Nonattainment areas: Command-and-control or markets?

1. Nonattainment areas:Command-and-control or markets?

2. 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?

3. Overview of the program and possible market mechanisms

9. 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”

10. 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.”

11. Ozone and the issue of regionalism

12. 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 cause • Coughing, painful breathing • Asthma attacks • Susceptibility to respiratory illness (e.g., pneumonia) • Lung damage from repeated exposure

13. Ozone’s welfare effects

14. 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

15. Inversion layers can trap smog near the ground

16. Ozone pollution is less of a problem in cool months

17. A common summer pattern

18. EPA amends the ozone NAAQS • March 2008—8-hr. ozone average goes from .084 ppm to .075 ppm • More nonattainment?

19. Problems in WNY … 20082008

20. … and across the state

21. Can SIPs address ozone fairly and effectively?

22. 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

23. 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

24. 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

25. In the background—acid rain and greenhouse gases Looking for Loopholes in Some of the Wrong Places

26. 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 up • EPA—past 2 yr. annual emissions vs. future potential (actual-to-potential)

27. Puerto Rican Cement precedent Modified kiln would pollute less at the same production, but could produce more Had to undergo New Source Review

28. 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

29. 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)

30. … and EPA can make predictive judgments on incomplete information

31. 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

32. 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?

33. 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

34. 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

35. 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

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

37. 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

38. Clean Air Act Implementation in a Nutshell

39. 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?