New development on the air front

Today EPA granted California’s waiver from federal air emission standards for cars and trucks. This waiver means that California can enforce its own tailpipe greenhouse gas emission standards BEFORE the federal emission standards become effective 2012. The same waiver had been denied by the Bush EPA earlier.

This is another example that California and other states can have more stringent environmental standards than the federal standards.

Another development today is the Minnesota Supreme Court’s ruling that Al Franken had won the Senate race. Norm Coleman conceded soon after the ruling came out. What that means is that there will now be 60 Democratic senators and that makes it easier for the Democrats to pass its cap-and-trade law in the Senate.

The House passed its cap-and-trade law (American Clean Energy Security Act) last week.

Cap-and-trade 101

What are greenhouse gases?

 Three forms of naturally occurring greenhouse gases are being affected by industrial activities. These are carbon dioxide, methane and nitrogen oxide. Of these three, carbon dioxide is by far the most prevalent – coming primarily from man-made incineration of fossil fuels. 

 The accompanying chart from EPA shows the changes in greenhouse gas emission since 1990 in absolute terms. The unit MMTCE refers to million of metric tons of carbon equivalent.  

 The idea of regulating carbon dioxide was given a push by the Supreme Court in its 2007 decision (Massachusetts v. EPA) where it affirmed (once again) that EPA has the authority under the Clean Air Act to regulate any pollutant that is found by the agency to be harmful to human health.

 So just what exactly is cap-and-trade?

 First of all, cap-and-trade is not a new concept. It was used in the 80s to control the emission of sulfur dioxide as part of the legislation to reduce acid rain. Cap-and-trade is also being used in California by the South Coast Air Quality Management District to reduce the emission of nitrogen oxides and sulfur dioxide from industries under its Regional Clean Air Incentives Market (RECLAIM) program.

Here is how cap-and-trade works. The regulatory agency places a maximum amount of emission that a facility can emit for a particular pollutant – say carbon dioxide. That’s the cap part. Once this cap is in place, the agency provides an emission allowance to industries that can be applied against the cap. The allowance may be as large as the cap during the first few years of the program. It then decreases gradually over time. This decrease in allowance has the effect of reducing the amount of carbon dioxide that can be emitted each year.

The whole idea of cap-and-trade is to provide a disincentive to industry to continue to emit harmful pollutants such as greenhouse gas (primarily carbon dioxide from coal power plant).

Faced with this decreasing allowance – which is in effect a more restrictive limit on emission over time – the regulated industry has two options to comply with the cap. It can install pollution control equipment to reduce its emission to make up for the decreasing allowance in order to meet the cap. Or it can purchase credit in an open market to make up for any short fall. That’s the trading part of cap-and-trade. Conversely, if a facility comes in below the cap as a result of installing pollution control devices, it may have “surplus allowance” that it can sell in the open market and make money.

That’s the whole idea of cap-and-trade. If you cannot meet the emission limit, you have to go to the open market and purchase emission credits. For those companies that choose to install pollution control equipment, they would not have to pay millions to purchase emission credits. They may even have unused allowances that they can sell in an open market. The underlying intent of the bill is to control emission by creating an incentive to the development and installation of pollution control technology.

There have been a lot of complaints from opponents of the proposed bill that cap-and-trade is a “tax” on industries.

Cap-and-trade is a pollution “tax” in much the same way that regulations that control the disposal of toxic wastes constitute a “tax” because they impose additional costs on industry. Companies that generate hazardous wastes will have to pay more to have them disposed of properly. The incentive there is to either change the manufacturing process to reduce the amount of toxic wastes generated or pay to have the wastes disposed of properly.

Another example of pollution tax is tailpipe emission control from automobiles. The cost of the catalytic converter increases the manufacturing cost of a car and is passed on to the consumers. So are the costs of seat belts and air bags. 

Why should carbon emission control be treated any differently?

A new partnership between industry and Congress?

One of the most striking aspects of the greenhoyse gas bill before the House of Representatives is that it has the support of some of the largest corporations in America such as General Electric, Duke Energy, Dow, Shell, DuPont, ConocoPhillips, BP America and Pepsico.

Twenty three major corporations and 5 environmental groups had formed a coalition known as the U.S. Climate Action Partnership (USCAP) several years ago to provide input in the drafting of the greenhouse gas bill. The corporation that started USCAP is General Electric whose CEO wrote in an op-ed piece in 2005 that environmental “polices that commit to market-based approaches will drive innovation and lead to environmental improvements.”

Membership in USCAP includes the following companies and environmental groups: Alcoa, Boston Scientific,  BP America, Caterpillar, Chrysler, ConocoPhillips, Dow, Duke Energy, DuPont, Environmental Defense Fund,  Exelon,  Ford,  FPL Group, GE,  GM, John Deere, Johnson & Johnson,  Natural Resources Defense Council,  The Nature Conservancy, NRG Energy, PepsiCo, Pew Center on Global Climate Change, PG&E, PNM Resources, RioTinto, Shell, Siemens, World Resources Institute.

Instead of opposing any new laws from Congress, these companies decided to work with major environmental groups to forge a consesus in the drafting of a greenhouse gas bill. In fact, the pending cap-and-trade legislation before the House is based in large part on the recommendations of the USCAP Blueprint for Legislative Action that was issued on January15, 2009.

Corporate America learned its lessions some 20 years ago. When congress proposed regulating a dozen or so hazardous air pollutants (HAPs) back in the 80s, the chemical industry fought back very hard to oppose any changes. The end result was the 1990 Clean Air Act Amendments that mandated much more stringent regulations on 189 HAPs. The program is known as National Emission Standards on Hazardous Air Pollutants (NESHAP) which imposes stringent and costly “maximum achievable control technologies” (MACT) on major industries that emit HAPs.

To prevent history from repeatingitself, industries decided this time around to actively engage in the process to affect a more favorable outcome.

Is cap-and-trade a tax increase?

I came upon a blog on cap-and-trade posted by Harvard economic professor Greg Mankiw this evenign.  The heading of his blog was “Is cap-and-trade a tax increase?”. There isn’t a link on his blog for me to post a comment. So I sent him the following email:

Dear Professor Mankiw:

 

Of course cap-and-trade is a tax!! What is your point?

 

When Congress enacted the Resource Conservation and Recovery Act (RCRA) in 1986 requiring industries to properly dispose of their hazardous and toxic wastes, that TOO was a tax on industry and consumers. The costs of disposal are passed on to the consumers. So are we to do away with RCRA in order to keep tax on industry low? How would the population react when they find toxic wastes dumped on their front yard because that will happen when you repeal RCRA.

 

The same thing can be said about the federal regulations on seat belts, catalytic converters and air bags. They are all ”taxes” on the consumers. Should we do away with them too?

 

So what is wrong with imposing a pollution tax on industry? The cap-and-trade is designed to provide a disincentive for industry to continue to spew out greenhouse gas. California has had a cap-and-trade on nitrogen oxides and sulphur oxides for some time now. Whether greenhouse gas is a danger to public health under the Clean Air Act is a separate issue. EPA seems to think it is. And if it is found to be a danger to public health, the Supreme Court has pretty much told EPA to regulate it.

 

Do you know of any regulatory scheme that will reduce pollution from industries that does not increase their cost of doing business (aka a “tax” on business)?

 

Update: Professor Greg Mankiw sent me an article in response to my email. A very interesting article on taxes and I highly recommend it.