EPA’s Clean Air Interstate Rule

In July, a major air pollution regulation was overturned by a federal court of appeals. Environmental regulations are always the subject of lawsuits, but this time the outcome shocked everyone when the EPA rule was “vacated” by the court. Because of the health and economic consequences of the court decision, federal and state policymakers in both parties are worried.

Known as the Clean Air Interstate Rule (CAIR), the regulation would have required power plants in 28 states and DC to achieve dramatic reductions in air pollutants that contribute to unhealthy levels of soot and smog. Congress, the White House, states, industry, and most environmental organizations all want Congress to act quickly to reinstate part or all of CAIR by passing legislation. But a quick fix is far from certain because there are different views about the details of a “fix” and Congress is set to adjourn at the end of September.

CAIR was issued by the U.S. Environmental Protection Agency (EPA) in March, 2005. The rule was already being implemented by states and power plant owners when the court made its decision. CAIR would have required power plants in the eastern U.S. to reduce emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) by 70 percent through a “cap-and-trade” program that helps lower pollution control costs.

CAIR was estimated by EPA to cost $53 billion. Without a cap-and-trade program, achieving these emission reductions will be even more expensive. Unfortunately, the court’s key finding was that the CAIR cap-and-trade program does not comply with the wording of the Clean Air Act.

The economic impact from the court’s ruling was immediate. Overnight, the price of “allowances” – which give the holder the right to emit one ton of sulfur dioxide or nitrogen oxides – plummeted. Many regulated utilities that installed SO2 and NOx pollution control equipment worry they will not be allowed to recover the cost of these pollution control investments. Because controls are no longer required by law, it is an open question whether public utility commissions will allow the cost to be passed through to ratepayers. If they do not, then shareholders will be forced to take the loss. Since it is also costly to operate the equipment, companies may be tempted to take the equipment off-line in order to keep electricity costs down.

The health impact could also be serious. Overall, the health and environmental benefits from the rule were estimated to be worth $85 - $100 billion. For instance, EPA estimated that the rule would save 13,000 lives by 2010 and 17,000 lives by 2015. It would also prevent millions of lost work and school days, and tens of thousands of non-fatal heart attacks and hospital admissions. In addition to better health, the rule was expected to significantly improve visibility in national parks such as the Great Smoky Mountains and Shenandoah and reduce acid rain and nitrates that cause algae buildup in the Chesapeake Bay and other water bodies.

Now, many of those health and environmental benefits are in jeopardy as some companies may question whether they should delay investments in pollution control equipment until the uncertainty over CAIR is resolved somehow. Senators Carper (D-DE), Sanders (I-VT), Alexander (R-TN) and Gregg (R-NH) sent a letter to the Edison Electric Institute to encourage its member companies to install and operate pollution control equipment. But without a clear legal requirement, companies may find it difficult to spend hundreds of millions of dollars and ask their shareholders to assume such a large financial risk.

Because CAIR is in limbo, it will be difficult, perhaps impossible, for states to meet EPA’s clean air deadlines for smog and soot if the issue isn’t fixed this month. Every state is required to submit a plan to EPA demonstrating how they will meet the deadlines. But all of the plans the states submitted are based on the emission reductions expected because of CAIR. Revising their plans will take time that the states do not have. Without CAIR, it is doubtful that some states will be able to meet the standards in time. Yet states that miss these deadlines will be penalized under the law.

Other air pollution efforts are threatened as well. EPA’s Clean Air Visibility Rule relied on pollution reductions required by CAIR. (This rule protects national parks from air pollution.) In addition, negotiations with Canada to curb transboundary air pollution were largely predicated on CAIR.

There is a broad consensus that some kind of a fix is necessary.

This could be accomplished if EPA appealed the decision and eventually won in a higher court (for example, the U.S. Supreme Court). The appeals process, however, would be time-consuming and the outcome could still be unfavorable for EPA. In addition, the rule could be rewritten by EPA to comply with the court’s decision but would lose the advantages of a cap-and-trade program. Congress also could intervene to support CAIR in some fashion.

But the obstacles to getting a fix -- especially a quick one -- are daunting.

While EPA will likely appeal the decision, it is improbable that EPA can preserve the rule in its current form. An appeal may do little more than delay the court’s order from taking effect to allow EPA time to salvage what it can of the rule. But this will also prolong the financial uncertainty and delay the health benefits of CAIR.

A legislative approach would be quicker and more effective, but it remains to be seen whether the cooperation necessary to pass legislation will occur in time.

The White House and some Members of Congress are pushing to pass a law to overturn the court’s decision, or put another way, to “codify” (write into law) the regulation. The appeal of this approach is that companies that have been making pollution control plans can continue their planning without losing too much time.

Senator Carper (D-DE) – who heads up the Senate subcommittee with jurisdiction over clean air – wants deeper cuts than CAIR across the entire country. Utilities, meanwhile, are split over some of the important details, such as the length of time CAIR should be codified in legislation. While some want to codify the near term provisions, others want the certainty of codifying the entire regulation, both its nearer and longer term provisions.

Environmental groups who tried to defend CAIR during court proceedings contend that it did not go far enough in cutting emissions over the longer term. Despite their concern, some of these groups want to guarantee the near-term health benefits of CAIR now through legislation, and fight for deeper pollution cuts later. Consistent with this view, leadership in Congress seems willing to consider a “fix” that would extend CAIR’s requirements for at least the next few years while stakeholders, policymakers and politicians wrangle over what should be done over the longer run.

It’s unusual for almost everyone to agree that a legislative fix is the best approach. We’ll know by the time Congress adjourns whether this consensus leads to real success.