Experts React: EPA Proposes Clean Power Plan Alternative
August 31, 2018
Senior Adviser (Non-resident), Energy and National Security Program
The Environmental Protection Agency’s (EPA) proposed Affordable Clean Energy (ACE) rule would regulate power plant carbon dioxide emissions under a Clean Air Act provision that authorizes the use of the “best system of emission reduction.” In the best-case scenario, the Trump administration’s interpretation of this phrase would result in very modest reductions of emissions. In the worst-case scenario, it would result in emission increases by creating new loopholes that prolong the operating lifetime of the most polluting coal-fired power plants. What does recent evidence suggest as the best way to reduce carbon dioxide emissions in the power sector?
Since 2005, U.S. power sector carbon dioxide emissions have fallen by nearly one-quarter, even as electricity generation has increased. As the U.S. Energy Information Administration illustrated, about 60 percent of this decline reflects the increased use of natural gas—driven by low gas prices, which make coal relatively more expensive as a power source—and about 40 percent reflects the growth in wind and solar power, which benefitted from subsidies that lowered their investment costs. In contrast to the Trump administration approach that focuses on improving the efficiency of burning coal, the last decade demonstrated that the most effective way to reduce emissions has resulted from changing prices for low- and zero-carbon power technologies.
Given this market experience, policymakers could design the best system of reducing carbon dioxide emissions by pricing carbon pollution. Doing so would make continued investment in gas and renewables more attractive, as well as encourage innovators to seek out truly meaningful ways of reducing coal-fired power plant carbon emissions through carbon capture and storage technologies. Pricing carbon would spur more investment in energy efficiency, improve the economics of nuclear power, and stimulate creativity about how we produce and consume energy that exceeds our imagination today.
I have supported a carbon tax as more effective in driving emission reductions than conventional regulatory authority. The Climate Leadership Council has likewise called for a carbon tax. And Congressman Curbelo, a Republican from Florida, recently proposed carbon tax legislation. The Trump administration proposal on power plants signals again that, despite all the rhetoric from the climate denialists and skeptics, climate change is occurring, it imposes costs on our society, and the government has the authority to regulate carbon dioxide emissions. It’s no longer a question of if we will regulate carbon dioxide emissions, but how. So, while much of the debate over the ACE rule will contrast it to the Obama administration’s Clean Power Plan (CPP), this will miss the fundamental issue that the best system for reducing carbon dioxide emissions is a carbon tax.
Senior Associate (Non-resident), Energy and National Security Program
Among the curious elements of the proposed ACE rule is how it takes a giant step away from the years-long effort to convince environmental regulators to adopt market-based policies over command-and-control policies. Despite emphasizing the broad discretion that states have for submitting ACE compliance plans, EPA is telling states that those plans cannot include a cap-and-trade program. Under this approach, programs like the Northeast’s Regional Greenhouse Gas Initiative could continue to exist but could not be used to comply with the ACE.
EPA asserts that the Clean Air Act ties its hands. The agency insists that Section 111 of the Clean Air Act mandates symmetry between the approach to setting the emission standard and the compliance plans submitted by the states. The agency is proposing that the “best system of emission reduction” for coal plants is an inside-the-fence measure: heat rate improvements. The agency, therefore, reasons that state plans must also be based on inside-the-fence measures. This forecloses policies that reduce emissions by shifting generation from higher-emitting to lower-emitting plants—as would occur under a trading or averaging program. One risk of “asymmetry” identified by EPA: “[A] state’s [market-based] implementation measures might result in a more stringent standard.”
This legal rationale is debatable. In describing the authority of states to develop compliance plans, Section 111 cross-references another section of the Act that explicitly allows market-based approaches. More generally, the Clean Air Act’s “cooperative federalism” approach affords states broad authority to determine the means of compliance with EPA standards—and the statute permits states to adopt more stringent measures than those mandated by EPA.
If EPA finalizes its command-and-control interpretation of Section 111, it will be a setback for the otherwise successful efforts to encourage market-based environmental policies. Clean Air Act-based cap-and-trade programs for the U.S. power sector have led to dramatic and cost-effective reductions in conventional pollutants and have been the model for greenhouse gas cap-and-trade programs in California, the Northeast, the European Union, China, and elsewhere.
Senior Associate (Non-resident), Energy and National Security Program, CSIS
The review of the proposed ACE rule together with its accompanying regulatory impact analysis (RIA) and other relevant energy projections suggests the following:
The cost-benefit analysis in EPA’s own RIA does not support the proposed rule. Despite the use of dramatically reduced values for the social cost of carbon compared to those applied during the Obama administration, the analysis shows negative net benefits in moving from a scenario representing the CPP to one representing the proposed ACE rule. Specifically, the estimated cost reduction in moving from CPP to ACE is smaller than the reduction in benefits when using standard EPA practice the benefits associated with reductions in both targeted and non-targeted pollutants are included in the analysis.
The benefits of the proposed ACE rule for coal-fired generation and coal use are likely highly overstated. The proposed ACE rule focuses on state-level action to apply heat rate improvements (HRI), which it identifies as the Best System of Emissions Reduction, at coal-fired power plants. However, the illustrative scenarios in the RIA apply heat rate improvements to the entire fleet of coal-fired units, which is unlikely to result from determinations within each state. Moreover, the RIA uses assumptions that overstate likely efficiency improvements from HRI and understate its costs.
Notwithstanding the name of the proposed rule, EPA’s analysis suggests only minimal differences in electricity prices between scenarios with the CPP, without the CPP, or with ACE. Because the RIA scenarios assume very favorable HRI costs and fleetwide application of HRI to all coal plants, which is unlikely given the significant leeway accorded to each state under the proposal, likely outcomes under ACE are likely to tend towards those presented for the no CPP case.
The CPP, despite its major symbolic importance, has fairly modest emissions mitigation impacts when viewed from the perspective of current electricity markets. The total U.S. energy-related CO2 emissions declined from 5,994 million metric tons (MMT) in 2005 to 5,142 MMT in 2017, with the bulk of the decline occurring in the electricity sector where emissions fell from 2416 MMT in 2005 to 1743 MMT in 2017. The differences between the CPP and no CPP scenarios and the extreme scenarios presented in EPA’s RIA range from 50 to 74 MMT over 2025-35, about 1 percent of the 2005 emissions level used as the base for U.S. emissions reduction commitments. Many electricity analyses outside of EPA that use similar natural gas price paths show similar results, with some showing a much steeper decline in coal-fired generation and emissions from electricity generation over 2025-35 even without the CPP.
While the repeal of the CPP or its replacement with ACE has only modest emissions implications in a world of abundant low-cost natural gas, the absence of the CPP makes future emissions outcomes more dependent on the price of natural gas. Fuel switching towards natural gas over the past decade was mainly supported by natural gas pricing. This continues under the natural gas price scenario in EPA’s analysis, which is reasonable provided that continued growth in share gas production and the infrastructure needed to transport it are not constrained. However, removal of the “safety net” provided by the CPP would make future coal generation more responsive to any sharp rise in natural gas prices, posing a conundrum for those who support emissions reductions but also oppose shale gas development and the buildout of gas pipeline infrastructure.
While recent proposals to replace the CPP with ACE and to freeze fuel economy standards for cars and light trucks will delay U.S. emissions reductions, these actions should be placed in context and not be used as an excuse for weakening the Paris Agreement. While the 26 percent to 28 percent emissions reduction below 2005 levels by 2025 announced as the initial U.S. Nationally Determined Contribution and deeper reductions beyond that date will new mitigation policies, recent independent assessments suggest that the United States will be close to reducing emissions 17 percent below the 2005 level by 2020, the target announced by the Obama administration in conjunction with the Copenhagen Accord. In this regard, attitudes towards Germany are instructive. Germany strongly supports both renewable energy and ambitious long-term climate objectives. However, it has made only small emissions reductions over the past decade and expects to fall well short of its 2020 reduction commitment. It has also supported coal and is phasing out nuclear power, a major source of emissions-free generation. The international community has wisely chosen to focus on the positive aspects of Germany’s record rather than its weaknesses and would likely benefit from adopting a similar approach to maximize opportunity for the future participation of the United States.
Emissions reductions delayed are not necessarily reductions denied. The U.S. electric power sector continues to provide low- and no-cost opportunities for emissions mitigation in the United States and will do so even if ACE delays some reductions available under the CPP. Existing coal plants are hard-pressed to remain competitive even when the implicit or explicit value of carbon emissions is set to zero, as it has been throughout much of the United States over the decade in which coal’s generation market share fell from 50 percent to 30 percent.
Senior Vice President; Director and Senior Fellow, Energy and National Security Program
The ACE rule stands in stark contrast with the Obama administration’s CPP in a host of ways. The greenhouse gas emission reduction implications are, of course, the most important as they relate to the global climate challenge, but, as my colleagues have already stated, the U.S. electric power sector is by and large delivering on the reductions promised by the CPP and could continue to deliver on those reductions regardless of ACE (though that outcome is not guaranteed).
The less tangible significance is three-fold: (1) the long-term policy signal and industry-wide expectation that emissions reductions from the electric power sector are a priority and will likely become more stringent over time; (2) the notion that the electric power sector is in fact a system whose economic, environmental, and security attributes and deficiencies should be thought about more holistically and that regulation is going to have to advance to accomplish that goal; and (3) that U.S. climate regulation is part of a global strategy to reduce emissions and that our efforts to take action on climate could and did yield emissions reduction efforts on the part of other countries.
These may seem like more abstract features of what is a technical piece of regulation, but they are important in the context of motivating action on climate change and reflecting upon the types of changes that will need to take place in the energy system to achieve our collective climate goals. The reality is that this regulation does not create more certainty or clarity for market participants or state regulators in the U.S. electric power sector. It simply means that the pace of action on climate policy will once again be set at the state level. Indeed, ACE stands in stark contrast to S.B. 100, the bill that just past California’s state legislature mandating among other things 100 percent zero-emission electricity by 2045. Not every state will follow California’s lead, of course, but the pressure for them to do more will only intensify as will the pressure on utilities and other market participants.
Senior Associate (Non-resident), Energy and National Security Program
EPA’s proposed ACE rule is not going to save coal because it won’t change the market pressures facing U.S. coal-fired power plant fleet. Persistently cheap natural gas, slack demand for power, and dramatic reductions in the cost of renewable energy have and will continue to push coal plants into retirement. These market factors drove coal generation last year to levels not seen since 1983. EPA projects that coal generation will get pushed back to late 1970s generation levels by 2025, with or without the ACE rule. EPA’s analysis may depict a best-case scenario for coal. Analysis by my colleagues and I at Rhodium Group found that if natural gas prices stay persistently low and renewable energy costs decline as quickly as they have in recent years, coal generation could get pushed back to late 1960s levels by 2025 without the ACE rule. That’s a 45 percent decline compared to last year. It’s hard to imagine how the modest requirements of the ACE rule would change this outcome. The majority of U.S. twentieth-century coal fleet can’t compete against twenty-first-century natural gas and renewable energy generation. The ACE proposal won’t change this reality. A case in point: 10 days after EPA announced its ACE proposal, leading coal plant operator FirstEnergy Solutions announced new plans to shut down another six coal units by mid-2022.
Sarah Ladislaw is a senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Joseph Aldy is a non-resident senior adviser in the CSIS Energy and National Security Program. Kyle Danish, Howard Gruenspecht, and John Larsen are senior associates in the CSIS Energy and National Security Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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