EPA’s Cap-and-Trade for State Pollution Risks Court Challenge

The Environmental Protection Agency’s plan to cut interstate air pollution through a cap-and-trade system may face legal challenges.

The EPA standards issued yesterday let 27 U.S. states from New York to Texas reduce power-plant emissions through trading in which companies exceeding limits can buy credits from those in other states that pollute less.

The Cross-State Air Pollution Rule replaces regulations that were issued under former President George W. Bush and rejected in 2008 by a federal court that said its trading provisions wouldn’t adequately protect communities against pollution wafting from nearby states. The new Obama administration limits may also be vulnerable, according to John Walke of the Natural Resources Defense Council.

“EPA thinks it’s mitigating the pollution risk as well as the legal risk, but none of us knows whether those risks have been adequately addressed,” Walke, clean-air director for the environmental group in Washington, said in an interview yesterday.

The legal challenge to Bush’s plan was led by North Carolina, which said its residents would be subjected to pollution from neighboring Tennessee. The U.S. Court of Appeals for the Federal Circuit in Washington rejected the trading system as unlawful.

The rules require the states to reduce power-plant emissions that lead to ground-level ozone and soot pollution crossing state lines. Photo: Saul Loeb/AFP/Getty Images Close

The rules require the states to reduce power-plant emissions that lead to ground-level... Read More


The rules require the states to reduce power-plant emissions that lead to ground-level ozone and soot pollution crossing state lines. Photo: Saul Loeb/AFP/Getty Images

The Obama administration rule applies to states in the eastern half of the U.S. and mandates the reduction of sulfur dioxide, which can lead to acid rain and soot emissions harmful to humans and ecosystems, and nitrogen oxide, a component of ground-level ozone, a main ingredient of smog.

Interstate Trading

The regulations allow polluters in each state to choose how to reduce emissions. Among the options are unlimited trading of emissions allowances between power plants within a state and interstate trading within two regional groups. Bush’s trading plan allowed unfettered trading among all states covered.

“The new rule likely will be challenged in court,” Rob Barnett, an energy analyst with Bloomberg Government, said. “EPA’s authority to regulate the emissions is firmly established, but its approach to trading could be contested.”

The EPA’s restrictions on the cap-and-trade system also may lead to limited liquidity, more volatile prices and difficulty in attracting market participants, according to Barnett.

Bush’s broader trading program “clearly provided more flexibility,” Pat Hemlepp, spokesman for Columbus, Ohio-based American Electric Power Co., one of the largest U.S. consumers of coal, said in an interview yesterday.

Cap-and-Trade’s Failure

A proposed cap-and-trade system for carbon emissions linked to climate change failed in Congress last year after protests from states and businesses. A trading program aimed at reducing so-called acid rain was established two decades ago under former President George H.W. Bush, a Republican, and won the support of utilities.

“Cap-and-trade is a time-tested tool invented by a Republican president that suddenly became demonized merely because of its association with carbon reduction,” Walke said.

The EPA’s decision to apply the new emissions rules to Texas may also be vulnerable to a court challenge, according to Christine Tezak, an energy policy analyst at Robert W. Baird & Co. in McLean, Virginia.

Including the state “may not stand up in court if challenged,” Tezak said last week in a note to clients. “We aren’t convinced that the EPA will prevail if this rule is challenged by Texas as promised.”

Texas Opposition

Texas government officials, companies and labor unions had argued against imposing the limits on sulfur-dioxide pollution, and the agency hadn’t included the state in a proposal last year.

Texas power plants emit the most nitrogen-oxide pollution in the U.S. and the second-largest amount of U.S. sulfur-dioxide emissions after Ohio, according to Vickie Patton, a lawyer with the New York-based Environmental Defense Fund.

The EPA added Texas to the states covered yesterday because “without this rule Texas power plants would contribute significantly to air pollution” elsewhere, EPA Administrator Lisa Jackson told reporters yesterday.

When asked whether the she’s worried about the new standards holding up against various legal attacks, Jackson said she’s confident the agency has fully complied with the law.

“We took great pains and went through a very transparent and open process,” she said.

$280 Billion in Benefits

The EPA said the regulation will help lead to as much as $280 billion in annual health benefits. It will cut sulfur- dioxide emissions by 73 percent from 2005 levels and nitrogen- oxide emissions by 54 percent, according to the agency.

The rule will result in $800 million in spending in 2014, adding to the $1.6 billion a year in capital investments already committed under the Bush rule, the EPA said.

The American Coalition for Clean Coal Electricity, an energy industry group, has said the rule, along with a pending regulation to cut air toxics from power plants, will cost electricity providers $17.8 billion a year from 2011 through 2030 and increase rates 11.5 percent on average in 2016.

The rules also may force as much as 47.8 gigawatts of electricity, or about 15 percent of coal’s U.S. production capacity, to close prematurely, according to a report released last month by the Alexandria, Virginia-based association.

The group’s members include Southern Co. (SO), the biggest U.S. utility by market value, and St. Louis-based Peabody Energy Corp. (BTU), the largest U.S. coal producer.

Environmentalists said the benefits of the EPA rule far outweigh the costs.

“This is a real milestone,” Frank O’Donnell, president of Clean Air Watch, a Washington-based environmental group, said in a statement. “This is a long-overdue and much-needed step toward protecting the health of people in states downwind of big coal burning power plants. It will prove to be a life-saver.”

To contact the reporter on this story: Kim Chipman in Washington at kchipman@bloomberg.net

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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