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Comments to EPA on Adding Flexibility to Greenhouse Gas Rules

Sadly, the idea that market forces can drive down the cost of public health regulation has lost favor in the past few years. The EPA’s long-delayed, first-ever greenhouse gas standards for new power plants (New Source Performance Standards or NSPS) offers an opportunity to make market mechanisms cool again.

The rules were proposed in the midst of an election-year battle over federal regulations. And the fight has been heating up lately with the rule cast as a part of President Obama’s “war on coal” and blamed for woes ranging from job losses to spiking electricity bills.

The accuracy of such claims is questionable (especially given the realities of the cheap cost of natural gas and a declining coal market). Industry pushback against EPA rules is hardly novel and is unsurprising here too. But to make the measure even more defensible, the EPA should tweak its proposal and maximize the efficiency of NSPS while easing compliance costs for businesses by applying market mechanisms.

The best flexible compliance mechanisms give businesses the elbow room to meet regulatory standards at the cheapest possible cost. They don’t make specific requests or requirements other than the levels of emissions that must be met so companies can find the most cost effective ways to do what they’re told.

Today, we sent comments to EPA suggesting that, in the case of NSPS, one of the easiest opportunities for including flexibility would be defining “air pollutants” as a mix of greenhouse gas standards. The EPA has the legal authority to do so and, in fact, has exercised the option in the past. Rather than individually regulating different pollutants, the standards could instead set emission requirements in terms of carbon dioxide (CO2) equivalents. By focusing on the aggregate rather than separate elements, companies could target their efforts towards the greenhouse gas that carries the lowest reduction cost.

The result: the same net decrease in emissions at a lower cost for business.

This approach could also be applied across an entire facility using a “bubbling” mechanism. Here, an imaginary bubble is placed over an entire facility and its level of emissions is calculated by averaging the rate across the bubble. As long as this overall emissions number is below a certain level, the plant is considered to be in compliance. This would give a power company the option of allowing excess pollution from one stack as long as it was offset by lower emissions from another.

There are also market tools that the EPA could implement: incorporating trading permissions into the regulation would be one. The rule could also allow state cap-and-trade programs to count towards emission reductions, a measure that could potentially garner more industry support. The early success of regional programs like the East Coast’s RGGI has demonstrated the additional benefits of market tools: companies are economically incentivized to lower their emissions even beyond a capped level.

Of course these opportunities to provide additional options might not matter if the EPA doesn’t extend the standards to cover existing plants. Even the agency admits that “indications suggest that very few new coal-fired power plants will be constructed in the foreseeable future” given market conditions that favor natural gas.

But incorporating flexibility and market tools in the final standards would set an important precedent for future rulemaking. And should existing plants eventually be phased in under the rules, then these mechanisms would already be in place to maximize efficiency.