Israel Catches Up

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nathan richardson is a lawyer at Resources for the Future, a Washington-based research organization, and the managing editor of its environmental-policy and economics blog, Common Resources.

Published January 21, 2014.


Listening to veteran environmentalists talk about climate change, you'll often catch a note of despair. Hyper-partisan politics and coal-industry lobbying succeeded in blocking cap-and-trade legislation back in 2010, they say, leaving the United States up a creek without a paddle.

Meanwhile, global containment is stalled – at least in part because the United States isn't providing leadership. Remaining hopes for generating momentum in this country are pinned on the states, some of which, like California, are pursuing relatively ambitious policies in the teeth of national indifference.

Some regulation experts tell a very different, if equally depressing, tale. President Obama's EPA, they say, is attempting an unprecedented power grab by using the venerable Clean Air Act to regulate greenhouse-gas emissions. The irony, they suggest, is that the inefficiency of this allegedly rigid command-and-control approach threatens another Obama administration goal – namely, full recovery from the Great Recession.

Neither view is accurate. Significant climate policy is, in fact, being made today at the federal level, using existing law. But the legal and political limits on executive discretion act as a check on rash, disruptive changes. Moreover, Clean Air Act regulation need not be (indeed, never has been) as rigid as its critics claim.

But the bang for a buck possible from regulation under the Clean Air Act is very much in doubt. That's why decisions made this year and next – above all, about how much flexibility emitters will have in responding to new mandates and how the country's armada of coal power plants is treated – will be the most significant ones that any president has ever made on climate.

That isn't to suggest that the act could, even in the best of circumstances, serve as the sole vehicle for a satisfactory climate policy over the long haul. Eventually, better means – a carbon tax or a political resurrection of cap-and-trade – will be needed to get the job done efficiently. But in the short term, there's at least an opportunity for substantial and cost-effective emissions containment.

How We Got Here

The Clean Air Act, a bipartisan response to public concerns about air pollution, was passed in 1970 and, with the help of subsequent amendments and a lot of rule-making, has served as a cornerstone of American environmental law. It has led to vast improvements in air quality and public health, making it one of the most popular and successful statutes of any kind. Moreover, the broad wording of the act has allowed the EPA to adapt to evolving scientific understanding of environmental threats and, to some extent, to evolving economic understanding of the advantages of market-based regulation.

To be sure, the law is far from perfect. It is exceedingly complex, incorporating a diverse range of programs aimed at taming different pollutants and emission sources. These programs sometimes do not work smoothly together, and legal uncertainty surrounding them has led to costly and time-consuming litigation over every key initiative under the statute. Equally to the point, it's plain that the EPA has made errors, some of them serious. But benefits to public health – and to the economy – from Clean Air Act regulation have clearly exceeded their costs, often by a wide margin.

The notion of applying the statute's regulatory tools to greenhouse gases is not new. It was first considered at the highest levels in the waning days of the Clinton administration, and was pushed by a handful of environmentalists long before that. The George W. Bush administration jettisoned the idea, arguing that carbon dioxide was not a "pollutant" in the sense envisioned by the statute, and therefore could not be regulated under it. (The Bush EPA did, however, make other valuable contributions to the evolution of Clean Air Act policy, as will become apparent later.)

In 2007, by a 5-4 vote, the Supreme Court rejected the not-a-pollutant argument Massachusetts v. EPA, arguably the most significant environmental-law decision of the past two decades. The court ruled that greenhouse gases are, indeed, pollutants for Clean Air Act purposes and that the EPA is thus obligated to determine whether they are a threat to public health or offer a good reason for not doing so. Such an "endangerment finding" would trigger regulation – initially of motor vehicles, but eventually of other sources as well.

Many EPA critics still try to reargue this case outside the courtroom, claiming (correctly) that Congress never envisioned the Clean Air Act being applied to climate change when it was passed, and (incorrectly) that this implies the statute should not be used for the purpose. While it's true Congress didn't foresee the statute being used to address emissions-driven climate change in the 1970s (or even when the act was last amended in 1990), it did expect change: the law does not just allow EPA to consider new environmental threats, but requires it to do so. In any case, Massachusetts is settled law, and the Supreme Court has repeatedly refused to reopen it. The Clean Air Act is therefore the nation's climate policy vehicle until Congress constrains or replaces it, or a very differently composed Supreme Court chooses to reverse itself.

The Bush administration made halting steps toward climate regulation before the 2008 election, including a darkly comic episode in which White House officials refused to open an email from the EPA containing proposed regulations. Instead, the administration punted, releasing an "Advance Notice of Proposed Rulemaking" – Washington-speak for "not now, maybe later." After the 2008 election, though, the Obama EPA brought the act to bear on carbon emitters, albeit in measured fashion. It made a formal endangerment finding in late 2009, then moved in 2010 and again in 2012 to sharply increase fuel-economy standards for the country's future fleet of road vehicles.

While vehicle-emissions standards are not the most cost-effective tool – because, among other reasons, better fuel economy encourages people to drive more, partly offsetting the emissions savings – they are broadly popular and will reduce emissions by a significant amount. Other rules require new factories and power plants ("stationary sources," in Clean Air Act parlance) to use the best emissions-reducing technology available when they are built, though this requirement is currently under legal challenge in a case that has reached the Supreme Court.

Most recently, EPA proposed rules that would require all new power plants to meet standards that only natural gas plants (or coal plants incorporating unproven and currently very expensive carbon-capture technology) can meet. Thus, if adopted, this rule would effectively ban new coal plants – which seems like a tectonic change until you realize that few new coal plants are being built, or even contemplated. Low natural gas prices and other environmental regulations aimed at reducing the multiple harmful health effects associated with burning coal simply make building new coal plants economically unattractive today.

For the most part, this EPA action happened quietly; while not secret, it received relatively little media coverage. Climate policy efforts in Congress received much more attention. The 2009 cap-and-trade initiative, culminating in the Waxman-Markey bill, which passed the House but failed in the Senate in 2010, is widely viewed as the high-water mark of climate policy in the United States.

With many conservatives demonizing what had begun as a bipartisan effort, cap-and-trade was banished to the political desert. An underreported aspect of the cap-and-trade bill, however, is that it would have stripped much of EPA's authority to regulate greenhouse gases under the Clean Air Act, leaving the EPA discretion only to set standards for vehicles. Since then, there have been sporadic efforts to peel away EPA's authority over climate policy without providing a substitute mechanism, but these are doomed – at least under this president.

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What Now?

Congress's failure to regulate greenhouse emissions or to bar the EPA from regulating them means that the Clean Air Act is the only viable instrument for making federal climate policy. The EPA is not, of course, immune to politics, as it works under the direction of the president. Indeed, EPA rule-making slowed dramatically in 2012, since the White House wanted to avoid controversy in an election year. The agency only resumed public moves in the wake of a June 2013 speech by President Obama in which he specifically committed EPA to the next phase of its climate program: performance standards for existing (rather than new) fossil fuel power plants. Those rules will be fleshed out this summer, with states and EPA working together on final standards over the next two years.

It makes sense to write performance standards for the electric power industry first. Electricity generation accounts for a larger share of U.S. emissions (about 40 percent) than any other sector. Moreover, unlike transportation, where the average vehicle's shelf life is 10 to 20 years, power plants last a very long time. That means that emissions cuts from existing sources are critical if emissions are to decline in the short-to-medium term – which most climate scientists agree is necessary in order to prevent dangerous climate change. Then, too, most analysts believe the lowest-cost significant emissions reduction opportunities lie in the electric power sector.

That means that the coming existing-source standards are not just the keystone of EPA's Clean Air Act agenda, but of the nation's near-term climate policy. The decisions made by the administration – and the states, which will play a major role – will determine whether the country can make substantial progress in cutting carbon emissions, and, if so, at what cost.

It's not an oversimplification to say that this is ultimately a story about coal, and coal alone. There are two reasons: coal is exceptionally dirty in terms of greenhouse emissions, and the United States burns a lot of it. In 2012, coal accounted for about 74 percent of emissions from the power sector, but only 37 percent of electricity generation. There may well be ways to improve efficiency at coal plants through a variety of technical fixes, perhaps enough to achieve a five percent cut in emissions. That's important, but not sufficient to make a serious dent in the country's total emissions. To do more, regulation would have to encourage shifts to cleaner fuel – most notably natural gas – or encourage energy efficiency at the user end.

A major shift away from coal is already underway in the United States. Coal's current 37 percent share in power generation is down from 49 percent just five years ago. A bit of that is due to rapid expansion of wind-generation capacity. But the lion's share is explained by shifts to natural gas – often in plants that can switch back and forth between coal and gas.

That shift has been driven by the sharp decline in gas prices (largely a result of the fracking boom) and by environmental regulations aimed at curbing other pollutants associated with coal, including mercury and smog-generating sulfur and nitrogen oxides. This "coal-gas margin" therefore appears quite fragile: further regulatory pressure would likely lead to additional movement away from coal and toward gas – at least if gas prices do not increase significantly – and, to a lesser extent, toward renewable sources like solar and wind power.

In any event, many argue that the cheapest source of emissions cuts from the power sector lie elsewhere, in using electricity more efficiently. The magnitude of the opportunity is a matter of debate, as is the ability of incentives to convince consumers to use technologies that are cost-effective, without further inducement. But surely, some is ripe fruit left to be harvested.

Using the Clean Air Act for climate policy will not destroy the American economy, and if, over time, it destroys the American coal industry, it will not have acted alone.
Those Devilish Details

For regulation to take advantage of the ostensibly low-cost opportunities for emissions reduction – the coal/gas margin and energy efficiency – it must be flexible. Traditional command-and-control regulation (for example, use this fuel or that technology) cannot do the job well. President Obama recognized this, calling specifically for flexible regulation in his speech last June.

EPA's critics are quick to claim that the Clean Air Act is not up to the task, that it is a regulatory dinosaur unable to adapt to new challenges.

As with dinosaurs, however, this reputation is undeserved. While it is possible to find examples of inefficient and ill-designed Clean Air Act programs, the largest and most important have been very successful by most any definition. Benefits have usually greatly exceeded costs, and – particularly since the act was amended in 1990 – programs have been relatively flexible, allowing various forms of trading in which emitters can either cut their own emissions where it is cost-effective or pay others to cut theirs.

The design of greenhouse-gas standards for existing sources is likely to continue this trend, and may in fact prove to be the most flexible Clean Air Act program to date.

There are a few reasons for this.

First, the part of the Clean Air Act on which standards depend, Section 111(d), is relatively short and, unlike other parts of the act, leaves much room for interpretation and discretion. It has only very rarely been used, so there is almost no legal precedent, and it is impossible to draw firm conclusions about it.

Courts will ultimately decide what its limits are. However, almost all legal experts agree that there is at least some room for flexible regulation, including regulation of emissions trading. In fact, the best arguments in favor of such an interpretation were made by the Bush EPA in 2005, when it attempted to use that part of the act to create a nationwide cap-and-trade program for mercury emissions. While that effort was rejected by the courts, they ruled on unrelated grounds; the underlying legal case for flexibility is alive and well. EPA will not again attempt to create a nationwide cap-and-trade program, largely for political reasons. But more modest approaches that include some form of trading are likely.

Second, states will play a key role, and individual ones will no doubt diverge in their regulatory approaches. This variation allows the structure of the policy to be sensitive to local conditions and to factor in the impact of actions that the states have already taken, like California's cap-and-trade program or, perhaps, the renewable-performance standards in place in many states.

Third, this part of the act specifically allows consideration of the cost side of the equation. Many other Clean Air Act programs require regulations to target specific environmental goals, regardless of cost. Here, EPA and the states can design regulations that weigh costs against benefits. Reducing costs per unit of emissions reductions, as flexible regulation can do, in effect makes the pie bigger; you can get more emissions cuts for the same cost, or the same emissions cuts at a lower cost.

Of course, deciding the balance between the gains from flexibility between greater emissions reductions and lower compliance costs is tricky, and will undoubtedly be the source of controversy. But critics' claims that EPA regulation will be excessively costly and cause great damage to the economy simply aren't credible.

Even fears that regulation will impose excessive costs on a few small players, like operators of old, small coal plants, are unlikely to be borne out. The act allows states to consider the "remaining useful life" of plants above and beyond the overall costs of the program. While carve-outs for such special cases are likely to make programs less cost-effective overall, they may be justified as a matter of equity or political expediency.

Flexibility has a dramatic impact on cost-effectiveness. A study by Resources for the Future found that, in a relatively simple trading scheme, allowing trading between coal and gas plants could achieve emissions reductions similar to those a policy targeting coal alone could achieve at about 30 percent lower overall cost, or could manage more than triple the emissions reductions at a similar marginal cost. Moreover, allowing such trading would substantially increase overall environmental benefits once reductions in other pollutants from coal are taken into account. These differences are driven by the ability of a trading program to access the low-cost, high-reward opportunities at the coal-gas margin.

Also, the Natural Resources Defense Council, a nonprofit environmental group, estimates that allowing plants to get credit for energy efficiency programs downstream could achieve a 26 percent reduction in emissions from the power sector by 2020 (relative to 2005 levels), generating $26 billion to $60 billion in benefits, at a cost of just $4 billion. These numbers depend, of course, on the underlying energy efficiency programs – for example, utility subsidies for replacing incandescent bulbs with LEDs. If these programs are deemed to be legally incompatible with the act or are not as effective or cheap as the analysis assumes, then reductions will have to come from elsewhere, and may be more costly.

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Getting From Here to There

Just before climate talks in Copenhagen in 2009, President Obama set a goal of a 17 percent reduction in U.S. emissions by 2020, relative to 2005. Even without significant policy moves, the country has made some progress toward that objective, thanks to lower natural gas prices, energy efficiency gains and slow recovery from the recession. EPA's tighter vehicle fuel economy standards will also make a modest contribution as the fleet turns over. Emissions cuts from existing fossil-fuel power plants could yield most or all of the remaining reductions necessary to meet the 17 percent target – but only if the regulations are flexible enough to drive a lot of fuel-switching or end-user energy efficiency at relatively low cost.

The Clean Air Act therefore should make it possible to achieve the country's short- to medium-term climate-policy goals, even in the absence of new legislation. There will certainly be obstacles: important parts of the act are untested legally and litigation over new rules is certain. But an overabundance of caution on the part of the EPA would lead to inflexible, unambitious programs that achieved little. And while lawsuits will be costly, they are unlikely to delay implementation, since courts rarely stay regulations during litigation.

The states' role here is also crucial. Some of them will likely strengthen their existing climate policies, create new ones, or join existing emissions-trading blocs like the Regional Greenhouse Gas Initiative in the Northeast. But others – those in the thrall of coal interests or simply inclined to deny climate change – will use litigation and stalling tactics to avoid action. And at this point, it's hard to say how effective they will be in undermining the national climate-change policy.

Looking past 2020, the Clean Air Act will become a less-effective tool. Relatively obvious low-cost opportunities for emissions reduction, like shifting from coal to gas and, possibly, energy-efficiency investments, will be tapped out. Only less obvious opportunities, often opened by new technologies, will remain. Clean Air Act regulators are not well equipped to keep pace with these changes, and the law makes it difficult or impossible to create market-trading programs that bridge sectors and harness the power of markets to identify them. Moving the country away from fossil energy and toward renewables, which will eventually become necessary, will also be difficult or impossible without new policy tools.

Note, moreover, that Clean Air Act programs cannot generate revenue, at least at the federal level, making it impossible to provide funding to clean-energy R&D or subsidies for energy infrastructure like fueling stations for electric vehicles, or to use climate policy to play a role in addressing the nation's larger fiscal issues, as advocates claim a carbon tax could. Over the long term, then, a market-based approach in the form of a carbon tax or cap-and-trade program is the only realistic way to make the transition to a low-carbon environment compatible with ongoing economic growth – though it is worth keeping in mind that interest-group politics would almost certainly guarantee that such a policy would not live up to economists' blackboard ideals.

Indeed, the stalemate over climate legislation has ironically left us with a way to contain greenhouse gases that has some advantages over new law, at least for the time being. For example, if program costs are lower than expected and climate risks more severe, emissions standards could be tightened. Try that with a policy made by 535 legislators who spend more time raising campaign funds than contemplating public policy.

But back to the present and the near future. Even if it is designed poorly or undermined by litigation, climate regulation under the Clean Air Act cannot be the costly disaster predicted by its critics. Using the Clean Air Act for climate policy will not destroy the American economy, and if, over time, it destroys the American coal industry, it will not have acted alone. Cheap natural gas and environmental regulation that has nothing to do with climate (and that carries large health benefits) have already dealt coal a serious, and possibly mortal, blow.

On the contrary, there's every reason to believe that well-designed and, above all, flexible Clean Air Act climate regulation can deliver a lot of emissions cuts for relatively little money and economic disruption. The president's ambitious emissions goals and his call for flexibility, along with the important role for the states, warrant optimism about smart policy design. There is no other approach to climate policy available today or, given political realities, in the near future, with similar potential.