by Michael Livermore, executive director of the Institute for Policy Integrity
When faced with regulation, industry will generally choose the cheapest way to comply. As long as they achieve stringent pollution goals, this is a good thing: Economically efficient rules get less resistance and blowback than those that create unnecessarily heavy burdens on business.
So it makes sense for EPA to choose more flexibility whenever legally possible. But in upcoming proposals to control greenhouse gases, some signs point to a political calculation that may steer the agency away from this tactic.
Using authority under the Clean Air Act, EPA is expected to propose greenhouse gas standards for power plants and refineries. Under the rules, new and existing sources will likely be required to achieve some kind of emissions reductions, but how, and how much, is still very much up in the air.
Legally, the government has wide legal latitude to use a range of flexibility mechanisms to keep costs down, and thereby set stronger standards. Certain sections of the Clean Air Act state with considerable certainty that the agency may consider a range of options in setting standards, including economic incentives and market mechanisms.
In a recent study, several think tanks (including Policy Integrity) found a number of options to make the anticipated rule more flexible. Programs like tradable performance standards or emissions budgets could most likely be used to regulate existing sources. EPA and the states should also be able to allow trading between different regulated source types and utilize flexible tools like allowance banking and price floors.
EPA should take advantage of this considerable leeway to allow industry to reduce their pollution as cheaply as possible. Decades’ worth of research has shown that environmental regulations that allow for flexible compliance are most effective at keeping costs down and promoting innovation. And when costs come down, stronger environmental targets can be achieved.
Despite the no-brainer status of this decision, partisan politics seems to have gotten in the way.
In last year’s congressional debate over cap-and-trade, climate science deniers dragged the idea of market-based mechanisms through the mud. Despite bipartisan support for the idea (indeed, some of the most important early supporters of the idea were Republicans), and despite its stunning success in clean up acid rain pollution at low cost, cap-and-trade was rendered untouchable.
There are many types of flexibility measures besides cap-and-trade that would help keep the costs of compliance low but maintain the rigor of tough anti-pollution controls.
But, because of the taint associated with the cap-and-trade model, these alternatives may also be jettisoned in favor of more rigid, more expensive approaches. Recently, Gina McCarthy, EPA’s air administrator, essentially said cap-and-trade is off the table and with it, may go any option even resembling it.
So who benefits when flexibility falls by the wayside? Businesses generally won’t, since the regulations will most likely proceed regardless—they may be able to negotiate a postponement, but the Obama Administration has committed to promulgating these rules before a court ordered deadline of 2012.
Certainly the public doesn’t benefit. When rules cost more, higher costs get passed along to ratepayers and consumers.
Markets and economic freedom are big losers too. Under a cap-and-trade, market actors are left with most of the decisions, but without that flexibility, it will be government that must decide who cuts pollution, by how much, and when.
The economic benefits of market mechanisms, and their legality under the Clean Air Act, make them a clear policy winner. But the tarring of cap-and-trade during the last legislative session has turned what once was a meeting ground between free-market fans and environmentalists into a heavily fortified no-man’s land that poses mortal political risks to anyone who dares cross.
As a result, industry gets more intrusive, clunkier rules, the public gets a higher price tag, and the environment gets less stringent protections.
While cute catchphrases like “cap-and-tax” and “cap and traitors” may have won the political day in 2009, they may end up leaving us with a long legacy of higher pollution and costly rules for years to come.
— Michael Livermore, executive director of the Institute for Policy Integrity