Electric utility companies all over the country are feeling nervous right now. They have a reason to. The reason is the arcane provision in the Clean Air Act known as "new source review."
Because of NSR, Wisconsin Electric Power accepted a deal with the U.S. Environmental Protection Agency in April requiring it to spend $600 million to reduce emissions from five of its power plants. Just a few days earlier, Dominion Resources, the East Coast utility, agreed to a $1.2 billion settlement--the largest ever under the Clean Air Act--to cut pollution from eight plants in Virginia and West Virginia.
The NSR program, created in 1977, requires any company building new facilities to install modern equipment to minimize air pollution. Companies that modify their facilities in ways that could increase pollution are required to do the same thing. The program has been enmeshed in conflict throughout its life, and has not produced the results Congress intended.
But the Wisconsin and Dominion cases are a reminder that NSR can bring stiff fines and great uncertainty for industry. The two big- money agreements have left many utilities frightened that they could face similar fines. These companies have lobbied the Bush administration to change air pollution regulations to give them more flexibility. Environmental groups call this backsliding and insist that air pollution problems require tough action. "The Clean Air Act works," says Frank O'Donnell, of the Clean Air Trust, "if those in power bother to enforce it."
Whichever side one is on, however, there's little dispute that new source review has been a clumsy instrument of environmental policy. The most troublesome issue has been "grandfathering." When Congress created NSR, it faced two fundamental choices: either require all facilities to meet new standards immediately (and, in many cases, at enormous cost) or invoke the standards gradually, as the facilities themselves are modernized (thereby allowing companies to stagger their investments). Congress chose the latter option. In doing so, it never intended that the grandfathered facilities avoid meeting new pollution standards. In practice, however, many of them did.
That, in turn, has caused big problems for many states. State governments must meet federal clean-air standards. In fact, new source review underlines a major point of environmental policy: Congress sets national goals, but the states carry the main responsibility for meeting them. If they fail to do so, EPA can impose its own restrictions, or states can lose their highway funds. The problem has been especially difficult for Northeastern states, which must deal with their own pollution plus the dirty air that blows in, on prevailing winds, from states to the south and west.
Last December, the Bush administration and EPA proposed new rules that would make it easier for companies to comply with the law. However, attorneys general from 14 states sued to block the regulations. They claimed the new rules would make it harder for them to meet Clean Air Act standards. Nine states counter-sued to support EPA. This battle among states, industry and the federal government, fought in the courts with EPA as the immediate target, was a poster child for federalism gone bad.
How can we fix such a deeply rooted problem? Congress asked the National Academy of Public Administration to look for an answer. In a report released in April, based on the work of a panel that I chaired, NAPA recommended a back-to-basics approach. Instead of forcing EPA into the position of having to define just how much change is enough to trigger NSR, we concluded that Congress ought to replace the current rule-bound approach with a market-based system.
Companies should be required to bring facilities "up to code"--to meet the best current standards for reducing air pollution. But they should be able to use market forces to solve the problem. Companies that find it cheaper to reduce emissions could sell pollution credits to other companies. Companies having a more difficult time meeting the standards would purchase the credits. The market-based approach would replace unworkable regulations with efficient, market-driven incentives. The result would be tough air pollution standards and flexibility for industry.
Just such an approach has greatly reduced sulfur dioxide emissions and produced a lively pollution-reduction market on the Chicago Board of Trade. It has also replaced a regulation-heavy office at EPA with a staff of fewer than two dozen employees.
Applying market principles would produce win-win-win results: a more certain climate of expectation for industry, more effective regulation by government and lower levels of pollution for everyone. State governments would find it easier to meet their targets, and the smog of war between the states would gradually dissipate. The only losers would be companies that have used grandfathering to duck congressional intent and attorneys who have benefited from the endless litigation.