When D.C. Is Not the Problem

 | Dec 10, 2013 | 12:00 PM EST
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Many Americans believe most environmental problems begin and end in Washington, DC. The truth is most issues begin at the local statehouse and end up Washington.

At the state level, legislators frequently link their environmental and energy policies. They want to optimize their local economies and favor the local resources. Consequently, states do not always agree on policy. In fact, they frequently disagree.

Disagreements can erupt into hostilities, particularly when states believe other states are dumping pollution over the fence. It some cases, the amount of pollution crossing borders are reaching obnoxious levels.

Consider the position some cleaner states are finding themselves. If they could cork all emissions from all internal sources, their air would still fail to meet air-quality standards. That is because some states are finding the huge volume of air pollution rolling in from other states is causing them to fall below those standards.

The economic impact on a state failing to meet air-quality standards can be severe. In nonattainment areas, states cannot issue new air permits. No new permits mean states have difficulty attracting new businesses.

States in nonattainment areas do have options. They can trade existing permits. But it is a tricky process and the price tag can be stunning. The cost could be so high that the state loses the business to another state.

Maureen T. Koetz is the Principal Partner in Koetz and Duncan LLC. She describes the economics of trading air permits in Southern California. In "You Can Have It For a SONGS," she argues trading permits can cost a new business almost $400,000 a ton for each type of pollution.

Southern California is an example. By its own description, California's South Coast Air Quality Management District has the worst air quality in the nation when it comes to ozone and particulate matter. 

"Getting airshed access through a permit often requires enterprises to buy what are called offsets -- Emission Reduction Credits (ERCs) from a permanently eliminated operating source -- that are transferred to cover the emissions from the permitee. Depending on the supply and demands in the market for these precious ration coupons, the price per ton of offsets can be quite steep. For example, in 2009, an ERC for the ozone ingredient nitrogen oxide (NOx) was $398,000 per ton; sulfur dioxide (SO2) was $434,000 per ton. For comparison, California Carbon Allowances (CCAs) are currently trading just below $15.00 per ton."

Even at lower prices, local administrators can become litigious when another state dumps pollution across state lines. This may be the reason Politico and the New York Times are reporting that a new battle is erupting between some states.

According to Politico, "(e)ight East Coast states will petition Environmental Protection Agency (EPA) to place stricter air pollution regulations on nine states. The move is the latest salvo in a long-running dispute between 'downwind' states whose air pollution levels remain high in large part because of emissions carried by air currents from more coal-dependent states.

'I care about this because it's put Connecticut at an economic disadvantage,' Gov. Dannel Malloy said. 'We're paying a lot of money to remove these compounds from the air.'"

The eight states complaining are Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. The nine states affected by the complaint are Illinois, Indiana, Kentucky, Ohio, Michigan, North Carolina, Tennessee, Virginia and West Virginia.

Affected states have options. One is to ignore the complaint by arguing their plants are EPA complaint. That tactic could force the courts and EPA to promulgate even tighter rules.

Another option is for to the offending states to modify their policies and accelerate the retirement of coal-fired power plants. Of course, each state will address the issue in their own unique fashion.

It appears cross-border pollution could become a threat to natural gas and coal. When a state reaches environmental limits, it is forced to put a cap on its consumption of natural gas, particularly for power generation. In turn, this could limit investment in new gas turbines offered by General Electric (GE) and Siemens (SI). It could dampen Peabody (BTU) and other coal companies' long-term earnings.

The potential winners are renewable energy and nuclear power. In particular, Exelon's (EXC) fleet of nuclear power assets is located in some of the affected states. Since nuclear power produces no air emissions, nuclear wins over coal. Entergy (ETR) and Dominion Resources (D) also win as they have nuclear assets in or near the region, but not to the extent Exelon does.

The problem is not Washington, yet the problem is Washington. Today, the root cause for more regulation appears to be individual states and their disparate approaches towards energy and environmental policies.

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