has 18,000 employees working nationwide, including 1,245 in the Office of Air and Radiation; these employees focus on national air quality policy (see Figure 4-2). A staff of 605 people in the ten regional offices interacts directly with state air pollution control agencies, to coordinate pollution-control efforts and to enforce federal requirements. When combined with researchers at EPA’s Office of Research and Development (ORD), nearly 4,000 EPA employees work specifically on issues of air quality.2 The 1970 CAA amendments authorized the new EPA to set National Ambi- ent Air Quality Standards and required states to develop and implement plans to meet them. Standards were required to be nationally uniform and to protect public health with an adequate margin of safety. The Act also authorized EPA to set emissions standards for large new stationary sources and for new motor vehicles. The CAA amendments of 1970 established a “cooperative” relationship between states and the federal government, in placing primary responsibility on the states 1Public Law 88-206, 77 Stat, 392 (1963). 2As of November 2006.

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 First efforts at federal legislation; emphasis Major legislation and No major legislation, Renewed focus on air Shifting focus to air toxics; on research to understand the problem; regulations established economic concerns pollution; criteria pollutants states lead movements to severe pollution events in California and dominate policy significantly reduced limit emissions, including CO 2 elsewhere 1960 1973 1995 2006 Motor Vehicle Act Oil embargo creates Lead phased out of California leads requires federal energy crisis for the gasoline; acid rain group of states research to address US, begins period of significantly reduced setting greenhouse pollution focus on energy as S02 emissions gas emissions 1967 1977 efficiency decrease limits 1955 Air Quality Act CAA Air Pollution established; first Amendments Control Act legislation aimed at create New Source established reducing pollution Review (NSR) 1995 Reformulated 1963 1975 gasoline (RFG) Clean Air Act CAFE required for urban (CAA) created standards areas with severe pollution 1970 1990 2003 EPA created; CAA CAA US Senate votes to extended and National Amendments roll back NSR; Ambient Air Quality propose emissions Clear Skies Act Standards (NAAQS) trading introduced to roll established back CAA 1990 FIGURE 4-1 Timeline of air quality regulation trends in the United States. 4-1

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS FIGURE 4-2 Organizational chart of EPA Office of Air and Radiation.

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 ENERGY FUTURES AND URBAN AIR POLLUTION to attain ambient air quality standards that were set by the federal government. However, the Act does not leave implementation to the individual states alone; it also assigns enforcement powers to the federal government. These include both direct enforcement actions against sources that are violating provisions of the CAA, and sanctions against states that fail to attain the standards by established deadlines, or states that fail to comply with other statutory requirements, includ- ing requirements to develop and administer the construction and operating permit programs for stationary sources, enforce permit limits, monitor air quality, and track emissions. State and local governments, environmental groups, and industry associations in the United States commonly use these provisions to seek the review of rules that EPA has developed, and to force the agency to undertake duties that Congress has assigned to it by statute. In addition to being incorporated explicitly into the statute, the CAA’s citizen suit provisions are in keeping with core principles of administrative law in the United States, which in turn trace back to English com- mon law principles of accountability of government officials to damage suits (Breyer and Stewart, 1979). The citizen suit provisions of the CAA augment the federal Administrative Procedure Act (APA) of 1946, which established modern requirements for the interaction between federal courts, regulatory agencies, and the interested public. The APA, which largely codified preexisting judge-made principles of administra- tive law, provides opportunities for the public to participate in the formulation of regulations, requires agencies to establish a reasonable basis for their decisions in the public record, and establishes procedures for judicial review of agencies’ reasoning and compliance with their authorizing statutes. EPA’s administration of the CAA is thus overseen by the President as head of the executive branch, by the courts in response to citizen suits, and by Congress, which exercises ultimate oversight through the power to amend or replace EPA’s authorizing legislation. In fact, Congress has enacted two major sets of amend- ments to the CAA since 1970, in 1977 and again in 1990. Other Agencies The EPA is not the only U.S. government agency with responsibility for air quality. The U.S. Department of Transportation maintains an air quality unit that provides information related to air quality impacts of the nation’s transportation systems, and supplies advice to transportation officials regarding air quality plan- ning. While not all federal agencies have air quality-specific programs, several agencies target energy, largely because of energy consumption’s impact on the environment, and in particular, on air quality. The U.S Department of Interior (DOI) runs a range of programs that are related to domestic energy production. As America’s principal conservation agency, DOI must ensure that air pollution does not degrade natural systems and that energy resources are used wisely.

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS DOI oversees numerous smaller agencies that are tasked with managing specific resources such as the Bureau of Land Management, Fish and Wildlife Service, National Park Service, U.S. Geological Survey, and Bureau of Reclamation. All federal agencies, including the ones mentioned above, are governed by the National Environmental Policy Act (NEPA). NEPA requires that federal agencies include environmental values in their decision making, by considering both the potential environmental impacts of proposed action and the impacts of reasonable alternatives to those actions. The manifestation of this requirement is that federal agencies must produce detailed reports called environmental impact statements (EISs), before taking significant action. NEPA regulations are over- seen by the Council on Environmental Quality. Some actions are categorically excluded from needing a detailed assessment, if they meet certain requirements such as that type of action that has been previously evaluated by the agency as having no significant impact. The next level of complexity requires the agency to perform a preliminary environmental assessment. If the environmental assessment determines that no significant impacts are likely to occur, the agency issues a find- ing of no significant impact. If the environmental assessment suggests that more significant impacts may occur, the agency must continue with a more detailed EIS. EPA publishes EISs weekly in a “Notice of Availability” in the Federal Register. The public can attend public meetings on EISs, and submit comments directly to the federal agency. It is the agency’s job to consider comments from the public during the comment period. China China’s history of AQM is comparatively short. The 1972 UN Conference on the Human Environment in Stockholm marked the first time that China officially addressed environmental issues. The conference, and the nascent environmental movements of industrialized countries such as the United States, provided the impetus for China and other developing countries to establish national environ- mental policies. Previously, the Chinese Ministry of Health oversaw environ- mental matters, but did so with little authority or motivation to regulate. Yet in spite of somewhat weak enforcement, environmental laws and regulations have resulted in improved air quality in many Chinese cities over the past few decades (Aunan et al., 2006). The real starting point for environmental protection in China is generally thought of as stemming from the first national conference on environmental protection held in 1973 (Editorial Board, 1994). The first organization concerned solely with environmental protection, the Environmental Protection Leading Group (Leading Group), was set up in 1974 under the State Council, which was formed to coordinate environmental protection at the national level. Since then, the institutions for environmental protection have developed and undergone changes several times (see timeline, Figure 4-3). In 1979, the provisional Environmental

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0 ENERGY FUTURES AND URBAN AIR POLLUTION Protection Law was promulgated, stipulating that “whosoever causes pollution is responsible for its elimination.” For the next decade, China’s environmental protection policies were focused primarily on pollution control (Qu, 1991; SCIO, 1996). Environmental protection departments not only formulated control plans, but also applied for investment in facilities designed for pollution abatement. Environmental protection was proposed as one of China’s national basic policies at the Second National Conference on Environmental Protection held in 1983. The government encouraged policies which combined pollution prevention and control measures (as opposed to the singular focus on control), and it also reinforced the principle of the “polluter pays.” The basic spirit of these policies was to shift emphasis from control to prevention, but in a way that Chinese leaders considered to be suitable to their economic circumstance. In other words, pollu- tion prevention was not sought at the expense of economic development, which maintained primary importance (Qu, 1997). The Third National Conference on Environmental Protection in May 1989 was a landmark for environmental management in China. Key regulations and measures that were developed at that conference included: • The Environmental Protection Objective Responsibility System; • The Quantitative Examination System on Comprehensive Control of Urban Environment (QESCCUE); • A pollution discharge licensing system; and • Centralized control and deadlines for pollution elimination. Earlier approaches based on point-source pollution controls were insufficient to improve regional environmental quality; thus Chinese leaders established the goal of moving toward integrated regional pollution control (Qu, 1991). Encouraged by the outcomes of the Rio Summit in 1992, the Chinese gov- ernment approved and promulgated China�s Agenda �White Paper on China�s Population, Enironment, and Deelopment in the st Century, in March 1994. This document put forward China’s overall strategy for sustainable development and served as a guide to various departments and regional governments, as they developed their own plans of action. Some policies and regulations flowing out of this were the Total Emission Control policy (1996), Acid Rain and SO 2 Control Zones (1998), and the Cleaner Production Law (2002). In March 1998, the Ninth National People’s Congress radically reformed government administration. Amidst this massive effort to cut central govern- ment administration, the environmental protection administration emerged as a bureaucratic exception: after years of lobbying, it was finally upgraded from semi-ministerial status (as NEPA) to ministerial status (the current SEPA). In this reorganization, SEPA was the only agency which was elevated in terms of official rank. This unexpected promotion, during a time of strict administrative austerity,

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National recognition of Early air pollution legislation developed; International organizations and NGOs Environmental protection office pollution problems environmental protection office increasingly influential; environmental further increases authority; established but lacks authority protection office gains authority shift to pollution prevention 2000 1979 1991 Second amendment to Air China promulgates the Law of China adopts WHO guidelines Pollution Prevention and Control the Peopleís Republic of China for ambient air quality Law, significantly strengthening on Environmental Protection the stateís regulatory capacity 1987 1995 1973 2005 Air Pollution Prevention First amendment to First National Conference Renewable energy and Control Law Air Pollution Prevention on Environmental Law passed, requiring grid adopted and Control Law Protection held operators to purchase available renewable energy 1974 1982 1994 2002 Environmental Protection The Environmental Protection First environmental Cleaner Production Law Office created Bureau (EPB) is established NGO, Friends of Nature, promulgated, further under the Ministry of Urban and established encouraging energy efficiency, Rural Construction and pollution controls, and waste Environmental Protection recycling 1988 1998 Chinese EPO moves NEPA is elevated to directly under the ministerial status; State Council; renamed renamed the State the National Environmental Environmental Protection Protection Agency (NEPA) Administration (SEPA) FIGURE 4-3 Timeline of air quality and energy regulation trends in China.  4-3

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 ENERGY FUTURES AND URBAN AIR POLLUTION indicated that environmental problems were a serious central government concern in need of increased attention (Jahiel, 1998). In China, the National People’s Congress enacts the laws, governments at different levels take responsibility for their enforcement, the administrative departments in charge of environmental protection exercise overall supervision and administration—and the various departments concerned exercise supervision and administration according to the stipulations of the law. SEPA is the cognizant environmental protection administration agency under the State Council, whose task it is to exercise overall supervision and administration over the country’s environmental protection work. The people’s governments at the provincial, city, and county levels have also successively established environmental protection administration departments to carry out overall supervision and administration of the environmental protection work in their localities (Figure 4-4). SEPA has a number of responsibilities related to air pollution monitoring and mitigation. In addition to helping formulate policies, laws, regulations, and administrative rules to be formalized by the National People’s Congress, SEPA’s other primary duties include: Leadership Role State Advisory Role Council Cross-ministry meetings National Monitoring SEPA Stations Provincial Government Provincial Monitoring Provincial EPB Stations Municipal Government City Monitoring Municipal EPB Stations District County District EPB County EPB Government Government FIGURE 4-4 China’s Environmental Protection Administrative System (adapted from Wang and Wu, 2004; Jahiel, 1998). 4-4

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS • Conducting environmental impact assessments for major economic and technical polices, programs, and development plans; • Organizing the formulation and supervision of pollution prevention plans and ecological conservation plans in key regions identified by the Central Government; • Investigating major environmental pollution accidents and ecological damage; • Formulating national standards of environmental quality and pollutant discharge; • Approving Energy Information Administration (EIA) reports on develop- ment and construction activities; • Organizing research and development, and technical demonstration projects of environmental protection; and • Environmental monitoring, data collection, and information dissemination. Although SEPA’s mandate is extensive and comprehensive, it is constrained by a limited staff (Fritz and Vollmer, 2006). Figure 4-5 illustrates the number of departments within SEPA with responsibilities for energy and air quality issues. SEPA employs approximately 220 people in its Beijing office, and while it has recently established five regional offices with approximately 30 staff in each, it still relies on provincial and lower-level Environmental Protection Bureaus (EPBs) to handle regional issues, both in monitoring and enforcement. This is the key divergence in responsibility between the central and local governments; enforcement is largely the job of provincial and local EPBs. Statistically there are nationwide more than 3,200 environmental protection administration departments with a total staff of 217,000 engaged in environmental administration, monitor- ing, inspection and control, statistics collection, scientific research, publicity, and education (SCIO, 2006). However, these numbers reflect all positions which could be construed as dealing with environmental protection; in reality, very few employees have responsibilities directly related to air quality monitoring and enforcement. Local-level action has nonetheless met with some success. Cities have led efforts to adjust their urban energy structure, in order to deal with air pollution issues, advocating clean energy use and central heating—so as to reduce pollu- tion caused by burning coal. Many cities, such as Dalian, have also undergone industrial relocation to the benefit of the urban core, though this strategy does not necessarily reduce total pollution (Bai, 2002). To reduce dust pollution caused by construction, cities are using ready-mixed concrete; concrete mixing is already prohibited in some larger cities. The Chinese government regards industrial pollution prevention and control as the focal point of environmental protection. China’s strategy in this regard is undergoing a major departure from the past, shifting from end-of-pipe solutions to comprehensive controls, from pollution concentration regulation to total pollutant

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0 TABLE 4-2 The Total Cost of Federal Incentives for Energy Development Through 2003 (billions of 2003 dollars) Nuclear Hydro Coal Oil Natural Gas Renewables Geothermal TOTAL Percent Research and Development 60.6 1.2 27.3 6.7 5.6 16.4 2.9 120.7 18.7 Regulation 9.9 4.1 6.2 106.1 2.9 0 0 129.2 20.1 Taxation 0 10.5 26.7 155.4 75.6 11.7 1.4 281.3 43.7 Disbursements -8.3 1.4 6.4 2.1 0 1.5 0 3.1 0.5 Government Services 1.2 1.3 12.6 27.2 1.3 1.7 0 45.3 7.0 Market Activity 0 54.1 1.7 4.5 1.7 1.3 1.4 64.7 10.0 TOTAL 63.4 72.6 80.9 302.0 87.1 32.6 5.7 644.3 Percent 9.8 11.3 12.6 46.9 13.5 5.1 0.9 100 SOURCE: Management Information Services, Inc., 2006.

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS related to climate change, fuel cells, and hydrogen. These have been primarily targeted toward renewables and coal. Regulation Federal mandates and regulatory actions have been an important part of energy policy, accounting for $129.2 billion (20.1 percent) of energy incentives. There are essentially two types of regulatory actions that the Federal government can undertake to promote energy development: (1) exemption from federal regulations; (2) payment by the federal government of the costs of regulat- ing the technology. An example of the latter type of regulatory incentive relates to nuclear energy, and through 2003 the federal government expended $9.9 billion on regulating the nuclear energy industry. These expenditures include the cost of administering the Nuclear Regulatory Commission and are net of the regulatory user fees paid by utilities. Federal payments for regulating the nuclear energy industry were phased out during the 1980s, and since 1991 the industry has been paying for the costs of regulation. Taxation Tax policy has been, by far, the most widely used incentive mecha- nism, accounting for $281 billion (43.7 percent) of all federal incentives. One example of this policy relates to the oil and gas industries, which have utilized the percentage depletion and intangible drilling provisions of the federal tax code as an incentive for exploration and development. Federal tax credits and deductions have also been utilized to encourage the use of renewable energy. Disbursements Direct federal grants and subsidies have played only a small role in energy policy, accounting for only $3.1 billion (0.5 percent) of incentive costs. An example of federal disbursement subsidies has been, for the oil industry, subsidies for the construction and operating costs of oil tankers. Government Services This category refers to all services traditionally and historically provided by the federal government without direct charge, and totaled $45.3 billion through 2003, representing 7 percent of total incentives. Relevant examples pertain to the oil industry; the policy of the U.S. government is to pro- vide ports and inland waterways as free public highways, and in ports that handle relatively large ships, the oil tankers represent the reason for deepening channels. They are usually the deepest draft vessels that use the port and a larger-than- proportional amount of total dredging costs are allocable to them. Market Activity Federal energy incentives consisting of direct federal govern- ment involvement in marketplace activities totaled $64.7 billion through 2003— 10 percent of all energy incentives. Most of this effort was expended on behalf of hydroelectric power, and, to a much lesser extent, on behalf of the oil industry. Market intervention incentives for hydroelectric energy include the prorated costs of federal construction and operation of dams and transmission facilities.

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 ENERGY FUTURES AND URBAN AIR POLLUTION BOX 4-5 Natural Gas Regulation in the United States Historically, the use of natural gas has been favored in the United States because it is cleaner burning fuel. However, the net results of a network of legislation, regula- tions, and financial incentives to use a fuel are not always internally consistent and can lead to outcomes which distort supply, demand, and market dynamics. When governments artificially lower energy prices by regulation or subsidies to make them more affordable for consumers, demand and, consequently, the resulting environmental emissions can increase, particularly in countries without modern pollution control equipment and regulations. From the 1930s until the 1980s, most of the interstate natural gas industry was highly regulated in the United States. Many of these regulations were in conflict, and low, regulated prices constrained supply growth while demand grew rapidly. During the 1970s these policies resulted in gas shortages. Additional regulations in the late 1970s attempted to allocate and curtail gas deliveries to some customers, such as industrial consumers and electric generators. These regulations exacted a significant cost on U.S. industry and consumers, and ultimately on the U.S. economy. Price controls on natural gas were effectively removed during the 1980s and competitive markets emerged. At present, many U.S. regulations and policies affecting natural gas are still in conflict. Public policies promote the use of natural gas as an efficient and environ- mentally attractive fuel, leading to restrictions on fuels other than natural gas for the siting of power generation and industrial facilities, restrictions on fuel switching, and fuel choice limitations. Other laws and regulations have been enacted that limit access to gas-prone areas, and there are outright bans on drilling in certain r egions. There are laws and regulations that restrict pipeline and infrastructure sit- ing or interfere with the functionality of the market in ways that lead to inefficiencies. Overall, these conflicting policies, encouraging use, but not addressing supply, have contributed to the current tight natural gas supply/demand balance in the United States, with higher and more volatile prices. EIA data show that U.S. natural gas prices were relatively stable in constant dollars from 1987 through 1998.a However, as shown in Figure Box 4-5 beginning in 2000, prices began to escalate—they were roughly 50 percent higher in 2000 compared to 1998. Prices in late 2003 and early 2004 further increased 25 percent over 2000, and by early 2006 prices were three times higher than in 1998. These higher prices have had a particularly adverse impact on the U.S. manu- facturing sector, which is highly dependent on natural gas. The U.S. Department of Commerce estimated that from 2000 to 2004, higher natural gas prices caused an average of 489,000 civilian jobs to be lost each year, 79,000 of these in the manu- facturing sector. Employment in industries such as chemicals, foundries, glass, paper, and fertilizer has been significantly reduced or, in some cases, virtually eliminated as facilities have closed or moved overseas, in some measure to areas with secure, long-term natural gas supplies. Natural gas–once a strength of the U.S. energy portfolio—is now characterized by highly volatile and increasing prices.

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS In 2005 alone, natural gas prices for industrial consumers ranged from $6.84 to $11.92. This volatile situation makes it very difficult for many manufacturing firms to effectively plan energy costs, and undercuts their cost competitiveness in world markets. These problems will become even more serious as domestic supplies continue to decline and demand increases. Supply and demand will balance at a higher range of prices than historical levels. That price range will be primarily driven by demand response moderated by efficiency, conservation and fuel flexibility, the ability to increase conventional and non-conventional supply from North America including the Arctic, and increasing access to world resources through LNG. aNatural Gas Markets and EIA’s Information Program, March 2000. 350 300 250 Natural Gas #2 Distillate 200 Motor Gasoline Electricity Coal 150 100 50 97 98 00 04 05 99 03 95 96 01 02 19 19 19 20 20 20 19 19 20 20 20 FIGURE Box 4-5 Indices of selected energy price levels in the United States, 1995-2005 (1995 = 100). SOURCE: U.S. Energy Information Administration and Management Information Services, Inc., 2006. Box 4-5

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 ENERGY FUTURES AND URBAN AIR POLLUTION These costs are prorated because, beginning in the 1930s, federal dams and water resource projects have been multipurpose. The results of these investments include flood control, navigation, recreation, regional development, and other benefits in addition to hydroelectric power. It is thus necessary to estimate that portion of the net investment in the construction and operation of dams that is allocated to power development and to the relevant transmission facilities. Releant Energy Legislation The Energy Policy Act of 2005 (Public Law 109-58, 42 USC 15801) The Energy Policy Act of 2005 established energy research and development pro- grams covering energy efficiency, renewable energy, oil and gas, coal, Indian tribal energy, nuclear matters and security, vehicles and motor fuels (including ethanol), hydrogen, electricity, energy tax incentives, hydropower and geothermal energy, and climate change technology. The Act extended tax credits until 2008 for renewable energy facilities (i.e., wind, closed- and open-loop biomass, geothermal energy, small irrigation power, landfill gas, and trash combustion facilities). It also provided tax credits for investment in bonds funding clean renewable energy and investment in advanced coal projects and certified gasification projects. The Act also repealed the Public Utility Holding Act of 1935. Public Utility Regulatory Policies Act (Public Law 95-617) Also known as PURPA, this Act was promulgated to promote the use of renewable energy. It created a market for non-utility electric power producers, such as small power production facilities and cogeneration plants, by requiring large electric utilities to purchase power from these “qualifying facilities” at avoided cost (the utilities’ incremental cost to produce the power), in an attempt to provide equitable rates for consumers. Congress encouraged the entry of qualifying facilities into the market by exempting them from rate and accounting regulations enforced by FERC and by the Securities Exchange Commission. PURPA was amended by the Energy Policy Act of 2005. National Energy Conservation Policy Act (Public Law 95-619) This Act sought to encourage conservation of non-renewable energy resources and to reduce growth in demand for energy without limiting economic growth. Power Plant and Industrial Fuel Use Act (Public Law 95-620) This Act pro- moted the greater use of coal and other alternate fuels over oil and natural gas as primary energy resources, and encouraged the use of coal as the primary energy source for existing and new electric power plants. The goals of the Act were to increase the nation’s energy self-sufficiency by promoting the use of domestic energy resources in lieu of petroleum imports.

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS China The NDRC, formerly known as the State Development Planning Commis- sion, was established in 2003 under the State Council of China, to develop national macroeconomic policy and strategies and to implement the Energy Conservation Law. The SETC was originally responsible for implementing the Law, but was discontinued in March 2003 when its responsibilities were assigned to the NDRC. Among its responsibilities, the NDRC is tasked with developing a strategy for sustainable development, including cleaner power production and pollution prevention. The State Bureau of Quality and Technical Standards (SBQTS) developed energy-efficiency standards for consumer appliances such as refrigerators, air conditioners, and fluorescent lamps. SBQTS also created the Energy-Conserving Products Certification Commission to award an energy conservation label to products that meet its standards, similar to the EPA’s Energy Star label. SBQTS is now a part of the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China, which oversees industry standards. The State Electricity Regulatory Commission (SERC) was established in 2003 as a law enforcement agency under the State Council of China. Its primary task is to regulate the electric power sector and to monitor market competition in the electricity industry. It issues licenses to electric power generators, monitors operations and pricing, and will develop an electricity trading market. SERC has authority to enforce environmental laws and regulations as well as safety and technical standards. In practice, though, SERC has had to compete with the powerful NDRC. The original reform plan which established SERC dictated that SERC and NDRC share responsibility in areas such as electricity price setting. As a result, NDRC has typically exercised most control over the power sector (IEA, 2006). Releant Energy Legislation Coal Law of the People’s Republic of China China’s Coal Law, promulgated in August 1996 and enforced in December of that year, promotes the use and pro- tection of the nation’s coal resources and the development of its coal industry and provides for the standardization of coal production and management. It establishes that coal resources are owned by the state. Electricity Law of the People’s Republic of China China’s Electricity Law, promulgated in December 1995 and enforced in April 1996, regulates the con- struction, production, supply, and utilization of electric power and specifies that utilities should protect the environment, adopt new technologies, minimize discharge of poisonous waste, and prevent pollution and other public hazards. The State encourages and supports electricity generation by using renewable and

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 ENERGY FUTURES AND URBAN AIR POLLUTION clean energy resources. And the planning for electric power development shall reflect the principles of rational utilization of energy, coordinated development of the power sources and power networks, increasing economic benefits, and being conducive to environmental protection. Energy Conservation Law China’s National Peoples’ Congress (NPC) created the Energy Conservation Law (ECL) in 1997 to address energy conservation management, rational energy utilization, technology progress, and legal liabilities. It applies to all energy sources in China, including coal, oil, and oil by-products, natural gas, electricity, coke, heat, liquid petroleum gas, and biomass. The ECL regards energy conservation as managing energy use in a manner that limits energy loss and waste in the production and consumption chain. Article 4 emphasizes that conserving energy is a “long-term strategy” for developing the nation’s economy. In response to the ECL, some provinces wrote energy conservation regulations that granted authority to provincial agencies to enforce energy conservation and these provincial regulations are more stringent than the ECL. The NPC Standing Committee is currently researching the effectiveness and enforcement of the ECL, with the goal of strengthening its legal framework. The government is also working to incorporate approaches taken by other countries, such as the United States in its Energy Policy Act of 2005. Cleaner Production Promotion Law The Standing Committee of the NPC created the Cleaner Production Promotion Law in June 2002. The comprehensive law was enacted to promote cleaner production of energy, increase the efficient use of raw materials in generating energy, minimize pollution, protect the environ- ment and human health, and promote sustainable development of the economy. It is administered by the NDRC. The law requires the State Council to develop fiscal and tax policies that will provide an incentive to implementing cleaner production of energy. It also requires the State Council to establish a system to periodically identify obsolete production technologies, processes, and equipment that are hazardous to the environment and that utilize resources inefficiently. When technology is upgraded, the law requires that enterprises select processes and equipment that have high resource utilization rates and reduced generation of pollutants. Renewable Energy Law The Renewable Energy Law was adopted by the NPC on February 28, 2005, and came into effect on January 1, 2006. The Renewable Energy Law defines “renewable energy” to include the following: wind energy, solar energy, hydropower, biomass power, geothermal energy, ocean energy, and other types of non-fossil energy. It sets forth a framework under which the NDRC is designated as the authority in charge of the regulation and formulation of policies for the development, use, and pricing of renewable energy. Under the Renewable Energy Law, scientific research associated with the development of

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 INSTITUTIONAL AND REGULATORY FRAMEWORKS renewable energy is to be included in technology and industry development plans, and hence will be supported by designated funding. All reports and plans are to be shared with the public. Significantly, the Renewable Energy Law imposes a mandatory obligation on energy distributors to purchase renewable energy. For instance, power grid opera- tions are obliged to enter into grid-connection agreements with renewable energy generation enterprises, to purchase all of the on-grid electricity generated from renewable energy within the coverage of their grids, and to feed such electricity to the grid. Gas and heat network operators as well as petroleum distributors are required to feed gas, heat, and/or fuel generated from biomass resources into their network, as long as the technical standards for grid connection are met. The Law outlines penalties for failures to comply with the requirements set forth within it. Vehicle Pollution Controls Under Chinese law, as in most countries of the world, controlling emissions from new vehicles is the responsibility of the national government, specifically SEPA. Local governments can petition the State Council to allow earlier introduc- tion of the national standards, but only after SEPA has adopted them. Therefore, SEPA has a very important ongoing role in controlling one of the major pollution sources in Chinese cities. In response to the growing air pollution problems related to motor vehicles during the 1990s, China initiated a serious motor vehicle pollution control effort. It moved aggressively in the late 1990s to eliminate the use of leaded gasoline and quickly followed this with the introduction of EURO I standards for new cars and trucks.16 Since prohibition of leaded gasoline, lead emission has been reduced by 1,500 tons each year. Most recently, it phased in the EURO II standards in 2003-2004 for cars, trucks, and buses, and lowered the sulfur content of both gasoline and diesel fuel to 500 ppm maximum.17 Nevertheless, the emissions requirements for new vehicles across China lag behind those of the industrialized world by almost a decade. In an effort to narrow this gap, SEPA decided to introduce Euro III, Euro IV, and (for heavy-duty trucks only), Euro V standards in 2007, 2010, and 2012, respectively,18 These emission standards will require advanced vehicle 16This is the same set of standards introduced in Europe in 1992. 17Beijing introduced Euro II standards one year earlier than the rest of the country in 2003. 18In December, the State Council approved the implementation of State Phase III and IV (similar to Euro III and IV) vehicle emission standards in Beijing. From December 30, 2005, Beijing applies Phase III requirements for light-duty gasoline and gaseous fuels vehicles, and for heavy-duty diesel and gas-fueled engines. From January 1, 2007, Beijing will apply Phase IV emission requirements for light-duty diesel vehicles. The State Council requires Beijing to prepare qualified diesel fuel in advance, and before this date, Beijing is allowed to take appropriate measures to discourage light- duty diesel vehicles.

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 ENERGY FUTURES AND URBAN AIR POLLUTION emission control technologies, which, in turn, require much better fuel quality for gasoline and diesel. Without additional improvements in fuel quality, greater tightening of new vehicle standards will not achieve their full benefits and some advanced pollution-control technologies will be precluded. Beyond new vehicle controls, there has been recognition of the need to intro- duce improved vehicle inspection and maintenance programs to maximize the air quality benefits of stringent new vehicle standards. This is the responsibility of the local governments. Beijing, for example, has mandated the requirement that all in-use vehicles undergo an annual loaded mode (ASM) emissions inspection, and is considering a further tightening to a VMASS based system. However, most if not all other I/M programs in the country remain quite weak with only limited improvements in a few cities such as Shanghai. Some cities have also started clean vehicle campaigns, actively promoting the use of low-pollution vehicles fueled by natural gas and liquefied petroleum gas. REFERENCES ACEF (All-China Environment Federation). 2006. Report on the Development Situation of Environ- mental NGOs in China. Aunan, K., J.H. Fang, T. Hu, H.M. Seip, and H. Vennemo. 2006. Climate change and air quality— Measures with co-benefits in China. Environmental Science & Technology 40(16) 4822-4829. Bai, X. 2002. Industrial relocation in Asia: A sound environmental strategy? Environment 44(5):8-21. Beijing EPB (Beijing Municipal Environmental Protection Bureau). 2005. Report on the State of the Environment in Beijing 2004. Breyer, S.G. and R.B. Stewart. 1979. Administrative Law and Regulatory Policy. Little Brown and Co. Burtraw, D. and E. Mansur. 1999. The Environmental Effects of SO2 Trading and Banking. Environ- mental Science and Technology. 33(20):3489-3494. CNEMC (China National Environmental Monitoring Center). 2006. Official website, http://www. cnemc.cn. Davis, D. 2002. When Smoke Ran Like Water: Tales of Environmental Deception and the Battle Against Pollution. New York: Basic Books. Editorial Board. 1994. China’s Environmental Protection Administration Over 20 Years. Beijing: China Environmental Science Press. Ellerman, A.D. 2002. Designing a tradable permit system to control SO2 emissions in China: Prin- ciples and practice. Energy Journal 23(2). Fritz, J.J. and D. Vollmer. 2006. To what extent can technology compensate for institutional failure in an urban environmental setting: The case of China. Technology in Society 28(1/2):95-104. He, K., H. Huo, and Q. Zhang. 2002. Urban air pollution in China: Current status, characteristics, and progress. Annual Review of Energy and the Environment 27(1):397-431. IEA (International Energy Agency). 2006. China’s Power Sector Reforms: Where to Next? Paris: IEA/OECD. Jahiel, A.R. 1998. The Organization of Environmental Protection in China, The China Quarterly 156 (Special Issue: China’s Environment). 757-787. Lewis, J. 1985. The Birth of EPA. EPA Journal, November. Washington, D.C.: U.S. Environmental Protection Agency.

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