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Octane, Clean Air, and Renewable Fuels: a Modest Step Toward Energy Independence

Posted on: Thursday, 16 February 2006, 09:00 CST

By Gray, C Boyden; Varcoe, Andrew R

I. INTRODUCTION: THE MANY COSTS OF PETROLEUM DEPENDENCE-AND A FIRST-RATE OPPORTUNITY TO REDUCE THEM

Americans' nearly exclusive reliance on petroleum for transportation fuel has become an increasing threat to U.S. economic and security interests. The major dangers of oil dependence, to name a few, include volatile and increasing oil prices, now projected to average about $63 a barrel in 2006;1 growing uncertainty over long- term oil supply; high current account deficits; and the financing of terrorism and tyranny by U.S. petrodollars.2 One 2000 estimate, cited in the Department of Energy's 2004 Transportation Energy Data Book, put the cost of U.S. oil dependence at $7 trillion in 1998 dollars over a thirtyyear period.3 But petroleum dependence is also a threat to the environment, human health, and the goal of spurring global trade and development by reducing agricultural subsidies.

Next year, the Bush Administration and the Environmental Protection Agency (EPA) will have a superb opportunity to make great strides in reducing this threat. To settle an environmental lawsuit for delay in carrying out the Clean Air Act (CAA), EPA has bound itself to begin a rulemaking proceeding in 2006 to comply with CAA section 202(1). This provision mandates requiring the maximum achievable reductions in toxic emissions from motor fuels. Over a quarter of the gasoline used by Americans is made up of benzene and other aromatic hydrocarbon compounds that are categorized as hazardous air pollutants (HAPs, also known as air toxics) under the Clean Air Act.4 These literally poisonous chemicals are being phased out in every other sector of the U.S. economy. In gasoline, they are used to enhance fuel octane.

Aromatic emissions are bad enough by themselves. Benzene, for example, is a known carcinogen. But aromatic emissions are also precursors to other pollutants that have major effects on the environment and on human health. To the extent that they can be quantified, the cumulative effects of gasoline air toxics pollution may cost Americans tens, or even hundreds, of billions of dollars per year.

EPA has recently signaled that it may be preparing soon to take a more aggressive approach to regulating aromatics in gasoline.5 This would be a salutary development Under a second Clean Air Act mandate,6 EPA is responsible for reducing concentrations of fine paniculate matter (PM25, also known as fine PM)-the single most pressing air pollution problem that EPA currently faces.7 And in September 2005, EPA declared that aromatics are considered to be the most significant of the gases caused by humans that react to form carbon-based PM.8

Curtailing the use of aromatics would not just benefit the environment. A substitute source of octane would be needed. As they have been for 100 years, the main candidates would be alcohols, such as ethanol, and related products such as ethers. An air toxics requirement that mandated the use of clean octane enhancers would jump-start the renewable fuels market. This, in turn, could pave the way to absorbing the First World agricultural surpluses that have stalled free trade talks and devastated Third World development. Fostering developingworld agricultural markets and reducing our petroleum dependence are two powerful ways of enhancing American security, both immediately and over the long term. It is for these interrelated reasons that we believe that the 2006 rulemaking could result in one of the most important air quality regulations that the U.S. government has ever issued.

II. SUBSIDIES, REGULATORY DISPARITIES, AND DEPENDENCE

The current status of aromatic chemicals as octane enhancers for gasoline reflects a pattern of subsidies and unique treatment for petroleum and its products that has lasted for well over half a century. This pattern is one of the most critical and yet least understood causes of America's petroleum dependency and, it must be understood, was originally imposed for reasons of national security.

Perhaps the most well known subsidy for Middle East oil is the one described in Daniel Yergin's superb history of oil in the United States and the world, The Prize: The Epic Quest for oil, Money, and Power. Yergin recounts how in 1950, the U.S. government responded to Saudi demands for more oil revenues by devising an arrangement whereby Saudi Arabia's 12.5% royalty became a fifty percent income tax for which Aramco received a dollar-for-dollar credit against its U.S. income tax liabilities.9 The tax credit arrangement, which soon spread to other Middle Eastern countries,10 transferred billions of dollars from U.S. taxpayers to foreign coffers.

There were, of course, other distinctive arrangements for oil based on national security considerations, some of which remain in force today. They have included not just tax subsidies, which stretch back to 1916,11 but also unusual regulatory arrangements.12 In tax law, two of the biggest subsidies were the percentage depletion allowance and the rapid write-off for socalled intangible drilling and development costs. The General Accounting Office estimated that these two subsidies alone cost the United States somewhere between $125 and $137 billion, respectively, between 1968 and 2000 (in 2000 dollars).13 In the regulatory arena, for example, it was explicit White House policy for much of the twentieth century to subordinate antitrust enforcement against the oil industry to national security concerns-often over the objection of Justice Department lawyers.14

The regulatory subsidy that we discuss in this article has much to do with the nuances of the Clean Air Act. The oil industry's central product, gasoline, largely escaped air quality regulation for two decades after the enactment of the CAA in 1970. Things started to change in 1990, when President George H.W. Bush, a former oilman from Texas, signed a set of comprehensive amendments to the CAA. The new amendments required the reformulation of gasoline to reduce pollution and ordered EPA to pursue further pollution reduction from motor fuels. Yet gasoline-in particular, the aromatic fraction of gasolinecontinues to enjoy special regulatory treatment even under the post-1990 legal regime. EPA has ample authority to reduce or eliminate aromatics from gasoline, but it has never exercised that authority with great vigor. At the same time, it has cracked down heavily on stationary sources of the same chemical compounds, even though the human exposure to stationary source air toxics emissions may be only a fraction of roadway exposures to gasoline emissions.

Given the apparent desirability of eliminating aromatics as an unnecessary source of octane, an obvious question comes quickly to mind: How is it that aromatics have been allowed to persist in gasoline-in even greater quantities now than in the 1970s-when they are apparendy the source of so much economic and environmental damage? The story of how aromatics got into gasoline and stayed there, which we recount in brief below, is a fascinating one, involving fatal industrial accidents, inadequate public health measures, and half-forgotten struggles between the oil and auto industries. The vision of the modern auto industry's founders, including Henry Ford and Charles Kettering of General Motors, was that cars would run on ethanol. The vision fell victim to Prohibition, the invention of leaded gasoline, and the discovery and development of gigantic oil fields in the Middle East.15 This history is well worth knowing, not least because it is possible that we have come full circle after 100 years of gasoline-powered motor transportation.

III. OCTANE, ETHANOL, AND "ETHYL": HOW LEAD GOT INTO GASOLINE

So why is benzene, along with other poisonous aromatics, in gasoline in the first place? The answer is that aromatics supply octane, which is another way of saying that they help prevent premature fuel detonation, a problem with which many young drivers are not even familiar.16 Nearly a century ago, premature detonation- known colloquially as engine knock-was the bane of motorists and engineers. A knocking engine made a metallic pinging noise that signaled that the engine was losing power. Climbing hills and hauling loads became difficult or impossible. Persistent knocking could destroy the engine.17

Auto buffs know that the knock problem was solved by General Motors. In the years following the First World War, Charles Kettering, who headed GM's research operations, and Kettering's research star, Thomas Midgley, led a research effort to find an inexpensive compound that would solve the knock problem. The result was a spectacular, and a lucrative, successfor a time. What is less known is that even then, there were serious alternatives to the winning compound. Grain alcoholour ethanol-could supply octane, as it does today.18 Efforts to derive ethanol from various kinds of vegetation were well known.19 And benzene, an aromatic hydrocarbon, could enhance octane, too.20 But both ethanol and benzene were expensive.21

Kettering and Midgley-and Henry Ford, then the owner of the world's biggest automobile company-were strongly interested in the uses of alcohol as a fuel, whether alone or combined with gasoline.22 In the mid-nineteenth century, alcohol had been used as a source of illuminating oil. But in 1862, Congress slapped an excise tax of $2 per gallon onalcohol-which helped to pay for the Civil War, but also destroyed the market for ethanol as an energy source.23 The tax was not repealed until the early twentieth century.24 Ford, who worried about the polluting effects of car exhaust, devoted sizeable resources to making his vehicles run on alcohol and acquiring the resources and knowledge to create the quantities of fuel that they would need. He designed the Model T to run on ethanol.25 He visited Cuba in search of sugarcane fields and sugar mills. He started a program for distilling wood chips (which serendipitously resulted in the invention of charcoal briquettes). But Prohibition put a damper on Ford's experiments. The Internal Revenue Department told him that distilling alcohol, even to make alternative fuels, was illegal.26 There is good evidence that both Kettering and Midgley thought that alcohol, over the long term, would become the substitute for petroleum fuels. But at the time, gasoline was cheap and plentiful, as it would be for decades to come.27 There may have been other factors as well. The more or less official history of Standard oil of New Jersey-later renamed Exxon- says that the company was "reluctant ... to encourage the manufacture and sale of a competitive fuel produced by an industry in no way related to petroleum."28

Alcohol could conceivably have become the default octane enhancer for gasoline, but history did not work out that way. In 1921, Midgley and his staff discovered the tremendous antiknock capabilities of tetraethyl lead (TEL), an additive that boosted octane ratings gready when it was added in tiny quantities to ordinary gasoline. TEL was inexpensive to make. And unlike alcohol, it could be patented.30 To market the compound, GM and Standard oil of New Jersey created the Ethyl Corporation. To avoid unpleasant associations with lead, it was called "Ethyl." DuPont, which then owned much of GM, manufactured the compound, and Ethyl Corporation marketed it.31 There was a problem, though: Tetraethyl lead, like lead itself, is a deadly poison.32 In 1924, ten workers were killed, and many more hospitalized, from Ethyl poisoning at a Standard oil facility in New Jersey. Other industrial accidents had also killed workers (Midgley himself had gotten lead poisoning from his work) ,3S but these had been kept out of the news. This one made the newspapers.34 As a direct result of the Standard oil disaster, tetraethyl lead was taken off the market for months.35 But thanks to adroit (and, it now seems, misleading) advocacy by Midgley and others, Ethyl was given a clean bill of health by a committee appointed by the Surgeon General.36 Industry was left responsible for further research on Ethyl's health effects, including the effects of leaded gas exhaust.37 This was an extraordinarily bad idea. Research work in the 1960s began to show that lead in exhaust is a poison for everyone who breathes the air that it contaminates, and particularly for children. But the research should have been done decades earlier.38

Once the scare passed, tetraediyl lead became spectacularly successful. Leaded gasoline eventually became the dominant gasoline39-so dominant, in fact, that the United States successfully took Ethyl Corporation to court for using its nearmonopoly power to enforce gasoline prices set by the major oil companies.40 In 1960, leaded gasoline amounted to almost ninety percent of the U.S. market for automotive fuels.41 And even after lead was phased out in the United States beginning in the 1970s, leaded gasoline continued to be sold elsewhere. Venezuela stopped producing leaded gasoline only in August 2005. Twenty African countries are scheduled to finish phasing out lead in 2006.42

Ethanol's fortunes, by contrast, declined sharply after the 1920s. At some point, the American Petroleum Institute (API) began lobbying and campaigning against measures to promote ethanol's use as a fuel or an additive-a campaign that continues today.43 (Similarly, farm groups and Midwestern politicians agitated for subsidies for ethanol that would support agricultural life.)" Yet ethanol had occasional successes up until the second World War, particularly outside the United States.45 In the 1930s, brands of gasoline (one of them pardy owned by Standard oil of New Jersey) containing thirty percent and sixteen percent ethanol were commercially successful in the United Kingdom.46 And during the war itself, ethanol was used in the effort to defeat Germany and Japan.47 But after peace was achieved, oil was inexpensive, and crop- based ethanol could not compete. Gasoline's dominance was assured. Almost no commercial fuel ethanol was available in the United States between the 1940s and the 1970s.48

IV. PHASING OUT LEAD-AND PHASING IN AIR Toxics

The Clean Air Act of 1970 authorized the new Environmental Protection Agency, which President Nixon had just created,49 to regulate fuel additives that endangered public health.50 Soon after, EPA acted to begin phasing lead out of gasoline-first because lead disabled the catalytic converters used to reduce emissions of other air pollutants, and then because of the accumulating evidence that lead was dangerous to people.51

The episode was a striking example of the tension between the oil and automobile industries over who should be held responsible for cleaning up vehicle emissions.52 For the first twenty years after the CAA was enacted, the auto industry generally bore the brunt of the regulatory burden. The phaseout of leaded gasoline was the one major exception to the rule.53 The major oil refiners fiercely opposed phase-out, citing the prospect of massive costs.54 Along with Ethyl Corporation, they sued EPA, arguing that EPA had not found that lead additives would endanger the public health. After two years of delay, phasedown was upheld.55 The oil majors began to realize that the new requirements would give them an advantage over small refiners.56 Even so, it was not until the middle of the 1980s that lead phasedown was largely complete.57 As use of leaded gasoline plummeted in the United States, so did Americans' blood lead levels.

An unintended consequence of lead phase-out was a major increase in emissions of a second set of toxic pollutants.59 In the 1970s, oil refiners had at least two basic substitutes for TEL as an octane enhancer, just as they had decades earlier-alcohols, such as ethanol and methanol, and related ethers; and aromatics, especially benzene, toluene, and xylene (BTX), which were already in gasoline to a significant extent.60 Major refiners generally chose the latter, which would not compete with gasoline, were within their control, and were cheap.61 EPA knew that aromatics were toxic,62 but it appears that EPA did not believe that refiners had much of an alternative to aromatics.63 In addition, adding alcohol to gasoline triggered a Clean Air Act provision requiring specific approval of new fuels and additives that were not substantially similar to old ones.64 Toxics, by contrast, were already in gasoline. Adding more of them did not implicate the new fuels and additives provision and thus required no EPA approval.

So the oil industry added aromatics to the gasoline pool in great quantities. To this end, the oil industry commenced a major refinery investment program to build more catalytic reformers and other so- called downstream refining units.65 The industry sank billions of dollars into these and other refining investments. As a result, the aromatics component of gasoline rose from about 22% of all gasoline sold in the early 1970s to about a third by 1990 (and 45% or even 50% of some premium grades).67

V. AIR Toxics AFTER LEAD: THE 1990 CLEAN AIR ACT AMENDMENTS

Around 1990, the trend began to turn. That year, President George H. W. Bush signed a comprehensive set of amendments to the Clean Air Act. A key component of the overhaul was an entirely new regulatory scheme that focused on the composition of automobile fuel itself, including the air toxic components."8

It was about time for this shift to occur. Any scheme of regulation that tries to reduce hazardous-air-pollutant (HAP) levels without focusing on mobile-source pollution is doomed to failure. Automobiles and other mobile sources account for about half of the HAPs that are released in the United States each year.69 And fuels must be regulated-not just vehicles-if the most reductions are to be achieved at the lowest cost.70

The new statute's biggest initiative to lower toxics in fuels was a program that applied to certain urban areas with serious ozone problems. The 1990 amendments required fuel marketers to supply all customers in these areas with reformulated gasoline (RFG), which has lower levels of benzene and other toxics than conventional gasoline. RFG had to contain a set percentage of oxygenates such as ethanol (which has no toxic content) and had to abide by limits on volatility and toxics levels.71 The statute also put limits on toxics in conventional gasoline. This was to prevent refiners from larding it with toxics that could not be used in RFG.72 Similarly, gasoline in cities with carbon monoxide (CO) problems had to contain a set percentage of oxygenates in the winter, when CO pollution is worst.73 Political motives, unsurprisingly, were highly relevant to decisions of this kind; Senators and Congressmen from farm states naturally took opportunities to promote corn-based ethanol.74 But mixed motives can have good policy results: By 2002, gasoline aromatics levels had declined to about 20% for reformulated gasoline and 25% to 28% (depending on the season) for conventional gasoline.73 The RFG program, along with other Clean Air Act initiatives, had cut mobile-source toxics emissions by about a million tons per year between 1990 and 1996.76

To clean up automobile fuels, the 1990 amendments directed EPA to go beyond the reformulated-gasoline requirements, which apply only in areas with ozone p\roblems.77 Section 202(1) of the amended statute required EPA to finish a study by May 1992 on "the need for, and feasibility of," controls on air toxics from mobile sources (MSATs).78 section 202(1) then required EPA to issue-and periodically revise-regulations controlling mobile-source toxics that would "reflect the greatest degree of emission reduction achievable through the application of technology which will be available," considering the availability and costs of the technology and other factors.79 This "technology-forcing" language made feasibility depend on foreseeable future innovations, rather than simply on the state of current technology.80 The deadline for issuing regulations under section 202(1) was May 1995.81 This provision pertains both to fuel controls and to controls on vehicle systems, but we concentrate on fuel controls here.

EPA finished the study in April 1993.82 But EPA did not issue MSAT regulations until early 2001.83 Its new rules did not require any new reductions.84 For the near term, the rules capped aggregate emissions of five toxics, including benzene, at recent levels, with separate "anti-backsliding" requirements for reformulated gasoline and dirtier conventional gasoline.83 Recent emissions levels were lower than had been expected because refiners had overcomplied with the 1990 RFG standards in order to extract benzene from gasoline and sell it at a profit in other markets.81" Accordingly, EPA said, its new rule "[wa]s not expected to impose any costs on industry"; the new regulations "[we]re not technology-forcing."87

For the longer terra, EPA said that it needed more time to consider suitable control options, as well as to allow refiners to comply with other regulatory requirements, including its "Tier 2" program for both vehicles and fuels. Tier 2, which requires automakers to make better catalytic converters, also requires refiners to make lower-sulfur fuel (sulfur impedes the operation of catalytic converters).88 So EPA promised to gather information and undertake a second rulemaking, with final action by July 1, 2004.89

Section 202(1) does not mandate the least costly degree of emission reduction. To the contrary, it mandates the greatest degree of reduction possible, taking costs (and other factors) into account. This, presumably, is why EPA said that the anti- backsliding program was "the most stringent program" that EPA could 'justify in the near term."90 Yet it appears that stricter mobile- source air toxics controls would have been achievable in 2001 without imposing much expense on the industry. As EPA said, its final rule imposed at most "negligible" costs on refiners.91 And EPA had already proposed a slightly stricter low-cost alternative.

In its 2000 Notice of Proposed Rulemaking, EPA had announced that it was planning to impose an anti-backsliding limit (at "negligible" expense)92 on the benzene content of gasoline.93 This limit would not have been costly; it was estimated in the final rule at 0.0702 cents per gallon-an annual aggregate cost of about $81 million for the nation.94 That is a very small sum of money compared with the sums that EPA has imposed on other industries to extract smaller pollution control benefits. Tier 2, after all, had an estimated cost of a litde less than 2 cents per gallon-about $12 per year per car, as the Clinton Administration noted in 1999.95 By the same reckoning, the benzene limit would have cost 36 cents per car annually. Yet EPA did not explain why it could not have combined the benzene cap with the aggregate toxics cap.

Indeed, it seems that the benzene limit could have been ratcheted down further. In its technical analysis for the final rule, EPA said, quoting a consultant, that "[t]he incremental cost to extract more benzene in a refinery is insignificant compared to the base cost to extract benzene down to the RFG limit."97 Perhaps it was for this reason that the American Petroleum Institute and the National Petrochemical and Refiners Association, when commenting on the proposed rule, said that if they had to choose, they would take a standard for benzene content rather than an overall toxics performance standard.98 Yet EPA does not seem to have seriously considered this possibility in the rulemaking.99

Indeed, in its technical analysis for the proposed rule, EPA had devoted only one paragraph to the topic of "more stringent control programs," principally to say that it did not know enough to adequately assess the costs and benefits of any such controls. EPA would "conduct further evaluations . . . over the next few years."100 This claim of ignorance is puzzling.101 Congress, after all, had instructed EPA in 1990 to study the feasibility of controls by 1992, and to promulgate a rule based on that study by 1995. And EPA had already spent years developing air toxics control technology standards for scores of categories of stationary pollution sources. As we'll see, some of these stationary-source reductions have been very costly.

Environmental groups and other parties sought review of EPA's decision in the D.C. Circuit. The court of appeals upheld EPA's fuel control decision.102 Without parsing the details, suffice it to say that our own analysis, which focuses on matters of policy, does not rest on any disagreement with the court's legal conclusions.103

When EPA missed its promised deadline for starting the second MSATs rulemaking, EPA was again sued by environmental groups, this time in federal district court. After the court held that the promised deadlines were legally binding on EPA,104 the parties reached a tentative settlement. Under its terms, the court would enter a consent decree that would require EPA to issue a final rule by February 2007.105 As of December 2005, the terms had not received final approval.

EPA now has an opportunity to go far beyond what it did five years ago. The magnitude of the opportunity, when one considers it, is surprising.

VI. GASOLINE AIR Toxics AND FINE-PARTICLE POLLUTION

The Clean Air Act lists 188 hazardous air pollutants.106 All of them "are known or suspected to cause cancer or other serious health effects, such as reproductive effects or birth defects, or adverse environmental effects."10 EPA says that there are no risk levels that represent acceptable or unacceptable regulatory thresholds for air toxics.108 But the "residual risk" provisions of the 1990 CAA amendments give us some idea of what kind of risk might be acceptable. Under the residual risk provisions, the ultimate goal, for any given category of stationary HAP sources, is to reduce the lifetime cancer risk to below one in a million.109 Before reducing residual risks, though, EPA is required first to develop "technology- based" standards mandating emissions reductions to the lowest levels already achieved in each industry-rather like the standards that EPA is required to set for mobile-source air toxics under section 202(1).110 The technology-based stationary-source standards, which EPA finished issuing in early 2004, have achieved annual reductions of 1.7 million tons of toxic air emissions from stationary pollution sources.111

Although EPA's air toxics program "has focused primarily on reducing emissions from large industrial sources through technology- based standards,"112 mobile-source air toxics emissions have also declined significantly since 1990 and are expected to continue to decline. This is because of programs tfiat direcdy regulate diese emissions, but also because of programs that were meant for other purposes.113 A classic example of the former is the reformulated gasoline program. A classic example of the latter is the Tier 2 program, which reduces toxics emissions as a byproduct of its main goals of reducing ozone and particulate matter.114 Thus EPA has projected that by 2007, U.S. mobile sources will be emitting 1.34 million tons of air toxics, about forty percent lower than the 2.25 million tons emitted in 1996.115 There is some evidence that this estimate is overly optimistic.116 Either way, 1.34 million tons is still quite a lot117-particularly when many of those tons are emitted in densely populated urban locations.118

What matters most is the risk caused by toxics exposures, not aggregate emissions numbers.119 And in the urban areas inhabited by many of the Americans with the highest exposure risks, motor vehicles are the largest single source of air pollution120 and mobile-source contributions to cancer risk levels may be especially significant.121 In its comprehensive 1996 air toxics assessment, EPA estimated that for mobile-source pollution alone, "more than 100 million people live in areas of the United States where the combined upper-bound lifetime cancer risk from all air toxics compounds exceeds 10 in a million"-over ten times the residual-risk threshold for categories of stationary pollution sources.122 A few years ago, EPA expected that exposures from onroad mobile sources would decline by half by 2007.123 Granting certain assumptions,124 this would get 100-million-plus Americans closer to the one-in-amillion residual risk target, but still at average risk levels at least over five times that target level.125 Moreover, average risk numbers may be misleadingly low. As the director of EPA's Air Toxics Center for transportation and air quality has said, "[c]oncentrations of air toxics in commuter vehicles can be substantially higher than average concentrations." More and faster reductions are needed.127

Aside from their direct effect, air toxics in gasoline also exacerbate other air quality problems, especially in cities. For instance, benzene and other aromatic mobile-source air toxics are important, photochemically reactive ozone precursors. Replacing them with cleaner renewable octane components such as ethanol, if it is done right, would help put U.S. counties into compliance with national ozone air quality standards. Similarly, replacing aromatics \with less carbon-intensive alternatives would reduce CO2 emissions.129 But the biggest of the air quality problems exacerbated by air toxics emissions-indeed, the most pressing air quality problem that EPA says it faces130-is the problem of fine particulate matter (PM) with an aerodynamic diameter of 2.5 microns or less (hence the term PM^sub 25^).131

Fine particles are predominandy derived from fossil fuel combustion and its products, including sulfates, nitrates, and organic carbon from vehicle exhaust.132 There is strong (and accumulating) evidence that high fine-particle concentrations lead to chronic respiratory disease, hospitalizations, and premature deaths.133 Roughly ninety million people-about thirty percent of the U.S. population-reside in so-called "nonattainment" counties that have fine-PM levels above national maximum limits.134 In December 2005, EPA proposed to tighten the national fine-PM limits further; this could significantly increase the number of counties in nonattainment.135

Like diesel-fueled vehicles, gasoline-fueled vehicles contribute significantly to fine-PM levels, both directly (from "primary" emissions of PM^sub 2.5^ itself) and indirectly (from "secondary" emissions of gaseous precursors that react in the atmosphere to form PM^sub 2.5^). This is particularly true in urban areas,136 where carbon-based particles, many of them from motor vehicles, can amount to fifty percent of the fine particles in the ambient air-or even more.137 Recent EPA monitoring data showed carbonaceous matter at between 35% and 59% of fine-particle mass at urban sites and between 26% and 57% in rural sites. As EPA has said, "[m]obile sources are much more concentrated in urban areas and may explain much of the elevated urban carbon concentrations."189

Many carbon-based fine particles contain, or are coated with, aromatic air toxics,140 which could go a long way toward explaining the health effects of fine PM. In addition, many carbonaceous particles from vehicles are ultrafine particles, a subgroup of fine particles that may be the most dangerous of all.141 A recent southern California study found that the concentration of ultrafines near two major freeways was twenty-five times higher than background levels.142

It would seem that EPA may be preparing to regulate gasoline's contribution to fine particles with some aggressiveness-and more aggressively than EPA's historic record with respect to gasoline regulation would suggest. Only a few months ago, EPA announced that aromatics are considered to be the most significant gaseous precursors of carbon-based PM^sub 2.5^ that are attributable to human activity.143 And in recent years, EPA has undertaken a campaign to reduce PM^sub 2.5^ pollution from a wide range of sources.144 There is no particular reason to think that gasoline may not be next.

EPA's fine-PM initiative is driven at least partly by its conclusion that the benefits are immense and the costs small. Two recent EPA rules prove the point. Each rule aims to sharply reduce emissions of both PM^sub 2.5^ and two of its main precursors, nitrogen oxides (NOx) and sulfur dioxide (SO2), and each is expected to prevent over 12,000 premature deaths per year by the time it is fully implemented.145

The first rule will reduce emissions from off-road diesel engines. EPA estimates that by 2020, these nonroad diesel regulations will result in net health and welfare benefits valued at $41 billion or $42 billion per year in 2000 dollars, depending on which discount rate is assumed. By 2030, the net annual benefits are estimated at $78 or $81 billion in 2000 dollars, again depending on the choice of discount rate.146 These estimates are based solely on benefits from reduced PM^sub 2.5^ levels. Strikingly, they imply that every microgram-per-cubic-meter [g/m^sup 3^] reduction in population-weighted levels of fine particulate matter nationwide means roughly $100 billion of annual health benefits.147

The second rule is the newly promulgated Clean Air Interstate Rule (CAIR), which was made final in March 2005.148 The rule will sharply reduce fine particles attributable to power plants in the eastern U.S. by capping emissions of nitrogen oxides and sulfur dioxide in 28 states, most of them east of the Mississippi, and the District of Columbia.149 As Tables 1 and 215 and the graph in Figure 1(151) show, SO2 and NOx emissions in the East in 2015 will be about half what they would be without this new power plant rule.

TABLE 1

TABLE 2

Just a few weeks ago, EPA issued its "performance and accountability" report for the 2005 fiscal year. In his introduction to the report, EPA's administrator, Stephen Johnson, stated that the Clean Air Interstate Rule "will result in the greatest health benefits of any rule [issued by] EPA since the phase-out of lead in gasoline."152

FIGURE 1

CAIR Accelerates 35 Years of Clean Air Progress: Nationwide SO^sub 2^ and NO^sub x^ Emissions from the Power Sector

In its Regulatory Impact Analysis for the Clean Air Interstate Rule, EPA predicts that in the eastern United States, population- weighted fine-PM annual averages will have "declined by 8.1 percent (or 0.96 g/m^sup 3^) in 2010 and 9.8 percent (or 1.15 g/m^sup 3^) in 2015."153 The net annual monetized benefits (almost all of them from particulate matter reductions)154 are estimated at $60.4 billion or $71.4 billion in 2010, and $83.2 billion or $98.5 billion in 2015, in 1999 dollars, depending on the discount rate.155 Here we would expect a figure lower than $100 billion per population-weighted g/ m^sup 3^, because the expected declines will occur only in part of the continental United States.156 Even so, the benefit per population-weighted g/m^sup 3^ reduction works out to $62.9 billion or $74.4 billion for 2010 and to $72.3 billion or $85.7 billion for 2020.

Even after the Clean Air Interstate Rule is implemented, fine- particle levels will remain significantly higher in densely populated areas than in rural areas. We know this because, as Table 3 shows, EPA has projected that population-weighted PM^sub 2.5^ levels will be significantly higher than non-weighted levels in 2010 and 2015.157 In the West (which is barely affected by CAIR), in fact, the projected population-weighted averages are over twice the non-weighted averages.

TABLE 3

Table 3-6. Summary of Base Case PM Air Quality and Changes Due to Clean Air Interstate Rule: 2010 and 2015

The discrepancy between weighted and non-weighted levels may help explain how EPA's regulatory agenda could now be shifting toward closer scrutiny of the toxics (and other) pollution caused by gasoline-fueled vehicles. Even assuming the elimination of all remaining power-sector emissions, the result, at best, would be population-weighted reductions about as big as those that the Clean Air Interstate Rule is projected to achieve. These reductions would be significant, but they would still leave the population-weighted average for the East at about 10.0 g/m^sup 3^ in 2010 and about 9.5 g/m^sup 3^ in 2015-and eastern urban areas would face significantly higher levels. In the West, of course, power-sector reductions would be even less efficacious.

VII. QUANTIFYING THE BENEFITS OF REDUCING AROMATICS IN GASOLINE

The benefits of major gasoline aromatics reductions are difficult to quantify, but we can make broad estimates.158 First, we assess the health effects of exposures to air toxics themselves. EPA is generally loath to quantify the benefits of reductions in ambient toxics concentrations.159 But we can get some rough sense of the benefits by looking at the dollar costs imposed by past industrial air toxics regulations, on the theory that, as EPA says, it concluded that those benefits, though unquantified, are great enough to justify the costs.160 The costs per ton of reductions predicted to result from these regulations vary by industry, but the upper limit is high. For example, EPA issued a regulation for rubber tire manufacturers in 2002. The rule is expected to cut hazardous-air- pollutant emissions in half, principally emissions of hexane and toluene, which also come from mobile sources.161 The annual cost (to simplify somewhat) is about $24,000 per ton of HAP reductions.162 An apparent outlier is a rule issued in March 2004 for new stationary combustion turbines, which will reduce HAP emissions by ninety percent.163 The estimated annual cost (again, simplifying slightly) is about $440,000 per ton of reductions-again, mostly reductions of pollutants also emitted by mobile sources.164 EPA imposed this cost even though it said explicitly that it did not know what the exposure or health effects would be.165

Because mobile-source emissions are likely to expose more people to higher concentrations of pollutants, we need to make adjustments before extrapolating from industrial-source figures. The White House Office of Management and Budget (OMB), which is known to be conservative about such matters, values mobile-source emissions of nitrogen-oxide precursors to PM^sub 2.5^ at twice the value of stationary-source emissions. Using this as a rule of thumb, and assuming (if that is possible) that one could eliminate all mobile- source air toxics emissions, one might value the ensuing effects on air toxics exposures at $64 billion per year as of 2007: $24,000 (say) per ton, multiplied by 1.34 million tons (EPA's prediction for 2007), multiplied by two to account for the exposure differential.

Second, we attempt a rough quantification of the benefits of reductions in exposures to fine particles traceable to aromatics. Relying on recent EPA monitoring data, we estimate that about forty percent of fine-PM mass is carbon-based.167 We then posit, for the sake of illustration, that half of this mass, when adjusted for population exposures-in other words, twenty percent of all population-weighted PM^sub 2.5^ nationwide-could be attributable to gasoline vehicles.168 Twenty percent \would account for more than 2 g/m^sup 3^ of population-weighted PM^sub 2.5^ nationwide (see Table 3, above), which the nonroad diesel rule and the Clean Air Interstate Rule suggest should be valued at over $200 billion per year or more. When this is added to the estimate for air toxics, the total is in the neighborhood of $250 billion annually, well over the annual value for CAIR and the nonroad diesel rule combined.

We emphasize that these are, necessarily, speculative estimates, based on various heuristic assumptions that cannot easily be proven (or refuted, given basic uncertainties). The fine-PM number might be much higher if PM^sub 2.5^ from gasoline is in fact particularly toxic, or lower if gasoline aromatics' contribution to population- weighted PM^sub 2.5^ levels is in fact much smaller than twenty percent. Furthermore, our numbers are based on a completely hypothetical case-the elimination of all (not some) air toxics emissions from gasoline vehicles. The crucial point is that the benefits of reducing aromatics levels in gasoline could be very great.169

As for the costs, what we know suggests that refiners can greatly reduce gasoline aromatic components using existing technology, and at a low cost, by replacing them with ethanol. As they did in the 1990s, it seems, refiners would make a profit today from taking toxics out of gasoline-or from simply leaving them out-and selling them in other markets.170 Demand for benzene in the chemicals market is expected to continue to increase, as it has done for some years.171 Of course, it will be EPA's task to perform a careful assessment of these matters when it moves in 2006 to consider imposing stricter fuel content controls to limit mobile-source emissions further.

There are recent indications that EPA is considering proposing a limit on the benzene content of gasoline when it begins the 2006 mobile-source air toxics rulemaking.172 This would be highly desirable: Private motor vehicles release almost ten times the benzene emitted by large industrial facilities.173 Yet EPA should also seriously consider action that would cut the aromatic content of gasoline and reduce emissions of a broader range of hazardous air pollutants. Toluene and xylene are prime candidates for this treatment. They account for over half of all Hazardous Air Pollutant emissions from all mobile sources174 and, through engine combustion, are themselves a significant source of benzene tailpipe emissions.175 Moreover, EPA made specific reference to toluene and xylene in September 2005 when it pointed to evidence that aromatics are the most significant human-caused gaseous precursors of carbon- based fine particles.176

VIII. NOT YOUR FATHER'S ETHANOL

Ethanol has had a bad name in some quarters, in large part because of a tax credit and other government subsidies that have heavily benefited the domestic corn industry. According to the Congressional Budget Office, the tax credit will cost the country $1.4 billion in 2006.177 This is very little compared with the subsidies that petroleum has received and continues to receive.178 At the same time, it is not pocket change.

Happily, today's ethanol doesn't have to be made just from corn. Brazilian sugar-based ethanol is cheaper,179 but a U.S. tariff offsets the value of the tax credit, distorting competition and raising ethanol prices for U.S. consumers.180 Eventually, cellulose- plant fiber-and other kinds of biomass may replace sugar as the cheapest source of ethanol.181 Although the production costs are still relatively high, progress is being made. The Battelle Memorial Institute recently concluded that using biomass to make 50 billion gallons of ethanol a year-over a quarter of the energy content of the 130 billion gallons of gasoline that Americans consume for ground transportation each year182-would require "a large increase over current biomass use, but would not result in large impacts on the agricultural system."188 By the end of the 1990s, according to the Department of Energy, the cost of cellulosic ethanol was $2.30 per gallon.184 Because of the energy content difference between ethanol and gasoline, that would be competitive only if the comparable cost for gasoline were about $3.30 per gallon-no longer an implausible scenario in light of recent events. Yet the costs of making cellulosic ethanol have fallen since then.185 For instance, a Danish company, Novozymes, announced in April 2005 that it had managed to cut thirty-fold the cost of enzymes used to convert corn cellulose biomass to ethanol, from over $5 per gallon in 2001 to 18 cents in 2005.186 Ironically, Henry Ford, Charles Kettering of General Motors, and others predicted eighty years ago that alcohol derived from cellulose would eventually replace gasoline.

As the costs of making ethanol continue to fall, it bears noting that ethanol can be used as a fuel, not just as a fuel additive. At a minimal extra cost, flexible-fuel vehicles (FFVs) can now be made that can run either on gasoline or on E85, a blend of eighty-five percent ethanol and fifteen percent gasoline.187 Take a hybrid- electric car that normally goes forty miles for every gallon of gasoline in its tank. If the car were an FFV, it would run about two hundred miles on E85-mostly burning ethanol, except for the fifteen percent gasoline component-before it had burned a gallon of gasoline.188 About five million FFVs are on the road today in the United States; many of their owners do not know it.189 If one of the Big Three U.S. automakers chose to sell all its models as FFVs, it might quickly gain a competitive advantage with consumers-and perhaps outrun pressures for a government FFV mandate.190

For FFVs to have a significant effect on U.S. fuel-use patterns, it will be essential to ensure the growth of a fueling infrastructure. A Department of Energy official said in July 2005 that there are over 225 public E85 stations nationwide (up from fifty-two in 2000), almost half of them in Minnesota.191 But in September 2005, the New York Times reported that the number of stations selling E85 had "nearly doubled since January, to more than 460."192 There are about 180,000 gasoline stations in the United States.193 So ethanol has a way to go.

A word about ethanol infrastructure should be added here. It might be argued that the major oil companies make little or no effort to put E85 in their pumps because they do not want it to get a foothold in competing with their main product.194 The major companies, after all, are vertically integrated, with major resources devoted to exploration, production, refining, transportation, and marketing.195 Without access to the needed infrastructure, ethanol and other renewable fuels could not make headway against an established competitor.196 Yet we assume that one or more of the majors, or at the very least owners of independent service stations, would aggressively sell ethanol at their stations given the right economic incentives. Minnesota, where a concentration of E85 stations is developing,197 will be an interesting test case for our assumption. In Thailand, where an explosion of demand for ethanol-blended gasoline has occurred in 2005 (a six-fold increase in the first five months over the same period in 2004), ExxonMobil's Thai unit has made plans to install ten percent-ethanol (E10) pumps in all 650 of its Thai stations by 2006.198

In the meantime, much can be done with gasoline blends containing relatively small amounts of ethanol. E10 gasoline contains the maximum ethanol allowed for U.S. automobiles that are not FFVs. But Minnesota recently passed a law that would require all gasoline sold in the state to contain twenty percent ethanol (E20) if certain conditions are met. EPA approval, which is one of the conditions, would likely mean that E20 could be sold nationwide.199 In Brazil, conventional gasoline has been over twenty percent ethanol for years.200

Blending ethanol in small amounts with gasoline does present some environmental challenges. But as the Natural Resources Defense Council has explained, they are not insurmountable.201 For example, E10 and other low-ethanol blends are more volatile than ordinary gasoline-or straight ethanol. This can result in higher summer ozone levels.202 Over time, the problem will diminish, as cleaner, newer vehicles replace older ones. Even now, it can be addressed by tightening volatility requirements for gasoline itself, which has been done before and can be done again.203 That, of course, would not be costless. Yet the added costs would be more than offset by ethanol's cost advantage over aromatic octane enhancers and by the net air toxics reductions caused by using ethanol. 4 In short, no additive is perfect, but ethanol is considerably better than what it would replace.205 That there are (as always) tradeoffs should not blind us to the overall picture.

The United States should certainly consider renewable options other than ethanol. For example, we should consider the use of an ether derived from ethanol, ethyl tertiary butyl ether (ETBE), that is less volatile than ethanol and is widely used in the European Union.206 The energy legislation recently signed by President Bush requires EPA to conduct a study on the public health, air quality, and water resources effects of using ETBE, ethanol, and other compounds in gasoline.207 The study should provide policymakers with guidance on the issue.208

IX. SOME IMPORTANT SIDE BENEFITS

EPA may indeed use the mobile-source air toxics rulemaking-and its responsibility to lower ambient fine-particle levels-as an opportunity to mandate a sharp reduction in the aromatics content of gasoline. If EPA does this, it could be much easier for the country to reach a goal set by the comprehensive energy legislation that the President signed in August 2005. In that enactment, Congress eliminated the oxygenate requirement for reformulated gasoline209 and, in essence, replace\d it with a Renewable Fuels Standard (RFS). The RFS mandates the use of 7.5 billion gallons of renewable fuels and blending components per year by 2012, but allows refiners flexibility as to how and when to use those renewable products.210 (Like the original decision to impose the oxygenate requirement, this, too, was a highly political decision.) Depending on the results of the rulemaking, the oil companies might exceed the requirements of the RFS mandate in order to comply with their obligation to reduce MSAT levels.211

But the mobile-source air toxics rulemaking could leave a far greater legacy than that of merely making the Renewable Fuels Standard moot. Let us assume that EPA decides to do to the makers of gasoline fuels, with respect to air toxics, as EPA has historically done to other big industries when it comes to reducing pollution levels. In other words, assume that EPA requires fuel quality improvements that result in mobile-source emissions reductions of fifty percent, sixty percent, or eighty percent, or even more.212 An eighty percent reduction of aromatics in gasoline would replace roughly twenty-five percent of the content of today's conventional gasoline. The result would be a market for over thirty-seven billion gallons of ethanol per year, or about five times the size of the RFS.213

Just as importantly, a major implicit subsidy to fuel producers would be significantly reduced. It cannot be emphasized enough that the current regulatory scheme imposes great costs on the American people. To be sure, these include the dollar costs resulting from the inefficiencies of the scheme, but more important are the direct effects on human health and quality of life that wiser regulation would have prevented. In this very real sense, the unrealized benefit of air toxics reduction (very roughly calculated above as $250 billion per year, with all the caveats stated above) is an annual tax on Americans that results in a subsidy to fuel producers. Worse, a significant chunk of that subsidy is transferred to oil- producing countries-with deleterious consequences for U.S. interests, as we know all too well.

Unwinding this and other deleterious energy subsidies would seem to be an essential step toward unwinding petroleum dependency and providing a level playing field for energy markets.214 As the current President (like his father, a former Texas oilman) has observed, the oil industry needs no subsidies to survive and flourish.215 After the subsidies are gone, it can be determined whether national security now demands a temporary tilt toward subsidies for alternatives to plain old gasoline.216 In the meantime, it is enough to know that our security is threatened, not enhanced, by our continuing to subsidize oil dependence.

As in decades past, the problem of octane is more significant, and less abstruse, than it may seem at first glance. Removing the disadvantages for alternative sources of octane-and harmonizing mobile-source toxics and fine-particle regulations with air pollution controls that already apply to other sectors of the U.S. economy-could provide the basis for the shift to a transportation system that uses ethanol as a fuel, not just as a tagalong additive to gasoline. As we have emphasized, a shift of this kind could have historic implications for our economic and military security in ways that could also be of great benefit to our global neighbors. For all the right reasons, the hour of alternative fuels may finally have arrived.

C. BOYDEN GRAY & ANDREW R. VARCOE*

* Mr. Gray is the President's nominee for U.S. Ambassador to the European Union. From 1989 to 1993, he served as White House Counsel to President George H.W. Bush. He was one of the principal architects of the 1990 Clean Air Act Amendments. Mr. Varcoe is an attorney in Washington, B.C. While in private practice, Mr. Gray and Mr. Varcoe have represented utility and chemical companies in Clean Air Act matters. The article reflects the authors' personal views alone. We are indebted to Fred Anderson, Jonathan Andron, Samuel Bray, Bill Chameides, Gary Cleland, Ana Unruh Cohen, Stephen Cox, Thomas Crane, Reid Detchon, Amy Dunham, Geri Edens, Glenn Giacobbe, Dan Greenbaum, Terry Higgins, Diane Johnson, Anne Kienlen, Tammy Klein, David Kolpin, Anna Lee, Teresa Llewellyn, Richard Palmer, Raphael Panitz, William Piel, Fred Potter, Edwin S. Rothschild, John Seinfeld, Jason Summers, Gabe Taran, Atman Trivedi, Helen Wall, Harwell Wells, and Natalie Young, among others, for invaluable help of many kinds.

We undertook this project with the encouragement and assistance of our pro bono client, the Energy Future Coalition (EFC) (http:// www.energyfuturecoalition.org). (At the time of publication of this article, Mr. Gray was a member of the Steering Committee for EFC.) We especially thank Reid Detchon, David Gardiner, Jana Gastellum, Hetal Mehta, and Tim Wirth for their aid and support. Any errors of fact or judgment are our sole responsibility.

Copyright University of Texas, Austin, School of Law Publications, Inc. Fall 2005

Source: Texas Review of Law & Politics

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