It's widely assumed that if Congress fails to pass a clean energy bill, the EPA will step in with regulations on CO2 under the Clean Air Act. The Supreme Court ruled in 2007's Mass. v EPA that it must do so if it finds CO2 to be a dangerous air pollutant -- and sure enough, the agency sent the White House its final endangerment finding Monday. EPA regulations now appear inevitable and unstoppable. But don't be so sure.

The threat of EPA CO2 regs is a thorn in the side of fossil-fueled legislators and one of the few points of leverage green Dems have. It has hovered over congressional climate negotiations, bringing recalcitrant lawmakers to the table. It's generally agreed by both sides that regulatory emission restrictions would be worse for power companies than legislative restrictions; a recent Wall Street Journal story covered several utilities lobbying for legislation on that basis. EPA regs would be "more arbitrary, more expensive, and more uncertain for investors and the industry than a reasonable, market-based legislative solution like cap and trade," said Exelon head John Rowe. Some enviros have gone so far as to claim that it would be preferable for the weak legislation in Congress to fail so that tougher EPA regs could take its place. (A dangerously wrong notion, IMO.)

Is it true, though, that EPA regulations are inevitable and unstoppable? It might seem so, given the stark clarity of the Supreme Court's ruling. But never underestimate the plasticity of congressional procedure or the willingness of conservatives to use any means necessary to protect their corporate constituents.

I put the question to a senior Senate legislative aide a while back: Is there really nothing Republicans and conservative Dems can do to stop the EPA? He smiled ruefully and told me to look into what happened to CAFE standards in the mid-'90s. This Congressional briefing paper (PDF) tells the story:

In October 1993, less than one year after taking office, the Clinton administration issued its Climate Change Action Plan, and this included a process that was to be co-chaired by the White House National Economic Council, Office of Science and Technology Policy and the Office of Environmental Policy to reduce greenhouse gas emissions from motor vehicles. In April 1994, it published an advanced notice of proposed rulemaking to develop fuel economy standards for light trucks for model years 1998-2006. Seven months later, Republicans won control of Congress and promptly began to attach "riders" on annual appropriations bills to prevent funding for administration activity to develop or implement new fuel economy rules for light trucks. These riders blocking progress on fuel economy improvements remained in place until President Bush took office.

Could the same thing happen to EPA regs that happened to CAFE regs under Clinton? Well, Sen. Lisa Murkowski (R-Alaska) has already tried once, back in September. Her amendment was poorly written and she ultimately backed down without forcing a vote on it. But as the aide told me, it would be possible for a more adept legislator to write a more carefully tailored amendment that would block only the stationary-source regulations and leave the (more popular) vehicle regulations untouched. Obviously Republicans don't control Congress now, and unless the most catastrophic predictions play out, won't in 2010 either. But hostility to EPA regulations on power plants cuts across party lines. And remember, what's needed here isn't 60 votes against the EPA regs per se -- just 60 senators who think passing an appropriations bill is more important than standing up for the EPA. The thing about appropriations bills is that they really need to pass or parts of the federal government go unfunded. There's enormous pressure; that's why members of Congress are fond of attaching riders to them.

EPA opponents will have plenty of opportunities to build a coalition, as E&E reports (sub rqd):

Sen. John Thune (R-S.D.), who cosponsored Murkowski's amendment, said there would be "extremely dangerous consequences" if the administration is allowed to "unilaterally" regulate greenhouse gas emissions and that the cost of gasoline, food and manufactured goods would skyrocket. He said the EPA regulations should be delayed until Congress has had a chance for a full and open debate on the issue.

"This issue will be back," Thune vowed. "Senator Murkowski will bring it back; I will bring it back."

Sen. Lamar Alexander (R-Tenn.), the ranking member of the Interior Appropriations Subcommittee, welcomed the senators' opportunities to air their grievances on the floor.

"I'm glad it was debated and I think Senators Murkowski and Thune were right to bring it up and it got them the chance to make the point," he said, adding that the point "will be made over and over again."

Over and over again, whee! In terms of raw numbers, there are probably more than 60 senators hostile to EPA regs. The question is whether some core number of coal-state Dems can be kept in line in the name of party discipline. You know how Senate Dems love party discipline.

What happens if an appropriations bill with an EPA-blocking rider comes to a vote? The only option for green Dems would be to filibuster. There are certainly legislators who seem willing to do so. In a conversation with National Journal last week, Sen. John Kerry said this:

I'm going to make this as clear as I can: I don't think anybody is going to wind up repealing [EPA CO2 regulations] because there's filibuster-proof capacity to prevent that from happening. ... I'll personally stand on the Senate floor day and night to prevent that from happening, and there are plenty of procedural ways in which to do that. So that's not going to happen. I don't see any scenario in which that does, and there are plenty of people who would stand there with me. This is not a solo effort by any sense of the imagination. As I've said, there is a clear number of votes that would not allow that to happen, assuming we're moving in good faith down the road.

This is tough talk. And there's plenty of precedent for blocking appropriations bills (see this section of Filibuster: obstruction and lawmaking in the U.S. Senate, by Greg Wawro and Eric Schickler). Dems famously filibustered a defense appropriations bill with a rider that would have opened the Arctic Refuge to drilling.

But Kerry's talking about mustering 40 liberal senators to block a much-needed bill on behalf of a policy that both the White House and EPA have spent the last year badmouthing and that most "centrist" senators oppose. That will be tricky political terrain, to say the least.

If there's a sufficiently large bloc of senators motivated to block the EPA, they'll probably find some way to block it. But the point here is not so much to try to predict what might happen. It's just to say that EPA regulations of CO2 are not "inevitable." Nothing in politics is inevitable; nothing's a sure thing; everything's a risk; everything's a fight. Those who would abandon legislation in Congress in favor of EPA regs run at least some risk of consigning the U.S. to years without any restrictions on CO2 emissions.

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The U.S. Environmental Protection Agency still does not know the exact number of coal ash dumps at the nation's power plants, but it's moving ahead with plans to regulate them.

Those are among the findings of a report [PDF] released last week by the Government Accountability Office on the status of EPA's efforts to improve oversight of coal combustion waste. The GAO is an independent, nonpartisan watchdog agency that serves Congress.

The report was prepared in response to a request from U.S. Sen. Barbara Boxer (D-Calif.), chair of the Senate Committee on Environment and Public Works, and Rep. Edolphus Towns (D-N.Y.), chair of the House Committee on Oversight and Government Reform. Their request came following the December 2008 coal ash spill disaster from a surface impoundment at the Tennessee Valley Authority's Kingston plant in eastern Tennessee.

That spill covered more than 300 acres with toxic waste, destroyed three homes and damaged 23 others, damaged nearby roads and rail lines, and sent toxic pollution into the nearby Emory River. TVA has estimated it could cost as much as $1.2 billion to clean up the mess and take up to three years.

As of mid-September, the EPA had identified over 580 coal ash waste surface impoundments nationwide, GAO reports. A surface impoundment is a depression, excavation, or diked area where the liquid coal waste is stored. Sometimes the solids in the waste are left to accumulate in the impoundment, while in other cases they are dredged periodically and taken to another disposal unit, such as a landfill.

Coal ash is also disposed of through minefilling, where it's dumped into abandoned mines. And a significant amount of the coal combustion waste produced at power plants goes to manufacture products such as cement and wallboard or structural fill for roads and other development, an application known under the law as "beneficial use."

Of the 131 million tons of coal combustion waste generated by U.S. utilities in 2007, 38 percent went toward so-called beneficial uses, 36 percent into landfills, 21 percent into surface impoundments, and 5 percent into mines, according to the GAO. Between 2000 and 2006 alone, power companies reported dumping into surface impoundments and landfills coal ash waste containing more than 124 million pounds of six toxic pollutants: arsenic, chromium, lead, nickel, selenium, and thallium.

Among the risks associated with surface impoundments are collapses such as the one at the Kingston plant; the leaching of coal ash contaminants such as arsenic, chromium, and lead into surface or groundwater supplies; and the discharge of wastewater containing coal ash contamination into rivers and other surface water supplies.

Following the Kingston disaster, the EPA sent out information requests to 162 electric generation facilities and 61 corporate offices in an efforts to gather information on coal waste surface impoundments. It's created a database with information on 584 surface impoundments or similar facilities in 35 states -- but the EPA says this number is likely to change as it conducts site visits.

Over the past 10 years, 26 facilities have reported spills or other unpermitted releases from a total of 35 surface impoundments. EPA has also identified 49 impoundments that have a high hazard potential rating, meaning that a failure would probably kill people.

The EPA is further assessing these potentially dangerous units. It's also considering whether to regulate the structural integrity of coal ash waste surface impoundments through wastewater discharge permits -- a move that came one day after three environmental groups announced they planned to sue the agency for failing to properly regulate such discharges.

The EPA recently completed a study of toxins in wastewater discharges from coal ash impoundments [PDF]. It concluded that current guidelines should be revised because of the significant toxic releases from impoundments and the likelihood that these will increase significantly over the next few years as new air pollution controls are installed.

The GAO report looked at federal oversight issues that still need to be resolved as EPA develops proposed regulations for coal ash waste disposal. It noted that while the Resource Conservation and Recovery Act of 1976 is the key federal law regulating hazardous waste, a 1980 amendment to the law sponsored by now-deceased Congressman Tom Bevill (D-Ala.) exempted coal combustion waste from RCRA.

EPA is considering several options for regulating the material:

* Regulating the waste as hazardous under RCRA Subtitle C. While supported by environmental groups, this approach is opposed by the industry because of the potential cost and complexity.

* Regulating the waste as non-hazardous solid waste under RCRA Subtitle D. This approach is supported by industry but opposed by environmental groups because EPA could not routinely inspect disposal sites or require permits and because the opportunity for public involvement in permits would be limited.

* A hybrid approach in which the material would be regulated as ordinary solid waste under certain conditions or a hazardous waste under others, such as designating wet disposal in surface impoundments as hazardous and dry waste in landfills as non-hazardous.

Lisa Evans, a coal ash expert with the environmental law firm Earthjustice, told the Charleston (W.Va.) Gazette's Coal Tattoo Blog that she had concerns about the hybrid regulatory approach, noting that dry disposal of coal ash waste also presents significant risks to health and the environment:

... [I]t would be a big mistake for EPA to leave landfilling entirely to the states. Current state laws are inadequate, and they will likely remain inadequate without EPA's hazardous designation.

EPA plans to issue its proposed rule on coal ash disposal next month.

(This story originally appeared at Facing South.)

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Copenhagen, U.S.A. December 7

Today's hearing of the Senate Environment and Public Works Committee -- the first of three days of hearings on the Kerry-Boxer clean energy bill -- didn't contain any big surprises. As Keith Johnson notes, Senators generally played their appointed roles.

There are four stories out of today that seem notable.

1. Republicans are completely out of the game.

This has been true ever since Obama was elected, of course, but today's hearing threw it in sharp relief. They're just not involved in the conversation. On the far end you have Inhofe, still shouting at clouds about the science. But Barrasso, Bond, and the rest simply repeat, robotically, absurd claims about the economics of emission reduction that have been utterly debunked -- by the EPA, by the CBO, by the EIA, and by the witnesses at today's hearing. With a few exceptions, every time it was a Republican's turn to talk, it was as if the whole hearing ground to a halt, taking a break to watch a sideshow before the adults resumed their business.

Lacking anything of substance, Republicans are resorting to procedural ratf*cks, as usual. They want the EPA to take five weeks to do a full analysis of Kerry-Boxer, even though the agency, like everyone else, knows that the economics are roughly the same as for Waxman-Markey. They're threatening to boycott the markup to prevent quorum unless the EPA accepts their absurd demands. They all left today before the four cabinet secretaries were done testifying, just to be, you know, deliberately rude. Expect these adolescent tantrums to ramp up over coming months.

Conservative Democrats (and a few Rs like Voinovich) are at least grappling with the substance of the bill. But Republicans on the committee, for the most part, are engaged in increasingly irrelevant theater.

2. Baucus is a problem.

Here's what Baucus had to say at the hearing today:

I have some concerns about the overall direction of the bill before us today, and whether it will lead us closer to or further away from passing climate change legislation. For example, I have serious reservations with the depth of the mid-term reduction target in the bill and the lack of preemption of the Clean Air Act's authority to regulate greenhouse gas emissions.

The 2020 target of 20% reductions from 2005 levels is, as Sen. Merkley (D-Ore) pointed out later, easily achievable. It could be hit with efficiency alone, at a profit. It could be hit with natural gas switching alone. We'll get a quarter of the way there just via the recession! With the suite of tools available, it will be a cakewalk. The only way you could look at that target and find it impossible is if you think carbon capture and sequestration (CCS) is the only technology capable of producing reductions. That certainly won't be ready by 2020! But that's an absurd perspective, one shared mainly by Republicans like Voinovich and ... Max Baucus.

Baucus phrases his reservations in the language of concern trolling -- he's just worried about getting the votes, you know. But even if bending on those two items will ultimately be necessary, why on earth would you broadcast your willingness to do so before negotiations even begin? Can we look forward to another months-long, futile quest for bipartisan support from Baucus? Is he going to weaken and slow-walk this bill like he did with health care reform?

See Elana Schor and Greenwire for more on this.

As to the EPA thing:

3. EPA authority emerges as central battle.

Many progressive groups like MoveOn are drawing their red line here: EPA authority under the Clean Air Act must be preserved in the bill. (It is in Kerry-Boxer; it wasn't in Waxman-Markey.). But several Senators, including Baucus and Specter, openly discussed it as something that will have to be given up to gain enough votes for passage.

It also has its champions in the Senate, including Gillibrand and Whitehouse. Speaking of which, check out Whitehouse's righteous pro-CAA, anti-coal remarks (taken from this great post by Ben Wessel):

Expect this to become an increasingly heated fight. It was certainly good to see Lisa Jackson point out that even with legislation there are still "common sense" ways to use the Clean Air Act to reduce emissions.

4. The administration steps up

Alongside the hearing today, where four cabinet secretaries testified, the Obama administration is ramping up its general involvement on this issue. Today saw the announcement of $3.4 billion in funding for smart grid initiatives; Biden announced the reopening of a shuttered GM plant to make hybrids; Obama spoke at a new solar plant in Florida, hyping clean energy and federal legislation; and a New York Times headline blared: Administration Steps Up Efforts on Climate Bill.

Everyone has been saying for months that the fight will succeed or fail based on Obama's investment. It looks like the White House is responding.

Altogether, it is a good day for the forces of climate sanity. The jobs and economics messages were front and center, and wavering conservative Dems were grappling with the legislation in a way that showed they're taking the possibility of passage seriously.

The hearings tomorrow and the next day will last allll day and get into some serious weeds. Watch Grist's Kerry-Boxer page for updates.

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Let’s credit Senator Lisa Murkowski (R-Alaska) for raising questions in the National Journal about the viability of cap-and-trade versus other approaches for the United States to employ in addressing CO2 and other greenhouse gas emissions linked with global climate change.

Senator Murkowski says that only one approach – cap-and-trade – has received significant attention in the Congress.  Let’s put aside for the moment the fact that most of the 1,428 pages of H.R. 2454 – the American Clean Energy and Security Act of 2009 (otherwise known as the Waxman-Markey bill) – are not about cap-and-trade at all, but about a host of other regulatory approaches (several of which are highly problematic, as I’ve discussed in a previous post).  We can also put aside the fact that both conventional regulatory approaches and carbon taxes have been discussed repeatedly in numerous House and Senate committees over the past decade, and received detailed attention from a succession of U.S. administrations.

So, let’s not quibble about the Senator’s claim that cap-and-trade is the only approach that has received serious attention.  Instead, let’s address the key substantive questions which Senator Murkowski raises, because they are important questions:  Is cap-and-trade the most effective way of addressing climate change?  And are there other approaches capable of achieving the same results at lower cost?  From my perspective, as a card-carrying environmental economist, these are indeed the key questions.

While political leaders in the European Union, Canada, Australia, New Zealand, Japan, and the United States (Congress) move toward cap-and-trade systems as their preferred approach for achieving meaningful reductions in emissions of CO2 and other greenhouse gases, many people – including some of my fellow economists — have been critical of the cap-and-trade approach in the climate context and have endorsed the use of carbon taxes.  The Senator is correct that we should reflect on the merits of that alternative approach.

But, first, what about conventional regulatory approaches, that is, performance standards and technology standards?

Conventional Regulatory Standards

In short, experience has shown that such standards cannot ensure achievement of emissions targets, create problematic unintended consequences, and are very costly for what they achieve.

Why can conventional standard not ensure achievement of reasonable emissions targets?  First, standards typically focus on new emissions sources, and do not address emissions from existing sources.  Think about greenhouse gas standards for new cars and new power plants, for example.  Second, standards cannot possibly address all types of new sources, given the ubiquity of energy generation and use (and hence CO2 emissions) in a modern economy.  Third, emissions depend upon many factors that cannot be addressed by standards, such as:  emissions from existing sources and unregulated new sources; how quickly the existing capital stock is replaced; the growth in the number of new emissions sources; and how intensively emissions-generating plants and equipment are utilized.

Next, what about those unintended consequences?  First, by reducing operating costs, energy-efficiency standards – for example — can cause more intensive use of regulated equipment (for example, air conditioners are run more often), leading to offsetting increases in emissions — the “rebound effect.”  Second, firms and households may delay replacing existing equipment if standards make new equipment more costly.  This is the well-known problem with vintage-differentiated regulations or “New Source Review.”  Third, standards may encourage counterproductive, unintended shifts among regulated activities (for example, from purchasing cars to purchasing SUVs under the CAFE program).  All of these unintended consequences result from the problematic incentives that standards can create, compared with the efficient incentives created by a cap-and-trade system (or a carbon-tax, for that matter).

If you favor a regulatory approach, then you may welcome what’s coming from EPA as a result of the Supreme Court ruling of a few years ago combined with the Administration’s endangerment finding.  For my part, I don’t welcome it; I worry about it, because the set of regulatory approaches that could be forthcoming will accomplish relatively little, do so at an unnecessarily high cost, and hence play into the hands of opponents of progressive climate policy.  (More about that in some other, future post.)

Putting a Price on Carbon

To virtually all participants in the policy world, it has become increasingly clear that the only approach that can do the job and do it cost-effectively is one which involves at its core putting a price on carbon.  That leaves cap-and-trade and carbon taxes.  Let me take these in turn.

Cap-and-Trade

Let’s step back from the debate regarding the details of the Waxman-Markey House bill or the new Senate proposal by Senators Boxer and Kerry, and think about the essence of the cap-and-trade approach.  (For some of those details, however, please see my previous posts, where I have commented on various aspects of Waxman-Markey and described a proposal I developed for The Hamilton Project of an up-stream, economy-wide CO2 cap-and-trade system to cost-effectively achieve meaningful greenhouse gas emissions reductions.)

Here are the basics.  First, aggregate emissions from regulated sources are capped, and the cap is enforced through a requirement for affected firms to hold emissions allowances.  Importantly, allowance trading minimizes costs of meeting the cap.  It does this because allowances migrate to the highest-valued uses, covering emissions that are the most costly to reduce.  So, the emission reductions undertaken are those that are least costly to achieve.  In essence, the uniform market price of allowances creates incentives for all covered sources to reduce all emissions, and do so cost-effectively.

A cap-and-trade system can be more environmentally-effective and more cost-effective than standards.  First, in terms of environmental-effectiveness, a cap-and-trade system can ensure achievement of emissions targets.  Cap-and-trade allows policymakers to set specific overall emissions targets.  And a well-enforced system guarantees achievement of those targets, because emissions will not exceed available allowances.  An economy-wide, upstream cap-and-trade system on the carbon content of fossil fuels can cover all fossil-fuel-related CO2 emissions without needing to regulate each emissions source individually.

In terms of cost-effectiveness, a well-designed cap-and-trade system minimizes emission reduction costs.  Unlike NOx, SO2, and other pollutants, GHG emission reductions have the same effect no matter how, where, or when they are achieved.  This makes the climate change problem unique in the degree to which compliance flexibility can be used to lower costs without compromising environmental integrity.  Hence, a cap-and-trade system can minimize costs while still meeting environmental objectives by offering three forms of flexibility: what flexibility; where flexibility; and when flexibility.

In regard to “what flexibility,” many types of actions offer low-cost emission reductions, and a cap-and-trade system allows emission reductions through whatever measures are least costly.  By contrast, standards can target only certain identified emission reduction measures, leaving other cost-effective opportunities untapped.  Furthermore, predictions of what measures are cost-effective may be wrong.

In regard to “where flexibility,” the costs of emission reductions vary widely across industries, across facilities, and even across users of the same equipment.  A cap-and-trade system exploits this variation in costs by achieving reductions wherever they are least costly.  By contrast, standards would only be cost-effective if they accounted for all of the variation in costs across sectors, technologies, and regulated entities — but it is completely infeasible for standards to do this.  Emission reduction costs across sectors and technologies change over time, making the flexibility offered by a cap-and-trade system even more valuable.  Also, lower-cost opportunities to reduce emissions may exist in other countries.  Importantly, a cap-and-trade system creates a common currency (emissions allowances) that makes it possible to link with other systems.

A cap-and-trade system also minimizes costs through “when flexibility.”  Costs can be reduced through flexibility in the timing of emission reductions by avoiding:  premature retirement of capital stock or lock-in of existing technologies; and unnecessarily costly reductions in one year due to unusual circumstances when less-costly offsetting reductions can be achieved in other years.  A cap-and-trade can incorporate “when flexibility”
without compromising cumulative emissions targets through: allowance banking and borrowing; and multi-year compliance periods.

Beyond such “static cost-effectiveness,” cap-and-trade creates incentives for technology innovation, and thereby lowers long-run costs.  By rewarding any means of reducing emissions, a cap-and-trade system provides broad incentives for any innovations that lower the cost of achieving emissions targets.  Although standards may encourage development of lower cost means of meeting the standards’ specific requirements, they do not encourage efforts to exceed those standards.

Several cap-and-trade systems have been successful at achieving environmental goals and cost savings:  the phase-out of leaded gasoline in the 1980s; the phase-out of ozone depleting substances; and the Clean Air Act amendments of 1990 SO2 allowance trading program to cut acid rain by 50%.  Perceived shortcomings in other cap-and-trade systems reflect design choices, not problems with the policy instrument itself.  This applies both to California’s RECLAIM program, and the pilot phase of the EU Emissions Trading Scheme (which is operating successfully in its real, Kyoto phase).

In summary, compared with conventional standards, a cap-and-trade system can be more environmentally-effective and more cost-effective.  As with any policy instrument, however, careful design is important.

Taxing Carbon

As I mentioned, it is clear that the only approach that can do the job and do it cost-effectively is one that involves putting a price on carbon.  So, what about the other carbon-pricing approach — a carbon tax?

I am by no means opposed to the notion of a carbon tax, having written about such approaches for more than twenty years.  Indeed, both cap-and-trade and carbon taxes are good approaches to the problem; they have many similarities, some tradeoffs, and a few key differences.   I am opposed, however, to the confused and misleading straw-man arguments that have sometimes been used against cap-and-trade by carbon-tax proponents.

While there are tradeoffs between these two principal market-based instruments targeting CO2 emissions — a cap-and-trade system and a carbon tax – the best (and most likely) approach for the short to medium term in the United States is a cap-and-trade system.  I say this based on three criteria:  environmental effectiveness, cost effectiveness, and distributional equity.  So, my position is not capitulation to politics.  On the other hand, sound assessments of environmental effectiveness, cost effectiveness, and distributional equity should surely be made in the real-world political context.

The key merits of the cap-and-trade approach I have described above are, first, the program can provide cost-effectiveness, while achieving meaningful reductions in greenhouse gas emissions levels.  Second, it offers an easy means of compensating for the inevitably unequal burdens imposed by a climate policy.  Third, it provides a straightforward means to harmonize with other countries’ climate policies.  Fourth, it avoids the current political aversion in the United States to taxes.  Fifth, it is unlikely to be degraded – in terms of its environmental performance and cost effectiveness – by political forces. And sixth, this approach has a history of successful adoption and implementation in this country over the past two decades.

Having said this, there are some real differences between taxes and cap-and-trade that need to be recognized.  First, environmental effectiveness:  a tax does not guarantee achievement of an emissions target, but it does provides greater certainty regarding costs.  This is a fundamental tradeoff.  Taxes provide automatic temporal flexibility, which needs to be built into a cap-and-trade system through provision for banking, borrowing, and possibly a cost-containment mechanism.  On the other hand, political economy forces strongly point to less severe targets if carbon taxes are used, rather than cap-and-trade – this is not a tradeoff, and this is why environmental NGOs are opposed to the carbon-tax approach.

In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and – depending upon design — the distributional consequences of the two approaches can be the same.  But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table.  But political pressures on a cap-and-trade system lead to different allocations of allowances, which affect distribution, but not environmental effectives, and not cost-effectiveness.

Proponents of carbon taxes worry about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax is sensitive to the same political pressures, and may be expected to succumb in ways that are ultimately more harmful:  reducing environmental achievement and driving up costs.

The Bottom Line

The Hamilton Project staff concluded in an overview paper (which I highly recommend) that a well-designed carbon tax and a well-designed cap-and-trade system would have similar economic effects.  Hence, they said, the two primary questions to use in deciding between them should be:  which is more politically feasible; and which is more likely to be well-designed?

The answer to the first question is obvious; and I have argued here that given real-world political forces, the answer to the second question also favors cap-and-trade.  In other words, it is important to identify and design policy that will be “optimal in Washington,” not just from the perspective of Cambridge, New Haven, or Berkeley.

In “policy heaven,” the optimal instrument to address climate-change emissions may well be a carbon tax (largely because of its simplicity), but in the real world in which policy is developed and implemented, cap-and-trade is the best approach if one is serious about addressing the threat of climate change with meaningful, effective, and cost-effective policies.

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In Canada, at least, there is such a thing as a free market think tank with a free market perspective on parking policy. The Winnipeg-based Frontier Centre for Public Policy recently published a concise little position paper, "How Free Is Your Parking?" by Stuart Donovan.

It makes three points, briefly:

1. Parking regulations suppress economic activity:

Parking regulations suppress economic activity in a number of ways. Most importantly parking regulations tie up large areas of urban land and reduce the space available for other, potentially more-productive, uses... The Toronto Parking Authority estimates the costs for constructing parking in the central city at $20,000 and $40,000 per space for surface and underground parking respectively.

2. Parking regulations undermine the transportation system:

Parking regulations also drive down urban density and further exacerbate the need for motorized travel. This manifests in higher demand for parking, which over time has been reflected in ever-higher parking regulations, which then drive down density even further and in turn stimulate even more vehicle travel.

3. Parking regulations disadvantage low-income households:

...low-income households are likely to own fewer cars, carpool more often, travel more frequently at off-peak times (reflecting their propensity to work shifts and/or part time) and use alternative transport modes more often. Low-income households consequently derive less direct benefit from parking regulations.

Good stuff. The paper is hardly a magisterial treatment of the subject, but it does manage to limn the major reasons why existing parking regulations should be replaced with more market-oriented policies.

Unfortunately, I still haven't found anything similar from the right-leaning think tanks in the Northwest, but I can tide myself over with a good local example:

...the City of Richmond, B.C., requires that new banquet halls provide 10 parking spaces per 100m2 of gross leasable floor area. Given the average parking spot requires 20-40m2 of space (including vehicle access-ways), banquet halls in Richmond are required to provide at least 200-400m2 of parking for every 100m2 of banquet space.

This means that Richmond is effectively mandating that banquet halls dedicate a minimum of 2 to 4 times as much space for cars as for people.

You'd think parking policies like this would raise eyebrows, but they're incredibly commonplace in both the US and Canada. In fact, one thing you can learn from media coverage is that attempts to undo parking mandates like these are actually examples of "social engineering" (and here, too). Go figure.

Hat tip to Michael Lewyn.

This post originally appeared at Sightline's Daily Score blog.

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The EPA made an announcement today that lots of folks seem to be misinterpreting as "proposed regulations on power plants." That's not what they are.

What was announced today is the "tailoring" rule; it establishes that when the EPA regulates stationary sources, it will only regulate those that emit more than 25,000 tons. This is a modification of the threshold now in the Clean Air Act, which is 250 tons. If EPA regulated every source emitting more than 250 tons, it would be a nightmare (churches! schools! marathons!). There's some dispute about whether the EPA is legally allowed to do this; not surprisingly, I hear different things from different sides of the aisle. It is sure to be litigated.

This announcement has been expected for a while, by the way, so it's not quite so epochal as some are making out.

When the new EPA fuel economy regulations go into effect in 2010, that will automatically -- as in, by law -- trigger regulations of stationary sources. Such sources will have to get permits showing that they've used Best Available Control Technology to reduce CO2. BACT has not yet been defined for CO2. That's going to be a huge and incredibly contentious fight. Now, at least, we know when the fight will start.

If you're interested, I wrote a comprehensive rundown on EPA regulation of CO2. It explains what to expect in clear language. Also it has bunnies.

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Update: This story keeps growing. Since last week...

Original story:

More trouble this week for the U.S. Chamber of Commerce, the 97-year-old business advocacy group that has been courting controversy by questioning climate change and trying to weaken a clean energy bill.

California’s second-largest utility, Pacific Gas & Electric Co., announced it was quitting the Chamber on Tuesday, citing “fundamental differences” over climate change. PG&E is a member of USCAP, a coalition of corporations and environmental groups calling for a comprehensive climate plan. The utility is also a leader in solar energy; this spring, it announced a 500 MW solar-voltaic initiative.

Nike and Johnson & Johnson, while retaining membership in the Chamber, have also let it be known that they're unhappy with the organization's climate position. The old battle line between business and environmentalists is blurring, but the Chamber is still fighting the old war.

PG&E CEO Peter Darbee explained the company's decision to leave the organization:

He’s referring to the Chamber’s recent call for a “21st Century Scopes Monkey Trial” to force the EPA to defend in court its finding that greenhouse gases endanger human health. As David Roberts detailed earlier this month, the monkey-trial fiasco is just one in a string of clumsy steps by the Chamber.

The Chamber can commiserate with another fossil-fuel-friendly group, the American Coalition for Clean Coal Electricity (ACCCE), which saw prominent members Duke Energy and Alstom Power quit this month. The loss capped an embarrassing summer in which it was revealed that ACCCE had contracted with an Astroturf firm that sent forged letters to Congress, purporting to be from minority and senior-citizen groups opposed to climate legislation. Congress is now investigating the fraudulent letters.

So here’s a question for climate activists: Why not hound companies in the Chamber and ACCCE, demanding to know why they lend their money and their legitimacy to such groups? Companies may decide that membership is a weight around their necks they don’t need.

The Chamber, by the way, doesn’t release names of its members. You’ll have to find out from companies themselves whether they belong.

I’m no activist, but I tried this out two weeks ago when I met Microsoft’s chief environmental strategist, Rob Bernard. Microsoft has never been considered an environmental leader, but it’s got a decent climate policy on paper. It opened an energy-efficient data center this summer that could lead to significant energy savings, particularly if the company finds ways to use the innovations in larger server labs.

Given all this, why is Microsoft a Chamber member? Bernard told me Microsoft takes climate change very seriously and tried to distance the company from the Chamber's climate shenanigans. "The views expressed by the U.S. Chamber of Commerce do not reflect Microsoft’s position on climate change and we are not participating in their climate initiatives," he said in a followup email.

It’s not much of an answer. But if people keep asking, that answer might change.

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Cross-posted from Wonk Room.

Why is Sen. Lisa Murkowski (R-Alaska) behaving like an outlaw? It’s jarring to learn that Sen. Murkowski wants to take away U.S. Environmental Protection Agency authority to limit greenhouse gas emissions from oil refineries, coal-burning power plants and other smokestack industries. As reported in Environment and Energy Daily, Murkowski has filed a proposed amendment to spending legislation for EPA that would prohibit the agency from regulating greenhouse pollutants except those from cars or other “mobile” sources:

“Senator Murkowski is concerned about the economic consequences of EPA command-and-control regulation of emissions,” said spokesman Robert Dillon. The senator plans to file the amendment, Dillon said, adding that he did not know whether a decision has been made to press for a vote.

Murkowski’s amendment would thwart the 2007 Supreme Court ruling that said EPA does have authority under the Clean Air Act to deal with climate pollution, as long as the agency determines that it is a threat to health and/or the environment. EPA is moving ahead with that determination. Because the judicial branch has spoken so definitively, EPA must follow the law. By trying to block the agency through such a sneaky, back-door approach, Murkowski is bidding to become a climate outlaw.

The weird part here is that Murkowski herself has warned about the impact of global warming on Alaska -- where, as Politico put it earlier this year, “the Alaskan tundra thaws and fishing villages disappear into the ocean.” USA Today once called Alaska the “poster state” for climate concerns.

And no wonder: Alaska’s climate has warmed about 4°F since the 1950’s. That has prompted more rain, the melting of two major glaciers and permafrost melting which has caused erosion, landslides, and damaged infrastructure. Some coastal towns could be overwhelmed by flooding. Carbon-caused ocean acidification threatens fish populations.

Grotesque evidence of the problem was recently reported as scientists determined the Arctic sea ice had reached the third-lowest level ever recorded: up to 200 walruses, which appear to be mostly new calves and yearlings, were reported dead near Icy Cape on the north coast of Alaska.

We can’t wait to hear Murkowski’s argument should she proceed with this ill-considered idea. Is she going to claim that this is something better handled by Congress? If so, why has she denounced the comprehensive climate legislation approved by the House? We suspect Murkowski is responding to the big campaign contributions she has received from the oil and electric power industries, both of which oppose EPA action. One major contributor is ExxonMobil, which continues to operate in Alaska despite its notoriety over the Exxon Valdez spill.

Several hours after Clean Air Watch alerted reporters by email about the Murkowski plan, a spokesman for Murkowski argued she “is not trying to subvert the process”:

The senator has no interest in trampling on that Supreme Court decision as it relates to mobile sources.

Exactly our point: she does want to trample on the Supreme Court decision as it relates to stationary sources. Murkowski has shown no interest in being constructive on the climate debate, so her defense of waiting for congressional action is obviously a fraud designed only to kill the Clean Air Act. Which is exactly what the Big Oil companies and her other financial supporters want. Her plan to handcuff the EPA is nothing but duplicitous special-interest pandering that should be rejected out of hand.

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Why won’t Lisa Jackson/Nancy Sutley visit a mountaintop removal site?

Beltway observers of all stripes owe Sen. Ben Cardin (D-Md.) a debt of gratitude. In 2006, after 20 years in the House of Representatives, he ran for Maryland's newly vacant Senate seat against then-Lt. Gov. Michael Steele. Steele's defeat put him on a trajectory to become chair of the Republican National Committee, where he has provided the political world with an unending stream of malapropisms and unintentional hilarities.

Meanwhile, Cardin -- who boasts close to a perfect 100 score from the League of Conservation Voters -- has become a key player on green issues in the Senate. He was kind enough to answer a few of our questions (transcript at bottom of post):

Sen. Cardin doesn't mention it specifically, but he is one of the original sponsors of CLEAN-TEA (the Clean Low-Emissions Affordable New Transportation Equity Act), which would set aside 10% of the revenue from any cap-and-trade program for green transportation projects. The provision was dropped from the House bill; it needs five more sponsors on the Environment and Public Works Committee to get voted through to the Senate floor. Neither Obama nor Transportation Secretary Ray LaHood have come out in support of the provision yet, but they oughtta.

Enviros will be heartened to hear that Cardin is on board with preserving the EPA's Clean Air Act authority over greenhouse gases. Rumor has it Sens. Barbara Boxer (D-Calif.), Jeff Merkley (D-Ore.), and other Dems on the Environment and Public Works Committee are pushing to include this in the climate bill.

Finally, Cardin doesn't mention this specifically either, but he is an original sponsor of S. 696, the Appalachia Restoration Act, which would define the word "fill" to prevent mountaintop-removal mining operations from dumping waste and rubble in mountain streams. He was one of the earliest members of Congress to speak out clearly against the barbaric practice of MTR; progress on the issue seems to be picking up steam.

Big thanks to Sen. Cardin for taking the time to answer our questions. With any luck, this won't be the last time.

Here's the transcript:

Introduction: I'm glad to be here today to answer questions from Grist, a great website covering environmental news.

Q: Are there any alternative ways of boosting public transit in the climate bill?

A: The climate bill gives us an excellent opportunity to increase public transportation. It's critically important to reduce greenhouse gases, to use less oil and fuel, and to provide better services to the people of our community, make their lives a lot easier. Now, we're very pleased about the House passing the climate change bill. It's an important bill; it establishes the framework to bring down greenhouse gases. But I must tell you, I think we could do much better on public transportation. And I'm looking forward, in the Senate, to providing more dedicated revenue sources to increase our commitment to improve public transportation in our nation. I think we can really get the job done that will help our communities as far as life is concerned, traffic is concerned, also, save us oil and energy and bring down greenhouse gases.

Q: Is there a push in Congress to preserve the EPA's new-source-review authority?

A: It's a very high priority that we preserve the new authority of EPA to regulate, especially under the Clean Air Act. We want to make sure that those authorities remain. Now, we are concerned about the House bill. The House bill is an important bill, and it moves us forward on global climate change, but we don't think we should take away from EPA's ability to use authority within the Clean Air Act, to make the type of progress necessary to bring down greenhouse gases. Bottom line is, we want it to be a partnership between what Congress will give this administration, the policies that we establish, working with the EPA to make the type of changes necessary to affect climate change in this country.

Q: What's the status of the Appalachian Restoration Act? Is there any appetite in the Senate for addressing mountaintop removal?

A: Mountaintop removal for coal is just devastating. There is no justification for mountaintop mining. The coal industry is important, but getting coal by that technique destroys our rivers. It destroys our environment. It's not fair to the people of that community. Their rivers are being destroyed, and it's just a horrible process. I'm pleased that we have bipartisan support to move legislation. Now, the EPA has already taken some steps. They're carefully reviewing each permit. I give the EPA a great deal of credit for taking that extra time, but they need the authority from Congress that prohibits this type of mining in our country. I do think there is support for it, and I'm hopeful that this Congress will move forward to an act of meaningful help for the EPA, in keeping our rivers clean and helping the environment.

Conclusion: I really want to thank Grist for giving me this opportunity to answer some of your environmental questions. I hope that we can continue this dialogue. Please feel free to go to my website, which is cardin.senate.gov, where we can help you with more information. This is an important subject. It deserves great debate. We appreciate you being part of it.

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The Second Circuit's recent decision in Connecticut v. AEP, in which a coalition of state attorneys general sued electric power producers to cap and then reduce their carbon emissions, allows the public nuisance case to proceed and gave the environmental plaintiffs virtually everything they wanted. It should also give pause to those of us tempted to see judges as purely political: it was decided by Judges Peter W. Hall, a George W. Bush appointee from Vermont, and Joseph McLaughlin, a George H.W. Bush appointee from New York. Damn liberals. (The third panel member, one Sonia Sotomayor, is now busy with other things and did not sign the decision.).

A few aspects of the case stand out (aside from the obviously correct decision that a common-law tort suit is not a nonjusticiable political question). Most importantly, the Court's holding on "displacement," i.e. whether the Clean Air Act "displaces" the common law suit, actually makes EPA regulations somewhat more likely.

1) The case jumps out for a very expansive ruling on "standing," i.e., which parties can bring suit. The Second Circuit held not only that states can bring climate change lawsuits (pretty much a slam dunk after Massachusetts v. EPA), but so can municipalities, and even private nonprofits. This is waving a red flag in front of the bull that is Chief Justice John Roberts.

2) The Court held that the suit is properly brought under federal, not state, common law. I have argued that this is a bad idea, because it essentially tells one federal district judge to take large swathes of the power grid into receivership. (My view is that the best tack is to make it a matter of state common law, with individual state Supreme Courts deciding on damages). Ruling this way on the federal v. state question means that lawsuits against automakers, which would have been pre-empted if the case was based on state law, can now go ahead. California's own lawsuit against the automakers was settled, but other plaintiffs will, like California's Governor, be bock.

3) By holding that the nuisance claims came under federal law, it had to determine whether the Clean Air Act "displaces" federal common law, thereby making it a dead letter. Dicta in previous decisions suggest that it is far easier for federal law to displace federal common law than it is for the same statutes to pre-empt state law, but there is also contrary dicta, and the Second Circuit used the latter to hold that there was no displacement.

But wait a minute, you might say: didn't the Supreme Court already hold in Massachusetts v. EPA that EPA has the authority to regulate carbon dioxide? And hasn't Obama's EPA already proposed finding that carbon dioxide is a threat to human health?

No matter, replied the Second Circuit: the finding is only "proposed" and in any event, the EPA's regulation only applies to mobile sources, not stationary sources like power plants. Thus--and here is the kicker--until the EPA actually starts regulating all sources of carbon dioxide, the Court said that it can't really determine whether or not displacement has occurred.

This holding is potentially significant, because it can put polluters in a real bind. Their normal strategy is to tie up new regulations in the courts for several years--maybe until they can get a more friendly administration. But now, the Second Circuit has told them that the only way to get rid of the public nuisance lawsuit is to let those regulations go into effect. The judges have told the power companies to choose their poison.

To the extent that you think regulation is better than common-law remedies, you should like this posture. Had the Second Circuit just held that the Clean Air Act does not displace the common law, it would have given the power companies no incentive to back off challenging new EPA regulations. The Court has provided them with a sort of carrot to let the rulemaking process run its course. It's not as strong a carrot as one might like, because the Second Circuit hinted strongly that the Clean Air Act would not displace even if EPA begins to regulate. But it leaves open the possibility.

What now? It would be over-optimistic to claim that the decision will have an immediate impact. But it does help to ratchet up the pressure on those forces opposing federal climate change legislation.

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Why won’t Lisa Jackson/Nancy Sutley visit a mountaintop removal site?

Two years ago, the U.S. Supreme Court ruled that the EPA has the authority and the obligation to regulate greenhouse gases under the Clean Air Act. At a stroke, the politics of climate change were changed. The choice was no longer between legislation or no legislation -- it was between legislation or regulation. One way or another, climate pollution would be controlled by a federal program.

Most experts agree that EPA regulations will be complex and somewhat unwieldy. Industry believes they will be onerous and expensive. Conventional wisdom, at least initially, was that fear of regulation would drive utilities and manufacturers to the bargaining table, changing the dynamic in Congress. EPA was supposed to play the role of the big, silent goon in the corner, tapping his baseball bat in his hand.

That theory isn't holding up too well. Opposition from coal and manufacturing states weakened the bill in the House and its passage through the Senate appears less and less likely. Fossil fuel and other industry groups are lobbying furiously against it. The conservative base equates it with socialism. Democratic Senators are openly expressing skepticism whether a bill can pass this year. Health care may drag on into winter and push it off the agenda; it could fracture into smaller bills; most likely, it simply won't find enough Blue Dog support to overcome a threatened conservative filibuster. At least at the moment, the smart money is on no climate/energy bill this year.

That means EPA regulations are suddenly germane again, though chances are high that 99.99% of Americans will continue to find the subject inscrutable and boring. What can the EPA do? When will it do it? Who will it do it to? How can we stay awake as we contemplate these matters?

Consider this post an effort to describe, in plain language, What the Deal Is with EPA Regulations. There will be acronyms ... but also pictures of bunnies!

What's everyone so scared of?

Why does industry fear, and the Obama administration prefer to avoid, EPA regulations of greenhouse gases? To understand the political dynamic it helps to understand that there's a three-part process ... and the third part is a massive headache.

1. Endangerment finding: A new air pollutant under the Clean Air Act first goes through an endangerment finding -- a determination by the EPA whether it's a threat to public health. For CO2, that's almost done. EPA submitted the finding for public comment and is now reviewing the (many, many) comments it received. It will likely issue the final finding this month or next.

2. Mobile sources: If the EPA chooses to go forward, it then crafts regulations for "mobile sources," i.e. vehicles, under Section 202 of the CAA. That won't be too difficult. In effect, EPA will partner with the Dept. of Transportation to raise CAFE standards; they've already submitted a proposal to do so to the White House Office of Management and Budget. (35.5 miles per gallon by the 2016 model year.) So far so good.

3. Stationary sources: The problem is, once mobile sources are regulated, the EPA must, by law, also regulate stationary sources, i.e., power plants and industrial facilities. That is a serious can of worms, which will involve creative interpretations, contentious decisions, and many, many lawsuits. Why so difficult? We'll get to that later, after a few more bunnies. First:

A little history

There's a fascinating backstory to be told about Mass. v EPA, the 2007 Supreme Court case that shook the political world. But we'll skip it. Instead let's jump in just after it passed.

The Bush EPA wanted to move quickly. Bush had identified America's addiction to oil in his State of the Union speech and proceeded to do very little about it, so there was some openness in the White House to conceding on a boost in CAFE standards. Since EPA regulation of mobile sources would effectively amount to just that, the Bushies were amenable to it.

To lead the large and capable team assembled to hash out the regulations (upwards of 100 people all told), EPA brought in Jason Burnett. Burnett is semi-famous to Grist readers for quitting the EPA in protest some months later, alleging interference from the Office of the Vice President. But initially, he says, "we were on a very fast clock. There was political desire to get everything done by the end of the administration's time [in office]."

(See: full transcript of my wonky interview with Burnett.)

What changed? In short, Congress passed the Energy Independence & Security Act (EISA), "which did much of what we were planning on doing through regulations," says Burnett. "After passage of the EISA, there was another way of accomplishing those same goals, and [the administration] didn't then need to deal with the stationary source ramifications."

At that point, things came to a crashing halt. Burnett sent the endangerment finding to the OMB, but the White House refused to open it. They told Burnett to take it back; he refused and left the agency. After that, the administration ran out the clock with endless public comment.

Obama came into office pledging to kick the process into gear, and he has. Lisa Jackson's EPA has been hashing through the issues quickly. The final endangerment finding is coming soon, the mobile-source proposal is already on paper, and the stationary-source regulations ... well, they're another matter.

What's so dang hard about stationary source regulations?

Grasping the challenges that greenhouse gases pose to the Clean Air Act means venturing into some fairly wonky territory; it is recommended that readers keep their bunnies with them at all times. Every effort will be made to minimize the ... hey, you there, wake up!

OK, the deal is, stationary sources of air pollution have to get a permit from the EPA. The permitting process is called New Source Review (NSR), implemented as part of the 1977 amendments to the Clean Air Act. All new sources have to go through this process.

What about existing sources, the ones already up and running in 1977? In particular, what about the large U.S. fleet of old, inefficient, filthy pulverized coal power plants built in the '40s, '50s, and '60s? Funny you should ask. Therein lies the problem(s).

Existing sources were not brought under NSR. They were "grandfathered," in the lingo. Enviros consider this a deal with the devil, the Original Sin of the CAA. See: Carl Pope.

Congress didn't completely ignore existing sources, though. NSR also specifies that any existing facility that makes "major modifications" that produce a "significant increase" in air pollution must get a permit.

How much is a significant increase? That's defined by a standard called Prevention of Significant Deterioration (PSD). What must facilities in attainment areas (long story, let's not bother) do to get a permit? They must install what's called Best Available Control Technology (BACT).

NSR! PSD! BACT! Can you feel the electricity in the room? Let's take a short bunny break ...

Anyway, this kludged-together NSR/PSD/BACT policy created all sorts of problems and has been the subject of endless lawsuits. And here's the thing: Many of the problems will be exacerbated by the extension of the Clean Air Act to cover greenhouse gases.

For instance: the PSD standard is now 100 tons for some facilities, 250 tons for others. Problem is, while 100 tons is a significant amount of most traditional air pollutants, it's a reasonably meager amount of CO2. A coal power plant producing 10 or 20 million tons of CO2 a year could trip the PSD trigger merely by running a few extra minutes a year. "The scare story," says Burnett, "is that that will cause facility managers for any large source of pollution to just freeze up and not make any modifications at all." The problem, he says, is that "these large emitters just emit so, so much CO2."

More troublesome: once you get down to 100 tons you're talking about churches, schools, and retirement homes. This is the conservative nightmare scenario, that EPA's regulatory reach will cover the entire economy and it will be red tape hell for every mom-and-pop operation.

Another problem is BACT itself. What is the best available technology for controlling CO2 emissions from, say, a coal power plant? Is it simply burning coal more efficiently? Cofiring with biomass or solar? Using carbon capture and storage, which is not yet commercially available? 'Tis vexing. EPA will be breaking new ground, setting new precedents. Lawsuits will follow.

PSD solution ... sort of

As we speak, EPA is trying to solve the PSD problem by raising the threshold from 250 tons to 25,000 tons (it has submitted such a rule to OMB). This is in line with the new mandatory greenhouse gas reporting rule it proposed in March, which only applies to facilities emitting over 25,000 tons of CO2 a year.

Raising the threshold to 25,000 tons would exempt schools, churches, etc. -- overall it would cover about 13,000 large industrial facilities, which represent 85-90% of U.S. emissions. So it would solve one of the biggest problems. Recall, however, that conservatives and (some) industries want EPA rules to be a regulatory/legal nightmare, and will do everything they can to insure that outcome.

Since raising the threshold would reduce the friction, some conservatives, like the Competitive Enterprise Institute's Marlo Lewis, are arguing that it is illegal for EPA to unilaterally change the threshold. The rule, if it goes into effect, will undoubtedly be litigated to a fare-thee-well.

(Note: Congress could pass a one-line amendment to the Clean Air Act: "PSD for CO2 is 25,000 tons." Boom, problem solved. If the climate bill goes down in flames and the EPA's threshold rule is rejected, this is a easy face-saving move for Dems.)

The EPA might also try to express the greenhouse gas threshold with reference to a more potent gas like methane -- the standard could be "250 tons of methane or methane-equivalent," which would be lots of CO2. Even if the court rules against EPA, it might allow the agency to start at 25,000 and ratchet down to 250 on a schedule. There are also ways the EPA could make permitting for small sources relatively painless (think: a post card), but getting into more detail on this just feels anti-bunny.

BACT solution ... not really

BACT is determined on a case-by-case basis. Whatever rulings the EPA makes, the precedent-setters, will be litigated to high heaven. There will be blood.

Cap and trade?

Another way forward, which some say could reduce compliance costs, is for the EPA to set up its own cap-and-trade program for stationary sources.

There's a checkered history here. During Burnett's original spin through EPA, he was involved in trying to develop a cap-and-trade system for mercury. Industry supported it but environmentalists loathed it, mainly due to concern over mercury "hot spots" (there are no such concerns for CO2). The courts ultimately ruled against that program; the Bush administration appealed; Obama's EPA is going to drop the appeal.

But Burnett still thinks it can be done:

You dust off the legal argument EPA made for using [the CAA] for a cap-and-trade system, and you search and replace mercury with CO2. You'd put both environmental groups and industry in an awkward position. Environmental groups would want to support the rule, presumably. Industry would not want to, but they're already on record saying EPA has authority to issue a cap-and-trade system under [CAA Section] 111. They wanted to have that for mercury.

Interestingly, an EPA-run cap-and-trade system would not have the same federal mandates as a legislative system. Instead it would effectively set out overall targets and allow states to figure out how to meet those targets. For states already covered by regional cap-and-trade systems -- RGGI in the Northeast, MGGA in the Midwest, and WCI in the West -- that would probably mean relatively minor tweaks in their existing systems. For all other states, it would mean linking into one of those systems or developing a new one.

Some folks, like Terry Tamminen, are advocates of this bottom-up approach, saying that it's better to allow for regional variation and experimentation than get locked into a weak federal program. As yet, EPA hasn't shown any indication that it will pursue this route, but it could still happen.

Political implications

So how will all this play politically?

Conventional wisdom was that the threat of EPA regulations would make carbon-intensive industry amenable to a climate bill. But after seeing what passed the House, they've largely decided that they would rather have "the uncertainty of the Clean Air Act than the absolute certainty of a very expensive [legislative] program," says Jeffrey Holmstead of Bracewell-Giuliani, who served at EPA under the second President Bush. Among those in heavy industry and the non-nuclear power sector, "it is nearly a universally held view that they're better off just living with the CAA than they are having to deal with something like Waxman-Markey," say Holmstead.

That's not to say those industries will accept EPA regulations gracefully. Just as coal and oil have waged war against the climate bill, they'll wage war on EPA regulations. They will sue as often as possible, at each stage. Already the Chamber of Commerce has announced its intent to sue against the vehicle regulations -- and those, remember, had been hashed out with automakers beforehand. They were supposed to be the easy part.

The war against EPA regulations will also be waged with aggressive public relations campaigns. There will be great hue and cry about the economy-destroying burden that command-and-control regulations impose on American business. And unlike with a climate bill, responsibility (read: blame) cannot be dispersed. There is no hint of bipartisanship. Responsibility for EPA regulations will fall entirely on Barack Obama and his administration, not on Congress -- which is probably how Congress prefers it. If it's a total mess, or demagogued as one (as is all but certain), it's Obama that takes the hit. That is yet another reason he'd rather avoid it.

Greens are fighting to preserve EPA authority in the climate bill. Some have even said that it would be preferable for legislation to fail and the EPA to take over. It's not hard to understand why -- something needs to be done about existing coal plants, and there aren't many tools in the climate bill toolbox to address them. But no one should be under any illusions. The NSR/PSD/BACT approach is grossly suboptimal for the job that needs doing. It might have the intended effect -- killing coal plants -- but there's potential for unintended effects as well, including substantial political blowback.

Both sides, greens and industry, have reason to fear if the climate bill fails. It's terra incognita, a volatile and unpredictable situation. Obama doesn't need any more problems like that. That's among the reasons he is likely, this fall, to put some of the time and energy toward lobbying for a good climate bill. From his narrow political perspective, virtually any bill is preferable to catching the EPA tiger by the tail. That tiger eats bunnies.

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Capturing the massive social benefits of fuel efficiency requires regulation

The following is an interview with Jason Burnett, who worked in the EPA under President GW Bush. In it, we discuss efforts by the EPA to regulate greenhouse gases. Burnett quit the EPA in protest in June 2008, alleging interference from the Office of the Vice President.

The interview is meant as a supplement to the story, "Everything you always wanted to know about EPA greenhouse gas regulations, but were afraid to ask."

What was your job at EPA?

I was brought in to lead the response to the Mass v. EPA Supreme Court case, and to develop the first federal GHG regulations.

Did you work on both the endangerment finding and the rules?

Traditionally, EPA has collapsed both of those into one rulemaking -- they have, in the preamble to the rule, the discussion about endangerment. That's the sequencing we were planning to have. We were, at least initially, on a very fast clock. There was political desire to get everything done by the end of the administration's time [in office].

So you felt like you could get the rules out the door fairly quickly?

There was a pretty large, impressive team put on this, up to 100 people.

There's no question there was a change of course -- for an understandable, if not justifiable, reason: Congress was in the process of passing the Energy Independence & Security Act (EISA), which did much of what we were planning on doing through regulations.

There was never a strong desire -- I daresay, in many quarters outside of EPA, any desire -- to move on to the stationary sources, but the way the CAA works, after you touch the mobile sources you automatically and immediately have to deal with stationary sources. From the political perspective at the White House, it was an unfortunate side effect -- worth doing only because it advanced the goal of increasing fuel economy of cars and trucks and creating more volume for renewable and alternative fuels. After passage of the EISA, there was another way of accomplishing those same goals, and they didn't then need to deal with the stationary source ramifications, -- namely, the PSD/NSR challenge.

Did the Bush administration ever really think they could get out of it, or were they just kicking the can down the road?

There were some people who thought they could make an argument, which ultimately would lose. And other people who said, "we don't want to make superfluous legal arguments, we'll just figure some other way of delaying." Fortunately for the integrity of our court system, they did the latter, basically by saying, "this is really complicated and interconnected, and would benefit from public input, and therefore we're going to go out and talk about all the complications and interconnections."

How do you think the Obama EPA's rules will differ from what your team came up with?

I think they'll be different in two fundamental ways. One is, they're going to be more aggressive. Two, they're going to deal with the California waiver, because the Obama admin has now granted it, whereas the Bush administration denied it. Whether the California program is in force will affect how you design the federal program. So EPA need to make at least those two adjustments.

I'm not surprised we still haven't seen the proposed rule. They probably could have pushed it a little faster, but they probably wanted to give Congress time to work through legislation. Virtually everyone believes that legislation will be better.

I keep hearing that. Is it true?

It entirely depends on how good the legislation is. It would be very easy to improve upon what the CAA would do. I have at times pushed for very narrow CAA fix. You could address the most problematic or challenging parts of the CAA in a very surgical way. At the other extreme is to pass the comprehensive, 1000-plus page bill.

How could the CAA be made more suited to the challenge of regulating CO2?

EPA certainly has discretion, and I'm confident it's being quite aggressive in pursuing ways of making GHGs fit within the CAA. But that will be challenged in court. Pretty much regardless of what they propose, there will be legal vulnerabilities. Trying to make GHGs fit within the CAA, you're going to have to be fairly creative in how you interpret certain terms and how you sequence the program.

Can lawsuits stop the regulations?

They may not delay the effectiveness of the regulations but they may make it pretty messy. Parts of the regulations may be passed back to EPA -- either left in force and passed back to EPA to rectify legal deficiencies, or taken off the books and passed back to EPA.

Exhibit A in the challenges of the CAA is the Prevention of Significant Deterioration (PSD) / New Source Review (NSR) program. EPA has a proposed rule over at OMB for review on how to work through PSD -- I haven't seen it. I'm sure EPA's trying to deal with the volume thresholds in the CAA, which say that a "significant" source of pollution emits either 100 tons or 250 tons, depending on the type of source.

The Supreme Court gave the definition of pollutant such broad range, but the volume thresholds are weirdly specific. How could Congress know how many tons of some future pollutant would be significant?

The original ICTA petition and later the Commonwealth of Mass were smart to focus on Section 202 of the CAA, which works quite well for regulating GHGs. In fact most of Title II, the mobile sources title, works quite well. There wasn't much attention paid in that case to the other dominoes that would fall upon issuing a S202 regulation. Also, there was the view that if this is what a plain reading indicates, what Congress had in mind -- you're going to regulate sources that emit 100 tons -- then you've got to find a way to make it work. And if GHGs meet the definition of air pollutants, they meet the definition of air pollutants, no matter how inconvenient that may be for the regulators and the regulated community.

Conservative advocacy group CEI says that EPA either obeys the thresholds and destroys the economy or, unilaterally and illegally, changes them.

That is something we foresaw years ago. It's a legal question.

There is a huge advantage to Congress raising that threshold. It would be a one-sentence amendment: For the purposes of greenhouse gases, the CAA threshold shall be 25,000 tons. That would solve a large fraction of the challenges.

I wouldn't be surprised if the court put EPA on some kind of schedule, where they are allowed to start out with a higher threshold, but over time that threshold had to move down to 250 or 100 tons. I hope EPA is successful in defending its proposal to lower the thresholds There are very good policy reasons not to try to apply PSD to the very smallest sources.

CEI is wants to turn this into a regulatory nightmare, so they can then stand back and say, I told you so, EPA ruins everything they touch.

Explain PSD. Why is it such a problem?

PSD applies to either new or major modifications -- it requires any new or modified facility to install Best Available Control Technology (BACT). For other pollutants, there's a long history of determining what BACT is. So we understand for a petroleum refinery, BACT today is a low-NOX burner, for instance. But right now we don't have any precedent for what constitutes BACT for greenhouse gases. So that's one problem, but it's one we can get around. EPA can start establishing this precedent.

The NSR program has been hugely contentious as it applies to regular pollutants, because there's this question as to what constitutes a major modification. That issue would come back with a vengeance when greenhouse gases come into play. A very small modification can increase GHG emissions by 100 tons. Take a coal-fired power plant that is emitting several million tons of CO2 a year -- if they increase their operations by, say, 20 minutes over the coarse of a year, that emits a huge amount of CO2, more than 100 tons, certainly. If you do something that increases your emissions a fraction of 1%, that arguably could trigger PSD and require you to install BACT. The scare story is that that will cause facility managers for any large source of pollution to really just freeze up and not make any modifications at all.

What kind of modification would entail 25,000 tons?

It's in the eye of the beholder whether it's big or small. If you think of something emitting 2.5 million tons a year, then 25,000 tons is 1%. Doesn't seem all that large. On the other hand, from the perspective of the environment, 25,000 is in and of itself a large source. The challenge we're dealing with is, these large emitters just emit so, so much CO2.

There have been pollution control exemptions. So if you're going in and making a modification for the purposes of pollution control, that in itself doesn't trigger NSR for all the other pollutants. It's a mechanism to reduce that perverse incentive -- the incentive to do nothing at all.

There's no question that will be litigated.

Say more about the BACT problem. Could IGCC be BACT for a new coal-fired plant?

The question will be, what constitutes BACT for a new coal-fired power plant? Is it carbon capture and storage (CCS) or something else?

In fact, environmental groups have petitioned EPA to find that IGCC is BACT. One of the counter-arguments will be, the baseline analysis of BACT does not include modifying the source. So if you if you propose a coal-fired power plant, BACT can't tell you to build a gas-fired plant. The argument that industry will likely make is, if I'm coming in proposing a pulverized coal plant, BACT shouldn't switch types of sources over to IGCC.

The whole issue of what constitutes BACT will itself be litigated. There will be people arguing that CCS is not commercially available and therefore can't constitute BACT. Others will argue that IGCC is modifying the source and therefore can't be considered BACT. We've yet to really even start that debate in earnest -- it will be an ongoing area of employment for lawyers.

Also, BACT is supposed to be a case-by-case review, where you're looking at the best technology at that point in time. Even if we decide today that something doesn't yet meet the threshold, someone will argue tomorrow, well, now we do.

Can a cap-and-trade system for GHGs be set up under the CAA?

I may have as much experience as anybody in that question: My first assignment when I came to EPA was to develop a cap-and-trade system under Section 111 and 111d of the CAA.

Sec. 111 is new source performance standards (NSPS), but 111d applies to existing sources. I've been of the view that if you are going to move forward with the CAA, the way to do it is to cover stationary sources -- as much as you decide, largely as a policy matter, you want to -- under 111 and 111d. Whether or not you put in place a cap-and-trade system depends on how much legal risk you want to take.

When I was at EPA we developed a cap-and-trade system under 111d. It was the mercury emissions rule, much-maligned by environmentalists because they were worried about hotspots. But no one's concerned about hotspots for CO2.

You dust off the legal argument EPA made for using 111d for a cap-and-trade system, and you search and replace mercury with CO2. You'd put both environmental groups and industry in an awkward position. Environmental groups would want to support the rule, presumably. Industry would not want to but they're already on record saying EPA has authority to issue a cap-and-trade system under 111 -- they wanted to have that for mercury.

It would be, in some ways, a more cumbersome cap-and-trade system than what Congress, at least in theory, could do. 111d is fundamentally a partnership between EPA and the states; EPA can't set a national program, period, whether it's cap-and-trade or some other program. Rather, EPA sets out the overall goals and tells the states to figure out how to regulate to meet those goals. The way it would presumably work is, EPA would strongly encourage states to opt in to the national cap-and-trade system -- or whatever it develops. But there's no requirement for states to do that.

Would the US regional cap-and-trade systems qualify under that kind of program?

I think that's exactly what would happen. EPA would set emission reduction criteria for existing sources and states would be in charge of designing programs to meet those, and the states that already have cap-and-trade programs, like the RGGI states or the Western states, would either be able to argue that their program already meets the EPA requirement, or would have to modify their program in some relatively minor ways to fit the EPA program. But what it would do is force all the other states to develop something, or essentially opt in to the federal program.

The threat of EPA regs was supposed to drive conservatives and business to the table. It doesn't really seem to be happening.

Not to the degree I might have expected. Part of the issue is that groups like the Chamber of Commerce are positioning themselves as, Just Say No. They're going to Just Say No up to the bitter end. Then they're going to complain about the regulations EPA moves forward with, even though any rational person looking forward can see that this is a natural outgrowth of their strategy.

The US Chamber is doing a disservice to their own members, for two reasons: one, many of their members stand to do quite well in a carbon-constrained world; two, they are pretending they can say no to both, when in fact the choice is one or the other.

Is there anything conservatives or business could do to stop the EPA going forward, or put roadblocks in the way?

I don't think so, because there was a lot of work in the previous administration to figure out what that road block could be, and they didn't come up with it. And that was when they had a receptive administration.

This is after we had completed our work and then it was rejected. Then, all attention was paid to, how do we relieve EPA of its obligation to respond to this? CEI and the Chamber were putting a huge amount of effort into figuring out legal theories, because if they'd come up with a plausible legal theory, it would have been forced on EPA. No theory came forward that was even plausible, and I heard a lot of theories. None passed the laugh test. If there is one out there I think it would have been discovered during that process.

More and more you're going to see the Chamber and EEI and CEI trying to figure out either how to make this a real big mess that will then cause political backlash, or at least dragging in smaller businesses that realize their industry is going to be regulated and just want others to be in the boat with them.

Do you think EPA can do it?

What EPA will face is a very large challenge and some inefficiencies, but they'll make it work. It won't be what anyone would design if starting with a blank sheet of paper, but it won't cause the US economy to come to a grinding halt.

There will be cases where there's clearly unnecessary regulatory red tape, and those will be well-publicized by the Chamber and their allies, but by and large EPA has a lot of tools it can use and a lot of creative people that can come up with systems for getting around the big problems.

One of the problems people have been talking about is, this is going to require a mom-and-pop business to get a PSD permit. Well, one, EPA may successfully raise the threshold to 25K tons. Two, even if the program is applied to sources that emit 250 tons, EPA may be able to figure out a very simple way for people to comply -- for example, instead of needing a formal permit application, you send in a post card that says, for instance, if you're building a new building, you've used an Energy Star label HVAC. Some people would complain because they didn't want to use an Energy Star system -- but that's hardly regulatory red tape, it's just a regulatory burden some businesses don't want to face. It may make good policy sense to move small businesses toward using more Energy Star equipment.

What do you think of the progressive push to preserve EPA authority in the climate bill.?

It's my general understanding that EPA authority is preserved in certain areas, modified in others, eliminated in others. It's preserved by and large in the mobile source sections and eliminated in the case of the PSD nightmare scenario. Those are reasonable decisions.

Environmental groups need to be careful what they ask for. You have to make sure you're not going to create the sorts of problems that the US Chamber and CEI are looking for. You don't want to play into their hands. You don't want to create a political backlash 5, 10, 20 years from now. Presumably you want this legislation to be in force for a long, long time rather than only being in force when you have the votes on Capitol Hill.

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Cass SunsteinAfter weeks of sustained attack from the right-wing on issues that are marginal to the job the President asked him to do, Cass Sunstein has emerged from the nomination process bloody but apparently unbowed (here’s yesterday’s roll call). He is now the nation’s “regulatory czar,” Director of the White House Office of Management and Budget, Office of Information and Regulatory Affairs.  

Although Professor Sunstein has been sitting in the Old Executive Office Building for months, he has undoubtedly been preoccupied with his nomination battle. Having survived the occasionally nonsensical trial by partisan and self-serving flight of fancy that was his confirmations process, we hope he will notice that his staff at OIRA has been behaving as if the 2008 election never happened. Having paid careful attention to OIRA over these past few months, in search of evidence of a new outlook, I’m sorry to report that I’ve drawn the strong impression that Bush Administration culture and ideology remain unchanged at OIRA. To deliver change we can believe in, Cass Sunstein needs to convert OIRA from industry waiting room to objective arbiter of inter-agency disputes.

My impression that change has not yet arrived is based in great measure on a chart [PDF] compiled and released today by the Center for Progressive Reform, showing that in recent months, OMB met nine times with outsiders to discuss health and safety regulations, and that eight of those meetings were dominated by industry representatives complaining about proposals under development at the Environmental Protection Agency (EPA), the Food and Drug Administration (FDA), and the National Highway Traffics Safety Administration (NHTSA). For example, tire manufacturers met to discuss NHTSA’s proposals on inflating tires to increase fuel efficiency. The oil industry met to discuss EPA’s rule on the reporting of greenhouse gas emissions. And the airline industry met to discuss EPA’s rule on water discharges from airport de-icing operations. Public interest groups have met with OIRA on only one regulatory matter: amendments to an EPA rule on renewable fuels. That meeting was one in a set of four, with the other three devoted to the views of the American Petroleum Institute, the biodiesel industry, and Shell Oil. 

Now, OIRA may well take the view that when you hold an open house for the neighborhood, you cannot help who drops by. But the history of the office makes that seem like a superficial argument.  For years, and especially during the tenure of Presidents Reagan, Bush I, and Bush II, OIRA has served as a backdoor for regulated industries, giving those aggrieved by agency decisions a second, third, and fourth bite at the apple to press their case. Having failed to persuade Congress of their arguments during the legislative process and then the regulatory agency during their deliberations, industry has found a friendly hearing from OMB, and OMB has too often watered down or scuttled regulations afterwards. But even if OMB staff sit silently at the meetings, giving an audience to industry complainants but not otherwise agreeing to overturn agency decisions, the practice is questionable. As experience in the courts since before the nation was founded has convinced us, only by airing all sides of a dispute through balanced advocacy can a wise decision be made.

Even if for some elusive reason we were willing to accept OMB’s “listening post” justification for these meetings, the sad fact is that objective evaluation of OMB’s role is impossible because OMB discloses only the fact of meeting, not its outcome. While this quasi-transparency is better than nothing, it cannot allay suspicions that the regulatory czar’s job is to kill, not improve, regulation.

We look forward to working with Cass Sunstein. And we also promise to stay in his face, making sure he remembers that his biggest challenge is to revive strong government protection of environmental quality, food, drug, and worker safety, and the control of climate change, not working to appease industry. We wish him luck and success. 

This post originally appeared in the Center for Progressive Reform blog.

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Business Week's September 14 issue reports:

Sun-soaked New Orleans should be a great place for solar power. Yet according to TÜV Rheinland PTL, a testing lab, up to 30 percent of photovoltaic panels installed in such steamy areas of the U.S. are likely to fail in less time than the 25 years manufacturers typically specify in their warranties. Homeowners will be covered, of course, but it will still be a hassle. Even in hot, dry areas failure rates could hit 12 percent.

The same producers' panels probably won't fail as quickly in Europe, where vendors agreed to performance and quality standards back in 1999. In the U.S., only the state of Florida has followed suit. As a result, "manufacturers make two grades of panels: one for the U.S. and another for Europe," says Mani Tamizhmani, TÜV's president. Panels do have to pass federal tests for safety in the U.S. but "consumers here don't yet know to ask for quality certifications," he says.

In other words, contrary to all that we've been told by the economic pundits for decades, it is the ABSENCE of regulations and regulatory performance standards that costs consumers money. This is a great case for the contribution of performance standards to overall economic efficiency.

Markets work very efficiently, indeed, but not in the ways we would like to see them work: In the absence of any quality standards and the presence of growing demand for a product, especially if there is any shortage of supply, it is efficient for a manufacturer or supplier to provide the lowest cost product possible, even if the quality is inferior to what could be produced. Buyer beware!!

Especially when the public sector is massively subsidizing demand for a product or service -- in this case demand for photovoltaic panels -- there is a need to assure value for money. In the absence of any quality standards, the government is asking to be taken for a ride by those quickest to market with the lowest cost (and potnetially lowest quality) products and services possible.

We saw this was true with Blackwater and Wackenhut security services in Iraq and Afghanistan ... and now we are seeing the same thing with PV panel providers to homeowners and businesses in the United States itself.

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The U.S. Chamber of Commerce can't catch a break these days. When the Waxman-Markey bill rolled out, it did what it always does: pretended to agree with the goal while recommending changes in the means so drastic that they would gut the bill. See this comical letter wherein it wants to "balance environmental objectives with the need for economic growth and job creation" by lowering targets, increasing free allocations, ditching the renewable energy standard, waiting for China and India to act first, completely preempting state programs, and increasing subsidies to fossil-fuel companies. This is standard operating procedure for CoC, a game it knows how to play. It lobbies for the interests of the corporate class.

But in this case, there's a problem: many, many business see enormous opportunities in the shift to clean energy. Many businesses want the stability and predictability ACES would bring. And many of those businesses happen to be members of the CoC. In May, several of them, including Nike and Johnson & Johnson, dealt the CoC a very public smack on the nose, asking it to quit speaking on behalf of "business" when lobbying on behalf of a few dirty-energy industries.

This kind if dissension in the ranks is new and embarrassing for the CoC. Its flailing response rolled out last week: a call for a "21st Century Scopes Monkey Trial" that would force the EPA to justify its endangerment finding in court.

Now, before you start mocking -- we'll get to that -- step back and think about this from a right-wing hack's perspective. The point is not, repeat not, to get at the truth of climate change. The CoC doesn't give a rat's ass about the truth of climate change. It's very simple: when in doubt, distract. Start a circus. Hype "the controversy."

The idea is to propose something that sounds reasonable on the surface, to the casual news reader, so that the EPA looks defensive if it refuses. It gives the right wing something to make hay over (and oh boy, are they). Most of all, it drags out the faux controversy of the existence of climate change.

Normally this stuff has worked well for conservatives, but a) times are changing, and b) this was a particularly ham-fisted attempt.

In comparing his proposal to the Scopes trial, CoC's Bill Kovacs revealed too much. In that case, conservatives had lost in the realm of science, so they relitigated via a theatrical court case in front of a jury with no scientific training. And Scopes lost. He was found guilty. It was less any kind of American triumph than a sad expression of provincial ignorance.

And that's exactly what Kovacs wants another one of.

Still, he came in for so much mockery that he tried to back off on Thursday, in a National Journal post that is, to put it charitably, rather opaque. He now says the Scopes comparison was "inappropriate" and that the CoC "is not denying or otherwise challenging the science behind global climate change." They just question whether it's a danger, despite the clear conclusion that it is contained in ... the science behind global climate change. Oh, and the Supreme Court case Massachusetts v. EPA.

Kovacs goes on to recycle the myth of the EPA "whistleblower," which shows how desperate he is. The EPA has spent a couple years now making a determination, complete with the requisite 60 days for open comment, but Kovacs wants to second-guess the agency staff's conclusion before a judge. Hell, he'd probably like to treat all regulations this way -- in the name of "transparency," you know. But it would be ridiculous. Government would grind to a halt.

I don't know how much the public is really paying attention to this stuff. But I can't imagine this looks anything but buffoonish to the casual news consumer.

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Should Waxman and Markey have kicked off House climate-bill negotiations with a stronger ask?

The bill they introduced was effectively the U.S. Climate Action Partnership proposal, which already reflected years of negotiation and compromise. The idea was that the difficult work of negotiations had already been done -- enviros and business both on board! -- and it would be easy for conservative Dems (and a few Republicans) to sign off on it.

Of course that's not what has happened. Republicans are balking en masse. Conservative Dems have compromised the bill down further, and by all indications will further weaken it in the Senate. Could the bill have ended up in a stronger place if it had started in a stronger place?

The counterargument is that the "green" side just didn't have much leverage. Without sticks, all they had were carrots -- more giveaways, more offsets.

One stick they did have was the threat of EPA greenhouse-gas regulations. There was a lot of talk about this when Dems first won their majorities but very little once negotiations actually got underway. Nobody is brandishing the stick.

Rep. Rick BoucherCould it have made more of a difference? Some recent comments from Rep. Rick Boucher (D-Va.) are intriguing in this regard. In an interview with the Kingsport Times-News, Boucher was candid about his motivation for negotiating with Waxman:

Boucher stressed his interest in climate change has not been driven by a moral belief to control greenhouse gases. [Paging Times-News editors: You awake over there? What is a moral belief to control GHGs?]

What is driving his involvement, said Boucher, is the U.S. Supreme Court determined two years ago that greenhouse gases are pollutants.

“As a consequence of that decision, the Environmental Protection Agency is, for all intents and purposes, effectively required to regulate greenhouse gases,” Boucher said. “The debate about whether or not we will have regulation is over. So the only question is will EPA regulate or ... will we have congressional regulation that does balance economic effect against environmental effect? Given that choice, industry would rather have Congress do this. Industry needs and wants a bill to pass.”

"Industry needs and wants a bill to pass" -- the words of the coal industry's most dogged and effective spokesperson.

So there was leverage. It was used to get Boucher to the table. But once he was there, it went out the window. Not once in the process has industry been forced to face an ultimatum or bargain away a key position. They've been relentlessly wooed, but rarely challenged. They've been able to talk out both sides of their mouths, offering tepid, nominal support while bulldogs like the Chamber of Commerce, National Association of Manufacturers, and the Edison Electric Institute attack and weaken the bill.

And Boucher got just about everything he wanted for Big Coal:

The Southwest Virginia congressman said he spent more than six weeks helping to rewrite the draft bill to help coal-powered utilities and coal producers in his district.

He pointed to “four key things” inserted in the bill.

First, Boucher said, was making sure emission allowances were assigned for free and not put up for auction by the federal government.

“That helps to keep electricity prices affordable and strengthens the case for utilities to continue to use coal,” he said.

Secondly, Boucher said the bill now includes 2 billion tons of carbon offsets available to industrial emitters to help them satisfy their reduction obligations.

“That means an electric utility burning coal will not have to reduce the emissions at the plant site. It can just keep burning coal,” he explained.

The third provision is a $1 billion per year special fund to develop carbon capture and sequestration technologies for controlled disposal or storage.

In the fourth provision, there is another special fund created to deploy the carbon capture and sequestration technology.

“Carbon capture and sequestration attached to coal still makes coal the cheapest fuel,” Boucher asserted.

These are the key -- some argue fatal -- weaknesses of the bill. They were put in to woo an industry that "needs and wants a bill to pass."

One other thing to note:

[Boucher] said lawmakers have “no political will” to mandate the EPA to do a cost-benefit analysis on climate change legislation.

Strictly speaking, this is false. The EPA has done detailed cost-benefit analyses of ACES. (It's going to be cheap, they say.) If Boucher is talking about the dipshit lawsuit the Chamber of Commerce is pushing, he's drifting into "death panel" territory.

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Gregory MankiwThe New York Times turned over some of its valuable opinion space to Harvard economics professor Gregory Mankiw last weekend, so that he could discuss the merits of various carbon policies. His record on that score is not great, and he doesn't have any special training or experience on the subject, but as far as Big Media is concerned, being an economist makes you a wise commentator on literally any policy issue. All you need is theory!

Mankiw's main point is that a refunded carbon tax would be preferable to a cap-and-trade system, because ... economists prefer it. If they can't have that, they'll take a fully auctioned cap-and-trade system, which would be functionally equivalent to a tax. Obama campaigned on such a system, but now the ACES bill has been corrupted by "powerful special interests" and "most" of the allowances are given away, so Obama should veto the bill. Blah blah. It's familiar ground; Ryan Avent does some good work bashing it.

I want to hone in on one of Mankiw's background assumptions, a deep-rooted and ubiquitous assumption in economics that doesn't get discussed enough.

Mankiw makes the familiar economic point that it's good to "internalize an externality" (make polluters pay for the environmental damage they cause) by charging for carbon emissions. Also familiar is his follow-on point: whether we tax emissions or do auctioned cap-and-trade, it's crucial to return all the revenue the government gathers directly to taxpayers by reducing other taxes (either income or payroll). This so-called "tax shift" would be revenue neutral.

Now, I've argued at some length that under ACES most of the allowance value is not, in fact, "given away to powerful special interests." In fact, the bulk of the allowance value is returned to consumers. But for Mankiw, that's almost irrelevant. For mainstream Chicago School and neoliberal economists, it is a baseline assumption that money is more productively deployed by the private sector than by the government. Left to its devices, the market deploys capital efficiently (the "invisible hand" and all that). When government collects taxes and spends revenue, the capital is deployed less efficiently. Taxes result in "TK" -- "reduced economic activity" meaning "reduced growth of GDP." Government spending cannot compensate for that reduced growth, because governments aren't as smart as markets.

Insofar as government wants to secure a social benefit -- say, a clean environment or public health -- by a) constraining the private market through regulation, or b) spending tax revenue on public programs, it necessarily reduces economic productivity and GDP. There is no way around that trade-off. If you want a cleaner environment, you have to pay for it. You can't get something for nothing. No free lunch. Etc.

That's the root economic assumption. That's why economists (and elites who view the approval of economists as a mark of Seriousness) favor a tax shift: it is the absolute minimum government intervention required to secure the social benefit of reduced CO2 emissions. It does not "adversely affect the tax code" -- econospeak for raising taxes. It disturbs the precious, fragile, magical free market as little as possible.

It's impossible to exaggerate how much this assumption shapes U.S. policy discussions. Anyone who proposes a regulation or public investment is inevitably faced with the kneejerk Blue Dog response: "we can't afford that." We have a deficit, you see, and since gov't action by definition reduces economic productivity and GDP, it increases the deficit. We can't have government do one thing unless it stops doing something else -- it's a zero-sum game.

You won't be surprised to hear that I think this assumption is wrong. Both regulation and public investment, when done properly, can increase economic productivity. Their effect on GDP is uncertain, but GDP is an absurd measure of public welfare anyway. On more sensible measures of public welfare, regulation and public investment can produce net gains.

Most importantly, carbon pricing (whether carbon tax or cap-and-trade) cannot do the job on its own. If complementary policies are ruled out, we're dooming ourselves to failure. (I'm going to make this point at much more length soon. Aren't you excited.)

Obviously this kind of fundamental dispute in economics won't get resolved in a blog post. But everyone fighting for vigorous, multifaceted government action to address climate change needs to be aware of it -- aware of the fact that they are ultimately fighting against the core faith of mainstream economics. As long as they accept that faith, the best they can argue is that tackling climate change will only moderately slow the economy and reduce GDP. And when you're fighting a battle this important, "moderate pain" is a pretty poor rallying cry.

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For more than two decades, environmental law and regulation was dominated by command-and-control approaches — typically either mandated pollution control technologies or inflexible discharge standards on a smokestack-by-smokestack basis.  But in the 1980s, policy makers increasingly explored market-based environmental policy instruments, mechanisms that provide economic incentives for firms and individuals to carry out cost-effective pollution control.  Cap-and-trade systems, in which emission permits or allowances can be traded among potential polluters, continue today to be at the center of this action.

Most recently, this has been in the context of deliberations regarding possible U.S. actions to reduce carbon dioxide and other greenhouse gas emissions linked with global climate change, as in HR 2454, the Waxman-Markey bill approved by the U.S. House of Representatives, as well as in proposals developing in the Senate.  (I have written a number of blog posts on this topic.  If you’re interested, please see:  “Opportunity for a Defining Moment” (February 6, 2009); “The Wonderful Politics of Cap-and-Trade:  A Closer Look at Waxman-Markey” (May 27, 2009); “Worried About International Competitiveness?  Another Look at the Waxman-Markey Cap-and-Trade Proposal” (June 18, 2009); “National Climate Change Policy:  A Quick Look Back at Waxman-Markey and the Road Ahead” (June 29, 2009).  For a more detailed account, see my Hamilton Project paper, A U.S. Cap-and-Trade System to Address Global Climate Change.)

But the transition from command-and-control regulation to market-based policy instruments has not always been easy.  Sometimes policy can outrun basic understanding, and the claims made for the cost-effectiveness of cap-and-trade systems can exceed what can be reasonably anticipated.  Among the factors that can adversely affect the performance of such systems are transaction costs.

In general, transaction costs — those costs that arise from the exchange, not the production, of goods and services — are ubiquitous in market economies.  They can arise from any exchange: after all, parties to transactions must find one another, communicate, and exchange information.  It may be necessary to inspect and sometimes even measure goods to be transferred, draw up contracts, consult with lawyers or other experts, and transfer title.

In cap-and-trade markets, there are three potential sources of transaction costs. The first source, searching and information-collection, arises because it can take time for a potential buyer of a discharge permit to find a seller, though — for a fee — brokers can facilitate the process.  Although less obvious, a second source of transaction costs — bargaining and deciding — is potentially as important.  A firm entering into negotiations incurs real resource costs, including time and/or fees for brokerage, legal, and insurance services.  Likewise, the third source — monitoring and enforcing — can be significant, although these costs are typically borne by the responsible governmental authority and not by trading partners.

The cost savings that may be realized through cap-and-trade systems depend upon active trading.  But transaction costs are an impediment to trading, and such impediments thereby can limit savings.  So, transaction costs reduce the overall economic benefits of allowance trading, partly by absorbing resources directly and partly by suppressing exchanges that otherwise would have been mutually (indeed socially) beneficial.  But when transaction costs can be kept to a minimum, high levels of trading — and significant cost savings - are the result.

Since David Montgomery’s path-breaking work in 1972, economists have asserted that the post-trading allocation of control responsibility among sources, and hence the aggregate costs of control, are independent from the initial permit allocation.  This is an extremely important political property, but does this still hold in the presence of transaction costs?  This is a question I investigated in an article titled, “Transaction Costs and Tradable Permits,” which was published in the Journal of Environmental Economics and Management in 1995 (and which the publisher lists as one of the ten most cited articles in the journal’s history, going back to 1974).

The answer to this question is: “it depends.”  If incremental transaction costs are independent of the size of individual transactions, the initial allocation of permits has no effect on the post-trading allocation of control responsibility and aggregate control costs.  But if incremental transaction costs decrease with the size of individual trades, then the initial allocation will affect the post-trading outcome.

This is of great political importance, because it means that in the presence of transaction costs, the initial distribution of permits can matter not only in terms of distributional equity, but in terms of cost-effectiveness or efficiency.  This can reduce the discretion of the Congress (or other legislature or agency) to distribute allowances as they please (in order to generate a constituency of support for the program), and may thereby reduce the political attractiveness and feasibility of a cap-and-trade system.

Empirical evidence, however, indicates that transaction costs have been minimal, indeed trivial, in enacted and implemented cap-and-trade systems, including the U.S. EPA’s leaded-gasoline phasedown in the 1980s, and the well-known SO2 allowance trading system, enacted as part of the Clean Air Act amendments of 1990.

That’s good news, surely.  But nevertheless, going forward, choices between conventional, command-and-control environmental policies and market-based instruments should reflect the imperfect world in which these instruments are applied.  Such choices are not simple, because no policy panacea exists.

On the one hand, even if transaction costs prevent significant levels of trade from occurring, aggregate costs of control will most likely be less than those of a conventional command-and-control approach.  A trading system with no trading taking place will likely be less costly than a technology standard (because the trading system provides flexibility to firms regarding their chosen means of control) and no more costly than a uniform performance standard.

But the existence of transaction costs may make the choice between conventional approaches and cap-and-trade more difficult because of the ambiguities that are introduced.  With transaction costs — as with other departures from frictionless markets — greater attention is required to the details of designing specific systems.  This is the way to lessen the risk of over-selling such policy ideas and ultimately creating systems that stand the best chance of being implemented successfully.

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Whether the policy domain is global climate change or local hazardous waste, it’s exceptionally important to understand the interaction between public policies and technological change in order to assess the effects of laws and regulations on environmental performance.  Several years ago, my colleagues ­- Professor Lori Bennear of Duke University and Professor Nolan Miller of the University of Illinois - examined with me the effects of regulation on technological change in chlorine manufacturing by focusing on the diffusion of membrane-cell technology, widely viewed as environmentally superior to both mercury-cell and diaphragm-cell technologies.  Our results were both interesting and surprising, and merit thinking about in the context of current policy discussions and debates in Washington.

The chlorine manufacturing industry had experienced a substantial shift over time toward the membrane technology. Two different processes drove this shift:  adoption of cleaner technologies at existing plants (that is, adoption), and the closing of facilities using diaphragm and mercury cells (in other words, exit).  In our study, we considered the effects of both direct regulation of chlorine manufacturing and regulation of downstream uses of chlorine.    (By the way, you can read a more detailed version of this story in our article in the American Economic Review Papers and Proceedings, volume 93, 2003, pp. 431-435.)

In 1972, a widely publicized incident of mercury poisoning in Minamata Bay, Japan, led the Japanese government to prohibit the use of mercury cells for chlorine production. The United States did not follow suit, but it did impose more stringent constraints on mercury-cell units during the early 1970’s. Subsequently, chlorine manufacturing became subject to increased regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act.  In addition, chlorine manufacturing became subject to public-disclosure requirements under the Toxics Release Inventory.

In addition to regulation of the chlorine manufacturing process, there was also increased environmental pressure on industries that used chlorine as an input. This indirect regulation was potentially important for choices of chlorine manufacturing technology because a large share of chlorine was and is manufactured for onsite use in the production of other products. Changes in regulations in downstream industries can have substantial impacts on the demand for chlorine and thereby affect the rate of entry and exit of chlorine production plants.

Two major indirect regulations altered the demand for chlorine. One was the Montreal Protocol, which regulated the production of ozone-depleting chemicals, such as chlorofluorocarbons (CFCs), for which chlorine is a key ingredient. The other important indirect regulation was the “Cluster Rule,” which tightened restrictions on the release of chlorinated compounds from pulp and paper mills to both water and air. This led to increased interest by the industry in non-chlorine bleaching agents, which in turn affected the economic viability of some chlorine plants.

In our econometric (statistical) analysis, we analyzed the effects of economic and regulatory factors on adoption and exit decisions by chlorine manufacturing plants from 1976 to 2001.  For our analysis of adoption, we employed data on 51 facilities, eight of which had adopted the membrane technology during the period we investigated.

We found that the effects of the regulations on the likelihood of adopting membrane technology were not statistically significant.  Mercury plants, which were subject to stringent regulation for water, air, and hazardous-waste removal, were no more likely to switch to the membrane technology than diaphragm plants. Similarly, TRI reporting appeared to have had no significant effect on adoption decisions.

We also examined what caused plants to exit the industry, with data on 55 facilities, 21 of which ceased operations between 1976 and 2001. Some interesting and quite striking patterns emerged. Regulations clearly explained some of the exit behavior.  In particular, indirect regulations of the end-uses of chlorine accelerated shutdowns in some industries. Facilities affected by the pulp and paper cluster rule and the Montreal Protocol were substantially more likely to shut down than were other facilities.

It is good to remember that the diffusion of new technology is the result of a combination of adoption at existing facilities and entry and exit of facilities with various technologies in place. In the case of chlorine manufacturing, our results indicated that regulatory factors did not have a significant effect on the decision to adopt the greener technology at existing plants. On the other hand, indirect regulation of the end-uses of chlorine accelerated facility closures significantly, and thereby increased the share of plants using the cleaner, membrane technology for chlorine production.

Environmental regulation did affect technological change, but not in the way many people assume it does. It did so not by encouraging the adoption of some technology by existing facilities, but by reducing the demand for a product and hence encouraging the shutdown of facilities using environmentally inferior options.  This is a legitimate way for policies to operate, although it’s one most politicians would probably prefer not to recognize.

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One year after his election, Obama on verge of audaciously fulfilling his promise as the green FDR

While climate change legislation works its way toward 60 votes in the Senate, President Obama's EPA has been quietly working on some serious revisions to the guidelines it uses to conduct cost-benefit analysis.  Tweaks they might make to the powerful but low-profile Guidelines for Preparing Economic Analyses could have major impacts on the environment and could spur greenhouse gas reductions if the Senate fails to take action. 

The Guidelines is little known outside of EPA, but used regularly by the agency to design every major environmental regulation.  Before any rule is adopted, it must go through an economic analysis according to the Guidelines.  In the past thirty years, cost-benefit analysis has been often used with an industry bias, weighing the costs of action more heavily than the benefits.  The result is that too often, regulators end up erring on the side of not addressing environmental problems. 

The draft changes to the Guidelines are under discussion now and will hopefully be adopted this fall.  These revisions would create a major shift in the status quo at EPA, ensuring more balanced cost-benefit analysis and leading to stronger levels of environmental regulation.  Here is a breakdown of the four most significant changes being considered:   

1. Stop Inflating Compliance Costs:  Too often, the compliance costs of regulations are over-estimated because worst case scenarios are used to judge how business will be affected.  Industry innovation of new, low-cost solutions are not considered so the proposed regulation seems more expensive.  The new Guidelines would clarify how environmental regulations can lead to innovations that significantly reduce compliance costs over time.

2.  Focus on Climate Change:  The old Guidelines focused on "traditional" environmental problems like smoke stack emissions but failed to address the complexities of relatively new problems, such as climate change.  The new version would zero-in on these newer problems as the preeminent environmental threats.

3. Measure Ecological Consequences: In the past, the full range of indirect environmental implications of its regulations, especially when it came to climate change, were often ignored. This creates a serious imbalance because the indirect costs of a regulation to industry are considered.  The new recommendations warn analysts that focusing only on impacts that can be monetized will often skew towards under-regulation.

4. Look at Under-Regulation:  Corrections in the Guidelines would require not only cost-benefit analysis of environmental protections, but also deregulation.  This is a major shift.  During the Bush Administration, deregulation of everything from air quality controls to mining practices as well as voluntary (read unenforceable) "solutions" to environmental problems went without any economic analysis.  Under the new version of the Guidelines, this would not stand; the agency would have to justify their weakening actions with as much rigor as it has to justify its proactive measures. 

The combined effect of these changes would be a significantly more balanced approach to the way environmental regulations are judged.  They will bring a much needed equilibrium to the cost and benefit sides of the balance sheets and remove economically unjustified impediments to rules. 

When used correctly, cost-benefit analysis is a friend to green advocates.  There are some who wish that regulations didn't have to go through an economic test; that agencies could institute new rules without justifying them in terms of dollars and cents.  But ensuring that regulations pass cost-benefit muster reduces the risk of serious backlash and prevents environmentalists from getting clobbered as insensitive to the costs of environmental action. 

Rather than focus on eliminating cost-benefit analysis, it would be better to work on improving it-for example, there were no recommendations to change how the agency deals with "discounting" benefits for future generations, a practice which can skew regulations designed to avoid passing catastrophic risks to our children.  While the proposed changes to the Guidelines are a good start, there is significant progress to be made.

But more than any other reason, greens should advocate for correcting the imbalances in the cost-benefit process because when conducted fairly, the numbers are often on their side.  By revising the Guidelines, the EPA is showing an awareness of the fact that economic analysis often justifies strong environmental rules.  Environmentalists should be paying close attention. 

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