U.S. EPA released is long awaited replacement rule for the Clean Air Interstate Rule (CAIR) which was the controversial cap and trade program for coal-fired utilities. In December of 2008, the U.S. Court of Appeals for the D.C. Circuit ruled CAIR exceeded EPA's regulatory authority and ordered the Agency to develop an new proposal.
Originally, the Court planned on throwing out the CAIR rule entirely. However, it was embedded in so many other State air pollution control plans, the Court allowed CAIR to remain in place temporarily while EPA worked to finalize the replacement rule proposed today.
EPA is calling its new proposal the “Transport Rule." It represents a significant revision from CAIR for a number of reasons including:
- Steeper reductions of NOx and SO2 than proposed under CAIR
- Virtual elimination of the cap and trade mechanism, by assigning each State a firm emission budget which it may not exceed
- Accelerating the time frame for reductions to coincide with the attainment deadlines faced by the States
The Transport Rule proposes a hard 2014 deadline for meeting reduction requirements- it appears the ability to bank allowances ("pollution permits") will no longer be permitted. Overall, the rule would reduce power plant emissions of sulfur dioxide (SO2) by 71 percent over 2005 levels and nitrogen oxides (NOx) by 52 percent. SO2 and NOx react in the atmosphere to form fine particle pollution and ground-level ozone (smog).
The agency puts the expected annual cost of compliance to power plant operators at $2.8 billion in 2014. However, elimination of original cap & trade program set forth in CAIR can only mean significantly increased compliance costs. The real benefit of cap & trade is to utilized market mechanisms to achieve more cost effective emission reductions.
State Budgets Based On "Contribution" to Downwind Air Quality Problems
The Court's big issue with CAIR, was EPA inability to ensure that the rule would eliminate each State's contribution to downwind air quality issues. The Court pointed out that all the utilities in any given State, could in theory, meet their compliance obligations by buying allowances and electing not to install pollution controls.
While this is in theory true, that is the point of a cap & trade program designed to utilize cost effective reductions. The power plants that can reduce pollution in the most cost effective manner will aggressively reduce emissions and sell excess reductions to those plants facing higher compliance costs.
A quick skim of the 1,300 page rule suggests the absence of a real market mechanism to achieve reductions. Sure EPA says interstate and intrastate trading can remain under its preferred option. However, States now have imposed hard emission budgets.
Perhaps this will mean limited intrastate trading, but far less interstate trading. With a smaller market to trade allowances, EPA makes it more difficult to leverage cost effective reductions.
Of course, EPA had to address the legal flaws identified by the Court. The real solution was to get better authority from Congress. Otherwise, we are left with a shell of a cap & trade program resulting in higher utility compliance costs (aka as higher utility bills).
EPA will take public comment on the proposal for 60 days after the rule is published in the Federal Register. The agency also will hold public hearings. Dates and locations for the hearings will be announced shortly.