Top three things to look for in EPA's power plant rule

Next week, the Environmental Protection Agency (EPA) is expected to publish the notice of proposed rulemaking to regulate carbon dioxide emissions from existing power plants. This is a big deal. After the failure to pass comprehensive legislation in 2009 and 2010 to reduce carbon dioxide emission throughout the entire economy, the administration has followed a sector-by-sector approach dictated by existing law under the Clean Air Act. The proposed rules slated to be published next week represent a new and important step, following efforts to address emissions from light-duty vehicles in 2009 and new power plants in 2012.

Why is it important? Existing power plants make up one-third of current carbon dioxide emissions, but perhaps 75 percent of the cheapest mitigation opportunities. A successful implementation of regulation under the Clean Air Act could go a long way toward achieving a cost-effective response to climate change.

It is also important because, unlike EPA regulation of light-duty vehicles and new power plants, which were entirely federal in their implementation, regulating existing power plants is an elaborate dance of federal guidelines and state plans to meet those guidelines. There are a lot of questions about how this will work — in particular, how much flexibility the EPA will explicitly give to states to implement the guidelines versus implicitly leaving states to propose and test.

What are the most important things to look for?

First, what is the level of targeted emission reductions? This is intimately tied up with the notion of a "best system of emission reduction," which is meant to define how emission reductions might be achieved and, in turn, inform the required level of emission reduction under the Clean Air Act. A more limited notion — that the best system of emission reductions is efficiency improvements at individual plants — will likely imply fewer reductions because such an approach is relatively expensive. A more expansive notion — that the best system is a market-based approach that encourages switching generation from high-emitting plants to low emitting plants — will likely imply more reductions because it is cheaper. One benchmark to look out for is a roughly 20 percent improvement across both coal and natural gas plants in 2020, which would come close to the administration's previous emission reduction pledge.

Second, is the emission standard set as a rate limit (tons of carbon dioxide per megawatt-hour) or a mass limit (tons of carbon dioxide), or both? The history of the Clean Air Act is almost entirely defined by rate-based regulations. Yet, existing state programs to control emissions in California and the Northeast are based on the total mass of emissions and would like to see their programs emerge as appropriate responses. The EPA could remain silent on setting mass limits, leaving states to test the waters, or could provide guidelines on how to convert one to the other, or could itself establish mass-based limits. A stronger lean toward mass limits would be a nod to those existing programs and others who wish to follow suit.

Third, how much compliance flexibility is explicitly endorsed? There are a variety of options that states might consider to achieve mandated emission reductions at lower cost. This includes trading among sources, trading with other states, incentives for non-carbon emitting electricity generation, incentives for demand-side management, and credits from other carbon-reducing activities outside the power sector. The last three options, in particular, include options for reducing emissions beyond the fence line of existing plants. The EPA could provide guidance, tools or even model rules for incorporating these various opportunities, which would likely influence whether and how states take advantage of them, but may raise questions concerning EPA's authority to do so.

What's next?

This notice of proposed rulemaking is only the first step. It begins a multi-year process moving to develop a final rule and state plans, though this may be litigated by stakeholders on both sides. The overarching question, however, is: What exactly will this process motivate states (and perhaps Congress) to do? Will it expand the collection of state-level trading programs that, linked together in some way, form an effective "bottom-up" national policy? Will it spur a broader variety of policy responses — including cap-and-trade, tradable performance standards, emission fees and traditional regulation — that provide test beds for various alternatives? Will it create a patchwork of regulation for electric utilities and consumers that forces Congress to act, either because it is too much or too little?

Arguably, a significant effort to reduce carbon dioxide emissions and address climate change will require a broad, flexible program to not only reduce existing emissions, but to create incentives for new technologies as well to encourage global action among all major emitters. Many eyes will be studying and reacting to next week's proposed rule to figure out how it might or might not fit into such an effort.

Pizer holds joint appointments as a faculty fellow at the Nicholas Institute for Environmental Policy Solutions and as an associate professor in the Sanford School of Public Policy at Duke University. His current research examines how public policies to promote clean energy can effectively leverage private sector investments, how environmental regulation and climate policy can affect production costs and competitiveness, and how the design of market-based environmental policies can be improved.

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