August 23, 2016

Coal’s Nightmare



Given that three of the four largest U.S. coal producers have or will soon emerge from bankruptcy, we hope that the people who have chosen to invest in, lend to, or manage this industry are thinking realistically about what they might face under a Clinton Administration. Specifically, we hope they are considering what could—and we think probably will—happen if Congress does not enact a carbon tax.

If Congress does not act meaningfully on the climate front, as the Obama Administration (finally) did, a Clinton EPA will continue to use its regulatory authority to reduce CO2 emissions. We have written previously about the Clean Power Plan 2.0, which—assuming the Supreme Court upholds Version 1.0—will come swiftly on the heels of that decision. It will be far more stringent than its predecessor. At the same time, EPA will expand its regulations to additional industrial sectors that use coal (e.g., iron and steel).  And that is the best the coal industry can hope for, absent Congressional action.

The worst is far, far, worse, and likelier than many might expect. It comes in the form of the Social Cost of Carbon meets Section 115 of the Clean Air Act.

On August 8, the Social Cost of Carbon (SCC) took another step closer to being the default monetary value applied to each ton of CO2, when the Seventh Circuit Court of Appeals rather casually approved the Department of Energy’s cost-benefit calculations for commercial refrigeration equipment efficiency standards. Because the standards’ energy-saving benefits far outweighed the costs, the SCC was essentially a footnote to the rule, and the court’s brief affirmation contained little substantive analysis. But it is another brick in the wall. Or nail in the coffin. Choose your own metaphor.

The SCC is a complex and controversial concept that has—to our surprise—faced little coherent opposition and no serious legal challenge from those with most to lose from its application.

As we have noted, the SCC’s real judicial tests will come, first in the Clean Power Plan litigation, and then in EPA’s methane rule for oil & gas exploration and production. The methane rule decision will be especially important because the closely-related Social Cost of Methane is the only benefit that EPA quantified in its analysis. Thus, the rule’s entire economic justification hinges on an educated guess about how much climate damage is caused by methane. In contrast, the SCC is only a relatively small part of the CPP’s benefit calculations, which are based largely on the value EPA attached to reductions in conventional pollutants.

The SCC is determined by a Federal interagency working group whose meetings are not open to the public; nor is it subject to any of the traditional rule-making checks and balances.

The SCC is not a fixed value. When announced in 2010, the high end of the SCC value range for 2020 was $41. Three years later, the feds set the high end of the 2020 range at $65 (both were expressed in 2007 $), a 58% increase in only three years. Fast forward to 2020, and (perhaps conservatively) assume that a comparable increase is in store after another seven years, and $65 becomes $103. Maybe the science starts to look worse or maybe the working group will find a justification to dial it up.

Even this price would likely not be enough to meet the Clinton administration’s goal of putting U.S. emissions on a path to an 80% reduction by 2050. Most studies (see for example here) find this requires a price much higher than $100/ton CO2, mostly because radical change in the transportation arena (~35% of emissions) is phenomenally difficult and expensive, especially outside the world of passenger cars. So you can be pretty sure the interagency working group will be increasing its SCC estimate regularly.

U.S. emissions of all greenhouse gasses in 2014 were 6.9 billion tons. Assuming that they will be 5% lower by 2020 (an enormous stretch), at $100/ton, the upper limit of the benefit side of EPA’s regulatory cost-benefit equations (i.e. how much its regulations can cost and still be deemed justified) will be $655 billion.  Per year.

While many believe the natural gas sector would be an economic winner in this scenario, they would not be beneficiaries for long, if at all. Leaving aside the impact of the oil and gas methane rule itself, a steadily escalating $100/ton CO2 regulatory penalty post–2020 will make building any new gas power plantsexcept as demand peak cover for renewablesa fool’s game. Existing facilities could become uneconomic, but at the very least  electricity cost would rise significantly.

Assuming that Congress continues to do nothing on climate, that $655 billion floor for regulatory justification (and the totally unknown ceiling) will prove significant when at some point a hypothetical second Clinton Administration—which promises to be serious about climate in a way that the Obama Administration apparently has not been—resorts to Section 115 of the Clean Air Act to regulate greenhouse gas emissions. It really will have no choice. The Clean Air Act lacks any other mechanism for economy-wide CO2 regulation, and the Administration will say it is legally and politically justified by both the inability of existing policy to meet either the specific U.S. commitment at Paris, an 80 percent emissions reduction, or the longer-term, 2-degree goal to which the world is collectively committed.

Back in February, we wrote that while we understood the environmentalists’ desire to use Section 115’s incredibly broad, economy-wide authority to regulate CO2, doing so made no legal sense. But four days later the Supreme Court stayed the CPP, and that has stimulated our thinking about Section 115 and the judicial response it would receive.

On its face, you’d think that the CPP stay would heighten concern that Section 115 could not pass judicial muster. But that stay was truly unprecedented, so much so that the EPA had absolutely no contingency plan for the stay. Neither did supportive states or the environmental community. And it made us realize that in Supreme Court jurisprudence, climate—like death—“is different”. Even before the extraordinary stay of the CPP, the Court had been presented with three climate cases, and it took all three. The common thread among those cases is the Court affirming EPA’s CO2 regulatory authority. In Massachusetts v. EPA, the Court overruled EPA and held that CO2 was a pollutant that could be regulated under the Clean Air Act. In Coalition for Responsible Regulation v. EPA, it upheld (with a minor exception) EPA’s regulatory authority. And in Connecticut v. AEP, the Court held that by creating that regulatory authority, Congress intended to supplant federal tort liability for CO2 emissions.

When the putative Section 115 rule reaches the Supreme Court (in, say, 2024), it will have a bench where—on this hypothesis—President Clinton will have not only appointed Justice Scalia’s successor, but quite possibly successors to Justices Ginsburg (82), Kennedy (80) and Breyer (78), giving it a 6-3 “liberal” majority. The Court will take the case in order to decide on the following question: “If after another eight years in which world temperatures have continued to increase, catastrophic climate change has become even more widely predicted, and Congress has still done nothing, does Section 115 provide authority to comprehensively regulate greenhouse gasses?”

We think that, given the alternative, the Court will say “Yes.”

Don’t say we didn’t warn you.