Clean Power Plan: Acid Rain Part 2?

In a recent speech in Washington, D.C., EPA administrator Gina McCarthy dismissed potential criticism of the costs of the new Clean Power Plan by pointing to America’s success in reducing sulfur dioxide (SO2) emissions associated with acid rain. She said (correctly) that over the past 40 years, the U.S. slashed SO2 emissions while maintaining a growing economy. She warned darkly of “special interest critics” who would claim the new rules would be a threat to the economy. “They were wrong in the ’90s when they said exactly the same thing,” she claimed.

Some SO2 cost estimates were indeed too high. In 1990, the U.S. passed the Clean Air Act Amendments (CAAA), which introduced a cap-and-trade system to reduce sulfur air pollution. Critics warned that it would cost hundreds of dollars per ton of abatement, yet when the permits started trading, the price soon fell below market expectations and stayed there through the late 1990s and into the early 2000s.

But the factors that caused this do not apply to CO2.

Warnings about the economic impacts of the Clean Power Plan need to be taken seriously.

A coal-fired power plant has four options for reducing SO2 emissions: switch to low-sulfur coal, install flue-gas desulfurization systems (“scrubbers”), switch to a cleaner fuel like natural gas, or scale back operations. The latter two are the costliest. The first two are relatively inexpensive but do not work for CO2. There are no scrubbers for CO2, and there is no such thing as low-carbon coal. (Well, actually, there is: It’s called water, and it doesn’t burn very well.)

Unanticipated developments also played a role in driving down the cost of SO2 abatement. Prior to the 1990s, power plants in the eastern U.S. got most of their coal from nearby mines, which are high in sulfur. At the time that acid-rain legislation was being debated, railway deregulation was also being proposed, but it was not clear whether it would actually occur or how much competition would emerge in haulage. As it turned out, deregulation did happen, and increased competition substantially reduced the cost of moving low-sulfur coal from Wyoming to power plants in the East and Southeast.

Further, since power-plant operators did not anticipate this, they invested heavily in scrubbers during Phase I of the acid-rain program (1990 to 2000). In 1995, as the twin effects of scrubbers and cheap rail transport hit the market, emissions from units subject to the CAAA plunged far below expectations, taking permit prices with them. Since Phase I permits were bankable, power plants built up a large inventory to use in later years, and this kept prices low even as the cap was reduced in Phase II, which began in 2000.

The story changed after 2000. Permit prices had been projected to be $500-700 per ton in Phase II. As the stock of banked permits declined, prices trended up to $500 per ton by summer 2004, then shot to over $1500 per ton in late 2005 and early 2006 as generators coped with surging power demand and the expectation of further tightening of the emission cap. McCarthy seems conveniently to have forgotten this part of the story.

The situation changed again a year later when the EPA began to develop the Clean Air Interstate Rule (CAIR). This was a plan to group the permits by region in order to address the concentration of effects in downwind states. In 2008, as the recession hit and power demand fell, the average price paid in the annual EPA permits auction fell to $390 — below forecasts, but not dramatically so, considering the depth of the recession, which obviously could not have been foreseen in the ’90s.

But a surprise court decision in July of that year blocking implementation of CAIR caused the permits market to collapse. By the next winter the regulatory uncertainty and the recession combined to push prices below $70. Needless to say, no one could have foreseen this, either. And the court battle came about because of the interstate differences in targets, which also does not apply to CO2 since concentrations are globally uniform.

Since 2010, uncertainty over the future form of the rule, the lingering effects of the financial crisis, and the rapid development of shale gas has caused SO2 permit prices to drop to a few dollars per ton. Until the EPA develops an interstate trading rule that satisfies the courts, the SO2 market is all but defunct.

It is wishful thinking to suppose that warnings about the costs of cutting CO2 emissions can be ignored, always and everywhere, just because some early estimates of SO2 control costs were too high, over some intervals. The main factors causing the overestimates do not apply to CO2, and absent these, SO2 permit prices would have been in line with, and occasionally far higher than, forecasts. Warnings about the economic impacts of the Clean Power Plan need to be taken seriously.

Ross McKitrick is an adjunct scholar at the Cato Institute.