Cap and Trade Rules
President Obama’s Roadmap to Cap-and-Trade - Part III

Warming Law
February 1, 2009

The Clean Air Act is President Obama’s key to triggering cap-and-trade

What follows is the third post in a four-post series written by the authors of
Warming Law for the online environmental magazine, Grist.

A debate has been rumbling over whether it is possible for the EPA to establish
a cap-and-trade program for carbon emissions under the existing Clean Air Act.
We’ll discuss that debate in Part IV of this series. Setting aside that debate
for a moment, the Act can still serve as an important catalyst for congressional
action on climate change, if used effectively by the new Obama administration.
Happily, Obama’s all-star climate team seems to clearly understand this
important truth.

The history here by now qualifies as environmental lore. Back in 1999, a group
of concerned organizations, led by the tiny but bold International Center for
Technology Assessment, petitioned the EPA to regulate greenhouse gases under the
CAA, arguing that the threat to human populations posed by climate change meant
each of these chemicals fell within the Act’s definition of an “air pollutant”
that “endangers public health or welfare.” After several years of legal
prodding, and under Bush-appointed leadership, the EPA denied the petition. EPA
claimed it did not have the authority to regulate GHGs and that, even if it did,
it would defer regulation until climate science and policy, including foreign
policy, became better developed.

Several U.S. states and environmental groups then challenged the EPA’s decision
in federal court, ultimately resulting in a landmark 5-4 Supreme Court ruling
against the EPA issued in April 2007. The Court not only held that the EPA had
the authority to regulate GHGs under the CAA, but that it was unjustified in
delaying its action based on policy considerations not enumerated in the CAA itself.

The Court’s ruling in Massachusetts v. EPA [PDF] was an historic moment in the
fight against climate change. With federal action at an alarming standstill, the
highest court in the land informed former President Bush that his administration
already had the power it needed to address GHG emissions on a national level.
Specifically, the Court held that the EPA could apply its broad authority under
the CAA to regulate CO2 as a pollutant, and therefore did not need to wait for
Congress to begin aggressively addressing climate change on a more comprehensive basis.

The Bush administration, unsurprisingly, acted as though this ruling never
occurred. It endlessly delayed making the endangerment finding necessary to
regulate auto emissions under Section 202 of the Act. It also continued busily
granting permits for the construction of major GHG-emitting sources, eventually
leading to an important ruling in the now-famous “Bonanza” case. In Bonanza, the
Sierra Club challenged EPA’s refusal to consider CO2 emissions in evaluating a
proposed coal-fired power plant subject to Prevention of Significant
Deterioration permit requirements, arguing that because CO2 is “subject to
regulation” under the CAA’s monitoring and reporting requirements, EPA was
required to impose Best Available Control Technology emissions limits for CO2 as
part of the permit.

In November 2008 the EPA’s highest administrative panel, the Environmental
Appeals Board, rejected the reasoning employed by EPA for not limiting CO2 and
instructed the Agency to go back and reconsider whether CO2 is “subject to
regulation” under the pertinent permitting provisions. Acting with speed notably
lacking in its response to Massachusetts v. EPA, Bush EPA Administrator Stephen
Johnson reacted by issuing a memo designed to blow off the decision and
continued issuing permits for new coal-fired power plants.

This history illustrates how much untapped power the EPA has to regulate GHGs
today. As President Barack Obama’s EPA Administrator Lisa Jackson told the
Senate in her confirmation hearing, these legal decisions have laid the
groundwork for an aggressive strategy by the new administration to start
combating climate change.

The Obama EPA should begin this strategy by pulling Johnson’s midnight memo and
instructing states that BACT for CO2 emissions should be required in permits for
new coal-fired power plants in PSD areas, in compliance with the Bonanza
decision. The EPA should then make the endangerment finding that formally
triggers CAA regulations so that it can lay out and follow a more comprehensive
schedule for reducing CO2 emissions. This includes using its authority under
Section 111(b) of the Act to develop New Source Performance Standards for new
major stationary sources of emissions, as well as its authority under Section
111(d) to set Standards of Performance for existing major stationary sources.
Next, President Obama should continue to tackle nationwide fuel economy
standards. These are controlled by two federal agencies — the EPA, which sets
vehicle emissions standards under Section 202 of the CAA, and the Department of
Transportation-led National Highway Traffic Safety Administration, which sets
federal corporate average fuel economy (CAFE) standards for new vehicles on a
fleet-wide basis.

In an ideal world, this complicated arrangement would change so that only the
EPA controls federal auto emission standards (which in turn, dictate fuel
economy standards). However, given the President’s recent decision to order
NHTSA to finalize higher fuel economy standards, the NHTSA-EPA dual system of
setting federal fuel economy standards will likely stay in place. Within this
framework, then, President Obama should continue to use his regulatory authority
to put the maximum possible amount of upward pressure on CAFE standards for the
nation’s entire fleet of vehicles.

What Ms. Jackson could not say so blatantly in her confirmation hearing (though
she certainly implied it) is that these relatively straightforward measures will
force Congress’ hand on cap-and-trade. Not only, as authors Michael Northrop and
David Sassoon strongly argued in a recent issue of Environmental Finance, can
the EPA “jump-start” federal regulation of GHGs with the CAA, but it can also
signal to industry that it intends to fully exploit its authority to restrict
CO2 emissions using rigid “command-and-control” measures. In the face of this
undesirable (from their perspective) regulatory environment, firms can be
expected to quickly throw their weight behind a more flexible, market-based
approach like cap-and-trade, which would provide them with long-term,
predictable targets around which they can plan for the future.

President Obama has therefore entered office with significant tools for
prompting cap-and-trade through legislative action. Through the authority that
his administration already has under the CAA, which has been affirmed by the
U.S. Supreme Court, President Obama should be able to convert the greatest
opponents of cap-and-trade (including the auto industry, the utility industry,
and the coal industry) into supporters, thereby laying the groundwork for an
aggressive, comprehensive federal cap-and-trade bill in the very near future.


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