The EPA's Clean Coal Dust-Up

Richard Epstein*

RICHARD EPSTEIN

RICHARD EPSTEIN

This past week in the Wall Street Journal, Kenneth Hill, the public utility regulator from Tennessee, joined Kentucky Senator Mitch McConnell in advocating that states boycott the EPA’s Clean Coal Plan (CPP) under the Clean Air Act of 1990. The plan would require the state to reduce the amount of carbon dioxide emissions so that by 2030 they are 30 percent below the 2005 levels. In making his case, Hill challenges EPA administrator Gina McCarthy’s soothing assurances that nothing in the EPA’s Clean Coal Plan will throw a monkey-wrench into coal operations, because “our rule creates a dynamic where cutting carbon pollution and investment decisions align.” That assertion is inconsistent with the report of the North American Electric Reliability Corp., which foresees major threats to transmission reliability, depending on exactly how the Clean Coal Initiative plays out on the ground. Indeed, it is far from clear whether sweeping new measures should be introduced to tackle this problem, especially since the EPA’s own figures show that emissions levels in 2013 were 9 percent below those in 2005.

Hill argues that the states should require the federal government to assume full responsibility for any Federal Implementation Plan, or FIP, that will govern those states that refuse to adopt a state implementation plan or SIP on their own. As of present, it is not clear whether this final confrontation will take place. Before that can happen, the courts will have to resolve the looming challenges to the EPA’s proposed rule, now that the EPA has pushed the envelope of its not inconsiderable statutory authority to regulate pollution.

The most notable opponent to the Clean Air Act is Harvard’s constitutional law Professor Laurence Tribe, who is a paid consultant for the Peabody Energy, whose wholesale denunciation of the EPA’s CPP for “burning the constitution” has attracted a strong dissent in forceful testimony before Congress from his own Harvard colleagues, Jody Freeman and Richard Lazarus, and from Richard Revesz, former NYU Dean and current head of the Institute for Policy Integrity.

The issues are complex and their resolution depends in large measure on understanding the ways in which the EPA’s CPP exercises its power. As is well explained by Mario Loyola in National Affairs, the devils lie in the details. His account is strongly at odds with Revesz’s claim that the EPA’s CPP program is just another chapter in the long-partisan tradition of effective pollution control.

The nub of the difficulty here is this: traditionally, the Clean Air Act pays homage to federalism by having the EPA set National Ambient Air Quality Standards (NAAQs), leaving it to the states to figure out how best to meet the national target in pollution control while knowing that the federal government can override them with its own FIP if the plan is not regarded as sufficient. Typically these SIPS were implemented under Section 112 of the CAA, which left it to the states to decide “the best system of emission reduction” (BSERs) to meet that standard. Generally, these were understood to let SIPs determine what technology to use to reduce pollution on a facility-by-facility basis.

The big difference with the CPP plan is that it takes these BSERs to the next level by announcing that SIPs should address four discrete “blocks” of issues that include modification of facilities but go beyond that to cover substitution of both natural gas and renewable energy for coal, and to taking measures to reduce the demand for energy within the state. Once the EPA proposed these additional measures, it became doubtful that it could act, as it traditionally had done, under Section 112, which deals only with emissions controls.

To avoid this problem, the EPA has asserted that it can regulate carbon dioxide emissions under Section 110, without regard to these limitations. Unfortunately, it appears as if resorting to Section 110 is only possible if regulation cannot be done under Section 112, which could be invoked now that the Supreme Court in its 2007 decision in Massachusetts v. EPA declared carbon dioxide a pollutant subject to EPA regulation. Unfortunately, the official text of the statute is of somewhat uncertain status because of the way in which it deals with two different versions of the 1990 CAA that were not fully reconciled in conference. The printed version limits the power of the EPA, while an alternative reading does not. Judicial decisions have pointed to a narrow reading of the EPA’s authority. Professor Tribe is surely correct to say that the EPA should not be accorded any administrative deference in deciding which version of the law controls. More likely than not, he is also not correct to claim that the printed version, done without an eye to the current controversy, should be accorded presumptive validity. In general, it is wise to have two different pathways to regulate the same types of pollution. Indeed, adopting this reading could abort the CCP before it gets off the ground.

Structurally, however, the CPP is subject to stronger objections that may yet play out in court. It is one thing to let the EPA specify the best technology for controlling pollution from a given source. It is quite another to allow it to venture into regulating the transmission and consumption of electrical power, especially since the first of these tasks is governed by the Federal Energy Regulatory Commission, or FERC, which normally leaves these issues to state control. This peculiar jurisdictional line up means that the FIP may not be able to incorporate any of the last three approaches that the EPA wants to be included in SIPs, at which point slashing carbon dioxide output from coal plants could require wholesale plant closings under the as-yet-stated FIP which may only be able to attack facility emissions directly.

EPA’s McCarthy praises the flexibility of her plans, by noting that the EPA “can look at stringency, timing, phasing-in, glide path,” and a lot else to make sure that grid reliability is not impaired. But therein lies part of the problem, for the question is just how much discretion should the EPA have in making decisions that could cost individual states and firms billions, especially since it appears that its direct regulatory authority to implement on its own only direct regulation of emissions from designated facilities. It looks therefore that the threat of very heavy direct cuts in output could be used to lever states to make alterations in local policy that the EPA is powerless to impose under its own authority. At this point, the crafty game of extending powers through threats does give rise to a serious constitutional challenge, as the EPA seeks to implement indirectly measures that it could not impose directly.

These difficulties are further compounded by the way in which the EPA sets its targets for different states, which, as Hill notes, could vary from as little as 11 percent in North Dakota to 72 percent in Washington. The huge differences are based on various local factors that relate to the ability to control carbon emissions. But the whole approach has to be taken with a grain of salt, given that the harm from carbon dioxide (which is itself the subject of serious scientific dispute, well summarized by Professor Judith Curry) in no way depends on the place from which it enters into the atmosphere, so that there is no issue of singling out dirty targets to clean up traditional forms of pollution in, say, high-sulfur areas.

Indeed, one great tragedy of this entire unfortunate episode is that it pushes further down the road any coherent way to deal with all forms of pollution. As I have previously argued, the best way to attack this problem is to direct attention to pollution outputs and not to elusive BSER standards under which it is not possible to ask the simple question of whether any particular reduction in pollution output is cost-effective. There could be a far more rapid shift to efficient coal plants if the EPA did not erect consistent barriers to getting new coal plants into service.

The huge level of discretion on these matters has given rise to the question of whether the coal companies can challenge the regulations on the grounds that they constitute a taking of private property without just compensation. On this point, Tribe’s claim that they can under current law is wholly unconvincing. The control of pollution lies at the heart of the government’s power to regulate under even the narrowest view of the takings clause. The effort to claim that somehow the EPA’s CPP “singles out” the coal industry for special treatment triggers one of the touchstones for a taking under modern law. But that principle usually applies to single parcels of land, not entire industry groups, so that it is highly unlikely that the coal companies could make out regulatory taking, under of all cases, Penn Central Transportation Co. v. New York City, which I noted in a recent column represents an indefensible expansion of state regulatory power to the confiscation of air rights when no threat of nuisance exists at all.

Tribe’s opponents, such as Revesz, Freeman and Lazarus, are therefore right to ridicule this constitutional argument. But their criticisms do not answer a more serious charge that can be levied against the CPP. Even if the end of pollution control is manifestly legitimate, the choice of means should be subject to higher levels of review than are often applied today. More concretely, the ability to set wildly different targets for different states opens up the real possibility that the EPA could help its political friends and hurt its political enemies. Right now, the courts are far too weak in the way in which they scrutinize this means-end connection in pollution. They should ratchet up their scrutiny of individual EPA determinations on carbon dioxide to see if they bear any relationship to sensible pollution control strategies, which on balance they do not.

At this point, the legal survival of the EPA’s CPP is anyone’s guess. Much will depend on the EPA’s own guidance documents about FIPs, which should come down this summer. But it is dangerous business to let the EPA take the coal industry hostage by this set of aggressive maneuvers. The Supreme Court’s initial wrong was Massachusetts v. EPA, which wrongly held that carbon dioxide counted as a pollutant under the Clean Air Act.

The simple point is that carbon dioxide raises unique issues that cannot be sensibly addressed within the basic Clean Air Act framework, which is why Congress should now legislate to take this confused matter out of the EPA’s hands. One central part of this technology is to ask the extent to which private incentives are likely to reduce overall carbon dioxide output, in light of improved technological efficiencies. A second key element is to develop a constructive national scheme that first updates the EPA’s 2009 endangerment finding on carbon dioxide, and then looks for a more even-handed regulatory scheme that does not hold an enormous dagger over the entire coal industry.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

Getting Environmental Regulation Right

Richard Epstein

The recent death of Ronald Coase has given rise to an outpouring of praise about his contributions to the field of economics and his influence on the complex world of institutional politics. In my interactions with Coase, he was always cautious and diffident about social prescriptions—the very opposite of an ideologue. He never engaged in overt political activity and he had little patience for political opportunists who turned his ideas to ends that his own cautious intellect did not support. He never proselytized like Milton Friedman, but was an understated and consistent critic of big government.

Sadly, in death, Coase is being swept into today’s overheated political vortex, most notably in a graceless column written by John Cassidy of the New Yorker. The column, “Ronald Coase and the Misuse of Economics,” castigates conservative intellectuals for using Coase’s insights to promote a slavish adherence to market solutions when it comes to the environment, leading, in Cassidy’s view, to “a conservative counter-revolution that turned the United States (and many other countries) into a coarser, less regulated, and less equitable direction.”

Cassidy’s uninformed and overwrought criticism cries out for a response.

Let’s start with the simple question of influence. Coase’s seminal intellectual contribution was his 1960 article, “The Problem of Social Cost,” which is apolitical. It has proved so influential over the last 50-plus years because it offers a coherent approach to environmental harms of use to liberals and conservatives alike.

Coase is taught regularly not only in environmental law courses, but also in courses like contracts, torts, property, and corporations. He is without question the most influential economist for lawyers who work on understanding property rights, liability rules, and, yes, government regulation. His work stresses the importance of transaction costs in dealing with social organization.

Two Parties, Zero Transaction Costs

Coase’s initial question asked how to treat pollution and similar externalities in a world with zero-transaction costs. His now paradigmatic case involved harmful interactions between a farmer and a rancher who are locked together in a land use dispute. In this two-person setting, Coase notes that if transaction costs are zero, then the assignment of rights and liabilities will not matter for determining the production levels of either crops (from the farmer) or meat (from the rancher).

Let the right be assigned to the farmer to keep the rancher off his land. If the rancher can make greater use of that resource, he will pay the farmer something to use his land. If not, no bargain will take place. Reverse the original entitlements, and the farmer will buy back the exclusive right if the land is more valuable for producing crops than for producing meat. If it is not, the entitlement will stay with the rancher. The original right assignment determines the relative wealth of the two parties, not the ultimate pattern of production.

Coase knew that his zero-transaction costs assumption was fanciful at best, so the second part of his analysis asked how property rights should be assigned when transactions costs are high. In the two-party situation, he rightly cautioned against assuming the rancher should be solely responsible for all precautions against harms from the joint interaction of two activities. In particular, many cases call for a joint care solution, so that the rancher reduces the size of his herd, while the farmer puts a less sturdy fence around his land. Some “victim precaution” helps lead to an efficient solution that maximizes the total value of crops and meat—a counterintuitive result that cuts against the environmental mantra of a “polluter pays” policy.

Many Parties, High Transaction Costs

One striking implication of Coase’s zero-transaction costs assumption is that it also works for cases with more than two parties. With zero transaction costs, all parties can resolve their differences instantaneously, so that all the right allocative decisions are made, as Cassidy himself acknowledges. The focus on the rancher and the farmer, however, can conceal the hard social problem, which is how to set up a property rights regime for a large population. That decision really matters in a positive-transaction costs world, because it is highly unlikely that voluntary transactions could correct any inefficiencies built into the original allocation.

It is just for this reason that the dominant choice of an initial position gravitates to a traditional system of private property and personal autonomy that gives one owner (or a small number of co-owners) the exclusive right to the possession and use of any given resource. Those rights in turn impose the correlative duty on all others to refrain from using or damaging that resource. This rule of mutual and reciprocal forbearance offers huge transaction costs gains that set up a round of voluntary exchanges among two or more parties.

In the initial position, everyone knows where he or she stands relative to everyone else; these rights remain stable as overall populations shrink or expand. And this regime works well regardless of the wealth or tastes of the many people governed by it. The next generation of Coasean defenders gravitated to this system for its social advantages, not to provide unwitting assistance to “right-wing groups” who “were doing the bidding of big business,” or to judges who were duped into thinking that they were doing good by “scrapping environmental regulations, and removing other restrictions on odious business behavior,” as Cassidy claims.

How then does Coase’s logic apply to environmental issues? As a first cut, it offers strong legal protection through both damages and injunctions against pollution that invades land, air, and/or water, both public and private. Those invasions can often be controlled by private lawsuits for major injuries concentrated in a few individuals.

But as early as 1536, the English court recognized that although private rights of action were appropriate for parties that suffer “special injury,” an administrative remedy had to be invoked to undo the nuisance, lest it cause widespread (if low level) harms to large numbers of other individuals. That mixture of private and public remedies remains, I believe, the best broad-based approach today to minimize in good Coasean fashion the enforcement costs needed to protect the initial entitlement.

This claim, however, must also be sensitive to Coase’s insight that it may be unwise to drive pollution to zero in a high transaction-costs world. A principle of “live-and-let-live” for low-level nuisances was clearly articulated in 1860 by Baron George Bramwell in Bamford v. Turnley. It also applies with equal force to modern environmental regulation. Cassidy foolishly assumes that undermining the enforcement of environmental laws is the big problem. But, as Coase reminds us, the risk of over-enforcement cannot be ruled out of bounds either. The question is how to strike the right balance.

Trading Emissions

Unfortunately, Cassidy peremptorily concludes that “there is seldom any reason to suppose that letting the market deal with externalities will produce a good outcome.” But he is going after a straw man. The right objective in this case is to find the right mix of regulation and markets to maximize the social gain from any given unit of pollution. And on this issue, it has been the so-called big business conservatives who have honed in on the right solution.

The correct environmental approach seeks to maximize the amount of useful output for any given unit of pollution. A very critical administrative law case, Chevron U.S.A. v. National Resources Defense Council, involves the use of a plant-wide “bubble” to control pollution. The program, championed by the Reagan administration, allowed any given plant to switch its production from one activity to another so long as it did not increase the total level of pollution, without having to first get an expensive and time consuming government permit. The program makes good sense from the Coasean point of view, as the increase in production comes at low transaction costs, without creating additional losses for others.

The bubble program is of course limited to pollution from a single source, and cannot organize trades of emission rights across plants, which should be encouraged so long as the buyer does not increase pollution beyond the seller’s level. The state sets the target, while markets increase useful output for the stated level of pollution.

The system also allows environmental groups to buy pollution permits, which they can retire or resell as they wish. But no direct regulation can reduce pollution to zero and hope to maintain a viable economy, so informed collective guesses are needed to determine the collective levels. Cassidy is so intent on denouncing conservatives that he never once addresses how widely accepted concrete proposals use government regulation to set up private markets.

Wetlands and Habitat Protection

Coase’s work is not only relevant to pollution, but also to burning issues such as wetland or habitat preservation. Here too markets usefully allow private bodies to purchase and protect sensitive environmental sites. Knowing that their resources are scarce, these organizations in their private dealings never demand a total cessation of output.

The Audubon Society allows for oil and gas drilling on its Louisiana land, accepting lower royalties in exchange for higher levels of protection for its sensitive properties. Increasingly, however, these trades rarely take place, as the same environmental groups now push for total moratoria on all development activities in a classic version of overprotection.

The same issue of government overreaching is evident in the common practice today of environmental agencies imposing onerous conditions on parties who wish to develop their land, unrelated to the actual or potential common law nuisances that these parties might create.

The issue, which received an erratic response in Koontz v. St. John’s Water Management District (2013), shows how these exaction programs lead to inferior environmental outcomes relative to the simple expedient of having the government impose general taxes on the public at-large to finance its own environmental improvement program. Exactions impose real inequities by insisting that new developers bear the brunt of general improvements enjoyed equally by others. In so doing, local governments hold landowners hostage by imposing an exaction that requires an owner to fork over a huge portion of his gains from development.

Yet since the government never commits its own resources to the project, no one knows whether its proposed improvements are cost-effective. Exactions create immense bargaining difficulties of the sort that Coase feared by forever tying up good projects in litigation or negotiations. Forcing the government to compensate from public funds avoids the bargaining hassles and leads to the selection of the right properties for wetland or habitat protection.

The takeaway from this discussion is that much of the serious environmental debate does not choose between markets and regulation. Rather, it asks what kinds of government regulations are likely to produce the right social results. Sometimes condemnation is superior to direct regulation. Sometimes it is not. Coase was right to be leery of adventurous regulatory programs that can misfire.

Cassidy’s crude effort to debunk property rights advocates is oblivious to the risks of his own doctrinaire approach to environmental issues. The strongest defenders of nineteenth-century laissez-faire had no wish to run roughshod over environmental interests. Indeed, like Baron Bramwell, they developed with great sophistication the common law backdrop that is still essential for the environment’s proper protection. Writers like John Cassidy seem fundamentally unable to get off their high horses to examine how various schemes of regulation actually work. If he had done so, he might not have portrayed Coase as the unwitting pawn of some pro-business conspiracy.