Blog Post

NRDC's EPA/GHG Proposal is Impressive. But Tough Legal Battles Are Likely

Dec 7, 2012 | Nathan Richardson

EPA (in cooperation with states) has extensive Clean Air Act authority to regulate GHG emissions from the large installed base of existing fossil-fuel power plants. Over the past few years, it has sent contradictory signals about how and even whether it intends to use this authority. At RFF, we've written about what EPA can do to cost-effectively use these tools (specifically, performance standards under Section 111 of the statute). But NRDC has been in this game even longer - they were first to petition EPA back to regulate back in 2008. This week, they released their comprehensive plan. The report and summary are here, and the Post's Brad Plumer hits the key points here. Dallas has posted his views too.

The plan is technically impressive, well-thought out, and moderate in most respects. These virtues come partly from the proposal's inclusion of almost any option for reducing emissions - efficiency improvements at power plants, demand-side energy efficiency, fuel switching from coal to gas or biomass, and new renewables. From a policy point of view, that's great. But that flexibility carries legal risk. Whatever EPA does (including nothing), it faces a legal battle. If it adops NRDC's proposal, I think that battle will be tough. Deciding whether that risk is worth the payoff won't be easy.

If emitters get more efficient, switch to cleaner fuels, or, someday, capture their carbon, measuring compliance with performance standards is easy. If some make such improvements, and trade with others that don't, the effect is the same.

But when sources profess to cut their emissions by funding (though credit purchases) programs to reduce demand or build new renewable generation, effects are harder to measure. These would probably lead to reduced emissions from fossil power, but not necessarily - they might instead displace existing clean sources, or relatively clean gas. Verifying reductions is hard, maybe impossible. Enforcement is another issue. Since only emitters - not renewables or consumers - can be regulated, they will bear responsibility for any credits that can't be verified.

If these were just worries about implementation, I wouldn't focus on them. Details can be worked out later, and if the greens at NRDC are confident these kinds of problems can be solved, that's good enough for me too. But there are legal implications too.

The Clean Air Act gives EPA a lot of flexibility. The agency explicitly has control over how broad or narrow to draw the "source categories" for which it sets emissions standards. And "performance standards" is thinly defined. The prevailing view is that the agency could use flexible tools, including averaging, banking, and trading, as part of these standards.

But there are still limits. EPA can't call the whole electric power sector a "source category" and by doing so give itself carte blanche to set energy policy. NRDC's proposal doesn't do this - but it comes close.  We often say EPA sets performance standards for a category of sources, but that's not accurate - standards are set for sources in a category. By allowing new renewable generation and demand-side energy efficiency to count for emissions reductions, it threatens to sever the connection between performance standards and the emissions sources they apply to. In my view, such a connection is legally required. Without it, EPA is no longer using performance standards.

As I've written, that puts limits on what EPA can allow sources to do to comply. Offsets, for example, are out (I think) since they by definition mean there are no emissions reductions from the regulated source buying the offset. NRDC's proposal doesn't include offsets. The new renewables and energy efficiency programs that are in NRDC's proposal are likely to result in lower emissions from regulated emitters. But, as noted above, that's not certain.

I think a judge is likely to closely scrutinize EPA's arguments that a sufficient connection exists between allowed compliance measures and emissions reductions. In short, is a source that does nothing to cut its own emissions, but instead buys efficiency and renewable credits really meeting a performance standard? An economist would probably say yes. I would too, though it's a close call. But it's legally risky. If a judge disagrees, the ruling might not only cut out energy efficiency and renewable credits, but trading among regulated sources too, leaving only traditional command-and-control standards. That, to say the least, would not be good.

A more conservative approach is to allow only emissions cuts at fossil plants - efficiency improvements, fuel switching, maybe biomass cofiring - and trading among those facilities. That strategy carries less legal risk, but probably also means fewer emissions reductions than NRDC's broad proposal, greater costs, or both. I generally think EPA should be bold when it comes to making its regulation as flexible as possible. But here, just getting existing-source performance standards off the ground is such a huge step that being conservative might be the better course. If the agency includes broad flexibility like NRDC advocates, it should at least make it clearly severable from the core of the program.

NRDC deserves a lot of credit for its proposal. It isn't the first set of ideas for regulating existing-source GHGs under the statute, but it is by far the most detailed and polished. I don't mean to damn with faint praise when I say it’s a great start. NRDC has put a stake in the ground on stringency and flexibility, and pushing the EPA in those directions is valuable. I do worry about legal challenges. Just getting the program in place is important, but what you get out of it is too. A lot of the impressive cost-benefit performance of the proposal comes from big investments in energy efficiency. If EPA can't include these, it will have to allow greater emissions or accept much higher costs. But if the program is rejected in the courts, or tied up in litigation for longer than necessary, you don't get any reductions at all.