August 12, 2014 at 1:30pm
America’s electricity industry is at the heart of some of the nation’s and world’s biggest environmental challenges, including climate change. Yet the Federal Energy Regulatory Commission (“FERC”), which has regulatory jurisdiction over wholesale sales and transmission of electricity in interstate commerce and is charged with ensuring that rates and other aspects of the industry are “just and reasonable,” has an official policy of excluding environmental considerations from its oversight of the industry.
In “Toward Greener FERC Regulation of the Power Industry,” in the forthcoming issue of the Harvard Environmental Law Review, Harvard Law School alumnus Christopher Bateman and Environmental Defense Fund senior counsel James T.B. Tripp trace the evolution of this policy and argue that it is time for a new and better approach—one that integrates economic and environmental regulation of the industry, and helps the United States achieve a clean energy future, especially with respect to greenhouse gas emissions.
Bateman and Tripp explore the possibility of such an approach under the Federal Power Act (“FPA”), which provides FERC’s mandate. In doing so, they address FERC’s reasoning for its current policy and find these reasons unpersuasive. Contrary to FERC’s position, they argue, it is plausible to view the FPA alongside other federal laws as being silent or ambiguous about FERC’s environmental authority, thus permitting an environmentally inclusive approach within reasonable constraints. This reading of the FPA is reinforced by a host of policy considerations: the urgent need to address the U.S. electricity industry’s significant contribution to climate change; the inadequacy of and continuing uncertainty surrounding existing regulatory efforts on this front; FERC’s expertise in aspects of the electricity industry important to effective design and implementation of regulatory solutions; the unique nature of greenhouse gas emissions as pollutants and the feasibility of FERC regulation of carbon emissions in particular; and the glaring problems with our schizophrenic approach to energy regulation, in which environmental regulation and traditional utility regulation often undermine each other, creating inefficiencies.
The article offers concrete examples of the types of progressive industry reforms that would be possible under an environmentally inclusive approach, while also acknowledging and exploring the limits and challenges of this approach. On balance, Bateman and Tripp conclude, the rewards seem to far outweigh the risks. FERC’s current policy causes it to regulate essentially in the dark as to environmental costs and benefits. By incorporating environmental considerations into its oversight of areas such as transmission planning and organized wholesale electricity markets, and by approaching environmental problems in a coordinated way with EPA and other regulators, the Commission would make better informed decisions and could potentially help the nation achieve significant, welfare-maximizing reductions in greenhouse gas emissions.
The question of whether FERC is doing enough to address climate change is one that scholars and policymakers are increasingly starting to raise. Recently, a pair of Berkeley scholars proposed a set of reforms–endorsed by United States Congressman Henry Waxman on the floor of the House–that FERC could undertake across its jurisdictional areas to do more. Focusing on FERC’s oversight of the electricity industry, Bateman and Tripp reach similar conclusions about the need for FERC to do more, and seek to provide the most sustained argument yet for a new approach to meet the defining energy and environmental challenges of our time.
By Rachel Proctor May — June 16, 2014 at 10:25am
In ELR Volume 38.1, published earlier this year, Cary Coglianese and Jennifer Nash examined the track record of Performance Track, EPA’s flagship voluntary program for companies to commit to environmental regulation outside the legal process. That article, Performance Track’s Postmortem: Lessons from the Rise and Fall of EPA’s “Flagship” Voluntary Program, is available here. ELR’s Rachel Proctor May sat down with the authors to discuss the article.
ELR: Does the demise of Performance Track indicate a shift away from voluntary programs in environmental regulation? To what extent are voluntary programs still a part of the regulatory landscape?
Coglianese & Nash: Wouldn’t it be great if government could protect the environment without imposing burdensome regulations on business? Imagine that, simply by recognizing and rewarding businesses for adopting positive environmental management practices, government could induce firms to make substantial progress protecting the air, water, and land. That’s the appeal of voluntary environmental programs, like the National Environmental Performance Track adopted by EPA in the 1990s. Performance Track, long considered EPA’s “flagship” voluntary program, offered positive publicity and modest regulatory relief to companies that the agency considered to be environmental leaders. At least in theory, voluntary programs like this have the potential to change the behavior of businesses without the need for passing legislation, promulgating regulations, and overseeing compliance – and without all the costs and conflicts associated with these traditional approaches to environmental policy. In this sense, voluntary programs are the regulatory equivalent of Brigadoon. They hold captivating appeal. As a result, even though EPA ended Performance Track in 2009, voluntary programs remain an important part of the regulatory landscape and policy entrepreneurs will continue to advocate for them as an attractive alternative to regulatory business as usual. Not surprisingly, voluntary programs proliferate throughout government at the federal and state levels. EPA runs dozens of voluntary programs, about fifteen of which seek to address energy and climate change alone. And interest in voluntary programs extends well beyond EPA. The Department of Energy runs programs very similar to Performance Track, as does OSHA and many states.
ELR: Based on your analysis of Performance Track, is there a place for voluntary programs in environmental regulation? Are there certain sectors/regulatory targets in which they are particularly likely to be effective or ineffective?
C&N: Perhaps some kinds of voluntary programs might have value within the broad portfolio of environmental policy, but our research on Performance Track suggests that EPA and other agencies need to recognize the severe limits to this kind of voluntary program. Voluntary programs cannot, despite the claims of some of Performance Track’s proponents, provide a basis for revolutionizing environmental regulation. Advocates of such programs need to calibrate expectations and avoid making the kind of grandiose claims that EPA continued to make about Performance Track throughout its history. EPA and states repeatedly made statements about the “top performance” of those who joined voluntary programs. Indeed, the very name “Performance Track” implies that the program attracts members that are better performers than their peers. But Performance Track never really tracked facilities based on performance, nor could EPA ever demonstrate that the facilities that joined Performance Track did better in terms of reducing environmental impacts than facilities that did not join. On the contrary, evidence suggests that some Performance Track facilities were not even better than the average facility in the same industrial sector. When we compared facilities that participated in Performance Track and similar facilities that did not, we did not find the joiners to be any more responsible than the non-joiners. Instead, we found that what most distinguished joiners were their distinct preferences for engaging in community outreach. The joiners were, in effect, extroverts – not necessarily performance leaders.
ELR: What are your recommendations for designing voluntary programs to make them as effective as possible?
C&N: Government should be circumspect about the role of voluntary programs. Whatever claims agencies make about benefits from these programs should be backed up with careful research. EPA continually said that Performance Track produced results in the form of reductions in pollution and natural resource consumption. But EPA never collected data on trends in emissions and natural resource consumption of non-members, so the agency lacked support for statements about what change Performance Track may have caused. To its credit, EPA did seek to study why businesses joined Performance Track – including by funding some of our research – but it could never demonstrate that Performance Track led to any environmental improvements that companies would not have made anyway for other reasons. If EPA and other agencies are interested in exploring the potential of voluntary approaches to supplement traditional regulation, they should design voluntary programs with empirical evaluation in mind so that they can demonstrate their value. Only in that way will policymakers ever be able to understand how to make voluntary programs as effective as possible.
This blog post contains the views of the author alone, and does not necessarily reflect the opinions of Professor Coleman or ELR staff.
“What difference do you think you can make? One man in all this madness?”
-First Sergeant Edward Welsh, The Thin Red Line
Scholars have come to recognize climate change as “the quintessential global-scale collective action problem”—so large that even superpowers cannot tackle it unilaterally. But after two decades of painfully slow multilateral negotiations, commentators have begun reexamining the potential for action by individual states. Among them is James Coleman, Assistant Professor at the University of Calgary’s Faculty of Law, whose article, “Unilateral Climate Regulation,” we had the privilege of publishing in the latest volume of the Harvard Environmental Law Review.
Unilateral action, Professor Coleman’s argument goes, can have a disproportionately large and positive impact in two ways. First, it can provide an effective model to states that might not have the wherewithal to design their own mitigation strategies. For example, if the United States designs a simple, transparent system for regulating greenhouse-gas emissions other countries can copy it, thereby lowering the costs of implementing their own climate policies.
Second, countries may implement policies contingent on other states’ mitigation efforts—a “matching contribution” approach familiar to anyone who has ever sat through an NPR pledge drive. In this scenario, the US might agree to implement policies to lower its carbon emission by, say, 1 billion units, provided that China do the same. This effectively doubles the benefit to China of reducing its greenhouse-gas emission: at the cost of 1 billion units in reductions, China would receive the benefit of a 2 billion-unit reduction in global emissions.
Perhaps the most striking example of unilateral climate action is the just-released EPA decision to regulate emissions from coal-fired power plants. Alongside the obvious benefit of eliminating a substantial source of CO2 emissions, the new rule may provide a model for other countries to limit their own coal pollution. This effect will likely be all the stronger because of the visibility and importance of the United States to other states.
But Professor Coleman’s point also applies to smaller-scale efforts to tackle climate change. One example of action stalling on the perennial question, “what can one actor do?” is the divestment effort at Harvard. As President Drew Faust put it in an open letter to the community last October, “Universities own a very small fraction of the market capitalization of fossil fuel companies. . . . Divestment is likely to have negligible financial impact on the affected companies.”
Professor Coleman’s arguments regarding unilateral state action suggest at least a partial alternative, where Harvard would use informational effects and matching commitments to give its investment decisions greater clout.
First, divestment could improve the information available to other institutions. As an example, imagine that the university decides to divest from any energy company with less than $3 billion invested in renewables and reinvest it sustainably: Harvard would first determine what counts as renewable energy investment, then compile a list of energy companies’ investment in renewables, then identify other, “greener” investments. By making this research publicly available, Harvard could spare other institutions also interested in divestment the cost of making a similar investigation. Ultimately, this would tend to increase the number of divestors, magnifying Harvard’s impact.
The second strategy that Professor Coleman’s article could suggest to divestors is to avoid collective-action problems by implementing matching commitments. This approach, termed “strategic matching” in economics, envisions a large group of institutions all agreeing to divest if each other institution does so as well—just as many treaties do not go into effect until a certain number of state parties ratify them. The advantage to this approach is that no institution would be required to take any action until the group formed, at which point the aggregate benefit (in terms of pressure on the industry) will be many times larger than for any individual divestment action.
It is interesting to note that these strategies are used by the two responsible-investment organizations to which Harvard has recently become a signatory: the Principles for Responsible Investment (PRI) and the Carbon Disclosure Project (CDP). (It should be noted that many faculty members disagree with this approach.)The PRI Association requires that signatories to the PRI complete a self-assessment on their consideration of environmental, social, and governance (ESG) factors in their investment policy and then publishes a compilation of the results, along with an annual report analyzing trends in and case studies of ESG-conscious investment. In other words, they allow institutions to increase the impact of their ESG-focused decisions by providing information which both signals their commitment to responsible investing and is useful to other investors.
The CDP, on the other hand, focuses on information about companies in which its signatories may be invested. It allows signatories to endorse surveys of corporations’ environmental policies, and then provides the resultant data only to those organizations which agreed to endorse (and thereby lend the CDP reputational force). By withholding information until an organization endorses, the CDP essentially implements an asymmetrical matching-commitment strategy: it increases its own impact by requiring its signatories to help gather information before they get the results.
The lesson here is that there’s no such thing as acting alone. Every forward step encourages others, and by taking advantage of this any actor—whether a country, a university, or a single person—can have a much greater impact than its limited resources would suggest.
When the new Farm Bill finally passed this February, two years behind schedule, many environmental groups breathed a sigh of relief–if not outright celebrated. In addition to other conservation provisions, the bill included a hard-fought requirement for farmers to adopt basic soil conservation measures to obtain crop insurance subsidies. Although the soil conservation requirements aren’t new, they had not been linked to crop insurance subsidies for many years and instead were a quid pro quo only for receiving direct subsidy payments. With the new Farm Bill’s emphasis on crop insurance subsidies in lieu of direct payments to support the agriculture sector, the environmental need to tie conservation measures to crop insurance became acute.
Commonly known as “conservation compliance,” these Farm Bill provisions are aimed at reducing soil erosion by requiring farmers to develop conservation plans for what are known as highly erodible lands. Conservation compliance has contributed to substantial reductions in soil erosion. According to USDA data, soil erosion declined by about forty percent annually from 1982 through 1997. But despite the track record of success, it took a multi-year, concerted campaign simply to apply conservation compliance to crop insurance subsidies. Environmental groups rightly see this addition to the new Farm Bill as a victory. As Steve Kline of the Theodore Roosevelt Conservation Partnership, which helped lead the campaign, told EE News: “We are certainly going to be celebrating this bill . . . . . I do think it’s the best we can get.”
At the same time, however, conservation compliance only partially addresses the environmental consequences of large-scale commodity crop production. Not only sediment pollution, but also nutrient and pesticide pollution resulting from commodity crop operations can have harmful effects both locally and downstream. Nutrient pollution, for example, has had wide‐ranging and costly impacts—from the dead zones that form in the Gulf of Mexico and other water bodies, to polluted streams, rivers, and lakes, to contaminated drinking water.
Agriculture is the only major industrial sector that is routinely exempted from baseline environmental safeguards. This is not to say that there are no requirements in environmental laws that apply to the agriculture industry, but environmental laws are more noteworthy for their exemptions for agriculture than for their coverage of it. And while many agricultural operations do implement some stewardship practices, pollution resulting from commodity crop production remains a significant national problem.
As a result, the costs associated with the environmental impacts are not accounted for by either the seller of commodity crops (the farmer) or the purchaser (such as grain‐trading companies, meatpackers, and feedlots). Instead, the externalized pollution costs attributable to large-scale agriculture are borne by the public.
In an HELR article last year, we made two proposals. First, to reduce the impacts of downstream pollution, we argued that large‐scale commodity crop operations that choose to accept federal subsidy payments should assume responsibility for implementing a baseline set of stewardship practices designed to minimize nutrient pollution. The aim is not to establish a significant new administrative program, but rather a workable, streamlined process for adoption of stewardship measures that can be integrated into existing subsidy program administration.
Second, to increase public access to information on the sources and quantities of nutrient pollution entering surface waters and groundwater, we recommended that large‐scale commodity crop operations publicly report on the quantity, type, and timing of fertilizers they apply.
Disclosure of fertilizer usage would increase public access to information on the sources and quantities of nutrient pollution entering surface waters and groundwater, while at the same time helping to discourage practices that result in overuse. Existing environmental disclosure programs (think Toxics Release Inventory) work in part because they cause the disclosing entity to focus on its chemicals use, which in turn can lead to opportunities for reductions – some of which can save money and increase efficiency. Reductions also occur in response to perceived public or market pressure. The goal is to generate an easy‐to‐understand dataset while minimizing the administrative burden on operators.
We proposed that these requirements be applied to large-scale commodity crop operations—farms that produce crops such as corn, wheat, and soybeans and gross $500,000 dollars or more in annual sales—because as a class they represent a large share of production, can generate substantial pollution, have the potential to afford conservation measures, and receive the most federal farm subsidies.
The 2014 Farm Bill took an important step toward enhanced environmental protection by linking conservation compliance to crop insurance. And yet, much more can reasonably be expected of large-scale commodity crop operations as a condition of federal support. If we settle for retention of current requirements, we risk setting the bar too low.
As climate change threatens to reshape our coastlines and rewrite our expected weather patterns, it poses another less obvious but very real threat: climate change may decimate our retirement funds.
Investment funds, like other corporate forms, are bound by the bedrock corporate law tenets of shareholder primacy and profit-maximization. According to these principles, managers and officers are bound by their fiduciary duty to protect shareholders interests above all by seeking solely to maximize corporate profits. They are barred from considering outside interests at the expense of share value maximization (see, e.g., Dodge v. Ford Motor Co., 170 N.W. 668 (Mich 1919)). While corporations can act for the “public good” (by making donations), these actions must be framed as an instrument to maximize profits and benefit stockholders, for example, corporate donations increase goodwill (see, e.g., AP Smith Mfg Co. v. Barlow, 13 N.J. 145 (1953)). For years, investment fund managers have used the cloak of profit-maximization to avoid acting on climate change. To them, climate change is an ethical, non-financial issue, and therefore beyond the bounds of what they consider.
And yet, there is a growing understanding around the world that climate change is an inherently economic issue. The head of the IMF described climate change as “the greatest economic challenge of the 21st century.” Insurance companies are hopping on board as well, adjusting rates based on the increasing frequency of catastrophic weather events. Even the Department of Defense has begun incorporating climate change risks into its long-term planning. When your insurance company and your military start factoring climate change into their long-term economic decisions, shouldn’t your retirement fund do so as well?
Because climate change is an economic issue, it can be framed as necessary to profit-maximization and therefore can be included within the ambit of shareholder primacy.
Pension funds, with their enormous financial holdings and long-term strategy, are the perfect businesses to lead the way. Pension funds are inherently long-term investors, and their ultimate end is not just to raise money but also to ensure pensioners have a prosperous and secure retirement. Moreover, pension funds in the past have used their considerable financial clout to make investment decisions based on policy preferences. For example, a year ago, the California Teachers Retirement pension chose to divest from companies that manufacture firearms that are illegal in California.
By incorporating climate change risk and opportunity into investment calculus and strategies, pension funds can both increase fund returns and advance sustainability goals. Funds can both improve the environmental performance of companies already in their fund and also consider climate risk in evaluating and pricing new stock (e.g., might a company have to comply with costly greenhouse gas emissions regulations in the future). Really forward-looking funds should invest in solutions offered by clean energy and energy efficiency companies.
Making climate change into an economic issue may not be sufficient, though. In Funding Climate Change, Claire Woods argues that fiduciary duties are just one part of a greater problem keeping institutional investors from acting on climate change. She argues that “the realities of human behavior,” including “inertia and myopia” serve as the greatest barrier to sustainability investment. Similarly, in a talk on global warming and psychology, Harvard Psychologist Dan Gilbert explains that our psychological impulses make it difficult for us to confront global warming. As humans, we’re programmed to respond most to threats that are intentional, immoral, imminent and instantaneous; in contrast, climate change is silent, amoral and slow, allowing it to sneak under the radar.
To ensure that pension funds actively address climate change, we must make the issue salient and relevant to their bottom-line and thus to their beneficiaries. Corporate law can help: we should consider passing legislation to explicitly include environmental considerations and climate change within the bounds of pension funds’ fiduciary duties. Beyond the legal element, though, we must stress to investors the losses that may result due to the ravages of climate change (behavioral economics has taught us that humans are hugely averse to loss). We must engage pension-holders and ask them to put direct pressure on their pension fund, explaining that their money is at risk. Pension funds are should be investing for the future; instead they’re investing in climate change.
 Courts for the most part would likely agree with managers’ vision of climate change as a non-financial issue outside the bounds of what they can consider, though there are rare exceptions. Courts have allowed investment funds to consider social impacts of investment decisions; for example, a Maryland Court of Appeals, ruling on divestment from South Africa, wrote “[n]evertheless, we do not believe that a trustee necessarily violates the duty of loyalty by considering the social consequences of investment decisions.”
When it comes to corporate law, the Securities and Exchange Commission (SEC) is king. Most people connect the SEC with the stock market, the 2008 financial crisis, and Bernie Madoff. However, for four years, the SEC has required companies to tackle an unlikely target: climate change.
Generally, publicly traded companies are required to disclose material business risks to investors via regular filings (called “10-K filings”) with the SEC. In July 2010, the SEC published binding interpretative guidance requiring companies to address how climate change (and climate change regulation) could potentially impact their businesses in their annual 10-K filings. Like all SEC disclosures, this is aimed at informing market price and protecting investors.
The climate disclosure requirement has been shrouded in controversy since its inception. It was approved in a three-to-two split vote by the five SEC Commissioners. The two in opposition believed that the science was not robust enough to require regulation; this belief was bolstered by criticism by the electricity-generating industry. The House and Senate responded by introducing bills to prohibit enforcement of this disclosure guidance, with their supporters arguing that it was a job-killing veiled attempt to promote a political agenda.
Four years later, the question is: has it worked? Numerous studies have answered this with an unfortunate and resounding “no.” After poring over annual reports of 3,895 U.S. public companies listed on major stock exchanges, a citizen researcher found that almost 75% of the companies failed to mention “climate change” or “global warming,” including retail giants like Apple and Amazon. Of the 1,050 businesses that acknowledged climate change, few disclosed specific issues, with most mentioning that operating costs may be affected by pending EPA greenhouse gas regulation. A Davis Polk & Wardwell study similarly found no significant impact on disclosures.
Why might companies be ignoring the requirements? An ABA study found that companies felt climate change disclosure was a “speculative process” without recognized standards; meanwhile there was also little interest in climate change among potential investors and the financial community. However, a 2011 Ceres report did find that public companies had improved their climate change risk disclosures, but it also noted that corporate filers still need more experience communicating risk, because currently disclosures “often fail to satisfy investors’ legitimate expectations.”
Given SEC personnel and funding limitations, enforcement of the disclosure requirement is limited if not negligible. The toughest penalty for not properly reporting risks is requiring a company to rewrite the report. More often, the SEC simply requests more information in the following year’s report.
Despite these disappointing results, the SEC disclosure rule could still be viewed as a success simply because it puts the idea of climate change risks into the corporate consciousness. At the time the SEC passed the Guidance, the Commission took pains to explain it was “not opining on whether the world’s climate [was] changing.” Nevertheless, the disclosure requirement ensures that climate change is treated the same as any other financial, environmental, or regulatory risk that a company must disclose.
At the time the measure passed, Luis Aguilar, then the Democratic Chairman of the SEC, explained, “this release clarifies that effects resulting from climate change that are keeping management up at night should be disclosed to investors.” Despite this ambitious sentiment, it is not clear that climate change actually keeps officers and directors up at night (except perhaps those in the electricity-generating industry currently battling in court to prevent GHG emission regulations). Given the current lack of interest from managers, investors, attorneys, securities regulators, and the financial industry generally, disclosure does not seem like an effective tactic. Yet, with GHG emission regulations imminent, insurance costs rapidly rising, and the potential for regulation to limit coal, oil, and gas extraction and decrease share prices, a failure to take heed will likely come at an investor’s own peril.
With the recent announcements that the Vermont Nuclear Power Station will go off-line next year and that Brayton Point, the region’s large coal plant, is ceasing operations by 2017, the face of New England energy is going through a rapid transformation. As environmentalists call for a greener grid and policymakers search for new sources to meet their states’ energy demands, ISO-New England, the regional grid operator, estimates the area will need an additional 6,000 megawatts of electricity within a decade.
One possible solution? An ambitious plan to transmit 1,200 megawatts of dam-generated electricity from Quebec to New Hampshire.
The Northern Pass, a joint venture between Northeast Utilities, NSTAR, and the public Canadian utility Hydro-Quebec, was proposed in 2008 as a way to bring cheap, clean energy to New England. The project calls for 187 miles of transmission lines to be built from the Canadian border to southern New Hampshire, with the electricity eventually finding its way to the heavily populated metropolitan areas of Massachusetts, Rhode Island, and Connecticut. Proponents see the Northern Pass as a one-size-fits-all solution, offering reliable, inexpensive energy that’s cleaner than fossil fuels and safer than nuclear power.
But the Northern Pass has run into fierce opposition from many sides, leaving the ultimate fate of the project in doubt. The increasingly rancorous debate over the plan has centered around some of the most vexing problems facing environmental law today: the conflicting demands of conservation and energy production, the true costs of “clean” energy, and the proper role of state and federal regulators in designing the energy regimes of the future.
The most controversial aspect of the proposed project is the feared impact of the Northern Pass on the natural beauty of the White Mountains and surrounding areas. The project’s transmission lines would require rights-of-way hundreds of feet wide to accommodate towers up to 155 feet tall, and would be visible from miles away. Many conservation and recreation groups, such as the Appalachian Mountain Club, have warned that these towers would permanently scar New Hampshire’s wilderness, damaging both local ecosystems and a thriving tourist industry. Critics estimate that at least 40 miles of new transmission corridors would need to be built to run power through the state.
In this atmosphere of increasing indecision over the Northern Pass’s ultimate shape, federal regulators have gone forward with the permitting and approval processes. Because the transmission lines would cross an international border, the utilities must seek a special presidential permit from the Department of Energy. The DoE will consider how the project affects “the public interest,” and must also prepare an Environmental Impact Statement, to be released sometime in 2014 in draft form for public hearing and comment. A decision on the permit is not expected for at least two years. The Northern Pass must also pass regulatory hurdles from an array of other federal and state agencies. These concerns have led to growing calls to bury the lines. While the utilities maintain such a project would be prohibitively expensive, New Hampshire Governor Maggie Hassan made headlines in September by urging the utilities to explore this option more seriously.
Another point of contention is just how clean the Northern Pass’ hydroelectricity would be. A 2012 report by Synapse Energy Economics suggested that the reservoirs that Hydro-Quebec creates to power its dams release greenhouse gases at a rate equivalent to two-thirds of a typical natural gas power plant’s emissions, and that utilities have typically underestimated the carbon dioxide and methane released by decomposing organic matter trapped under the reservoirs. Groups like the Conservation Law Foundation have pointed out that many New England states may attempt to use Northern Pass hydropower as part of their Renewable Portfolio Standards, relieving them of the obligation to seek equivalent power from other, greener sources. The massive influx of Canadian hydroelectricity would not only be dirtier than previously assumed, critics argue, but would also cripple New England’s budding renewable energy sector by undercutting the competitive advantage of smaller utilities producing wind, solar, or tidal power.
What began, then, as an emblematic solution to a set of typically twenty-first century energy problems has morphed into a hard-fought, intensely political battle over how best to balance environmental protection with energy security and local concerns with regional demands. As policymakers at the state and federal levels attempt to wade through the competing interests and contradictory predictions surrounding the Northern Pass, stakeholders will continue to disagree over whose concerns are paramount. The coming months and years will offer a test case for how — or how not — to build the next generation’s grid.
If an agency uses cost-benefit analysis (CBA) to inform its decision-making, what costs and what benefits should it consider? A case currently before the D.C. Circuit, White Stallion Energy Center, LLC v. EPA, raises this issue. White Stallion suggests a tension between the incentives created by Office of Information and Regulatory Affairs (OIRA) review and those created by judicial review, such that an agency seeking to insulate itself from review from within the administration may end up exposing itself to increased risk of losing upon external (judicial) review.
White Stallion concerns one of the most important and expensive rules the EPA has ever promulgated: a regulation under Section 112(n)(1)(A) of the Clean Air Act (CAA) that requires oil- and gas-fired power plants to reduce their emissions of mercury and other hazardous air pollutants. The benefits of the regulation are staggering: monetized benefits of $37 billion to $90 billion, plus non-monetized benefits above and beyond that range. But the costs are also significant – approximately $9.6 billion per year. Among the issues before the court is whether the statute requires EPA to consider these costs, as industry challengers to the rule contend. EPA argues that Section 112(n)(1)(A) – which permits it to promulgate regulations that are “appropriate and necessary” to address hazards to public health posed by oil- and gas-fired power plants – does not require the agency to take costs into account.
Regardless of how the D.C. Circuit resolves that question, the way in which EPA did consider costs raises an interesting issue with broad implications. EPA did tabulate costs and benefits in its rulemaking, not because it believed the CAA required it to do so, but because Executive Order 13,563 requires all agencies (to the extent permitted by law) to adopt regulations “only upon a reasoned determination that [their] benefits justify [their] costs.” EPA’s use of CBA in this context may be seen as an example of what Jennifer Nou has identified as agency self-insulation: that is, an attempt to insulate the agency’s rule against review from within the administration at OIRA. The tension, however, is that, in insulating itself from review from within the administration – by demonstrating very positive CBA scores – EPA may have exposed itself to liability in external review.
Under D.C. Circuit precedent, agency rulemaking will not be invalidated for failure to conduct a CBA if consideration of cost is not required by statute. But if an agency relies on a CBA in making its decision (even if it is not required to conduct a CBA), the agency’s analysis must be reasonable to survive judicial scrutiny. Here, EPA explicitly did not rely on a CBA to make its “appropriate and necessary” finding; so the strength of the CBA will be irrelevant if the court affirms EPA’s legal theory that section 112 does not require consideration of costs. But if the court rejects this theory, EPA might be in real trouble. This is because EPA’s CBA estimated benefits from mercury reductions totaling just $4 million to $6 million. The vast majority of benefits from the regulation come from “co-benefits” due to reductions in particulate matter, PM2.5. EPA’s decision to regulate oil- and coal-fired power plants was based on health effects caused by hazardous air pollutants, under a provision of the CAA specifically focused on hazardous pollutants. PM2.5 is not a hazardous pollutant. Thus, there is an argument that EPA’s consideration of the benefits of PM2.5 reduction was arbitrary and capricious because these benefits are statutorily irrelevant for the purposes of Section 112.
In this case, the tension between intra-administration review and judicial review of an agency’s CBA will likely remain below the surface. EPA quite explicitly declined to rely on its CBA to justify its “appropriate and necessary” determination, and it has a very strong argument that this determination should be upheld under Chevron. But even if EPA is vindicated in the D.C. Circuit, the underlying tension between intra-administration and judicial review is unlikely to be resolved anytime soon.
This is because the tension between intra-administrative and judicial review highlights a larger problem: the shortcomings of our current environmental laws. Since the Reagan Administration, cost-benefit analysis has gained an increasingly prominent role in agency decisionmaking, and courts (the D.C. Circuit in particular) are increasingly likely to read cost-benefit balancing into statutes.
But the environmental laws have not been revised to reflect these policy choices. Agencies, left trying to make sense of laws that have not been revised in decades, are left in limbo. To pass muster at OIRA, an agency must justify its decisionmaking in terms of costs and benefits. In a case like this one, where the costs are very significant but the benefits are even greater, EPA has every incentive to insulate its rule with a CBA highlighting those great benefits. But reliance on a CBA of this kind may create a risk that a court will invalidate the rule as arbitrary and capricious.
 No. 12-1100 (D.C. Cir.).
 77 Fed. Reg. 9306 tbl.2.
 See Jennifer Nou, Agency Self-Insulation Under Presidential Review, 126 Harv. L. Rev. 1755 (2013). Nou suggests a “simple theory”: Under an anti-regulatory president, agencies will submit CBAs of poor quality to increase the costs of review for OIRA, making it less likely that OIRA will reverse the agency. Under a pro-regulatory president, agencies will submit high-quality CBAs to reduce the costs of review for OIRA, making it more likely that OIRA will approve the agency’s rule. Id. at 1806–07. The agency-OIRA interaction here suggests a complication to Nou’s “simple theory.” The Obama Administration would surely be considered “pro-regulatory,” but EPA might still feel a need to insulate itself because of the sheer magnitude of this rule and its high political saliency.
 OIRA is not the only body within the Administration that participates in review, but “OIRA” is often used as convenient shorthand for this review process. See Cass R. Sunstein, The Office of Information and Regulatory Affairs: Myths and Realities, 126 Harv. L. Rev. 1838, 1856 (2013).
 See Bus. Roundtable v. SEC, 647 F.3d 1144, 1148–49 (D.C. Cir. 2011) (invalidating agency action as arbitrary and capricious because, inter alia, it “inconsistently and opportunistically framed the costs and benefits” of its rule).
 77 Fed. Reg. 9306, tbl.2.
 See 77 Fed. Reg. 9306; CAA § 112.
 See Clean Air Act § 112, codified as amended at 42 U.S.C. § 7412(b)(1) (listing hazardous pollutants).
 See Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42–44 (1983) (holding that an agency acts arbitrarily when it considers statutorily irrelevant factors in its decision-making).
 Cf. Richard J. Lazarus, Congressional Descent: The Demise of Deliberative Democracy in Environmental Law, 94 Geo. L. J. 619, 629–32 (2006) (noting the lack of environmental legislation since 1990, with particular focus on the absence of new laws addressing substantive environmental issues, including climate change).
If you’ve been reading the ELR blog, you might also be interested to know that all of our articles from Volume 37.2 are now available in print and on our website! One article, Administrative Proxies for Judicial Review: Building Legitimacy from the Inside-Out, by Emily Hammond and David Markell, recently received a favorable review in JOTWELL. Hammond and Markell’s piece explores how to build legitimacy from the “inside-out” when judicial review of agency actions is unlikely or unavailable. The article presents an empirical study of an EPA process that allows parties to petition EPA to withdraw a state’s authority to administer environmental statutes (which EPA has the authority to do if the state is inadequately implementing environmental laws). EPA’s decision to withdraw authority is within its enforcement discretion, and is largely not subject to judicial review. Hammond and Markell evaluated a set of petitions that spanned a 25-year period to determine whether EPA takes actions to legitimize its decisions with regard to the petitions. The authors found that despite the absence of judicial review (and the unlikelihood that EPA would actually withdraw a state’s authorization to implement the law), EPA independently engages in behaviors to create internal legitimacy. EPA works to resolve the petitions informally, investigating the concerns raised in the petitions and negotiating with states to reach substantive outcomes. Hammond and Markell draw a number of lessons from this case study, and highlight institutional design features that might enhance “inside out” legitimacy.
In its review of the piece, JOTWELL states that the article is “a thought-provoking and admirable” piece of scholarship, noting that it raises central questions of administrative governance, offers a theoretical framework for evaluating the performance of agencies within the administrative state, and ambitiously seeks to connect theory with practice. With respect to this last feature of the article in particular – its connection of theory with practice – the JOTWELL reviewer notes that “[r]ather than articulating a theoretical framework and stopping there, the authors use their framework to structure their examination of actual agency process, to see how well the data fits the theory. This is good work. We need more of it.”
Don’t forget to check out the article, as well as the others in Volume 37.2, here!