With the climate policy discussion now settling into lines of cap & trade vs. carbon tax, and allocation vs. auction, it has implicitly moved beyond the top-down, command-and-control models favored by early plans (and in particular the multi-pollutant, "4P" bills).

This market focus is a good thing, on balance. What isn’t good is that it’s only being applied to greenhouse gas pollution. Our existing air pollution laws create disincentives to GHG reduction. Modernization of these (non-carbon) pollution laws may be the single most important thing the federal government can do to lower GHG emissions. As we head out of the harbor, it’s time to haul up the anchor.

Relevant history

The Clean Air Act, coupled with New Source Review, has dramatically lowered SOx, NOx, and particulate emissions. It has also substantially increased GHG emissions. The reasons why are three-fold:

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1. The rules were set on a so-called "input basis." Come under a certain parts-per-million of exhaust and you are OK. Exceed it and you’re in violation.

This has the perverse effect of discouraging energy efficiency: if I lower absolute pollution (tons/yr) by 40% and cut fuel use by 50%, I have reduced the flow of fuel and combustion air by more than I’ve reduced pollution (e.g., the "millions" in the parts-per-million formulation). Thus my ppm actually increases and I can’t get a permit anymore.

2. Contrary to popular belief, the rules do not mandate maximum pollution reduction. Rather, they mandate the use of the maximum pollution reduction control technology. In other words, they confuse the path with the goal.

Thus, the regulatory directive is not to maximally lower pollution or (God forbid) select the most economical pollution reduction technologies, but simply to use a particular technology. This has yielded extraordinarily perverse outcomes in the environmental equipment industry, where the game is not to reduce pollution but to get named as the MACT/BACT (maximum/best available pollution control technology, respectively), and stay thusly named.

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Meanwhile, it has created problems common to any pass/fail grading structure. With no incentive for exceptional performance, emissions compliance has become a process attractive only to C students.

3. As has been thoroughly discussed elsewhere on Grist, it included grandfathering of old sources.

This has two impacts. One, it gives the old, dirty guys perpetual pollution rights, substantially slowing the natural turnover rate of new technology. On this level, it is tantamount to paying people to drive Dodge Darts running on leaded gasoline, but only if they were built in 1972. Those 1972-vintage power plants have become cash cows solely because of these grandfather protections.

But it has also had a second, more pernicious effect. Suppose you own a 1972 coal plant that is grandfathered, but you’re a good guy and you have an opportunity to increase the efficiency of that plant. Should you? Absolutely not. If you do, you will be making a major modification to the plant, triggering New Source Review and jeopardizing your grandfathered status. So NSR serves not only to slow the reduction of criteria pollutants, but to create a huge barrier to GHG reduction for existing generation assets.

So let’s look at the results.

  • Because of #1, we have compelled power plants to install pollution control technology that universally serves to lower the fuel efficiency of those plants, thereby increasing GHG emissions in the name of environmental protection!
  • #2 has served to essentially expel creative thought from the emissions control process, and made it verboten to invest in economically sensible pollution control (which is almost never MACT/BACT). And since the most economically sensible pollution control is to burn your fuel more efficiently, that is another knock in the wrong direction for GHG emissions.
  • And #3 serves to freeze technology in place, keeping not only better SOx/NOx/particulate control but more efficient generation from being deployed.

We can do better

There is a relatively easy way to fix this: simply shift to an output-based standard, and provide differential rewards (and differential penalties) to those who stray to either side of the standard.

Suppose, for example, that instead of saying "thou shalt achieve 100 ppm NOx or better," we said "thou shalt have the right to emit 5 grams of NOx per kilowatt-hour of power generation and 5 grams of NOx per MMBtu of useful thermal energy recovered." Then set up a market so that those who stray above these metrics must buy credits from those who stray below.

Now look what happens. Judged on an output basis, I have two opportunities to comply. I can lower my NOx or I can increase my production of useful energy.

If I install a solar panel, I find myself with NOx credits to sell, as a function of my annual power production. If I own a fossil-fired power plant, I can either purchase credits, install pollution control equipment, or recover some of my waste heat and sell it to my neighbor to get myself a few MMBtu credits (shutting down his NOx-source in the process).

A few states have taken the first tentative steps down this path (NY, TX, and CT, among others). The Regulatory Assistance Project has been a leader in building this framework. But in most cases, the rules are still top-down models that don’t create financial incentives to over-comply (or financial penalties for undercompliance).

The irony is that we appear to be heading toward a more market-oriented approach on GHGs. It would be tragic if we didn’t simultaneously modernize old pollution rules that, as currently formulated, stand in direct opposition to the intent of GHG policies. Let’s fix both.