Monday, April 27, 2009

Climate Change and the Clean Air Act As Is

Last week, the Administration announced its much anticipated “endangerment” finding on greenhouse gases and the Clean Air Act (CAA). Quite cleverly, the finding was a preliminary step only: it concluded that six major GHGs combine to function as “air pollution” that may be “reasonably anticipated to endanger public health and welfare” under Title II of the Act (on mobile sources). This had the virtue (to EPA) of protecting EPA’s discretion to treat different types of GHG sources differently.

So just out from NYU yesterday: a roadmap for regulating four of the six GHGs under the CAA as currently structured (assuming the finding is finalized as planned). The NYU report outlines (1) the legal arguments that the CAA fully authorizes EPA to create a “cap-and-trade” program for the six major GHGs, (2) the way that such a program could operate at or near an “economy wide” scale, and finally (3) that standard cost/benefit analyses would support EPA moving forward with such a program quickly.

There is much to admire in the report. It suggests plausible (and even creative) paths forward assuming no Congressional action on climate change for the foreseeable future. It offers the first “cover-to-cover” assessment of the options available to EPA under the CAA of which I’m aware (even EPA’s own “Advanced Notice of Proposed Rulemaking" last year wasn’t as comprehensive). These are important achievements because the negotiations in Copenhagen in December will likely stall if the U.S. doesn’t show up ready to commit to real cuts in the very near future.

But let me outline the following reasons for caution and perhaps even for insisting that Congress update the CAA itself, hastily if need be. As many have noted lately and as the NYU report makes clear, we have a very broad spectrum of GHG sources we must confront to make meaningful cuts in emissions nationwide. If/when EPA rolls out a broadly applicable cap-and-trade system pertaining to all or most of our many different kinds of polluters, the few guarantees we will have include the following: (1) the right to emit GHGs will be much more valuable to some economic actors than it will be to others; (2) some of these actors will be able to continue business-as-usual by innovating new means of doing their business while some will not be; and finally (3) any scarcities in allowable emission permits that arise will be of uncertain intensity/duration and, therefore, of unknown effect on the price of GHG emission allowances.

With these three certainties in mind, the following seems unavoidable: for cap-and-trade to spur innovation and actually harness the power of free markets, the pricing of emission allowances will have to rise to a level where they become significant factors in economic disruption of various kinds. And when that happens, it will be crucial that the nation and its leaders have actually had a hand in creating such a system. In fact, my hunch is that EPA thinks exactly this.

Put differently, without real Congressional ownership of cap-and-trade, the system that is most likely to result is one replete with precisely the sort of “safety valves” and other escape hatches planned in advance for when allowances become truly scarce that the result will be depressed emission allowance prices – something that will seriously curb their potential for real economic disruption and render cap-and-trade a distinctly “business-as-usual” approach to climate change. That’s my fear anyway.

Posted by Jamie Colburn