Grandfathering and Environmental Regulation: The Law and Economics of New Source Review

Article excerpt

INTRODUCTION

How should the law introduce a new, more stringent regulation that governs behavior that predates it? Should the law afford relief to actors that have been engaging in the behavior since before the new regulation's enactment? If so, in what form? And for how long?

In this Article, we consider these questions in the context of environmental regulation in general and the Clean Air Act in particular. Almost forty years ago, under the 1970 amendments to the Clean Air Act, Congress decided to subject new sources of air pollution to stringent pollution control standards. It "grandfathered" preexisting sources, leaving them free of federal regulation.1 In the ensuing decade, however, statutory and regulatory development made clear that a "modification" of a grandfathered plant that increased the plant's pollution emissions would subject it to the same federal standards applied to "new sources." The Environmental Protection Agency (EPA) determined on a case-by-case basis what constituted a modification, which triggered the new source standards, and what constituted "routine maintenance, repair, and replacement," which did not.

In December 2002 and October 2003, the Bush Administration adopted regulatory revisions that significantly extended the grandfathering of old plants. One regulation allows plant owners more flexibility in determining the baselines against which changes in pollution emissions levels are measured. This change decreases the number of modifications that are deemed to result in increased pollution emissions levels and, thus, that are subject to the New Source Review (NSR) program. The other regulation provides a safe harbor for modifications and renovations of grandfathered plants that cost less than twenty percent of the replacement cost of a grandfathered unit. The Administration justified these regulations by noting that the uncertainty of the existing case-by-case standard discouraged owners from undertaking desirable plant renovations. The new regulations, the Administration declared, would resolve this uncertainty without impairing environmental quality.

Environmentalists, and some states, challenged the new regulations, arguing that they extend the lives of obsolescent plants that should be taken out of service. Most of the regulations' provisions have survived judicial scrutiny. However, the United States Court of Appeals for the District of Columbia Circuit invalidated the twenty percent safe harbor.2 Even with respect to this invalidated regulation, however, the story continues. First, the Administration filed a certiorari petition, which the Supreme Court denied on April 30, 2007.3 Nonetheless, the EPA has indicated that in any event it may apply the safe harbor in its case-by-case analysis of whether to bring enforcement actions, thus giving it de facto effect.4 And, on September 14, 2006, the EPA proposed a further set of regulations, making it easier for plants to modernize without meeting the new source standards.5

In this Article, we present an economic analysis of the transition relief issue that the new regulations raise. We demonstrate that the new regulations are inefficient and would, contrary to the Administration's contention, worsen environmental quality. While certain transition relief may be appropriate in the context of environmental regulation, we argue that the relief should be limited in time. Moreover, because providing time-limited transition relief itself introduces the risk that recipients will seek to have that relief extended, we advocate that an appropriate system of time-limited relief should include disincentives to extensions.

The analysis here applies beyond the particular implications of the new regulatory revisions of grandfathering to new source review under the Clean Air Act generally. For example, in United States v. Duke Energy Corp., the Fourth Circuit concluded that a plant modification allowing the plant to operate more hours per day, thereby increasing its total yearly emissions, did not trigger new source review provided its hourly emissions rate did not increase. …