Policy commentary

Greenhouse Gases and the Clean Air Act: A Useful Option for the Short Term

In the absence of new legislation taxing carbon or establishing a cap-and-trade system for greenhouse gases in the United States, the Environmental Protection Agency is working to regulate emissions under the Clean Air Act. How does that law provide for action on this front? What mechanisms and regulatory strategies can be used that are practical and legally sound?

Until recently, it has been widely assumed that U.S. action on climate change would come, if at all, through new legislation—most likely by pricing carbon within a broad cap-and-trade system. While almost all economists and policy experts still agree that legislation remains the best long-term option, it has become increasingly likely that in the near future the regulatory vehicle for carbon emissions will be an old friend: the Clean Air Act.

The Clean Air Act is a battle-tested law: its predecessors were passed in 1963 and 1967 before substantial revision and expansion led to its modern form under Richard Nixon in 1970. Important further amendments followed in 1977 and again in 1990. So why is it being applied to greenhouse gas emissions only now? And why has its use moved to the forefront of the policy debate on climate change? There are two main reasons: first, it was only in 2007 that the Supreme Court held in Massachusetts v. Environmental Protection Agency (EPA) that greenhouse gases were included in the act’s definition of “pollutants.” Before this decision, it was unclear whether carbon could be regulated under the act at all—the Bush-era EPA argued that it could not be, and that new legislation would be necessary. The Supreme Court disagreed, although the effects of this decision have taken some time to percolate through EPA’s regulatory apparatus and the policy community in general.

Second, under the Obama administration, EPA has moved relatively quickly to bring the act to bear on greenhouse gas emissions. The agency issued an “endangerment finding” for greenhouse gases in 2009, which legally established that greenhouse gas emissions threaten public health and welfare, a crucial first step. This finding formed the basis for the agency’s first carbon regulation under the act—new emissions standards for cars and trucks issued in March 2010. Although these moves focused on transportation-sector emissions, they commit EPA to regulate stationary sources (power plants and industrial facilities) as well.

At the same time, continuing congressional inertia means that there is no new comprehensive climate legislation. While new legislation would almost surely supersede and preempt at least some aspects of existing EPA authority, the current lack of action leaves regulation under the Clean Air Act as the inevitable alternative.

The result is that, at least over the short term, continued EPA moves to regulate carbon emissions under the act are likely. What that means in practice is only partly clear. The 2010 rules for cars and trucks show the agency’s plans for the transportation sector. EPA has also clarified requirements for consideration of greenhouse gas emissions in the Clean Air Act permit process for all new stationary sources (and those undergoing major upgrades), but how this ultimately will be implemented is still uncertain. The permits require “best available control technology” and it is unclear what such technology would be for greenhouse gas emissions. Permits would also be required for even very small emitters of greenhouse gases, likely including tens of thousands to millions of facilities that cumulatively account for a very small portion of emissions and have never been subject to the permitting process. To avoid this conundrum and improve the cost effectiveness of permitting, EPA issued a rule to “tailor” the process—meaning that only large emitters would be affected—but this approach is legally questionable.

Even greater uncertainty exists about how EPA would regulate other existing stationary emissions sources—those that are not being modified. How the agency chooses to do so is the largest unanswered question in this area, not least because these existing sources account for the majority of U.S. carbon emissions. EPA has a variety of tools available under the Clean Air Act, including setting a national air quality standard (the approach used for major traditional pollutants such as particulate matter and nitrogen oxides), or treating carbon as a hazardous pollutant (as is done for mercury, for example). Most of these approaches have significant legal and/or practical problems, however. The best and most likely Clean Air Act mechanism seems to be sectoral performance standards under the New Source Performance Standards (NSPS) program—which, confusingly, also applies to existing emissions sources. States would assume the primary implementation and enforcement role for existing sources under this program. Traditionally, these performance standards are technology-based, but the act appears to be sufficiently flexible for EPA to incorporate market-oriented mechanisms.

At RFF, we have analyzed how EPA might use performance standards to regulate carbon emissions from one sector—coal power plants. Preliminary studies by EPA and the U.S. Department of Energy indicate relatively accessible emissions reduction opportunities from coal in the form of power-plant efficiency improvements and co-firing of biomass with coal. Traditional technology-based performance standards would allow EPA to require efficiency improvements. But market tools would allow the agency to reach these opportunities and those from biomass co-firing in a more cost-effective way. For example, EPA could implement an emissions efficiency-based performance standard, but allow plants to trade their progress toward that standard. Plants that could readily become more efficient or that could co-fire biomass could sell credits to plants for which such moves would be more expensive. EPA might also create a cap and trade-like system for coal plants (and possibly other categories of emissions sources) that would create similar incentives.

Our analysis indicates that Clean Air Act regulation of the coal sector could result in emissions reductions of between 5 and 10 percent, equivalent to up to about 3 percent of total U.S. emissions, without changing the level of electricity generation. This is not a large number, but it is not trivial either. It represents a significant portion of the reductions expected from coal-fired power plants under the “17 percent by 2020” goal articulated by President Obama in his pre-Copenhagen announcement and the House of Representatives in the Waxman-Markey bill. And these gains are only from one sector—Clean Air Act regulation of other sectors could achieve additional reductions.

Although our evaluation does not yet estimate costs, there is reason to believe that such modest regulation would have modest costs. Because efficiency improvements and biomass co-firing would very likely be among the first moves made by coal plants under a carbon price (implemented, presumably, under new legislation), it is unlikely that requiring these moves through regulation would result in comparatively higher costs.

Any enthusiasm about the Clean Air Act as a vehicle for carbon regulation should be tempered, however. While it is possible to identify some readily available opportunities for emissions reductions and push them via regulation (with market tools to keep costs down), it quickly becomes difficult to identify what steps should be taken next. A carbon price (either cap-and-trade or a carbon tax) created by legislation would allow the market to make these decisions. Comprehensive climate legislation could also establish a uniform carbon price across sectors, provide for international offsets, create greater opportunities for innovation, and include other cost-saving mechanisms that the Clean Air Act cannot provide.

With those reservations, however, a good case can be made that the Clean Air Act—if used wisely by EPA—can be a useful vehicle for short-term greenhouse gas regulation. Given the inertia in Congress, that is good news. Unlike a carbon price created by new legislation, the Clean Air Act is a tool we already have—and because it is the law, a tool we are compelled to use.