Introduction

The Bush administration recently unveiled a set of measures to reform controversial clean air regulations called New Source Review (NSR). Rather than remedy NSR's problems, the administration has launched another pitched battle of the green wars between industry and environmentalists. Industry groups -- which have long claimed that the regulations are too costly and create disincentives to upgrading old plants -- applaud the plan, while some states and many environmental groups call it the biggest rollback of clean air standards in history.

In our opinion, NSR is a classic case of command-and-control environmental regulation, and is in desperate need of modernization. But the president's so-called "reforms" do nothing to remedy the regulation's most nettlesome features: its reliance on costly, prescriptive standards; its unintended consequences, which keep dirty old plants running long past their useful lifespans and discourage the transition to clean, new plants; and its chilling effects on innovation. Instead of fixing these flaws, the president's new proposed and final rules merely make it much easier for firms to avoid NSR when making production changes at existing plants, which, if anything, makes the problem worse.

As its name suggests, NSR heavily regulates new plants, or "sources," and does not regulate old plants unless they make a major upgrade. When triggered, NSR requires companies to undergo a lengthy permit review and typically install costly end-of-pipe technologies to control air pollution. By focusing on new plants instead of old ones, NSR misses the source of most pollution. The regulations also create an unduly complex and time-consuming permitting process, and impose a one-size-fits-all approach to pollution control technologies. In its present form, NSR is neither efficient from an economic standpoint nor effective from an environmental perspective.

In response to green-group pressure, a number of Democrats have opted to blithely defend NSR, rather than pursue Third Way policies with the potential to truly modernize the program and strike a balance between environmentalists and industry at the same time. Several multi-pollutant proposals currently before Congress present a major opportunity to improve air quality and make NSR's most cumbersome features -- the program's one-size-fits-all approach to pollution control technologies -- merely redundant. Wherever possible, progressives must resist the Bush administration's moves to only tinker around NSR's margins, as well as the temptation to join in the chorus of those who seek to uphold a badly broken program. Instead, they must revise the entire regulatory structure of clean air provisions to avoid the current paradigm that heavily regulates new sources but allows most old sources to avoid regulation. As this report shows, it may even be possible to create a deal that combines real NSR reform with much-needed regulation of carbon emissions, achieving a win-win for the environment. Reforms to NSR should proceed on two levels:

1. Wherever possible, replace NSR with comprehensive cap-and-trade regulations.

For electric generators, there is a cleaner, cheaper, and far better modern alternative to NSR. It is called cap-and-trade, a market-based regulation created by the government that caps total pollution and lets companies that can control pollution cheaply sell their emissions allowances to those that cannot. The ability to trade emissions reductions gives companies incentives to ratchet down pollution by rewarding them for shifting to cleaner fuels or cleaner new technologies. This very system, pioneered under the previous Bush administration, has successfully reduced the utility emissions that cause smog and acid rain, and holds great promise to control the gases implicated in global warming -- an enormous challenge that the White House simply refuses to acknowledge, much less act on.

Currently, Congress has advanced several cap-and-trade proposals for electric utilities, such as the Clean Power Act introduced by Sen. Jim Jeffords (I-Vt.), and the Clean Air Planning Act of 2003 introduced by Sens. Tom Carper (D-Del.), Lincoln Chafee (R-R.I.), and Judd Gregg (R-N.H.). These "four-pollutant" bills harness the power of the marketplace instead of command-and-control regulations to reduce emissions of carbon dioxide (CO₂), mercury, sulfur dioxide (SO₂), and nitrogen oxide (NO_x) from electric generators over time. However, they stop short of replacing NSR, which becomes redundant under a cap-and-trade system and simply creates costs without environmental benefits. It is imperative that cap-and-trade legislation be designed to largely replace NSR for sources covered under the legislation.

2. Make commonsense NSR reforms for sectors where cap-and-trade does not apply.

Comprehensive cap-and-trade legislation is a promising way to reform NSR in the electric utility sector. For the most part, however, no comparable proposals exist for other industrial sectors subject to NSR -- petroleum refining, chemical processing, natural gas transport, pulp and paper mills, automobile manufacturing, and pharmaceuticals. For these other sectors, Democrats must develop and apply more commonsense approaches to NSR's technical rules and practices, which are inflexible and fail to drive optimal environmental outcomes.

Environmental groups are correct to call for major improvements in environmental regulations, such as tightening standards for NO_x and SO₂, and regulating carbon emissions. But PPI also believes industry's concerns regarding environmental regulations' inflexibility and unduly high costs to be legitimate. We support stronger environmental standards. But these standards should be achieved at the least cost with minimal interference to legitimate business activity.

In what follows, we describe how progressives should pursue these principles to truly modernize clean air regulations. It is therefore useful to first understand the hotly debated NSR permitting program in greater detail and what the new and proposed Bush administration regulations will and will not do to fix it.