John Dizard in today’s Financial Times highlights a news-worthy development that has somehow gone largely under the radar, namely, that the one reasonably well functioning US cap and trade regime has come under a legal cloud, not only to detriment of the market, but also to pollution emissions.
The legal beef is that the EPA exceeded its legal authority in implementing the cap and trade program for power plans emissions of sulphur dioxide and nitrous oxide, aka Sox and Nox. Now we have not been as keen about cap and trade as other have been. For large companies to plan and make investments, price certainty is far more beneficial, and taxes are a better way to achieve that. Even a conservative true believers like Greg Mankiw (and the more centrist Financial Times editorial opinion) prefers taxes to cap and trade, which lead to variable prices of the right to produce the problematic substance. But in the US taxes = bad, while cap and trade sounds more palatable.
Having said that in general, the power plant regime appears to have been well designed and was producing the desired behavior prior to the recent tsuris.
While cap and trade is better than no regime at all, the flip side is that the uncertainty created by the courts may work to the detriment of future cap and trade programs. In this case, rulings that would have forced the program to be tougher in some respects have wreaked havoc with the market, certainly not an intended outcome. Prices for emission rights have plunged, leaving investors in them with considerable losses and producing higher levels of emissions. From the Financial Times:
While the Administration and most of the Congressional leadership have been pouring their attention and political capital into cobbling together a coalition to support a carbon cap and trade mechanism, the one existing such system for air pollution has been coming undone.
For the past several years, the Environmental Protection Administration has operated a market in “allowances” for power plants to emit.
Over time, the way the regulations were set up under the Clean Air Interstate Rule, or Cair, utilities have had to spend progressively more money to buy emission allowances. That has given them an incentive to install scrubbing devices for their smokestacks. If they installed the devices more quickly than required by law, they could sell the extra allowances to other emitters.
So it was profitable to clean up. The industry estimates up to $75bn (£47bn, €53bn) of Sox and Nox controls were built early due to the Cair regulations.
Last July, however, a US Federal appeals court in Washington ruled the Cair regulations gave the EPA more authority than Congress had authorised, while failing to address problems of specific states that are downwind of large Sox and Nox emitters. So it ordered the EPA to try and fix Cair, while setting conditions for doing so that are impossible to meet without the authority of new legislation.
The alternative to a Cair fix by next year would be the zero-ing out of the Sox and Nox markets, and the imposition of an administrative command and control system.
The appeals court ruling had a perverse effect. By ruling that Cair did not do an adequate job, or one justified by the Clean Air Act, the court crashed the Sox cap and trade market, and did considerable damage to the Nox market. Before the court’s decision, Sox allowances traded around $600 to $800 a ton. Now, depressed by the utilities’ and traders’ belief that EPA cannot devise a fix, Sox allowances go for about $60 a ton, creating tens of billions in losses.
It is cheaper to buy allowances from devalued existing stock, and emit more acid-rain-causing SO2, than to build new scrubbers or even operate existing equipment.
As one utility lawyer in Washington told me: “I know of utilities that are buying cheaper, high sulphur coal, or running their scrubbers at a less intense rate. I am absolutely certain that SO2 emissions will increase next year as well.”
The EPA’s studies estimate that the crash of the Cair markets will lead to an extra 35,000 deaths over the next couple of years.
You would think this would raise a huge hue and cry, more than a jet crash, though perhaps not as much as a televised amateur talent show. You would be wrong.
The most scarce resource in the political class is attention span, and it seems only one air issue can be dealt with at a given time. This year, it’s carbon dioxide…
Mr [Thomas] Carper [Senator from Delaware] intends to submit a law to replace the Cair regulations, called “3P”, for the three pollutants of sulphur dioxide, nitrous oxides, and mercury….
The provisions would probably be attached to either a climate bill, which faces long odds, or an omnibus energy bill.
One of the Federal court’s main objections, that the EPA exceeded its authority, would be dealt with by imposing rules by law rather than regulation. The other, that downwind states would not have protection from specific emitting plants, could be mitigated by lowering pollution limits very rapidly.
According to Mr Carper: “The EPA agrees on the need for a legislative fix, and they will be our partners on this.”
There is another point that seems to have escaped some of the political leadership. How could industrialists or traders have faith in, or commit capital to, a future carbon cap and trade system if a similar system is allowed to collapse through inaction?