The EPA and Regulatory Costs: Letting the Market In

Alec Webley*

On Wednesday the Supreme Court heard Michigan v. EPA, a case that considered the legality of an Environmental Protection Agency (EPA) rule restricting the mercury emissions from coal-fired power plants. Setting aside some of the statutory niceties, the case seems to pose a compellingly simple question: must the EPA consider costs when it decides to regulate certain kinds of power plants?

To petitioners, including a bevy of states and electricity industry lobby groups, the answer is simple: yes, the EPA should always consider costs, and often this will tip the scales against regulation. The EPA’s answer is also pretty simple: no, because Congress didn’t require it to under the relevant bit of the Clean Air Act. And, the EPA and its supporters go on to say, if the EPA was required to consider costs, its regulation would still be justified.

So goes another round of the interminable debate between industry and regulators. But what if they are focusing on the wrong part of the question? What if the question is not whether costs should be considered when regulating power plants, but whether the EPA should consider them?

This was one of the themes raised in the Institute for Policy Integrity at NYU Law’s amicus brief on the case. When asking who considers costs rather than whether they’re considered at all, this case becomes a lot more interesting, because it helps show how the EPA could regulate air pollution in more sophisticated ways than current ‘command and control’ rules allow.

The question should be who sets the standards.

The question should be who sets the standards.

The heart of this approach lies in section 112(d) of the Clean Air Act. This statute says that when the EPA has decided to regulate a plant or factory emitting hazardous air particles (a list of which Congress included elsewhere), it has a choice, more or less, between two options.

The first, called 112(d)(2), leaves the cost calculation to the EPA itself. While the agency has to balance compliance costs against the benefits to public health and the environment, it decides how to strike that balance, and what mechanisms industry may use to comply with what they decide (subject to judicial review if the EPA is ‘arbitrary and capricious’ in its determinations).

The second choice is more subtle. Congress was worried that the EPA would be too timid in its regulations; in the 1980s, the old Clean Air Act set such a high standard for public health that the EPA seemingly chose not to regulate pollutant-emitters at all for fear of shutting down huge swathes of the U.S. economy that relied on them (like, say, those who rely on coal-generated electricity). Congress didn’t want to leave EPA that choice again, so in 1990 they enacted section 112(d)(3). Congress said that when the EPA identifies an emitter of hazardous pollutants, it can choose to impose a standard set by the market itself – the “maximum achievable control technology,” or MACT, that the best performing, cleanest sources in the category have already implemented.

MACT, under section 112(d)(3), is a “race to the top” rule. If the best-performing plants (those with the lowest emissions) use a certain technology, then their peers have to catch up. If no plants currently use a technology – possibly because it’s too expensive – then no one is compelled to adopt it.  The great thing about MACT is that, within the emissions limits the EPA and other set, the industry decides which technology is feasible and which isn’t; the EPA only has to look at choices made in existing markets, and then tell the emitters bringing up the rear to catch up to their faster peers.

Of course, those best performers often only install technology because some other regulator has told them to clean up their act, but in many cases those regulators aren’t the EPA– they’re states and local governments responding to pressure from citizens seeking cleaner air. And even when the regulator is the EPA, best performers are often responding to market-style incentives, such as from the Title IV acid rain program, under which plants can gain valuable emission “credits” to trade by upgrading their technology.

In other words, when the EPA is forced to look to MACT rather than its own cost-benefit analysis, it empowers those outside the environmental bureaucracy in Washington, D.C. There are tremendous benefits to this approach. As the Solicitor General argued on Wednesday, and as Justice Breyer has argued in concurrences elsewhere, often the cost to industry of these best practice standards is much lower than advertised – and much lower than the cost drawn up by administrators.

Critics of the EPA should cautiously welcome the adoption of MACT standards precisely because they allow real market conditions, and not EPA staffers, to set the relevant technological standards. Indeed, if industry wins Wednesday’s case it may well be a pyrrhic victory. First, if industry wins the Supreme Court will strike down the EPA’s rule as written. But after that happens the EPA will simply come back with pretty much the same rule with a new cost calculation stuck on the front.

Herein lies the rub: the more industry asks the Court to demand that the EPA account for costs, the less the EPA can, or will, take into account the outside actors and the limited market forces that make MACT a step in the right direction. A wise, and libertarian, policy on the part of industry should build on MACT, not undermine it by requiring the EPA to do its own math up front.

Fans of market mechanisms for environmental regulation (such as this author) should cheer any use of market-based measures, even when they merely help set the terms of a direct regulation. In environmental law, we might say that the arc of regulatory history is long, but it bends towards markets. Industry petitioners in this case should be wary of victory; they may unintentionally make that arc bend more slowly.

Alec Webley is a J.D. Candidate in the New York University School of Law Class of 2016, a member of the Regulatory Policy Clinic, and a researcher at the Institute for Policy Integrity at NYU School of Law. The views expressed are his and not the Center’s.