The EPA is considering whether and how to use the Clean Air Act (CAA) to regulate greenhouse gas emissions (GHGs), especially carbon dioxide (CO2), as pollutants emitted from electric generating units (EGUs). This task is complicated by the fact that, unlike most other pollutants regulated under the CAA, CO2 is not an inadvertent byproduct of an industrial process; it is the direct product of fossil fuel combustion. A coal-fired EGU is bound by the second law of thermodynamics, and produces electricity by releasing both heat and CO2 into the environment. Improvements in efficiency of coal-fired EGUs are certainly possible, but their CO2 emissions can never be comparable to those of a hydropower EGU.
Despite recent shifts in the economics of electricity production, coal-fired EGUs remain a major part of our energy infrastructure. It is possible to imagine that Congress might some day decide that coal combustion is too harmful and should be banned in favor of, say, nuclear power; but it is also possible to imagine them doing the opposite. So far it has not done either of these things, nor has it delegated the authority to make such momentous decisions to the EPA. What it has delegated to EPA under the CAA, as interpreted by the Supreme Court, is the authority to set standards that reduce the pollution-intensiveness of various categories of industrial facilities, and charged the agency to do so using the “best” (which I read to mean the most economically efficient) system of emissions control.
Toward that end, this comment offers four principles for designing a rule. Together they are intended to achieve an economically efficient outcome—similar to a Pigovian carbon tax—but one that works within EPA’s existing authority.
First, EPA should continue to focus on an intensiveness standard rather than a mass-based standard. Arguably this is more congruent with EPA’s legal authority, but it has other desirable properties as well. A carbon-intensiveness standard is more equitable in that it avoids the regressive effects of a mass-based standard, and it is likely to be more efficient because it reduces the opportunity for rent-seeking.
Second, EPA should set a standard that is tiered by technology, recognizing the inherent differences in the carbon footprint of coal vs. oil vs. gas vs. other EGU technologies.
Third, EPA should allow for emissions trading, across technology tiers as well as within them. The agency should consider setting targets for states using a “composite standard” of the type proposed by the Regulatory Analysis Review Group (RARG) in the early days of the corporate average fuel economy (CAFE) standards.
Fourth, EPA should consider mechanisms that would tie the trading price for carbon credits to the domestic SCC, rather than to any fixed quantitative goal. By using a safety-valve feedback mechanism to stabilize the price at the SCC, the standard can act as a “last-ton tax”—with many of the desirable efficiency properties of a Pigovian tax on carbon, but one that works within the
limits of EPA’s current statutory authority.
This comment has two attachments, which will be discussed below. The first is the “Composite Standard” section of the RARG report of March 31, 1980. The second is the author’s earlier comment on EPA’s 2014 proposal for the Clean Power Plan (CPP). That 2014 comment goes into much greater detail on the economic theory of constraints on the intensive and extensive margins.