September 26, 2016

Getting Real About the Clean Power Plan



The D.C. Circuit Court of Appeals will hear oral arguments tomorrow in West Virginia vs. EPA to determine whether the agency violated the law when it finalized its rules to address greenhouse gas emissions from the electric power sector under the Clean Air Act. Those rules, known as the Clean Power Plan (CPP), are the main vehicle by which the Obama administration hopes to address climate change.

Those rules are also Exhibit A in the Right’s case that the Obama administration is engaged in an ideologically-charged “war on coal” that will devastate the economy. Karl Rove told Fox News, for instance, that electricity rates will increase 30 to 40 percent for many manufacturers in some parts of the country. At the Conservative Political Action Conference this year, Megan Toombs of the conservative Cornwall Alliance warned that electricity rates would soar so high that many people will not be able to afford to surf the Internet. David Rivkin, Jr., a partner at Baker & Hostetler and a counsel for the state plaintiffs tomorrow, told the Federalist Society earlier this month that, in addition to eviscerating the Constitution, the CPP would “destroy states’ existing energy economy,” thereby forcing them to massively reengineer the power grid at extremely high cost to consumers. Accordingly, the CPP is “the most potent brew of federal commandeering and coercion of states in American history.”

That is quite the parade of horribles. But it’s a parade of nonsense.

The (Un)Aggressiveness of the Clean Power Plan

The EPA claims that the CPP will reduce greenhouse gas emissions from the electricity sector by 32 percent by 2030. That sounds like a lot. But that emission reduction is in relation to 2005 emission levels, and U.S. emissions are currently 21 percent below 2005 levels. In short, we’re already two-thirds of the way towards meeting the EPA emission reduction targets, and the CPP does not even start biting until 2020.

Every single analysis published since the final CPP rulemaking finds that, even if optimistic scenarios don’t come to pass, states need do little to hit EPA emission targets. A review by the Center for Climate and Energy Solutions (C2ES) of five detailed studies published recently by various NGOs and federal energy forecasters (M.J. Bradley, the Energy Information Administration, the Bipartisan Policy Center, the Rhodium Group for the Center for Strategic and International Studies, and the Nicholas Institute) finds that the CPP will only require about an 18 percent emissions reduction beyond business-as-usual scenarios from now through 2030. This won’t impose much of a burden on ratepayers. According to those studies, national average retail electricity rates may decline by as much as 7 percent, or increase by as much as 7 percent, relative to business-as-usual. The most likely outcome is anywhere from a $1.89 decrease to a $4.65 increase in average monthly household electricity bills.

Conservatives might reasonably respond, well, you’ve got your studies and we’ve got ours. Fair enough. So let’s take a look at what’s coming out of the business community.

The most compelling report comes from the Electric Power Research Institute (EPRI). That’s because EPRI is the analytic arm of the electric power industry and, presumably, is in a better position to analyze these matters than anyone else. EPRI assumes, for the sake of its study, that there will be no trading of emission credits across state lines. That is, each state is a regulatory island unto itself and will achieve all of its emission reductions within state lines.

Under a low natural gas price scenario, 17 states need lift no finger to meet CPP emission targets set for 2030 and intrastate carbon emission trading prices are low. Consequently, power prices increase very modestly.

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In a high natural gas price scenario, 21 states need lift no finger to meet CPP emission targets established for 2030. Intrastate carbon emissions trading prices are likewise modest.

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Were emissions trading to occur across state lines, of course, low-cost states would see credit prices go up, and high-cost states would see credit prices go down. National average credit prices, however, would be somewhat lower.

Be that as it may, many conservatives are fond of citing a study from the National Economic Research Associates (NERA), which was commissioned by the American Coalition for Clean Coal Energy. NERA estimates that the CPP will require a 19 to 21 percent reduction in greenhouse gas emissions relative to business-as-usual (a smidgen more than the studies examined by C2ES) but with an 11 to 14 percent increase in electricity rates as a consequence. Why the higher cost estimate? Largely because NERA modeled five market condition and regulatory compliance scenarios rather than the 90 or more that could be modeled, and those five scenarios have rather bearish assumptions not embraced by other cost estimate exercises. Are those scenarios more realistic than others that could have been modeled? NERA’s Vice President, Scott Bloomberg, concedes that it is impossible to know. “I think everything is speculative at this point,” Bloomberg told a trade reporter recently. “The key is to understand the range. If you hear just one number, you need to understand what the assumptions are.”

To illustrate Bloomberg’s point, consider another report issued last year by Morgan Stanley Research. Using different assumptions, Morgan Stanley estimates that the CPP will increase electricity rates by only 5 percent in the Southeast, 4.5 percent in the Midwest, and not at all in other regions of the country.

Interestingly, the two states served by American Electric Power’s Appalachian Power Company (West Virginia and Virginia) will have more challenging emission reduction targets to meet than most other service providers in the United States. AEP’s analysis, however, suggests that the Clean Power Plan will increase residential electricity prices by only 2 to 5 percent in their service territory.

Plenty of other analyses that eschew hard projections exist, including extremely detailed deep-dives such as that undertaken by the Midcontinental Independent System Operator, aka MISO. Moreover, as noted by Resources for the Future, “A variety of organizations have performed simulation modeling of the CPP on behalf of the electricity industry and environmental organizations, which they have shared in stakeholder dialogues, workshops, and private briefings. These findings are not generally available in a citable form.” As one who has been present in many of those briefings, I can vouch for the fact that they are all generally consistent with the studies discussed above. In sum:

The Conservative Counter-Attack

So where does all of this hysteria come from, if not from industry? While conservative activists have offered many general, unreferenced assertions about CPP compliance costs, as far as I am aware, only three papers have been published by the Right laboring to make those assertions more concrete.

A study published by the Heritage Foundation estimates the cost of the Obama administration’s climate policy commitments as offered in Paris in 2015 (a 26 to 28 percent reduction in greenhouse gas emissions in 2025 relative to 2005 levels). Those commitments rely heavily on the emission reductions that the administration argues will follow from the Clean Power Plan. Heritage assumes that these programs, all told, will impose the equivalent of a $36 per ton carbon tax on the economy because that’s the administration’s estimate of the social cost of carbon in 2015 using a 3 percent discount rate for future damages.

While the study’s authors argue that “modeling tax changes as a substitute for quantifying the economic impact of regulatory proposals is a widely accepted practice,” they offer no analysis whatsoever to back up their assumption that the regulations at issue impose an implicit tax anywhere near that size. The number simply is plucked out of thin air. Contrast Heritage’s implicit tax figure with the implicit carbon tax figures produced by EPRI (shown in the maps above). Virtually no state, according to EPRI, will face compliance costs anywhere near as steep as that.

Be that as it may, the Heritage authors run their $36 per ton carbon tax through an economic model and conclude that the administration’s climate policies will cost nearly 400,000 jobs through 2035, increase household electricity costs between 13 to 20 percent, and cost the economy $2.5 trillion of lost GDP. A family of four, reports Heritage, will experience a total income loss of more than $20,000.

A similar paper was published by the Manhattan Institute. Its author, Oren Cass, argues that the CPP imposes an implicit carbon tax of $30 per ton that would rise each year because that’s what economic modeling in other contexts suggests would be required to achieve the CPP’s target (a 32 percent emission reduction below 2005 levels). Cass then combines that tax with the Obama administration’s stillborn proposal to impose a 25 cent per gallon tax on gasoline (the equivalent of a $25 per ton tax on carbon emissions in the transportation sector) to conclude that the administration’s climate policies impose, in total, a $25 to$30 per ton tax on carbon across the entire economy. Cass then does a back-of-the-envelope calculation to argue that, “The Obama policies will cost households in the lowest quintile $19 billion per year, equal to a 166 percent increase in their federal tax bills. Households in the second-lowest quintile would pay an extra $25 billion, equal to a 33 percent tax increase.”

Careful readers will immediately note the fundamental problem with this analysis. Cass assumes that all of the emission reductions required by the CPP are on the horizon. He overlooks the fact that two-thirds of the required emission reductions have already occurred. The CPP’s baseline for emission reductions, recall, is 2005, not 2015. We need only an 11 percent emission reduction below existing (2015) levels to hit CPP targets, not a 32 percent emission reduction. Hence, the math is wildly off.

Finally, the American Action Forum (AAF) uses EPA’s regulatory impact analysis to argue that the CPP will cost 125,800 jobs. They arrive at that figure by taking EPA’s estimate of 31,000 to 34,000 lost jobs from coal and oil-fired power sectors and multiplying the higher figure by 3.7; the number of non-energy jobs supported by each energy job. Even if we accept the multiplier, (which we should not necessarily accept), we should remember that shifting from coal and oil to renewables and energy efficiency will likewise shift employment from the former sectors to the latter. Hence, if we want to know the net employment impact of the CPP, we have to offset coal and oil job losses with the number of new jobs created in the renewable energy and energy efficiency sectors. This AAF does not do.

Fortunately for us, we’re not at sea here. A recent (critical) analysis of EPA’s assumptions about employment impacts from the CPP finds that, by 2030, a net gain of roughly 15,000 jobs can probably be expected. Of course, if business-as-usual renders the CPP non-binding (which, as discussed above, is quite plausible), then job impacts will be close to nil.

As far as hard analysis from the Right, that’s it. It is pretty thin gruel.

The Politics of All This

Conservative and libertarian proponents of a carbon tax have argued that a carbon tax is preferable to regulations like the CPP. But if the Clean Power Plan is so anemic, why in the world would conservatives entertain the idea of replacing it with a much more robust and ambitious carbon tax, particularly when that tax would almost certainly impose more net costs on the economy than the CPP as it is written at present?

Good question.

First, acting to robustly address climate risk is something that conservatives, as well as liberals, should embrace. Present policy does not do that in any meaningful way … which is one of the main reasons that environmentalists are willing to entertain a carbon tax in lieu of existing EPA regulatory authority.

Second, partly because of that, the Clean Power Plan is going to be simply the first shot in a long regulatory war to reduce greenhouse gas emissions. Its lack of ambition will necessitate more ambitious rulemakings in the future. The CPP 1.0 will be superseded by CPP 2.0, then CPP 3.0, and so on, with blitzkriegs from other sections of the Clean Air Act to come. This has certainly been the pattern in EPA rulemakings in other arenas, such as ozone standards and air toxics. Moreover, EPA is eyeing similar rulemakings for other industrial sectors—such as manufacturing—that have heretofore escaped the agency’s regulatory attention.

A carbon tax that swaps out EPA regulatory authority over greenhouse gas emissions swaps out not just existing greenhouse gas regulation, but all agency regulation to come. And more of that will be coming. Guaranteed.

Third, conservatives should be wary of abdicating responsibility for the pace and nature of greenhouse gas emission control policy to the EPA. As will no doubt be demonstrated in the oral arguments tomorrow, courts generally defer to agencies when it comes to rulemakings such as these. Broad delegations of regulatory power (such as those found in many sections of the Clean Air Act) allow for few checks and balances on agency power. Unless Congress steps up and legislates on this front (preferably via a carbon tax), it will continue to stand impotently on the sidelines while administrative actors make all of the important decisions for decades to come.