- The Washington Times - Tuesday, February 5, 2002

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 (NOx) and sulfur dioxide (SO2). The Bush administration soon will announce 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 NOx and SO2, unlike most cake ingredients, are substitutes. Adding salt while reducing flour wrecks a cake. But substituting NOx 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 NOx 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 NOx 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 NOx 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 NOx 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 NOx and SO2, and so prevent the power industry from altering the ratio of NOx and SO2 emissions even if doing so could improve air quality.

The economic advantages of exchanging NOx 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 NOx permits sold for around $2000. 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 NOx (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 3 to 5 times greater than a ton of NOx, according to EPA analyses.

Allowing power plants to substitute NOx 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 NOx emissions from power plants because two-thirds of all NOx come from outside the utility sector.

In addition, small changes in NOx 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 NOx and SO2 permits could help the environment. Suppose a government office gave out 40 NOx permits in exchange for 11 SO2 permits. So long as the expected incremental environmental damages from a ton of SO2 were 4 times greater than from a ton of NOx, as EPA's studies indicate, every such exchange would reduce expected environmental damages by the equivalent of one ton of SO2.

While choosing the right NOx-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 NOx (or SO2), regardless of its size, could ever compensate for a one-ton increase in utilities' emissions of SO2 (or NOx).

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 NOx 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 fellow with the American Enterprise Institute-Brookings Joint Center for Regulatory Studies.


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