Ed Dolan's Econ Blog

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.

Addendum: Of the options in the second to last paragraph, the EPA chose to appeal the  CASPR rule to the Supreme Court. In April 2014, the court upheld the legality of the rule. The Court of Appeals lifted its stay in October 2014. It remains to be seen whether this legal victory will eventually lead to the reestablishment of an effective cap-and-trade mechanism.



10 Responses to “Court Rejects EPA Cross-State Air Pollution Rule. Where to Next?”

Gilbert EAAugust 27th, 2012 at 10:43 am

EPA regulations need a serious reality check. It seems that more often than not, regulatory policy we’ve developed to help us along is actually the very thing that’s destroying us. The judge’s decision in this regard is not a surprise, our policies continually keep a steady foot on our necks, making it very hard for us to actually achieve any sort of recovery that we apparently say we want. We have been out of balance on this for a while and this move is the way to at least begin talking about curbing regulatory policies that are killing jobs and slowing down our recovery.

Ed Dolan EdDolanAugust 27th, 2012 at 12:14 pm

You raise an interesting question: When do environmental regulations kill jobs? Here is how I see it:

Harm done by pollution is a cost of doing business. The question is not whether such costs exist, but who should bear them. As the saying goes, TANSTAAFL; There Ain't No Such Thing as a Free Lunch. Should the firm that causes the harm bear the costs? Or should the costs be shifted to the victim? Which creates more jobs?

For example, suppose I have a bakery. Instead of buying flour for my bread, I steal the flour from a warehouse. That shifts the cost of the flour from me to the warehouse. Because my costs are lower, I can create more jobs for my bakery workers, but does this create more jobs for the economy as a whole? What about the higher costs for the warehouse (insurance, security, etc.). Won't that mean fewer jobs for warehouse workers?

So the question is, when does shifting costs create jobs, when does it destroy jobs, and when does it have no effect on jobs?

RogerAugust 27th, 2012 at 1:20 pm

At the expense of sounding philosophical, profit without regulation causes greed. Greed in this case translates into global warming and other harmful effects to the environment. The question is how do we sustain our standard of living in a growing population without destroying our ecosystem in the process?
Fossil fuels serve as the aorta to our economy with its capillaries branching to the throats of right wing politicians and parts of our judicial system. Is it not surprising that the two judges who ruled against the EPA were Bush appointees?
Until we’re able to bypass these vessels from the malignant levers of authority, we’ll continue to hear the tired diatribe of how cutting pollution will kill jobs. Can someone tell me how a scorched earth produces jobs?
Until the Republican party comes to terms with the environment, especially global warming, this independent voter will vote for bypass.

SciguybmAugust 27th, 2012 at 1:58 pm

Corporate USA seems to believe that they have been granted a "free pass" in regard to the impact on the environment. Seems more like extortion or blackmail when with a finger pointed at a single word, and with lobby-friendly politically stacked courts, they can jimmy rules and regulations put in place to help insure a cleaner and healthier future.
From the change of the 1800s to the 1900s, of the top 100 companies, none existed at the change from the 1900s to the 2000s. The very reason business evolves is that the old is replaced with the new. Today's mega-billion dollar industries have found a way to circumvent that evolution; payola. Point at "jobs", put the fear of job-loss and voter disfavor at political party elected officials and apparently they can, and do, outlive their time. Weakening the EPA and preventing cleaner regulations to come into play, stops the evolution of businesses, prevent newer technology from being invested into and keeps the techno-savvy cottage-industry companies from replacing the old dinosaurs. This needs to be defeated on a state-to-state level: one state enacts cleaner forcing other states to equal the progress or lose businesses that will locate to cleaner environments for their workers.

Tom GillilanAugust 27th, 2012 at 3:43 pm

The most serious health destroying air pollution that the average citizen is exposed to does not come from businesses, vehicles, or power plants, but rather from their neighbors fireplace or charcoal barbeque.






Americans want their cake and eat it too. They blame air pollution on businesses, vehicles, and power plants, yet at the same time they burn unlimited amounts of wood and charcoal to heat their homes and cook their meals. A very big part of the air pollution problem is "closer to home" than Americans are willing to accept.

Ed Dolan EdDolanAugust 28th, 2012 at 11:54 pm

Not to mention their neighbors' lawnmowers and leaf blowers, which emit zillions more pollutants per gallon of fuel burned than a modern car, and runoff from their neighbors' chemically treated lawns. Yes, you are certainly right, pollution is not just industry.

ThomasGrennesAugust 28th, 2012 at 3:37 pm

Isn't it possible for a private property owner to protect himself from pollution by a neighbor
without relying on an agency of the federal government, such as EPA? Can victims not seek damages from the source of pollution, such as a coal-fired electrical generating plant? As for the sources of pollution, there are some private firms, but many of the biggest polluters are not-for-profit government agencies such as city water and sewage plants and military bases.

Ed Dolan EdDolanAugust 28th, 2012 at 11:52 pm

Very good points.

Yes, for sure, it should be, and sometimes is, possible for an owner to protect herself from pollution w/o regulatory intervention. I should write a whole post on this sometime. To make a long story short, the idea is a practical one in 1-on-1 pollution situations, but the procedural barriers, law-based, science-based, and cost-based, get out of control when there are multiple pollution sources that damage mega-multiple victims. (Time for a commercial: I have written at some length about this in my book TANSTAAFL).

And yes, you are absolutely right, government agencies can be big polluters, especially, but not only, the military, and not just federal government. Not just pollution, but government agencies often promote environmentally harmful land use policies, such as underpricing of leases on government range land.

James RentzApril 17th, 2013 at 12:19 am

It's quickly becoming really ironic that they call themselves the Environmental Protection Agency. I mean, they can't even come up with a decent policy to effectively combat all forms of air pollution.

Joann G. RicardoApril 21st, 2013 at 11:26 pm

It is back to the drawing board for the proponents of the CSAPR. I believe that each state should adapt their air pollution laws under a collective consultation from agencies.