October 28, 2015

The Clean Power Plan Under the Microscope: Part II

I. What is the CPP supposed to accomplish?

The CPP’s goal is to reduce CO2 emissions from the current fleet of coal- and gas-fired power plants (Electric Generating Units or “EGUs” for the cognoscenti.) In 2013, those units emitted 2,040 MMT of CO2, and by 2030 the CPP aims to reduce that to 1,646 MMT per year.

Note that EPA, reflecting the international negotiations in Paris, uses a baseline of 2005 emissions for comparison with the 2030 targets. (Plus, for PR purposes, the further back the baseline, the larger the baseline emissions, and thus the larger apparent reduction by 2030.) We use 2013 because that is where the CPP process started from – updating to the latest 2014 numbers just complicates everything for a very small increase in accuracy.) This is why the Administration always says that the CPP will reduce emissions by 32% from 2005 levels (2,401 MMT) never pointing out that we are already half of the way there- assuming – a VERY big assumption – that future economic growth does not lead to increased emissions. For purposes of those emission targets, the most significant difference between EPA’s proposed rule and the final version is the large difference between what EPA originally said the 2030 EGU emissions would be without the CPP, and the comparable “base case” in the final rule.

EPA predicted in the proposed rule that “base case” in 2030 meant EGU emissions of 2,256 MMT CO2. However, the final rule has 2030 BAU emissions of only 2,020 MMT. In other words, between proposed and final rules EPA’s estimate of business-as–usual 2030 emissions dropped by 236 MMT, or over 10%. That is a very large difference, and we have no idea where it came from.

Although EPA claims that its base case numbers are based on EIA’s predictions, at the time of the proposed rule EIA estimated 2030 BAU emissions at 2,227 MMT (almost exactly the same as EPA’s 2,256 MMT). And while by the time of the final rule, EIA had similarly revised that estimate down by 50 MMT to 2,177 MMT, EPA’s 2030 final rule BAU is still another 157 MMT less than that. It’s a bit of a mystery. In any event, regulations look much easier – and cost a lot less – when much of what they are supposed to accomplish is assumed to happen even without them.

Finally, it is worth noting that if implemented, the CPP will also have a significant impact on emissions of other, more traditional, pollutants such as NOx and SOx. EPA estimates that by 2030, the switch from coal to gas and renewables will reduce NOx and SOx each by about 21%, with very large localized health benefits. These co-benefits also help justify the rule’s costs.

II. How can states achieve their CPP targets?

We expect that states will, for the most part, opt into EPA’s mass-based cap and trade system as we described last week. After that, it’s up to the EGUs to figure out how to reduce their emissions in order to meet the available permit supply. They only have two options: using lower-carbon fuels (switching from coal to gas and renewables, or from gas to renewables) or burning less fuel (by reducing electricity – or fuel – demand). As we have previously written, [link], EPA believes that most of the emissions reductions will come from reduced electricity demand (generally the cheapest way to reduce emissions), but how the EGUs will go about this in each state is open to question.

III. What are the Political Risks to the CPP?

The major political risk facing the CPP is a Republican winning the White House in 2016 (or 2020, though to a far lesser extent). As we have written before, Congress is simply not a threat: even controlling both houses, the Republicans cannot stop it, as the President would veto any repeal of his (or her) predecessor’s signature environmental achievement that even made it to his desk.

Because complex regulatory schemes (and they don’t come any more complex than the CPP) assume a life of their own, there is considerable happy talk from the environmental community that even a 2016 Republican victory would not derail the CPP. The truth is that nothing would be easier than for a new Administration to announce (via a new rule, if they must) in early 2017 that instead of the current 2018 deadline to submit state plans, states will have, say, an additional five years to do so. EPA has virtually unreviewable discretion to determine such regulatory timetables: even if challenged in court, there is in our view a 99% chance that the D.C. Circuit would uphold it.

Having eliminated any sense of immediacy by moving the deadline for plan submissions off to 2023 and sent the very clear signal that the CPP was doomed, a year or so later EPA would say that, upon further consideration of the legal and policy issues, blah, blah, blah, it was withdrawing the rule entirely, but that it would, at some future time, issue a new proposed rule. And in fact, around 2019 (so as to be finalized before the 2020 election), it would do so, limited solely to making modest heat-rate improvements at existing coal-fired power plants; those would yield at best about a 5% decrease in CO2. Clearly there would be plenty of political heat about this – not least because it would rip up any commitments made in Paris, and the electric power sector would probably be unhappy about a further bout of uncertainty- but it is far from inconceivable.

Thus a 50% chance of a Republican winning the White House in 2016 means that the CPP has – at best — a 50% chance of being implemented (unless there is a Republican candidate out there who has not yet promised to repeal it). Moreover, should a Democrat win in 2016 but then lose in 2020, there remains a small but non-zero residual Republican risk.

What are the legal risks to the CPP?

The Clean Power Plan being the most complex rule EPA has ever issued, so it is also the most potentially lucrative rulemaking ever for the lawyers. No sooner had EPA proposed the CPP than the lawyers started filing a whole series of suits aimed at stopping EPA from finalizing it. Not surprisingly, every one lost.


But now that the final rule has been published in the Federal Register, the real fight begins. Before explaining the CPP’s alleged major legal infirmities, it is useful to keep the following principles in mind:

First, the Supreme Court will have the final say. The Justices have taken each of the three greenhouse gas cases that have come before them (Massachusetts v. EPA, AEP v. Connecticut, and Utility Air Regulatory Group v. EPA) and, regardless of which side wins in the D.C. Circuit, they will take this one as well. To quote the late Yogi Berra, “It ain’t over till it’s over”, and the Court’s decision should come around early 2019.

Second, this has all the makings of a 5-4 result, with Justice Kennedy holding the swing vote. The Court’s ideological split was on full display in Massachusetts (5-4), again in the threshold determination in AEP as to whether states can show that they are injured by climate change (4-4; as the author of the decision under review, Justice Sotomayor recused herself and thus the decision that the states were so injured stood), and finally in UARG (5-4).

Third, and as a consequence of this being ultimately decided by the Supreme Court, the D.C. Circuit’s ultimate ruling will be not nearly as important as the one it makes early on when it decides whether to stay the rule (i.e., suspend its operation) for the next 18 months or so while the case is briefed, argued and decided. Should it do so (or should Chief Justice Roberts do so in his capacity as “Circuit Justice” for the D.C. Circuit), it would be a significant setback for the CPP in two ways. No longer facing the 2016 deadline for the initial submission to EPA (as cursory as it is), or the 2018 deadline for submitting final plans, states would put their planning efforts on the back burner. Thus, even if upheld in the end, implementation will be delayed. And, as a legal matter, one of the factors that the Circuit will discuss in its stay decision is the “likelihood of success on the merits”; a decision granting the stay would explain why the court thinks the challengers will win. Even though the ultimate decision lies with the Supreme Court, that sort of 1-2 punch would put the rule in Purgatory until 2019.

As to the actual legal issues, the two cited most by CPP opponents are:

Going “beyond the fence line.” As noted above, EPA admits that coal-fired EGUs can achieve only about a 5% emissions reduction by improving how efficiently they burn coal; the vast bulk of the CPP’s emissions reductions come about not by such actions at the emissions source itself (“inside the fence”) but rather by mandating systemic changes in generation from coal to gas/renewables and from gas to renewables, or by reducing demand (“beyond the fenceline”). This central feature of the CPP is at the heart of the legal battle, and the decision will turn on what Congress meant by “system” in “best system of emissions reduction”, which is the standard Congress mandated for these sources.

To make it just a little bit more interesting, although that exact same standard also applies to new power plants, at the same time EPA finalized the CPP, EPA also finalized CO2 standards for new plants that explicitly rejected any “beyond the fenceline” requirements. And, to top it off, EPA’s new-plant standards set far more lenient CO2 emission rates than the ones imposed on existing plants, completely reversing a basic presumption of, and decades of practice under, the Clean Air Act, namely that – for obvious reasons — more stringent standards are imposed on new sources and more lenient ones on existing ones.

The §112 Exclusion. EPA promulgated the CPP based on its authority under §111(d) of the Act, which includes language suggesting that if power plants are regulated for any pollutant under §112 (dealing with “hazardous air pollutants”), then EPA may not regulate it for any other pollutant under §111(d). And, just in case you thought that figuring this out ought to be relatively easy, note that the problem stems from Congress simultaneously passing two separate and inconsistent amendments to §111(d) back in 1990.

So, what are the odds? Rule opponents have other arguments, some of them credible, and they only have to win one of them. On the other hand, Justice Kennedy believes that global warming is real and that EPA has the Clean Air Act authority to address it. Thus this whole enterprise comes down to whether Anthony Kennedy believes that CO2 and the electric power system is a truly unique situation, and that the Act allows EPA to create a regulatory system that is not only far beyond the traditional smokestack controls that serve for every other pollutant, but one that reaches deeply into the fabric of the American economy as no federal regulatory program from any agency has ever done. (And if he thinks EPA can do this then he will have no problem with any of the other arguments.) Or, Justice Kennedy believes that the Act does not allow EPA to meaningfully control CO2 emissions from the largest emitters category of sources in the country.

Good question. Call it 50-50.

While the final outcome depends on the Supreme Court’s decision, likely sometime in 2019 and then the 2020 election, in 2016 we will know whether the rule will be stayed, what the D.C. Circuit thinks of its prospects, and which party wins the Presidency. It promises to be an interesting year for the CPP and uncertain one for states and EGUs that will have to comply with it. In the next part of this series we’ll talk about what might be a better approach for all concerned.