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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EPA’s Carbon Proposal – Which States Have The Biggest Burden Isn’t Simple

The Wall Street Journal yesterday criticized EPA’s recent proposed standards for carbon emissions from existing power plants on the grounds that they will have a large disproportionate impact across states. That may or may not be the case, but figuring out which states have a greater burden is not as simple as the WSJ implies. The Journal looks at each state’s carbon intensity – the tons of carbon it emits for each unit of energy produced – and claims that those states with high carbon intensity (mostly heartland states dependent on coal) will have a much greater burden than those with lower carbon intensity (mostly coastal and, the WSJ claims not coincidentally, liberal states).

That claim might be true if EPA set a uniform carbon intensity standard for the whole country. But the agency did not do so. Instead, it calculated a unique carbon intensity target for each state, based on four “building blocks”, each corresponding to different emissions-cutting opportunities EPA estimates is available in the state. These targets vary widely: for example, during the initial compliance period, Montana’s target is more than seven times greater (that is, less stringent) than Washington’s. This does not mean that Montana will have an easier time meeting its targets – it may or may not, depending on how accurate EPA’s estimates are of the opportunities available to each state, the relative cost of those opportunities, and whether states have other emissions-cutting opportunities that EPA did not consider. You simply can’t tell from EPA’s target numbers, much less from a simple list of states’ carbon intensity, which states will have the greatest burden (either total or per-capita). Figuring that out will take careful modeling and analysis (working on it at RFF). Brad Plumer at Vox makes a similar point in a good post with more details.

To be fair to the WSJ, they admit that the carbon intensity figures they point to are not “a perfect proxy” for states’ burden under EPA’s proposal. But they nevertheless claim the figures are “a good indicator of which states will have to adjust the most”. That’s not true – or at least we can’t conclude that it is based on carbon intensity rankings alone.

Moreover, even if states do have differential burdens (in economic terms, different marginal abatement costs), the EPA proposal allows them to form multistate groups and trade with each other. Doing so will narrow the gap between state burdens, and potentially equalize them. But it will be up to states whether to join together. In this sense and many others, states’ burden will depend more on the policies they choose than on the targets EPA sets.

In short, it’s too soon to tell who the “winners” and “losers” among the states are. We will know more in the coming weeks and months, but there will be a lot of uncertainty until the program is in place in 2020 – a lot can change between now and then. And if states trade, the winners and losers on paper may not matter as much.

Another small point – the WSJ piece talks briefly about “stranded assets”. I don’t like the term, partly because it’s not well defined, and partly because I read it as either an appeal to the attraction of the sunk-cost fallacy or an attempt to ignore externalities (or both). But here the term just pops up in the lede, so that’s a point for another day.

2005 vs. 2012 in EPA’s Proposal

EPA’s existing source performance standards (ESPS) proposal from Monday claims it will achieve 30% emissions reductions from the power sector by 2030. That reduction is relative to 2005 emissions – a target that’s important because of the president’s stated goal in Copenhagen of 17% economy-wide emissions reductions from 2005 by 2020. If that goal is achieved, early reductions from the ESPS will play a major role (though given the rule’s timeline, the 2020 target looks ambitious).

Focusing on this headline emissions reduction target, many observers have claimed that picking a 2005 base year instead of 2012 means the rule is less stringent than feared (or hoped, depending on where you sit). This is because US emissions have actually declined substantially since 2005. That means a big slice of the needed reductions are already in the bank. To pick one example, Bloomberg’s Mathew Philips claims “EPA did the power industry a big favor by using 2005 levels” for this reason.

Former EPA General Counsel Roger Martella, when asked about this in an interview this week, pointed out that even if this is true for the country as a whole, it’s not true for every state. Some states increased their emissions between 2005 and 2012. He points to Texas, but EIA data available through 2011 indicates that  Texas emissions have gone down slightly (about 5%). However, 8 states’ emissions did increase: Oklahoma, Wyoming, Kansas, North Dakota, Iown, South Dakota, Arkansas, and Nebraska – the latter three by 10-20%. Choosing a 2005 base year therefore seems to disadvantage those states.

However, all of this analysis appears to be wrong since EPA did not actually use 2005 as the base year. All of the calculations in EPAs proposal used to create state-level emissions rate improvement targest are based on 2012, not 2005 (or in the case of heat rates at existing coal plants, a 2002-2012 average). 2005 is only used to get the headline emissions reduction figure. Moreover, these goals are stated in terms of emissions rate – that is, the tons of emissions per megawatt hour generated. That means that running fossil power plants less due to reduced demand, a major component of the decline in US emissions, has no effect on the target.

You can debate whether the reason for nevertheless picking 2005 as the base year for the headline emissions cuts numbers is to inflate the emissions reductions from the proposal or, as EPA claims, to match up with international emissions reduction commitments. In any case, claims that using 2005 as the base year for calculating these overall results helped the industry, or helped or hurt any state, don’t hold water. Everything is based on the most recent numbers available – 2012.

If state targets are still based on 2012 numbers in 2020 when they become enforceable, it’s of course possible that changes in states’ emissions in the intervening 8 years will mean some have more work to do than others. But that’s much less of a problem – first because EPA could update the targets with new data, and second because states are now on notice that these requirements will be in place.

Comparing the Clean Air Act and a Carbon Price

As readers likely have heard by this point, EPA proposed performance standards for carbon emissions from existing power plants on Monday. This major climate policy move is perhaps most notable in that it happened without new legislation from Congress. Economists have long argued that an economywide carbon price is the most cost-effective way to reduce emissions. This would require new legislation (though EPA’s policy does allow states to use some trading programs). Many (myself included) believe a carbon price remains the endgame for U.S. climate policy. But what advantages (if any) would it have over EPA policy? My colleague Art Fraas and I asked this question in a paper we wrote last year, which has just been published in the Environmental Law Reporter this week. Here’s a brief summary of our conclusions (re-posted from last year).

We plan to revisit our analysis in this space now that we have a concrete proposal to examine (though of course we don’t have a carbon price proposal from Congress to compare it to).


 

Though President Obama is set for a major address on climate tomorrow, US climate policy faces an uncertain future. EPA is moving haltingly ahead with regulations under the Clean Air Act (and may redouble its efforts after the speech most notably its proposed existing source standards), but some in Congress are pushing to revoke its authority. Others in Congress support new legislation setting a price on carbon (with most recent attention focused on a revenue-neutral carbon tax). While the near future is in EPA’s hands, Congress will—by action or inaction—determine the longer term path for US policy. That path hinges on two decisions. First, will Congress pass new comprehensive legislation, like a carbon tax? And second, will Congress preempt EPA’s authority? These are independent decisions, so there are four possible outcomes:

 

 

EPA authority mostly/wholly preempted EPA authority mostly left intact

No new climate legislation

1. No U.S. climate policy 2. EPA regulates under the CAA (status quo)

New climate legislation

3. Carbon price supplants EPA regulation 4. Parallel EPA regulation and carbon price

 

Preemption is a real possibility. Any new climate legislation appears (to us) likely to preempt at least some EPA authority, as the Waxman-Markey cap-and-trade bill would have done. Removing EPA’s authority without any new policy is also possible, but less likely given the President’s veto. That means two options – the Clean Air Act status quo and a new policy replacing it – appear the most likely outcomes.

In a new paper, Comparing the Clean Air Act and a Carbon Price, we try to evaluate these two pathways. We don’t choose one or the other, since there is a lot we don’t know about both policies and since much depends on one’s prior convictions. But we do think we’ve identified many of the right questions to ask. And even if you disagree with us on what the most likely policy outcome is here (for example, if you think EPA regulation and a carbon price will coexist), we think you’ll find our discussion is still useful. Read More

Legal Risks in EPA’s Existing Source Proposal

EPA’s existing source proposal is the cornerstone of  the administration’s climate policy and, once finalized next year, will be the most signifcant federal climate policy move to date. Even relatively minor EPA rules face legal challenge from industry, environmental groups, or both. This rule’s significance means it will be no exception. Legal challenges will not come until the rule is finalized next summer (assuming it remains on schedule). In fact, there will be no actual regulation in place until states begin to submit their plans to EPA in 2016, so litigants may not have standing until then. The rule may also change a lot before it’s finalized and implemented, so making predictions is probably useless. But here are the biggest legal vulnerabilities I see today.

1) Renewables and Energy Efficiency

In the proposal, EPA sets emissions rate targets for each state, that the states must then meet with their plans. In building the rate targets, EPA uses four building blocks. The first two – efficiency improvements at coal plants and increased use of existing gas plants – are on relatively solid ground, I think. But the third (new renewable generation) and fourth (demand-side energy efficiency improvements) blocks are more legally risky. EPA argues that because both blocks would reduce emissions from the existing fossil power plants that are the subject of the rule, including them in the targets is legitimate. They’re right that fossil emissions would go down – add zero marginal cost renwables or cut demand, and you don’t have to run fossil as much (note that this is not true for carbon offsets like planting trees or cutting agricultural emissions, which EPA has not sought to include).

But, litigants will likely argue, the relevant part of the Clean Air Act (§111(d)) gives neither EPA nor the states any authority to regulate activity outside the sources subject to the rule’s performance standards. Since renewables have no CO2 emissions, and energy efficiency isn’t even a stationary source, neither is properly included in a “source category”. Former EPA General Counsel Roger Martella pointed to this issue as a particular area of vulnerability in an interview today.

On balance, I think EPA has the better argument here, but I would not be surprised if a court disagreed. EPA appears to acknowledge this risk, requesting comment on the legal issue and, more importantly, cleanly separating renewables and energy efficiency into severable building blocks. If a court nixes either, the policy will survive, though it will be less stringent.

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Can Natural Gas Deliver the Goods to Obama’s Carbon Policy?

The success of President Obama’s new plans for reducing carbon emissions from power plants will rest heavily on the natural gas industry. The key building block of that plan is to ramp up the use of natural gas. Before the shale gas revolution natural gas prices were a good deal higher than they are today. But shale gas and the fracking that made it possible have reduced gas prices,  inducing a frenzy of gas generator purchases and increased generation from existing gas plants. This has driven down electricity prices as well. In the process, electricity from coal has been disadvantaged. In principle, cheap gas could also hurt renewable electricity, but in many states renewables’ share of the power mix is protected (and increasing) due to portfolio standards.

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. The fact that companies can put multiple wells on a given well pad very rapidly and are drilling into very rich and productive rock means that even a small increase in the price of natural gas brings forth a lot of new supply. Indeed the pace of technological change has been very high, further reducing production costs and holding prices down. Even with low prices there is so much gas that pipeline capacity is inadequate to get the gas to market resulting in shut in capacity. This will be remedied soon. An estimate we made of the costs of a plan with similar stringency to Obama’s shows that the natural gas revolution can shave a $ billion off of the plan’s cost.

Still, just how responsive supply will be to big increases in demand is not well understood. With plans to export lots of liquid natural gas, to use natural gas (as both a fuel and chemical feedstock) to drive a manufacturing renaissance and even to use it as a transportation fuel, the extent to which gas costs will rise is uncertain. That creates parallel uncertainty over the future price of electricity.

An even bigger concern is with natural gas as a powerful greenhouse gas. We can’t very well promote natural gas as a major building block to CO2 reductions when leaky gas (termed fugitive methane) could reverse those gains. Thus it is imperative that the industry get their leaks down or conclusively demonstrate they are already low enough.

RFF on the Issues: EPA’s Clean Power Plan

RFF researchers on the regulation of greenhouse gas emissions from existing power plants

Today, the Obama administration proposed a new rule to reduce emissions from existing power plants, using EPA’s authority under the Clean Air Act. EPA Administrator Gina McCarthy commented: “The glue that holds this plan together, and the key to making it work, is that each state’s goal is tailored to its own circumstances, and states have the flexibility to reach their goal in whatever way works best for them.” (Note that there is still time to register for RFF’s special event on June 5, where experts will discuss the challenges and opportunities of this approach.)

RFF experts on greenhouse gas emissions and Clean Air Act regulatory issues have examined various flexible approaches that the states might take to reduce emissions from power plants under the Clean Air Act. Below are some highlights.

On cost-effectiveness:

On state implementation:

  • Nathan Richardson notes that “allowing states to choose unique policy paths is sensitive to local conditions and creates a policy laboratory” where “states aren’t just responsible for enforcing federal rules or meeting federal targets, but are the primary regulators, with control over the program’s structure and stringency.”
  • Dallas Burtraw says: “I don’t think we will end up in a world where there are 50 different approaches ineach of the states. For one reason, many states do not have the resources to really give form to an approach that has not already been thought through by their neighbors. There’s going to be leading states and maybe some states that will follow.”

On international targets:

  • Dallas Burtraw and Matt Woerman find that EPA’s proposed emissions reductions “could be expected to take the United States past 15 percentage points of the 17 percentage-point reduction from 2005 levels that President Obama pledged in Copenhagen in 2009.”

For more work by RFF researchers on these topics, visit www.rff.org/cleanairact.