Why US emissions must be regulated under Clean Air Act

Two Tomorrows US chief executive Todd Cort says a new bill that proposes to exclude greenhouse gases from regulation under the Clean Air Act spells disaster

The Waxman-Markey climate change bill was just passed by the US House of Representatives. It will now travel to the Senate amid strong support for speedy resolution.

To some extent, the rush in Capitol Hill is a response to clear statements from the Obama Administration that it will proceed with regulation of greenhouse gas emissions through the existing Clean Air Act (CAA) statutes in the absence of action from Congress. This willingness to expand the purview of the CAA was demonstrated on May 19^th when the administration announced new federal fuel-efficiency standards. During that announcement, it was made clear that the Environmental Protection Agency (EPA) will indeed regulate tailpipe emissions under the CAA (which has never been done before) and that the adopted standard need not be approved by Congress as the emissions standards would be implemented through existing federal rules. Moreover, this authority of the EPA to regulate under the CAA has been recently bolstered by Supreme Court rulings.

The Congressional response, in the form of the Waxman-Markey bill, establishes a national cap-and-trade system for greenhouse gases and identifies regulated industries in a manner similar to the California Climate Bill AB32. However, the Waxman-Markey bill takes a more definite stand that ‘the solution to the greenhouse gas emissions challenge is market-based’ because it explicitly excludes greenhouse gases from regulation under the CAA.

Putting aside the political maneuverings between the White House and Congress and the desire to influence developing markets in Asia by setting an example, the exclusion of greenhouse gases from the CAA, and the resulting reliance on a market-based solution to curbing emissions, is a disaster for forward-thinking and responsible companies. History has taught us that a cap-and-trade system for regulating pollutants must be supported by a regulatory ‘baseline’ in order to justify capital expenditures by industry. In the absence of that regulatory baseline, a market-based system to reduce emissions is doomed to failure.

Sulfur has been touted as the great success for a cap-and-trade system in the US and the success in reducing acid rain is demonstrable. We tend to forget that the success of the system was underscored by the realization that control technologies were much less expensive than anticipated. The result was that industry could make the required capital investments fairly readily and the price of sulfur emissions never became unduly onerous to the bottom line. We also tend to forget that a purely regulatory approach undertaken in France and Germany achieved greater emissions reductions.

This disconnect was made clear in southern California with the RECLAIM scheme. When RECLAIM was extended to greenhouse gases, industry faced two investment ‘phases’ for reductions. In the first investment phase, the ‘low hanging fruit’ of process efficiencies were adopted by most companies, resulting in moderate declines in emissions. Then the second phase hit – the moderate improvements in efficiencies were no longer sufficient and significant capital expenditures to install new technologies became necessary. It became clear to industry that, not only did the cost of carbon not justify the investment, but that all of the competitors were in the same situation. Suddenly, there was no carbon credit to be purchased and the cap was violated. Regulators were faced with a decision. Either continue the cap and trade, which would mean rolling blackouts for utility customers as industry cut carbon by cutting production (a politically unsavory solution), or reinforce the cap and trade with regulatory requirements to justify the capital expenditures necessary to realize a second phase of reductions.

There are several lessons from RECLAIM, the European Union Emission Trading Scheme and any number of other regional trading schemes:

1)      The price of carbon takes a long time (if ever) to reach a point where significant investment in new technology is justified.

2)      If the price does reach this point, a variety of factors come into play – uncertainty in the enforceability of the cap, and political pressure as established companies exert pressure on regulators to choose between the cap and economic disruption (in a scenario similar to the one faced by regulators in the US for General Motors and AIG where the companies were deemed ‘too big to fail’). The result, in almost all cases, is a violation of the cap and collapse of the system.

3)      While new facilities (e.g. a new coal-fired power plant) will have an incentive to adopt easily integrated technologies, there is no incentive under a cap-and-trade system for them to adopt best available control technologies (BACT) and to be a carbon market leader.

For those of us who want to see a successful approach to reducing greenhouse gas emissions and, particularly for those companies that are forward thinking and have effectively integrated environmental responsibility into their business strategy, the solution is a combined market and regulatory approach to greenhouse gas emissions. Specifically, smart business should support a version of the Waxman-Markey bill that allows greenhouse gases to be regulated under the CAA.

The benefits of an integrated approach are manifold. First, establishing a federal regulatory baseline levels the playing field and makes the risk equation for business decision-making much clearer. In simple terms, a regulatory standard ensures a baseline price for carbon on the market against which capital investments can be given a clear threshold for consideration. Moreover, a federal baseline ensures that this price will not be lower in some States (although it can be higher as States adopt more stringent standards). The primary benefit to companies of a more stable carbon price is the ability to justify long-term investments by eliminating uncertainty. These long-term investments are the only manner by which meaningful reductions in carbon will be achieved.

Second, this approach utilizes a method for evaluation of technologies that is well-established and well understood by smart companies. The control technology standards under the CAA have been well tested and implemented by industry and the EPA. While contentious issues continue to arise, the ‘rules of the game’ are clear. This level of understanding will be important for companies to understand expectations from the regulatory authority – a luxury that is not present in the current, CAA-less version of the Waxman-Markey bill.

Finally, and perhaps most importantly, allowing regulation of greenhouse gas emissions under the CAA addresses the challenge of new facility builds. Under the CAA, the expectations (and associated permit requirements) for new builds is clear and based on BACT. This would allow industry to factor the costs of greenhouse gas emissions technology requirements directly into the earliest phases of planning and cost-benefit analysis rather than plugging these costs into the project overhead after the cost of building has already been incurred. In terms of budget planning and stability for companies, this benefit is a ‘no-brainer’. Bringing new facilities in under BACT also prevents the ‘too big to fail’ scenario through forward planning because these facilities will not have an established service that would be missed by communities. Finally, it is critical for regulators, communities and broader society that new builds push emission reductions if there is any chance to meet reasonable greenhouse gas emissions reductions targets.

The success of a cap-and-trade system relies on the ability of participating industries to plan effectively for risk and opportunity – not just in the short term, but also for long-term, capital-intensive investments. A market-based system underlined by regulatory authority to establish a baseline of performance is the best way to provide certainty and stability to companies that wish to take advantage and benefit from carbon emissions reductions. It is clear, then, that smart companies will be supporting a federal approach that includes greenhouse gas emissions within the Clean Air Act.