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New Source Review for Stationary Sources of Air Pollution Summary The Clean Air Act (CAA) establishes a pair of programs—together known as New Source Review (NSR)—that regulate the construction and modification of large stationary sources of air pollution, such as factories and electricity-generating facilities. Under the NSR programs, a permit is required before construction may begin on a stationary source that has the potential to emit more than a specified level of emissions. A permit is also required before an existing major stationary source may be modified—that is, physically changed, or changed in operation, in a way that increases emissions.1 The permit applicant must show that the construction or modification will include advanced emission controls. The applicant must also show that the project will not disrupt progress toward attaining the nation’s ambient air quality standards nor violate limits, known as increments, that restrict growth in air pollution in clean air areas. NSR’s treatment of modifications has been particularly controversial. This is partly because of the complexities involved in determining precisely which changes qualify as modifications. In addition, the U.S. Environmental Protection Agency (EPA) in the late 1990s brought lawsuits against some electricity-generating plants based on an aggressive interpretation of its rules and a correspondingly narrow view of which projects are exempt from NSR as being “routine maintenance, repair, and replacement.” A number of these suits are currently pending. In the early 2000s, EPA sought to revise its rules. 1 EPA has long exempted routine maintenance, repair, and replacement from coverage by NSR. The scope of this exemption is in dispute, as Chapter 2 of this report discusses, as is the definition of what constitutes an emission increase.
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New Source Review for Stationary Sources of Air Pollution The agency made a number of regulatory revisions to the NSR programs in December 2002 (the 2002 NSR rules). These included revisions in methods for determining what particular physical or operational changes in a facility might result in significant emission increases and thus invoke NSR requirements. In support of these revisions, EPA concluded that the 2002 changes would be likely to result either in some degree of emission reduction or in no significant changes in emissions. However, EPA indicated that it did not have sufficient data to quantify the emission changes that might result and also said it could not reliably determine the locations of any potential emission changes. Thus the agency could not estimate the rule’s impacts on public health. In October 2003, EPA made additional NSR revisions, referred to as the equipment replacement provision, that allow facilities to make certain equipment replacements without an NSR permit even if pollutant emissions increase significantly, as long as the facility does not exceed its maximum level of allowable emissions.2 This expanded the scope of the exemption from NSR for “routine” maintenance. After conducting a computer model analysis of the electric power industry and six case studies of other industrial sectors, EPA concluded that the equipment replacement provision would have little impact on future emissions. The rule changes have provoked much dispute. EPA and other supporters of the revisions say the NSR changes will provide industry with greater flexibility in operating its facilities, increase energy efficiency, and help to modernize plants—all without causing substantial emission increases. Opponents say that the NSR revisions will slow progress in cleaning the nation’s air, and thus damage human health, and that the changes are not necessary to provide operating flexibility in industry. Congress directed EPA to arrange for an independent study by the National Research Council (NRC) to estimate the effects of the 2002 NSR rule changes and the 2003 equipment replacement provision. Congress called for an assessment of changes in emissions of pollutants regulated under the NSR programs, the effects on human health, and changes in operating efficiency (including energy efficiency), pollution prevention, and pollution-control activities at facilities subject to the revised NSR programs. The study task statement specified that the study should consider the data and methods necessary to assess specific effects of the NSR rules expected to occur in the coming years. Several factors made it difficult to assess the effects of the NSR rule changes. As of mid-2006, the 2002 NSR rules have gone into effect in only a few states, and few permits have been issued under the 2002 rules. In ad- 2 Sources often emit less than their allowable maximum. Therefore, it is often possible for a source to increase emissions without exceeding its allowable maximum.
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New Source Review for Stationary Sources of Air Pollution dition, portions of the 2002 rules have been struck down by the D.C. Circuit Court of Appeals as beyond EPA’s authority under the Clean Air Act. The equipment replacement provision has not gone into effect in any state. A panel of the D.C. Circuit Court of Appeals stayed the rule change before its effective date and concluded in March 2006 that the rule was beyond EPA’s authority under the Clean Air Act. In addition, in March 2005, while this report was being prepared, EPA promulgated another rule, the Clean Air Interstate Rule (CAIR)—a “cap-and-trade” program aimed at lowering emissions from electric power plants in eastern and midwestern states. In those states, CAIR may have a substantial effect on the consequences of the NSR reforms. However, CAIR is subject to judicial review. The shifts in the regulatory and legal landscape since the committee began its evaluations do not negate the core value of this report. The fundamental issue raised by the 2002 and 2003 rules—the question of which alterations at existing major sources ought to be subject to NSR—remains important because those sources emit a large portion of the total air-pollution burden in some areas. In addition, EPA is considering a number of other rule changes, described in Chapter 2, that would narrow the possible applicability of NSR in various ways. Any significant change in NSR should be accompanied by careful prospective and retrospective analyses. This report can serve as a case study on how such analyses should be conducted. Although the report focuses on the 2002 and 2003 rules, its analytic framework applies as well to other possible changes in NSR and to other regulatory contexts. Our methodology and recommendations about necessary data and information, and the need for development of better research methods, are as important as the evaluations in this report regarding the 2002 and 2003 rules. The committee’s analyses of existing data and computer simulations provided several insights into the potential effects of the NSR changes, as indicated in this report. However, the committee concluded overall that, because of a lack of data and the limitations of current models, it is not possible at this time to quantify with a reasonable degree of certainty the potential effects of the NSR rule changes on emissions, human health, energy efficiency, or on other relevant activities at facilities subject to the revised NSR program. Use of anecdotal information, by itself, is insufficient to evaluate changes in performance expected from the broad range of facilities affected by the NSR rule changes and to evaluate what effects might occur as a result of those changes. Additional data and a combination of empirical analysis and modeling will be necessary to quantify the effects of the NSR rule changes and associated uncertainties. In the interest of demonstrating how such an analysis might be undertaken in the future, the committee provides the following in this report:
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New Source Review for Stationary Sources of Air Pollution Several model scenarios of how NSR changes might affect national emissions in the electricity-generating sector based on different assumptions about future regulations and decision making in the industry. A limited analysis of permit activity and emission records for a variety of industries. Recommendations for specific analytical approaches that will improve the likelihood of finding quantitative answers to the study questions, and for data collection and modeling improvements that could be used to carry out these approaches. THE COMMITTEE’S ANALYSIS OF POTENTIAL EFFECTS OF RULE CHANGES ON EMISSIONS FROM ELECTRICITY-GENERATING FACILITIES The committee focused primarily on the electricity-generating sector, especially coal-fired power plants, because that sector dominates national emissions of sulfur dioxide (SO2) and is the major stationary source contributor of nitrogen oxides (NOx). Those two pollutants are important contributors to concentrations of airborne particulate matter, and NOx is an important precursor to ozone. Particulate matter and ozone are of considerable concern because of the risk they pose to public health. Older power plants have higher emission rates than newer facilities and contribute proportionately more to total emissions than to electricity generation. More than 60% of all coal-fired electricity-generation capacity in the United States currently lacks the kinds of controls for SO2 and NOx emissions that have been required under NSR. Also, the older facilities are more likely than newer facilities to undergo maintenance, repair, and replacement of key components, so a substantial portion of emissions from the electricity-generating sector is potentially affected by the NSR rule changes. The committee focused on the impact of the 2003 equipment replacement provision because that rule was expected to influence the electricity-generating sector more than the 2002 NSR rules. Because the equipment replacement provision has not been implemented and there are no actual data, modeling was necessary to estimate its potential effects on emissions of SO2 and NOx. The committee used an expanded version of the approach used by EPA in its prospective regulatory impact analysis of the 2003 equipment replacement provision. In assessing the potential effects of the equipment replacement provision compared to the prerevision NSR rules,3 EPA assumed that, under 3 In this report, the term prerevision NSR rules refers to the NSR rules prior to the 2002 and 2003 changes.
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New Source Review for Stationary Sources of Air Pollution the prerevision rules, owners of electricity-generating facilities would have chosen to avoid NSR requirements by deferring maintenance, thus resulting in deterioration of facility performance. The committee asked EPA to run the model using different assumptions about decisions by owners of electricity-generating facilities under the prerevision NSR rules that, for various percentages of electricity-generating facilities, owners would add emission controls, upgrade their electricity-generating processes so as to create less pollution, or retire their facilities. Three sets of model scenarios were run assuming that those choices would be made for a minimum of 2%, 5%, and 7.5% of facilities each year, respectively. Those scenarios allowed the committee to consider the possibility that aggressive implementation of the prerevision NSR rules would have compelled changes to be made at coal-fired facilities to a much greater extent than would the equipment replacement provision. That possibility could occur if aggressive NSR enforcement of the prerevision rules would have resulted in substantial replacement of old equipment. In examining this range of assumptions for a bounding analysis, the committee is not judging that these scenarios are more likely than the NSR-avoidance assumptions of the EPA analysis. Like the EPA analysis, the committee considered the impacts of the equipment replacement provision under the regulations for SO2 and NOx that existed when the rule was promulgated.4 In addition, the committee’s analyses went beyond EPA’s regulatory impact analysis by considering applicable regulations that have not yet been implemented, such as CAIR. The committee also considered alternative scenarios about economic and technological conditions. The Model In EPA’s analysis, an industry-sector model called the Integrated Planning Model (IPM)5 was used. IPM estimates future emissions based on different assumptions regarding (1) decision making in the industry, (2) values of important parameters such as the percentage of plants that might have complied with the prerevision rules or retired, and (3) other relevant environmental policies and enforcement actions. IPM does not explicitly model NSR-relevant decisions about equipment repair and replacement, so 4 Model scenarios included emission limits of the acid-rain program enacted under Title IV of the 1990 Clean Air Act amendments. They also included emission limits of a program (commonly referred to as the “NOx SIP Call”) to mitigate NOx emissions that contribute to ozone formation. 5 IPM is a deterministic model of the electricity sector that uses linear programming techniques to find a lowest-cost approach to determine how electricity generators might meet projected demand and the amounts and types of generating-capacity investment and retirement sufficient to meet peak demand and regional reserve requirements.
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New Source Review for Stationary Sources of Air Pollution incorporating the NSR rule changes in IPM requires subjective judgments by those running the model. The committee concludes that current versions of IPM, or similar industry-sector models, cannot be used as the sole basis for estimating the effects of the NSR rule changes on electricity-generating-facility emissions. Like all current power-sector models, there is substantial uncertainty in the estimates from IPM even for assessing broad patterns. For example, the model assumes essentially perfect foresight on the part of facility decision makers, an unrealistic premise. At best, IPM is a tool for estimating national, or perhaps regional, patterns of emissions, which are important to public health but can overlook significant local variations in effects on a smaller geographic scale. Because uncertainties are greater at smaller scales than on the national level, conclusions that can be drawn from current modeling are limited. Results The committee considered both an NSR-avoidance assumption regarding prerevision NSR compliance (the basis of the previous EPA analysis), as well as assumptions that the prerevision NSR rules would lead to retrofits of pollution-control equipment that would have otherwise not taken place. Based on the committee’s IPM analysis, the potential effects of the equipment replacement provision on national emissions from electricity-generating facilities depend on whether CAIR is assumed to be in place or not. The IPM results suggest the following conclusions if indeed the prerevision NSR rules would have compelled significantly more retrofits: For SO2, without implementation of CAIR, the equipment replacement provision would be expected to result in a moderate decrease in emissions in the first 6 years or so (compared with prerevision NSR), followed by a period of relatively little change in the next 6 years or so.6 However, after the first 12 years, if it is assumed that prerevision NSR rules would have caused all coal-fired electricity-generating facilities to add emission controls, the equipment replacement provision would be expected to cause a relative increase in emissions, perhaps substantial, from the electricity-generating sector compared with the prerevision NSR case (see Chapter 6). If CAIR is assumed to be implemented, the model estimates minimal differences in total SO2 emissions between the prerevision rules and the 6 The decrease is expected, under these assumptions, because the equipment replacement provision would significantly increase the value of Title IV SO2 emission allowances to facilities, making overcompliance and banking of allowances in early years more attractive (see Chapter 6).
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New Source Review for Stationary Sources of Air Pollution equipment replacement provision, even if all electricity-generating facilities would have added emission controls under the prerevision rules. For NOx, without implementation of CAIR, the equipment replacement provision rule changes would be expected to cause an increase in emissions after the first few years; this increase is larger when the prerevision NSR is assumed to compel greater amounts of emission controls. If CAIR is implemented, the model estimates a minimal change in NOx emissions; although, after the first 12 years or so, the equipment replacement provision would be expected to cause a moderate increase in emissions if all facilities would otherwise have added emission controls under prerevision NSR rules. The model estimates have substantial uncertainty, because facility-level decision making in response to NSR rule changes is difficult to predict, and many assumptions about such decisions that are embedded in the model may not be realistic depictions. Also, the net effects of the equipment replacement provision would depend heavily on how electricity producers respond to the rule changes. Under the revised NSR rules, fewer investment projects would require NSR permits, thus reducing the costs of such projects, both in terms of avoiding NSR-permit-related emission controls and potential delays and uncertainties caused by the NSR permitting process. The newer production equipment might be cleaner than the older equipment it replaces—even if not as clean as the equipment that NSR might require—and might result in some reduction in emissions. Therefore, if the revised NSR rules encouraged additional investment in new equipment, the result could be a reduction in emissions at some facilities, if those facilities would have avoided triggering prerevision NSR by delaying investment in process upgrades. Key questions are whether many investment projects that were discouraged by the prerevision rules would proceed under the revised rules, and how much those projects would reduce emissions. Available empirical data are not sufficient to formally evaluate this effect. It is reasonable to conclude that the implementation of the ERP could lead to SO2 and NOx emission increases in some locations and decreases in others. However, the magnitude of the changes and the number of geographic areas affected could not be assessed. Although IPM can provide some reasonable insights about national emission patterns under different scenarios, such insights are on a scale too large for assessment of health effects and should not be used for such purposes. COMPARISON OF EMISSION CONTROL COSTS FOR ELECTRICITY-GENERATING FACILITIES The committee’s analyses allowed for a comparison of the cost of achieving SO2 and NOx emissions reductions through aggressive implemen-
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New Source Review for Stationary Sources of Air Pollution tation of the prerevision NSR rules versus lowering the caps on allowable national emissions with a market-based trading program. (NSR has local objectives as well, as mentioned in Chapter 2, so this comparison, which is limited to national emission reduction, should not be taken as attempting an overall assessment of NSR.) The IPM analysis suggests that a national market-based trading program with emission caps below those specified by CAIR could produce emission reductions at approximately one third or less of the cost of aggressive implementation of the prerevision NSR rules. This is primarily because a more-traditional regulatory approach, such as the NSR rules, tends to be less cost efficient at achieving emission reductions across multiple facilities than market-based approaches. When the IPM simulation allowed facilities to trade emissions in the lower-emission-cap scenario, the model predicted greater use of low-sulfur coal and natural gas and fewer retrofits of emission controls by the affected facilities. IPM results suggest that if lower national emissions of pollutants are desired, setting emissions caps below those set for CAIR would be a more cost-effective means of attaining national emission goals than the type of regulatory approach used for the NSR rules. However, because of the limitations in IPM, emissions could not be assessed at the facility level, and any effective strategy must be designed and implemented to guard against potential pitfalls, such as worsening air quality in a particular local area. Whether such a strategy should be undertaken is a matter of policy and outside of this committee’s scope of work. THE COMMITTEE’S ANALYSIS OF POTENTIAL EFFECTS OF RULE CHANGES ON EMISSIONS FROM SECTORS OTHER THAN ELECTRICITY GENERATION Other industry sectors besides the electricity-generating sector would have been affected by the equipment replacement provision. In addition, the other sectors are affected by the 2002 NSR rule changes, which have gone into effect in some locations. To gain some insight about the industry sectors other than the electricity-generating sector that are expected to contribute most to emission and air-quality changes as a result of the NSR rule changes, the committee evaluated some permit data and emissions inventories from the recent past. A substantial number of NSR permits have been issued for facility modifications within industry sectors, such as stone, clay, and glass products; paper and allied products; chemicals and allied products; and food and kindred products. Those modifications have led to increased emissions clustered within certain locations. For example, permits for facilities within the cement industry and pulp and paper industry have resulted in a substantial contribution to permitted NOx emissions for facility modifications. The geographic clustering of NOx emissions from those industry
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New Source Review for Stationary Sources of Air Pollution sectors in Texas, Pennsylvania, Georgia, and Michigan, near areas that are in nonattainment of ambient air quality standards for particulate matter and ozone, indicates that further research into the influence of the NSR rule changes on the sectors would be warranted. Similar conclusions can be reached for other pollutants, on the basis of information on permits issued for modifications in the chemical, cement, and pulp and paper industries for SO2; chemical and allied products, metal industries, and pulp and paper for particulate matter; and pulp and paper, soybean oil mills, and lumber and wood products for volatile organic compounds. Although the 2002 rules have been implemented in few states, and available data are not sufficient to quantify the effects of the NSR rule changes, the existing data provide some insight about areas on which to focus for future analyses. In addition to permit data, more information is needed on facilities that make changes not requiring an NSR permit, so as to assess the extent to which projects that lower emissions or improve efficiency are undertaken in response to the revised rules. Also, suitable industry simulation models are not available for industrial sectors other than the electricity-generating sector. The only basis at this time for determining the effects of the NSR rule changes on those other sectors are anecdotal evidence and a few case studies, which in the committee’s judgment, do not provide an adequate basis for the evaluations needed. FUTURE ANALYTICAL APPROACHES FOR DETERMINING EFFECTS OF RULE CHANGES Modeling efforts to date have provided some insights into the potential effects of the NSR rule changes on national emissions from the electric power industry. However, such models cannot be used to quantify how much emissions may change at individual facilities and thus cannot be used to assess potential health effects as is usually done for other air regulations. In order to further evaluate the effects that the committee was asked to consider, an investigator would need to analyze a set of actual data on what individual facilities are doing or have done in response to the NSR rule changes. The committee considered a number of potential analytic approaches that could be used to evaluate the effects of the NSR rule changes, including econometric and statistical models, process engineering models for particular facilities, and simulation models for the electric power sector. Each of the approaches has its strengths and weaknesses. Rigorous assessments of the impacts of the NSR rule changes should include both empirical analysis of information such as permit data or investment activities, and modeling approaches for industry-sector responses to regulatory changes or air-quality effects of emission changes.
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New Source Review for Stationary Sources of Air Pollution Future Analysis of Permit Data Analysis of NSR permit data could be used to determine how NSR permitting activity has changed as a result of the rule changes. However, current databases are inadequate for such an analysis. In addition, permit data would capture only projects that are actually implemented, omitting investments that may have been forgone to avoid NSR requirements. If the databases included minor-construction-permit information at the state level for investment projects that no longer needed NSR permits, such analyses might plausibly capture the major effects of the rule changes on the overall level of investment activity. Future Analysis of Investment Activities The NSR rule changes have been implemented in some states and not in others, which provides an opportunity in the future to observe differences in outcomes that may be attributable to implementation of the rule changes. Data on investment activity, such as those collected by the U.S. Census Bureau, could be used to evaluate the rule changes (see Chapters 4 and 5). The evaluation depends on comparing investment activity at facilities in states where the revised NSR rules have been implemented with investment activity at facilities in states that have not implemented the changes. Facility-level data on emissions could also be analyzed to see how NSR rule changes affected emissions. Analysis of investment activities would also disclose improvements to facilities that do not involve NSR permits. However, such analyses will not be possible for several years for a variety of reasons—the data become available only after a 3-year lag, many states have not yet implemented the rule changes, and investment decisions can take years to be carried out. A complete econometric analysis may therefore not be feasible until 2009 or 2010. Even at that point, the impact of the NSR rule changes on investment activity will not be very precisely estimated; if the NSR rule changes cause less than approximately an 11% change in investment, the analysis may not show a statistically significant result (see Chapter 5). Future Assessment of Human Health Effects After assessing the effects of NSR rule changes on facility investment behavior and related emissions, atmospheric transport and fate models will need to link emissions changes with incremental changes in ambient concentrations of pollutants of interest. In order to make health-effects assessments, modeling will also be needed to capture detailed meteorologic factors with appropriate geographic specificity (for example, on a local scale) and on a relevant time scale to assess the influence of population exposures to
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New Source Review for Stationary Sources of Air Pollution changes in ambient pollutant concentrations. Given the variability in meteorologic factors, stack characteristics, and downwind population density, the population health benefits per unit emissions can vary by more than a factor of 10 across sites even if relationships between air-pollution concentrations and health responses are assumed to be linear. The variability could be even greater if the relationships are not linear. This reinforces the importance of understanding detailed geographic patterns of emission increases and decreases as a result of NSR rule changes. CARRYING OUT THE APPROACHES: MODELING NEEDS AND DATA COLLECTION To improve the likelihood that the effects of the NSR rule changes can be better estimated, additional data collection and improved modeling methods are needed for each of the recommended approaches. These improvements might also be valuable for measuring the effects of other regulatory changes regarding air-pollutant emissions. Prospective data collection in key areas could lead to more informed policy decisions in the future. Modeling Improvements Industry-Sector Models Industry-sector models represent the primary analytical approach now available. In principle, those models are most relevant to the committee’s task because they can theoretically capture the geographic location of emission changes necessary for air-quality and human-health impact assessment. The committee recommends several steps that could potentially improve the reliability of regional (if not local) emission estimates and could allow for quantification of effects on air quality and health. Recommendation: Electricity-sector models, such as IPM, should be refined to account better for the influence of NSR and related regulations on plant-level decision making. Although this is clearly a daunting task, sequential refinements could capture the factors that influence decisions to retrofit a facility or perform maintenance activities. Recommendation: Electricity-sector models should be refined to facilitate analyses of the sensitivity of model results to changes of input parameters and to conduct more formal uncertainty analysis. In particular, periodic expert review of key inputs and components
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New Source Review for Stationary Sources of Air Pollution of a model are important for a more-informed updating of the model. Recommendation: Steps should be taken to compile the necessary input data to support development of industry-sector models of industries other than electricity generation to allow for more-informed future analyses. Development of those models should strive to achieve qualities recommended for electricity-sector models. Econometric Models Reduced-form econometric analyses of investment and emission data from sets of facilities in various states that differ in the effective date of the NSR rule changes could be a useful complement to industry-sector simulation models. Such analysis could be accomplished through the use of an econometric analysis model that focuses on total investment spending or emissions from an entire facility (see Chapter 5). Recommendation: Econometric analysis of facility-level investment and emission data should be carried out when the necessary data become available, recognizing that substantial research time and resources will be needed to carry out the analysis. Data Collection Improvements There is no central database on issued NSR permits. This constitutes an important data gap. State data on NSR permits and minor-construction permits are generally limited and are often kept in paper form. There appears to be no attempt by states to develop permit databases that are compatible with each other. Development of a standardized database program adopted by all states could make analyses of these permit data more plausible. Recommendation: Information on issued permits should be collected in a systematic format (same data fields, field layouts, variable definitions, and so on) in a database maintained by EPA. This database should include the full range of state and federal permits, including both NSR and minor permits. Resources should be made available so that EPA and other agencies can collect the information consistently in the future. The information could inform future assessments of NSR rule changes and, perhaps more important, could provide the foundation for prospective assessments of other future regulatory actions.
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New Source Review for Stationary Sources of Air Pollution Recommendation: Data should be compiled when the NSR rule changes became applicable for facilities in different states as well as on perceptions at regulated firms and among regulators regarding the timing of the rule changes. Such information will help to identify when investment decisions are likely to be affected by the NSR rule changes. The data should be collected both in areas that have attained air-quality standards as well as in those that have not. The information can be gathered at the state level in a systematic format and compiled by EPA. Because the number and types of facilities that may be subject to NSR varies across states, existing data can be used to target data-collection efforts (see Chapter 7). CONCLUSION This report serves as a case study on the types of information and methods needed to analyze the effects of significant changes to the NSR programs. Overall, because of a lack of data and the limitations of current models, available information is insufficient to quantify the effects of the NSR rule changes with reasonable certainty. A combination of empirical analysis and modeling will be necessary to determine the effects of the implemented NSR rule changes and associated uncertainties for affected industry sectors. Although current modeling approaches can provide some reasonable insight about national emission patterns under different scenarios, such insights are on too large a scale for assessment of health effects and should not be used for such purposes. If industry-sector modeling were improved, it could in principle capture the geographic location of emission changes necessary for air-quality and human-health assessment. The committee recommends that EPA and other government agencies undertake and sustain the data-collection efforts outlined in this report and that future efforts to assess NSR effects take account of the methods presented here. Our methodology and recommendations about necessary data and information and the development of better research methods are as important as the evaluations of this report regarding the 2002 and 2003 rules.
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Representative terms from entire chapter: