October 01, 2009

Boxer-Kerry: Integrating Regulation and Cap-and-Trade

This post is the second in a series from CPR Member Scholars examining different aspects of the Boxer-Kerry bill on climate change, which was released September 30.

Wednesday was a big day for advocates of traditional regulation. While the Waxman-Markey bill proposed exempting greenhouse gases (GHGs) from key Clean Air Act (CAA) provisions, the Boxer-Kerry bill proposes a greenhouse gas (GHG) cap-and-trade program to complement rather than replace the CAA’s standard authority to establish regulations for stationary sources of air pollutants. Almost simultaneously, EPA proposed a rule that would set the stage for applying CAA standards for new and modified sources on the nation’s biggest GHG emitters.  

Most of the Clean Air Act’s existing authority is retained under the Boxer-Kerry bill. That means that EPA can establish standards for all new facilities and for existing facilities that significantly modify their plants. (More specifically, EPA can develop generic “new source performance standards” for new and modified facilities, and can require these facilities to go through a more detailed “new source review” process that generally imposes additional requirements.)  

In addition, the Boxer-Kerry bill supplements the Clean Air Act’s regulatory authority over brand new coal-fired power plants by setting future emission reduction requirements for them. Plants that receive permits between 2009 and 2019 must achieve a 50-percent reduction in emissions by 2025 (or sooner if commercial large-scale carbon capture and sequestration is already in use). Plants that receive permits from 2020 on must achieve a 65-percent reduction in emissions. (Section 812(b)) The provisions provide utilities considering future investments in coal with advance notice that emissions from coal-fired plants will be constrained. 

The Boxer-Kerry bill preempts only a narrow slice of Clean Air Act authority. It temporarily precludes EPA from establishing regulations that would interfere with uncovered sources’ ability to generate offsets. (Section 811.) The preemption is narrow, since it applies only to entities that are not covered by the cap-and-trade program and the trading program covers a broad range of entities. (See section 700(13), defining “covered entity.”)

Meanwhile, on Wednesday EPA proposed regulations that would establish the parameters for regulating large sources of GHGs that contribute approximately 70 percent of the nation’s stationary source emissions. For five years, EPA proposes applying the Clean Air Act only to large new sources – those that emit at least 25,000 tons of GHGs per year, and to existing sources that modify operations and increase emissions by more than 10,000 tons per year. The existing thresholds for pollutants covered under the Clean Air Act are much lower – from 100 to 250 tons per year – and, if applied to GHGs, would sweep in many small businesses that have never been subject to CAA regulation. So under EPA’s proposal, power plants, refineries, and factories are likely to be covered, while small businesses are not. The proposal makes clear that EPA is moving forward with regulations to control stationary sources.

Industry has strongly opposed regulatory approaches to GHGs, and has argued that any federal cap-and-trade bill should strip EPA of Clean Air Act authority over GHGs. The Waxman-Markey bill reflects this approach. Regulatory approaches are seen as less efficient, since they could force emission reductions at facilities that would otherwise have found it cheaper to purchase allowances. In addition, regulatory approaches might foreclose opportunities for industry profit by reducing the number of allowances facilities could generate for sale.

Preserving and forwarding regulatory options for addressing GHGs is the right way to go. As I explain in more detail in a recent blog post (Why a Cap-and-Trade System Needs a Regulatory Backstop), a cap-and-trade program could fail to induce facilities to adopt reasonably available and affordable measures to reduce emissions. If facilities are allowed to cover their emissions by purchasing significant offsets, as appears likely under the current legislation, then they might purchase allowances and offsets rather than reducing emissions. The law would fail to induce its hoped-for technological changes. EPA should therefore retain the regulatory authority to require affordable controls if the “market” fails to provide sufficient incentives.

In addition, regulatory approaches could better maximize some of the very significant co-benefits of climate regulation, like reducing co-pollutant emissions – harmful pollutants that are released along with GHGs. For example, EPA could determine that the overarching purposes of the Clean Air Act would best be met by maximizing the GHG reductions that provide the greatest simultaneous reduction in co-pollutants. Having regulatory authority would better enable EPA to achieve that result.

That said, the critics of applying the Clean Air Act to GHGs are right when they say that the law doesn’t provide an ideal tool for regulating GHGs.  Its basic regulatory programs are structured to address pollutants having local, not global, consequences.  Most importantly, EPA appears poised to apply CAA requirements in a manner that addresses only new and modified sources, not existing sources. Its proposal establishing the threshold for applying the CAA indicates that future GHG regulation will be under the “prevention of significant deterioration” (PSD) program, a program that imposes standards only on new and modified sources.  The federal PSD program does not require any limitations on existing sources unless they are modified – unless they significantly increase emissions as a consequence of substantial physical modifications.

Rather than passively allowing Clean Air Act regulatory authority to continue, as the Boxer-Kerry bill does, the legislation would ideally give EPA independent legal authority to regulate GHG emissions. EPA should have the authority to regulate both existing and new sources of greenhouse gases; the Clean Air Act does not go far enough.  The legislation could also establish applicability thresholds that make sense in light of the realities of GHG emissions, instead of forcing EPA to modify, by Wednesday’s proposed rule, the CAA’s applicability thresholds. And EPA could be given the discretion to determine when and whether to supplement the cap-and-trade program with regulation. EPA should be allowed to determine the sectors or circumstances in which regulatory standards would best complement cap-and-trade and the circumstances in which they are unnecessary. 

Nonetheless, Boxer-Kerry’s preservation of CAA authority is better than Waxman-Markey’s elimination of it. And EPA should be lauded for moving forward to implement the only statute that currently governs GHG emissions: the CAA.

Alice Kaswan, CPR Member Scholar; Professor, University of San Francisco School of Law. Bio.

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