nonattainment areas: command-and-control or markets?

Some dilemmas of regulating nonattainment areas Can we force industry to clean up the air

without impairing economic efficiency? (over- and underinclusiveness)

What’s the appropriate balance between cutting old plants some slack while making new plants cleaner? (Will we create an incentive to keep old plants in service too long—a perverse incentive?)

Is there a role for “market mechanisms” in a statute based primarily on coercive (command-and-control) regulation?

General SIP nonattainment mandates (sec. 172(c)) Emissions inventory of pollutant sources Permits for new/modified major sources “Reasonably available control

measures” (RACM); and “reasonably available control technologies” (RACT) for existing sources

Enforceable controls and timetables—”reasonable further progress”

American Trucking (Sup. Ct.):classifying nonattainment areas Could EPA use general (Subpart 1) CAA

powers for O3 nonattainment, rather than pollutant-specific powers (Subpart 2)?

Subpart 2 did not fit well with revised O3 standard (1-hr. vs. new 8-hr. averaging)

Nevertheless, EPA has to follow Subpart 2’s “carefully designed restrictions on EPA discretion.”

Ozone and the issue of regionalism

Good and bad ozone “Good up high, bad nearby” 10-30 miles above earth’s surface, ozone

shields against ultraviolet light (a cause of skin cancer)

Ozone shield depleted by cholorfluorocarbons

Ground-level ozone can causeCoughing, painful breathingAsthma attacksSusceptibility to respiratory illness (e.g.,

pneumonia)Lung damage from repeated exposure

Ozone’s welfare effects

Ozone and smog

Volatile organic compounds (VOCs) and oxides of nitrogen (NOx) react with sunlight to produce ozone

Ozone is the primary component of smog

Inversion layers can trap smog near the ground

Ozone pollution is less of a problem in cool months

A common summer pattern

EPA amends the ozone NAAQS

March 2008—8-hr. ozone average goes from .084 ppm to .075 ppm

More nonattainment?

Problems in WNY …

20082008

… and across the state

Can SIPs address ozone fairly and effectively?

Chevron and the Bubble Rule 1977 Act requires permit for nonattainment

new/modified major source Courts—bubbling mandatory where

preserving air quality (PSD) but prohibited where improving air quality (nonattainment)

1980—EPA defines “source” to mean the whole plant

Bubbles OK in nonattainment areas

Rationale for upholding EPA’s rule Statute gives some flexibility (“source”

includes “facility”) Legislative history not helpful Congress wanted to encourage both

better air and capital improvements EPA is in a better position than the

courts to make that tradeoff Agency rule was reasonable

Congress later endorses but tweaks the bubble 1990 amendments adopt but tighten

bubble requirements In serious ozone nonattainment areas,

sources have to exceed one-for-one offsets (1.3 : 1)

Bubbles, offsets (and more generally market tools) can be used to ratchet down pollution

In the background—acid rain and greenhouse gases

New York I (‘05): Q: “How’s your emissions?” A:“Compared to what?” Statute: a “modified” source has to meet

new source standards (NSPS) – “above NAAQS”

1980 regs– major mod = any physical or operational changes causing significant net emissions increase

What’s an “increase”?Industry—max hourly emissions go upEPA—past 2 yr. annual emissions vs. future

potential (actual-to-potential)

Puerto Rican Cement precedent

Modified kiln would pollute less at the same production, but could produce more

Had to undergo New Source Review

WEPCo precedent Utility argues that increases should be

measured by “actual to projected actual” emissions (why might this make sense for utilities but not factories?)

EPA agrees, court affirms 2-year average replaced by “two

consecutive years out of 10” (ten-year lookback)

2002—EPA applies actual/projected actual to all sources

Is the 10-year lookback arbitrary and capricious? No. Two years preceding modification may

be anomalous Promotes economic growth, ability to

respond to market changes Removes disincentive to make

modifications that may reduce emissions Reduces disputes over

representativeness of baseline years (business cycles vary by industry)

… and EPA can make predictive judgments on incomplete information

Increases measured not by actual emissions, but by “clean unit status” If you installed LAER or BACT w/in past

10 years, you’re a “clean unit” and modifications don’t have to go thru NSR

Violates statute, which speaks in terms of pollutants emitted

Congress distinguished among actual, potential and allowable emissions

Some underlying questions Why would New

York resist rules that gave it more flexibility to achieve compliance?

Judge Williams’ concurrence says cap-and-trade or pollution taxes would work better. Do you agree? Why, or why not?

New York 2 (‘06): Does “any” mean “any”? Equip. Replacement Provision defines

“routine maintenance, repair or replacement” as a physical change involving “functionally equivalent components” up to 20% of replacement value

No NSR even if emissions increase

DC Cir.: No way, EPA

Statute requires NSR for any change that increases emissions

Congress did not permit reliance on markets to this extent

But EPA has discretion to overlook trivial violations

Note case—what does “routine” maintenance mean? What’s normal for this plant, or what’s

normal for the whole industry? Ohio Edison uses whole-industry

standard Significance of Ohio Valley utilities

CARE v. EPA and the problem of “phantom reductions”

Want to build a refinery in an area that is nonattainment for photochemical oxidant

Proposed offset: shift from petroleum-based asphalt for road paving to water-based

The state was already shifting to water-based asphalt for cost reasons

But it’s OK as an offset because State AG certified that it was enforceable

Clean Air Act Implementation in a Nutshell

Looking ahead Should greenhouse gas controls be added

into the NAAQS/SIP system? What changes would need to be made?

What role would you recommend for market mechanisms—netting, offsets, marketable emissions rights, banking?

Should greenhouse gas limits be set so as to “protect the most sensitive, with an adequate margin of safety,” or some other risk-management framework? How should economics be factored in?