Pulling the Plug on Greenhouse Gas Emissions

Posted on June 12, 2014 by Robert Wyman

Buoyed by favorable recent Supreme Court and DC Circuit decisions recognizing EPA’s broad discretion under the Clean Air Act, on Monday, June 2, EPA scaled new heights of legal adventurism by proposing the Clean Power Plan, a greenhouse gas reduction program for the power sector that would compel states to implement supply- and demand-side energy strategies.  EPA projects that its proposal would achieve approximately a 30% reduction from 2005 levels by 2030.

EPA’s action is under section 111(d) of the Clean Air Act, a little-utilized section that authorizes EPA to set emission guidelines for states to regulate listed source categories whose emissions are not regulated under either the Act’s criteria pollutant program under section 108 or the hazardous air pollutant program of section 112.  The College recently prepared an excellent overview of section 111 authority for the Environmental Council of the States (ECOS).

Certain aspects of EPA’s proposal are worth noting.  First, in stark contrast to prior stationary source rules, EPA seeks to harness the entire energy system, not just efforts at individual sources.  The bulk of the proposed emission reductions will come not from the minor expected heat rate improvements at individual electric generating units (EGUs)(EPA’s first “building block”), but from directing states to increase generation at natural gas plants and renewables while reducing electricity demand.  Three of EPA’s four “building blocks”  thus address emission reductions that are outside the control of EGUs, the listed source category.  Consistent with this approach, EPA proposes a portfolio enforcement approach by which states would be authorized to oblige entities other than the affected source for the reductions in building blocks two through four.  The proposal calls for an overall state energy plan, not just for implementing emission reduction opportunities available to individual sources.

Second, the proposal does not establish common performance standards, but sets highly-variable standards for each state based on EPA’s assessment of the state’s individual capacity to reduce emissions under each of the four building blocks.  EPA clearly listened to state pre-proposal input regarding material differences in each state’s EGU portfolio, its capacity to harness wind and solar generating technologies and other state differences.

Although the proposal’s projected benefits reflect an estimated 30% emission reduction from 2005 levels, EPA actually uses 2012 as the baseline for measuring a state’s starting carbon intensity.  Because EPA sets each state’s interim and future carbon intensity targets based on the state’s capacity for reducing, shifting or avoiding EGU emissions, it is not surprising that the proposal does not provide any state with early action credit in the traditional sense.  Some states are further along on their individual progress lines, but as currently designed the proposal does not allow any state to monetize its early reductions nor to avoid future progress based on its prior actions.  This means that some states will be expected to do more than others for the foreseeable future.  And, unless a true early action mechanism is included in EPA’s final rule, some states, such as California, may continue to incur net energy costs higher than their neighbors.

Several commenters have noted the material legal risk that EPA takes with this proposal.  Among the many expected challenges will be that EPA cannot regulate EGUs under section 111(d) because the House version of that section precludes such regulation if the source category already has been listed under section 112.  The proposal also could be challenged for including in the “best system of emission reduction” (BSER) emission reductions outside the control of the source and for obliging the state and entities other than EGUs to achieve such reductions.  EPA argues in its proposal that it can require states to consider any measure that has the effect of reducing EGU emissions (i.e., an “effects” or “ends” test), but some will argue that section 111 only allows EPA to require those emission reduction options (i.e., “means”) available to the EGU itself.

Should EPA fail to finalize one or both of its section 111(b) new and modified/reconstructed unit proposals, then it may be challenged for a failure to finalize the prerequisite 111(b) rule.  Other challenges could relate to an alleged failure properly to subcategorize facilities and for stepping beyond its emission reduction role to, in essence, regulate a state’s energy policy.

EPA has left some important design issues unresolved.  EPA strongly encourages interstate cooperation, including the use of emissions trading, but it leaves the actual shape of such linkages undefined.  Similarly unresolved is the question of how states can interact if they act alone.  Given the regional nature of power markets and the fact that emission reductions occurring in one state often result from investment (on either the supply or demand side) in another, states and companies will need to know the ground rules for adjudicating potentially-conflicting claims for state plan credit and company compliance credit.  EPA seeks comment on these and other critical issues.

For those interested, a more substantive analysis of the proposal can be found here.