Blog Post

5 Things to Watch for in Monday's ESPS Proposal

May 29, 2014 | Nathan Richardson

On Monday, President Obama is set to announce proposed regulations limiting emissions from the existing fleet of power plants. These existing source performance standards or ESPS will be the most important part of the administration's climate policy and, as my colleague Dallas Burtraw likes to point out, the most significant action any President will have taken on climate change. I've been working to understand what these regulations might look like for almost 5 years, and over that time I've seen attention to them gradually increase.

It seems like this week everyone has something to say, including major studies from the U.S. Chamber of Commerce (with some flaws) and Harvard/Syracuse, and greatly increased media coverage. That coverage is good since the rules are important. Anyone interested in energy and climate should be paying attention. But if you're getting up to speed on this my advice is to wait until next week. Then we'll actually have something to talk about. But if you can't resist, below are the five things I'll be looking for most when the proposal is released. I'll come back to these on Monday and explain how they turned out.

1) Emissions Most observers will focus on the rule's stringency - how much will they cut emissions, and how quickly. My guess is that the proposal will be quite ambitious - the NYT suggests 20% emissions cuts from coal, which translates to 6% of total U.S. emissions. That's a substantial step towards the President's Copenhagen pledge of 17% cuts by 2020. But details matter here - what's the baseline, what's the timeline for cuts, etc. The stringency targets are important, but it will be equally important to look behind the headline numbers.

2) Flexibility Traditionally, performance standards are fixed targets that each emitter must meet. That's better than a technology mandate, but it's still not a very cost-effective way to cut emissions. Market-based tools like trading and taxes are better. To what extent will the proposal give free rein to states to use such flexible tools, and to trade amongst themselves? The most legally conservative path is not to allow any trading. But that won't happen. Any such policy would either have to accept minimal emissions cuts or be very expensive. The most progressive states (California and the Northeast) already use cap-and-trade programs. It's hard to imagine EPA not allowing those states to take credit for them under ESPS. Most legal analysts think flexibility in some form is allowed by the law. But not all agree, the limits of that flexibility are unknown, and the issue has never been tested in court.

3) Coal and Gas In reality, the flexibility question won't be resolved by Monday's proposal, but rather by each state as it decides how to regulate under the program. But EPA can signal what it will accept. And the agency does control the basic structure of the program. Most importantly, it will determine whether coal and gas plants can trade with each other. Allowing such trading is probably the lowest-cost large emissions-cutting opportunity in the U.S. economy today. But coal's political power and unequal distribution of coal and gas among the states make it politically difficult. Whether EPA groups coal and gas into the same regulatory "source category," as I have encouraged it to do, may therefore be the most important decision made Monday.

4) Scope The standards will cover almost all fossil fuel power plants in the U.S. Assuming EPA allows flexibility and states go along, many if not all of these sources will be able to trade with each other in some way, reducing the cost of emissions cuts. But there may be even cheaper opportunities outside these plants. There is persistent evidence that increasing energy efficiency is cheaper than cutting emissions at power plants or switching to gas. At some point, renewables become cost-effective; states are already promoting renewables with portfolio requirements, and will want credit for those policies. Will EPA allow states to credit renewables, energy efficiency, or other more ambitious options like forest offsets? The opportunities are there but the legal risks are high. My personal view is that incorporating energy efficiency and maybe renewables is legal, though practical problems like enforcement may be insurmountable. I don't think offsets as they're traditionally understood are legal.

5) Mass or Rate? In the proposal, EPA is not actually setting standards, despite what most coverage would lead you to believe. Instead, the agency is setting guidelines for what states must do. States are the regulators here - all EPA can do is approve or disapprove their plans. EPA only regulates if the states fail to do so. But setting guidelines requires EPA to give states some sense of what the agency will approve. Part of that is about what form standards can take (like how flexible they can be - see #1). But mostly it's about stringency: how much each state must do to cut emissions. EPA could set that target in a variety of ways, but the most likely are either a rate (tons of carbon emissions per megawatt-hour generated by plants in the state) or a mass (tons of carbon) - i.e. a cap. A rate approach fits better with how performance standards have worked in the past, and might be less legally risky. But the states in the lead on climate policy have caps. A mixed approach is also possible, though there may be perverse outcomes if some states aim for a rate target and others for a mass cap.

Look for more on this - understanding how states' different approaches under EPA's policy umbrella work (or don't work) together will be difficult but important. Check back on Monday and I'll review what the proposal actually does on each of these points.