Interstate Air Pollution Control Using Economic-Based Air Pollution Controls

AuthorArnold W. Reitze, Jr.
Page 115
Chapter 4:
Interstate Air Pollution Control Using
Economic-Based Air Pollution Controls
§1. Emissions Trading
In the 1960s, when Congress debated how to best
control pollution, economists argued for the use
of euent or emissions taxes.1 eir ba sic argu-
ment, which continues today, was that freely trad-
able rights to pollute induce rational actors to
reduce pollution at the least possible cost. ere are
numerous advantages to an economic approach.
A desired level of environmental quality can be
achieved at a cost lower than that imposed by a
uniform standard. An economic-based system is
exible and gives polluters a continuing incentive
to reduce pollution until the marginal cost of con-
trol equa ls the charge imposed.2 e incentive to
delay controlling pollution is lower than occurs in
a regulatory system. Polluters can reduce pollution
discharges in any way they wish, and they have an
incentive to innovate and to adopt new methods.
Moreover, the use of economic approaches may
allow the market to reect more accurately the cost
to society of producing or u sing a product.3 How-
ever, economic approaches can be manipulated in
the politica l process to transfer money to a group
or groups with politica l clout and produce little or
no environmental benet.
When federal environmental laws bega n to be
enacted, the United States chose a traditional regu-
latory approach, known as “command and control.
1. See generally O C. H  A V. K, Q-
   E  (); E Q
  G E  (Henry Jarrett ed., 1966); T
E  A P (H. Wolozin ed., 1966); G
H. H, D-M  A P C
 ().
2. See generally Byron Swift, U.S. Emissions Trading: Myths, Realities,
and Opportunities , N. R  E’ , summer 2005,
at 3.
3. See generally E  E P (T.H.
Tietenberg ed., 1994).
e dominance of law yers in Congress may have
helped to ensure that traditional legal approaches
were selected; however, the disadvantages of eu-
ent/emissions cha rges also played a role. Charges
may be based on the harm to the environment
from a discharge, but if charges are too low to
protect the environment, they become a license to
pollute. Political pressure to keep charges low may
result in charges being imposed that are insucient
to stimulate the use of new or adequate controls.
For a pollutant emitted from many industries and
sources, it is dicult to set a charge that accurately
reects the marginal costs of the control needed to
protect the environment from each industrial clas-
sication or even from sources within an industrial
class. Determining the appropriate charge for pol-
lutants that are dicu lt to measure or that are cre-
ated by chemical reactions in the environment after
the pollutant is released also is d icult. Moreover,
a viable emissions trading program requires accu-
rate records of pollutant release s to be maintained
to prevent cheating by either buyers or sellers; emis-
sions reductions must be real and veriable.
Other factors that helped prevent proponents of
an economic approach from obtaining the neces-
sary legislation included, t he lack of eective con-
trol technology for many pollutants in the 1960s,
the lack of quality monitoring instruments, and the
inability to eciently handle the data needed to
make an emissions charge system work. Neverthe-
less, there was a continuing eort by proponents of
an economic approach to implement an emissions/
euent charge program.
President Richard M. Nixon proposed a sulfur
tax in “the president’s 1971 environmental pro-
gram.” e program would have imposed a ta x on
each pound of sulfur in fuel used with rebates for
Page 116 Air Pollution Control and Climate Change Mitigation Law
successful emissions capture.4 However, no Repub-
lican would introduce t he Administration’s tax
sulfur proposal as a bill.5 In 1972, Sen. William
Proxmire (D-Wis.) a nd Rep. Les Aspin (D-Wis.)
introduced bills that would have imposed a charge
on sulfur that would rise to 20 cents a pound.6
ese bills were the rst seriously debated, broadly
applicable, economic-based proposals to control
pollution at the federal level. e selection of sulfur
as the rst ta rget of control was an obvious choice.
Sulfur can be measured in fuel prior to combus-
tion; stack monitoring is not necessary. e tech-
nology for sulfur control was more eective in the
early 1970s than the technology for the control of
most pollutants. e numbers of sources needed
to be controlled to signicantly reduce emissions
of sulfur was much smaller than the number of
sources that would have had to be controlled to sig-
nicantly reduce other air pollutants that are emit-
ted in large quantities from many sources. As the
movement for economic-based controls gathered
support, the basis for charges shifted from charges
based on the harm to the environment to a system
using charges based on the cost of control.
§2. Emissions Trading Under the
Clean Air Act
Two types of em issions trading have been utilized
by the Clean Air Act (CAA). e rst type involves
emission reduction credits (ERCs) being avail-
able for sources with emissions that are lower tha n
legally required. is is an “open market” system.
ese ERC’s can be used or traded as described
below. e second ty pe of emissions trading is a
“cap-and-trade” program in which a category of
sources has an overall limit on emissions, with an
initial allocation of emissions allowances to each
source. is is often called a “closed market” sys-
tem. e total emissions allowed by a ll allowances
must equal to the cap. e “cap-and-trade” pro-
grams are described in det ail below.
e buying and selling of ERCs and allowances
has become part of the air pollution control eort
aimed at major stationary sources. Trades usually
are local trades bet ween sources in the same air
quality control region (AQCR). Trading programs,
4. Sulfur Tax: A Break for the Smelters, W S. J., Feb. 17, 1972,
at 8.
5. Sulfur Tax Lacks GOP Sponsors, W. P, July 6, 1972, at
6. S. 3057, 92d Cong. (1972) and H.R. 10890, 92d Cong. (1972).
based on state law, vary widely in complexity and
in utilization. ere are nationally applicable pro-
grams such as the CA A’s Subchapter IV program,
which also is discussed below. Moreover, there is an
evolving global program for trading emission cred-
its in greenhouse gases.7
Emissions trading under the CAA began with an
indirect approach based on the concept of a “bub-
ble”—an imaginar y dome placed over a pollut-
ing plant or other facility having many individual
sources of air pollution emissions. Instead of regu-
lating emissions from each individual smokestack,
pipe, or fugitive emission source, only the total pol-
lution of the plant is regulated—as if the pollution
were coming from a single imaginary outlet in the
bubble. e bubble concept is attractive to industry
because of the substantially dierent costs of con-
trolling a given quantity of a ir pollution emissions
from various sources within each plant or facil-
ity. Other concepts have evolved from the bubble
concept, including osets, netting, and banking.
ese concepts are discussed below.8
EPA’s state implementation plan (SIP) program
is arguably an implicit approval of the bubble con-
cept. With the SIP, an emission limit for each cri-
teria pollutant or its precursor is established for
an AQCR. e SIP is used to a llocate the regions
emission budget. e states also used the bubble
concept when developing SIP revisions. e U.S.
Environmental Protection Agency (EPA) encour-
ages t his approach in order to place the economic
burden of control where the margina l cost of con-
trol is low and to allow the use of a more economi-
cally ecient mix of pollution controls.
e bubble concept, however, primarily focuses
on the private sector’s use of internal and external
trades to keep overa ll emissions at a legally accept-
able level. e use of a bubble became important
when EPA announced its Emission Oset Interpre-
tive Ruling.9 e 1977 CAA Amendments adopted
EPA’s prevention of signicant deterioration (PSD)
and nonattainment policies, setting the stage for
7. Richard B. Stewart et al, Designing an International Greenhouse
Gas Emissions Trading System, N. R  E’, Winter
2001, at 160. e Pew Center on Global Climate Change has
extensive publications on this subject. ey are available at www. (last visited Dec. 10, 2008).
8. For information concerning their evolution, see U.S. Environ-
mental Protection Agency (EPA), Emissions Trading Policy
Statement, 51 Fed. Reg. 43814 (Dec. 4, 1986). See also Robert
W. Hahn & Gordon L. Hester, Marketable Permits: Lessons for
eory and Practice, 16 E L.Q. 361 (1989).
9. 41 Fed. Reg. 55524-31 (Dec. 21, 1976).

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