Court Rejects EPA Cross-State Air Pollution Rule. Where To Next?

Last week, the United States Court of Appeals for the District of Columbia rejected an EPA rule known as the Cross-State Air Pollution Rule (CSAPR). The rule was supposed to have gone into effect at the beginning of 2012, but the same court had previously stayed its implementation on procedural grounds. Last week’s ruling is the first to address CSAPR on its merits.

CSAPR governed emissions of sulfur dioxide (SO2) from Midwestern coal-fired power plants and other sources. SO2, along with oxides of nitrogen (NOx) and others is a precursor of acid rain, which causes widespread environmental damage not only in the states where the sources are located, but also those downwind.

As I discussed in detail in a post at the time of the court’s January stay of CSAPR, what is at stake is the future of the EPA’s emissions trading scheme for SO2. That scheme, which had been hailed as a success story for the cap-and-trade approach to pollution control, collapsed in 2008 when the court ruled against an earlier version of the EPA regulation known as the Clean Air Interstate Rule (CAIR). CSAPR had been intended to fix the legal defects of CAIR, but in the eyes of the court majority, it failed to do so.

The shortcomings of CSAPR, and CAIR before it, are partly economic and partly legal. The economic defects of the rule lie in the fact that SO2 pollution is not ideally suited to the cap and trade approach. That approach works best when pollution from any one source is equally harmful as pollution from any other source.

The contribution of CO2 to climate change fits this pattern, since CO2 emitted anywhere in the world is, after a time, mixed uniformly throughout the earth’s atmosphere. That being the case, the principal economic challenge is to ensure that regulation achieves any given reduction in CO2 emissions at minimum cost. Cap and trade does a good job in that regard. Sources with low marginal cost of abatement reduce their emissions. Doing so allows them to become sellers of permits or to avoid buying permits. As total emissions fall to the level of the cap, only the sources with the highest costs of abatement buy permits and continue to pollute. The tighter the cap, the higher the price and the fewer sources continue their emissions.

The situation with SO2 is not so tidy. SO2 is a regional, not a global pollutant. In the United States, it travels downwind, west to east, from sources such as Midwestern coal-fired utilities to downwind areas like the Adirondacks. Much of the pollution from East Coast sources, in contrast, blows out to sea where it does less damage. An optimal system for control of SO2 pollution, then, would not only have to concentrate abatement where marginal abatement costs are lowest, but would also have to balance marginal abatement costs against marginal harm for each source, depending on its location. SO2 trading under CAIR did the former, but not the latter.

That brings us to the legal issue. The Clean Air Act includes a so-called “good neighbor clause” that aims to ensure that emissions from upwind states do not make it more difficult for downwind states to meet minimum air quality standards. That seems to imply that the degree of pollution abatement required for each state should be governed according to the harm it does. Emissions trading, instead, reduces pollution in proportion to costs, with those sources having the lowest abatement costs cutting back first, regardless of where they are located. Because there is no reason to expect marginal harms and marginal costs to be proportional for sources in all states, the cleanup pattern resulting from emissions trading can plausibly be construed as a violation of the law’s good neighbor clause. CSAPR tried to meet this objection by placing geographic restrictions on pollution trading while still attempting to preserve much of the cost-minimization that is the main attraction of the cap-and-trade approach. Unfortunately, the attempted compromise failed to meet the requirements of the law in the view of two of the three appellate court judges.

In principle, we should be happy that we live in a country where the rule of law trumps economic expediency. Still, the decision leaves the downwind states of the Eastern Seaboard without adequate defenses against acid rain. The question is, where to next?

One possibility would be to do nothing. CAIR remains formally in effect, although it is unclear how long the court will permit that to continue. The 2008 decision intended to allow CAIR to remain in force only until the EPA developed a satisfactory replacement, something it has failed to do. However, from an economic point of view, the legal status of CAIR is moot. Uncertainty over the future of the regulatory regime has caused the prices of SO2 permits to collapse. They are now so cheap that it reportedly costs less for some utilities to buy pollution permits than to operate pollution control equipment that they have already installed at great expense.

There are several things the EPA could do. One would be to appeal the decision to the Supreme Court. A second would be to write a new version of CSAPR that would meet the court’s objections. A third would be to give up on emissions trading and revert to its earlier command-and-control approach to regulating SO2, NOx, and other acid rain precursors. Still another alternative would be to encourage the states to submit a new round of air quality standards of their own, as the recent court decision says they should be allowed to do. However, any of these approaches would take years.

In an ideal world, Congress would amend the law in a way that encouraged the EPA to implement a pollution control regime that focuses on the common interest of all states in efficiency and effectiveness, rather than setting them against one another over issues of who bears costs and receives benefits. A law that unambiguously allowed a return to emissions trading would be one possibility. Even simpler would be one that imposed taxes on emissions of SO2 and NOx. However, a Congress that has relabeled cap and trade as “tax and trade,” that treats new taxes of any sort as anathema, and that sees any form of pollution control as subversive of industrial prosperity is unlikely to act. Meanwhile, there is reason to fear that reductions in acid rain over the past two decades face reversal.

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