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

EPA Sets New Air Rules for 27 U.S. States as Industry Balks
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

July 8 (Bloomberg) -- The Environmental Protection Agency’s plan to cut U.S. interstate air pollution through a cap-and-trade system may face legal challenges.

The EPA standards issued yesterday, the Cross-State Air Pollution Rule, let 27 U.S. states from New York to Texas reduce power-plant emissions through limited trading in which companies exceeding standards can buy credits from those in other states that pollute less.

The rule replaces Bush-era regulations rejected in 2008 by a federal court that said trading provisions wouldn’t protect communities against pollution from nearby states. The new restrictions are tougher than expected and remain vulnerable to litigation, according to Christine Tezak, an energy policy analyst at Robert W. Baird & Co. in McLean, Virginia.

“This rule is even stricter than anticipated for states,” Tezak wrote in a research note to clients today. “Opponents promise legal action.”

The challenge to President George W. 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.

North Carolina officials are still reviewing the new rules and have no comment, according to Noelle Talley, spokeswoman for the state’s Justice Department in Raleigh.

Protecting Health

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.

The rule will help protect 240 million people from pollution-related health ailments, according to the EPA.

John Walke of the New York-based Natural Resources Defense Council estimates that the rule will reduce more than 3.6 million tons of hazardous emissions from power plants.

“Good Bush administration clean-air standards were made even better,” Walke, clean-air director in Washington for the environmental group, said in an interview yesterday.

The regulation establishes a backstop maximum for pollutants in each state. It also gives utilities some flexibility in 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.

Approach to Trading

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

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

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.

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 and won the support of utilities.

Time-Tested Tool

“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 Charles Blanchard, a power-markets analyst with Bloomberg New Energy Finance.

“The rule will likely be challenged in the courts, whether on the grounds of its trading program or by states like Texas,” Blanchard said in an interview today.

Texas officials, companies and labor unions had argued against having to limit sulfur-dioxide pollution. Senator John Cornyn, a Texas Republican, has said the state didn’t have enough time to comment fully on the rules because the EPA didn’t include Texas in a proposal last year.

The rule may result in $1 billion in compliance costs in Texas as well as lost jobs due to plant closings, Cornyn told the Senate Environment and Public Works Committee last week.

Texas Emissions

Texas power plants emit 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 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 fully complied with the law.

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.

Coal-Plant Closings

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 generators of 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., the biggest U.S. utility by market value, and St. Louis-based Peabody Energy Corp., the largest U.S. coal producer.

In the states covered by the new sulfur-dioxide limits, power plants with about 36 percent of existing coal-fired capacity don’t have flue-gas desulfurization units, or scrubbers, according to Blanchard.

“Even if engineering firms are able to handle the uptick in retrofits, many coal plants, particularly smaller and older plants, will choose to retire rather than undertake expensive upgrades,” he said.

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