The US Environmental Protection Agency on Tuesday proposed the Transport Rule to replace the current Clean Air Interstate Rule as a means of reducing sulfure dioxide and nitrogen oxide emissions from coal-fired power plants in upwind states that affect the air quality of downwind states and their ability to meet national clean air standards.

The Transport Rule is designed to cut power plant emissions of SO2 by 71% and NOx by 52% from 2005 levels by 2014 by setting state-by-state emission budgets.

EPA's proposal would set a pollution limit for each of the covered states and the District of Columbia and allow limited interstate trading among power plants to address reliability issues if there are assurances each state will meet its pollution reduction requirements.

"It is not clear whether it will be possible to achieve the standards set by the rule while still providing affordable and reliable electric power," said Jeff Holmsted, a former EPA administrator who drafted CAIR under the Bush administration and now heads the environmental practice at Bracewell & Giuliani LLP.

In replacing CAIR with this Transport Rule, EPA would "substantially" increase the stringency of existing requirements for tackling SO2 and NOx from upwind states, said Holmsted, who serves as counsel to the Electric Reliability Coordinating Council, a coalition of coal-fired utilities.

"But it is clear that technical experts in state regulatory bodies, grid operators and industry will be studying this rule very closely from a reliability perspective. Hopefully, the rule won't set up an unfortunate choice between environmental compliance and keeping the lights on."

CAIR in 2005 created an interstate NOx and SO2 emissions cap and trade system for 28 states and the District of Columbia to address soot and ozone pollution transported across state borders.

But the US Court of Appeals for the District of Columbia Circuit in July 2008 vacated CAIR, finding that it had "several fatal flaws." In December 2008, the court decided to allow CAIR to stay in place until EPA replaced it with a rule reflecting the court's opinion.

Gina McCarthy, EPA assistant administrator for air and radiation, said the agency believes the new rule "will withstand legal scrutiny." The new Transport Rule will "lock in" NOx reductions that CAIR installed and set stricter SO2 caps on electric generation than set by the original rule. The new rule also offers "very limited" interstate trading, she said.

"I think we met both spirit and letter of what court challenged us to do," McCarthy told reporters. "The court was very clear we needed to hold states to a [NOx and SO2] budget. We have done that."

McCarthy called the new rule a "large statement" for the Obama administration for power plant pollution reduction, "but not the final answer." Tougher proposals for ozone are pending in August, with a final rule expected in 2012.

McCarthy said she did not know that the rule would result in the direct shutdown of any coal-fired power plants, but she anticipated that it would drive facilities to install pollution controls.

The National Association of Clean Air Agencies also lauded EPA for locking in NOx reductions in CAIR and tightening the SO2 emissions caps beyond those set in CAIR.

The state air regulators' group also is "pleased that EPA proposes to limit the total amount of interstate trading, thus ensuring that each state in the region will be required to reduce emissions of NOx and SO2," said Bill Becker, NACAA's executive director.

"This is crucial for meeting the Clean Air Act's requirement to eliminate air pollutant emissions that significantly contribute to downwind nonattainment or interfere with maintenance of health-based air quality standards," he said.

The state air regulators' group is "confident" EPA's proposal resolves the legal issues identified previously by the federal court that remanded CAIR in 2008, Becker said.

EPA will open the Transport Rule to a 60-day public comment period and three public hearings once the proposal is published in the Federal Register.

The agency also will take public comment on two alternative approaches -- one that would allow emissions allowance trading only among power plants within a state and a second that would set emissions limits on each power plant. Under either scenario, EPA would propose a pollution limit on each state.

US Senator Tom Carper, a Delaware Democrat who has pushed a power plant pollution bill for years, said EPA's new rule underscored the need for Congress to act.

The Transport Rule "is complicated and open to further lawsuits, which would likely cause even more delays" in cleaning the air, he said. "To me, the path forward is clear -- Congress must pass legislation to address the serious threat posed by air pollution this year."

--Cathy Cash, cathy_cash@platts.com