Abstract: Over the last half decade, a variety of federal legislative proposals for limiting greenhouse gas (GHG) emissions have been put forward, most of which would set a price on carbon. As of early 2013, the one politically plausible policy appears to be a carbon tax, passed as part of a larger fiscal reform package. Meanwhile, the US Environmental Protection Agency has begun regulating GHG emissions from a variety of sources using its authority under the Clean Air Act. It may be necessary to choose between these two policies, however. The Waxman–Markey cap-and-trade bill that failed in 2009 would have preempted much of this authority, and it appears likely that a carbon tax law would do the same. But how can one make this choice? What are the key questions and issues to consider? The purpose of this paper is to compare these policies. Our aim here is therefore not to determine whether an exchange is wise or unwise. Instead, our intention is to give policymakers and other interested readers an impartial assessment of both policies and, in particular, the features that are important to a comparative evaluation. We don’t give answers, but hope at least to give the right questions to ask.

Abstract: The U.S. Environmental Protection Agency’s (EPA) proposed greenhouse gas (GHG) performance standards for power plants are an important step forward in regulating GHGs in terms of both their substantive impact and legal precedent. Nevertheless, we have some concerns with the proposal, which we discuss in the following comments submitted to the agency. The majority of our comments are directed to ways that EPA can increase certainty for the industry—reducing costs and, possibly, improving environmental outcomes. We highlight two specific areas of concern. First, the current proposal contributes to the significant uncertainty facing existing sources. Second, EPA’s proposed averaging option for new facilities that will install carbon capture-and-storage (CCS) technology in the future, although intended to create a flexible pathway, unfortunately creates some new regulatory uncertainty. We also comment on EPA’s decision to combine most coal and gas generators into a single source category. We believe this decision is legally valid and practically important, and that EPA should resist pressure to reconsider.

Abstract: EPA is in the process of regulating U.S. greenhouse gas (GHG) emissions using its powers under the Clean Air Act. The likely next phase of this regulatory program is performance standards under Section 111 of the act for coal plants and petroleum refineries, which the agency has committed to finalize by the end of 2012. Section 111 appears to allow use of flexible, market-based regulatory tools. In this paper, we discuss one such tool, tradable standards. Tradable standards appear to be a legally and politically viable choice for the agency, and evidence suggests they are substantially more cost-effective than traditional performance standards. The paper discusses implementation issues with tradable standards, including categorization, banking, and phased implementation, as well as broader issues with the Section 111 rulemaking process as it relates to state-level GHG regulatory efforts.

Abstract: In their recent paper, “Efficient Pollution Regulation: Getting the Prices Right” (henceforth, EPR), Muller and Mendelsohn describe a broader, more appealing concept of efficiency that incorporates information on damages caused by emissions from specific sources: “The science and economics related to pollution control”, they write, “have advanced to the point where regulations can now move from cost-effectiveness to efficiency.” We argue that despite the appeal of the EPR solution, its conclusion that source-specific marginal damage estimates are ready for use in regulations is simply incompatible with the empirical evidence presented in EPR. In particular, we explore the implications of the EPR finding of negative marginal damages from NOx emissions for many heavily populated counties. The associated nonconvexities, we show, imply that the source-specific trading ratios that EPR advocates lead to unattractive outcomes not likely to be efficient. We also discuss how the EPR assumption that the regulators know damages with certainty oversimplifies key aspects of efficient air pollution regulation.

Abstract: Recent legislation has prompted federal regulatory agencies inside and outside the executive branch to develop numerous new major regulations. The Wall Street Reform and Consumer Protection Act alone contains more than 300 provisions expressly stating that rulemaking is required or permitted, although there is uncertainty about the number of rules because some provisions give regulatory agencies authority but not an obligation to issue a rule, some provisions may result in multiple rules, and rules may be used to implement yet other provisions that do not explicitly require or grant rulemaking (Copeland 2010). In summer 2010, the Commodities Futures Trading Commission (CFTC) released a list of 30 areas of rulemaking to implement the Wall Street Reform and Consumer Protection Act (CFTC 2010). The CFTC, like other “independent” regulatory commissions, develops and issues regulations outside the process of regulatory planning and review of the 1993 Executive Order 12866, continued in President Obama’s Executive Order 13563, “Improving Regulation and Regulatory Review” (President Obama 2011). These executive orders, like President Reagan’s 1981 Executive Order 12291, extend to regulatory agencies whose heads serve at the pleasure of the President, such as the Environmental Protection Agency and the Food and Drug Administration, but not to agencies intended to be independent of the President, whose heads can be removed only for cause. These independent agencies include the Consumer Product Safety Commission (CPSC), the Nuclear Regulatory Commission (NRC), the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the Federal Reserve Board. Regulations from these independent regulatory commissions (IRCs) are typically developed without adherence to the Executive Order 12866, which requires that major regulations be subject to an analysis of benefits and costs. Here we address the practice of regulatory impact analysis at IRCs. We explore whether information available to the public about the expected consequences of regulatory decisions by IRCs is comparable to or less specific than that made available by executive branch agencies issuing comparable regulations. We focus on only those agencies identified by the federal Office of Management and Budget (OMB) as having issued major final regulations over the past 10 years. We ignore other independent regulatory commissions and agencies, including some identified as such by statute (i.e., the Federal Deposit Insurance Corporation, the Federal Housing Finance Board, the Federal Maritime Commission, the Mine Enforcement Safety and Health Review Commission, the National Labor Relations Board, the Occupational Safety and Health Review Commission, and the Postal Rate Commission) (Paperwork Reduction Act, Section 3502(5)). We do not consider regulatory actions by some agencies that are clearly important, such as the International Trade Commission, whose mission includes administering the U.S. trade remedy laws within its mandate in a fair and objective manner. We do not assess whether final regulations recently issued by these agencies might rise to the level of “major,” nor do we explore the quality of any economic analysis they may conduct in support of regulations.

Abstract: Until recently, most attention to U.S. climate policy has focused on legislative efforts to introduce a price on carbon through cap and trade. In the absence of such legislation, the Clean Air Act is apotentially potent alternative. Decisions regarding existing stationary sources will have the greatest effect on emissions reductions. The magnitude is uncertain, but plausibly 10 percent reductions in greenhouse gas emissions from 2005 levels could be achieved at moderate costs by 2020. This is comparable to the reductions that would have been achieved under the Waxman-Markey legislation in the domesticeconomy. These measures do not include the switching of fuels, which could yield further reductions. The ultimate cost of regulation under the act hinges on the stringency of standards and the flexibility allowed. A broad-based tradable performance standard is legally plausible and would provide incentives comparable to the proposed legislation, at least in the near term.

Abstract: This study compares and contrasts regulatory and related practices—in particular, regulatory decisionmaking, risk assessment and planning processes, inspection and compliance, and organization structure, budgets, and training—of the Minerals Management Service (MMS, now the Bureau of Ocean Energy Management, Regulation, and Enforcement, or BOEMRE) with those of the Federal Aviation Administration (FAA) and the Environmental Protection Agency (EPA). Comparing MMS practices withthose of other federal agencies that also manage low-probability but high-consequence environmental risks provides a basis for identifying opportunities for enhancing regulatory capacity and safety performance in managing deepwater energy exploration and production. Our research finds important differences in processes for setting standards; peer review contribution to the rulemaking process; establishment of tolerable risk thresholds; and training of key staff. The paper concludes with several recommendations for how various EPA and FAA practices might be modified and used at BOEMRE to strengthen its regulatory and risk management processes.

Abstract: Federal regulatory policy and the evaluation of regulations using benefit-cost analysis continue to be quite contentious. Advocates for more regulation claim that benefit-cost analysis loses information andimpedes our understanding of the real beneficial consequences of regulatory action. Against this backdrop, economists and advocates of economic analysis have sought to improve the quality and technical content of benefit-cost analysis. This paper examines key changes made by the 2003 guidelines in Circular A-4 for regulatory analysis issued by the U.S. Office of Management and Budget in an effort to strengthen such analysis. This paper discusses the motivation and basis for these changes—the treatment of discount rates and uncertainty and the cost-effectiveness analysis for rules affecting health and safety—and evaluates the EPA’s response to the A-4 changes in its analysis of environmental rules.

Abstract: The history of emissions-trading markets in the United States is marked by change. Since cap-and-trade programs were first implemented on a large scale after the 1990 Amendments to the Clean Air Act, the U.S. Environmental Protection Agency (EPA) has repeatedly revised and replaced emissionstrading markets for nitrous oxides and sulfur dioxide. In each transition, the agency has had to decide what to do with emissions allowances banked in the earlier program. These banked allowances represent early reductions in emissions, with corresponding environmental benefits, but also the expectation on the part of regulated entities that they will continue to hold value in the future. Unsettling these expectationscan lead to price volatility, instability in markets, and erosion of buy-in from regulated entities and the credibility of regulators. The paper discusses EPA’s mixed record regarding these transitions and implications for the future of cap and trade as a policy tool.

Abstract: It appears inevitable, absent legislative intervention, that regulation under the Clean Air Act (CAA) will move beyond mobile sources to the industrial and power facilities that emit most U.S.greenhouse gas (GHG) emissions. We analyze the mechanisms available to the EPA for regulating such sources, and identify one, New Source Performance Standards (NSPS) as the most predictable, likely, andpractical, i.e. knowable, pathway. Based on the legal structure of the NSPS and the EPA’s traditional approach, we analyze a hypothetical GHG NSPS for one sector, coal electricity generation. This analysis indicates that efficiency improvements and perhaps biomass cofiring could be implemented through the NSPS, yielding modest but meaningful emissions reductions. Trading could also rein in costs. Though analysis is limited to one sector and does not include modeling of costs, it suggests that CAA regulation, though inferior to comprehensive climate legislation, could be a useful tool for regulating stationarysource GHGs.

Abstract: An understanding of the uncertainty in benefit and cost estimates is a critical part of a benefit–cost analysis. Without a quantitative treatment of uncertainty, it is difficult to know how much confidenceto place in these estimates. In 2002, an NRC report recommended that EPA move toward conducting probabilistic, multiple-source uncertainty analyses in its RIAs with the specification of probabilitydistributions for major sources of uncertainty in the benefit estimates. In 2006, reports by GAO and RFF found that EPA had begun to address the NRC recommendations, but that much remained to be done to meet the NRC concerns. This paper provides a further review of EPA’s progress in developing a quantitative assessment of the uncertainties in its health benefits analyses for the RIAs for four recent NAAQS rulemakings. In conclusion, EPA’s recent RIAs present the results of its uncertainty analyses in piecemeal fashion rather than providing an overall, comprehensive statement of the uncertainty in its estimates. In addition, its recent RIAs continue to focus on the concentration-response relationship and largely fail to address the uncertainty associated with the other key elements of the benefits analysis.

Abstract: Increasing energy security and lowering greenhouse gas (GHG) emissions have been prominent goals in recent energy and environmental policies. While these goals are often complementary, there may also be cases where they conflict. A case in point is the Energy Independence and Security Act of 2007 (EISA). The goals of EISA are to increase the United States’ energy independence and security as well as to increase the nation’s production of clean renewable fuels. Title I of EISA establishes new fuel economy requirements for American cars and trucks that can be expected to reduce both the nation’s future oil consumption and GHG emissions. Title II of EISA establishes mandates for the use of increasing quantities of low carbon fuels. While the Title II mandates will meet the energy security goal of EISA, the mandate for the use of at least 16 billion gallons of cellulosic ethanol by 2022 may conflict with efforts to substantially reduce the nation’s GHG emissions over the next 20 years. The nation’s production capacity for biomass may be limited by a variety of factors, such as land availability. The biofuels mandate in EISA will likely require shifting biomass from its potential use as a low cost, low GHG emissions energy source for the production of electric power. Thus, there is a trade-off between the energy security gains of the biofuels mandate under EISA and the more effective (in terms of GHG emissions reductions) use of biomass in the electric utility sector. One means of evaluating this trade-off is to examine the factors that affect “cost-effectiveness” in terms of energy security of diverting biomass from electricity production to cellulosic ethanol production. This paper identifies some of the key factors that affect the cost-effectiveness of the energy security and climate change goals of EISA. The cost-effectiveness of the EISA energy security goal will depend on (1) constraints on biomass production, that is, the extent to which the EISA mandate may crowd out the use of biomass to generate electricity; (2) the world oil price; and (3) the social cost of carbon.