Blog Post

A Quick Legal FAQ on EPA’s Clean Power Plan

Jul 14, 2015 | Nathan Richardson

The Clean Power Plan is a proposed EPA regulation that aims to reduce greenhouse gas emissions from existing (rather than new) electric power plants. Coal and natural gas-fired power plants are the single largest source of GHG emissions in the US economy.

Why do I care?

The Plan will be among the most significant environmental regulations EPA has ever put in place. It is the first federal regulation aimed at reducing GHG emissions from existing power plants, targeting a 30% cut from the sector. The Plan and parallel regulations imposing stricter fuel economy standards on cars and trucks are the most important measures aimed at reducing US carbon emissions. In the absence of a carbon price (a carbon tax or cap and trade), these regulations are the cornerstone of US climate policy and will be a key element of the US position in international negotiations.

These emissions reductions will also come with a cost, possibly a large one. Coal power plants will be shut down, and new plants - gas, renewables, or nuclear - built in their place. These costs will vary across the country and among electricity consumers. The effects of decisions triggered by the Plan will persist for decades, long after it has sunset in 2030.

When will the Plan be put in place?

EPA released a proposal last summer, sparking controversy and a flood of comments. EPA has now sent the final rule to the White House (OMB) for review, putting it on schedule to be released soon. Under the proposal, power plants would have to begin reducing emissions in 2020, continuing through 2030. That timetable could change in the final rule, though it’s unlikely.

How does it work?

The proposal is complex, but the basic structure is that EPA sets emissions targets that each state must meet. States - not EPA - are the primary regulators; such “cooperative federalism” is common under the Clean Air Act, though the Plan will push even more authority to states than is traditional.

The targets EPA sets are in “heat rate” or efficiency terms - the amount of carbon emitted per unit of electric power output (lbs/mWh), and are based on four “building blocks” of emissions-cutting measures EPA believes states can take. The first two building blocks are relatively straightforward - improved efficiency at existing coal plants, and shifting generation from coal to currently-underused gas plants. The other two are more ambitious, requiring investment in new renewable generation or reducing electricity use (AKA “demand-side energy efficiency”).

A frequently-misunderstood part of the Plan is that EPA isn’t requiring states to use any of the building blocks - they’re just the agency’s method for estimating what states are capable of doing and setting corresponding targets. States just have to submit plans to EPA that say how they will meet the targets, either alone or in multistate groups. How much flexibility states really have is unclear, however, and may depend on legal challenges (more below).

Can EPA do this?

EPA is using its powers under the Clean Air Act, which largely dates to the 1970s and was last substantially updated in 1990. The Act has been understood to apply to GHGs since the Supreme Court’s 2007 decision in Massachusetts v. EPA, but the Plan is nevertheless in new legal territory. The part of the statute from which EPA derives authority for the plan, §111(d), has only rarely been used, and never for a regulation of this magnitude. That doesn’t make the Plan improper, illegal, or even particularly unusual, but it does mean that there is little precedent to guide the EPA, states, industry, or the rest of us on how the regulations can and will play out. It also means legal challenges are even more likely than usual for EPA regulations, as we have begun to see already.

Didn’t EPA lose at the Supreme Court?

EPA has lost a case in the Supreme Court this year (Michigan v. EPA) and last (UARG v. EPA). But neither case relates directly to the Clean Power Plan. Michigan struck down a separate EPA regulation aimed at mercury emissions, not GHGs, from power plants. In UARG, the court struck down EPA’s efforts to limit (not expand) review of newly constructed facilities’ GHG emissions. Neither case is likely to significantly change the substance of EPA’s regulations, despite the agency nominally losing both. And both cases were decided based on language in the Clean Air Act that is completely separate from that on which the Clean Power Plan is based. There’s no direct legal connection at all, and neither case will determine how the Court rules on the Plan.

At most, the cases are evidence that the Court is trending toward less deference to agency interpretations of statutes, especially when regulatory programs have big economic effects (as the Plan undoubtedly does). Under the frequently-cited Chevron doctrine, courts defer to agency interpretations of law when the text is ambiguous and the agency interpretation is reasonable. But the recent EPA cases might signal a subtle shift in this doctrine. In UARG, the Court ruled that the text of the Clean Air Act in question was clear on its face, not ambiguous. And in Michigan, the Court agreed with EPA that text elsewhere in the statute was ambiguous, but ruled that the agency’s interpretation was unreasonable - a very rare outcome given traditional deference to agencies. In both cases, the court drew attention to the large economic impact of the regulations in question. This might mean EPA will face tougher scrutiny regarding its interpretation of §111(d) than it would have expected in the past. Or maybe not - in neither case does the majority opinion from the court claim any shift in doctrine. If these two cases are evidence of increased legal risk for EPA, it’s weak evidence at best.

What are the legal risks?

Legal challenges to the Clean Power Plan are inevitable, and in fact have already begun. It’s impossible to predict all of them, and there isn’t space to go into much detail. But here is a summary of the most likely claims:

1. The Plan is illegal in its entirety

There are actually two versions of §111(d) which were never properly reconciled between the House and Senate. One version can be read to forbid regulation of facilities whose hazardous pollutant emissions (like mercury) are regulated under §112 of the statute. If this reading is right, §111(d) is a dead letter and the Plan has no legal basis. A group of states and industry groups already challenged EPA’s proposal on these grounds, but the case was rejected by the DC Circuit Court of Appeals as premature. A new challenge along similar lines is likely once the Plan is finalized.

The challenge is a long shot, however. EPA’s reading of the two versions is more reasonable given the context of the statute, and deference to the agency should go a long way here. Still, a loss in this case would undercut the Plan entirely. Ironically, the Supreme Court’s (probably temporary) rejection of EPA’s mercury rule in the Michigan case undermines the foundation of this claim - even if carbon and mercury rules for power plants are mutually exclusive, then the agency could choose between them, or maybe even do both if it regulates carbon first.

2.  Targets should be for emitters, not states

Traditionally, Clean Air Act performance standards have set targets that categories of polluting facilities have to meet. For the Clean Power Plan, EPA instead set targets for states’ power sectors as a whole. This move makes EPA’s job of setting targets a bit easier, and may give states greater flexibility. But it might not be legal. §111 of the Act is written in a facility-centered way, though §111(d)’s cooperative federalism scheme for existing sources (the basis of the Plan) is less clear. If courts require EPA to set targets for source categories rather than states, the Plan will have to be rewritten from the ground up. This isn’t an existential threat - EPA could certainly do this, likely without changing the stringency or cost of the regulation very much - but it would mean substantial delay.

This argument against the Plan has received little attention to date, despite the controversy surrounding the proposal. That may indicate that it’s a weak argument, or it could mean that even critics of the Plan don’t object to states being made responsible - some of the most important Plan critics are the states themselves, and they are unlikely to complain about being in charge. However, assuming a good legal argument won’t be made because there’s no obvious party to make the argument is dangerous - it only takes one.

3. “Outside the fence” building blocks are illegal

Since EPA released its proposal last year, the agency’s decision to include renewables and demand-side energy efficiency - building blocks 3 and 4 - in its state targets has been controversial. Critics claim that doing so exceeds the agency’s legal authority because, they argue, the law only allows regulators to consider emissions-cutting actions that the facilities actually being regulated (here, fossil fuel power plants) can take. EPA and its allies, however, claim that there’s no meaningful difference between the building blocks in this regard. The agency says new renewables and improved energy efficiency will lead to reduced use of fossil power, that these causal links can be traced, and the resulting emissions reductions therefore attributed to specific power plants just as if the plants had installed emissions-reducing technology at the plant.

A legal challenge over this issue is certain. If successful, EPA will have to cut building blocks 3 and 4 from the Plan, making it less stringent. But the agency has designed the Plan so that these building blocks are “severable” - the Plan would survive, albeit in less-ambitious (and less costly) form.

4. No emissions trading

EPA’s cost estimates for the Plan assume that states will allow power plants to trade progress towards the Plan’s targets. In other words, each emitter won’t be required to make cuts, just the sector as a whole in the state (or across multiple states, if those states create a multistate market). Trading among plants would result in emissions cuts at the plants where they are cheapest. Almost everyone agrees that such trading is crucial to containing the costs of any GHG regulation.

But it’s not clear whether it’s legal. §111(d) doesn’t forbid it by requiring each emitter to meet standards individually, but neither does it explicitly allow trading, as other parts of the Clean Air Act do. In fact, as I have written recently, §111(d) says almost nothing about how regulated facilities are supposed to comply with its regulations. (As you may have concluded by now, §111(d) is hardly a masterpiece of legislative drafting). This ambiguity creates legal risk. Are EPA and the states within legal bounds when they say the Plan will allow emissions trading? A court may have to decide. Note that this is a different question from whether EPA can include outside-the-fence building blocks when it sets the Plan’s targets - whether trading is allowed is a question of how regulators can allow emitters to comply, regardless of where the target is set.

If trading isn’t allowed, EPA won’t be legally required to weaken the Plan, but in practice it will have to. Without trading, the Plan could cost three or more times as much, something neither the agency nor Congress would tolerate.

So Will the Clean Power Plan Survive?

These legal challenges create risk for the Clean Power Plan. The final proposal might make changes that head off some of the challenges, and it might also create avenues for new ones. Until we see it, it’s impossible to make predictions. Even if one assumes the final rule will be a lot like the proposal, predictions are very difficult. At this stage, I can offer only the most general legal prediction - while I don’t think the proposed plan would survive legal challenge intact, on balance I do think meaningful carbon regulation under §111(d) is legal. The final rule might change enough from the proposal to make it likely to survive, but there’s so much legal uncertainty that I think ultimately the courts will have their say, forcing EPA and/or the states to make at least one set of revisions.

Beyond this legal risk, however, there is political risk. Even if all litigation does is delay the Plan, the next presidential administration may have very different plans. While undoing the Plan after it is in place would be difficult, revising or even scrapping something still in EPA’s hands is much easier.

That means the next year will be crucial for the plan. If it can survive initial challenges and enter into effect, even in reduced form (for example, by dropping building blocks 3 and 4), then it will probably survive as an important part of US climate policy. If not, many more years of US inaction on climate are a real possibility. Some form of carbon price is almost certain in the long term, but the Clean Power Plan is the key piece of medium-term US climate policy. Without it, negotiating internationally will be even more difficult than it already is.

What’s Next?

Remember, the Clean Power Plan only applies to one sector of the US economy - fossil power plants. Many other sectors have substantial (albeit smaller) emissions, and EPA could regulate these sectors similarly under §111(d) of the Clean Air Act. The Clean Power Plan is therefore the first part of what could become a much broader regulatory program. At one point, EPA committed in a settlement with environmental groups to regulate oil refineries at the same time as power plants. It has since backed off that commitment, and there is no clear indication of what sectors the agency intends to regulate next. There is some evidence that oil and gas wells, not refineries, are next on the list, and this would fit in with the agency’s efforts to reduce methane emissions from drilling, including hydraulic fracturing. But other sectors like pulp and paper or cement production could also be regulated. The agency is also pursuing regulations for aviation emissions under separate legal authority.