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APPENDIX G Possible Economic Implications of Regulation Demand for alternative jet fuel will be affected by the passage of state or federal legislation that mandates use of bio-derived fuels or taxes emissions from the use of jet fuel. To date, the U.S. Congress has not passed legislation that creates a market for carbon in the United States, but has done so for other pollutants (see Section G.2). Moreover, the global popularity of using credits for limiting pollutants and emissions makes it possible that additional variations on emissions trading will be mandated in the United States. Currently the EPA has purview over these issues and is a source of useful information, including summaries of national markets in different pollutants on its web site (EPA 2010b). Examples of existing cap-and-trade programs (which cap a maximum amount of emissions and allow those emitting them to trade emission credits) in the United States are the nationwide Acid Rain Program (EPA 2010a), the regional NOx Budget Trading Program (EPA 2010d) in the Northeast, and the Regional Greenhouse Gas Initiative, which limits GHG emissions from electricity generation in ten participating North- east states (RGGI 2011). G.1 National Ambient Air Quality Standards Airport activity is subject to compliance with all federal regulations, including EPA regula- tions under the CAA (FAA 1997a). The EPA establishes NAAQS for a series of criteria pollutants, including NOx, SO2, and PM, which can be present in or result from the exhaust of jet engine emissions. (Such emissions together account for a very small percentage of jet engine emissions.) Geographic areas in which concentrations of these pollutants are determined to be in excess of the NAAQS are designated as NAAs and are subject to formulating a SIP to bring the area back into compliance (FAA 1997a). SIPs can affect airports in two important ways. First, an airport in an NAA may be subject to regulation targeted at bringing the area back into compliance with NAAQS. Federal aviation statutes preclude state regulators from imposing emissions requirements on aircraft, but they can affect other non-aircraft sources at the airport, such as on-road vehicles (including cars, taxis, and shuttles), construction equipment, power plants, and other stationary sources. Second, if an airport is in an NAA and has plans for a development project, the airport has to show that the project will be in "conformity" and will not cause or contribute a further violation of a SIP before it can receive federal funding. It is important to note that one of the most problematic sources of emissions that may lead to a violation of a SIP is emissions from construction equipment. Alternative jet fuels may help airports in NAAs meet the goals specified in SIPs because of their potential to have lower emissions levels of criteria pollutants such as SOx, NOx, and PM as com- pared to conventional jet fuel. This may allow airports to save time and cost in the approval process for development projects. It may also allow airports to grow their operations without violating existing SIPs. 94

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Possible Economic Implications of Regulation 95 G.2 Emission Reduction Credits The Clean Air Act of 1990 created an opportunity for industry to buy and sell ERCs tied to atmospheric pollutants including sulfur dioxide (SO2), NOx, carbon monoxide (CO), PM, lead, and volatile organic compounds (VOCs) (EPA 1990). An airport operating within a non-attainment area could theoretically generate and sell ERCs if it can demonstrate that it is removing criteria pol- lutants through the supply of cleaner aviation fuel. Alternative aviation fuels can potentially contain less SO2 and PM than conventional petroleum-based jet fuel (see Section E.2). However, while creating a market for ERCs, the Clean Air Act also created restrictions based on New Source Performance Standards such that any entity operating a site subject to NSPS regulations must reduce emissions of criteria pollutants and cannot claim ERCs. G.3 Regional Greenhouse Gas Initiative The Regional Greenhouse Gas Initiative (RGGI) is a program in which ten states--Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont--have capped CO2 emissions from electric power generation and will reduce such GHG emissions by 10% by 2018 (RGGI 2011). Although it is limited to power gen- eration so has no impact on aviation GHG, RGGI is the first mandatory, market-based GHG emissions reduction program in the United States and could be used as a model for expansion into other industries. In the RGGI model, each state has individual CO2 budget trading programs that limit emissions of CO2 from electric power plants operating within the state, issue CO2 allowances, and establish participation in regional CO2 allowance auctions. Regulated power plants can use CO2 allowances issued by any of the states, so the ten programs act as a single regional compliance market for CO2 emissions. G.4 EPA Renewable Fuel Standards The Environmental Protection Agency adopted an RFS called RFS-2 in February 2010 (EPA 2010c). While aviation does not have a required biofuels contribution under RFS-2, producers of alternative fuel for aviation may generate benefits in the form of tradable credits for fuels merited by their ability to provide benefits as quantified by the Renewable Index Number of those fuels. G.5 Federal Rules for Purchase of Alternative Fuels Section 526 of the 2007 Department of Energy Authorization mandates that U.S. government buyers can only purchase alternative fuels if their life-cycle GHG footprint is less than that of petroleum-based fuels (U.S. Congress 2007). In the case of alternative jet fuels, this can be of rele- vance to airports that have or want to attract government customers such as the Air National Guard. Furthermore, the U.S. Air Force and DOE have published peer-reviewed procedures to help alternative jet fuel companies verify that their products meet the requirements of Section 526 (NETL 2008; Allen et al. 2009). These documents can also be of value to airports interested in a better understanding of the process of determining the life-cycle GHG footprint of alternative jet fuels and of overall compliance with Section 526. G.6 Carbon Markets The U.S. Congress has had difficulty in finding a political consensus on how to deal with greenhouse gas emissions, even as some states and municipalities pass rules and/or legislation that address this issue within their jurisdictions. The most notable example is California's Global Warming Solutions Act of 2006, also known as Assembly Bill 32, which requires the state to

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96 Guidelines for Integrating Alternative Jet Fuel into the Airport Setting develop regulations to reduce GHG (CAEPA 2009). It is important to note that AB32 does not apply to jet fuel. As of the first quarter 2011, it seems unlikely that Congress will introduce a carbon market system within the United States in the near future. Nevertheless, there are developments in other parts of the world that may have an impact on U.S. airports and airlines. For example, the ICAO is currently analyzing a CO2 standard for new aircraft. The largest active market for carbon trading is in the European Union. The EU emissions trad- ing scheme is a cap-and-trade system--it caps the overall level of emissions and allows partici- pants to buy and sell allowances as they require (EC 2010). The ETS has been in effect since 2005 for specified energy-intensive activities (power stations and other combustion plants, oil refiner- ies, coke ovens, iron and steel plants, and factories making cement, glass, lime, bricks, ceramics, pulp, paper, and board), and as a result of growing European public concern over global warm- ing, the EU is leading the effort to control greenhouse gas emissions from aviation sources. EU legislation requires that all airlines landing at EU airports participate in the European Greenhouse Gas Emission Trading Scheme as of January 1, 2012, and monitor and report their CO2 emissions and ton-kilometer data from January 1, 2010 (EC 2003). These initiatives are being opposed by non-European airlines on the grounds that the EU has no jurisdiction over international flights because regulation of international flights is the exclusive right of ICAO, but the EU contends that since the European Greenhouse Gas Emission Trading Scheme treats all airlines entering the EU in the same manner, it is permitted under ICAO regulations. If it is determined that all airlines that fly into European airports are subject to the ETS, it is expected that airlines that use bio- derived fuel may use fewer allowances than with conventional petroleum-based jet fuel (EC 2003) and, therefore, may be able to reap an economic benefit. Even though there is still uncertainty with respect to aircraft GHG emission regulations, the airline industry has been proactive in adopting a common position of a commitment to carbon neutral growth starting in 2020 (IATA 2009). The industry realizes that alternative jet fuels with a life-cycle GHG footprint smaller than conventional jet fuel can help airlines meet their carbon- neutral growth goals. Furthermore, in the event that GHG emissions targets under the EU's ETS or other potential cap-and-trade mechanisms become mandatory, alternative jet fuels may also help airlines meet their cap and reduce the need to purchase emissions credits. Airports that offer alternative jet fuels could provide benefit to airlines. It is important to indicate that carbon regulation, including cap-and-trade systems, will need to be crafted carefully to be effective at improving the environmental performance of air trans- portation. There is a concern among airlines that mechanisms that result in excessive monetary payments may affect the carriers' ability to invest in new technology such as aircraft and engines with reduced fuel consumption. Furthermore, airlines are concerned that funds collected through environmental charges may not be re-invested in air transportation, and thus needed investments in air traffic control modernization, alternative jet fuels, and airport infrastructure may not occur.