United States: EPA Announces Final Rule Regulating CO2 Emissions; Emissions Goals Stricter Than Originally Proposed, Both Nationally And For Indiana

Last Updated: August 18 2015
Article by Kelly S. Earls and Seth M. Thomas

On August 3, 2015, the Environmental Protection Agency (EPA) released its Final Rule to regulate Carbon Dioxide (CO2) emissions from existing power plants under Section 111(d) of the Clean Air Act; commonly referred to as the Clean Power Plan (CPP). These regulations are designed to reduce the pounds of carbon emitted per megawatt-hour (MWh) of electric energy produced by U.S. electric generating units (EGUs). EPA anticipates that the rule will achieve a 32 percent reduction in U.S. power plant CO2 emissions from historic levels by 2030. The CPP affects all fossil fuel-fired EGUs with a capacity over 35 megawatts that either were in operation on or commenced construction by January 8, 2014, with some limited exceptions. Currently, fifteen states, including Indiana and Ohio, have filed suit, asking for an emergency stay to stop implementation of the CPP.  

The goals that EPA set in the CPP Final Rule are stricter than originally proposed, both nationally and for Indiana. States have two options to comply with the CPP: (1) a target emissions rate, which is measured in the poundage of CO2 emitted per net MWh; or (2) a mass-based cap measured in millions of tons of CO2 emissions. Under the first approach, EPA looked at 2012 CO2 baselines, the state's energy portfolio, and projections for future energy demand growth. Indiana's 2012 CO2 emissions baseline was 2,021 pounds per net MWh. EPA has set a target for Indiana to reduce its CO2 emissions rate by approximately 39 percent by 2030 (the target is 1,242 pounds per net MWh). Under the second approach, states may cap emissions, but the CPP allows sources to find cheaper reductions elsewhere. Under this scenario, Indiana's 2012 baseline is 107.3 million tons of CO2 and EPA's Final Rule would impose an approximately 29 percent reduction in total emissions by 2030 (the target is 76.1 million tons of CO2). Under either option, Indiana may incorporate trading among affected EGUs (or renewables). For other state-specific information, such as for Ohio, please see pages 842-845 of the CPP (a link is provided at the end of this article). Under the first option, the rate-based option, trading would occur using "emissions reductions credits," or ERCs. Under the second option, the mass-based option, trading would involve an emissions trading program within a cap. 

States have until September 6, 2016 to submit state implementation plans (SIPs). However, states may request a two-year extension to submit a final SIP, which extends the submission deadline to September 6, 2018. EPA stated that it may take up to one year to review a SIP. If a state does not submit a SIP, or EPA does not approve the SIP, EPA can impose on the state a federal implementation plan (FIP). State compliance programs start in 2022, with an eight-year interim period and final targets to be reached in 2030.   Currently, Indiana's and Ohio's attorneys general, along with 13 other state attorneys general, have asked the D.C. Circuit Court to issue an emergency stay of the CPP and its deadlines, while it is reviewed by the courts.  Nevertheless, many utilities and state entities are beginning to consider the ramifications of the Final Fule. It remains to be seen whether the states will develop SIPs that achieve the interim and final rate-based goals or mass-based goals.  

EPA also provided suggested steps, or "building blocks," to fulfill the required emissions reductions. EPA left three Building Blocks in tact in the Final Rule; however, some are concerned with the elimination of Building Block 4, which focused on increased end-use energy efficiency. Energy efficiency is still encouraged, but has been eliminated as one of the rule's "Building Blocks" for states to use in building their own carbon-reduction plans.

The removal of Building Block 4 came on the heels of concerns that demanding more energy efficiency may be beyond EPA's authority because utilities and states cannot control end-use energy efficiency. Some contend that all four Building Blocks exceed EPA's authority. Yet, EPA issued its final rule with the three remaining Building Blocks mostly intact: (1) heat rate improvements leading to an increase in coal plant efficiency; (2) increase use in natural gas; (3) increase use of zero-emitting resources. 

In the First Building Block, EPA concluded that coal-fired EGUs may adopt best practices and upgrade equipment to achieve a six percent improvement in heat rate. Under the Second Building Block, EPA determined that states should increase generation from existing natural gas combined cycle units and reduce generation from steam EGUs. Under the Final Rule, EPA used summer capacity ratings and found that a 75 percent target utilization rate is feasible. Under the Third Building Block, EPA originally proposed including existing and new renewable energy generation and "at risk" nuclear plants and nuclear plants under construction. However, in the Final Rule EPA removed both existing renewable energy generation plants and "at risk" nuclear generation. This Third Building Block now focuses entirely on new renewable energy generation. However, uprates at existing nuclear generation plants and new nuclear generation (including generation under construction) are eligible to generate credits under a rate-based compliance program. The Building Blocks are merely suggestions on how to achieve EPA's reduction goals. States have flexibility as to how to meet the targets, including using energy efficiency.

You can find EPA's Final Rule here: www.epa.gov/airquality/cpp/cpp-final-rule.pdf.

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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