Playing without aces: offsets and the limits of flexibility under Clean Air Act climate policy.

Author:Richardson, Nathan
  1. INTRODUCTION II. EPA'S CLIMATE REGULATIONS A. The Clean Air Act and Carbon B. The Knowable Pathway III. WHAT FLEXIBILITY MEANS A. Flexibility, Benefits, and Costs B. Types of Flexibility C. Analyzing Flexibility Types IV. EXTENDED FLEXIBILITY UNDER SECTION 111 OF THE CLEAN AIR ACT A. Type 1 Flexibility: Other Sources in the Same Category 1. Flexibility: The "Best System"? 2. Counterarguments to Type 1 Flexibility as the "Best System" 3. States Independent Powers 4. The Scope of Type 1 Flexibility B. Type 2 Flexibility: Other Regulated Source Categories C. Type 3 Flexibility: Unregulated Source Categories 1. Converting Type 3 into Type 2 Flexibility 2. Pure Type 3 Flexibility a. Section 111 Does Not Rule Type 3 Flexibility Out--or In b. Parallels Elsewhere in the Clean Air Act c. The "Best System and Type 3 Flexibility d. Type 3 Flexibility and States' Independent Powers 3. The Case for Type 3 Flexibility D. Type 4 Flexibility: Extra-Clean Air Act Sources 1. International Sources 2. Nonstationary Sources 3. Barriers to Type 4 Flexibility E. Type 5 Flexibility: Sequestration F. Biomass--Another Option? G. Summary V. THE ROLE OF STATES A. Environmental Federalism and States' Freedom To Act B. Constitutional Issues with State Programs C. Leakage D. Extended Flexibility at the State Level VI. CONCLUSIONS AND IMPLICATIONS A. Legal Limits, Political Pressure, and EPA B. Flexibility and Stringency C. States D. Implications of Limited Flexibility E. Further Research I. INTRODUCTION

    Since the Supreme Court's 2007 Massachusetts v. US. Environmental Protection Agency (Massachusetts v. EPA) (1) decision and the 2009-2010 failure of cap-and-trade in Congress, the Environmental Protection Agency (EPA)--under the authority of the Clean Air Act (CAA) (2)--has become the sole vehicle for federal climate policy. But that authority is limited: EPA's freedom to design and implement climate policy is constrained by the scope of its powers under the CAA. (3) Although critics' claims that regulating greenhouse gases (GHGs) under the CAA will be a "train wreck" are overblown, (4) CAA climate policy does require compromises. But which ones? This Article tries to answer a key part of that question, specifically: Can EPA allow emissions trading, offsets, and other flexibility mechanisms for the power plants, refineries, and other existing "stationary sources" whose carbon emissions the agency will soon regulate under the CAA?

    EPA's climate policy program under the CAA may have reached the end of its beginning, due to the recent proposal of the first regulations limiting GHG emissions from the biggest class of emitters: existing fossil fuel power plants. (5) Limits for existing fossil power plants, and for both new and existing sources in other sectors will follow. (6) Future existing-source regulations come via a rarely used and relatively poorly understood part of the CAA: performance standards under section 111(d).

    Can these performance standards be flexible, allowing emitters to trade, or does the CAA require EPA to issue rigid, one-size-fits-all standards? To put it differently, does section 111(d) give EPA the authority to implement a modern, market-based policy for GHGs? The answer is critically important for both the economic costs and the environmental benefits of the program. (7) In the most basic sense, the answer appears to be yes. Independent legal observers and EPA have both concluded that section 111 does allow EPA to give emitters "compliance flexibility" up to and possibly including the authority to impose a cap-and-trade system across the entire regulated sector. (8)

    But this is only part of the answer. There is more to flexibility than the ability to trade with other similar emitters, power plant to power plant. Most comprehensive climate policies, both actual and proposed, allow trading with other kinds of emitters, maybe even those in other jurisdictions. (9) They also allow regulated emitters to buy offsets from those that are not covered, or from projects that cut atmospheric carbon in other ways, such as by preserving or planting forests. (10) These forms of flexibility matter: expanding emissions markets by adding dissimilar emitters increases the opportunities for low-cost emissions cuts, and offsets may be the cheapest carbon-cutting opportunity of all. (11)

    This Article attempts to determine whether EPA can take advantage of any of these "extended flexibility" opportunities under section 111. For some opportunities, the answer appears to be yes: EPA probably can, for example, allow trading between different kinds of emitters ("source categories"). But for most types of extended flexibility, unfortunately, significant legal barriers exist. For international forest offsets--probably the most cost-effective option--these barriers appear insurmountable.

    Part II of this Article discusses the basics of EPA's CAA regulations for GHGs, while Part M defines and discusses the different types of flexibility available under climate policy. Part IV forms the core of the Article, analyzing the legal compatibility of CAA and section 111 regulation with these flexibility mechanisms. Part V then discusses implications for states, some of which have independent climate policies. Conclusions are presented in Part VI.


    Before discussing the scope of flexibility under EPA's section 111 regulations, it is important to at least briefly describe where the agency is, how it got there, and the legal foundations of its program. In short, as of late 2011, EPA was well on its way to implementing a broad set of policies aimed at reducing GHG emissions in the U.S. with its authority under the existing CAA. (12) On April 13, 2012, the agency formally proposed the much-anticipated carbon emission performance standards for new power plants, but it has not yet detailed its plans for existing sources, the primary subject of this paper. (13)

    1. The Clean Air Act and Carbon

      Two events led to EPA's predominant role in national climate policy. In 2007, the Supreme Court concluded in Massachusetts v. EPA that carbon is a pollutant subject to regulation under the CAA. (14) In 2009, it appeared possible that Congress would pass legislation creating a new national climate policy and preempt the existing CAA, most likely in the form of economy-wide cap-and-trade--but these efforts ultimately failed in the Senate. (15) These two developments have together left the regulatory burden squarely on EPA's shoulders.

      Under the Bush administration after Massachusetts v. EPA, the agency investigated pathways for GHG regulation, issuing a lengthy public analysis, (16) but it did not move to actually regulate any GHG emissions sources. Under the Obama administration, EPA has moved relatively aggressively to use its CAA authority. (17) The agency has made a formal endangerment finding for GHGs (enabling their regulation under the CAA), (18) strengthened regulation of tailpipe emissions from vehicles, (19) included GHGs in the permitting process for large new or modified emitters, (20) and, as noted above, proposed GHG performance standards for most new fossil fuel power plants.

    2. The Knowable Pathway

      Until recently, EPA's plan for regulating GHG emissions from existing stationary sources--the power plants and industrial facilities responsible for the majority of U.S. emissions--was completely unknown. In December 2010, EPA revealed its general plan: in a settlement agreement with states and environmental groups that had sued the agency shortly after Massachusetts v. EPA, the agency announced that it would use a specific tool under the CAA--performance standards under section 111--to limit stationary-source emissions. (21) Still, much remains unclear, even after the agency's April 2012 proposal of standards for new sources. Given the magnitude of the emissions at stake, EPA's program for these sources will probably be the most important part of its GHG regulatory program.

      As noted above, EPA's choice of regulatory program for new and existing stationary sources appears to be performance standards. (22) Under section 111 of the CAA, the agency first defines categories of similar emitting sources ("source categories"). (23) For new sources under section 111Co), the agency sets a performance standard based on the "best system of emission reduction." (24) These new sources are then required to meet the level of emissions (or some other measure, such as efficiency) set by the standard, (25) though they are not required to use any specific technology to do so. (26) It is this set of standards that the agency proposed in April 2012, setting a stringent 1,000 lbs C[O.sub.2]/MWh standard that effectively bans construction of new coal plants, at least without carbon-capture-and-storage technology.

      The process for existing sources under section 111(d) is similar, but for these sources EPA only sets guidelines, whereas states are charged with setting and implementing the standards--subject to EPA review. (27) In practice, the process is likely to be collaborative, with EPA possibly issuing a model rule that states may adopt. (28) Traditionally, the section 111(b) New Source Performance Standards (NSPS) process has been technology-driven and has applied uniformly to all new sources within each category, without much flexibility. (29) However, section 111(d), which addresses performance standards for existing sources--which I will call Existing Source Performance Standards (ESPS)--has rarely been used at all. (30)


    Much remains unclear about these future ESPS. Some of the questions are procedural: Will other categories of sources eventually be covered? How much latitude will EPA give to states in implementing ESPS? And some are substantive: How stringent will the performance standards be?

    1. Flexibility, Benefits, and Costs

      But possibly more important than stringency is flexibility: How much compliance flexibility...

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