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How Environmental Laws Work: an Analysis of the Utility Sector's Response to Regulation of Nitrogen Oxides and Sulfur Dioxide

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How Environmental Laws Work: an Analysis of the Utility Sector's Response to Regulation of Nitrogen Oxides and Sulfur Dioxide This material is copyrighted by the Tulane Environmental Law Journal (2001). The Journal has given EPA limited permission to post this material on its web site, but does not allow further duplication without permission unless for not-for-profit educational purposes (www.law.tulane.edu/resources/journals/enviro/index.htm). How Environmental Laws Work: An Analysis of the Utility Sector’s Response to Regulation of Nitrogen Oxides and Sulfur Dioxide Under the Clean Air Act Published at 14 Tulane Environmental Law Journal 309 (Summer 2001) Byron Swift Environmental Law Institute* I. INTRODUCTION ................................................................................. 312 A. Methodology............................................................................ 313 B. Background of Title IV ............................................................ 314 II. REGULATORY PROGRAM FOR SULFUR DIOXIDE (SO2).................... 315 A. Background and History of SO2 Regulation: Traditional Rate-Based Standards.......................................... 316 B. Title IV...................................................................................... 319 C. Industry Response ................................................................... 322 1. Price Signals, Coupled with the Flexibility of Title IV, Drove Major Shifts in Businesses’ Compliance Strategy ...................................................... 323 2. Over-Compliance and Banking..................................... 325 3. Autarkic Compliance ..................................................... 327 4. Strategies for Compliance.............................................. 328 5. The Scrubbing Story: Fewer Scrubbers than Expected but Lower Costs Due to Economics, Innovation, and Regulatory Design............................... 330 6. The Low-Sulfur Coal Story—Regulatory Design and Economic Choices................................................... 335 7. Retirement ...................................................................... 339 8. Substitution Units........................................................... 340 * The Environmental Law Institute gratefully acknowledges the support of the Andrew W. Mellon Foundation for this study. The research and analysis for this study benefited considerably from the assistance of LeRoy Paddock, together with Susan Bass, Linda Breggin, Shi-ling Hsu, Gary Ganoung, Beverly Grossman, Kelly Mott, Jay Pendergrass, and Brian Rohan. ELI also gratefully acknowledges the assistance of the EPA’s Clean Air Markets Division, Denny Ellerman of MIT, and Dallas Burtraw of Resources for the Future, the individuals who provided comments on this Article, and the many individuals, firms, and organizations interviewed during the research. The author can be reached by e-mail at [email protected]. 309 310 TULANE ENVIRONMENTAL LAW JOURNAL [Vol. 14 9. Trading............................................................................ 341 10. Phased Structure Caused Problems ............................... 349 11. Environmental Effects or “Hot Spots” from Trading............................................................................ 350 III. REGULATORY PROGRAMS FOR NOX................................................. 351 A. Background.............................................................................. 353 B. Title IV NOX Standard and Its Legislative History ................ 354 C. Results of Title IV .................................................................... 357 1. Initial Litigation and Delay............................................ 357 2. Implementation............................................................... 358 D. Business Behavior and Title IV............................................... 359 1. Rate Standards Led to One-Time Compliance Using the Expected Technology.................................... 360 2. In Making Pollutant Reductions, Firms Sought First to Optimize Their Process Efficiency, as Regulations Were Sufficiently Flexible to Create Benefits Through Doing So........................................... 360 3. Firms Heavily Used Flexibility Mechanisms with Low Transaction Costs, Such as Averaging.................. 361 4. Businesses Faced with Rate Standards Can Be Expected to Over-Comply by 10% ............................... 365 5. Innovation under Title IV’s Moderate Rate Standards Was Limited in Scope and Extent ................ 366 E. Other NOX Regulation in the 1990s ....................................... 370 1. OTC Cap-and-Trade in 1999 Forced Further Reductions at Existing Plants ........................................ 370 2. New Source Standards ................................................... 374 3. Technology-Based Rate Standards for NOX in the 1990s Created an Uneven Regulatory Framework and Varied Economic Signals for Most Business Units................................................................................ 375 IV. GENERAL FINDINGS.......................................................................... 376 A. Environmental Standards Have Been Essential to Drive Businesses to Reduce NOX and SO2 Emissions ..................... 377 B. It Has Proven Difficult to Set Standards That Properly Align Private with Social Costs, and Both NOX and SO2 Standards Were in Retrospect Too Lenient............................. 378 C. Standards Based on Rates or an Old Source/New Source Distinction May Create Conflict Rather Than Alignment Between Regulatory and Economic Drivers for Environmental Quality...................................................... 380 2001] HOW ENVIRONMENTAL LAWS WORK 311 D. Different Regulatory Designs Greatly Affect the Cost of Compliance for Achieving Equivalent Environmental Results...................................................................................... 381 E. Rate Standards Were Inflexible, Limiting Businesses’ Ability to Develop and Implement Compliance Methods and Technologies..................................................................... 383 1. Emissions Rate Standards Limited Technology Choice ............................................................................. 384 2. Emissions Rate Standards Did Not Force a Move Toward Cleaner Technologies ....................................... 387 3. Rate Standards Promote One-Time Compliance Without Incentives for Further Progress ....................... 387 4. Rate Standards Created High Transaction Costs .......... 388 5. The Design of Rate-Based Standards Can Be Marginally Improved ..................................................... 388 F. Emissions Cap and Allowance-Trading Programs Allow Greater Integration of Environmental Issues into Business Decision-Making Processes, Providing Greater Flexibility and Lowering Costs Without Sacrificing Environmental Integrity....................................... 391 G. Innovation, Investment, and Cleaner Production.................. 392 1. Cap-and-Trade Programs Promote Broader Technology Use and Innovation.................................... 393 2. Rate-Based Systems Were Unfriendly to Innovation....................................................................... 394 3. While Innovation Can Be Expected to Occur Broadly, It Is Not Guaranteed for Any Specific Technology ..................................................................... 394 4. Traditional Regulatory Approaches Have Discouraged and Distorted Private Investment in Research and Development, and Capital Markets for Innovation ................................................................. 395 H. Imposing Stricter Standards on New Sources Has Proven Ineffective in the Power Sector, and Has Led to Neither Cheaper Compliance Nor Better Environmental Results ............................................................ 396 1. New Source Standards Have Not Effectively Reduced Ambient Pollution Levels............................... 397 2. New Source Standards Force Only Limited Kinds of Innovation .................................................................. 397 312 TULANE ENVIRONMENTAL LAW JOURNAL [Vol. 14 3. NSR Rate Standards Create Few Net Benefits When Combined with Offsets or in Conjunction with an Emissions Cap................................................... 398 I. Transaction Costs in Cap-and-Trade and Rate-Based Programs ................................................................................. 399 1. Transaction Costs in Establishing Legislation .............. 399 2. Transaction Costs in Establishing Regulations............. 400 3. Transaction Costs in Implementing the Programs........ 402 4. Transaction Costs in Incrementally Lowering Standards......................................................................... 403 J. Monitoring and Compliance .................................................. 404 1. Strict Monitoring and High Penalties............................ 404 2. Design of Cap-and-Trade Programs.............................. 404 3. Inclusiveness of Cap-and-Trade Programs ................... 405 K. Over-Compliance and Other Conservative Compliance Strategies by Firms.................................................................. 405 L. Flexibility Mechanisms with Low Transaction Costs Were Widely Used .................................................................... 406 M. Retirement and/or Switching to Cleaner Power Sources...... 407 V. C ONCLUSION .................................................................................... 408 A. Stringency ................................................................................ 408
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