In a bid to preserve some of the health and air quality benefits of a defunct regulation, House Democrats have floated a legislative proposal to codify the near-term emission reductions required under the Bush administration’s Clean Air Interstate Rule, a regional cap-and-trade program for utility emissions that was thrown out in July by a federal appeals court. (See “Court Kicks CAIR Rules to the Curb,” COAL POWER, August 2008).

The legislation, drafted by House Energy and Air Quality Subcommittee Chairman Rick Boucher (D-Va.) and obtained by The Energy Daily, would codify limits on utility emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) under the regulation’s first phase, which would have begun January 1. The draft also would delay the issuance of a Bush administration rule revising the Environmental Protection Agency’s New Source Review program until February 1.

Time Flies

The proposal is seen as having only a slim chance at best of being enacted into law, in part because of the limited amount of time remaining in the congressional session but also because of the sharply divergent positions within the utility industry and among other stakeholders about how to solve the multiple regulatory and legal problems created by the July 11 court decision.

Issued in 2005, the Clean Air Interstate Rule (CAIR) put in place an SO2 and NOx emissions cap-and-trade program for utilities operating in 28 states and the District of Columbia, with the initial reductions beginning in 2009 and a second round of cuts in 2015.

Environmental Protection Agency officials said the rule would trim annual SO2 emissions from the 2005 level of 9.4 million tons to 3.6 million tons by 2010 and to 2.5 million tons by 2015. For NOx, emissions would fall from the 2005 level of 3.2 million tons per year to 1.5 million tons annually in 2010 and 1.33 million tons in 2015.

But after numerous challenges by environmentalists, utilities, and affected states, the U.S. Court of Appeals for the District of Columbia Circuit vacated CAIR, saying the massive regulation was riddled with “several fatal flaws,” and ordered the EPA to rewrite the rule from the ground up.

The order provoked chaos in regional NOx and SO2 emission markets by rendering billions of dollars in emission allowances virtually worthless. Public health advocates warned that the decision will lead to thousands of premature deaths from air pollution—deaths the advocates say would have been prevented had the court upheld the rule and its emissions cuts.

No Common Ground

Soon after the court’s decision, industry officials began discussions to determine if there was any way to salvage the rule to preserve the value of pollution control equipment that utilities have purchased and installed to comply with the CAIR emission limits, and to restore the value of allowances they have purchased for CAIR compliance.

But because of the dizzying diversity of business decisions made by companies in anticipation of CAIR, and the impact of the court’s decision on utility planning, no industry consensus has emerged.

“My sense is that the majority of the regulated community would prefer to simply codify Phases 1 and 2 [of CAIR],” said an industry attorney. “I think the reason for this is CAIR was a negotiated rule that traded significant levels of emission reductions for an increase in regulatory certainty. My sense is that you can argue that codifying Phase 1 alone does provide an increment of certainty above the status quo . . . but not enough for a majority of utilities to take a position in favor of that approach.”

A spokesman for the Edison Electric Institute noted that the trade association for investor-owned utilities is still studying Boucher’s draft and has not reached a consensus among its members on whether to support such legislation.

Environmentalists also began discussing possible solutions that could save the public health benefits that would have resulted from the CAIR emission reductions. According to our sources, major environmental groups such as the Natural Resources Defense Council and Environmental Defense support the concept of restoring the Phase 1 emission cuts to recapture the health benefits that would ensue.

But greens also hope that a new administration, backed by what is expected to be stronger Democratic majorities in both chambers of Congress, will require utilities to make deeper, faster emission cuts than Phase 2 of CAIR would have required.

In a note to stakeholders accompanying the Boucher draft, subcommittee aides said that “[b]ased on discussions with representatives of states, environmental groups, the electricity industry and other [Capitol] Hill staff, it appears that there is a broad range of preferred outcomes ranging from no legislation this year to full codification of CAIR (including Phase 2).”

Other Options

Even as Boucher floated his draft legislation, a competing CAIR-fix proposal was circulated by Council on Environmental Quality (CEQ) Chairman James Connaughton.

Connaughton’s proposal, also obtained by The Energy Daily, calls for codifying CAIR in its entirety, and includes language aimed at ensuring that any tightening of the rule’s emission limits by the next president could not take effect immediately. The language stipulates that any changes to the rule by a future administration would not become final until they are “affirmed by a competent jurisdiction of judicial review” if the changes occur.

That means that any revisions to CAIR by the new administration could not take effect until all legal challenges are exhausted and a court upholds the revisions in their entirety.

In addition, while the CEQ proposal would deem as lawful various provisions singled out by the D.C. Circuit as violating the Clean Air Act, it would not provide such legal protection to any CAIR revisions issued by the next administration. Attorneys said this means that if the next administration seeks to revise CAIR using the same emissions-trading approach as the Bush administration employed, utilities, states, and green groups could file legal challenges based on the same legal arguments that were ultimately upheld by the appellate court.

Connaughton’s proposal is strongly backed by Southern Company, among other utilities.

—Chris Holly ([email protected]) is a reporter for COAL POWER’s sister publication, The Energy Daily (