Amicus Curiae Brief — Massachusetts v. EPA

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4972p Sie CaS

(29) OCT 2 4 2006

OFFICE OF >

No. 05-1120 THE CLERK

In the Supreme Court of the Gnited States

COMMONWEALTH OF MASSACHUSETTS, ET AL.,

Petitioners.

Vv.

ENVIRONMENTAL PROTECTION AGENCY, ET AL.,

Respondents.

On Writ of Certiorari to

the United States Court of Appeals

for the District of Columbia Circuit

BRIEF OF WILLIAM J. BAUMOL,

ROBERT W. CRANDALL, ROBERT W. HAHN,

PAUL L. JOSKOW, ROBERT E. LITAN, AND

RICHARD L. SCHMALENSEE AS AMICI CURIAE

IN SUPPORT OF RESPONDENTS

ERIKA Z. JONES TIMOTHY S. BISHOP

ADAM C. SLOANE Counsel of Record

Mayer, Brown, Rowe & RUSSELL R. EGGERT

Maw LLP Mayer, Brown, Rowe &

1909 K Street, N.W. Maw LLP

Washington, DC 20006 71 South Wacker Dr.

(202) 263-3000 Chicago, IL 60606

(312) 782-0600

Counsel for Amici Curiae

A NARDIN SES ESA PD IEE SEA

QUESTION PRESENTED

Amici will address the following question:

Whether the Environmental Protection Agency’s denial

of the petition to regulate emissions of greenhouse gases

from motor vehicles under Section 202(a) of the Clean Air

Act was reasonable in light of the global nature of green-

house gas emissions and the likely superiority of other meth-

ods for combating greenhouse gases.

TABLE OF CONTENTS

Page

Se STII ccrccusecaiencsccssnenhecuterinnadunscnssetiitens i

INTEREST OF THE AMICT CURIAE ...........0.scssecessseessenseees 1

INTRODUCTION AND SUMMARY .....0....:ccccssseseeeteeneees 2

ED crcicretnncinicninenciinmnnnenmiannmmninnns 7

I. GREENHOUSE GAS EMISSIONS ARE A

GLOBAL PROBLEM THAT DOES NOT LEND

ITSELF TO LOCAL, SINGLE-SECTOR

A Ie ns ecancsenncecernnvessiseiemnmiatenammnenentenmneneennns 7

II]. CONTROLLING CARBON DIOXIDE

EMISSIONS THROUGH CAFE STANDARDS

OR ZERO-EMISSION- VEHICLE MANDATES

WOULD PRODUCE A HOST OF ADVERSE

SRA ciisincsiciesnicieninnntisisinanntsiinbabecimnacines 10

A. The Use Of CAFE Standards Would Produce

Several Adverse Comsequences. ...........:scseseeeeeerees 10

B. Zero-Emission-Vehicle Requirements Also

Would Produce Adverse Consequences...............+.. 14

Ill. THE STANDARD-SETTING REGULATIONS

PROPOSED BY PETITIONERS BEFORE EPA

WOULD YIELD LOWER NET BENEFITS

THAN OTHER REGULATORY

ALTERNATIVEG. ............ greens oceneseniibnibeniusenemietammanants 15

CRIS AIEIIY coscecesessscnsessssccnsecovsscessesecosnensonssonsessucsuecses 18

TABLE OF AUTHORITIES

Cases: | Page

DePaepe v. General Motors Corp., 141 F.3d 715

SEL Cea cnc cnirennitareniadaennenineevietnnsniitnensnsteperiantennion 16

Engine Mfrs. Ass'n v. South Coast Air Quality Mgmt.

BE, FES CD, BOB GI wsccscvccececscecscssevevsqeeversemnensnnens 15

Statutes and —_—

Energy Policy Conservation Act, Pub.

L. No. 94-163, 89 Stat. 871 (1975).........cscccssseseseereeeeeeees 1]

eb ET TE 3, 5, 6, 15

ee eke Sb Pi iactcnssessishaninitscamnnsteninnseansiaindimeininnationins 3

49 U.S.C. § 32904(c)........ hisinsiniiaannnnbinunhiieimemimeianiaiagiiie 1]

eae Oe I niericinoniccnscnnppnensencocnnmnion posancnesssenssese 11

re Fe BD creer sescsensnccenenesesumeniersnionaranmninien i]

Miscellaneous:

William J. Baumol, On Taxation and the Control

of Externalities, 62 AM. ECON. REV. 307 (1972)............. 17

Robert W. Crandall & John D. Graham, The

Effect of Fuel Economy Standards on

Automobile Safety, 32 J.L. & ECON. 97 (1989) ..........004.. 13

ROBERT W. CRANDALL, HOWARD K. GRUENSPECHT,

- THEODORE E. KEELER & LesTER B. LAVE, REGULATING

eT cncintnniiiaceiipanididbisninieniantenotanietek 12

TABLE OF AUTHORITIES—Continued

ENERGY INFO. ADMIN., INTERNATIONAL ENERGY

ANNUAL (2004), http://www.eia.doe.gov/emeu/

ORIG cxceccervessssinsactenscnssnavatesaniemeanaaieaiaian 9

ENERGY INFO. ADMIN., PROJECTED INT’L CARBON

DIOXIDE EMISSIONS FROM ENERGY USE TO

2030 (REFERENCE CASE) (2006), http://www.eia.

doe.gov/oiaffieo/pdf/ieoreftab_10.pdf.............ccseeesereerers 9

GAO, Electric Vehicles: Likely Consequences of U.S.

and Other Nations’ Programs and Policies,

PRES, Dat, FE, BIG cnccscccecnsnrsnnesescsoeenpnentnitintets 14

David L. Greene, James R. Kahn & Robert C. Gibson,

Fuel Economy Rebound Effect for U.S. Household

Vehicles, 20 ENERGY J. 1 (1999) ........cccsssssceseserseeeeseres 11

David L. Greene, Vehicle Use and Fuel Economy:

How Big is the “Rebound” Effect?, 13 ENERGY

B. BEF GPRD xcncscossossvessssasstvecsonideseneasncinnbudemnbenseisnentite li

Lorna A. Greening, David L. Greene & Carmen

Difighio, Energy Efficiency and Consumption—

the Rebound Effect—a Survey, 28 ENERGY

POE 8 Sa GRD ccerccececascasesasinsessenesetiiteimaseapeiansanpiasiaie 12

Howard K. Gruenspecht, Differentiated Regulation:

The Case of Auto Emissions Standards, 72 AM. ECON.

REV. PAPERS & PROC. 328 (1982).......cccsccsesseeereceressereenes 12

Howard Gruenspecht, Zero Emission Vehicles:

A Dirty Little Secret, RESOURCES, Winter 2001,

at 7, available at http://rff.org/rff/Publications/

CUO, FD ccencccssnsscssesticssenntnetnatnnnmeneiaa 14

TABLE OF AUTHORITIES—Continued

Garrett Hardin, The Tragedy of the Commons,

162 SCIENCE 1243 (1968).........svcescsessveveesesssseveeereese

Clifton T. Jones, Another Look at U.S. Passenger

Vehicle Use and the ‘Rebound Effect’ from

Improved Fuel Efficiency, 14 ENERGY J. 99

Andrew W. Kleit, Impacts of Long-Range

Increases in the Fuel Economy (CAFE) Standard,

42 ECON. INQUIRY 279 (2004) ......cccccsseeeersrereeseereeees

Warwick J. McKibbin & Peter J. Wilcoxen, The

Role of Economics in Climate Change Policy,

16 J. ECON. PERSPECTIVES 107 (2002)............0:c000000

WILLIAM D. NORDHAUS & JOSEPH BOYER,

WARMING THE WORLD: ECONOMIC MODELS OF

GLOBAL WARMING (2000) ...0.........ccccceeeeeceeereeeeneeees

Paul R. Portney, Ilan W.H. Parry, Howard K.

Gruenspecht & Winston Harrington, The Economics

of Fuel Economy Standards, 17 J. ECON.

PERSPECTIVES 203 (2003) ........ccceseceseceecerseceeereseeeees

HARVEY S. ROSEN, PUBLIC FINANCE

IE CITI cctestencintentndscntscnsceninesssssconssossotceneesvesect

Robert N. Stavins, Vintage-Differentiated

Environmental Regulation, 25 STAN.

Be ile Randle SP GED ccccccscsccsdesseseecebensserescscsesecnsons

CASS R. SUNSTEIN, RISK AND REASON: SAFETY,

LAW, AND THE ENVIRONMENT (2002).............0.:c00000

TABLE OF AUTHORITIES—Continued

Page

U.S. EPA, INVENTORY OF U.S. GREENHOUSE

GAS EMISSIONS & SINKS: 1990-2002 (2004),

http://yosemite.epa. gov/oar/globalwarming.nsf/

content/ResourceCenterPublicationsGHGEmissions

USEmissionslInventory2004 html...............cccccceeeeeeeees 9,10

INTEREST OF THE AMICI CURIAE'

Amici are economics professors and scholars who have

expertise and write and teach on public policy, regulatory

economics, and the economics of environmental policy.

' All parties have consented to the filing of this brief. Pursuant to

this Court’s Rule 37.6, amici state that no counsel for any party in

this case authored this brief in whole or in part. The following non-

parties made monetary contributions for the preparation and sub-

mission of this brief: Arizona Automobile Dealers Association;

Automobile Dealers Association of Alabama; Automobile Dealers

Association of Greater Philadelphia; California Motor Car Dealers

Association; Chicago Automobile Trade Association; Colorado

Automobile Dealers Association; Detroit Auto Dealers Associa-

tion; Eastern New York Coalition of Automotive Retailers, Inc.;

Florida Automobile Dealers Association; Georgia Automobile

Dealers Association; Greater Cleveland Automobile Dealers’ As-

sociation; Illinois Automobile Dealers Association; lowa Automo-

bile Dealers Association; Kansas Automobile Dealers Association;

Kentucky Automobile Dealers Association; Maine Automobile

Dealers Association, Inc; Maryland Automobile Dealers Associa-

tion; Massachusetts State Auto Dealers Association, Inc.; Metro

Denver Automobile Dealers Association; Metro Portland New Car

Dealers Association; Michigan Automobile Dealers Association;

Missouri Automobile Dealers Association, New Hampshire Auto-

mobile Dealers Association; New Jersey Coalition of Automotive

Retailers; New Mexico Automotive Dealers Association, New

York State Automobile Dealers Association; Niagara Frontier

Automobile Dealers Association; North Carolina Automobile

Dealers Association; Ohio Automobile Dealers Association; Okla-

homa Automobile Dealers Association; Oregon Automobile Deal-

ers Association; Pennsylvania Automotive Association; Rochester _

Automobile Dealers’ Association, Inc.; Silicon Valley Auto Deal-

ers Association; South Carolina Automobile Dealers Association;

Tennessee Automotive Association; Texas Automobile Dealers

Association; Utah Automobile Dealers Association; Vermont

Automobile Dealers Association; Virginia Automobile Dealers

Association, Washington Area New Automobile Dealers Associa-

tion; Wisconsin Automobile and Truck Dealers Association.

Amici are

e William J. Baumol

Professor of Entrepreneurship and Academic Director

of the Berkeley Center for Entrepreneurial Studies,

New York University, and Senior Economist and

Professor Emeritus, Princeton University;

Senior Fellow, Brookings Institution, and Senior

Fellow, AEI-Brookings Joint Center for Regulatory

Studies;

Executive Director, AEI-Brookings Joint Center for

Regulatory Studies, and Resident Scholar, American

Enterprise Institute;

Professor of Economics and Management,

Massachusetts Institute of Technology, and Director,

Center for Energy and Environmental Policy

Research, Massachusetts Institute of Technology;

Director, AE]-Brookings Joint Center for Regulatory

Studies, and Senior Fellow, Brookings Institution;

Dean, Alfred P. Sloan School of Management,

Massachusetts Institute of Technology, and Professor

of Economics and Management, Massachusetts

Institute of Technology.

Amici file solely as individuals and not on behalf of any

institutions with which they are affiliated.

INTRODUCTION AND SUMMARY

Climate change poses serious environmental, social, and

economic issues that should not be neglected. The urgency of

these issues, however, should not obscure the fact that there

are better and worse policy instruments for responding to this

global problem.

This case arises from the D.C. Circuit’s denial of a peti-

tion for review that challenged the refusal by the United

States Environmental Protection Agency (“EPA”) to engage

in rulemaking to regulate “Greenhouse Gas Emissions from

New Motor Vehicles Under § 202 of the Clean Air Act.” Pe-

tition for Rulemaking at JA 5.’ Section 202 directs the Ad-

ministrator to prescribe “by regulation * * * standards appli-

cable to the emission of any air pollutant from any class or

classes of new motor vehicle or new motor vehicle engines,

which, in his judgment cause, or contribute to, air pollution

which may reasonably be anticipated to endanger public

health or welfare.” 42 U.S.C. § 7521(a)(1). EPA denied the

petition, based in part on its determination that, having regard

to “public health or welfare,” “setting [greenhouse gas] emis-

sion standards is not appropriate at this time.” Pet. App. A67.

The D.C. Circuit, in a lead opinion by Judge Randolph, held

that, in weighing “‘policy’ considerations” relevant to the

public health an welfare to deny the petition, the “EPA Ad-

ministrator properly exercised his discretion under

§ 202(a)(1).” Pet. App. Al4, A1S.

The rulemaking petition sought the regulation of GHGs

under Section 202(a) of the CAA, 42 U.S.C. § 7521(a)(1),

rather than just a determination that carbon dioxide, methane,

nitrous oxide, and hydrofluorocarbons are air pollutants

within the meaning of Section 302(g), 42 U.S.C. § 7602(g).

See JA 5, 6-7, 15, 16, 21-44. The court of appeals recognized

that the petition for rulemaking sought regulation of GHGs.

See Pet. App. All (“Petitioners sought to have EPA regulate,

under § 202(a)(1) of the Clean Air Act, carbon dioxide (CO2)

and three other greenhouse gases: methane (CHsg), nitrous ox-

ide (N20), and hydrofluorocarbons (HFCs)”).

? Throughout the remainder of this brief, we use the abbreviations

“GHG” to refer to greenhouse gases and “CAA” to refer to the

Clean Air Act.

EPA rested its decision not to regulate GHGs on a num-

ber of considerations. First, the agency stated that, “[bJased

on a thorough review of the CAA, its legislative history,

other congressional action and Supreme Court precedent,

EPA believes that the CAA does not authorize regulation to

address global climate change.” Pet. App. A67 (footnote

omitted); see also id. at A68-A78. EPA also concluded that,

even if it was authorized to regulate carbon dioxide under the

CAA, “Congress has not authorized the Agency to regulate

CO, emissions from motor vehicles to the extent such stan-

dards would effectively regulate car and light truck fuel

economy, which is governed by a comprehensive statute ad-

ministered by DOT.” Jd. at A67; see also id. at A77, A79-

A80. -

EPA also cited a number of policy considerations that

counseled against the regulatory action sought by the peti-

tioners. Specifically, EPA referred to the potential for con-

flict with existing White House policies and initiatives (Pet.

App. A67-A68), as well as concerns about the foreign policy

implications of the regulation. /d. at A68; see also id. at A85-

A87.

In addition EPA stated that, even if the Administrator

were to “find that GHGs, in general, may reasonably be an-

ticipated to endanger public health or welfare” (Pet. App.

A81), the agency would have the discretion not to regulate.

EPA stated that “[d]epending on the particular problem, mo-

tor vehicles may contribute more or less or not at all An im-

portant issue before the Administrator is whether, given mo-

tor vehicles’ relative contribution to a problem, it makes

sense to regulate them. * * * The discretionary nature of the

Administrator’s section 202(a)(1) authority allows her to

consider these important policy issues and decide to regulate

motor vehicle emissions as appropriate to the air pollution

problem being addressed.” /bid. (emphasis added). EPA con-

cluded that “{w]e do not believe * * * that it would be either

effective or appropriate for EPA to establish GHG standards

for motor vehicles at this time” (id. at A82), noting, among

other things, that establishing GHG emission standards for

U.S. motor vehicles would “result in an inefficient, piece-

meal approach to addressing the climate change issue.” Jd. at

A85.

It is this policy judgment that we address in this brief. In

doing so, we offer our perspective as economists, focusing on

whether, when considered through the prism of basic eco-

nomic principles, it makes sense to regulate GHGs — particu-

larly carbon dioxide — under Section 202(a) of the CAA.’ We

conclude that the regulatory proposals made by the petition-

ers before EPA are likely to have significant adverse impacts

and that there are alternative regulatory mechanisms for re-

ducing carbon dioxide emissions that are likely to be much

more cost-effective than the regulatory mechanisms provided

by Section 202(a).

The petitioners before EPA requested that carbon diox-

ide emissions from motor vehicles be regulated through per-

formance standards involving either Corporate Average Fuel

Economy (“CAFE”) regulations or a zero-emission-vehicle

* Our focus on carbon dioxide mirrors the overriding focus on

carbon dioxide in the petition itself — a focus discerned by the

court of appeals. See Pet. App. All n.2 (“[t]he rulemaking request

and the papers submitted to this court focus on the effects of

CO,”). As EPA observed in its decision document, although the

petitioners suggested a number of ways of reducing carbon dioxide

emissions, “[p]etitioners do not, however, address the potential for

reducing motor vehicle emissions of the other three [greenhouse

gases].” Pet. App. A62; see also Pet. App. A87 (“With respect to

the other GHGs ~ CH,, N,O, and HFCs — petitioners make no sug-

gestion as to how these emissions might be reduced from motor

vehicles”).

* A policy is said to be more “cost-effective” than another if it can

achieve the same overall goal, such as a specified reduction in pol-

lution, at a lower cost. See HARVEY S. ROSEN, PUBLIC FINANCE

257 (7th ed. 2005). “Net benefits” are simply benefits minus costs.

(“ZEV”) mandate.’ In response to the petitioners’ position

before EPA, we first discuss the problems inherent in at-

tempts to address a global commons issue like greenhouse

warming by regulating locally on an individual sector basis.

Next, we discuss the adverse consequences that would result

from CAFE regulations and ZEV requirements, which, as

noted above, are the principal regulatory actions sought by

petitioners before EPA. Finally, we discuss the widespread

preference among economists for regulatory mechanisms that

are more cost-effective and that provide more flexibility than

standard-setting regulations, such as those proposed sion the

petitioners before EPA.

Our conclusion is that regulation of carbon dioxide un-

der Section 202(a) is likely to bring with it a number of ad-

verse consequences. This does not mean that policies to con-

trol greenhouse gases should be rejected out of hand. Rather,

our view is that the use of the regulatory mechanisms af-

forded by Section 202(a) is insupportable and that there are

other more cost-effective policy options for addressing

GHGs that should be considered instead. In particular,

economists generally consider incentive-based mechanisms,

such as carbon taxes or marketable permits for carbon reduc-

tion, to be much more likely to yield net benefits than would

performance-based standards, such as those proposed by peti-

tioners before the agency. Accordingly, EPA’s decision not

to regulate under Section 202(a) was reasonable.

* That CAFE and ZEV regulation were the principal regulatory

options proposed by petitioners is clear from the petition for rule-

making. See JA 36-38, 39-41. EPA recognized this, as well. See

Pet. App. A87. EPA noted that petitioners also proposed “tire effi-

ciency standards,” but dismissed such a suggestion as irrelevant to

the setting of “‘standards applicable to the emission’ of an air pol-

lutant from a motor vehicle under section 202(a)(1).” J/bid. (quot-

ing Section 202(a)(1)).

ARGUMENT

We begin with some basic principles to which econo-

mists generally subscribe. First, other things being equal,

economic principles favor the choice of regulatory options

that are more cost-effective than alternative regulatory op-

tions. Economists also recognize that regulatory policies that

provide regulated entities with flexibility in choosing ways to

meet regulatory goals are likely to yield higher net benefits

than policies that do not afford flexibility to the regulated en-

tities. Flexibility in regulatory schemes allows regulated enti-

ties to tailor their compliance efforts to their particular cir-

cumstances, enhancing the likelihood that they will choose

cost-effective methods of compliance, as well as facilitating

innovation.

I. GREENHOUSE GAS EMISSIONS ARE A

‘GLOBAL PROBLEM THAT DOES NOT LEND

ITSELF TO LOCAL, SINGLE-SECTOR SOLU-

TIONS. |

The abatement of greenhouse gases presents a classic

“tragedy-of-the-commons” problem. See Garrett Hardin, The

Tragedy of the Commons, 162 SCIENCE 1243 (1968). In the

tragedy-of-the-commons, individual members of a commu-

nity make excessive use of a common area because they do

not take into account the costs that their individual uses im-

pose on others. As Hardin described it:

Picture a pasture open to all. It is to be expected that

each herdsman will try to keep as many cattle as

possible on the commons. * * *

As a rational being, each herdsman seeks to

maximize his gain. Explicitly or implicitly, more or

less consciously, he asks ““What is the utility fo me

of adding one more animal to my herd?” This utility

has one negative and one positive component.

(1) The positive component is a function of the

increment of one animal. Since the herdsman re-

ceives all the proceeds from the sale of the addi-

tional animal, the positive utility is nearly +1.

(2) The negative component is a function of the

additional overgrazing created by one more animal.

Since, however, the effects of overgrazing are

shared by all the herdsmen, the negative utility for

any particular decision-making herdsman is only a

fraction of -1.

Adding together the component partial utilities,

the rational herdsman concludes that the only sensi-

ble course for him to pursue is to add another animal

to his herd. And another; and another. . . . But this is

the conclusion reached by each and every rational

herdsman sharing a commons. Therein is the trag-

edy. Each man is locked into a system that compels

him to increase his herd without limit — in a world

that is limited. Ruin is the destination toward which

all men rush, each pursuing his own best interest in

a society that believes in the freedom of the com-

mons. Freedom in a commons brings ruin to all. -

Id. at 1244.

The case of GHG emissions presents a tragedy-of-the-

commons if individuals and firms are not appropriately

charged the full social cost that their emissions imposes on

others. Appropriate charges for GHG-emissions, and subsi-

dies for actions that reduce such emissions, can help achieve

the economically efficient level of GHGs — that is, the level

at which the marginal benefit of reducing an additional in-

crement of GHG emissions just equals the marginal cost of

reducing that increment.

Like other tragedy-of-the-commons problems, GHG

emissions are not efficiently solved in a piecemeal fashion. In

denying the rulemaking petition, EPA properly recognized

that an efficient solution to a GHG emissions problem must

involve other major emissions-producing countries, and not

just the United States, and must not be confined to a single

sector. Pet. App. A71-A74, A82, A85-A86.

A brief review of worldwide GHG production shows the

logic in the EPA’s decision. In 2004, the United States pro-

duced 21.9 percent of estimated worldwide manmade carbon

dioxide emissions.° China produced 17.4 percent and Russia

produced 6.2 percent.’ Although the United States is cur-

rently the largest producer worldwide of GHG, that status

will soon change. If current trends hold, China will be the

largest producer of GHGs by the year 2015."

Furthermore, GHG production is not limited to an indi-

vidual sector of an economy. In particular, transportation

produced only 26.8 percent of U.S. GHG emissions in 2002.°

Transportation was not even the sector that contributed the

most to GHG emissions in 2002. The most significant con-

tributor to GHG emissions in 2002 was electricity generation,

which was responsible for 33 percent of emissions. '° More-

over, the carbon dioxide emissions from fossil fuels that were

not produced by transport vehicles contributed to 49.4 per-

cent of US GHG emissions.'' By comparison, carbon dioxide

® ENERGY INFO. ADMIN., INT’L ENERGY ANNUAL (2004), http://

www.eia.doe.gov/emeu/iea/carbon.html, Table H.lco2 (“World

Carbon Dioxide Emissions from the Consumption and Flaring of

Fossil Fuels (Million Metric Tons of Carbon Dioxide), 1980-

2004”).

” Ibid.

* See ENERGY INFO. ADMIN., PROJECTED INT’L CARBON DIOx-

IDE EMISSIONS FROM ENERGY USE TO 2030 (REFERENCE CASE)

(2006), http://www.eia.doe. gov/oiaf/ieo/pdf/ieoreftab_10.pdf.

* U.S. EPA, INVENTORY OF U.S. GREENHOUSE GAS EMISSIONS &

SINKS: 1990-2002 (2004) table 2-6, at 2-8 to 2-9, http://yosemite.

epa.gov/oar/globalwarming.nsf/content/ResourceCenterPublication

sGHGEmissions USEmissionsInventory2004 html.

" Ibid. "

emissions from fossil fuels from the transportation sector

produced 25.4 percent.’

Consequently, because the emission of GHGs is not only

a multi-country problem but also a multi-sector problem, it

was reasonable for EPA to decline to address the issue

through the tailpipe emission standards sought by petitioners

before the agency.

II. CONTROLLING CARBON DIOXIDE EMISSIONS

THROUGH CAFE STANDARDS OR ZERO-

EMISSION-VEHICLE MANDATES WOULD

PRODUCE A HOST OF ‘ADVERSE CONSE-

QUENCES.

As noted above (page 6, note -, su ~a), petitioners be-

fore the EPA focused their arguments on regulation to con-

trol carbon dioxide emissions, and urged the use of CAFE

standards and ZEV mandates to control such emissions.’

Both of these approaches present a myriad of economic

problems, including serious adverse consequences.

A. The Use Of CAFE Standards Would Produce

Several Adverse Consequences.

In the denial of the petition for rulemaking, EPA ob-

served that “the only practical way to reduce tailpipe emis-

sions of CQ, is to improve fuel economy.” Pet. App. A79.

2 Ibid.

° The petitioners before EPA also urged the agency to take steps

to encourage the “market penetration” of hybrid vehicles — that is,

vehicles “combining a gasoline-powered engine and a battery-

powered electric motor.” JA 38, 39. The only method that the peti-

tioners proposed for enhancing the “market penetration” of hy-

brids, however, was the “setting of new § 202-based CAFE stan-

dards by the EPA.” /d. at 39. Thus, the concerns that we raise in

subsection A, infra, about the adverse consequences of new CAFE

standards also apply to the petitioners’ proposal that EPA take

steps to encourage the marketability of hybrid vehicles.

Therefore, the regulation of carbon dioxide emissions would,

in all probability, involve new CAFE standards.

Existing “CAFE” standards are set forth under the fed-

eral motor vehicle fuel economy program authorized under

Title II] of the Energy Policy Conservation Act (“EPCA”),

Pub. L. No. 94-163, 89 Stat. 871, 901, et seq. (1975) (now

codified at 49 U.S.C. § 32901, et seg.). The program is ad- -

ministered by the National Highway Traffic Safety Admini-

stration (“NHTSA”), a unit of the United States Department

of Transportation. NHTSA has administered CAFE standards

under the program for light duty motor vehicles for more

than two decades. These CAFE standards establish average

fuel economy levels that must be met by each vehicle manu-

facturer’s fleet. The average fuel economy for each fleet is

calculated under “testing and calculation procedures pre-

scribed by the Administrator” of EPA. 49 U.S.C. § 32904(c).

EPA’s procedures call for measuring certain exhaust emis-

sions, including carbon dioxide. The carbon dioxide emis-

sions are measured in terms of grams of carbon dioxide per

mile, and then converted into miles per gallon, according to a

formula in EPA’s regulations. 40 C.F.R. § 600.113-93(e).

With this information, EPA computes each manufacturer’s

fleet average fuel economy in miles per gallon, and reports

the results to NHTSA. 49 U.S.C. § 32904(e).

CAFE standards create a host of well-documented ad-

verse consequences. One such consequence is known as the

rebound effect. The rebound effect states that, by reducing

driving costs, fuel economy standards actually encourage

more driving and thereby increase congestion, pollution, and

traffic accidents.'* Such additional driving also would likely

increase the emissions of GHGs.

“ See, e.g. David L. Greene, Vehicle Use and Fuel Economy:

How Big is the “Rebound” Effect?, 13 ENERGY J. 117, 118 (1992);

David L. Greene, James R. Kahn & Robert C. Gibson, Fuel Econ-

omy Rebound Effect for U.S. Household Vehicles, 20 ENERGY J. 1,

1-2 (1999); Clifton T. Jones, Another Look at U.S. Passenger Ve-

The size-of the rebound effect is considerable. Econo-

mists have estimated that the rebound effect is large enough

to undermine the -ifectiveness of CAFE standards by be-

tween 10 and 30 percent.’* That is, a 100 percent improve-

ment in the fuel economy of the vehicle fleet would result in

a 10 to 30 percent “rebound” in the form of additional miles

driven. When added to the additional damage of increased

congestion and traffic accidents, it is clear that the goal of

CAFE standards is significantly undermined by the existence

of the rebound effect.

Another adverse consequence of CAFE standards is the

fact that they increase the cost of new vehicles. This, in turn,

provides incentives for individuals to delay the purchase of

new vehicles and continue driving their older vehicles, which

could have adverse economic consequences for various parts

of the automobile sector. Moreover, any delay in purchasing

new vehicles also delays the achievement of the environ-

mental benefits associated with newer vehicles that are pro-

duced with new technologies that decrease emissions.'®

Therefore, CAFE standards can actually increase the level of

emissions produced by vehicles, particularly in the short-

run.

hicle Use and the ‘Rebound Effect’ from Improved Fuel Efficiency,

14 ENERGY J. 99, 99 (1993) (discussing that the rebound effect re-

sults in an increase in vehicle miles traveled).

'S Lorna A. Greening, David L. Greene & Carmen Difiglio, En-

ergy Efficiency and Consumption—the Rebound Effect—a Survey,

28 ENERGY POL’y 389, 398 (2000) (table 3).

'€ See, e.g., Howard K. Gruenspecht, Differentiated Regulation:

The Case of Auto Emissions Standards, 72 AM. ECON. REV. PA-

PERS & PROC. 328, 330-331 (1982); ROBERT W. CRANDALL,

HOWARD K. GRUENSPECHT, THEODORE E. KEELER & LESTER B.

LAVE, REGULATING THE AUTOMOBILE 89-90 (1986).

" See, e.g., Gruenspecht, Differentiated Regulation, supra note 16,

at 331 (more stringent emissions standards for CO, NO,, and HC

in 1981 resulted in a short-run increase in the production of those

Still another potential consequence of CAFE standards is

their effect on vehicle safety, although this effect is still con-

tested. Economists have argued that one approach that vehi-

cle manufacturers can use to meet CAFE standards is a re-

duction in the weight of the vehicles they produce.'* Lighter

vehicles, on average, are linked with greater instances of in-

jury or death when vehicle accidents occur.'? Opponents of

this argument, however, state that it is unclear whether the

majority of vehicle weight reductions from CAFE standards

result in a conversion from mid-sized cars to small cars

(which could increase fatalities) or cause manufacturers to

limit the production of their largest cars and light trucks

(which could actually improve overall vehicle safety).”°

Nevertheless, it is clear that CAFE-like standards pose a

great risk of producing detrimental consequences. Thus, EPA

would be entirely justified in refusing the petitioners’ request

to promulgate them as a means of restricting the emission of

carbon dioxide from motor vehicles.

emissions in certain areas); Robert N. Stavins, Vintage-

Differentiated Environmental Regulation, 25 STAN. ENVTL. L.J.

29, 48-49 (2006) (regulations that impose standards for new auto-

mobiles depress sales and have “extended the useful lives of cars

on the road, and therefore can increase aggregate emissions,”

thereby compromising the cost-effectiveness of such regulations;

Po “alternative regulatory approaches merit ongoing explo-

ration”).

'® Robert W. Crandall & John D. Graham, The Effect of Fuel

Economy Standards on Automobile Safety, 32 J.L. & ECON. 97, 97

(1989).

9 Id. at 98.

Winston Harrington, The Economics of Fuel Economy Standards,

17 J. ECON. PERSPECTIVES 203, 211-212 (2003).

B. Zero-Emission-Vehicle Requirements Also

Would Produce Adverse Consequences

A ZEV-mandate also would produce a number of ad-

verse consequences, the most problematic of which would be

likely net increases in the emissions of non-GHG pollutants.

In fact, the category “zero emissions vehicle” is a misnomer:

ZEVs do produce emissions, just not from the tailpipe. Thus,

electric cars — the only ZEV yet to be produced on any wide-

scale basis — produce significant amounts of pollutants result-

ing from the production of electricity, because their batteries

must be recharged.”' Once an electric car’s battery is drained,

the car requires significant quantities of electricity before it

can be driven, and that electricity is genera enerally produced by a

fossil fuel or nuclear generation unit.“ In addition, the lead-

acid batteries used in ZEVs pose risks of increased emissions

of lead and other toxic metals and will require the processing

and recycling of many times more lead than is found in con-

ventional vehicles.”

In addition to the increased non-GHG pollutants associ-

ated with ZEVs, a ZEV mandate also would provide great in-

centive for consumers to retain their older combustion engine

vehicles for longer periods of time. When estimating the ef-

fect on net pollution from California’s mandate for the sale of

ZEVs, Howard Gruenspecht found that California’s ZEV

mandate would substantially increase vehicle emissions of

reactive organic gases and nitrogen oxides, on net.”* In par-

ticular, he found that the increase in such emissions from the

*! GAO, Electric Vehicles: Likely Consequences of U.S. and Other

Nations’ Programs and Policies, PEMD-95-7, Dec. 30, 1994, at

111.

2 Ibid.

3 Cf, Howard Gruenspecht, Zero Emission Vehicles: A Dirty Little

Secret, RESOURCES, Winter 2001, at 7, available at http://rff.org/

rff/Publications/Resource_Articles.cfm. :

** See id. at 8.

increase in the retention of existing vehicles would be be-

tween 3 and 15 times greater than the decrease in emissions

enjoyed from ZEVs.”°

In summary, a ZEV mandate also would produce signifi-

cant adverse consequences. Thus, EPA’s policy judgment not

to promulgate such a mandate was a reasonable exercise of

the agency’s discretion.

Il. THE STANDARD-SETTING REGULATIONS

PROPOSED BY PETITIONERS BEFORE EPA

WOULD YIELD LOWER NET BENEFITS THAN

OTHER REGULATORY ALTERNATIVES.

The petition for rulemaking sought regulation under Sec-

tion 202(a) of the Clean Air Act, which requires EPA in

specified circumstances to regulate by setting “standards” for

emissions of pollutants from new motor vehicles. See Peti-

tion for Rulemaking, JA 5, 6-7, 15, 16, 21-44; see also Pet.

Br. 3 (“In 1999, the International Center for Technology As-

sessment and other parties petitioned EPA to set standards

for four chemicals emitted by new motor vehicles: carbon di-

oxide, methane, nitrous oxide, and hydrofluorocarbons”).

As this Court has recognized, under Title I] of the CAA,

which includes Section 202(a), “standards” refers to “re-

quirements such as numerical emission levels with which ve-

hicles or engines must comply, or emission-contro] technol-

ogy with which they must be equipped.” Engine Mfrs. Ass'n

v. South Coast Air Quality Mgmt. Dist., 541 U.S. 246, 253

(2004) (citations omitted; citing subsections 202(a)(3)(B)(ii)

and 202(a)(6)). )

As noted above, the petitioners before EPA primarily

sought standards-setting regulations in the form of CAFE re-

quirements or a ZEV mandate. See page 6, note 5, supra. The

CAFE and ZEV mandates proposed by the petitioners before

EPA would involve the imposition of performance standards.

> Ibid.

16 :

In general, regulation through performance standards is pref-

erable to regulation by means of design standards.”* See, e.g.,

CASS R. SUNSTEIN, RISK AND REASON: SAFETY, LAW, AND

THE ENVIRONMENT 270 (2002) (“A ‘performance standard,’

telling people (for example) to reduce sulfur dioxide emis-

sions to a certain level, is better than a technology require-

ment [i.e., design standard] simply because it is more flexible

and allows companies to meet the standard as they choose”).

Nevertheless, despite the general superiority of perform-

ance standards to design standards, there can be still more

cost-effective ways to regulate, depending on the circum-

stances. For instance, a carbon tax or marketable permits for

carbon reduction both are likely to be more cost-effective ap-

proaches to controlling carbon dioxide emissions than would

CAFE regulations or a ZEV mandate. As Professor Sunstein

notes in connection with the use of tax schemes for regulat-

ing pollutants,

[bjut much of the time, a still] better approach [than

performance standards] is to impose a tax on harm-

ful behavior and to let market forces determine the

response to the increased cost. In many settings, the

best approach is for government to impose fees on

those who put pollutants into the atmosphere. Con-

sumption of the harm-producing good will decline.

People will, for example, be less likely to use high-

polluting gasoline; emissions of carbon dioxide, the

leading contributor to global warming, will decline.

*° For the distinction between performance standards and design

standards in the context of motor vehicle regulation, see DePaepe

v. General Motors Corp., 141 F.3d 715, 718 (7th Cir. 1998) (“De-

sign standards specify what a component of a vehicle must be; per-

formance standards specify what the component must accom-

plish”).

SUNSTEIN, RISK & REASON, supra, at 270.7’

The use of alternative incentive-based regulatory ap-

proaches would afford regulated entities greater flexibility

than would the performance standards advocated by the peti-

tioners before EPA. Such approaches would be likely to yield

higher net benefits than would CAFE regulations or a ZEV

mandate. For example, these alternative approaches could be

more cost-effective than CAFE regulations or a ZEV man-

date by achieving the same overall level of emissions reduc-

tions for carbon dioxide at a lower cost. In these circum-

stances, EPA’s rejection of the petition seeking to force it to

impose CAFE or ZEV regulation was not arbitrary or capri-

cious but perfectly reasonable.”®

” See also William J. Baumol, On Taxation and the Control of Ex-

ternalities, 62 AM. ECON. REV. 307, 319 (1972) (a system based on

specified standards for pollutants and taxes on emissions would

“avoid{] direct controls with all of their heavy administrative costs

and their distortions of consumer choice and inefficiencies”;

“unlike any system of direct controls, it promises, at least in prin-

ciple, to achieve decreases in pollution or other types of damage to

the environment at minimum cost to society”); Warwick J.

McKibbin & Peter J. Wilcoxen, The Role of Economics in Climate

Change Policy, 16 J. ECON. PERSPECTIVES 107, 107 (2002) (“hy-

brid policy, combining the best features of” a tradable permit sys-

tem and an emissions tax “would be an efficient and practical ap-

proach” to climate change regulation). For a discussion of eco-

nomically efficient climate change policies in a global context, see

WILLIAM D. NORDHAUS & JOSEPH BOYER, WARMING THE

WORLD: ECONOMIC MODELS OF GLOBAL WARMING 121-144

(2000).

* See, e.g., Andrew W. Kieit, Impacts of Long-Range Increases in

the Fuel Economy (CAFE) Standard, 42 ECON. INQUIRY 279, 293

(2004) (“increases in CAFE standards above current levels are nei-

ther cost-effective nor cost-beneficial” and would amount to “12

times the cost of a gasoline tax increase that would save the same

amount of fuel”); of McKibbin & Wilcoxen, supra note 27, at 127

(criticizing as “deeply flawed” policies that set “rigid targets and

timetables for emissions reductions” and commending a more

*_e nee

In sum, EPA acted reasonably in rejecting the petition-

ers’ request for CAFE regulations or a ZEV mandate to ad-

dress emissions of carbon dioxide from motor vehicles. The

emission of GHGs is not only a multi-country problem but

also a multi-sector problem. In addition, the regulations

sought by the petitioners before EPA could produce a num-

ber of adverse consequences. Incentive-based mechanisms,

such as carbon taxes or marketable permits, would likely be

more cost-effective than CAFE regulations or a and man-

date, and merit further consideration.

CONCLUSION

The decision of the court of appeals should be affirmed.

Respectfully submitted.

ERIKA Z. JONES TIMOTHY S. BISHOP

ADAM C, SLOANE CounseFof Record

Mayer, Brown, Rowe & RUSSELL R. EGGERT

Maw LLP Mayer, Brown, Rowe &

1909 K Street, N.W. Maw LLP

Washington, DC 20006 71 South Wacker Dr.

(202) 263-3000 Chicago, IL 60606

; (312) 782-0600

Counsel for Amici Curiae

OCTOBER 2006

flexible approach, such as one that combines tradable permits with

an emissions tax).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.