State and US Regional Policies

Twitter Q&A Roundup: EPA's Clean Air Plan

On June 5, RFF hosted a seminar titled, “Making Sense of EPA’s Proposed Rule for Reducing Greenhouse Gas Emissions from Power Plants.” We did not have time to answer all of the questions posed by our Twitter audience during that event due to time constraints. Below are our responses to some of those questions.

Dallas: Some states start with no coal-fired generation while other states start with a generation mix that is over 90 percent coal fired. That means that, as a point of departure, the emissions rate of electricity generation varies by a factor of six across states. EPA is taking this initial rate, and the initial mix of generation in a state, as the basis for calculating the state’s obligation to improve. To do otherwise and impose the same standard on all states would be cost-effective but it would impose greater costs on some states than others.

Nathan: Yes – states can choose among the blocks as they see fit, or choose other options for reducing power sector emissions that EPA did not consider in setting the targets.

Nathan: The regulations would for the first time create a general, national incentive to reduce power-sector emissions. This makes investments in research and deployment of technologies like CCS (carbon capture and storage) and cheaper renewables more attractive than they would be without the policy. My intuition is that the policy probably isn’t stringent enough to attract large research investments that might make breakthroughs significantly more likely. For that reason I think separate policies that invest in early-stage energy R&D are needed. But every bit helps.

Nathan: It may not mean much. EPA’s targets for both EE (energy efficiency) and renewables are based on what states are already doing. States without strong EE or renewable policies would have an incentive to put them in place. That incentive is lost if EE/renewables don’t survive legal challenge. But there are other reasons to support those policies, as evidenced by the states that already have them. I think you only see a large renewables buildout under the proposal if they turn out to be quite inexpensive. But if that happens we’ll build a lot even without the policy.

A bigger implication may be that requiring such policies to comply with federal law reduces the chances that they will be rolled back, as some are pushing for now.

Dallas: States have a compliance obligation that will be measured in terms of performance in achieving a target emissions rate. A state might use cap and trade, for example, as a way to drive a transformation of its electricity sector. In this case, it would be up to the state to determine the stringency of the trading program (the emissions cap) that would enable EPA’s rate-based goal to be achieved.

Dallas: It is clearly the intent of EPA that states could implement emissions trading programs as a means to achieve the compliance obligation.

Nathan: Yes. It’s possible these programs (or at least using them to comply with Clean Air Act requirements) could be challenged in court – it’s never been tested. But all three of the lawyers on today’s panel think these tools are legal.

Dallas: RFF’s cost analysis is built on a characterization of the US electricity industry that includes competitive and regulated (cost of service) regions of the country. In competitive regions, we find that most of the costs associated with EPA’s regulation is likely to fall on producers, with little passed on to consumers. In regulated regions, companies are guaranteed a rate of return on investment, and in those regions one can assume the costs of the regulation are mostly or entirely passed on to consumers.

Dallas: There appears to be no objection from EPA, and in fact there is support, for the creation of regional cap-and-trade programs. However, EPA will not measure the performance of states by the reduction in emissions achieved but rather by the emissions rate that is achieved.

Nathan: Again, it’s possible these programs (or at least using them to comply with Clean Air Act requirements) could be challenged in court – it’s never been tested. But all three of the lawyers on today’s panel think these tools are legal.

Nathan: EPA does mention this effect when discussing improved efficiency at coal plants. It argues that because the rule assumes other policy measures (most importantly demand side EE) will be implemented, that this isn’t a big problem. Makes sense, but let’s see if the modeling agrees.

Nathan: EPA does care – the proposal sets one “interim” target that states must meet on average for the years 2020-2029, and a final target for 2030.