September 30, 2015

The Clean Power Plan, Part I: What Is It and How Does It Work?



For those who have not read EPA’s final Clean Power Plan (CPP) regulations and supporting documents, more than 4,000 pages, this and two forthcoming posts offer a primer on the CPP from two who have read it all. This post—Part I of our primer—explains what the standards are and how EPA wrote the CPP to create a national CO2 cap and trade system. Part II will explain what the CPP is supposed to achieve, how EPA thinks states will meet the standards (and at what cost), and whether it can get past the legal and political roadblocks that stand in the way of implementation. Part III will conclude with a discussion of why a state-level carbon tax is likely to be—for some states—the cheapest and most efficient compliance alternative.

The goal of the CPP is to reduce CO2 emissions from the U.S. fleet of existing coal- and gas-fired power plants. Compliance begins in 2022, with progressively more stringent standards kicking in until reaching the final standard in 2030. After that, everything gets remarkably complicated. Here we go…

Power Plant Performance Standards

On average, coal-fired plants emit about 2,000 pounds of CO2 for every megawatt-hour (“MWh”) of power produced. Gas-fired plants emit less than half that per megawatt hour, but we will assume they emit 1,000 lbs / MWh for convenience’s sake. The CPP sets a performance standard for coal at 1,305 lbs / MWh, despite the fact that EPA, and everyone else, agrees that is physically impossible for any existing coal plant to meet this standard unless it is retrofitted with prohibitively expensive carbon capture and storage technology (CCS). EPA has set the gas standard at 771 lbs/MWh, which is achievable and is already being met by some existing plants.

Normally, the Clean Air Act would not allow EPA to set an impossible standard, but EPA’s rationale is that power generation is different.  Here, EPA treats power plants as all part of a single, interconnected power grid (actually two or three, depending on how you count), and reasons that by (1) improving coal plant efficiency so that they burn less coal and thus produce less CO2 per megawatt/hour, (2) shifting generation from coal to existing gas plants, and (3) shifting generation from both coal and gas to new renewable sources (more on that later), the system is collectively capable of meeting the CPP standards.

EPA refers to these three factors—improved coal plant efficiency, the shift from coal to gas, and the shift from coal and gas to renewables—as “building blocks” 1, 2 and 3. (The legality of basing a standard in part on blocks 2 and 3 will be discussed in Part II.)

Statewide Compliance

The Clean Air Act requires that the CPP standards be established and enforced on a state-by-state basis.  In the usual situation, each state would simply take EPA’s two standards and impose the appropriate one (either coal or gas) on each of their plants. But as noted above, no coal plant could physically meet the coal standard, so EPA planned for each state to set up a cap and trade system. States would initially distribute emissions allowances to their plants, and then allow them to buy and sell credits earned for each hour of below-the-standard generation.

In other words, to meet its 1,305 lbs / MWh emission standard, a coal plant emitting 2,000 lbs / MWh would buy credits (for either zero lb / MWh produced by renewable power or 1,000 lbs / MWh produced by gas) and use enough of them to get its average emissions below the limit. Gas plants, in turn, would buy those zero lb / MWh renewable credits to go from 1,000 lbs / MWh to below 771 lbs/MWh.

EPA then took two additional steps. First, rather than states simply imposing the applicable standard on each plant individually, EPA took each state’s particular mix of generation from coal and gas plants and came up with a single, blended performance standard for each state. EPA did this in order to allow the states to then tailor EPA’s categorical standards for coal and gas plants to suit the specific capabilities of each individual plant in the state, so long as they cumulatively met the collective state standard. According to EPA, this avoids a “one-size fits all” approach and makes overall compliance cheaper.

From Emissions Rates to Mass Compliance

Then EPA took things one step further. Having first translated the coal- and gas- plant standards into state-specific rate standards, EPA then translated each state’s rate standard (how much CO2 per Megawatt hour of power) into an ostensibly equivalent state specific mass limit (how many tons of CO2 per year), and gave states the option of complying with either.

In converting the state-specific rate standards to “equivalent” state-specific mass limits, EPA’s (questionable) methodology results in far lower reductions being needed to meet the mass targets than the rate ones. In fact, as of today, nine states that would still need significant improvements to meet the 2030 rate standards are already in compliance with the final 2030 mass limits. (Whether they remain in compliance depends on future demand and generation growth patterns).[1] It is therefore no surprise that EPA claims that the costs to comply with the mass limits are about 40% less than the costs to comply with the rate standards.[2]

By making it allegedly far cheaper and easier for states to comply with the CPP using its favored option (hitting an annual mass target), EPA has limited political opposition from the power industry and (as we will discuss in Part II) eliminated the risk of a court finding that the rate standards are impossible to achieve. We have yet to hear how the environmental community feels about this.

In short, with a few exceptions to be discussed in Part III, every state will basically be forced to opt for the mass-limit targets, and mass-limit cap and trade systems are simpler than the rate-based system described above. Beginning in 2022, the state will have to distribute a limited number of CO2 allowances on an annual basis, and then reduce those allowances each year to meet the final 2030 target. States can distribute those allowances any way they see fit, but given the revenue-raising possibilities, it is virtually certain that every state will choose to auction those allowances.

The piéce de resistance is that EPA not only allows, but actively encourages, inter-state trading. This is apparently meant to reduce costs further and provide a ready-made pool of allowances (from the nine states already in compliance with the 2030 targets and others that will be in compliance by 2022 when the program is set to kick off). Presto! A fledgling national cap and trade system is born, under EPA control, and all without new federal legislation.

New Sources

Although the CPP is designed to limit emissions from existing coal and gas plants, EPA does not want power producers to avoid these limits by building new gas-generation capacity. New renewables are fine, however, and no one is likely to build new coal. So EPA is imposing a requirement that states take steps to prevent generation “leakage” from existing coal to new gas plants. (Whether the Clean Air Act allows such back-door regulation of new sources is another legal issue we will discuss in Part II.)

Accordingly, states must either

  • extend their mass caps to new gas plants using a very modest increase in the emissions cap that EPA has calculated for each state, or
  • use allowances to subsidize greater use of existing gas and renewables in order to make generation from existing facilities cheaper than building new gas plants.

There is irony here. EPA is trying to discourage new gas capacity in a rule covering existing power plants because “emission reductions achieved through the use of new NGCC (natural gas combined cycle) capacity . . . is inconsistent with the long-term need to continue reducing CO2 emissions beyond the reductions that will be achieved through this rule.” Yet in the accompanying new-source rule, EPA encourages such new NGCC capacity by setting a CO2 emission standard for new NGCC plants at 1,000 lbs / MWh. This standard is far higher than what most existing plants already achieve and, accordingly, may draw a legal challenge.

State Implementation Plans (SIPs)

Because the Clean Air Act requires states to implement these standards, each state has to submit a plan to EPA describing how it will do so, which EPA must then approve. If you are familiar with the national ambient air quality standard state implementation plan (NAAQS SIP) process, then you know about “completeness determinations,” “partial approvals/disapprovals,” “conditional approvals,” etc., the whole range of which EPA has imported into the CPP process. The upshot is that while states can drag this process out, in the end, either the EPA approves a state’s plan or it imposes its own federal implementation plan (FIP). States that go the “just say no” route will “get FIP’d.”

In Part II, we will describe what the CPP will accomplish, how it will do so, and at what cost. We’ll also tackle the question of whether the CPP can survive the enormous political and legal challenges ahead.

Notes

[1] California, Connecticut, Idaho, Maine, New Jersey, Oregon, South Dakota, Virginia and Washington.

[2] Remarkably, while EPA concedes both the cost difference, and significantly larger percentage reductions necessary to meet the rate standards, it still publicly claims that the rate and mass standards will result in virtually identical emissions reductions.