Final Mercury Standards for Power Plants

As promised the other day (see here), EPA has finalized new regulations on mercury emissions from fossil fuel-fired power plants. The final rule in its entirety is here, and the regulatory impact statement, which includes the highly favorable cost-benefit analysis is here. For those who don't want to work so hard, a brief summary of the the rule is here.

EPA Finally Finalizes Air Toxics Rule for Mercury

Not so much a "job-killing" regulation as a long-overdue protection (developed under court order) that finally will prevent utilities from committing involuntary manslaughter 17,000 times per year (not to mention hundreds of thousands of non-fatal assaults on public health).

According to this Washington Post story (the finalized rule is not yet available online), the new rule will force utilities, which are the largest emitters of air toxics in the US, to install scrubbers to remove emissions of mercury and soot, which will cost them $10.6 billion between now and 2016, but result in estimated mortality and morbidity cost savings of between $59 billion and $140 billion per year.

As soon as the final rule and regulatory impact assessment are available, I will link to them.

Washington Environmental Council v. Sturdevant

Yesterday, Federal District Court Judge Marsha J. Pechman ruled (here) that Washington State agencies must  promulgate technology-based standards for greenhouse gas emissions from oil refineries in the state. The decision is based on a highly technical (but not convoluted) reading of state regulations under the federal Clean Air Act (CAA), according to which the state environmental agency must set RACT (reasonably achievable control technology) standards  for certain categories of existing stationary sources (in this case oil refineries) pursuant to their State Implementation Plan (SIP).

The most interesting aspect of this opinion to my mind is that SIPs are a compliance tool for attaining (or maintaining) national ambient air quality standards (NAAQSs), which are set for criteria pollutants. To date, the EPA has not established criteria documents for greenhouse gases, which would lead to the promulgation of NAAQSs for them. Yet, the federal court did not hesitate to require Washington state agencies to include regulations in their SIPs for GHGs. As Judge Pechman notes in her ruling, nothing in the SIP provision (sec. 110) of the CAA restricts the state from regulating air pollutants beyond federal requirements.  So long as the SIP "meets all the applicable requirements," EPA must approve it, even if it is more stringent than federal law requires. And it remains enforceable by both federal and state courts. In this case, the state's RACT regulations were broader than federal requirements in applying not only to criteria pollutants but to "all air contaminants." A 2009 executive order (09-05, May 21, 2005) by Washington Governor Christine Gregoire specifies that "greenhouse gases are air contaminants."

Presumably the State of Washington could easily avoid the court's order in this case simply by amending the language of its current RACT regulation to explicitly exclude GHGs. However, it may be politically difficult to for it to do so, given the 2009 executive order.

This is the first case (to my knowledge) where environmental groups have succeeding in regulating GHG emissions from existing (as opposed to new or substantially modified) stationary sources of greenhouse gas emissions under the CAA. The EPA has studiously avoided bringing GHGs under the general ambit of Title I of the CAA, which would require an endangerment finding (under sec. 108, separate from the endangerment finding EPA made under Title II for auto emissions of GHGs), issuing criteria documents, and promulgating NAAQSs (under sec. 109). Even in the absence of NAAQSs, emissions from new and substantially modified sources are subject to federal regulation because of  broad language in the relevant sections of the statute. However, "existing" sources are not subject to direct federal regulation under the act (broadly speaking); rather, they are regulated by the states, pursuant to sec. 110 SIPs. The EPA must approve SIPs that meet certain federal requirements relating to attainment (or movement toward attainment) of NAAQSs. This case shows how language in state regulations, if it is sufficiently broad, can bring SIPs into play in regulating GHGs from existing stationary sources with technology-based standards.

When is Command-and-Control Efficient? Evidence from the Field

"Command-and-control" is a derisive label usually applied (mainly by economists) to traditional forms of environmental regulation including technology-based "design standards" and "performance standards" (which are non-tradable quota limits). In most of the environmental instrument-choice literature, "command-and-control" is considered generally inefficient both nominally and relative to so-called "economic instruments,"* which include effluent taxes and cap-and-trade (a performance standard with trading of pollution rights or allowances).

More than a decade ago, Peter Grossman and I published a long article (a pre-publication version is here), with an unusually long title, in the Wisconsin Law Review about the limitations of cap-and-trade and effluent taxes as substitutes for traditional forms of quantity-based regulations.** In “When is Command-and-Control Efficient? Institutions, Technology, and the Comparative Efficiency of Alternative Regulatory Regimes for Environmental Protection,” we explained why, as a matter of both theory and historical experience, traditional forms of environmental regulation have sometimes been, and sometimes remain, more efficient and effective than so-called “economic instruments” mainly because of monitoring and enforcement cost differentials. In at least some cases, command-and-control regulations, particularly technology-based standards, can have administrative cost advantages that offset, or more than offset, the admitted compliance-cost advantages of cap-and-trade or effluent taxes.

One important implication of our analysis in that article is that compliance costs are not the sole concern in environmental protection (although they are often treated as such by economists*). Rather, society should be concerned with minimizing the total costs of environmental protection, which are the sum of compliance costs, administrative (monitoring and enforcement) costs, and residual pollution costs. See, e.g., Peter Z. Grossman and Daniel H. Cole, "Toward a Total Cost Approach to Environmental Instrument Choice," in T. Swanson & R. Zerbe (eds), An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional Design, 20 Research in Law & Economics 225 (2002) (see here). Moreover, it is a mistake to presume that minimizing compliance costs necessarily minimizes total costs, as if differential administrative or residual pollution costs are either insignificant or inevitably move in the same direction as compliance costs.

In the years since we published our Wisconsin Law Review article, it has been cited hundreds of times (more often by legal scholars than by economists). To date, our analysis and findings have not been substantially challenged. Now comes a new article in the October 2011 issue of The American Economic Review providing further empirical support for sometimes preferring traditional forms of regulations over "economic instruments."

In “Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality,” co-authors Maxmiliian Auffhammer and Ryan Kellogg, analyze empirical data on national and state-level (California) gasoline-content regulations, and find that the more flexible federal approach has virtually zero cost-effectiveness (costs of compliance were minimized but at the price of completely nullifying the environmental effect of the regulation), but California's more stringent set of traditional regulations have reduced substantially emissions that contribute to low-level ozone pollution, albeit at higher cost of compliance (but providing substantial net social benefits). Here is their abstract:

This paper examines whether US gasoline content regulations, which impose substantial costs on consumers, have successfully reduced ozone pollution. We take advantage of spatial and temporal variation in the regulations' implementation to show that federal gasoline standards, which allow refiners flexibility in choosing a compliance mechanism, did not improve air quality. This outcome occurred because minimizing the cost of compliance does not reduce emissions of those compounds most prone to forming ozone. In California, however, we find that precisely targeted, inflexible regulations requiring the removal of particularly harmful compounds significantly improved air quality.

The empirical information and conclusions of Aufhammer and Kellogg's article further support Cole and Grossman's conclusion that command-and-control regulations are sometimes (but certainly not always) more effective and efficient than market-based mechanisms. Where our analysis focused on differential administrative costs that sometimes favor design standards, Aufhammer and Kellogg have a somewhat different concern, that more flexible regulatory mechanisms, by focusing myopically on the minimization of compliance costs, might fail to achieve emissions reductions necessary to achieve the (exogenous) environmental goal. For reasons that should be obvious, a regulation with zero cost-effectiveness (purchasing at some positive cost zero additional increments of environmental protection) cannot be considered efficient, let alone more efficient than another regulation, albeit one with higher compliance costs, but which actually furthers the environmental protection goal (assuming the goal itself is economically sensible).

Aufhammer and Kellogg's empirical analysis provides a welcome reminder that social scientists, legal scholars, and policy analysts should not neglect or underestimate the potential of traditional command-and-control instruments in the environmental policy mix.

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*In effect, all forms of regulation are economic instruments. Even technology-based standards function by raising the costs of polluting activity, which shifts the supply curve outward and (assuming some price elasticity of demand) reduces the rate of demand for pollution-intensive goods. What economists really mean when they use the phrase "economic instruments" is "economically more efficient instruments." This presumes that the compliance cost advantage of cap-and-trade and effluent taxes means that they necessarily have lower total costs than command-and-control instruments. As noted above, this presumption is unwarranted.

** Unfortunately the full, final published versions of the three articles cited in this post are not freely downloadable on the Web. Each, however, is available behind a pay-wall.

What are the Social Costs and Benefits of EPA's Various Greenhouse Gas Regulations?

Just last week, the EPA sent for OMB regulatory review one of several proposed regulations on greenhouse gas (GHG) emissions (see here). This is another important step in a regulatory process that began on Dec. 7, 2009, when the EPA issued an "Endangerment Finding" for GHGs, which requires their regulation under the Clean Air Act. Among the regulatory proposals already completed or in the pipeline are: (1) a mandatory GHG reporting rule (see here); (2) a "tailpipe" rule to control motor vehicle emissions of GHGs (see here); (3) sequestration rules to govern carbon capture and storage projects (see here); (4) the GHG "Tailoring Rule," to limit the number of stationary sources of GHG emissions subject to regulation under the Clean Air Act (see here); and (5) a  "Scheduling Rule," adopted pursuant to a court settlement according to which EPA must issue final regulations imposing New Source Performance Standards on electric power plants and refineries by the middle of 2012.

Each of these regulations is controversial and entails significant economic costs. And the question OMB will be asking in regulatory review is whether the costs are justified by the benefits. As required by statute and by executive order of the president, EPA must prepare a "regulatory impact analysis" (RIA) for each major rule, and the central feature of the RIA is a cost-benefit analysis (CBA). EPA has not completed RIAs for its "Scheduling Rule" (which, after all, does not substantively regulate emissions) or its proposed "Sequestration Rule." It has, however, published RIAs for its "Tailpipe" and "Tailoring" rules (see here and here).

On the EPA's analysis, the "Tailpipe Rule" will provide around $188 billion in net social benefits over the course of its lifetime, and the "Tailoring Rule" is expected to provide around $193 billion (and perhaps double that, depending on what EPA ultimately decides for the third stage of the phase-in process) in net social benefits. However, the net social benefits of the "Tailoring Rule" have to be taken with several grains of salt because it is entirely about exempting (relatively) smaller emitters of GHGs from regulation. In this respect, the social benefits provided by the "Tailoring Rule" are not benefits stemming from regulation but gross benefits stemming from the lack of regulation that otherwise would be subject to regulation under the Clean Air Act. They are gross, rather than net, benefits because they are not offset against the social costs of the GHG emissions from the sources that the rule exempts. Moreover, one wonders how EPA determined just what the regulatory savings are, as it has yet to prepare an RIA estimating the costs of not-yet-determined regulations on plants that are not exempted by the "Tailoring Rule." As a CBA, the EPA's RIA for the "Tailoring Rule" is neither very informative nor persuasive.

Pending more information about the costs and benefits of the various GHG regulations, it is too early to say that they will, overall, be good or bad for social welfare in the US. So far, about all we can conclude is that, on EPA's own estimates, the "Tailpipe Rule" appears economically sensible; absent any major flaws in EPA's CBA for the rule, the positive outcome should make it difficult for political opponents to overturn it (pursuant to the political-economic analysis of CBA presented in my new working paper, here). The biggest hurdle for the "Tailoring Rule" will not be economic objections but legal ones (lawsuits already have been filed) because of the way EPA has had to de facto amend the Clean Air Act to regulate without over-regulating GHG emissions from power plants.

One development that should assist EPA in preparing future CBAs for its GHG regulations is the federal Inter-agency Working Group's schedule of valuations for the "social cost of carbon," published in 2010. The  central estimate for 2010 (using a 3% discount rate) is $21.40 per ton of CO2eq, rising to $23.80 by 2015, $26,30 by 2020, and $44.90 by 2050. Even though these valuations are on the low side (according to some more recent literature estimating the social cost of carbon), they should help EPA to justify economically its various proposed GHG regulations.

Obama and Ozone

According to reports in the New York Times (here) and other sources, President Obama is forcing EPA to back down from proposed regulations that would tighten up national air quality standards for ground-level ozone, which is a precursor to smog, much to the consternation of environmentalists. The EPA already had tightened up the ozone standard in March 2008, during the waning days of the Bush Administration, from 0.084 parts per million (ppm) to 0.075 ppm. Shortly after taking office, the Obama Administration announced a reconsideration of the ozone standard based on its belief that the science supported an even more stringent standard than the one the Bush Administration adopted.

The legal basis for the Obama Administration's reconsideration of the Bush Administration's standard is clear. The Clean Air Act requires EPA to set national ambient air quality standards (NAAQSs) to protect the health of the most vulnerable sub-populations in the US, based solely on scientific evidence (Clean Air Act, sec. 109, 42 USC sec. 7409). It cannot consider cost. This understanding of the Clean Air Act's plain language has been consistent since 1970. The US Supreme Court reconfirmed it in Whitman v. American Trucking Assc., 541 US 457 (2001), despite an amicus brief filed by several prominent economists arguing that the agency should not be prohibited from considering costs in deciding whether to adopt or amend NAAQSs.

As a result of its reconsideration of the Bush Administration standard, the Obama EPA proposed (here) reducing the primary NAAQS from 0.075 ppm to somewhere between 0.060 ppm and 0.070 ppm (along with a separate secondary NAAQS based on seasonal fluctuations in emissions). One unusual feature of this proposed rule was its failure to specify a precise numeric target for the ozone NAAQS, which left substantial uncertainty about where on the range between 0.060 and 0.070 it would finally come down. Even if we take it as given that the science supports a reduction in ambient concentration levels, it is difficult to understand why the EPA could not settle on a single number in its proposed regulation.

As noted earlier, EPA is legally barred from considering costs in setting NAAQSs. Nevertheless, it is required both by statute (the 1995 Unfunded Mandates Reform Act) and several Executive Orders to undertake regulatory impact analyses (RIAs) of all major proposed regulations. Thus, the EPA has to prepare cost-benefit analyses for new and revised NAAQSs, even though it is supposed to ignore them when actually setting the standards.

As I argue in a working paper, which I am currently in the process of revising (an older version can be viewed here), it is ludicrous to suppose that EPA does not consider the cost calculations it is legally required to undertake in setting or revising NAAQSs. The Clean Air Act requires EPA to considering revising NAAQSs for all regulated ("criteria") pollutants, including Ozone, every 5 years. If EPA only relied on the best science, it would almost certainly increase the stringency of its regulations every five years. The fact that NAAQS revisions are the exception rather than the rule since 1970, indicates that cost does play a role, if only informally, in EPA's decision-making. (I take this to be a good thing, though many of my fellow environmental law professors would no doubt disagree. It would be even better, in my estimation, if Congress allowed EPA to consider costs formally.)

In the case of the reconsidered Bush Administration revisions to the NAAQSs for ozone, the Obama EPA's supplemental RIA estimates that the Bush Administration's rule, revising the ozone standard to 0.075 ppm, would yield median net social benefits of $3.1 billion, as compared with $1.4 billion for a standard of 0.070 ppm, $0.7 billion for 0.065 ppm, and -4.8 billion for 0.060 ppm (all discounted at a constant rate of 7%). The figure below (from page S1-8 of the RIA) shows the range of costs and benefits under alternative standards. The bottom line is that the Bush Administration's selection of a 0.075 ppm yields higher net social benefits than any of the alternative standards the Obama Administration was considering.

The question that naturally arises, of course, is whether President Obama's decision to retreat from reconsideration of the Bush Administration's ozone standard is related at all (and, if so, to what extent) to the regulatory impact analysis. It would be naive to suppose that the decision had nothing to do with the cost-benefit analysis, especially given the political stakes. As the country approaches a presidential election year with a very shaky (to say the least) economy and high employment, President Obama would find it difficult and highly inconvenient to defend regulatory choices that are not significantly and obviously social-welfare maximizing. The EPA's RIA indicates that a shift from the Bush Administration's 0.075 ppm standard for ozone to a standard somewhere between 0.060 and 0.070 ppm would not significantly nor obviously enhance social welfare.

Of course, the Obama Administration cannot explicitly defend its decision to abandon its proposed tightening of the ozone NAAQs without violating the clear terms of the Clean Air Act (although Dan Farber, at Legal Planet, argues plausibly that the timing of the Obama proposal, prior to the next mandatory 5-year review in 2013, might exempt it from the Clean Air Act's prohibition on consideration of costs). However, if I am right that cost considerations, as well as practical politics, always play a role regardless of the letter of the law, then it seems much more likely than not that Obama's decision was substantially determined by EPA's RIA. Just as a positive cost-benefit analysis can insulate the EPA from negative political fall-out from new or revised regulations, so a negative cost-benefit analysis can create a political obstruction to regulation, even when costs are not supposed to count.

Between now and November 2012, we should not expect to see any new regulations emerging from the Obama Administration, including the EPA, that do not clearly and overwhelmingly pass a cost-benefit test, regardless of any legal constraints on the consideration of costs.

A FURTHER THOUGHT: The Obama Administration's withdrawal of the ozone NAAQSs from reconsideration opens the door for possible litigation, in which environmental plaintiffs would challenge the Bush Administration's decision to reset the primary NAAQS at 0.075 instead of some lower level. The scientific basis for that lawsuit would be the same as the scientific basis for the Obama Administration's reconsideration of the rule. If they prevail, the court would likely order the Obama Administration to re-open its reconsideration of the rule, which it could then do without having to take as much (if any) political heat for the results.

Indeed, this debacle over the ozone standards is yet another example of political ineptness by the Obama Administration. Lawsuits against the Bush standards already were filed when the Obama Administration took office. Instead of preempting those lawsuits by announcing that it would voluntarily reconsider the standards, the Administration probably should have let the lawsuits proceed before acting.

EPA Tries to Reboot the Acid Rain Trading Program

I've been too busy (with the move, knee surgery, and all) to keep up with EPA's new sulfur dioxide and nitrogen oxide regulations under the Clean Air Act, which were finalized this past week (see here). These rules are especially important because the extremely successful acid rain trading program has been moribund for more than a year, largely because of legal uncertainties stemming in part from a 2008 court ruling overturning the 2005 Clean Air Interstate Rule (CAIR). I  previously posted (here and here) on the death of trading under the acid rain program.

Instead of describing the new rules myself (I haven't had time yet to actually read them), let me refer you to the description from economist Richard Woodward, which has been reprinted at the Environmental Economics blog (here). I may have more to say about the rules myself, once I've had a chance to read and digest them.

American Electric Power Co. v. Connecticut et al.

Yesterday, the US Supreme Court ruled 8-0 that the Clean Air Act displaces the federal common law of nuisance with respect to climate change and its mitigation. (You can read the opinion here). Justice Sotomayor did not take part in the decision; she had sat on the appellate panel below, but was not a party to that court's ruling.

Most scholars expected this result. In fact, I doubt whether more than a few were surprised that it was a unanimous decision. Many environmentalists will not be pleased that  state and private plaintiffs cannot sue power plants and other large carbon emitters for nuisance. It certainly reduces the incentive large emitters have to seek a federal solution as a means of reducing common-law exposure. However, the prospect of controlling greenhouse gas emissions through nuisance law has always struck me as both  haphazard and too costly, relative to a well-designed regulatory scheme (which still isn't in place).

Perhaps more important than the Court's ruling on the merits, going forward, is the Court's strong reaffirmation of Massachusetts v. EPA. As Dan Farber explains (here), Justice Sotomayor, voting in subsequent cases, would make a clear 5-vote majority on issues of standing and the political question doctrine.

EPA Publishes Proposed Rule on Mercury Emissions from Coal-Fired Power Plants

EPA has finally gotten around to seriously regulating toxic mercury emissions (as well as other toxins) from coal-fired power plants. The announcement is here. A fact sheet on the proposed rule is here. The full proposed rule is here.

Mercury is of special concern because exposure (mainly through consumption of contaminated fish) can cause damage to nervous system development in fetuses, infants, and young children. Other toxins to be regulated under the rule include arsenic, nickel and chromium, all of which are known carcinogens. The rule will impose emissions standards (under section 112 of the Clean Air Act), which will effect 1,350  power plants nationwide. It aims to reduce their mercury emissions by 91%.

The rule, which will take effect (unless withdrawn or amended) after a 60-day public-comment period, is expected to avoid (by 2016) between 6,800 and 17,000 premature deaths, 4,500 cases of chronic bronchitis, 11,000 nonfatal heart attacks, 12,200 hospital visits, 11,000 cases of acute bronchitis, 850,000 missed work days, and 120,000 cases of aggravated asthma.

Industry is already complaining about the gross costs of the rule, which could amount to $10 billion per year (see here). But, according to the proposed rule's Regulatory Impact Analysis (RIA) (here), it will yield annualized net benefits (in 2007 dollars) ranging from $42 billion to $120 billion (using a 7% discount rate), or $48 billion to $130 billion (using a 3% discount rate), not including several difficult-to-quantify benefits. The benefits of the rule outweigh the costs, according to EPA's estimates, by a factor of 13-to-1 (using a 3% discount rate) or 5-to-1 (using the 7% discount rate).

If the RIA is anywhere close to accurate, this rule is a no-brainer. Of course, that won't stop the anti-brainers in Congress from trying to stop it.

President Bush's Trusted Policy Advisors on Climate Change

In January 2008, after the Supreme Court's ruling in Massachusetts v. EPA that the agency had authority under Clean Air Act to find that the greenhouse gases endangered public health, EPA Administrator Stephen Johnson sent a letter to President Bush noting that he was preparing to make such an endangerment finding because the

latest science of climate change requires the Agency to propose a positive endangerment finding….  the state of the latest climate change science does not permit a negative finding, nor does it permit a credible finding that we need to wait for more research.

Johnson's letter also set forth a detailed plan for regulating greenhouse gas emissions under the Clean Air Act (see here).

As it happened, President Bush overruled Johnson's decision to make an endangerment finding, after consultations with other important agencies of the federal government including Vice President Cheney, the heads of the Office of Management and Budget and the Transportation Department, and Exxon Mobil Corporation. Funny, I don't recall the Senate voting to confirm Exxon Mobil as a member of the President's cabinet.

Hat tip: Brad DeLong.

EPA to Issue New Regulations to Regulate Toxins in Drinking Water

While it faces Republican attempts not just to prevent it from regulating greenhouse gases under the Clean Air Act (see here), but to shut it down entirely (see here), the EPA, to its credit, pressing ahead with plans to issue much-needed regulations to reduce and prevent contamination of drinking water supplies by carcinogenic and toxic substances that are commonly found in drinking water supplies. The New York Times has the story here. The EPA's official announcement is here.

Unfortunately, Republicans are playing politics with a very important federal agency that has contributed greatly to improving public health and welfare since its creation in 1970. Not all EPA regulations are well-founded, efficient or effective (and those specific regulations should be amended or eliminated), but many EPA regulations and programs are both effective and efficient. Indeed, the Clean Air Act is, overall, among the most effective and efficient government social-welfare programs ever implemented.