CIAO DATE: 12/03

How to Get Clean Air at Less Cost

Randall Lutter

On The Issues

February 2002

American Enterprise Institute for Public Policy Research

New legislative bills would prescribe identical limits on aggregate power plant emissions of nitrogen oxides and sulfur dioxide. That would prevent the power industry from altering the ratio of those two emissions, even if doing so could improve air quality.

Congress is preparing new legislation to limit power plant emissions as if it were writing a recipe for a cake. Sen. James Jeffords, Vermont independent and chairman of the Environment and Public Works Committee, has enough support from other northeastern senators to move out of committee a bill specifying identical 75 percent emissions cuts for two pollutants that cause similar environmental problems—nitrogen oxides (NO_X) and sulfur dioxide (SO₂). The Bush administration has announced its support for a similar approach to these pollutants. These proposals are likely to raise emission control costs unnecessarily because they prescribe identical proportional cuts in different types of emissions.

Congress should instead adopt a more economically sensible approach that allows the mix of emissions to change but keeps air quality constant at the new level. This is possible because NO_X and SO₂, unlike most cake ingredients,

are substitutes. Adding salt while reducing flour wrecks a cake. But substituting NO_X for SO₂ can leave environmental protection unchanged because both pollutants affect the same key measures of air quality. If power plants could collectively substitute SO₂ emissions cuts for NO_X emission cuts (or vice versa) they could reduce their control costs without worsening environmental quality.

This economic approach is an important refinement to existing and proposed programs that cap NO_X and SO₂ emissions while allowing firms to trade emissions permits. Cap and trade programs, which have broad support because of the success of the Environmental Protection Agency's SO₂ trading program, let individual firms buy permits to emit NO_X or SO₂ if they perceive the price of permits

to be less than the cost of reducing their emissions. Thus each utility chooses its mix of NO_X and SO₂ emissions. Although the Jeffords bill and other legislative proposals offer this choice to individual utilities, they would prescribe specific numeric limits on aggregate power plant emissions of NO_X and SO₂, and so prevent the power industry from altering the ratio of NO_X and SO₂ emissions even if doing so could improve air quality.

 

Advantages of the Exchange

The economic advantages of exchanging NO_X and SO₂ emissions permits may be quite large for the nearly 2,300 emissions sources that new emissions caps might cover. In 2000, SO₂ allowances traded at $140 to $150 per ton, while NO_X permits sold for around $2,000. Given these values, a firm could give the EPA a permit to emit one ton of SO₂ (worth some $150) in exchange for a permit to emit one ton of NO_X (worth $2,000) and gain $1,850. EPA and environmentalists should like such a deal because it would not increase emissions and would greatly reduce environmental damages. A ton of SO₂ causes environmental damages three to five times greater than a ton of NO_X, according to EPA analyses.

Allowing power plants to substitute NO_X cuts for SO₂ cuts makes sense because these pollutants have very similar environmental effects. Both raise concentrations of fine particles, which in turn boost mortality risk and restrict visibility. Both pollutants also raise acidity of lakes and forests.

Nitrogen oxides but not SO₂ contribute to elevated ozone concentrations, but ozone causes public health problems less severe than those associated with fine particles. Moreover, ozone may be effectively controlled without deep cuts in NO_X emissions from power plants because two-thirds of all NO_X come from outside the utility sector.

In addition, small changes in NO_X or SO₂ from the levels of proposed caps will not cause significant health effects. The Clean Air Act already requires states to cut emissions in polluted cities so as to meet EPA's health-based air quality standards.

Exchanging NO_X and SO₂ permits could help the environment. Suppose a government office gave out forty NO_X permits in exchange for eleven SO₂ permits. So long as the expected incremental environmental damages from a ton of SO₂ were four times greater than from a ton of NO_X, as EPA's studies indicate, every such exchange would reduce expected environmental damages by the equivalent of one ton of SO₂.

 

Ensuring the Best Mix

While choosing the right NO_X-SO₂ exchange rate is admittedly difficult, there is no doubt that the outright prohibition of such exchanges envisioned by all congressional proposals is illogical. It makes sense only given the unrealistic assumption that no reduction in the emissions of NO_X (or SO₂), regardless of its size, could ever compensate for a one-ton increase in utilities' emissions of SO₂ (or NO_X).

The best mix of emissions cannot be prescribed by statute but needs to vary with economic factors. An approach that allows sources to exchange SO₂ emissions permits for NO_X emissions permits (and vice versa) could significantly reduce both the costs of controlling emissions and expected environmental damages. This approach should appeal to anyone genuinely interested in getting clean air for less. 

 

Randall Lutter is a resident scholar at AEI.