Weathervane: A Climate Policy Blog from Resources for the Future

Jul07

Death of Cap and Trade?

When Sen. Lindsey Graham recently declared cap and trade “dead” he may have been more right than he realized. He was referring to the political prospects for carbon pricing in this Congress, but cap and trade has been the tool of choice for limiting emissions of other pollutants—like sulfur dioxide and nitrous oxides—for almost 20 years. The EPA proposed a rule yesterday that could sharply limit the role of trading in markets for those pollutants.

The proposed “transport rule” would replace the existing Clean Air Interstate Rule (CAIR). Both are aimed at reducing emissions that affect air quality not locally, but in downwind area (hence the “transport” and “interstate” in their names). CAIR was issued under the Bush administration but comprehensively rejected by the D.C. Circuit Court (in North Carolina v. EPA, 531 F.3d 896). CAIR has been in effect since the ruling, but as a zombie regulation. The EPA needs to replace it with a new rule that fits the court’s view of the agency’s powers under the Clean Air Act. The Transport Rule released yesterday is the agency’s attempt to do this. The rule is massive—1,300 pages—and reads like a long-form response to the court’s opinion.

So what does this have to do with cap and trade? Among the court’s major objections to CAIR was the inability of the EPA to guarantee each state would reduce its emissions sufficiently to prevent interference with air quality downwind. The emissions trading systems set up by CAIR was to reduce emissions overall, and prevent problematic transport of pollution generally but the EPA couldn’t promise, as the court read the statute to require, that each and every state would reduce emissions sufficiently. The reason for this is interstate trading. CAIR would have allowed emissions sources in different states to trade with each other. This has obvious benefits, as a bigger market is generally more efficient, but it is impossible to know in advance where the emissions reductions will occur. If it is unexpectedly cheap to reduce NOx emissions in Ohio and unexpectedly expensive in Kentucky, trading will happen and Ohio will make deeper cuts. Knowing in advance where reductions will be cheaper is hard (this lack of information is the reason for having a market in the first place). Generally, this lack of foreknowledge is not a problem, since the overall cost of emissions reductions is lower. Under the court’s reading of the Clean Air Act, however, the agency has to know the outcome in advance, at least at the state level.

The transport rule responds by largely eliminating interstate trading. Intrastate trading is still allowed, but the rule would only allow interstate trading at the margin—within relatively narrow “variability limits.” The EPA seems to be doubtful that even this small amount of interstate trading will be permitted by the courts. The new rule lists alternative options that do not include interstate trading at all.

It looks like we’ll be lucky if the final version of the new rule includes any interstate trading at all. Without interstate trading, the emissions reductions achieved by the new rule will be more expensive than they otherwise would be – possibly a lot more (I look forward to analysis from economists on exactly how much). Since the transport rule would replace both of the major cap-and-trade programs currently in operation in the U.S.—the Title IV SO2 program and the NOx SIP Call—this would mean an end to interstate emissions trading, at least for the 31 states affected by the new rule. It’s only a slight overstatement to say that cap and trade as we now know it would end.

It’s hard to accuse the EPA of timidity or error here, though. The agency attempted in CAIR to create an interstate market and was (somewhat surprisingly) kicked in the teeth for it by the D.C. Circuit. Though I and many other lawyers disagree with the D.C. Circuit’s reading of the Clean Air Act that led it to reject CAIR, the reading isn’t unreasonable, so it’s hard to place all of the blame on the courts either. Congress ultimately has responsibility for either creating markets for pollution reduction, or giving the EPA sufficient tools to create them itself. The transport rule released yesterday makes it clear that the EPA does not have the tools it needs.

At least some in Congress are aware of this problem, however. The three-pollutant or “3P” bill written by Sens. Carper and Alexander would create new national cap-and-trade markets for SO2, NOx, and mercury (a new EPA mercury rule was also rejected by courts). If this bill were passed it would hopefully include a fourth “P”, carbon, but even without it, the EPA would have the tools it needs. Without it, the transport rule appears to be the best the agency can do. Twenty years after the 1990 Amendments to the Clean Air Act, that should be embarrassing.

Nathan Richardson is a Visiting Scholar at RFF. He also contributes to The Progressive Fix.

Published: Jul-07-10 | 0 Comments

Jun11

Murkowski Amendment Update

Congress, EPA

The Senate has voted down Sen. Murkowski’s (R-AK) amendment that would have invalidated the EPA’s greenhouse-gas endangerment finding. I wrote about the amendment a few months ago, and predicted that it wouldn’t pass—largely because it had to overcome four hurdles to become law. Yesterday the amendment fell at the second hurdle when the full Senate rejected it. As a practical matter, I don’t think the vote means very much since neither the House nor the president would have been at all likely to sign on to the measure even had it passed the Senate.

One way to look at the rejection of the amendment is that it’s a good sign for action on climate in the Senate. I don’t think that’s right. The amendment failed 53-47, with all Senate Republicans and six Democrats voting for it. For this kind of measure, that’s close to passing—unlike new legislation, the amendment requires only 50 votes to pass, not 60. If you have 47 Senators against EPA action on climate, it’s hard to see how you get 60 for new legislation.

Now its possible that some of those who voted for the resolution did so for political reasons (easy when you know the measure will fail) and might vote for a climate bill. That’s plausible, but a closer look at the list of Democrats supporting the amendment makes me skeptical. There are no surprise “yes” votes; they’re all from the South or coal states and are not considered proponents of climate legislation. These six—Bayh, Lincoln, Landrieu, Nelson, Pryor, and Rockefeller—are the senators that will have to be brought on board to get a climate bill (plus one Republican, and without losing any other Dems). Their votes for the Murkowski amendment aren’t a good sign.

The EPA’s Clean Air Act powers to regulate greenhouse gases also aren’t safe yet. Sen. Rockefeller (D-WV) has another proposal to curtail that authority. It would require 60 votes, but as I’ve written before, it at least makes more sense than Murkowski’s proposal (since it would delay, rather than cancel EPA authority, and since it targets the most controversial, rather than least controversial part of that authority). Other senators have preemption proposals (some broader, some narrower) that may be considered in the future. Rockefeller’s proposal stands a good chance of passing the Senate, I think, given the vote breakdown for the Murkowski amendment. If it needed 50 votes instead of 60, I’d be sure it would pass. That doesn’t mean it would pass the House or be signed by the president, however. I don’t see this House agreeing to any substantial preemption of EPA authority outside of a climate bill, and I don’t see the president doing so as long as he’s in office.

This means the EPA will continue to move towards substantial greenhouse gas regulation over the next year. It will be interesting to see how that regulation affects the politics of climate. Will it make a bill more likely, or less? Hard to say for sure, but I tend to think EPA action will push at least some in industry to demand Congress finally do something, and I think there’s a better chance for that to be positive (a climate bill) than negative (naked EPA preemption).

Nathan Richardson is a Visiting Scholar at RFF. He also contributes to The Progressive Fix.

Published: Jun-11-10 | 0 Comments

May25

Don’t Hate the Clean Air Act: Why EPA Climate Regulation Isn’t as Bad as You Think

Carbon Market, Clean Air Act, EPA

Pricing vs. Regulation

The prevailing view among economists and policy people is that a broad carbon price set by new legislation is vastly superior in efficiency terms to EPA regulation under the existing Clean Air Act (CAA). This is especially true if the CAA is assumed to be a tool for traditional command-and-control regulation, but the perception seems to hold even if you suggest limited market-based approaches under the CAA.

The reasons for this are relatively simple, and familiar to most people with some understanding of policy economics. Markets are a more efficient tool for getting policy results where the players have different ways of contributing to the desired result, and where regulators don’t know that much about these players. In technical terms, markets are superior where opportunities for reaching the goal most cheaply are heterogeneous, and where regulators lack information about those opportunities.

To illustrate this, imagine you, your spouse, and your kids are at the state fair. Having spent the afternoon playing carnival games, everyone is hungry. You want everyone to enjoy their dinner as much as possible while spending the smallest amount of your family’s money you can. There are lots of stands selling all kinds of tasty food, but everyone wants something different. Since you’re carrying the wallet, you could just pick one of the many food stands. You could also ask everyone what they each want, and try to fashion a compromise. But neither of these options is going to result in everyone being happy, and might cost more too.

One solution is to give each member of the family some money and let them each buy their own dinner – and let them keep the change. Since everyone knows what they want for dinner, and has an incentive to spend less, the result should be the maximum satisfaction for the lowest cost to the family. You can then all sit down together and enjoy the meal – some of you will have corn dogs, some will have barbecue, etc. One of the kids might end up with a stick of cotton candy and lots of money left over, but that’s OK (if it’s not, you can limit the available choices in advance – though with a reduction in the level of satisfaction).

This analogy isn’t perfect since you aren’t really creating a market, but it does illustrate the value of pushing decisions down and creating incentives. At the state fair, you are like the regulator in climate policy: you know the results you want, but your family has varying preferences about which you have little good information. In climate policy, there are countless opportunities to reduce carbon emissions which vary greatly in cost. The EPA, with all its expertise, knows relatively little about what these opportunities are, much less about how much they cost. A price on carbon – just like giving money to your family members – allows those with the best information to make the decisions.

In the long run, these conditions are certainly true for climate policy. An economywide carbon price is undoubtedly the most efficient way to achieve a reduction in emissions. This is what makes legislation so much more appealing than regulation under the CAA. Even the most creative forms of CAA regulation can’t create an economywide carbon price, and many of them won’t result in any kind of carbon price at all – they’ll just be blanket requirements to do (or not do) something specific, regardless of whether it’s the cheapest method of reducing emissions. The result is higher costs per unit of emissions reduction… in the long run.

The Short Run

But this might not necessarily be true in the short run. Let’s briefly return to our analogy. You don’t know what each family member wants for dinner – that’s why you sent them off to make their own choices. But you aren’t completely clueless. You do know there are some things that everybody is going to want when they have dinner. Everyone will want a seat at the picnic table. Everyone will want some napkins. You might also have pretty good information about what some people in the family want. Even if you don’t know what your spouse wants for dinner, you can probably make a very good guess about what he or she wants to drink. You can take care of all of these things yourself without any appreciable change in anyone’s enjoyment of dinner. Grab a table, get some napkins and plastic silverware, and get a beer for you and your spouse. Everyone will be just as happy (maybe even better off, since you saved some time). This works because in these cases, preferences are similar (homogeneous) and/or you have relatively good information. Might the same conditions sometimes hold for climate policy?

In some cases, they might. Some industries have fewer participants and are more homogenous than others. Regulators also might have more information about them. Take coal power plants, for example. Reducing emissions from coal in the long run will require major changes: either carbon capture and storage (CCS) or large-scale switching to cleaner fuels. But in the short run, some things are clear. Many coal plants aren’t as efficient as they could be – the EPA estimates that the existing fleet could be made 2-5% more efficient on average. Many coal plants could also burn biomass, reducing their net carbon emissions. The EPA estimates doing so would mean another 2-5% reduction in emissions from coal. We don’t know exactly how much either of these moves would cost, but we can be pretty sure that neither would be as expensive as CCS or switching to natural gas. We’ve written here at RFF on policies the EPA could use under the CAA to reach these emissions reductions from coal.

If there were a price on carbon, we can therefore be relatively sure that coal plants would make these moves. They might not be the very first emissions-reducing moves the plants make, but they might be, and they would certainly be among the earliest. In these cases, therefore, the basic conditions under which a market is superior don’t hold: opportunities are relatively homogenous, and the regulator has decent information. Therefore the efficiency advantages of a market aren’t there or at least aren’t as large. Just like with your family’s dinner at the fair, there are certain more-or-less obvious choices that can be made in the short run with little or no penalty.

Of course, this doesn’t hold true in the long run or for all sectors of the economy. Carbon emissions are simply too pervasive in our society for any regulator to hope to be able to force their reduction in any efficient way without a price. But in the short term, there are real opportunities – low-hanging-fruit, to use the cliché – that regulators can go after with the CAA or other tools, without a big efficiency penalty.

The Good, the Perfect, and the Clean Air Act

This is an observation worth making because in reality we don’t have a carbon price, however economically attractive it is. Getting one will be politically difficult and will take time. In the long run, we will have a price – it’s the only reasonable outcome. But there is still a short term worth worrying about. Doing nothing to reduce emissions during that time is making the perfect the enemy of the good. Saying we shouldn’t use the CAA because it’s less efficient than a carbon price is also a false dichotomy – it’s possible to do one now and the other as soon as possible. Moreover, action under the CAA is legally required – the Supreme Court made that clear in Massachusetts v. EPA. The EPA tried to argue then that better policies were coming, and that Congress, not the EPA, had to decide what to do about carbon. The Court rejected those arguments.

In short, the distaste among economists and some policy people for climate regulation under the CAA is somewhat misplaced. So long as the CAA is viewed not as a replacement for a carbon price, but as a short-term supplement to it, it is relatively appealing. We realize that taking this position goes somewhat against the trend in economic and policy thought over the past few decades towards market-based solutions to environmental problems. But we don’t suggest unearthing and reanimating the corpse of command-and-control regulation. Rather, we think that under certain, limited conditions regulation short of an economywide price on carbon can achieve similar results at similar cost. Just as importantly, the CAA, unlike a carbon price, is a tool we actually have. The policy community should help the EPA identify opportunities to use the statute effectively, rather than dismiss it as useless or counterproductive. It need not be either.

Dallas Burtraw is a Senior Fellow, and Nathan Richardson a Visiting Scholar at RFF.

Published: May-25-10 | 6 Comments

May19

Kerry-Lieberman and the EPA

Cap and Trade, Clean Air Act, Congress, EPA

This post was updated on 5/21/2010

While climate legislation is moving through Congress, the EPA (as most of you know) is moving ahead with greenhouse-gas regulations under the existing Clean Air Act. Industry groups and many in Congress think the two paths should be mutually exclusive – they want new climate legislation to preempt the EPA’s existing authority. Many environmental groups want to keep both tools. Some states have also requested that Congress preserve EPA authority.

I’ve questioned elsewhere whether leaving Clean Air Act authority intact gets very much in the way of environmental results (though note that even if preemption isn’t very costly from a policy point of view, opposing it could be very useful from a strategic point of view – it’s a useful bargaining chip).

But this debate doesn’t have to be hypothetical anymore. We have draft bill text in the form of Kerry-Lieberman, and it’s worth taking a look at what effect it would have on EPA authority.

In short, the bill would preempt almost every major element of EPA Clean Air Act authority by preventing the agency from using most Clean Air Act programs to regulate pollutants based on their climate change effects. In a general sense, Congress would be repealing the holding of Massachusetts v. EPA that greenhouse gases (GHGs) can be regulated under the existing statute (and, of course, replacing the old statutory provisions with a new set of cap-and-trade tools).

But there are exceptions to the preemption: one big one that actually leaves the narrow holding of Massachusetts v. EPA intact, one relatively small one, and a variety of tiny ones that might be noteworthy, but probably interest only me and other climate law wonks.

Preemption

Kerry-Lieberman aims a series of rifle shots at the foundations of each of the existing programs the EPA might use to regulate GHGs. Section 2301 of the bill would block the agency from setting national air quality standards (NAAQS) for any pollutant based on climate change effects. Section 2303 would similarly forbid the agency to regulate GHGs as hazardous air pollutants, and Section 2304 would prevent the agency from using a little-used part of the Clean Air Act (Section 115, governing international emissions) that has been discussed by some as a plausible choice for regulating GHGs. Section 2302 blocks the agency from issuing GHG performance standards (NSPS) for sources covered under the cap – or emitters that the bill treats as sources of offsets. Finally, Sections 2306 and 2307 prevent the agency from requiring emitters to get permits (NSR) based only on their GHG emissions.

These five programs – NAAQS, hazardous air pollutants, NSPS, Section 115, and NSR permitting are the only routes available to the EPA to implement big regulations for stationary GHG emitters. By preempting this authority, Kerry-Lieberman blocks the agency from economywide GHG regulation under the existing CAA.

Mobile Sources Excepted

But this broad preemption applies only to stationary sources – what about the transportation sector? Like Waxman-Markey before it, Kerry-Lieberman largely leaves EPA authority to regulate vehicles alone. This means that the EPA’s recent rule setting new vehicle fleet emissions standards would stand – and could be strengthened in the future. This is the core result of the Massachusetts v. EPA decision – that the EPA has the authority to regulate GHGs from vehicles under the current statute – and it would continue to be the case under the new bill.

This isn’t surprising. Unlike EPA regulations of stationary sources (which are often portrayed as expensive and inefficient, though our research suggests they aren’t necessarily so bad), fleet fuel-economy and emissions regulations are broadly popular. The EPA measure released recently is in part the result of a compromise between states, the EPA, and the car industry. Whatever it’s flaws, it’s more politically expedient to let it stand than to preempt it and create a new program (though the new bill would bring transport-sector carbon emissions into the price mechanism as well).

Some Performance Standards Excepted

As I mentioned above, the EPA wouldn’t be able to set GHG emission performance standards for emitters that are subject to the cap set by the bill. The EPA would still be able to set such standards for uncapped sources, however. For example, industrial sources that emit less than 25,000 tons/year of CO2-equivalent GHGs aren’t included under the Kerry-Lieberman cap. The EPA would still have authority to regulate these sources under the Clean Air Act.

~~This isn’t much of an exception, however.~~ The EPA has shown no interest in regulating such small GHG sources to date. The tailoring rule it released this week exists solely to avoid regulating small sources, and it’s unlikely that the agency would have a newfound interest in them if the bill were to pass.

Update: It appears that this exception is somewhat broader than I initially realized. The bill in fact allows EPA to set performance standards for most coal plants as well. Specifically, the EPA can (through the states) set standards for all coal plants permitted before 2009, and also all plants permitted more recently, until the agency determines carbon capture and storage technology is available or 2020, whichever comes first. When either of those things happens, the bill has its own, new, performance standards that essentially require CCS.

If you’re not interested in the deep details of EPA preemption, you can stop reading – though if you’ve gotten this far. . .

Loopholes

Beyond these apparently intentional exceptions, the bill has some smaller loopholes which would allow the EPA to exercise its existing authority. These may be unintentional, or may simply have been thought too trivial to be worth addressing.

First, the statute allows the EPA to consider the effect on GHG emissions of performance standards it issues for other pollutants. This would allow the EPA to consider the climate-change “co-benefits” of regulations on traditional pollutants like sulfur dioxide: if the agency tightens regulations on those pollutants, fuel switching or technical changes could reduce GHG emissions as well. Of course, this can cut in the other direction: some regulations on traditional pollutants could increase GHG emissions – and the EPA could consider that too.

Second, Sections 2306 and 2307 of the bill that limit the ability of the agency to require permits from GHG emitters aren’t completely clear. My interpretation of these sections is that the EPA wouldn’t be able to require permits based on GHG emissions alone, but that the agency could consider GHG emissions for a source that is required to get a permit for other reasons.

Finally, and this may really only interest me, the bill prevents the EPA from using some of its existing authority based on a pollutant’s climate change or ocean acidification effects. In other sections, though, ocean acidification isn’t mentioned. The EPA could still in principle use ocean acidification (or other non-climate harms) to allow regulation under those programs. The chances of the EPA actually attempting this approach zero.

It’s possible there are other loopholes that I haven’t noticed, and it’s possible that those I point out will be filled in a final version of the bill.

Despite these loopholes and exceptions, however, I think the right story to tell about the bill is that advocates of EPA preemption have gotten essentially everything they asked for.

http://www.flickr.com/photos/sierraclub/ / CC BY-SA 2.0

Published: May-19-10 | 0 Comments

May04

Can the Senate Climate Bill be Exposed with FOIA?

EPA, Congress

After the dramatic cancellation of last Monday's unveiling, the Kerry/Graham/Lieberman Senate climate bill is on hold. Everybody interested in climate policy wants to know its contents. Some of them have taken matters into their own hands. Energy & Environment News and the American Energy Alliance (an industry group) have filed Freedom of Information Act (FOIA) requests with the EPA seeking materials related to the bill that the senators have sent to the agency for analysis. If successful, these requests would make the bill proposal (or at least its framework) public.

The EPA claims it doesn't have much, certainly no legislative text, but that’s still more than anyone outside of Congress appears to have. Whatever the agency does have, will these FOIA requests succeed?

Somewhat surprisingly, I think they might. None of the standard exceptions to FOIA requests (like national security, private information about individuals, etc.) appear to apply.* The reason why the EPA, and not Congress, is the target of the FOIA request is simple: FOIA does not apply to Congress at all, only executive agencies. But the EPA admits it has something—so it should, in principle, be reachable through FOIA.

Congress is also protected by the Speech or Debate Clause of the Constitution, but this generally applies only so long as information is within Congress’ control. For example, efforts to prosecute former senator (and presidential candidate) Mike Gravel for obtaining the Pentagon Papers and reading them into the official record of a Senate subcommittee failed due to the protection offered by the Speech or Debate Clause. However, the clause did not protect an independent publisher to whom Gravel had given the papers. For FOIA requests, the relevant test (Goland v. CIA, 607 F.2d 339) is whether the material held by the agency has “passed from the control of Congress and become property subject to the free disposition of the agency with which the document resides”. If it has, then it is an agency document subject to FOIA.

So did the climate bill pass from congressional control when it was sent to the EPA? It’s hard to tell, since we don’t know under what terms the information was given. If Congress told the EPA to keep the information secret and return what it had been given, Congress might be said to have retained control. Otherwise, it may not have. There is apparently no specific time when Congress has to assert continuing control, but cases suggest that doing so after the FOIA request is made is too late (though one case claims a congressional resolution would be sufficient even after the FOIA request). Of course, Congress can always fix the problem in the future with legislation. A new FOIA exception for all documents created by Congress, for example, would do the job (though EPA analyses based on Congress’ documents might still be subject to FOIA). Since it has the power to change the rules, Congress has the luxury, if it chooses, of facing this kind of problem only once.

So what if the FOIA requests succeed? Leaving aside for the moment any possible changes to FOIA that Congress might make, I tend to think it’s actually a bad thing. I want to know what the senators have planned in their bill as much as anyone, but if FOIA is used to get this information, it will chill congressional attempts to get good analysis of their proposals in the future. If Congress contemplates a climate bill, I want EPA to weigh in; if Congress contemplates a change in defense policy, I’d similarly want the Department of Defense to have some input.

If requests for agency analysis or comment are subject to FOIA, Congress is unlikely to make them. Even FOIA’s most ardent supporters, I suspect, admit the value of private debate in Congress. If agencies can’t be asked to participate without that debate becoming public, then Congress is crippled. That’s not good for good public policy.

* The fifth FOIA exception, for inter- or intra-agency materials, doesn’t apply since Congress is not an executive agency.

Nathan Richardson is a Visiting Scholar at RFF. He also muses on things law and climate over at The Progressive Fix.

Published: May-04-10 | 0 Comments

Apr14

Charting a Course for EPA Regulation Under the Clean Air Act

Clean Air Act, EPA

Sens. Kerry, Lieberman, and Graham are set to unveil their proposed climate legislation as early as next week. Action on the Hill—whether in the form of that bill or something else—is far and away the best way to address climate change. But observers hoped (and many assumed) that Congress would have acted last year after years of national debate on climate. When it comes to climate, it’s hard to underestimate congressional inertia.

Enter the EPA. As we at RFF and others have discussed, the EPA has broad authority under the existing Clean Air Act (CAA). The Supreme Court has held this authority extends to greenhouse gases (GHGs). Indeed, the EPA has already moved to substantially regulate some GHGs. It released an “endangerment finding” late last year that laid the groundwork for last month’s new fleet emissions standards for cars and trucks.

Scholars have started to identify and debate the various CAA programs available to the EPA under the CAA for regulating GHGs from what are called “stationary sources” – the power and industrial facilities responsible for most U.S. GHG emissions. In-depth analysis of any of these programs has been scarce, however.

Three of us here at RFF have a new paper this week that tries to fill that gap. In the paper we identify one CAA program, the New Source Performance Standards (NSPS)—which, contrary to their name, can also apply to existing emissions sources—as the most likely, practical, and predictable pathway for the EPA to regulate stationary-source GHGs. While far from perfect, the program has a long track record in CAA regulation, is relatively well-understood both inside and outside Washington, and is flexible enough to fit the GHG problem. President Obama’s proposed budget for this fiscal year also specifically requests funds for EPA to look at NSPS for GHGs. In short, the NSPS are the knowable path for GHG regulation under the CAA.

In the paper, we go beyond just highlighting the NSPS and begin an analysis of what GHG regulation under the program might look like and might achieve, focusing on coal-fired electricity plants. As a starting point, the EPA has identified opportunities for efficiency gains at coal plants of around 2 to 5 percent fleetwide. This means that coal plants could use less fuel, emit less GHGs, and generate the same electricity. The agency could use performance standards to require these plants to be more efficient. There are also opportunities for biomass co-firing—burning biomass alongside coal—that the EPA estimates would give another 2 to 5 percent net reduction (fleetwide) in emissions across all coal plants, although it would likely be difficult for EPA to mandate biomass co-firing on a plant-by-plant basis as a pure technology-based standard.

Further, the CAA appears to be sufficiently flexible to allow the agency to adopt trading approaches for existing sources under the NSPS provisions. A trading approach would potentially yield additional emissions reductions, in part by making it possible for the EPA to reach the gains from biomass co-firing. Adding up the reductions available from energy efficiency standards and from biomass gives a total emissions reduction of 5 to 10 percent from coal-fired plants. Trading could also achieve significant cost savings. There may also be opportunities to expand trading under the NSPS to include trading with other fossil-fuel fired power plants and, perhaps, even across source categories. However, an economy-wide cap-and-trade program—and the further emissions reductions it would require—would be impossible with the NSPS.

These emissions reductions from coal aren’t massive, but they aren’t trivial either. Taken together, they could reduce overall U.S. GHG emissions by 3 percent. This is a good chunk of President Obama’s stated goal of 17 percent emissions reductions by 2020—and it is from coal alone. Add in EPA regulation of other sectors with NSPS, and EPA’s already-announced vehicle efficiency standards—and GHG reductions from the CAA look significant. It’s unlikely that the CAA by itself could be used to reach the President’s goal, and it’s certain that new legislation creating a national carbon price could do so at lower cost. However the CAA is the tool we have and our paper suggests it’s a useful one.

Nathan Richardson is a Visiting Scholar at RFF. He also muses on things law and climate over at The Progressive Fix.

Published: Apr-14-10 | 0 Comments

Apr08

New CAFE Standards Are Good — But Hardly the Best Climate Policy

EPA, CAFE

In a new post over at the Progressive Fix, Nathan takes an in-depth look at CAFE standards released last week by the EPA. While pushing the U.S. fleet-wide fuel economy to 35 miles per gallon by 2020 is certainly a step forward, he wonders whether that step—and its underlying analysis—is really taking U.S. climate policy in the right direction.

The new standards are largely a product of a compromise between states, the federal government and auto manufacturers last year. (Is it still a compromise if one party—the feds—owns a big chunk of another—the U.S. auto industry—and has Supremacy Clause powers over another—the states? Just asking.) They are also the end product of the Supreme Court’s Massachusetts v. EPA decision requiring the EPA to address impacts of greenhouse gases under the Clean Air Act. The requirements appear relatively modest: the existing requirement of 35 mpg fleet average fuel economy by 2020 is moved up to 2016 and increased by 0.5 mpg.

That apparently small change can have a big impact when you consider how many cars and trucks there are in the U.S. and how long those vehicles will remain on the road. The EPA claims that the standards will reduce greenhouse gas emissions by 960 million metric tons and cut U.S. auto emissions by 21 percent over business as usual by 2030. The EPA also estimates that increased up-front vehicle costs of about $1,000 will be offset over the course of each vehicle’s life by reduced fuel costs, resulting in a savings of about $3,000.

That’s good news for the environment, and good news for consumers, right? The auto industry is (at least for now) OK with the new standards, and the environmental community is generally happy as well. I think the positive spin is broadly correct—we’re better off with stricter CAFE standards than we would be without them.

That said, I’m skeptical about the size of the benefits estimated by the EPA. Performance standards, and in particular efficiency standards, are flawed policy tools—emissions benefits may be lower, and costs higher, than with the best alternative: a carbon price.

The largest problem with efficiency standards is that they encourage increased use of whatever is being made more efficient. If your car is more efficient, it’s cheaper to drive it, and you’ll probably do so more often (and for longer distances). You might even move farther away from work or make other choices that increase your fuel consumption (but not your cost—remember, you’re more efficient now). This is great for you since you get increased utility from driving more, but your vehicle emissions won’t go down as much. Even if you “save” more money over the life of the car, the added cost per unit of emissions reduction goes up. Other social costs, like traffic congestion and increased risk of accidents, go up as well. This is called the “rebound effect,” and estimating its size is the subject of significant research among economists.

The EPA is aware of this effect and, as you might expect from an 837-page rule (with a 475-page regulatory impact analysis and 215-page technical support document), accounted for it in its analysis. Both the EPA estimates of emissions reductions and of costs to consumers assume that owners of new, more efficient vehicles will drive more. Good job by the EPA, right? Maybe.

Read the rest of Nathan’s Post, Why the New CAFE Standards Are Good — But Hardly the Best Climate Policy, from The Progressive Fix here.

Published: Apr-08-10 | 0 Comments

Mar31

Update: Clean Air Act GHG Permits Won’t Be Required Until 2011

EPA, Clean Air Act

I posted recently on the EPA’s reconsideration of the “Johnson Memo,” a piece of regulatory arcana that determines when pollutant emitters have to get permits under the Clean Air Act (CAA) for new plants or major upgrades to existing plants. Now the EPA has revealed its final version of the memo (cheat sheet here). There are no big surprises; the approach is essentially the same as that taken in the proposed memo from last year. The key point is that greenhouse gas (GHG) emitters won’t have to get permits until 2011. The EPA talks about different triggers in the memo that would have required permits earlier, but decided not to go that route.

The Johnson Memo deals with a technicality, but it has a big impact. Since the EPA will start regulating GHGs from cars and trucks under regulations to be released this week, big emitters will soon have to include GHG analysis in their permit applications. These permits (called PSD or NSR) are time-consuming and expensive, and industry is very concerned about their impact. The Johnson Memo determines when the permit requirement kicks in. The legal issues here aren’t all that complex. The CAA says major emitters—those who put more than 250 tons of pollutants into the atmosphere—have to get permits that include analysis of all the pollutants they emit, and that these permits are required when a pollutant is regulated under the CAA.

As always, politics plays a role too. Strictly interpreted, the CAA would impose big burdens on lots of emitters through a permit process that isn’t really set up to deal with the scale and volume of GHG permits required. Industry is spooked by the process, but so are the state regulators who would have to issue many of the permits. The EPA itself also doesn’t think a full-scale, immediate permit requirement is workable.

The result is a series of compromises. The most well-known is the “tailoring rule,” in which the EPA is limiting the permit requirement to big emitters (really big emitters, according to the EPA’s latest statements). The Johnson memo revision achieves similar aims by delaying the permit requirement until 2011, when the EPA claims its new mobile-source rules will enter into effect.* Note that the memo hasn't come close to silencing EPA critics - the agency is getting criticism from both industry and environmentalists - but it is clearly a compromise.

The tailoring rule has been under consideration since last year, but I think these recent moves (upping the tailoring rule cutoff and pushing permit requirements out to 2011) are partly in response to pressure from Congress. Congress, in proposals by Sens. Murkowski and Rockefeller, has threatened to take away the EPA’s authority to regulate GHGs (for mobile sources, stationary sources, or both). Part of this is driven by fears among industry and on the Hill that the EPA would cause havoc in the economy with GHG permit requirements. By moderating the impact of these requirements, the EPA is trying to comply with the CAA and achieve its environmental goals while appeasing the Congressional dragon. To be sure, the EPA and state agencies are probably concerned about their own ability to handle the permit requirements and would benefit from more time, but I think Congressional pressure is a big factor. One piece of evidence is that EPA Administrator Lisa Jackson announced these moves first in a letter to Sen. Rockefeller.

You could characterize this series of events as influence by special interests behind the scenes, undermining an EPA regulatory program without a congressional vote. I think there’s a more benign balance-of-powers story, though. The EPA, using its powers delegated from Congress and following the Supreme Court’s Massachusetts v. EPA interpretation of the law, got into a difficult situation. It proposed a solution (the tailoring rule) both because the agency recognized the problems the situation presented for itself and because it recognized that a by-the-book approach would be a political non-starter. Congress aside, it’s unlikely even Administrator Jackson or her boss, President Obama, would find much value in a draconian permit scheme. Congress continued to push back with some legislative saber rattling, and the EPA moderated its approach a little further. Time will tell whether that is enough to forestall congressional action, but it appears to be sufficient for now.

This isn’t ideal, but it's regulatory government at work. In a real—though awkward, politicized, and bureaucratic fashion—the three branches of government have had a conversation of sorts on the proper form of climate policy. A compromise seems to have been reached. Sure, new climate legislation would be much better, not only because of its Schoolhouse Rock clarity but because of the superior policy mechanisms that Congress has the power to implement. But even if Congress is having trouble doing its job there, at least it is still participating in some way in policymaking. That’s good news, even if the process and results are a little ugly.

* This is because the rules apply to model-year 2012 cars and trucks. A 2010 rule applies in 2011 to "2012" vehicles. Only in Washington...

Nathan Richardson is a Visiting Scholar at RFF. He also muses on things law and climate over at The Progressive Fix.

Published: Mar-31-10 | 0 Comments

Mar26

EPA Calls for Corporate Identifiers on GHG Disclosure

Disclosure, Corporate, EPA

Earlier this week, the EPA proposed expanding its greenhouse gas (GHG) observation net by adding additional emissions sources to its mandatory GHG reporting system. If the proposal is enacted the system, which required some 31 industrial sectors to begin tracking and reporting their GHG output earlier this year, would expand to cover oil and natural gas sectors.

The rule also proposes folding an additional layer of reporting into the mix, requiring facilities to disclose their corporate ownership. As environmental concerns become increasingly important in investment decisions, having a clear picture of who is emitting and where will help investors, corporations and government devise smarter plans and policies going forward.

As Mark Cohen pointed out in this July 2009 post, the EPA already includes corporate identifiers in many of its monitoring programs and the measure could be of great use to investors and observers:

Corporate identifiers are important because facility environmental performance varies by the location, size, and financial standing of the parent company. Investors and NGOs are also increasingly interested in corporate-level climate policies and impacts. For example, the Carbon Disclosure Project, Global Reporting Initiative, and budding carbon footprint labeling efforts (See post A Call for Product Carbon Labeling) are dependent upon accurate data to verify corporate sustainability performance.

The EPA currently requires corporate parent identifiers in other reporting programs, such as the Risk Management Plan Rule. This small burden on reporters could reduce redundancy and errors that could lead to contradictory conclusions.

Tiffany Clements is managing editor of Weathervane.

Published: Mar-26-10 | 0 Comments

Mar16

Why CAIR Matters for GHGs

EPA, Clean Air Act

Greenhouse gases (GHGs) are the sexy pollutant. “Traditional” pollutants like sulfur dioxide (SO₂) and nitrous oxides (NOx) get less attention, with media, legal, research, and to a lesser extent regulatory attention devoted to GHGs. These pollutants have much greater health impacts than GHGs, however. Moreover, how the EPA regulates them under the Clean Air Act (CAA) might shed some light on how they will regulate GHGs under the same statute.

Unfortunately, the EPA’s master plan for new SO₂ and NOx regulations, the Clean Air Interstate Rule (CAIR) is in legal limbo. In North Carolina v. EPA, the D.C. Circuit found such substantial flaws in the rule that it vacated CAIR completely in 2008, before backing down somewhat and directing the EPA to fix a number of problems. In the meantime, the rule has remained in effect - CAIR is zombie regulation.

Nobody likes zombie regulation. It’s hard to determine environmental benefits and for industry to determine costs, and markets in tradable allowances don’t work very well when the future structure of those markets (and even whether they will exist) is unclear. Whatever the EPA does to address the court’s concerns with CAIR is therefore likely to be an improvement on the current situation.

The EPA is expected to release the required revisions to CAIR soon. Some of the issues the court identified with CAIR in its original form are that compliance deadlines for it and other regulations do not match, and that the EPA exceeded its authority by making changes to the congressionally-created Title IV trading program for SO₂.

The largest problems for the court, however, were with the trading programs created or modified by CAIR. How the EPA addresses these concerns will be the most interesting part of the new CAIR and will shed the most light on how far the EPA can go in using emissions trading methods under existing CAA authority—something that may be important for future GHG regulation.

Will emissions trading survive?

The original CAIR created new interstate trading programs for SO2 and NOx or expanded existing ones. The court, however, cast real doubt on whether these trading programs are viable. Specifically, the court held that the CAA authority (NAAQS) used by the EPA requires actual reductions in emissions from each state that contributes to pollution in downwind areas (it is largely this interstate pollution “transport” problem that CAIR is designed to address). The trading programs in the original CAIR would have reduced pollution from upwind states, but free trading among states meant that the EPA could not guarantee that every upwind state would reduce its emissions.

It’s hard to see how the EPA can comply with the court’s interpretation of the CAA here and keep interstate trading as part of the revised CAIR. If you have interstate trading, you reduce costs of compliance but at the expense of certainty over where emissions will be reduced. It is just this certainty that the court claims the CAA requires. Trading may survive in the form of purely intra-state markets, or the EPA may devise some hybrid regulation that includes some command-and-control elements that would force reductions in emissions in all upwind states.

The structure the EPA chooses—and whether the court deems it permissible—is important. There is some chance that the EPA will choose (or be forced) to regulate GHGs under the NAAQS program. If the EPA does go down this route, CAIR and the courts’ treatment of it will provide the precedent for a GHG trading system. Can such a system be implemented nationwide under the CAA if only intrastate trading is permitted for other pollutants? If GHG regulations are not driven by contributions to other states' pollution problems, the EPA might be able to distinguish them from the CAIR regulations. But SO₂ and NOx are the best examples by far of emissions trading programs under the CAA. If the new CAIR kills or guts these programs, the precedent for any GHG trading scheme - at least under the NAAQS - will be weakened.

The proposed new CAIR should be released by the EPA in the near future. The character of the emissions trading programs it creates will tell us a lot about the future of the CAA for GHGs and beyond.

Nathan Richardson is a Visiting Scholar at RFF.

Published: Mar-16-10 | 0 Comments

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