RFF on the Issues: Natural Gas in EPA’s Plan; Insuring Against Climate Change

Natural Gas in EPA’s Plan

Analysis that accompanied EPA’s Clean Power Plan predicts that “natural gas [will] edge out coal to become the most common fuel for power plants by 2030.” The EPA says that this could have significant environmental benefits because “natural gas emits about 40 percent less carbon than coal for the same amount of energy.”

There will be economic benefits as well, according to RFF researchers. In a recent blog post, RFF’s Alan Krupnick writes: “With the new plan, the demand for natural gas will increase even more. In the old days, this would have led to big increases in costs and prices to bring that gas to market. But the shale gas revolution has changed all that.” Research by Krupnick, RFF’s Stephen P.A. Brown, and Margaret Walls on the cost of a similar plan “shows that the natural gas revolution can shave a [a billion dollars] off of the plan’s cost.”

Insuring against Climate Change

Recently, a major insurance company dropped the lawsuits it filed against Chicago municipalities who it says are failing to prepare for climate change. The company argued that the cities and suburbs have been aware of the increasing impact of global warming on regional rainfall “since the 1970s” and that the lawsuits were intended to “encourage cities and counties to take preventative steps to reduce the risk of harm in the future.”

At a recent RFF seminar (video now available), experts questioned whether disaster events that are exacerbated by climate change and globalization are becoming increasingly uninsurable. RFF Fellow Carolyn Kousky noted that “insurability is a dynamic concept that changes over time,” requiring risk management tools that can accommodate levels of financial and scientific uncertainty to keep insurance profitable for its writers and affordable for its buyers. (Related: See “How Much Do Weather-Related Disasters Cost?” for Kousky’s examination of the costs and why they are increasing.)

Energy Efficiency in 111(d): Understanding Building Block #4

EPA’s recently released Clean Power Plan to regulate emissions of carbon dioxide (CO2) from existing power plants under the Clean Air Act includes four building blocks that are used to establish the target CO2 emissions rate for each state. Earlier blog posts by my RFF colleagues have described these different building blocks; my focus here is on building block four, based on energy efficiency potential.

The purpose of building block four is to find the electricity generation savings that states could achieve through energy efficiency programs and factor those potential savings into the emission rate target calculation as a non-emitting energy resource. The higher the energy savings potential, the tighter the state’s emissions rate obligation under the policy, all else equal.

These calculations are based on existing state policies: 24 states have adopted Energy Efficiency Resource Standards (EERS) that target a specific minimum ratio of efficiency program related energy savings to total electricity consumption. Twelve of those states have EERS policies that require or soon will require a 1.5 percent incremental reduction in total statewide electricity consumption each year, a target that EPA adopts in its proposal.

Here’s how it works: states currently achieving 1.5 percent annual energy savings are assigned that rate in 2017 and for all future years. States that have yet to attain that amount of savings are assumed to start at their 2012 annual incremental savings rate in 2017 and then the annual savings target is incremented by 0.2 percentage points per year until it reaches 1.5 percent where it remains going forward. In both cases new energy efficiency programs are expected to yield energy savings for multiple years and these cumulated savings are reflected over 2020-29. According to EPA’s calculations, total energy efficiency potential in 2029 (which determines the target in 2030) ranges from 9.3 percent of annual electricity sales in Louisiana and Virginia to just over 12 percent in Maine.

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Resources Magazine: Toward a North American Energy Strategy

New drilling technology and supportive market prices have opened vast reserves of oil and natural gas resources to extraction in North America. Canadian oil sands development is now operating at scale, the shale gas and tight oil revolutions are upon us in the United States, and major institutional energy reforms in Mexico are under way that could enable substantial new investment in the Mexican oil and gas sector.

The three countries have much to gain from these developments. The exploitation of these resources and the potential for enhanced cross-border energy trade will make the energy-intensive economic sectors more competitive, improve energy security, dampen short-term energy price volatility, and stimulate continent-wide economic growth.

How this boom will impact the environment is an unresolved question. On one hand, extraction and use of these reserves could increase North American carbon dioxide (CO2) emissions far beyond the limits espoused by each country. Then again, to the extent that natural gas substitutes for coal in electricity generation (and fugitive methane emissions are low) and electric vehicles powered by relatively clean electricity substitute for gasoline and diesel, CO2 emissions over the next two decades could be far less than expected 10 years ago.

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This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.

The Untapped Potential of California’s Water Supply
[From Press ReleaseCalifornia could be saving up to 14 million acre-feet of untapped water – providing more than the amount of water used in all of California’s cities in one year – with an aggressive statewide effort to use water-saving practices, reuse water, and capture lost stormwater, according to a new analysis released today by the Pacific Institute and the Natural Resources Defense Council… — via National Resources Defense Council

Financing Energy Improvements on Utility Bills: Market Updates and Key Program Design Considerations for Policymakers and Administrators
The State and Local Energy Efficiency Action Network (SEE Action), a state- and local-led effort facilitated by the U.S. Department of Energy and the U.S. Environmental Protection Agency to achieve all cost effective energy efficiency, recently published a new report that provides an overview of the current state of on-bill lending programs with actionable insights for consideration by state policymakers, utility regulators and program administrators. States and utilities are increasingly turning to on-bill financing to stretch their limited efficiency program dollars and encourage the uptake of energy improvements in residential and non-residential properties… — via US Department of Energy

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Twitter Q&A Roundup: EPA’s Clean Air Plan

On June 5, RFF hosted a seminar titled, “Making Sense of EPA’s Proposed Rule for Reducing Greenhouse Gas Emissions from Power Plants.” We did not have time to answer all of the questions posed by our Twitter audience during that event due to time constraints. Below are our responses to some of those questions.

Dallas: Some states start with no coal-fired generation while other states start with a generation mix that is over 90 percent coal fired. That means that, as a point of departure, the emissions rate of electricity generation varies by a factor of six across states. EPA is taking this initial rate, and the initial mix of generation in a state, as the basis for calculating the state’s obligation to improve. To do otherwise and impose the same standard on all states would be cost-effective but it would impose greater costs on some states than others.

Nathan: Yes – states can choose among the blocks as they see fit, or choose other options for reducing power sector emissions that EPA did not consider in setting the targets.

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EPA’s Proposal vs. a Carbon Price – Initial Thoughts

As I mentioned last week, my colleague Art Fraas and I have a new paper in which we compare EPA regulation of greenhouse gases under the Clean Air Act to most (though not all) economists’ preferred alternative – a carbon price (either cap and trade or a carbon tax). When we wrote the paper, no concrete regulatory or carbon price options were on the table to compare with each other, so we instead offered pointers on what to look for in such proposals when they did emerge, grouped into 10 issues.  Since we now do have a proposal from EPA, it’s worth a quick look at those issues. What did EPA do, and how might it compare to an (admittedly hypothetical) carbon price?

1) General Cost-Effectiveness

EPA appears to have set its targets in an effort to level the burden across states, rather than setting targets that reflect a cost-effective level of control in each state. However, the proposal also allows the states to enter into multi-state agreements that could include emissions trading approaches that could yield more cost-effective outcomes.  The general cost-effectiveness under the EPA proposal will ultimately rest with decisions in the individual states. Even if states implement wise policies and elect to cooperate, overall cost-effectiveness would still almost certainly be less than under an ideal economy-wide carbon price. But any carbon price legislation that could emerge from Congress is unlikely to be ideal – there will be many compromises and handouts.

2) Scope

The proposal is limited to electric generating units. EPA will likely proceed to regulate other sectors in the future, likely starting with oil and gas extraction. As we have stated before, regulation of carbon through this industry-by-industry rulemaking process will be a long and cumbersome process. An economy-wide carbon price would be simpler and would equalize costs across different sectors. But, of course, no such proposal appears politically viable today.

3) Stringency

The proposal appears to be directed to achieve a moderate level of stringency–a level consistent with President Obama’s commitment that the US would achieve a 17% reduction in emissions from a 2005 baseline by 2020. It’s unclear whether any carbon price would be more or less stringent.

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What’s In the BSER: EPA’s Process for Setting State Goals in the Clean Power Plan

Vogtle_NPPEPA’s proposed Clean Power Plan uses a rarely used section of the Clean Air Act, Section 111(d) to regulate existing fossil-fired electric generating units (EGUs). This part of the Clean Air Act, like the more familiar provisions governing ambient air quality for more traditional pollutants, gives EPA the task of determining an acceptable target for emissions and leaves it to the states to figure out how to achieve that target. One aspect of EPA’s proposal that’s different from other comprehensive power sector regulations like the NOx Budget Trading Program or the Cross State Air Pollution Rule is that it’s not straightforward to figure out how the agency set targets for each state. For those rules, EPA, using the Integrated Planning Model (IPM), simulated the impact of a pollution tax that produced an acceptable level of abatement and then allocated responsibility for reductions in states based on their power plants’ responses to the modeled tax. In essence, EPA used a price to set the quantity. This approach was recently upheld by the Supreme Court.

For the Clean Power Plan, EPA describes four “Building Blocks” that it says, when combined, determine the target, called the Best System of Emission Reduction or BSER, that each state must meet. Nowhere in the 645 pages of the proposed rule does EPA spell out what marginal abatement cost it had in mind when it set the targets. So I set out to dig into the technical support documents for the rule to figure out how EPA set the goalpost, and if there was a straightforward way to measure the that goal against more familiar cap-and-trade or carbon taxation strategies. Here’s what I found.

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Research Questions for the Midterm CAFE Review: Credit Trading and Flexibility under the New Rules

This is the fourth and final blog post in a series by RFF’s transportation team that addresses some of the key research questions for the midterm CAFE review.

source: iStock

source: iStock

The first three blog posts in this series introduced the midterm review of the corporate average fuel economy (CAFE) standards and discussed important areas of research related to the fuel efficiency gap and the footprint-based standards. In this post, we focus on provisions in the rule that allow car companies to earn credits for reducing the fuel consumption and greenhouse gas (GHG) emissions rates of particular vehicle models below their targets. The new rules allow manufacturers to bank, borrow against, and trade those credits. Credit trading provides manufacturers with flexibility and can lower the costs of meeting these strict new standards, especially when the costs of complying vary across vehicle models. But will the manufacturers take advantage of this flexibility? And how much will the provisions lower costs? Read More

EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?

This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.

This week, the Obama Administration’s Environmental Protection Agency (EPA) released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector.  The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030.

The Fundamentals in Brief

Through a carefully designed formula, EPA’s proposal lists specific targets for each state, under Section 111(d) of the Clean Air Act. States are given broad flexibility for how to meet their targets, including:  increasing the efficiency of fossil-fuel power plants; switching electricity dispatch from coal-fired generating plants to natural gas-fired generating plants; developing new low-emissions generation, such as new natural gas combined cycle plants, more renewable sources (wind and solar), nuclear, or coal with carbon capture and storage; and more efficient end-use of electricity.

States are also given flexibility to employ (in their implementation plans to be submitted to EPA) any of a wide variety of policy instruments, including but by no means limited to market-based trading systems.  Furthermore, states can work together to submit multi-state plans.

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This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.

The All-of-the-Above-Energy Strategy as a Path to Sustainable Economic Growth
The White House has released a report charting progress on several energy fronts that is clearly aimed at setting the stage ahead of President Obama’s expected announcement next Monday of the first regulations restricting carbon dioxide from existing power plants. (It’s been a very long journey — abetted by an important Supreme Court decision – since President George W. Bush tried to restrict carbon dioxide from such plants and quickly reversed course.) — via DotEarth by Andrew Revkin

Climate Change Implications for Fisheries and Aquaculture
Climate change could cost global fisheries as much as $41 billion by 2050, due to loss of landings, according to a new report. The report is based on the fifth assessment of the Intergovernmental Panel on Climate Change. It distills the assessment’s findings related to marine resources and outlines the challenges facing fisheries and aquaculture. Among the predicted effects are fluctuating fishery yields with fisheries in the high latitudes increasing as much as 70 percent while those in the tropics could see a reduction of 60 percent…  — via E&E News PM article by Emily Yehle [sub. req'd] 

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