Blog Post

Flexibility and Stringency Come Together in Greenhouse Gas Regulation

Apr 1, 2016 | Dallas Burtraw, Hang Yin

In determining emissions performance standards under the Clean Power Plan (CPP), the US Environmental Protection Agency (EPA) considered the possibility for increased generation from non-emitting renewable facilities as one way to reduce emissions, and this possibility is reflected in the stringency of the standards. A part of the pending legal challenge to be argued before the DC Circuit Court in June 2016 is the claim that EPA lacks authority to consider activities in setting the stringency of the standards beyond those that can be taken at the affected facilities, that is, existing coal- and gas-fired plants.

The plaintiffs could be expected to favor broad flexibility including the possible expansion of renewable generation as a way to contribute to compliance with the goals of the CPP, but their legal argument is that the stringency of the standard cannot reflect that. There are several other examples of potential flexibility in complying with the CPP as it is currently written that are not considered by EPA in determining stringency. Energy efficiency is not a “building block” for determining stringency in the final rule, but EPA formally gives credit for successful efficiency programs in calculating an emissions rate for compliance. Similarly expanded generation from nuclear units can be used to reduce emissions rates for compliance, but the stringency of the CPP is not built on that possibility. More generally, natural gas or biomass cofiring or carbon capture and storage might be used at an existing coal plant that is directly subject to regulation; however, EPA does not weigh these measures either, because they are thought to be more expensive than ones the EPA does consider—specifically greater generation from natural gas and renewable facilities.

The stringency of emissions rate policies is ambiguous when flexibility is unanticipated or not considered in setting the standard. Similarly the environmental outcome would be ambiguous if flexibility were taken away. For example, a specific emissions rate improvement averaged over a larger set of generators may lower cost but also reduce the actual emissions change; and, if averaged over a smaller set of generators the cost may be greater and the emissions change may be greater.

In a new modeling exercise, we find that:

  • If EPA were to restrict compliance options to measures that could be taken at affected facilities while keeping the emission rate standards the same as described in the CPP, the emissions change would be substantially greater than anticipated under the CPP; however costs also would be greater.
  • If the agency were to revise the regulation so that emissions rate standards were not based in part on opportunities beyond the affected facilities, EPA would still be able to select emissions rate standards that achieved emissions outcomes similar to the CPP. However, we suspect the costs could be greater than under the CPP.

This modeling exercise illustrates the importance of anticipating consistency in the options EPA can consider in setting the targets and the options that can be used for compliance. To quote our previous published work on this, at issue is whether the gains from flexible policies are captured by the productive sector through lower costs for consumers or firms without changing the stringency of the policy, by the environment from greater stringency, or shared.

Our exercise examines the removal of flexibility by disallowing credit for expanded renewable generation. We find that if EPA were to restrict compliance options to measures that could be taken at affected facilities while keeping the emission rate standards the same the emissions change would be substantially greater than anticipated under the Clean Power Plan; however, costs also would be greater. We anticipate that if the agency were required to revise the regulation so that standards were not based in part on opportunities beyond the affected facilities, EPA would be able to select targets that achieved emissions outcomes similar to the CPP at lower cost compared to the set of scenarios we model. However, we expect the costs would necessarily be greater than under the CPP because less flexibility that would be available for the affected EGUs.

The larger question is who should pay that cost if less flexibility is allowed? If we were to presume the cost is shared between the productive sector and the environment then there would be higher costs for industry and a smaller emissions change. What would be interesting to know, and the subject of ongoing research, is whether narrowing the flexibility in this way would lead to market equilibrium changes in investment and retirement that might unexpectedly amplify the emissions change, say, by leading to unexpected coal retirements because existing units could no longer receive credit for secular changes that are leading to cost reductions in other technologies.