The Natural Resources Defense Council (NRDC) has proposed the first comprehensive plan to regulate greenhouse gas emissions from stationary sources under the Clean Air Act.
The plan would have the EPA assign emission rate standards for existing coal and gas fired power plants. States could allow facilities to average their emissions rate. The emissions rate at the state level would be the generation-weighted average of power produced in that state, and the EPA would require improvement by reducing the acceptable emissions rate for each type of generation over time. In this way, states that have relatively dirtier generation sources would receive a more generous standard, but they would also be required to achieve emissions reductions more rapidly over time. The proposal also would allow states to take credit for investment in renewable energy and energy efficiency. Finally, states could propose to participate in interstate trading of credits to achieve the required improvements.
In brief, the plan resembles a clean energy standard with the amendment that credit would also be given for energy efficiency.
Beyond the specifics of NRDC’s proposal, the plan makes two substantial contributions. First, the NRDC proposal illustrates forcefully the value of a flexible, incentive-based approach to implementing the regulations. Flexibility allows industry to look beyond a narrow set of engineering measures to identify the least-cost opportunities for emissions reductions throughout their operations. Flexibility also has environmental rewards, because as flexibility reduces costs it enables the EPA and the states to identify more stringent efficiency targets.
Secondly, the NRDC proposal provides a vision that is relevant even beyond 2020 by giving credit for a broad range of compliance options including efficiency improvements in the operation of existing coal-fired power plants, greater use of low-emitting and non-emitting energy sources, and an important role for energy efficiency.
It is possible the Clean Air Act embodies the regulatory infrastructure that will be used to guide the U.S. economy to achieving long-run emissions reduction goals. This would be a familiar role for the Clean Air Act, played out in the reduction of many other pollutants previously. The big opportunity the NRDC proposal presents the EPA is a demonstration of one way the agency could insert flexible, incentive-based approaches into its regulations.
The opportunity is historic. In 2009, President Obama pledged that, by 2020, the United States would achieve reductions in greenhouse gas emissions of 17 percent from 2005 levels. Many observers, especially in the international community, thought the failure of Congress to adopt comprehensive climate legislation in 2010 put the president’s pledge in doubt. However, in recent research we at RFF find that even without reliance on international offsets (which had been included in the administration’s earlier projections) the 17 percent target remains within reach. Two factors that contribute to this outcome are secular trends including changes in relative fuel prices and energy efficiency, and the efforts of states and local governments. These, along with the mobile source standards, will get the country 60 percent of the way to the goal.
The remaining piece to achieving President Obama’s pledge involves regulations of stationary sources under the Clean Air Act. In technical documents published in 2008 the EPA identified low-cost opportunities for efficiency improvements in several sectors that would provide the required additional emissions reductions to achieve the President’s goal. Under the Clean Air Act, the EPA has the responsibility to begin to regulate these sources.
The electricity sector is the first and most important sector to be regulated. The EPA cites several engineering studies that identify specific low-cost measures that can be taken at coal-fired power plants and research at RFF has validated this claim through statistical analysis. Moreover, efficiency improvements at coal plants are only a small part of the opportunities that are available. However, the regulatory design the EPA uses to pursue this goal is crucial. We find the costs would be reduced by 60 percent if the EPA enables states to use a flexible approach, such as the use of tradable performance standards or other innovative approaches.
NRDC’s plan could be the template for EPA policy. The virtue is that it is simple enough to be explained in the backseat of a cab. The challenge is the legality of giving credit for measures taken beyond the fenceline of the regulated facilities, including investments in renewables, transmission line upgrades and energy efficiency. That is a legal challenge; the economic challenge will be for the EPA to certify a methodology for evaluation of the contribution from energy efficiency.
It is fitting that the electricity industry is the first to be regulated. It is the sector with the most low-cost emissions reductions opportunities available. Moreover, it is the “chosen industry.” That is, the electricity industry stands to benefit substantially from efforts to modernize our economy. Mitigating greenhouse gas emissions will reinforce technological trends leading to expanding electrification of the economy. However, for the electricity industry to fulfill this role requires it to improve efficiency. The process provides substantial economic opportunities for those who understand the direction of history and who innovate.
The challenge facing the EPA is similar. It has to find a way to innovate in the development of new greenhouse gas regulations so as to maximize flexibility and efficiency. NRDC’s proposal offers compelling guidance on where the agency should look to begin this process.