Policy Options for the United States Environmental Protection Agency to Create a Market-Based System to Regulate Greenhouse Gases under the Clean Air Act By Lilly Zoller Professor Jonathan Wiener, Adviser April 2012 Masters project submitted in partial fulfillment of the requirements for the Master of Environmental Management degree in the Nicholas School of the Environment of Duke University 2012 Abstract Although the US Congress has not enacted legislation to control greenhouse gas (GHG) emissions, the US Environmental Protection Agency (EPA) has authority under the existing Clean Air Act (CAA) to promulgate regulations on GHGs. EPA’s regulations could take the form of either traditional technology-based/design standards, or they could be more cost-effective market-based economic incentives. This paper evaluates the feasibility of creating a marketbased system, in the form of cap and trade, either under sections 108-110, National Ambient Air Quality Standards, or section 111, New Source Performance Standards, of the Clean Air Act. This paper compares the desirability of each of these two options based on the criteria of: legal authority, economic efficiency and environmental effectiveness. While the EPA has the legal authority to create a market-based system for GHGs under either part of the CAA, this comparison supports NSPS as being more preferable than NAAQS because it offers greater flexibility and associated cost-effectiveness; and NSPS avoids the contentious task of setting an ambient standard for GHGs that could prove either unattainable or superfluous. 1 I. Introduction Market based incentive systems are often considered, and in some cases have been implemented, as a means to control greenhouse gas (GHG) emissions from stationary sources and mitigate the impacts of global climate change. The European Union, for example, launched its cap and trade program, called the Emissions Trading Scheme (EU ETS), in 20051. Similar programs have been proposed in the United States in various pieces of legislation, most notably within the American Clean Energy and Security Act of 20092. However, the United States Congress has enacted none of these bills. Due to the repeated failure of such bills that included market based mechanisms to control GHG emissions, many have written off cap and trade in the US all together.3 Despite the failure of Congress to enact new national GHG legislation,4 the US Supreme Court has held that the US EPA has the authority to regulate GHGs under the existing CAA5. In December 2009, EPA issued an endangerment Finding regarding GHGs6, setting the stage for the EPA to adopt regulations on GHGs. The EPA has a number of regulatory options under CAA from which to choose for controlling GHGs. http://ec.europa.eu/clima/policies/ets/index_en.htm Open Congress for the 112th United States Congress. H.R.2454 – American clean Energy and Security Act of 2009. http://www.opencongress.org/bill/111-h2454/show. 3 “Walsh, B. May 2010. Senate Climate Bill: Last Chance for Cap and Trade. Time Magazine. “Kerry has said the bill could be the last, best chance for cap and trade – but right now, it looks like it might just be the last”. 4 The EPA issued a new rule addressing GHGs, the Greenhouse Gas Reporting Rule, in 2009. This rule was pursuant to a rider in the FY2008 Consolidated Appropriations Act (H.R. 2764). “Of the funds provided in the Environmental Programs and Management account, not less than $3,500,000 shall be provided for activities to develop and publish a draft rule not later than 9 months after the date of enactment of this Act, and a final rule not later than 18 months after the date of enactment of this Act, to require mandatory reporting of greenhouse gas emissions above appropriate thresholds in all sectors of the economy of the United States.” 5 Massachusetts et al. v. EPA et al: Certiorari to the United States Court of Appeals for the District of Columbia Circuit. US Supreme Court. 2006 6 http://epa.gov/climatechange/endangerment.html 1 2 2 This paper argues that a market-based incentive mechanism is a legally authorized and desirable strategy for EPA to control GHG emissions in the United States under the CAA. It compares two approaches for the EPA to regulate GHGs with a market-based solution under the Clean Air Act: Sections 108-110, National Ambient Air Quality Standards (NAAQS); and Section 111, New Source Performance Standards (NSPS). II. Issue Definition (a). Background on Climate Change According to the EPA, climate change is “any significant change in measures of climate (such as temperature, precipitation or wind) lasting for an extended period (decades or longer).”7 Climate change may result from natural processes but it is also a product of human activities emissions of GHGs from the burning of fossil fuels and land cover change. GHGs mix globally and trap heat in the atmosphere. The principal GHGs that enter the atmosphere because of human activities are carbon dioxide, methane, nitrous oxide and fluorinated gases8. Because GHGs trap heat in the atmosphere, the release of GHGs leads to an increase in global atmospheric temperatures, which may, in turn, create changes in a range of environmental conditions such as weather, sea levels and land use patterns 9 . These environmental changes pose a significant threat to organisms, ecosystems and the public health and welfare of people across the globe. The Intergovernmental Panel on Climate Change (IPCC) EPA. November 14, 2011. Climate Change: Basic Information. http://www.epa.gov/climatechange/basicinfo.html. 8 EPA. April 20, 2011. Climate Change – GHG Emissions. http://www.epa.gov/climatechange/emissions/index.html. 9 Intergovernmental Panel on Climate Change. 2007. Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Parry, Martin L., Canziani, Osvaldo F., Palutikof, Jean P., van der Linden, Paul J., and Hanson, Clair E. (eds.)]. Cambridge University Press, Cambridge, United Kingdom, 1000 pp. 7 3 has established that climate change poses a serious threat to human health and welfare: “human beings are exposed to climate change through changing weather patterns (for example, more intense and frequent extreme events) and indirectly through changes in water, air, food quality and quantity, ecosystems, agriculture, and economy. At this early stage the effects are small but are projected to progressively increase in all countries and regions.”10 The looming threat of the impacts of climate change has prompted many countries to implement climate change regulation. (b). Current Status of GHG Regulation Although Congress has enacted no new federal legislation regulating GHG emissions (besides the recent GHG Reporting Rule), in 2007 the United States Supreme Court held that the US EPA has the authority to regulate GHGs under the existing CAA and charged the EPA with determining whether GHGs from mobile sources would “reasonably be anticipated to endanger public health and welfare”11. EPA Issued an endangerment finding in 2009, in which it concluded that GHGs do pose a threat to human health and welfare. The EPA thereby became responsible to regulate GHGs from both stationary and mobile sources under the CAA. The EPA has a variety of regulatory options from which it may choose. (b)(1). Failure of Past GHG Legislation Multiple federal bills to reduce GHG emissions have been introduced in the United States government, none of which have passed. The most comprehensive bill, which did pass in the House in June 2009 (but died in the Senate), was the American Clean Energy and Security Act of 2009 (ACES). This bill, introduced by representatives Henry Waxman (D-CA) and Edward 10 11 ibid 42 U.S.C § 7421(1)(a) 4 Markey (D-MA), would have established an energy efficiency and renewable electricity standard, set goals for improving energy productivity and established a national cap and trade system to reduce GHG emissions.12 Many mark the failure of ACES as the last chance for Congress to pass a cap and trade climate bill13. (b)(2). Mass v EPA In 2004, the Commonwealth of Massachusetts and eleven other states sued the EPA for failing to regulate carbon dioxide and other GHG emissions from the transportation sector. These states claimed that GHG emissions were causing adverse effects to their states. In April 2007, the Supreme Court ruled in favor of the states. The closely divided Court found that the plaintiffs had standing to sue because sea level rise along the states’ coasts constituted “actual and imminent harm”. The Court held that the CAA did cover GHGs as “pollutants”14. This court decision made it the EPA’s responsibility to determine whether GHGs “endanger” public health and welfare.15 (b)(3). Endangerment Finding Following the Massachusetts v. EPA decision, the EPA found that the current and project concentrations of the six key GHGs (carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)) “endanger Open Congress for the 112th United States Congress. H.R.2454 – American clean Energy and Security Act of 2009. http://www.opencongress.org/bill/111-h2454/show. 13 “Walsh, B. May 2010. Senate Climate Bill: Last Chance for Cap and Trade. Time Magazine. “Kerry has said the bill could be the last, best chance for cap and trade – but right now, it looks like it might just be the last”. 14 Massachusetts et al. v. EPA. U.S. Supreme Court. April 2007. “The rise in sea levels associated with global warming has already harmed and will continue to harm Massachusetts. The risk of catastrophic harm, though remote, is nevertheless real. That risk would be reduced to some extent if petitioners received the relief they seek. We therefore hold that petitioners have standing to challenge the EPA’s denial of their rulemaking petition.” (Opinion by Justice Stevens). 15 Massachusetts et al. v. EPA. U.S. Supreme Court. April 2007. 12 5 public health and welfare”16. The EPA also concluded that GHG emissions from on road vehicles cause and contribute to this endangerment. This obligated the EPA to regulate GHG emissions from mobile sources. Additionally, because the EPA was regulating GHGs from mobile sources, these regulations were “subject to regulation under the Act” and this triggered controls on stationary sources as well (citation?). Moreover, because the endangerment language in CAA section 108 regarding stationary sources is virtually identical to the endangerment language in section 201 for mobile sources, the EPA arguably became legally required to regulate the same pollutants from stationary sources as well. According to EPA Administrator Lisa Jackson, “these long-overdue findings cement 2009’s place in history as the year when the United States Government began addressing the challenge of greenhouse-gas pollution and seizing the opportunity of clean-energy reform”.17 (c) GHG Markets Market based instruments are regulations that encourage behavior through market signals, rather than traditional command and control regulations, which mandate a prescriptive technology or design standard.18 Market-based instruments are more cost-effective than traditional command and control regulations because they provide polluters maximum flexibility to find the lowest-cost abatement opportunities while still requiring economy wide emissions reductions. Costs may vary across abatement methods within each firm and across firms in different locations. Prescriptive technology standards are insensitive to such cost 16 42 U.S.C § 7421(1)(a) states that “The Administrator shall by regulation prescribe (and from time to time revise) in accordance with the provisions of this section, standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.” 17 Jackson, Lisa. December 7, 2009. EPA Press Release: GHGs Threaten Public Health and the Environment. http://yosemite.epa.gov/opa/admpress.nsf/0/08D11A451131BCA585257685005BF252. 18 42 U.S.C § 7415 6 variations. Professor Robert Stavins, director of the Harvard Environmental Economics Program, explains: “Because the costs of controlling pollution vary greatly among and within firms, any given aggregate pollution control level can be met at minimum aggregate control cost only if pollution sources control at the same marginal cost, as opposed to the same emission level. Indeed, depending on the age and location of emission sources and available technologies, the cost of controlling a unit of a given pollutant may vary by a factor of one hundred or more among sources.”19 Market-based incentive programs have proven to be economically effective in the past. For example, the EPA developed a lead trading program in the 1980s to allow gasoline refiners greater flexibility in reducing lead content of gasoline. The EPA estimated “savings from the lead trading program of approximately 20% over alternative programs that did not provide for lead banking, a cost savings of about $250 million per year”20. Additionally, the EPA believes that because of the cost savings associated with these approaches, it could seek deeper emissions reductions through a market-based approach than it could support through a conventional technology-based standard.21 (c)(1). Cap and Trade (Allowance Trading) Markets-based incentives to regulate GHGs place a price on emissions of GHGs (using an index of each GHG’s relative climate impact to weight each GHG as a carbon dioxide equivalent). Cap and trade, a common market-based strategy, would set a limit on overall national emissions. It would then allocate allowances, which, in aggregate, would add up to the cap. These allowances could be traded. Each emissions source would be required to hold Robert N. Stavins, Policy Instruments for Climate Change: How Can National Governments Address a Global Problem? 1997 U. CHI. LEGAL F. 298, 297‐98) 20 Portney, P and Stavins, R. 2000. Public Policies for Environmental Protection, 2 nd Edition. Resources for the Future. 21 Richardson, Fraas and Burtraw. April 2010. GHG Regulation Under the Clean Air Act: Structure, Effects and Implications of a Knowable Pathway. Resources for the Future. 19 7 allowances covering its emissions (with a penalty for exceedances). The allowances may be allocated for free to each emitting source, or auctioned. Each source may keep the allowances to cover its own emissions; reduce its emissions and sell the extra allowances to other sources; and/or purchase additional allowances (from other sources making extra reductions) to cover its additional emissions. The market price of allowances is not fixed, but is subject to the supply and demand for allowances among sources.22 Cap and trade has been a successful tool in the past, for example with the Acid Rain Trading Program23, the NOx Trading Program24 and the EU ETS.25 III. Policy Alternatives: Sections of 108-110 or Section 111 of the CAA Regulatory schemes fall into three main categories within the Clean Air Act: permitting26, air quality standards, and technology standards. Two major strategies that can be used for setting GHG standards with a cap and trade approach include: NAAQS (NAAQS): Under section 109 of the Clean Air Act, the EPA is required to establish NAAQS for any air pollutants listed under section 108 as endangering public health and welfare. To date, NAAQS have been established for six “criteria” air pollutants: carbon monoxide, lead, nitrogen dioxide, particulate matter, ozone and sulfur dioxide. 27 Environmental Protection Agency. April 2009. Cap and Trade. http://www.epa.gov/captrade/basic-info.html. 23 Environmental Protection Agency. April 2009. Clean Air Markets: Acid Rain. Program. http://www.epa.gov/airmarkets/progsregs/arp/index.html. 24 Ibid 25 http://ec.europa.eu/clima/policies/ets/index_en.htm 26 Permits of GHG emitting facilities have already gone into effect, starting in January 2011. These permits include Prevention of Significant Deterioration (PSD) permits and Title V Operating permits. Now, the EPA must create a regulatory program to implement in addition to the existing GHG permitting program. 27 Environmental Protection Agency. November 2011. National Ambient Air Quality Standards. http://www.epa.gov/air/criteria.html. 22 8 NSPS (NSPS): Section 111 of the Clean Air Act authorizes the EPA to establish standards for new sources of major pollutants. New source is defined as either construction of or modification of a stationary facility (e.g., petroleum refineries, coal-fired power plants, municipal landfills, etc.). However, section 111 also addresses existing sources, specifically in section 111d.28 (a). NAAQS/SIP/FIP process Once the EPA has found endangerment and listed a pollutant under section 108, it is authorized under section 109 to establish a NAAQS.29 Currently, the EPA has established NAAQS for the six criteria pollutant and they include primary standards to protect public health, and secondary standards to protect public welfare. EPA must review and potentially revise each NAAQS every five years. After the EPA sets NAAQS under section 109, the states must “attain” thee NAAQS under section 110 through State Implementation Plans (SIPs) that set limits and lay out how local emitters are to comply with the standards. A SIP must “provide for implementation, maintenance and enforcement of [emissions limits] in each air quality control region within such State.”30 Additionally, if the EPA finds a SIP to be deficient or disapproves of the SIP under section 110, it may establish a Federal Implementation Plan (FIP), which is rarely done.31 A FIP is a 42 U.S.C §7411(d)(1)(A)(i) 42 U.S.C §7408(a)(1) 30 42 U.S.C. § 7410(a)(1) 3142 U.S.C §7410(c)(1) (detailing the prices language for EPA’s FIP requirement: “The Administrator shall promulgate a Federal Implementation Plan at any time within 2 years after the Administrator – (A) finds that a State has failed to make a required submission or finds that the plan or plan revision submitted by the State does not satisfy the minimum criteria established under subsection (k)(1)(A) of this section, or (B) disapproves a State Implementation Plan submission in whole or in part, unless the State corrects the deficiency, and the Administrator approves the plan or plan revision, before the Administrator promulgates such Federal Implementation Plan.”) 28 29 9 “plan (or portion thereof) promulgated by the Administrator to fill all or a portion of a gap or otherwise correct all or a portion of an inadequacy in a State implementation plan, and which includes enforceable emission limitations or other control measures, means or techniques (including economic incentives, such as marketable permits or auctions of emissions allowances), and provides for attainment of the relevant national ambient air quality standard”32. (a)(1). NAAQS and GHGs So far, the EPA has not set a NAAQS for GHGs. The EPA may be reluctant to do so because setting a NAAQS is a complex and time consuming process, requiring a decision about the allowable concentration of GHGs in the atmosphere which, in turn, would have important economic effects. Yet the statute prohibits the EPA from considering cost, and any NAAQS will likely be challenged in court. Additionally, if the EPA does regulate a pollutant under section 109, then, as discussed below, section 111(d) is not available by its own terms to regulate that pollutant. It remains unclear whether the EPA is legally obligated to regulate GHGs with a NAAQS. The endangerment finding for motor vehicles under section 202 of the CAA might provide a basis for regulating stationary sources of GHGs because section 108 “contains endangerment language identical to that of 202(a)”33. However, there is potential statutory ambiguity regarding the requirements for a pollutant to be regulated under sections 108-110. Section 108 of the Clean Air Act lists three required elements for an endangerment finding of a pollutant: 42 U.S.C §7602(y) Meltz, R. December 2009. Legal Consequences of EPA’s Endangerment Finding for New Motor Vehicle Greenhouse Gas Emissions. Congressional Research Service. 32 33 10 (A) Cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare; (B) The presence of [the pollutant] in the ambient air results from numerous or diverse mobile or stationary sources; and (C) Air quality criteria had not been issued before December 31, 1970 but for which [the Administrator] plans to issue air quality criteria under this section34 Although it would be clear that GHGs meet the first two requirements, whether GHGs meet the third requirement is still up for debate. There are two general opinions as to whether GHGs meet the necessary requirements to be regulated as a criteria pollutant. Those who argue that GHGs do meet the requirement cite the case, NRDC v. Train. According to NRDC v. Train, the EPA is obligated to regulate a criteria pollutant under section 109 once it has found endangerment under section 108.35 The court held that the Environmental Protection Agency (EPA) is “required to set 'ambient air' quality standards which, in the EPA's judgment, are 'requisite to protect the public health,' ... and 'requisite to protect the public welfare from any known or anticipated adverse effects associated with the presence of such air pollutant in the ambient air”36. Therefore, the language in the third element of section 108 (quoted above) did not give the EPA the discretion to choose not to issue air quality criteria. In other words, under NRDC v. Train, any pollutant meeting the first two elements listed in section 108, as GHGs do, must be regulated by the EPA with a NAAQS. Those who claim that the EPA is not required to regulate GHGs with a NAAQS argue that the statute’s language offers the EPA some discretion, specifically with the third listed 42 U.S.C §7408(a)(1) NRDC v Train. US Supreme Court. April 1975. 36 ibid 34 35 11 element37. This argument rests on the view that the U.S. Supreme Court decision in, Chevron U.S.A., Inc. v. NRDC (1984) opened discretion to the EPA to interpret the ambiguous meaning of the third element in section 108. In Chevron, the Court held that if a statute is silent or ambiguous with respect to a specific issue, the implementing agency may offer its own reasonable interpretation of the statute. 38 In the case of GHGs, if the statute is ambiguous about the third element in section 108, the EPA could interpret the statute to offer some discretion not to regulate GHGs through NAAQS. (a)(2). NAAQS and Market-Based Mechanisms: Legal Feasibility If the EPA does regulate GHGs with a NAAQS, it does have the legal authority to use (or allow state to use) a market-based incentive system under a NAAQS. The statute includes market-based mechanisms in section 110 by saying that SIPs may: “Include enforceable emission limitations and other control measures, means, or techniques (including economic incentives such as fees, marketable permits, and auctions of emissions rights), as well as schedules and timetables for compliance, as may be necessary or appropriate to meet the applicable requirements of this chapter”.39 This section makes it clear that market-based mechanisms can be used by states in their SIPs as a control measure to limit emissions. It authorizes fees as well as cap and trade; and it authorizes auctions. Additionally, section 302 of the CAA authorizes the use of cap and trade mechanisms, but not necessarily taxes. Federal Implementation Plans may “include 42 U.S.C §7408(a)(1)(c) (“for which air quality criteria had not been issued before December 31, 1970 but for which he plans to issue air quality criteria under this section.”) 38 Chevron v. NRDC. US Supreme Court. June 1984. 39 42 U.S.C §7410(a)(2)(a) 37 12 enforceable emission limitations or other control measures, means or techniques (including economic incentives, such as marketable permits or auctions of emissions allowances)”40 Some previous attempts to use cap and trade systems within the NAAQS program have been components of rules that have failed, although their failure was for reasons that would not undermine a GHG trading system. For example, the Clean Air Interstate Rule (CAIR), and the Nitrogen Oxide State Implementation Plan (NO SIP) Call. The Clean Air Interstate Rule, issued in 2005, was meant to reduce power plant conventional air pollution that drifted from one state to another. This rule covered 28 states and the District of Columbia and used a cap and trade system to reduce the target pollutants, sulfur dioxide and nitrogen oxides.41 CAIR was based on the statute’s requirement that SIPs must “prohibit sources within the state from contributing significantly to nonattainment in…any other State”.42 However, three years after the rule was issued the U.S. Court of appeals for the D.C. Circuit invalidated CAIR in its decision in North Carolina v. EPA. The court held that CAIR did not “actually require elimination of emissions from sources that contribute significantly and interfere with maintenance in downwind nonattainment areas”.43 CAIR was later replaced by a new rule, the Cross State Air Pollution Rule (CSAPR) in 2011.44 The NOx SIP Call, which was meant to reduce regional transport of ozone, was finalized in 1998. In this rule, ozone reduction was tackled by mitigating significant transport of nitrogen oxide, a precursor to ozone. This rule gave states significant flexibility in achieving emissions 42 U.S.C §7602(y) Environmental Protection Agency. February 2012. Clean Air Markets: Clean Air Interstate Rule. http://www.epa.gov/cair/. 42 42 U.S.C §7410(a)(2)(D)(i)(I) 43 North Carolina v EPA. United States Court of Appeals for the District of Columbia Circuit. December 2008. 44 Environmental Protection Agency. February 2012. Cross State Air Pollution Rule. http://www.epa.gov/crossstaterule/. 40 41 13 reductions, including the option of reducing NO emissions with a cap and trade program. Similar to CAIR, the NOx SIP Call was defeated, this time by the D.C. Court of Appeals in NRDC v. EPA. This case held that the rule violated the requirement that “nonattainment areas achieve ‘such reductions in emissions from existing sources in the area’ as can be achieved by the adoption of reasonably available control technologies”. According to the court, the rule failed to meet this requirement because it did not guarantee “at least RACT [reasonably available control technology] level reductions in emissions sources within the nonattainment area”. 45 Despite the failure of these rules that included market-based programs, neither decision actually concluded that cap-and-trade was illegal under the NAAQS program. A market-based mechanism is still possible for GHGs because there are significant differences between those pollutants regulated in CAIR and the NOx SIP call and GHGs. The argument used against CAIR in North Carolina v EPA, that the rule did not “prohibit sources within the State from contributing significantly to nonattainment in…any other State,”46 seems inapplicable to GHGs because GHGs mix globally in the atmosphere and the major GHGs pose no local hotspots. If strictly applied, this provision would render all SIPs inescapably inadequate to control GHGs (because any remaining emissions of GHGs in any state would affect ambient levels in other states). Therefore, national or global, rather than state specific, emission reductions would need to be employed. The result would either be a court holding that this interstate nonattainment provision does not invalidate SIPs for GHGs (which do not pose local hotspots), or that it invalidates all such SIPs and hence requires the EPA to issue a FIP. 45 46 NRDC v EPA. United States Court of Appeals for the Ninth Circuit. November 4, 2010. 42 U.S.C §7410(a)(2)(D)(i)(I) 14 Similar to the reversal of CAIR not necessarily being applicable to GHGs, the NOx SIP call reversal may not be either. The NOx SIP Call was reversed because the D.C. Court of Appeals in NRDC v EPA determined that “the EPA has not shown that NOx SIP Call compliance will result in at least RACT-level reductions in emissions from sources within each nonattainment area, the EPA’s determination that compliance with the NOx SIP Call satisfies the RACT requirement is inconsistent with the “in the area” requirement and thus violates the plain text of § 172(c)(1)”47. However, because GHGs mix globally, the nonattainment area will be the entire country, making the “in the area” requirement inapplicable to GHGs because the entire country will have to satisfy the RACT requirement, rather than specific areas (as was the case with NOx because it has more regional effects). The unique properties of GHGs, in contrast to the six criteria pollutants previously regulated, necessitate a different interpretation and application of the statute. These unique properties may make it more difficult to regulate GHGs with a NAAQS. Traditionally, NAAQS have been used to limit pollutants with primarily local or regional impacts. Because GHG emissions mix globally and GHG concentrations are distributed uniformly across the globe, no local jurisdiction can effectively control its own ambient level. At whatever level the NAAQS is set, the entire country will either be in attainment or out of attainment, making it less sensible for state governments to regulate because each individual state would have little, if any, effect on GHG concentrations.48 NRDC v EPA. United States Court of Appeals for the Ninth Circuit. November 4, 2010. Richardson, Fraas and Burtraw. April 2010. GHG Regulation Under the Clean Air Act: Structure, Effects and Implications of a Knowable Pathway. Resources for the Future. (“Nothing any individual state could do would have any significant effect on local GHG concentrations. In short, the cooperative federalism approach that has been successful in regulating other NAAQS pollutants seems unsuitable for GHGs” (pp 13)). 47 48 15 (a)(3). NAAQS and Market-Based Mechanisms: Economic Efficiency The EPA is not permitted to consider costs when setting NAAQS because section 109 tells the EPA to set the NAAQS at a level “requisite to protect public health” (not mentioning cost)49. Section 108 of the CAA also mandates that EPA base the standard on “the latest scientific knowledge useful in indicating the kind and extent of all identifiable effects on public health or welfare which may be expected,” not on the costs of control.50 This prohibition on considering cost in setting the NAAQS, and the public and political controversy that a NAAQS for GHGs would undoubtedly elicit, may make the EPA reluctant to use the NAAQS process for a set of pollutants that are (at least in the near term) so closely linked to overall economic performance. However, cost may be considered in setting emissions limits to attain a NAAQS: by the states, when creating SIPs; or by the EPA, if the creation of a FIP is necessary. This means that the costs may be considered when a state chooses the “control measures, means or techniques (including economic incentives such as fees marketable permits, and auction of emissions rights), as well as schedules and timetables for compliance,”51 that will be used in order to comply with the NAAQS; or by the EPA in choosing control measures in a FIP to “fill all or a portion of a gap or otherwise correct all or a portion of an inadequacy in a SIP”52. Cost containment measures are one way to limit the cost of a cap and trade system. Cost containment measures “limit the macro-economic risks of complying with quantity based 49 Whitman v. American Trucking. U.S. Supreme Court. 2001. “Section 109(b) does not permit the Administrator to consider implementation costs in setting NAAQS. Because the CAA often expressly grants the EPA the authority to consider implementation costs, a provision for costs will not be inferred from its ambiguous provisions.” 50 42 U.S.C §7408(a)(2) 51 42 U.S.C §7410 (a)(2)(a) 52 42 U.S.C §7602(y) 16 greenhouse gas (GhG) reduction targets by setting an upper limit on the price of carbon emissions”53. Some cost containment measures might be available to EPA or the states under a GHG NAAQS. Because banking encourages early reductions (and was a part of CAIR, and was one of the few aspects of the rule not explicitly struck down by the D.C. Circuit) it could likely be implemented as part of NAAQS trading program. Additionally, offsets could be available because, although they may not contribute to emissions reductions from specific sources, they could – if well monitored - help the overall ambient air concentration to be reduced or maintained, as mandated by the statute. However, safety valves, or price ceilings54, may interfere with achieving the ambient air quality standard because if the trading price remains at, or would rise above, the safety valve price, the safety valve sells additional allowances at its trigger price and it’s possible that no reductions would occur. (a)(4): NAAQS and Market-Based Mechanisms: Emissions Reductions Emissions reduction mechanisms for NAAQS are different for areas in attainment versus areas in non-attainment. Whether an area is in attainment depends on where the air quality standard is set and whether the atmospheric concentrations of the area in question fall above or below that standard. NAAQS must be set at levels “requisite” to protect public health and Nemet, G. July 2008. Cost Containment in Climate Policy and Incentives for Technology Development. Nelson Institute Center for Sustainability and the Global Environment, University of Wisconsin-Madison. 54 Murray, B, Newell, R and Pizer, W. 2008. Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap and Trade. “A key alternative is the idea of a “safety valve,” in which a cap-and-trade system is coupled with a price ceiling at which additional allowances can be purchased (in excess of the cap). So long as the allowance price is below the safety-valve price, this hybrid system acts like cap-and-trade, with emissions fixed but the price left to adjust. When the safety-valve price is reached, however, this system behaves like a tax, fixing the price but leaving emissions to adjust. Given the importance attached by many stakeholders and policymakers to containing the costs of any U.S. climate policy, this approach has received considerable attention in the U.S. debate over climate change regulation (e.g., Samuelsohn 2008), and has come to be known as the “cost-containment” issue (Pizer and Tatsutani 2008).” 53 17 welfare. Because GHG emissions are distributed equally across the globe, the entire United States will either be in attainment or in non-attainment with any chosen ambient standard. The EPA can chose to set the ambient air concentration standard at any level, as long as the number is based off of “the latest scientific knowledge useful in indicating the kind and extent of all identifiable effects on public health or welfare which may be expected,” as mandated by the statute.55 The EPA will undoubtedly have a to overcome a number of obstacles when setting the standard. Industry and government leaders will be opposed to more stringent standards due to the economic burden it will impose on the energy industry, while environmental organizations and public health professionals will oppose a less stringent standard due to the need for a more dramatic reduction in emissions. Whichever standard the EPA chooses, it must gather scientific evidence that supports the NAAQS as being “requisite” to protect public health/welfare. Two GHG concentrations that are often proposed as plausible ambient air quality standards are 350 parts per million (ppm) and 450 ppm. In December 2011, the global atmospheric concentration of CO2 was 392 ppm.56 Therefore, if the air quality standard for GHGs is set at 350 ppm, the entire country will be in non-attainment. Conversely, if the air quality standard is set at 450 ppm, the country will be in attainment. If the standard is set at 450 ppm and the US is in attainment, GHG regulation will be subject to the prevention of significant deterioration (PSD) permitting program. Facilities subject to PSD permits are those that are major emitters of the regulated pollutant and are 55 42 U.S.C §7408(a)(2) 56 U.S. Department of Commerce , National Oceanic and Atmospheric Administration , Earth System Research Laboratory. December, 2011. http://www.esrl.noaa.gov/gmd/ccgg/trends/global.html. 18 either constructing a new source or modifying an existing source. PSD permits require the installation of Best Available Control Technology (BACT), an air quality analysis, an impact analysis and public involvement.57. BACT is decided on a case-by-case basis and is determined by a five step process: 1. Identify all available control technologies. 2. Eliminate technically infeasible options. 3. Evaluate and rank remaining control technologies based on environmental effectiveness. 4. Evaluate cost effectiveness of controls and energy and other environmental impacts. 5. Select the BACT.58 If the standard is set at 350 ppm and the US is in non-attainment, facilities will be subject to Non-Attainment New Source Review (NSR) Permits. All nonattainment NSR programs require the installation of the lowest achievable emission rate (LAER), emission offsets, and the opportunity for public involvement. LAER is the most stringent emissions limitation contained in the SIP for a source or the most stringent emission limitation achieved in practice by the source.59 Nonattainment NSR permits require more stringent emissions limitations in order to achieve attainment with the 350 ppm air quality standard. Therefore, with a lower NAAQS, greater emissions reductions will be achieved. The standard that would be chosen is still unknown. That decision will be based on any further scientific findings about the threat to public health and welfare at each ambient level. EPA. July 2011. Prevention of Significant Deterioration: Basic Information. http://www.epa.gov/NSR/psd.html. 58 EPA. November 2010. Clean Air Act Permitting for GHGs: Guidance and Technical Information. http://www.epa.gov/nsr/ghgdocs/ghgpermittingtoolsfs.pdf. 59 EPA. July 2011. Nonattainment NSR: Basic Info. http://www.epa.gov/nsr/naa.html. 57 19 (b). NSPS Section 111 of the Clean Air Act, NSPS, requires that the EPA establish standards for new sources of major pollutants. New source is defined as either construction or modification of a stationary facility (e.g., petroleum refineries, coal-fired power plants, municipal landfills, etc.). Unlike air quality standards, which are based on the atmospheric concentrations of the pollutants, NSPS are performance standards that limit the emissions of certain pollutants from source categories of emitters. The statute defines standards of performance as “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated.” 60 (b)(1). NSPS and GHGs The EPA has significant discretion in identifying source categories of emitters to be regulated under NSPS. In order for a source category to be regulated under NSPS, the EPA must determine that emissions from that source category endanger public health or welfare. Based on a variety of pollutants, the EPA has already determined that a number of source categories endanger public health and welfare. Sixty source categories and sub-categories61 are listed under NSPS, covering many industrial facilities including coal, oil and gas fired power plants, refineries and cement plants. In December 2010, the EPA entered into a settlement agreement requiring that GHG emissions from fossil fuel fired electricity-generating units and petroleum refineries be 42 U.S.C §7411(a)(1) Federal Title 40: Protection of the Environment. Part 60: Standards of Performance for New Stationary Sources. 60 61 20 regulated under NSPS. These two source categories account for 40% of GHG emissions in the United States.62 Unlike most pollutants regulated under NSPS, GHGs will be regulated under section 111(d), which applies to existing sources of pollution. Because GHGs are neither a criteria pollutant regulated under sections 108-110 nor a hazardous air pollutant regulated under section 112, they are automatically regulated within section 111(d) of NSPS. This is because the statute states that this section applies to sources that are neither criteria pollutants nor hazardous pollutants.63 (b)(2). NSPS and Market Based Mechanisms: Legal Feasibility The specific wording of two sub-sections of NSPS implies that standards may use market-based mechanisms. First, Section 111(a)(1) states that standards for each source category must “reflect the degree of emission limitation achievable through the application of the best system of emissions reduction” that has been adequately demonstrated.64 The wording of this section leaves a lot open to interpretation because “best system” is not explicitly defined. A market-based incentive system could be the “best system”. “There is widespread agreement in the academic community that section 111 authorizes the use of many types of flexible approaches…the EPA and the states should be able to fit a variety of flexible approaches into the statutory criteria for performance standards.”65 This may include inter- EPA. November 2011. Addressing GHG Emissions. http://www.epa.gov/airquality/ghgsettlement.html. 42 U.S.C §7411(d)(a)(1) (“for which air quality criteria have not been issued or which is not included on a list published under section 7408 (a) of this title or emitted from a source category which is regulated under section 7412 of this title”.) 64 42 U.S.C §7411(a)(1) 62 63 Wannier, G, Schwartz, J, Richardson, N, Livermore, M, Gerrard, M and Burtraw, D. July 2011. Prevailing Academic View on Compliance Flexibility Under Section 111 of the Clean Air Act. Resources for the Future, Washington DC. 65 21 firm trading, inter-sector trading, banking, etc. The Supreme Court has also recently upheld the EPA’s discretion to interpret the word “best” to include economic analysis66. The second sub-section of NSPS that may be interpreted as allowing a market-based system is 111(d)(1) which states that the standard must, “establish a procedure similar to that provided by section 7410 of this title under which each State shall submit to the Administrator a plan which a) establishes standards of performance for any existing source for any air pollutant, and b) provides for the implementation and enforcement of such standards of performance.”67 The term “similar to” may be interpreted simply as requiring the same cooperative federalism approach from section 110, which mandates states to create SIPs (or the EPA to create a FIP). The words “procedure similar to” may also imply that the plans developed under section 111 may follow the same parameters as those created under section 110. This means that because state plans from section 110 can include “economic incentives, such as fees, marketable permits, and auctions of emissions rights”68, state plans for section 111 can include economic incentives as well. If anything, the phrase “similar to” appears to give the EPA more discretion under 111 to allow the use of flexible policy designs like those under 110. Section 111 has been used with a cap and trade program once before in a rule finalized in 2005, the Standards of Performance for New and Existing Stationary Sources: Electric Steam Generating Units, otherwise known as the Clean Air Mercury Rule (CAMR). Under CAMR, EPA proposed a mercury emissions cap for new and modified sources and existing electric steam Entergy Corp v. RIverkeeper Inc. United States Supreme Court. 2009. “it was well within the bounds of reasonable interpretation for the EPA to conclude that cost-benefit analysis is not categorically forbidden.” “That the EPA has for over thirty years interpreted §1326(b) to permit a comparison of costs and benefits, while not conclusive, also tends to show that its interpretation is reasonable and hence a legitimate exercise of its discretion.” 67 42 U.S.C §7411(d)(1) 68 42 U.S.C §7410(a)(2)(a) 66 22 generating units and allowed trading among them. Additionally, EPA required that new and modified sources comply with traditional performance standards and could not exceed the performance standard by buying allowances. The Rule was meant to go into effect in 2010 with a cap of 38 tons per year, followed by a cap of 15 tons per year in 2018.69 However, the rule was vacated before it even went into effect. In 2008, the U.S. Court of Appeals for the D.C. Circuit vacated CAMR, stating that it was not in EPA’s authority to delist mercury from section 112 of the Clean Air Act (Hazardous Air Pollutants) in order to have it regulated under section 111 instead. Although at the time that the rule was created the EPA asserted that it deserved Chevron deference, the D.C. Circuit held that the statute did, in fact, address the delisting process and that the EPA had no authority to delist mercury. As a result, mercury was put back onto the Hazardous Air Pollutant list and could no longer be regulated with a cap and trade system.70 Although this attempt to use a cap and trade system within section 111 for mercury did not succeed, the issue with CAMR would not apply to GHGs because they are not currently listed as Hazardous Air Pollutants. Despite this fact, because CAMR never went into effect, a market-based system through section 111 remains legally untested. EPA. 2005. Standards of Performance for New and Existing Stationary Sources: Electric Steam Generating Units http://www.epa.gov/ttncaaa1/t3/fr_notices/27982camr111.pdf. 70 New Jersey v. EPA. D.C. Court of Appeals. February 28, 2008. “EPA promulgated the CAMR regulations for existing EGUs under section 111(d), but under EPA's own interpretation of the section, it cannot be used to regulate sources listed under section 112; EPA thus concedes that if EGUs remain listed under section 112, as we hold, then the CAMR regulations for existing sources must fall.” 69 23 (b)(3). NSPS and Market Based Mechanisms: Economic Efficiency NSPS regulation may be economically efficient for three reasons. First, when setting a standard under 111, the EPA is obligated to consider cost.71 This means that the economic impact to the industries affected by the regulation must be taken into account, avoiding any unreasonable costs to maintain compliance. Second, because the EPA regulates pollution through the identification of source categories, the agency may design regulatory programs that are most appropriate for each different sector of the economy. Considerations of cost may be taken into account and standards may therefore reflect the specific needs of each source category, rather than forcing source categories to comply with one general standard. This will also reduce the excessive costs imposed on regulated facilities. Finally, regulating GHGs under section 111(d) allows a significant amount of flexibility across states. There is no requirement for a uniform national standard. This allows states to develop tailored plans within their borders, meaning that they may be able to utilize existing programs and remain in compliance with NSPS requirements. “Allowing states to demonstrate the equivalency of existing programs could help the Agency meet its stated goal of implementing standards that address the environmental harm in a cost-effective manner.”72 GHG regulatory programs currently in place at the state level generally fall into five categories: (1) renewable portfolio standards (RPSs) or end-use efficiency programs; (2) 42 U.S.C §7411(a)(1) (“taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements”) 72 EPA. December 2010. Press Release to Set Modest Pace for GHG Standards/Agency Stresses Flexibility and Public Input in Developing Cost Effective and Protective GHG Standards for Largest Emitters. http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/d2f038e9daed78de852 5780200568bec!OpenDocument. 71 24 averaging the rate-based standard across the facility, source category, state, or region; (3) planned retirement of coal-fired power plants; (4) utility-only GHG markets; and (5) GHG markets that include source categories beyond the power sector.73 Under 111(d) and the “procedure similar to 110”, the states have discretion to chose the best way to achieve the emissions limitation objective set by the EPA. And under 111, there is no NAAQS for state plans to attain (or to be found inadequate to attain). If the States with these programs already in place can demonstrate equivalency to the 111(d) program, their programs may not require any changes to achieve the NSPS emissions requirement. Of course, flexibility for each state to design its own program to implement 111(d) means that the EPA would not be creating a national trading market; the cost-savings from state-by-state markets might be less than under a national market. Meanwhile, this flexibility across states may not apply to new sources under section 111(b). This section does mandate a uniform national standard74, making it less likely for states to use their existing programs. The flexibility allowed in 111(d) also grants the use of some cost containment measures. For example, banking and borrowing mechanisms may be utilized. Banking, whereby early excess reductions can be saved for future compliance periods, is more likely to be legally valid than borrowing, whereby facilities with insufficient reductions can promise to pay for extra reductions in future compliance periods. This is because emissions reductions must be achieved as quickly as the federal standard.75 Monast, Profeta, Pearson and Doyle. March 2012. Regulating GHG Emissions From Existing Sources: Section 111(d) and State Equivalency. Environmental Law Institute. Washington D.C. 74 42 U.S.C §7411(b). “Within one year after the inclusion of a category of stationary sources in a list under subparagraph (A), the Administrator shall publish proposed regulations, establishing Federal standards of performance for new sources within such category.” 75 40 U.S.C §60.22 73 25 Price ceilings or safety valves, which impose a limit on how low allowances may cost, may result in emissions exceeding a technology performance standard. Offsets fit less comfortably within the structure of NSPS. Although offsets do contribute to overall reduction in atmospheric GHG levels, they do not contribute to emissions reductions from specific source categories. (b)(4). NSPS and Market Based Mechanisms: Emissions Reductions The standards for GHGs under NSPS are still undecided. Under the court-approved settlement agreement, both the regulations are to be finalized in 2012, with the power plant NSPS due on May 26, 2012 and the refinery NSPS due on November 15, 2012. Despite the unknown standards, studies show that substantial emissions reductions are feasible under NSPS authority. Moreover, incentive-based approaches that place an explicit price on CO2 should do a better job of inducing emissions reductions than uniform, strict performance standards.76 The exact values of emissions reductions are unknown and hinge on the technology and projects used by each state. In one analysis of existing coal-fired electricity generating units, results show that a market-based NSPS approach could achieve a reduction of nearly 3% of total national emissions from 2011 emissions levels. These results reflect a relatively modest NSPS approach of only one source category.77 If NSPS were applied to only new sources, they may reach a much smaller share of emissions than if they were also applied under 111(d) to existing sources. New coal-fired power plants are few compared to existing coal-fired power Richardson, Fraas and Burtraw. April 2010. GHG Regulation Under the Clean Air Act: Structure, Effects and Implications of a Knowable Pathway. Resources for the Future. 77 Ibid. 76 26 plants. And a tighter standard applied only to new sources could discourage replacements and modifications, leaving existing sources in use longer. Thus for effective emissions reductions, there are good reasons for the EPA to adopt 111(d) standards for existing sources as well as 111(b) for new sources. IV. Options for Implementation (a). Require States to Adopt Plans Requiring states to comply with either NAAQS or NSPS by adopting a SIP is a likely option. As previously mentioned, NAAQS utilize the cooperative federalism approach whereby the federal EPA sets the ambient air quality standard and states implement the emissions limits to comply with that standard through a State Implementation Plan. Section 110 identifies how states create those plans.78 SIPs lay out the implementation, maintenance and enforcement of emissions limits for both primary and secondary ambient air quality standards. Because Section 111 states that NSPS procedures must be “similar to” section 110,79 NSPS also adopts the cooperative federalism approach and States must complete programs “similar to” SIPs under 111(d). Allowing states to adopt their own plan is the most desirable approach for NSPS because many of the benefits of NSPS lie with its room for flexibility. With SIPs, States are able to chose the most cost-effective methods of emissions reductions. States and the EPA can learn from the experimentation and experience with different programs in different states. However, state-by-state flexibility means that the EPA would not create a national trading market. 78 79 42 U.S.C §7410 42 U.S.C §7411(d)(1) 27 (b). Require A Federal Plan that States Must Adopt if State Plans are Not Satisfactory Although SIPs do allow significant flexibility and are generally more cost-effective for the States, SIPs may not be adequate to address a globally mixing pollutant like GHGs. The EPA may be forced to establish a Federal Implementation Plan for a number of reasons. For NAAQS, section 110(c) authorizes the EPA to promulgate a Federal Implementation Plan if it: “(A) finds that a State has failed to make a required submission or finds that the plan or plan revision submitted by the State does not satisfy the minimum criteria established under subsection (k)(1)(A) 80 of this section, or (B) disapproves a State implementation plan submission in whole or in part.”81 Section 111(d), in addition to incorporating the SIP/FIP process by reference in its “similar to 110” language, also has an independent provision that allows the EPA administrator to create a Federal Implementation Plan. Section 111(d) states that the EPA may do so: (A) to prescribe a plan for a State in cases where the State fails to submit a satisfactory plan as he would have under section 7410 (c) of this title in the case of failure to submit an implementation plan, and (B) to enforce the provisions of such plan in cases where the State fails to enforce them as he would have under sections 7413 and 7414 of this title with respect to an implementation plan If the EPA did reject every state’s SIP as inadequate to attain a NAAQS for a globally mixing pollutant, there could then be a mandatory national trading program under EPA’s power to establish a FIP. The definition of FIP expressly includes “enforceable emissions limitations or other control measures, means or techniques (including economic incentives such as marketable permits or auctions of emissions allowances.”82 This option would reduce flexibility 8042 U.S.C §7410(k)(1)(A) (“Within 9 months after November 15, 1990, the Administrator shall promulgate minimum criteria that any plan submission must meet before the Administrator is required to act on such submission under this subsection. The criteria shall be limited to the information necessary to enable the Administrator to determine whether the plan submission complies with the provisions of this chapter”) 81 42 U.S.C §7410(c)(1)(A) 82 42 USC § 7602(y) 28 to the sates, but would increase flexibility for firms to trade nationally, potentially improving cost-effectiveness. Such a program would undoubtedly be met with significant opposition by state governments. (c). Offer States a Federal Plan to Opt-In An alternative option for implementation would be for the federal EPA to establish a model federal standard and FIP for which states could choose to opt-in. Giving the States a choice between creating their own SIP or adhering to the FIP is an economically efficient and effective method for implementation because those States with existing programs or specific needs to incorporate into implementation have the option to do so, while those States lacking in any previous programs can use the system set forth by the federal EPA and possibly save costs in research and planning. An opt-in FIP may also encourage a national trading market that includes most states, while still letting some states experiment in other ways. V. Policy Evaluation Figure 1: Evaluation of NAAQS Goals Metric 108-110 NAAQS SIP 108-110 NAAQS FIP (opt-in) 108-110 NAAQS FIP (mandatory) Legal Feasibility Legal Authority for Regulating GHGs NRDC v Train says EPA mandated to regulate GHGs. May be subject to Chevron (EPA decides) NRDC v Triain says EPA mandated to regulate GHGs. May be subject to Chevron (EPA decides) NRDC v Triain says EPA mandated to regulate GHGs. May be subject to Chevron (EPA decides) 29 Legal Authority for Trading Program Section 110 includes "economic incentives such as fees, marketable permits, and auctions of emissions rights" Section 110 includes "economic incentives such as fees, marketable permits, and auctions of emissions rights" Section 110 includes "economic incentives such as fees, marketable permits, and auctions of emissions rights" State v Federal Allocation EPA sets standard, states create and implement plan (SIP) Clean Air Interestate Rule (invalidated by DC Circuit court in NC v EPA); NO SIP Call (invalidated by DC Court of Appeals in NRDC v EPA); CSAPR (final rule in July 2011) EPA sets standard and creates and implements a FIP EPA sets standard and creates and implements a FIP Existing Precedents Economically Efficient Emissions Reductions Consideration of Cost Not in setting NAAQS but state may in establishing SIP Price Containment Banking and Measures Offsets, maybe price valve Emitter/Source Depends on Covered SIP Not in setting NAAQS but EPA may in establishing FIP Not in setting NAAQS but EPA may in establishing FIP Banking and Banking and Offsets, maybe Offsets, price valve maybe price valve Depends on FIP Depends on FIP 30 Statute Requirements for Reduction New v. Existing Source Requirements 83 EPA sets standards, exact emissions reductions depends on SIP Based off of “the latest scientific knowledge useful in indicating the kind and extent of all identifiable effects on public health or welfare which may be expected,” as mandated by the statute.83 Depends on SIP EPA sets standards, exact emissions reductions depends on FIP EPA sets standards, exact emissions reductions depends on FIP Depends on FIP Depends on FIP 42 U.S.C §7408(a)(2) 31 Figure 2: Evaluation of NSPS Goals Metric 111 NSPS SIP 111 NSPS FIP (opt-in) Legal Feasibility Legal Authority December for Regulating 2010 GHGs settlement agreement requiring GHG emissions from fossil fuel fired electricitygenerating units and petroleum refineries are regulated under NSPS. Legal Authority Section 111(d) for Trading directs that the Program process for setting standards be "similar to" Section 110, under which plans include “economic incentives" State v Federal Standard Allocation developed by the EPA. Delegated authority to the states but EPA retains authority to implement and enforce. 111 NSPS FIP (mandatory) December 2010 settlement agreement requiring GHG emissions from fossil fuel fired electricitygenerating units and petroleum refineries are regulated under NSPS. December 2010 settlement agreement requiring GHG emissions from fossil fuel fired electricitygenerating units and petroleum refineries are regulated under NSPS. Section 111(d) directs that the process for setting standards be "similar to" Section 110, under which plans include “economic incentives" Section 111(d) directs that the process for setting standards be "similar to" Section 110, under which plans include “economic incentives" Standard developed by the EPA. EPA also creates and enforces plan. Standard developed by the EPA. EPA also creates and enforces plan. 32 Existing Precedents Economically Efficient Consideration of Cost Emissions Reductions Price Containment Measures Emitter/Source Covered Clean Air Mercury Rule, vacated in 2008 due to complication with delisting from HAP list Yes Yes Banking and Price floors Specified by source category, currently GHGs regulated through fossil fuel fired electricitygenerating units and petroleum refineries Statute "Best System of Requirements Emissions for Reduction Reduction" New v. Existing GHGs only Source regulated as Requirements existing sources (section 111(d)) because not currently a criteria pollutant or HAP Yes Banking and Price Banking and Price floors floors Specified by source category, currently GHGs regulated through fossil fuel fired electricitygenerating units and petroleum refineries Specified by source category, currently GHGs regulated through fossil fuel fired electricitygenerating units and petroleum refineries "Best System of Emissions Reduction" GHGs only regulated as existing sources (section 111(d)) because not currently a criteria pollutant or HAP "Best System of Emissions Reduction" GHGs only regulated as existing sources (section 111(d)) because not currently a criteria pollutant or HAP 33 VI. Policy Recommendation It’s clear that each of these two regulatory options – NAAQS and NSPS - have both advantages and disadvantages in terms of legal feasibility, cost-effectiveness and the potential to actually reduce the impact that the United States has on global climate change. In terms of legal feasibility, the EPA appears to have the authority to regulate GHGs under either provision. To regulate under 111, the EPA will need to defeat claims (if any are raised) that NRDC v. Train requires the EPA to regulate under 109 and not 111. The EPA’s settlement agreement in December 2010 requiring GHG emissions from fossil fuel fired EGUs and petroleum refineries to be regulated under NSPS, suggests that the EPA prefers this path. Still, both of these options are at least somewhat legally vulnerable. Both options remain untested. Prior efforts to incorporate cap and trade systems into EPA rules (CAIR and the NOx SIP call for NAAQS and CAMR for NSPS) were vacated by the courts before they went into effect, although none of these court decisions held that a trading system is illegal under the CAA. Additionally, Adding a pollutant to the list of six criteria pollutants regulated under NAAQS takes a significant amount of time, scientific input, and political resolve. The NAAQS itself may be challenged in court, impending the development of an allowance market. In terms of economic efficiency, NSPS would impose fewer costs on government and industry than NAAQS. This is because the EPA may consider costs when setting the standard for NSPS, but it may not when setting the standard for NAAQS. Additionally, because NSPS regulate source categories instead of a pollutant, standards per source may vary depending on the specific requirements of that source. Finally, the flexibility allowed to states by NSPS means that existing state or regional programs may fulfill the federal NSPS as long as the state or 34 region proves equivalency. This will save a number of states a tremendous amount of money. Yet a nationally trading market (via a FIP under either 109-110 or 111) may be even more costeffective for firms. The potential for emissions reductions for each of these programs remains uncertain. Emissions reductions from NAAQS depend on where the EPA sets the NAAQS, such as at 350ppm or 450ppm. If the NAAQS is set at the more stringent option of 350ppm, this would require an approximately 10% reduction in the ambient level (from today’s concentration of 392ppm). This would translate to a very high reduction in emissions, likely exceeding 80%84. However, if the EPA were to choose 450ppm, the country would be in attainment (at least for a few years) and would not have to reduce the ambient level (from the present level of 392ppm). Emissions reduction potential for NSPS also remains uncertain. Some estimates show that a conservative NSPS will result in a 3% reduction of total national emissions but that is only for one source category. At this point, pending EPA announcements, it’s difficult to identify which of these two options would result in greater emissions reductions. Overall, NSPS is the better option. Because the EPA has already committed to regulating GHGs under NSPS, the NSPS avoids the need to set a NAAQS, and the NSPS allows for marketbased incentives both as the “best system of emission reduction” and via the “procedure similar to 110”, NSPS is a better way to create a market-based mechanism under the CAA. Additionally, the flexibility allowed to states through NSPS offers an opportunity to learn from state experimentation. 84 For example, the American Clean Energy and Security Act had an atmospheric GHG concentration goal of 450ppm which required that “in 2050, the quantity of United States greenhouse gas emissions does not exceed 17 percent of the quantity of United States greenhouse gas emissions in 2005.” (H.R. 2454. United States Senate. American Clean Energy and Security Act of 2009. 35 VII. Conclusion Although legislation imposing a market-based mechanism to control GHGs has not succeeded in the United States, such a system is still entirely possible under the current CAA. The EPA has a number of regulatory options from which to choose under the CAA, and, both NAAQS and NSPS may allow the use of a market-based incentive approach. After evaluating the legal feasibility, economic efficiency and potential to reduce emissions, this paper has argued that NSPS is the better option for regulating US GHGs emissions with a market-based incentive mechanism in the United States. The EPA has already taken the initial steps to regulate GHGs under NSPS. Now the EPA can move forward with this program by setting a standard and enforcing a comprehensive market-based incentive program in which all states will participate. With this program, the United States will have the potential to significantly reduce the global GHG concentrations and minimize the impacts of global climate change. 36