UPDATE 2-US EPA proposes tougher air rules on power plants

* Clean air rules would overturn Bush-era plan

* Rules would cut carbon by shutting small coal plants

* Would cost power industry $2.8 billion a year
(Adds comments from EPA, green groups)

By Timothy Gardner and Tom Doggett

WASHINGTON, July 6 (Reuters) - Power plants in the eastern
half of the United States will have to slash emissions of
pollutants blamed for premature deaths under proposed rules
issued on Tuesday by federal regulators.

The Environmental Protection Agency said the rules, part of
a series of steps to control emissions from power plants, would
overturn and toughen clean air regulations issued by former
President George W. Bush's administration. The agency hopes
they would begin taking effect in 2012.

The plan would cut sulfur dioxide emissions that drift
across state lines by 71 percent from 2005 levels and nitrogen
oxide emissions by 52 percent by 2014, the EPA said.

"It achieves greater reductions sooner," than the Bush era
air plan, EPA air official Gina McCarthy told reporters. She
said the new rules would cut sulfur dioxide emissions by a
million tons more a year by 2012 than Bush's 2005 Clean Air
Interstate Rule would have.

Companies heavily reliant on coal for power generation,
such as Southern Co (SO.N), Duke Energy (DUK.N), and American
Electric Power (AEP.N), could face additional costs under the
rules. Many firms are looking to invest in cleaner natural gas.
[ID:nN29152263]

Like the Bush plan, the rules requiring 31 states to cut
pollution, would encourage market forces to help cut emissions.
Companies that cut emissions by installing scrubbers or other
equipment to reduce the chemicals could sell pollution
reduction credits to other emitters in cap and trade markets.

UTILITY-FIRST CLIMATE BILL

Some analysts said the proposed rules could push utilities
to support a plan for climate legislation that would cap
greenhouse gas emissions at power utilities first.

Utilities may seek to get relief from some air and water
pollution controls from regulations in a climate bill in
exchange for shutting down their least-efficient plants fired
by coal, which emits more carbon dioxide than any other fossil
fuel.

Whitney Stanco, an analyst at Concept Capital's Washington
Research Group, said the idea could gain steam either this year
or next if Congress pursues such a bill.

The EPA estimated the rules would cost industry $2.8
billion a year, but yield $120 billion to $290 billion a year
in public health and welfare benefits by 2014. Those benefits
included the value of avoiding 14,000 to 36,000 premature
deaths, the EPA said.

Environmental groups welcomed the plan but also said the
EPA needed to make further pollution cuts at power plants.

"As anyone who has tried taking a deep breath outside
recently could tell you, we need to do more to clean up dirty
air," said Frank O'Donnell, who heads Clean Air Watch. "EPA
still needs to move ahead with plans next year to limit power
plant emissions of toxic mercury and other hazardous air
pollutants."

Bill Becker, who heads the National Association of Clean
Air Agencies, also applauded the proposal, but said the
agency's 2014 cap on nitrogen oxide emissions "will be
insufficient for resolving the pervasive ozone problems
throughout the East."

The EPA expects to begin taking public comment on the
proposed rules for 60 days late this month and hopes to start
the program in 2012.

(Reporting by Timothy Gardner, Tom Doggett and Eileen
O'Grady in Houston; Editing by Marguerita Choy, David Gregorio
and Lisa Shumaker)