INSIGHT: US EPA moving to regulate CO2

26 February 2009 16:44  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS news)--The Environmental Protection Agency (EPA) is moving inexorably toward regulation of carbon dioxide (CO2) as a pollutant, an action that some in business believe will de-industrialise the US - and there is no way to stop EPA.

The EPA said last week that it would review a Bush administration ruling that the Clean Air Act (CAA) did not require the agency to regulate CO2 emissions from new power plants.

In addition, the new EPA administrator, Lisa Jackson, told reporters that she had directed her staff to develop documentary support for a formal agency declaration that CO2 posed a danger to the environment and human health and must be regulated under authority of the Clean Air Act.

The two actions come as no surprise, but they have triggered wide alarm in the US manufacturing and general business sectors.
It is no surprise because the US Supreme Court two years ago ruled that EPA not only has authority under the Clean Air Act to regulate CO2 as a pollutant, the agency has an obligation to regulate the ubiquitous gas.

In its April 2007 ruling in Massachusetts v. The Environmental Protection Agency, the high court held that under the CAA: “EPA can avoid taking further action [to regulate CO2 and other greenhouse gases] only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do”.

Under the Bush administration, the EPA basically dodged the Supreme Court ruling, arguing that the issue of greenhouse gas emissions control was so vast and problematic that it should be Congress that decides how to proceed.

But under the administration of President Barack Obama, the EPA is virtually certain to implement the Supreme Court’s mandate and move to regulate CO2.

And because EPA would be acting in compliance with the high court’s 2007 ruling, business and industry attempts to challenge the agency’s decision in federal court would be pointless - the nation’s highest judicial authority has already told EPA it may and indeed should regulate CO2.

If EPA does rule that CO2 is an environmental and health risk - a decision known as a finding of endangerment - “then it is very difficult to see how any federal court could overturn that”, according to Jeffrey Holmstead, a partner at Bracewell & Giuliani, where he heads the law firm’s environmental strategy group.  Holmstead also served as an assistant EPA administrator during the Bush administration.

What will likely happen if EPA presses on to regulate CO2?

“It will be regulatory chaos,” said Bill Kovacs, vice president for regulatory affairs at the US Chamber of Commerce.

Under the Clean Air Act, any entity emitting more than 250 tonnes of CO2 would be subject to regulation.  As Kovacs and others point out, that criteria would include virtually every manufacturing facility in the nation, along with most commercial buildings, hospitals, schools and even retail businesses such as donut shops, fast food outlets - any business, factory or other enterprise that consumes energy and thereby emits CO2.

“This will reverberate all through the manufacturing sector,” said Garry Vaughn, economist at the Manufacturers Alliance. 

“CO2 is the direct product of burning fossil fuels, and fossil fuels - coal, oil and natural gas - account for the vast majority of all CO2 emissions because fossil fuels account for 85% of all US fuel use,” Vaughn noted, with the 15% balance of US fuels attributed to nuclear, hydro and geothermal along with a small portion of biomass, wind and solar power.

“If EPA is going to regulate CO2, it will be focusing on 85% of all energy use in this country,” Vaughn.

As a consequence, said Vaughn, “the EPA will decide how electric utilities, refiners, metal manufacturers, cement companies and chemical producers must operate”.

The immediate effect would be a sharp increase in the cost of energy because utilities would rush to dump coal in favour of cleaner burning natural gas, and many coal-fired power facilities probably would have to shut down outright.

Natural gas - a principal feedstock and fuel source for the US chemicals industry - would shoot up in price.

“There is no disagreement,” said Holmstead, “no one disagrees that any effort to control emissions of CO2 will drive up energy prices.”

“For manufacturing, and especially for energy-intensive manufacturing, there will be increased production costs and they will be less competitive in the global marketplace,” he said, “and my sense is that it will accelerate the movement of US manufacturing overseas.”

Vaughn agrees, saying that under EPA CO2 regulation, “the first order of effect would be to move any large industrial energy consumers, such as aluminium manufacturing, offshore”.

“Then the question is whether consumer industries of high-energy items such as aluminium would flow offshore as well, both because of increased US energy costs and to be near to their raw material sources,” Vaughn said.

That’s not to say that Boeing Aircraft Co. would simply pick up and move to Brazil, Vaughn said, but it would certainly influence the aircraft manufacturer’s decision on where to site its next production facility.  Wisconsin, Mexico or Brazil?  Not a difficult decision.

The National Petrochemical & Refiners Association (NPRA) also takes a dim and dire view of EPA regulation of CO2.

“The regulation of GHGs [greenhouse gases] under the CAA would constitute EPA’s single largest and potentially most complex assertion of authority over the US economy and Americans’ lifestyles,” said NPRA president Charlie Drevna.

“Regulation of GHGs under the Act would have enormous consequences for every facet of the economy, for industry large and small, as well as for the general population,” he said, adding: “Indeed, the potential impact on the country of any decision to regulate GHGs cannot be overstated.”

The only possible route to avoid EPA regulation of CO2 could be action by Congress to pass a more selective emissions control programme, such as a cap-and-trade mandate.

Indeed, there are many in business and industry who hold that the Obama administration is using the threat of EPA regulation of CO2 as a bludgeon to force industry to accept, even eagerly embrace a federal cap-and-trade mandate.

“I think the administration and Congress have been pretty clear about it,” said Holmstead.  “They’re reminding us they will have no choice but to go the EPA route unless business and commerce get on board with a comprehensive cap-and-trade measure from Congress.”

“Administration officials have been saying they would rather have cap-and-trade legislation,” Vaughn said, “but failing that the second-best approach would be through EPA.”

But Vaughn wonders whether Congress will have the political will to pass a cap-and-trade mandate, which would likely raise energy costs on everyone - consumers and business alike - by as much as 70%.

“Many members of Congress might want to avoid the responsibility for such a huge energy cost increase,” Vaughn said. especially when the US is struggling to emerge from a recession.  “If they fail to act, it will be left to the EPA to impose CO2 regulation and resulting energy cost increases directly on business but only indirectly on consumers.”

In other words, Congress could avoid the potentially sharp political consequences of imposing high energy costs on consumers and just let EPA and the White House take the blame.

Even if EPA were not already inclined to enforce the Supreme Court’s will, environmentalists would surely flood federal courts with suits to force EPA into action.

The huge irony of it all is that the resulting unilateral US regulation of CO2 would have no impact on global greenhouse gas emissions, because the emerging economies of China, India, Brazil and others have already ruled out any prospect of inhibiting their development by shutting down coal-fired power plants and other industry.

“We could shut down all of our industry in this country and accomplish little or nothing in reducing global emissions,” said Holmstead.

For Kovacs at the US Chamber of Commerce, the rush to CO2 regulation “illustrates how the environmental groups truly view the climate change debate”.

“It is not about developing new technologies that can produce non-fossil fuel energy sources,” he said. “Rather, it is about de-industrialising the US.”

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By: Joe Kamalick
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