Interstate pollution: How much should upwind states care if their filth blows next door?

Interstate pollution: How much should upwind states care if their filth blows next door?

Sep 7th 2013 | WASHINGTON, DC |From the print edition


“ON SOME days even if we shut down the entire state, we would be in violation of some health standards because of pollution coming over from other states.” Thus the late Senator Frank Lautenberg griped about foul air blowing into New Jersey. For years, upwind states could dump part of the cost of pollution onto their neighbours, while reaping all the benefits of the factories that caused it. Though banned by the Clean Air Act, such smother-my-neighbour policies persist.The Supreme Court may soon weigh in, however. It has accepted appeals by the Environmental Protection Agency (EPA) and the American Lung Association concerning the agency’s 2011 Cross-State Air Pollution Rule (CSAPR), which controls interstate emissions that cause ozone and fine-particle pollution.

Under the law states are responsible for cleaning their own air. They must also reduce emissions that “contribute significantly” to another state’s dirty air. The CSAPR is the latest attempt to give teeth to this “good neighbour” requirement. The rule’s scope is vast, covering 28 eastern and midwestern states. Power plants there were found to emit too much sulphur dioxide and nitrogen oxides, pollutants that can travel long distances and harm people.

The agency told these states how much pollution to cut and how to do it. By 2014 emissions were to fall to less than half of what they were in 2005. Proponents of the rule claimed it would prevent 400,000 asthma cases each year and save nearly 2m work and school days lost to respiratory illness. Detractors griped at the costs, estimated at $800m in 2014, and worried that the rule would drive up energy prices. Greg Abbott, the attorney-general of Texas, predicted that the CSAPR would kill jobs and make the power supply less reliable.

Aggrieved states, cities and power companies sued (the case is called EPA v EME Homer City Generation). A panel of appeals-court judges decided by two to one to strike down the CSAPR for going beyond the EPA’s legal authority. The judges reasoned that the rule might force states to cut pollution more drastically than is required by law. The court was also troubled by how the EPA went about rule-making: telling states how to reduce pollution without first letting them draw up their own plans. The upshot is that the EPA must tell states the exact proportion that each contributes to downwind pollution. Until then, the states need not cut emissions as the EPA has ordered them to.

On appeal, the EPA contends that the lower court’s reasoning ignores the reality of interstate air pollution. The agency argues that emissions move in complicated channels; polluters can send different quantities to multiple downwind areas. States can even be upwind for some emissions and downwind for others. Determining every state’s proportional responsibility is therefore impractical.

It is now up to the Supreme Court to clarify the extent to which states must be clean neighbours. It has agreed to consider whether the lower court exceeded its jurisdiction and whether the EPA reasonably interpreted what it means to “contribute significantly”. The court will also examine whether the CSAPR upset the delicate federalist balance underlying the Clean Air Act. Its decision could affect how the EPA regulates other pollutants, including greenhouse gases.

Court-watchers predict that the CSAPR will survive its grilling. Share prices of coal companies plunged when the justices accepted the case. But the nine are unpredictable and, until they rule, the nation’s leading green regulator will be mired in confusion.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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