United States: The President's Climate Action Plan: What Might It Mean For Existing Coal-Fired Plants?

Last Updated: August 9 2013
Article by William J. Walsh

Earlier this summer, the President issued a Climate Action Plan (CAP) directing the U.S. Environmental Protection Agency (EPA) to issue final "standards, regulations, or guidelines, as appropriate," pursuant to Sections 111(b) and 111(d) of the Clean Air Act (CAA) to "address carbon pollution from modified, reconstructed, and existing power plants," no later than June 1, 2015 (one year after issuing its proposal next year). EPA is in the process of devising a regulation to implement this broad directive. This Environmental Client Alert explores the potential details and options that EPA may propose and, to the extent possible at this early stage, suggests some impacts.

The CAP Requirements

The CAP directs EPA to require states to submit implementation plans required by and consistent with EPA's implementing regulations by no later than June 30, 2016. Once the State Implementation Plans (SIPs) are approved, they will establish regulatory standards of performance for existing sources, i.e., the installation of a "best system of emission reduction," which takes "cost into account" and which has been "adequately demonstrated." A "best system" is not defined in the CAA. After the final regulation is issued, each state then establishes a performance standard that achieves the emission limit. The CAP, however, specifies no numerical goal for reductions in coal-fired utility GHG emissions, standards, technologies or other details, only that EPA should use "market-based instruments," "performance standards," and "other regulatory flexibilities." While it is still early in the process to predict what EPA will propose, it is possible to assess the likely contours of an EPA-proposed approach to regulating existing coal-fired electric plants.

Potential Components of a Rule Governing Existing Power Plants

A broad sense of the potential specifics can be gauged by examining prior statutory proposals, the advocacy positions of environmental groups, and the proposals of some relatively neutral nonprofit groups (see table summarizing select proposals below).

Existing GHG Reduction Programs and Proposals for the Electric Power Sector

Source of the Proposal*

Percent Reduction by the Coal-fired Electric Power Sector (unless otherwise noted)

Programs Characteristics (Including Potential Best Systems)

European Union (EU-15) 2020 Goal

20 percent below 1990 levels all sources (~18 percent below 2005 levels)

Not directly comparable since carbon dioxide (CO2) emissions from coal-fired power plants made up 26 percent of total U.S. GHG emissions. The legislative cap-and-trade method not comparable to CAA approach.

2009 House Climate Bill (all sources)

17 percent below 2005 for all GHG emissions (economy-wide).

21.4 percent below 2005 level in 2020 from coal-fired power plants

Market-based programs were expected to achieve these emission reduction targets.

2009 U.S. Nonbinding Goal Copenhagen Accord

17 percent below 2005 for all GHG emissions (no separate goal for existing coal-fired plants)

No details specified.

EPA Proposed Rule Reducing GHG Emissions from New Electric Power Plants

Initially targeted utility sector-wide emission rates attainable by gas-fired electric plants, but now expected to distinguish between major fuel types

Currently under review by OMB.

Resources for the Future (RFF), Greenhouse Gas Regulation under the Clean Air Act: Structure, Effects, and Implications of a Knowable Pathway (2010)

11.4 percent below 2005 in 2020 from the electrical sector

>15 percent below 2005 in 2020 from all electric generating sources (from another RFF study using an economic model to calculate the reductions from a performance standard requiring a 4 percent reduction in average emission rate applied to all electric generating sources. The electricity price would increase 1.3 percent (RFF, Technology Flexibility and Stringency for Greenhouse Gas Regulations at Ex. Sum. (July 2013), available at http://www.rff.org/RFF/Documents/RFF-DP-13-24.pdf).

A fleet-wide average is attained from energy efficiency improvements at coal-fired plants plus a 5 percent fleet-wide reduction in CO2 emissions with the co-firing of biomass with trading (free allowances).

A substantial portion of those reductions banked for compliance in future years.

World Resources Institute (WRI), Using Existing Federal Laws and State Action to Reduce Greenhouse Gas Emissions (WRI 2013)

Lackluster: 22.1 percent reduction in "power plant" emissions from 2005 to 2020 (below 2005 level)

Middle-of –the Road: 30.8 percent reduction from 2005 to 2021 across all electric generators

Go-Getter: 47.9 percent reduction from 2005 to 2021 across all electric generators

Other than stating EPA could specify "5 percent improvement in efficiency starting in 2018," the report simply states EPA considers technological feasibility; cost; lead time; energy and non-air environmental impacts; and the remaining useful life of the plant, including use of flexible, market-based approaches.

Natural Resources Defense Council (NRDC), Closing the Power Plant Carbon Pollution Loophole (NRDC 2013)

26 percent below 2005 level (from the fossil generating fleet in power sector)

Each state is free to calculate its own target fossil-fleet average emission rate for 2020. The target fossil-fleet average emission rate for 2020 is calculated for each state, using the state's baseline coal and oil/gas generation fractions and an emission rate benchmark of 1,500 lbs/MWh for coal-fired units and 1,000 lbs/MWh for oil and gas-fired units. States with more carbon-intensive fleets would have higher target emission rates, but greater differentials between their starting emission rates and their targets. Plant owners choose how to achieve target reductions (giving credit for additional energy efficiency and electricity generation using renewable sources and allowing emission-rate averaging among fossil fuel-fired power plants. States design their own approach, as long as it achieves equivalent emission reductions.

* There is no utility industry-sponsored proposal at this time. In some cases, the authors of the reports listed in the table calculated the emissions reductions from 2005 to 2020. In other cases, the Department of Energy's reported annual carbon dioxide emissions for the electric power sector were used to convert the emission reductions promised in these reports into 2005 to 2020 emission reductions.

Potential Impacts

One potential macro impact of this scheme is that, as the goal for 2020 decreases allowable CO2 emissions, regulatory incentives will seek to increase energy efficiency, use of biomass fuel, and greater renewable sources of electric generation and gas-fired turbines. In certain situations, there may even be an incentive to implement (if feasible) carbon sequestration or other innovative methods of reducing CO2 emissions.

Issues that need to be decided include what level to require a cap, whether states will be allowed to use interstate electric utility, multi-sector, and/or international trading, use offsets, and price floors/ceilings. (Pew Center on Global Climate Change, GHG New Source Performance Standards for the Power Sector: Options for EPA and the States at 3 – 4 (March 17, 2011), available at http://www.c2es.org/docUploads/EPA-HQ-OAR-2011-0090-2950.1.pdf). Other possibilities include a potential menu of options for the states.

The average CO2 emission reduction goal from 2005 to 2020 that EPA might propose is not clear because EPA has not made public the details of the specific alternatives that it is considering and, although some of the proponents have provided their estimates of the costs and benefits, a thorough regulatory impact assessment of the costs and benefits of each alternative (using EPA's methodology) is not available, and EPA has not tipped its hand on how aggressive a policy goal it prefers. However, based on the proposed alternatives listed in the table above, EPA may propose a program goal for GHG reductions from 2005 to 2020 that is greater than 10 percent (i.e., the amount achievable using increased heat efficiency and biomass), though less than the 26 to 48 percent goals advocated by some environmentalists.

The examples provided above also suggest that EPA is likely to consider, among other actions, increasing heat efficiency (~ 5 percent), expanding the use of biomass (~ 5 percent), using fleet-wide and fuel-source averaging, setting renewable energy standards, and supporting state-based market approaches, such as the program adopted in California, to the extent legally feasible.

The biggest unanswered question is how much will it cost, which in turn will depend on the degree of flexibility granted in the rule. It remains to be seen how EPA will document the cost given the large number of possible options that the states may pursue with the flexibility being proposed for the regulation. Utilities that operate coal-fired plants have expressed concerns that this decision places another expensive environmental compliance burden on the economy at a time when the economic recovery is still fragile. The extent of this burden is hard to evaluate precisely at this point.

In theory, the flexibility in the scheme should result in the most cost-effective measures being selected by states and utilities (see all of the white papers and reports cited in the table, above). However, these measures are not cost-free and ideal economic efficiency is rarely achieved through direct regulation (particularly at EPA and in certain states).

The flexibility and cost of any EPA proposal, as well as its overall viability, also depend on whether the courts hold that the CAA allows EPA to use these various tools, e.g., averaging emissions or adopting a market-based approach. EPA has previously determined that averaging emissions across facilities or an emission trading system can qualify as a "best system" pursuant to the CAA. On its face, the CAA authorizes a trading system for the acid rain program. However, there is no explicit language in the CAA either authorizing or prohibiting EPA from using a market approach to reduce CO2 emissions from existing electric power plants (Congressional Research Service (CRS), Climate Change and Existing Law: A Survey of Legal Issues Past, Present, and Future (2013)). CRS has cautioned that a cap-and-trade scheme would be an awkward fit to the CAA. Other evaluations have suggested the CAA has the flexibility to support these approaches (RFF Report in 2013). The only clear points are that the courts have not yet ruled, EPA does not have legal authority to tax pursuant to the CAA, and litigation is likely to delay implementation by years. Therefore, absent new legislation, a market approach cannot include the purchase from EPA of emission allowances or credits (RFF 2013; CRS 2013). Some states, however, may decide to require the purchase of allowances based on separate state laws (as in California).

In summary, when EPA solicits comments from stakeholders (and obviously, when a proposed regulation is published), there will be a great deal to discuss. The utility industry must decide whether, when, and to what degree it should prepare comments to build the administrative record that it will need to convince EPA to modify its proposed program and/or to challenge a final regulation. Since a CAA regulation directed at existing electric power plants provides legal and policy precedent for issuing similar rules directed toward reducing the CO2 emissions from the major existing industrial sources (including some facilities which emit CO2, because carbon is in the raw materials utilized in the manufacturing process), other industry sectors may want to monitor EPA's proposal closely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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