Tuesday, October 9, 2012

Setting the Record Straight on the Acid Rain Program

A lot has been written about the Acid Rain Program (ARP), but much more of it has been to claim that it (and by inference, cap-and-trade regulation) was a huge success, and much less of it has focused on its weaknesses or failures.  Here are two points of weakness that haven’t gotten the attention they deserve:

1) Legal Controversy. EPA’s efforts over the last several years to segue the ARP into a program that can effectively address current air pollution reduction goals have spawned a huge legal mess. First in 2008, the DC Circuit rejected the Bush EPA’s Clean Air Interstate Rule (CAIR), which would have imposed somewhat stricter caps on power plant emissions than the outdated, overly generous ARP caps.  The DC Circuit essentially held that the caps imposed on states were not sufficiently related to the authorizing statutory provision, namely the “good neighbor” provision of the Clean Air Act (Section 110) (North Carolina v. EPA).  EPA went back to work, and the Obama EPA promulgated the Cross-State Air Pollution Rule in 2011, another cap-and-trade program for power plants with stricter caps.  In August, the DC Circuit rejected that one too, disapproving of how the EPA had distributed the burden of making emissions reduction to states (EME Homer City Generation v. EPA).  Last week, the EPA petitioned the DC Circuit for en banc review. 

2) The Real Explanation for SO2 Reductions. Empirical studies have now shown that economic factors rather than the ARP were primarily responsible for the fuel-switching from high-sulfur coal to low-sulfur coal that is known to have been responsible most of the SO2 emissions reductions of the late 1990s.  My favorite source on this point is Gerking & Hamilton, What Explains the Increased Utilization of Powder River Basin [PRB] Coal in Electric Power Generation?  Amer. J. Agr. Econ 90(4) (November 2008): 933-950.  The authors show that between 1985 and 2000, the average real price of low-sulfur PRB coal delivered to midwestern power plants fell from $13.97/ton to $5.38/ton. They conclude that “much of the increased utilization of PRB low-sulfur coal was due to the operation of market forces rather than to changes in environmental policy” (949). In light of how much credit the ARP has received for those emissions reduction, this is a finding that deserves much more attention than it has received. 

What does all of this say about cap and trade as a regulatory approach?  First, it undermines the sometimes-heard claim that cap-and-trade regulation is somehow less susceptible to being embroiled in legal controversy than direct regulation. Also, EPA’s successive failures in court make it hard to imagine that the EPA would try to implement a cap-and-trade program for greenhouse gases without direct statutory authorization.  Even more importantly, it should make us question the claim that the ARP demonstrates that cap-and-trade systems can achieve significant emissions reductions.  The ARP wasn’t primarily responsible for those significant emissions reductions, so it doesn't prove that point. 

- Lesley McAllister


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