Blog Post

Helping States Move toward a Cleaner Electricity Future under the Clean Power Plan

Oct 11, 2016 | Karen L. Palmer

Federal climate policy has been interrupted by the Supreme Court’s stay (freeze) on implementation of the US Environmental Protection Agency’s (EPA’s) Clean Power Plan, which will regulate emissions from the electric power industry. Judges on the DC Circuit Court of Appeals heard arguments for and against the rule on September 27. Their opinion is expected by winter, but meanwhile the stay remains in effect. While this extended period of delay and uncertainty may be seen as slowing climate policy on the domestic front, it also provides states with time to consider and evaluate different options for developing their plans to comply with the Clean Power Plan and to move toward a cleaner electricity future.

The Clean Power Plan is all about options. States can choose between reducing their emissions rate, expressed as pounds of carbon dioxide emissions per megawatt hour of electricity generation, or reducing their emissions mass, expressed in total tons of emissions. EPA lays out a schedule for the submission of state plans describing their compliance approaches and, subject to a few requirements and conditions, gives states wide latitude in what goes into those plans. The main requirement is that the state plan shows it can achieve the required improvements in electricity emissions.

Such wide latitude requires a fair amount of exploration of the various options and evaluation of what makes the most sense in each state. In conjunction with the National Governors Association (NGA) Center for Best Practices, my colleagues and I at RFF provide some important lessons for states in a new slide deck, Helping States Examine Federal Greenhouse Gas Rules, that emerged from our work as part of NGA’s recent Policy Academy on the Clean Power Plan. This effort involved in-depth engagement with four states and convenings with roughly a dozen more.

Some of the main issues addressed in include the following:

(1) The differences between rate- and mass-based approaches to Clean Power Plan compliance. For example, we found that mass goals appear to be more easily achievable than rate goals, especially in the near term.

(2) The treatment of new generation sources in a state plan and the need to address emissions leakage in state plans that do not cover new sources. For example, we found that including new sources may require more total emissions reductions than excluding them based on future projections of new generation, although it may provide advantages for program administration and improve the operation of power markets.

(3) The various options for the initial distribution of emissions allowances under a mass-based policy and their implications. For example, we found that when states distribute emissions allowances through an auction, they will have the flexibility to spend the allowance value for any purpose, such as energy efficiency, renewables, and offsetting preexisting taxes.

(4) Issues at the intersection of power trading and allowance trading. For example, we found that when states have excess allowances, no trading can cause low allowance prices and a substitution from new sources of electricity generation to existing coal.

The presentation also describes important differences between states with regulated power markets and those with competitive markets, particularly with regard to allowance allocation.

One of the most important lessons for states to recognize is that each state’s circumstances matter and there is no single preferred approach to Clean Power Plan compliance. States need to consider numerous factors, including the composition of the existing power fleet, preexisting state energy policies, and the quality of a state’s renewable energy resource. The effects of a state’s compliance choices on its electricity sector and citizenry at large will depend on some factors that are beyond its control, including future natural gas prices, which other states open their markets for allowance or emissions-reduction credit trading, and which policy options (particularly rate versus mass) are adopted in neighboring states.

Perhaps most important, the process involved in developing state compliance plans provides an opportunity to envision a state’s energy future and to begin to put in place the policy and infrastructure to enable that future to be realized. States that start the process now will be ahead of the game in a rapidly evolving energy landscape.