The big news this week is that the U.S. Environmental Protection Agency (EPA) released its proposed rules to restrict greenhouse gas (GHG) emissions from existing power plants. The 645-page proposed rule will now undergo four months of formal comment, which the EPA must analyze before issuing final regulations in one year. Here are the key highlights:
First, the EPA has proposed a 30% reduction in power sector GHGs by 2030 compared to 2005 levels. The 30% goal sounds ambitious, but the 2005 baseline year was higher than our current GHG emissions levels. There are four reasons for this: (1) the recession weakened demand for electricity, so less was generated; (2) the natural gas fracking boom flooded the market with cheap natural gas, so some power plants switched from coal to natural gas; (3) the boom in state-driven Renewable Portfolio Standards (RPSs) has dramatically increased installation of and generation by wind, solar, geothermal, and other renewable sources; and (4) uncertainty about the scope of this proposed regulation, together with other EPA regulations on mercury emissions and inter-state pollution, have made investments in coal plants much costlier and riskier. The result has been lower GHG emissions since 2005.
Second, the rule does not just focus on emissions levels at individual power plants. The EPA has interpreted the Clean Air Act (CAA) phrase “best system of emission reduction” (BSER) to include “outside the fenceline” changes in the overall electricity system that reduce GHGs. This is incredibly important, because it means that there are four ways to meet the targets: (1) reducing GHG emissions through technological investments at the scale of individual Electric Generating Units (EGUs); (2) reducing individual EGU emissions by switching from coal to natural gas; (3) improving energy efficiency on the demand side so that less electricity needs to be produced; or (4) increasing renewables generation as a share of the overall generation so as to reduce the average level of GHGs per unit of electricity produced. This last option will spur expanded investment in renewable energy projects.
Third, the states are in the driver’s seat for determining how to meet the GHG targets. This is the norm for most air pollutants under the CAA, where the individual states adopt State Implementation Plans (SIPs) to meet EPA-set National Ambient Air Quality Standards (NAAQS). In this case, each state has an individually-specific target based on its baseline. California, for example, has much lower emissions per unit of electricity generated (because it has very little coal and a lot of renewables in its mix) than Wyoming—so California’s baseline is lower but its target is also much lower than coal-dependent states. The hard political choices about how to meet the targets are now on the states—and each state must submit its plan to EPA by June 2016 for meeting the targets in the EPA rule. That means there’s going to be a lot of policy development at the state level in the next two years (of course some states may decide not to do this, in which case the EPA has the authority to do it instead).
Finally, existing state programs like California’s cap-and-trade regime under AB 32 are left largely intact. California’s leadership (together with the Regional Greenhouse Gas Initiative [RGGI] in the Northeast) has demonstrated that the EPA rule can be implemented in a cost-effective manner. The EPA rule even creates incentives for other states to join California’s or other states’ programs—which will likely result in multiple regional efforts nationwide that will mean lower costs, greater integration, and more political support for the system as the key power producers in each state become vested in the system. That’s brilliant politics.
There are some uncertainties about the match between California’s system and the EPA rule, however, that need to be resolved—especially regarding how offsets that are valid under AB 32 but do not directly involve the power sector will be treated by the EPA. I’ll address those issues, as well as the international ramifications of the rule, in the future.