President Obama spoke yesterday at Georgetown, announcing (sort of) new climate policy moves independent of a Congress that remains unwilling to seriously consider reducing greenhouse gas (GHG) emissions. The biggest of these moves is a commitment to EPA-issued performance standards for existing power plants under the Clean Air Act (CAA). The standards are to be proposed by mid-2014, and finalized within a year after that.
The President’s new commitments are important, but not for obvious reasons. The biggest climate policy shift this week didn't even make it into the speech.
The speech may have some political impact, and targeting fossil-fuel power plants is environmentally important, since they are the largest emitters of carbon in the US economy. But the policies the President announced are no surprise. EPA promised in late 2010 to implement the same standards for new and existing plants that the President promised again yesterday, to be finalized by mid-2012. That didn’t happen—EPA did propose standards for new plants last year, but it recently missed a deadline to finalize them. Whenever those new-source standards are finalized, the existing-source standards the President announced yesterday would be legally required anyway. If EPA were to fail to issue existing-source standards, or if it withdraws the new-source proposal without finalizing it, environmental groups would sue (and probably win). So, barring Congressional intervention to strip EPA authority, the country was already on the path President Obama described. The President didn’t change the direction of climate policy—at best he accelerated it.
The long delay in EPA action has given analysts time to consider what the EPA existing-sources standards might look like. It does appear that standards can lead to real emissions reductions. But the size of those reductions depends on the how flexible EPA standards are. More flexibility means lower costs, which may enable more ambitious environmental goals because the CAA requires EPA to consider costs in crafting the standards. Lower costs could also reduce the impact of the standards on the economy, holding environmental targets constant. How to divide the efficiency gains from flexibility will be an important behind-the-scenes battle within the EPA.
What does flexibility mean here? A traditional, inflexible standard requires every plant to meet an emissions (or efficiency) target individually. A tradable performance standard provides flexibility by allowing plants (or firms) to trade progress toward it—plants that emit less than the standard can trade credits to those that emit more, so that average emissions meet the standard. Recent RFF research estimates that, for equivalent emissions reductions, a traditional performance standard would be roughly three times more costly than a tradable performance standard.
Even more flexibility might be possible if plants can get credit for emissions-cutting moves “outside the fence line,” like investments in renewable generation or energy efficiency—the most comprehensive existing-source proposal to date, from NRDC, includes such options. Economy-wide cap-and-trade or a carbon tax are even more flexible, but are beyond EPA's authority.
The policy prescription looks simple, then: more flexibility. But there’s a dark side—flexibilty increases legal risk for the EPA. Section 111(d) (the relevant part of the CAA) remains almost completely untested. The EPA, under a Republican president, has previously argued that a full sector-wide cap-and-trade program (for mercury, not carbon) is possible under the CAA. Most CAA lawyers seem to agree. But this view hasn’t been tested in court. And it doesn’t answer whether “outside the fence” options can be included. We’re skeptical about these options, but many in the environmental community are supporters, and the efficiency gains are tempting.
Reading agency intentions is hard, but until recently the EPA seemed likely to pursue an inflexible (but more legally defensible) approach. The President’s post-speech memo to EPA suggests this may be changing. It calls for “approaches that allow the use of market-based instruments, performance standards, and other regulatory flexibilities.” That’s good news, and may be the most important policy change this week, rather than anything in the speech itself. We as researchers have long advocated a bold approach from EPA, despite reservations about legal defensibility of some options.
A tradable performance standard or similar flexible approach would show ambition to squeeze substantial GHG reductions out of the CAA. The legal risks associated with this approach are real, but can be minimized. One option is to make more ambitious elements of the standards severable, so that a court can reject them without eviscerating the entire program. Another is to leave flexibility decisions to states, which play a major role in existing-source rules under the law.
The President’s commitment to EPA action is good news. Action from Congress on climate would probably be better (though not necessarily). But EPA does have the ability to take meaningful steps to cut emissions, and has the tools to do so in a flexible, relatively low-cost way. The President's command to EPA to use those tools is great news.