EPA’s Program for Carbon Reductions Is In Line With Power Sector TrendsJohn R. Weinberger *(Washington, DC)
U.S. EPA’s recently proposed “Clean Power Plan,” to limit power plant CO₂ emissions to 30% below 2005 levels by 2030, sets modest and attainable goals.[i] The proposed EPA rule regulates emissions at the state level. It sets a 2030 aggregate emission rate target for each state and allows states enormous flexibility to develop and implement their own policies to improve carbon emission rates, or develop policies jointly with other states. The Clean Power Plan will not bring about dramatic transformation of the power sector, but instead will lock-in market and regulatory trends that are already in place.
Taking Advantage of Existing Power Sector Trends
Power sector carbon emissions nationally are already on a downward trend due to a variety of market and regulatory factors. States are already making progress toward reducing power sector C0₂ emissions. In fact, power sector carbon emissions are now 12% below 2005 levels[ii] – almost halfway to EPA’s goal. The Clean Power Plan will have the effect of locking in existing state trends for renewable energy development, energy efficiency, and reduced coal combustion. The 2030 state targets are not overly ambitious. For example, in setting the state emission rate targets, EPA assumes that all states can improve demand-side efficiency rates to 1.5% annually. In fact several utilities are already achieving demand-side energy savings that exceed EPA’s 1.5% assumption.
Although not highly ambitious, the proposed rule is important. Along with a preceding proposed rule for future sources,[iii] this rule represents the momentous first C0₂ emissions regulation in U.S. history. It applies exclusively to the power sector and is designed to reduce electric generation carbon emissions 30% below 2005 levels by 2030. The Clean Power Plan correctly targets the power sector because that is where the greatest CO₂ emission reductions can be attained at the least marginal cost. Electricity generation accounts for 40% of all U.S. CO₂ emissions.[iv] In the U.S. power sector, a 30% cut in carbon emissions below 2005 levels is the equivalent of taking two-thirds of all U.S. cars and trucks off the road.[v]
On a global scale, the impact of the Clean Power Plan will be small. It will cut global carbon emissions by less than 2%. Nonetheless, the U.S. power sector is critical to any global climate strategy. If the U.S. power sector were a country, it would be the third largest CO₂ emitting country in the world.[vi]
The power sector is ripe for CO₂ regulation because a confluence of forces, including lower natural gas prices, stagnant electricity demand, mercury and air toxics regulatory compliance, and state policies promoting renewable energy sources, make older coal-fired plants economically vulnerable. Those existing trends are conspiring to force the retirement of older coal-fired units and replace coal capacity with lower carbon alternatives. Hence, from a carbon emissions reduction standpoint, coal-fired power plants are “low-hanging fruit.” Significant CO₂ savings can be made at relatively low cost.
Regulatory Approach: The Rule Does Not Set Power Plant Emission Standards
The Clean Power Plan is both historic and, from a regulatory perspective, innovative. It’s innovative in the sense that, unlike other air emissions regulations, it doesn’t set standards at the generating unit level. The proposed rule creates no emissions limit for any power plant. Instead, it sets a CO₂ emissions rate cap for each state. States are responsible for designing and implementing plans that meet the EPA designated emissions rate cap. States have great latitude in designing implementation plans. States might, for example, create new or strengthen existing renewable energy portfolio standards and/or energy efficiency standards. States may enter into multistate cooperatives for the purpose of meeting CO₂ emissions goals. States may convert the emissions rate limit into an emissions volume cap and allow trading of emissions rights within the cap. The value of this “outside the fence line” approach to regulation is that, in theory, states can make rational policy choices to improve CO₂ efficiency at the least economic cost.
A national cap-and-trade system or carbon dioxide tax would be simpler and more efficient than the EPA proposal which creates 50 separate state targets with 50 different emissions reduction plans, but an optimal economic strategy such as a nationwide emissions trading scheme is beyond the scope of what the EPA can do under the Clean Air Act.[vii]
The Regulatory Time Line
Costs and Benefits
The proposed rule will have significant compliance costs which will have price implications for electricity, coal and natural gas. The EPA projects that the annual incremental compliance cost of the proposed rule ranges from $5.4 to $7.4 billion in 2020 and from $7.3 to $8.8 billion in 2030.
According to EPA’s Regulatory Impact Analysis, average national retail electricity prices are projected to increase 6% to 7% in 2020, and 3% in 2030.[viii] However, EPA projects that the increase in the price of electricity will more than be offset by reduced electricity consumption because the proposed rule will lead to increased energy efficiency.[ix] The EPA also projects that the proposed rule will lead to increased natural gas demand causing a 9% to 12% increase in natural gas prices. [x]
The Clean Power Plan proposes to deliver health benefits, which, according to EPA, would vastly outweigh the compliance costs. In addition to reductions in CO₂ emissions, the proposed rule would have ancillary reductions in SO₂, NO₂ and particulates resulting in lower ambient concentrations of soot and smog. According to EPA, the health benefits of the ancillary emissions reductions total $55 billion to $93 billion.[xi]
State Emission Rate Targets
For each state, EPA establishes a 2012 CO₂ emissions baseline based on that state’s 2012 power sector emissions divided by total electricity generation from all sources (not just fossil fuel generation). Each state is assigned a 2030 CO₂ emissions target based on its 2012 emissions rate and the capacity of that state to achieve emissions reductions. Capacity to make reductions is determined by applying a series of assumptions that EPA has organized into four “building blocks” outlined below.
Contrary to intuition, states that are most reliant on coal-fired generation are not expected to make the steepest carbon emissions cuts. Indiana, as an example of a highly coal reliant state, with 81% of its electricity coming from coal-fired generating units, is required to reduce its emissions rate by only 19% below 2005 levels by 2030. By contrast, New York, with a much more diverse generation portfolio, is expected to improve its carbon emissions rate by 42% below its 2012 base.
The four “building blocks” for adjusting each state’s current emission rate to the 2030 target are summarized as follows:
Building Block 1 – Efficiency improvements for coal-fired plants: The EPA assumes that on average, coal-fired powered plants can achieve heat rate improvements of 6%. The net cost of achieving a 6% heat rate improvement is estimated by EPA to be $6 to $12 per metric ton of C0₂.[xii]
Building Block 2 – Fuel switching: The capacity of a state to replace a portion of coal-fired generation with existing and under construction combined-cycle natural gas. The EPA assumes dispatch to natural gas combined-cycle plants that are currently utilized at less than 70% of generating capacity. The net cost of fuel switching is estimated by EPA to be $30 per metric ton of C0₂.[xiii]
Building Block 3 – Renewable energy: The capacity of a state to replace a portion of coal-fired generation with non-fossil generation including new and existing renewable generation, nuclear generation currently under construction, and continued use of preserved nuclear generation. The net cost of Building Block 3 is estimated by EPA at $10 to $40 per metric ton of C0₂.[xiv]
Building Block 4 - Energy efficiency: EPA assumes that each state can increase demand-side energy efficiency to a rate of 1.5% annually.[xv]
It is important to keep in mind that the four “building blocks” are used by EPA exclusively to set state emission rate targets. The building blocks are not intended to provide guidance to the states on how to design implementation plans. States do not have to meet any specific C0₂ reduction in any of the building blocks. Instead, states must comply with the ultimate emissions rate standard.
Inequities in State Targets
EPA’s assumptions underlying the four “building blocks” above lead to some glaring inequities among states in their carbon emission rate targets. States with similar 2012 fossil emission rates may have strikingly different reduction requirements. For example, compare Michigan and North Carolina. North Carolina’s baseline 2012 emissions rate is 1094 lbs CO₂/MWh. 44% of its power comes from coal-fired generation. Michigan, slightly more coal dependent (49% of its power is coal-fired), has a slightly higher baseline emissions rate – 1383 lbs CO₂/MWh. But the EPA assigned 2035 reduction targets for the two states are strikingly different. Michigan, with the higher baseline, is required to reduce its emission rate by 32%. North Carolina with a better emission rate to begin with, is required to make a steep 40% reduction. Ironically the state required to make the greater reduction, North Carolina, has already reduced its emission rate by 25% since 2005. It appears that under EPA’s four “building blocks” method of assigning emissions reduction targets, states with a more diverse energy portfolio are expected to make the most reductions.
Another illustration of the inequity in assigning state reduction targets is Massachusetts and Ohio. Massachusetts’ baseline 2012 emissions rate is 874 lbs CO₂/MWh – one of the lowest in the nation. It has reduced its emissions rate by 47% since 2005 with a generation mix of 68% natural gas, 16% nuclear, 7.5% renewables and 6% coal. Ohio by contrast has a current emissions rate of 1623 lbs CO₂/MWh with 66% of its power coming from coal. Of the two states, you would expect that Ohio, with its high carbon emissions rate, would be required to make the steeper emissions rate cut. In fact, under the four “building blocks” approach, Massachusetts is deemed have the greater capacity for reductions and it is required to make a cut of 38% below its 2012 baseline. Ohio, more coal dependent than Massachusetts, is deemed to have less capacity for emissions reductions and has a 2030 reduction target of 28% below its 2012 baseline.
Implication for Coal
Under the current national mix of power generation, coal accounts for 39% and natural gas provides 29% of capacity. EPA estimates that, under the proposed rule, coal and natural gas will each account for roughly 30% of the national power generation portfolio.
The Clean Power Plan does not regulate coal-fired power plants, nor does it explicitly target coal emissions for CO₂ reductions. The proposed rule regulates aggregate emission rates from a state’s power sector rather than the emissions of individual generating units, and allows states to improve their aggregate emission rates through such tactics as improved end-user efficiency, improved transmission efficiency and improved heat rates in current generating units. In theory, states can design plans to minimize the loss of coal-fired generation capacity. However the Clean Power Plan targets CO₂ emissions in the power sector and those emissions are primarily from coal combustion. Inevitably, lower emissions in the power sector translates into less coal-based generation.
According to EPA’s Regulatory Impact Analysis, the proposed rule will likely push some older coal-fired plants into retirement representing 30 to 49 gigawatts of current coal-fired capacity.[xvi] The EPA projects a drop in coal consumption by the power sector of 30% to 32% in 2030.[xvii] But there is evidence that the projected loss in coal-fired capacity would occur even without the Clean Power Plan.
An analysis by Black and Veatch projects that approximately 60 gigawatts of coal plant capacity will be retired by 2020 and 35.4 gigawatts of nuclear resources will be retired by 2025.[xviii] Coal plant retirements are driven by cost-competitive natural gas, state renewable energy portfolio mandates, and state end-user efficiency policies. 138 coal generators with a combined capacity of 18 gigawatts have retired between 2011 and 2013.[xix] 170 more coal generators, with a combined capacity of 35 gigawatts, have been announced for retirement as of December 2013.[xx] Collectively, all of these retirements accounts for 1/3 of U.S. coal burning capacity. Many of these retirements are driven by environmental regulations, but not the proposed state limits on CO₂ emissions. [xxi] The mercury and air toxics rule (MATS) and the cross-state air pollution rule are the primary regulatory drivers of coal-fired generator retirements.
Under the proposed Clean Power Plan, coal will remain a significant source of energy in the U.S. – particularly in states that are currently most reliant on coal. By giving coal reliant states like Indiana, Tennessee, Ohio, Michigan and Illinois relatively easy 2030 targets, the program appears to be designed to minimize political opposition while making modest progress on CO₂ emissions. The U.S. will eventually need a more stringent economy-wide CO₂ policy. When that day comes, the U.S. power sector will be in a better position to adapt to more stringent limits as a result of the progress that it will have already made under the Clean Power Plan.
* Mr. Weinberger is an attorney and public policy consultant specializing in energy and environmental issues.[i] Standards of Performance for Greenhouse Gas Emissions From New Stationary Sources: Electric Utility Generating Units, Federal Register, https://www.federalregister.gov/articles/2014/01/08/2013-28668/standards-of-performance-for-greenhouse-gas-emissions-from-new-stationary-sources-electric-utility
[ii] U.S. Energy Information Administration, Today in Energy, “U.S. Energy-Related CO₂ Emissions in 2013 Expected to be 2% Higher than 2012,” January 13, 2014.
[iii] U.S. EPA, Standards of Performance for Greenhouse Gas Emissions From New Stationary Sources: Electric Utility Generating Units, published in the Federal Register on January 8, 2014, https://www.federalregister.gov/articles/2014/01/08/2013-28668/standards-of-performance-for-greenhouse-gas-emissions-from-new-stationary-sources-electric-utility
[iv] U.S. EPA CO₂ Emissions Data, 2012
[v] U.S. EPA, Carbon Pollution Standards, “Fact Sheet: Clean Power Plan,” http://www2.epa.gov/carbon-pollution-standards/fact-sheet-clean-power-plan
[vi] World Bank, http://data.worldbank.org/indicator/EN.ATM.CO2E.KT/countries.
[vii] Section 111 of the Clean Air Act, 42 USC § 7411 provides for a delicate balance between states and the Federal government in regulating air emissions in which states have the authority to design implementation plans that meet or exceed the EPA identified best system of emissions reduction. See Congressional Research Report, “Climate Change: Potential Regulation of Stationary Greenhouse Gas Sources Under the Clean Air Act,” Congressional Research Service, May 14, 2009.
[viii] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[ix] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[x] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[xi] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[xii] Carbon Pollution Emissions Guidelines for Existing Stationary Sources: Electric Generating Units, June 2, 2014, 40 CFR Part 60.
[xiii] Carbon Pollution Emissions Guidelines for Existing Stationary Sources: Electric Generating Units, June 2, 2014, 40 CFR Part 60.
[xiv] Carbon Pollution Emissions Guidelines for Existing Stationary Sources: Electric Generating Units, June 2, 2014, 40 CFR Part 60.
[xv] Carbon Pollution Emissions Guidelines for Existing Stationary Sources: Electric Generating Units, June 2, 2014, 40 CFR Part 60.
[xvi] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[xvii] U.S. EPA, Regulatory Impact Analysis for Proposed Carbon Pollution Guidelines for Existing Power Plants and Emissions Standards for Modified and Reconstructed Power Plants, June 2014.
[xviii] Black & Veatch, 2014 Black & Veatch Strategic Directions: U.S. Electric Industry Report.
[xix] U.S. Energy Information Administration, Annual Energy Outlook 2014, Issues in Focus, “Implications of Accelerated Power Plant Retirements,” April 28, 2014, http://www.eia.gov/forecasts/aeo/power_plant.cfm
[xx] U.S. Energy Information Administration, Annual Energy Outlook 2014, Issues in Focus, “Implications of Accelerated Power Plant Retirements,” April 28, 2014, http://www.eia.gov/forecasts/aeo/power_plant.cfm
[xxi] “Ripe for Retirement, the Case for Closing America’s Costliest Coal Plants,” Union of Concerned Scientists, November 2014.