Marlo Lewis

Last week, EPA leaked a Power Point presentation revealing that the agency plans on April 30 to propose a finding that “air pollution” from emissions of greenhouse gases (GHGs), principally carbon dioxide (CO2), ”endanger public health and welfare.”

The endangerment proposal, part of EPA’s response to the Supreme Court’s Massachusetts v. EPA (April 2, 2007) decision, is the essential first step towards establishing GHG emission standards for new motor vehicles under Sec. 202 of the Clean Air Act (CAA).

As I explain in this column, EPA cannot establish GHG standards for new motor vehicles without triggering a regulatory cascade through multiple CAA provisions. The impacts on energy markets and the economy will be subject to the vagaries of litigation, and potentially would be far more costly and intrusive than any climate bill Congress has either rejected or declined to pass.

There are three main risks (indicated in the title of this post). Litigation-driven regulation of CO2 under the CAA could block development and new construction, create a Kyoto-on-Steroids regulatory regime never approved or even voted on by Congress, and empower the greenhouse lobby to extort industry support for cap-and-trade legislation in return for dubious promises of “regulatory certainty.”

In the column, I advise friends of energy abundance, economic growth, and limited government to hang tough. Team Obama has got to know that EPA cannot control the regulatory cascade once it starts, that the results could be economically devastating, and that they won’t be able to blame G.W. Bush. If they open Pandora’s Box, there will be political hell to pay, and they know it.

When the greenhouse gang invoke the specter of CAA regulation if we don’t support their cap-and-trade program, we should say: “First you take that gun away from our head, and then we’ll discuss the merits of your bill.”

Thanks, Fran, for blogging on the carbon tariff threat to the peace and prosperity of the world.

We should all remember that carbon tariffs are no mere quirk of this or that administration, political party, or government agency. Protectionism is an inherent feature of carbon suppression policies, for three reasons:

(1) Companies and labor unions in carbon-constrained countries will demand carbon tariffs to “level the playing field” vis-a-vis firms in non-carbon constrained countries. Absent carbon tariffs, domestic industry and labor will not support cap-and-trade or carbon taxes.

(2) Carbon suppression programs all exhibit the classic collective action problem. However much it might be in the collective interest of every nation to “save the planet,” it is in the separate interest of each nation to free-ride on the sacrifices of others. The environmental harm any individual country incurs because it cheats on its emission reduction obligations is likely to be immeasurably small (even if we assume that global warming is an unfolding catastrophe), whereas the gains from cheating are likely to be both measurable and substantial. Unless credibly deterred and punished, cheating will be widespread and the system will collapse. Absent the threat or use of military force, trade sanctions (carbon tariffs) are the only way to prevent cheating.

(3) The EU-IPCC-Al Gore goal of achieving a 50% reduction in global emissions by mid-century is impossible absent deep emission cuts in developing countries. As this U.S. Chamber of Commerce presentation shows, the vast majority of the growth in global emissions is projected to occur in developing countries. Thus, even if industrialized countries go cold turkey and cut their net emissions to zero by 2050, developing countries would have to cut their CO2 emissions 62% below baseline projections to achieve a 50% reduction in global emissions. Whether trade sanctions would be enough to bully China and India into cutting their emissions is doubtful. One thing is certain: Preaching Gorethodoxy is not going to make them stop building coal plants and buying automobiles.

A study by Carnegie Mellon finds that the Chevy Volt, GM’s rechargeable battery-driven car designed to go 40 miles on electricity,  is “not cost effective in any scenario,” Bloomberg reports.  

There appear to be two main problems, cost and durability. Says Bloomberg:

A battery big enough to propel a car for 40 miles, such as the 400-pound pack for Volt, may cost $16,000, based on current industry and academic estimates. The price of the car isn’t set, though GM backed off last year from an initial goal of less than $30,000 when the Volt reaches the U.S. market in late 2010.

$16K for a battery is a huge expense, especially if the battery has to be replaced. K.G. Duleep, a researcher on plug-ins, told Bloomberg he is “very skeptical” about the near-term durability of the batteries.  “Even in the lab they aren’t lasting more than 7 years,” Dunleep said.

I’ll be sorry for GM if the Volt proves to be the next Edsel or EV-1. But the Carnegie Mellon study, as summarized by Bloomberg, is a sobering reminder that a “beyond petroleum” transport system will arrive when and as economic and technological reality permits, not when green political agendas or CO2-suppression mandates dictate.

Yes, for three reasons.

(1) Companies in carbon-constrained countries will demand carbon tariffs to “level the playing field” vis-a-vis firms in non-carbon constrained countries.

(2) Cheating will be rampant unless deterred and punished by credible trade sanctions.

(3) The EU-IPCC-Al Gore goal of achieving a 50% reduction in global emissions by mid-century is impossible absent deep emission cuts in developing countries, which in turn won’t happen unless developing countries are bullied into limiting their consumption of coal and oil.

For further discussion, see my post on Masterresource.Org.

In today’s Guardian, Juliana Glover reports that carbon permit prices in Europe’s Emission Trading System (ETS) have crashed from €31 last summer to €8 today. This price is too low to create any incentive for covered entities to invest in ‘green’ technology.

Glover identifies two causes for the collapse of carbon permit prices. First, the recession has reduced demand for energy and, thus, for carbon permits. Second, European governments handed out “luxurious quantities” of carbon permits, free of charge, to big emitters, claiming that economic growth “would soon see them bumping against the ceiling.”

Glover says the EU must do two things to rescue the ETS:

First, the EU must stop importing permits from countries such as Russia–a bonus for a paper transaction. No one really believes that 15m tonnes of imported permits will not be emitted by a steelworks somewhere east of Novosibirsk.

Second, it must publish plans to crack down on the surplus of permits when the recession is over. Warnings of famine ahead, when the scheme enters its third stage in 2012, would raise prices now, if believed.

She concludes caustically: “Like medieval pardoners handing out unlimited indulgences, governments have created a glut. Reformation must follow. Wanted–a modern Martin Luther to nail a shaming truth to industry’s door: Europe’s whiz-bang carbon market is turning sub-prime.”

Glover’s commentary vindicates free-market critics (see, e.g., here, here, and here) who have warned that Europe’s vaunted ETS is an unsavory combination of wealth transfer and creative accounting.

My concern is what lessons if any climate doomsters here in the United States draw from Europe’s failure.

Most U.S. greens prefer cap-and-trade to carbon taxes. Part of the reason is political. Most voters oppose new taxes, but most do not understand that cap-and-trade schemes are stealth energy taxes.

Greens also argue that only cap-and-trade (a) provides “emissions certainty” (determines in advance how much and how fast emissions will decline) and (b) creates strong incentives for firms to innovate and go “beyond compliance” in order to amass and sell surplus carbon permits (transferring wealth from buyers to sellers).

But the collapse of the carbon market calls in question both alleged policy advantages of cap-and-trade. Europe’s ETS is exerting no pressure to reduce emissions in today’s distressed economy, whereas a carbon tax mostly certainly would. Moreover, the ETS is fostering creative accounting, not innovation.

While it would be premature to say that the cap-and-trade lobby is losing its clout on the Hill, it is interesting that Energy Secretary Steven Chu recently floated the idea of a carbon tax. It is also noteworthy that NASA’s James Hansen, the doyen of global warming alarmism, cautioned President-elect Obama last December that, “A carbon cap that makes one more stinking millionaire on the backs of the public is going to infuriate the public.” Hansen argued that, “A carbon tax (across all fossil fuels at their source) is essential.”

Given the Administration’s apparent determination to regulate carbon dioxide (CO2) under the Clean Air Act (CAA), we could possibly see growing support within green circles for a combination of carbon taxes and CAA regulation of CO2 from autos and large stationary sources.

Of course, this would take all the fun and profit out of global warming for the corporations pursuing European-style wealth transfers and windfall profits under cap-and-trade.

So, liberty lovers be warned: We could end up with cap-and-trade, carbon taxes, and CAA controls on CO2. As Al Gore said at his March 2007 Senate Environment and Public Works hearing, “We need it all.”

Earlier this week, in a letter to Sierra Club climate council David Bookbinder, EPA Administrator Lisa Jackson said the Agency would reconsider, via a notice-and-comment rulemaking, a Bush-EPA memorandum interpreting regulations that determine whether carbon dioxide (CO₂) is currently subject to emission controls under the Clean Air Act’s Prevention of Significant Deterioration (PSD) pre-construction permitting program.

The memorandum, issued on December 18, 2008 by Jackson’s predecessor, Stephen Johnson, responds to EPA’s Environmental Appeals Board (EAB) decision in a dispute between EPA Region 8 and the Sierra Club. Region 8 granted Deseret Electric Power Cooperative a PSD permit to build a new coal electric generating unit near Bonanza, Utah. Like all other PSD permits issued in the program’s history, this one did not require the regulated entity to install best available control technology (BACT) to limit CO₂ emissions. Sierra Club argued that EPA regulations adopted in 1993, which require power producers to monitor and report CO₂ emissions, make CO₂ a regulated pollutant for PSD purposes. Region 8 countered that it has no power to apply PSD or BACT to CO₂, because EPA has consistently interpreted “subject to regulation” to mean subject to emission controls. The 1993 rules require data collection and reporting, not emissions control.

The EAB disagreed with Sierra Club in part, and with Region 8 in part. Contrary to Sierra Club, “subject to regulation” does not have an unambiguous meaning that compels EPA to impose a CO2 BACT standard in a PSD permit. But, contrary to Region 8, EPA is not bound by the Agency’s historic interpretation to apply PSD only to pollutants for which EPA currently administers emission controls. The EAB asked EPA to clarify the meaning of “subject to regulation” in the context of an action of “nationwide scope.” That’s what Johnson did in his December 18, 2008 memorandum.

The reason this is important, even if you don’t live in Bonanza, Utah, is that applying PSD to CO₂ could have a chilling effect on new construction and economic development throughout the nation. As explained here, here, and here, the cutoff for regulating business entities as “major stationary sources” under the PSD program is a potential to emit 250 tons per year (TPY) of a CAA-regulated air pollutant. An estimated 1.2 million previously unregulated buildings and facilities actually emit 250 TPY of CO₂. All would be vulnerable to new controls, paperwork, and penalties if courts deem CO₂ “subject to regulation” under the CAA.

Before any firm could build or modify, for example, a large commercial office building, enclosed mall, or big box store, it would have to obtain a PSD permit, which means it would have to undertake a complex investigation of how to comply with BACT (see pp. B6-9 of EPA’s New Source Review Workshop Manual). Even apart from any technology investments required for BACT compliance, the PSD permitting process is costly and time-consuming. In 2007, each PSD permit on average cost $125,120 and 866 burden hours to obtain.

EPA’s Advanced Notice of Proposed Rulemaking (ANPR) estimates that even a ten-fold increase in PSD permitting from 200-300 permits per year to 2,000-3,000 permits “could overwhelm permitting authorities” and subject firms to “new costs, uncertainty, and delay in obtaining their permits to construct.” Yet if firms seek to modify just 1% of the 1.2 million entities that currently emit 250 TPY of CO₂, EPA and its state counterparts would have to process 12,000 PSD permits per year. The costs, delays, and uncertainties produced by this administrative quagmire would bring economic development to a halt.

Johnson’s memorandum makes a strong case for the lawfulness of EPA’s historic interpretation that PSD and BACT are triggered only by emission control requirements established under other provisions, not by monitoring and reporting regulations. I find particularly impressive Johnson’s argument that Sierra Club’s reading of the Act would make nonsense of CAA §114, which authorizes the Administrator to require entities to gather and report emissions data to inform policy development. If EPA took the position that monitoring and reporting regulations automatically trigger PSD and BACT, then “the mere act of gathering the information would essentially dictate the result of the decision that the information is being gathered to inform (whether or not to require control of a pollutant).” Johnson remarks: “I prefer an interpretation that allows the Agency to first assess whether there is a justification for controlling emissions of a particular pollutant under relevant criteria in the Act.”

Attorney Peter Glaser put the point more forcefully in an amicus brief on behalf CEI and 13 other free-market groups. In the Deseret case, Sierra Club wanted the EAB to mandate CO₂ regulation under PSD and BACT even though the EPA Administrator had not determined (and still has not determined) whether CO₂ emissions endanger public health or welfare. This regulate first, do the analysis later (if ever) approach would stand the logic of the CAA on its head.

Johnson’s memorandum accomplished two things. First, it averted a “PSD nightmare”—at least on his watch. Second, as an Aiken Gump analysis astutely observed, the only way Johnson’s successor could overturn his “interpretative rule” would be through a notice and comment rulemaking. Jackson’s decision to reconsider Johnson’s memorandum via a rulemaking seems to confirm that assessment.

Sierra Club, Environmental Defense Fund, and Natural Resources Defense Council sued EPA last month in the U.S. Circuit Court of Appeals for the District of Columbia, asking the court to overturn Johnson’s memo. But, as Greenwire reported on February 17, when the deadline came, the groups declined to file a motion to “stay” the memo, or put it on hold. Greenwire explains: “If the agency were to stay the memo immediately, Bookbinder said, it could trigger an obligation under the Clean Air Act for broad-ranging regulations targeting even very small sources of carbon dioxide emissions.”

Bookbinder commented: “The Clean Air Act has language in there that is kind of all or nothing if CO2 gets regulated, and it could be unbelievably complicated and administratively nightmarish for both EPA and the states if they were to yank the Johnson memo and not have something in place that makes it clear that we’re going after only the very large sources.”

This is quite remarkable. At a September 23, 2008 hearing before the Senate Environment & Public Works Committee (see segments 1:47:10-1:48:22 and 2:03:83-2:05:20 of the Committee’s Archive Webcast), Bookbinder derided as a “bugaboo,” “red herring,” and “pure scare tactic” warnings by industry and free-market groups that establishing greenhouse gas (GHG) emission standards for new motor vehicles under CAA §202 would expose tens of thousands of previously unregulated stationary sources to PSD and BACT regulation. Yet now he acknowledges that, if applied to CO₂, the PSD program could morph into an “unbelievably complicated and nightmarish” affair.

To be sure, Bookbinder thinks it’s possible for EPA, in a rulemaking, to make “clear we’re going after only very large sources.” But as a matter of law, EPA has no authority to pretend that a statutory cutoff set at 250 TPY really means 10,000 TPY, 25,000 TPY, or 100,000 TPY. Furthermore, although neither the Sierra Club nor any other major environmental group would sue EPA to insist on a strict letter-of-the-law application of PSD to CO₂, the major environmental groups do not have a monopoly on CAA litigation. Applying PSD to small CO₂ sources would empower legions of NIMBY (“Not in my backyard”) activists to block or delay construction of strip malls, big box stores, fast food restaurants, or other development they deem undesirable.

Lisa Jackson needs to understand that she cannot rescind Johnson’s interpretation and make CO₂ a pollutant “subject to regulation” under PSD without running the very serious risk of turning the Clean Air Act into a gigantic de-stimulus package.

A front-burner issue facing Environmental Protection Agency (EPA) Administrator Lisa Jackson is whether to grant a waiver under the Clean Air Act allowing the California Air Resources Board (CARB) to implement first-ever greenhouse gas (GHG) emission standards for new motor vehicles. Thirteen other states are poised to adopt the CARB program if Jackson grants the waiver. In all, about 40% of the U.S. auto market would come under the CARB rules.

Jackson’s predecessor, Stephen Johnson, rejected CARB’s application  in December 2007.  His reasons, published in the Federal Register in March 2008, may be summarized as follows. EPA’s historic practice has been to grant CARB waiver requests to address air pollution threats arising from circumstances specific to California–its topography, regional meteorology, and number of vehicles. In contrast, global climate change is, well, global. Conditions associated with global climate change in California are not sufficiently different from those in other states to justify a separate emissions program.

This argument, which is tantamount to saying that EPA won’t allow CARB to combat global warming because global warming is bad for people everywhere, predictably elicited scorn from California politicians and environmental groups.

“Patchwork Proven,” a new report by the National Automobile Dealers Association (NADA), presents two compelling arguments against granting the waiver that Johnson should have made.

First, granting the waiver would violate the Energy Policy and Conservation Act (EPCA), which prohibits states from adopting laws or regulations “related to fuel economy.” Yes, I’m well aware that in Central Valley Chrysler-Jeep, Inc. v. Goldstone (2006), the U.S. District Court for Eastern California held that EPCA does not preempt CARB from establishing GHG standards for new motor vehicles. However, the Court’s reasoning was spurious, and Johnson should not have given it a free pass.

The CARB emissions program is essentially fuel economy regulation by another name. CO2 comprises 97% of the GHG emissions from motor vehicles. Since there is no commercial technology for capturing or filtering out motor vehicle CO2 emissions, the chief way to decrease CO2-equivalent grams per mile (that’s how the CARB GHG standards are calibrated) is to decrease fuel consumption per mile, i.e., increase fuel economy.

As “Patchwork Proven” points out, the relationship between fuel economy and tailpipe CO2 emissions is so close that EPA tests compliance with federal fuel economy standards by measuring vehicular CO2 emissions. The bottom line: “Absent a significant increase in new vehicle fleet fuel economy, it is impossible to comply with CARB’s regulation.” So the CARB emissions program is substantially “related to fuel economy.” As such, it is prohibited by EPCA.

Alas, in this day and age of judicial activism and global warming hysteria, we should not expect Jackson to pay heed to the spirit of EPCA.  However, she and other Obama Administration officials should be worried about havoc that the waiver would wreak on the distressed U.S. auto industry.

CARB and its allies repeatedly deny that granting the waiver would create a regulatory “patchwork,” with automakers required to comply in different ways in different states. According to them, there would be at most two programs: the federal program and the California program.  A dual system of regulating air pollution from vehicles has been in place since the start of the Clean Air Act. Vehicles built to federal standards are “federal cars” and vehicles built to CARB standards are “California cars.” Automakers have had no trouble building  cars that meet two different emission standards. Promulgating GHG emission standards would merely update a system that has worked well for decades, CARB contends.

The fundamental flaw in this argument is that CO2 is not like the air-quality damaging pollutants subject to existing EPA and CARB emission standards.  For smog-forming pollutants such as nitrogen oxides, both EPA and CARB specify how many grams per mile individual vehicles may emit. That’s not how CARB regulation of GHG emissions would work. There would not be two types of vehicles, “California” and “federal.” Rather, the CARB standards specify the CO2-equivalent grams per mile that each automaker must attain on average for the fleet it delivers for sale. In other words, the CARB program implicitly specifies fleet-average fuel economy.

This is a radical departure from previous EPA and CARB emission standards, and it inexorably produces a regulatory patchwork.

Here’s why. Consumer preferences and the corresponding mix of vehicles delivered for sale differ from state to state. For example, in 2007, the Dodge Ram (with a fuel economy rating of 18.7 mpg) accounted for 20.66% of all Chrysler vehicles sold in California, but only 9.46% of all Chrysler vehicles sold in Rhode Island, and 8.43% in New Jersey. In contrast, the Jeep Grand Cherokee (with a fuel economy rating of 20.2 mpg), accounted for only 5.23% of Chrysler vehicles sold in California but 11.23% of Chrysler vehicles sold in Rhode Island, and 16.26% in New Jersey.

The number and percentage of vehicle models an auto company “delivers for sale” differ from state to state.  For any auto fleet, no two states are likely to have the same average fuel economy or CO2-equivalent grams per mile.

Thus, to comply with the CARB standards, automakers would have to adjust the “mix” of vehicles offered for sale in each state adopting those standards. In each such state, an automaker would have to “deliver for sale” enough vehicles with CO2-equivalent per mile (fuel economy) ratings above the CARB standard to offset vehicles delivered for sale with ratings below. The “mix-shuffling” required for compliance  in State A would likely be different from that required for compliance in State B, C, and so on.

Note that the CARB program would create a vehicle-rationing patchwork even if there were no competing federal fuel economy standards. As the NADA report puts it, “If CARB’s regulation were to take effect in all 50 states, the resulting 50-state patchwork would require automakers to manage 50 unique state fleets and to individually meet CARB’s standard 50 different ways.”

Since the current mix in each state is determined by consumer preference, the adjusted mix would clash with consumer preference. The most likely compliance strategy would involve “rationing larger vehicles, discounting smaller models for quick sale, or other pricing strategies that distort the market,” the NADA report warns. Is that any way to rescue the auto industry?

Adding insult to injury, it’s not even clear that the CARB standards would achieve any significant reduction in emissions. CARB claims that adoption of its standards by 13 states would eliminate 59% more CO2 emissions in 2020 than would compliance with federal fuel economy rules. But companies forced to “deliver for sale” smaller, lighter, more fuel-economical vehicles in the CARB states would be allowed, under the federal fuel economy program, to sell more large, heavy, gas-guzzling vehicles in non-CARB states.

Moreover,  if CARB rules restrict the supply and increase the cost of gas-guzzlers “delivered for sale” in California, for example, Californians would still be free to buy lower-priced gas guzzlers in Nevada and bring them back home. Emissions in California might go down somewhat, but auto sales, jobs, and tax revenues might go down even faster.

California politicians and environmental lobbyists talk about the CARB emissions program as if it were the greatest thing since sliced bread. Lisa Jackson would be well advised to read “Patchwork Proven” before deciding on CARB’s waiver request.