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Thursday, July 08, 2010

Will the New Transport Rule Gut Cap and Trade?

Reblogging John Whitehead'a reblog of RFF:

It's like smaller hot dogs at lower prices, Environmental Economics:

When Sen. Lindsey Graham recently declared cap and trade “dead” he may have been more right than he realized. He was referring to the political prospects for carbon pricing in this Congress, but cap and trade has been the tool of choice for limiting emissions of other pollutants—like sulfur dioxide and nitrous oxides—for almost 20 years. The EPA proposed a rule yesterday that could sharply limit the role of trading in markets for those pollutants.

The proposed “transport rule” would replace the existing Clean Air Interstate Rule (CAIR). Both are aimed at reducing emissions that affect air quality not locally, but in downwind area (hence the “transport” and “interstate” in their names). CAIR was issued under the Bush administration but comprehensively rejected by the D.C. Circuit Court (in North Carolina v. EPA, 531 F.3d 896). CAIR has been in effect since the ruling, but as a zombie regulation. The EPA needs to replace it with a new rule that fits the court’s view of the agency’s powers under the Clean Air Act. The Transport Rule released yesterday is the agency’s attempt to do this. The rule is massive—1,300 pages—and reads like a long-form response to the court’s opinion.

So what does this have to do with cap and trade? Among the court’s major objections to CAIR was the inability of the EPA to guarantee each state would reduce its emissions sufficiently to prevent interference with air quality downwind. The emissions trading systems set up by CAIR was to reduce emissions overall, and prevent problematic transport of pollution generally but the EPA couldn’t promise, as the court read the statute to require, that each and every state would reduce emissions sufficiently. The reason for this is interstate trading. CAIR would have allowed emissions sources in different states to trade with each other. This has obvious benefits, as a bigger market is generally more efficient, but it is impossible to know in advance where the emissions reductions will occur. If it is unexpectedly cheap to reduce NOx emissions in Ohio and unexpectedly expensive in Kentucky, trading will happen and Ohio will make deeper cuts. Knowing in advance where reductions will be cheaper is hard (this lack of information is the reason for having a market in the first place). Generally, this lack of foreknowledge is not a problem, since the overall cost of emissions reductions is lower. Under the court’s reading of the Clean Air Act, however, the agency has to know the outcome in advance, at least at the state level.

The transport rule responds by largely eliminating interstate trading. Intrastate trading is still allowed, but the rule would only allow interstate trading at the margin—within relatively narrow “variability limits.” The EPA seems to be doubtful that even this small amount of interstate trading will be permitted by the courts. The new rule lists alternative options that do not include interstate trading at all. 

It looks like we’ll be lucky if the final version of the new rule includes any interstate trading at all. Without interstate trading, the emissions reductions achieved by the new rule will be more expensive than they otherwise would be – possibly a lot more (I look forward to analysis from economists on exactly how much). Since the transport rule would replace both of the major cap-and-trade programs currently in operation in the U.S.—the Title IV SO2 program and the NOx SIP Call—this would mean an end to interstate emissions trading, at least for the 31 states affected by the new rule. It’s only a slight overstatement to say that cap and trade as we now know it would end.

via www.rff.org

I'm don't fully understand the reasoning behind the D.C. Circuit Court ruling. Can anyone help? Can Congress fix this with new legislation? Actually, is there any hope left for meaningful legislation? Spending on R&D to encourage new technologies seems quite likely, but meaningful measures to reduce carbon emissions do not. I thought there was a chance at one time, but I'm more pessimistic now.

    Posted by on Thursday, July 8, 2010 at 01:04 AM in Economics, Environment | Permalink  Comments (20)


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