09/12/2018 - Power Sector Rules - Regulatory Rollbacks

The Clean Power Plan Proposed Replacement – Background and Analysis

This backgrounder supplements our regularly updated Regulatory Rollback Tracker post on the Clean Power Plan.

The Environmental Protection Agency (EPA) is expected to propose shortly a rule to replace the Clean Power Plan (CPP). Last year, EPA proposed to repeal the CPP and issued an Advance Notice of Proposed Rulemaking for its replacement. The repeal proposal and the Advance Notice provide some insights into the impending replacement proposal, as it is likely to incorporate substantial elements of both the repeal proposal and the Advance Notice.

Like the Clean Power Plan, the replacement will rely on section 111(d) of the Clean Air Act to address carbon dioxide (CO2) emissions from existing coal- and natural gas-burning power plants. The Clean Power Plan would have reduced power plant CO2 pollution more than 30% and dangerous particle pollution 25% by 2030. The proposed replacement could yield very few, if any, reductions in CO2 and other harmful air pollutants – and may even include a provision that allows pollution to rise. The EPA replacement proposal rests almost entirely on a new legal argument that the agency rejected in 2015 after taking public comment and performing extensive analysis. The difference between the emissions reductions projected for the Clean Power Plan and the much lower amount of emissions likely to be achieved by the replacement hinges on the change EPA made in its legal interpretation of section 111 after 2015. Since 2017, the EPA has also taken a very different approach to evaluating the costs and benefits of the Clean Power Plan, and that difference is likely to be reflected in the proposed replacement as well.

The Clean Power Plan

In August 2015, EPA issued CO2 emissions standards for power plants and final guidelines that directed states to develop plans to apply those standards to reduce CO2 emissions between 2022 and 2030.

Clean Air Act section 111 requires the EPA to set emissions standards by determining “the degree of emission limitation achievable through the application of the best system of emission reduction … adequately demonstrated.”

In determining the “best system of emission reduction” for power plant CO2 emissions, the EPA conducted an intense and sustained two-year engagement with the utility industry, states, and the public to find out what utilities and states had been actually doing and came to understand that:

  • Power plants do not operate as individual units in isolation.
  • Plants operate on large-scale, interconnected power grids that determine when individual plants should increase or reduce their generation.
  • Power companies were using fuel switching (coal to gas), renewable energy (wind and solar) and energy efficiency to reduce costs and pollution.
  • States had already adopted a wide range of policies and programs, including energy efficiency policies and renewable energy standards, that were reducing CO2 emissions.

As a result, the EPA determined that the “best system of emission reduction” entailed improving the operating efficiency of power plants, and reducing generation at high-polluting power plants and replacing it directly or indirectly, via the grid, with low- or zero-emitting generation, like wind, solar, nuclear, hydro, and natural gas.

The Clean Power Plan offered states a wide range of choices in developing their plans, including joining other states in multi-state plans and/or developing plans based on total emissions or rates of CO2 emitted per unit of energy.

States could allow utilities to meet the requirements on average across the fleet, to trade with one another and to set their own emission reduction “glide paths” over the 2022-2030 period.

The “glide path” option provided the planning time and flexibility utilities and system operators said they needed to ensure reliability.

The wide flexibility offered to states and utilities did not jeopardize the projected CO2 emissions reductions.

The CPP Replacement Proposal

Late last year, the EPA issued an Advance Notice of Proposed Rulemaking in preparation for the impending replacement proposal. Based on this preview and recent reporting, the impending proposal is likely to require only CO2 emissions reductions that can be achieved via very modest operating improvements at individual plants. The proposal excludes strategies like reducing generation at high-polluting plants and relying more on sources that emit less CO2, like wind, solar and natural gas. States will be offered options for implementing CO2 reductions to only a minimal extent, including, in certain circumstances, opting their power plants out altogether, even if that means the proposal will achieve even fewer reductions.

At the same time, last year’s Advance Notice of Proposed Rulemaking also previewed a change to the New Source Review program, a requirement of the Clean Air Act that ensures that the amount of pollution a plant adds to local air sheds is minimized when it expands or makes renovations. The change, which is reported to be included in the CPP replacement proposal, would apply to power plants making changes to meet the replacement’s CO2 standards. Under the proposal, states would not be required to make those plants avoid increasing emissions of other pollutants, increases which often occur when power plants change their operations in the way contemplated by the CPP replacement proposal. This proposal would follow several other policies already put in place by the Trump EPA that dial back protective New Source Review requirements.

The Clean Power Plan Legal Theory

Section 111 of the Clean Air Act directs the EPA to set emissions standards based on “the degree of emission limitation achievable through the application of the best system of emission reduction which … the Administrator determines has been adequately demonstrated.” The Clean Power Plan reflected EPA’s interpretation at the time that this was a mandate to conduct extensive research, information-gathering and analysis of the actual operations of the power sector to support the determination of “best system of emission reduction … adequately demonstrated” to be expressed in a uniform CO2 emissions standard for coal and natural gas plants. The states were then required by section 111 to create plans for implementing those standards, either by setting them for each power plant or implementing any of a wide variety of flexible compliance mechanisms.

Reflecting the agency’s careful reading of the Clean Air Act’s language and extensive caselaw, the EPA’s 2015 interpretation rejected the notion that the Clean Air Act precluded the agency from considering the defining features of power plant operations and all of the ways in which power plants can and do limit their CO2 emissions when determining the “best system of emission reduction”. The EPA’s research and information gathering, in turn, compelled the agency to recognize that power plants operated collectively, not individually, through an interconnected network or grid. The agency also saw that states and utilities were already “applying” a variety of clean energy measures that were delivering reductions in CO2 emissions. These measures, driven by the energy market or by public policy, included the replacement of high-polluting generation with low- or zero-polluting generation like wind, solar, and natural gas. Nowhere, in EPA’s interpretation, did section 111 require the EPA to truncate its “best system of emission reduction” determination and standard-setting at a facility’s fence line if the facts did not otherwise justify such a limitation. On the contrary, EPA interpreted section 111’s “best system of emission reduction” language to all but compel the agency to account for the interconnected functioning of the power system and the measures already being employed to curb CO2 emissions.

The Replacement Proposal Legal Theory

The legal theory the replacement is likely to rely on was previewed by the EPA last year in its proposal to repeal the Clean Power Plan. In the repeal proposal, the agency offered an interpretation of the statutory text that limited the “best system of emission reduction” determination only to those “emission reduction measures that can be applied to or at an individual stationary source.” Invoking the fact that section 111 referred to “source” in the singular, the EPA argued: “if standards must be set for individual sources, it is reasonable to expect that such standards would be predicated on measures that can be applied to or at those same individual sources.” The agency relied on “application” to mean that its “best system of emission reduction” considerations are limited to physical or operational changes at the source. The only examples the agency cited for this proposition date from 1974 and 1975.

The agency simply did not take on the fact, which it had previously embraced as legally salient, that the operations of individual power plants are dictated by the networked or interconnected grid in which they operate. The agency also declines to explain why widely observed practices like reducing generation “at” an individual plant and replacing it with cleaner generation are outside the statutory language. The repeal proposal’s interpretation did not address the fact that less than three years earlier, the agency had reached a diametrically opposed conclusion in establishing uniform CO2 emissions rates for coal plants and for gas plants based on a wider range of CO2 emissions reduction measures, including reducing high-emitting generation in favor of low-emitting generation.

Last year, the agency also issued an Advance Notice of Proposed Rulemaking in preparation for proposing the replacement rule. The Notice reinforced the new legal interpretation that the agency could consider only physical or operational changes within a single facility in determining the “best system of emission reduction”. The Notice also suggested that the emissions standards the EPA would propose would be exceedingly modest and yield few reductions in either CO2 or other pollutants.

The Benefits and Costs of the Clean Power Plan

If the Clean Power Plan, as issued in 2015, had gone into effect and was implemented through 2030, it was projected to achieve about $45 billion in net benefits composed of $20 billion in climate benefits and $14-34 billion in health benefits that offset the costs of about $7.3 to $8.8 billion. The CPP would have created major public health benefits because cutting carbon pollution reduces other harmful air pollutants at the same time, especially ones that create soot and smog. By 2030, emissions of sulfur dioxide from power plants would be 90 percent lower compared to 2005 levels, and emissions of nitrogen oxides would be 72 percent lower. The CPP would have avoided up to 3,600 premature deaths, 1,700 heart attacks, 90,000 asthma attacks, 30,000 missed work or school days. Thousands of lives would have been extended and/or improved by the Clean Power Plan. EPA also found consumers’ utility bills would decrease over time because inexpensive energy efficiency measures would be a major component of compliance.

The Benefits and Costs of the Replacement proposal

The proposed repeal of the Clean Power Plan likely previewed, in its Regulatory Impact Analysis, elements of the benefit/cost analysis to be offered in the replacement proposal. The repeal proposal stated that the costs of the Clean Power Plan would be higher and the benefits would be lower than EPA estimated in 2015. It did this by changing certain analytical methods in ways that diverge from the traditional ways of assessing health benefits in particular and that rely selectively on scientific uncertainty to discount benefits even further:

  1. It counts only domestic climate change benefits, not global benefits (even if global benefits will be good for Americans, for example, allowing for the continued production of products we import from countries where climate change threatens those industries).
  2. It counts only some, but not all, of the demonstrable health benefits from the improved air quality that will come along with actions to reduce CO2 emissions.
  3. It changes how the cost savings from energy efficiency are counted, essentially an accounting maneuver that has the effect of appearing to significantly increase the projected costs to utilities.
  4. It uses a higher discount rate (7%) to calculate the social cost of carbon than the rate used in standard economic practice (3%). The discount rate adjusts the future climate damage estimate into current dollars to determine what we could spend today to avoid future harm. A higher discount rate dramatically reduces the future damage estimate and lowers the value of preventing it. That is, it represents a choice to assume away evidence that climate change can bring significant damage and thus to limit present spending to prevent such future hazards. This tactic, like the other changes, makes it easier to portray current regulations as having costs that exceed their benefits.
The Supreme Court Stay

On Jan. 21, 2016, a unanimous 3-judge panel of the DC Circuit Court of Appeals denied a motion to stay the Clean Power Plan. On Feb. 9, 2016, the Supreme Court, in a 5-4 decision, issued an order staying the Clean Power Plan until the litigation challenging the Clean Power Plan was concluded. Neither court included a decision on the merits in support of its respective order. As a result, the legal issues in dispute – including the EPA’s 2015 legal interpretation and the agency’s diametrically opposed 2017/2018 interpretation – have yet to be addressed by the courts. The legal challenge to the CPP has been fully argued and briefed to the DC Circuit, but that court has so far agreed to EPA’s request not to issue a decision.

Additional Background

Science: Climate Change and CO2 The vast majority of climate scientists agree that increasing levels of CO2 in the earth’s atmosphere from human activity are contributing to changes in global climate. The effects of climate change are already being felt in the United States (as well as the rest of the world) through more frequent and/or severe droughts, storms, coastal flooding, wildfires, and changes to the habits of species that can affect human health (e.g. mosquitoes, ticks, and pollen-producing plants).

Utilities and CO2 Fossil-fueled power plants emit far more CO2 than any other stationary source in the US and globally. In 2015, according to data collected by EPA through the Greenhouse Gas Reporting Program, power plants emitted nearly 2 billion tons of CO2, which is an order of magnitude more than what’s emitted by the second largest stationary source sector, oil and natural gas production.

EPA’s Extensive Public Process Starting before the Clean Power Plan proposal and through the final Clean Power Plan, the EPA conducted numerous and various public sessions and meetings with states, utilities, and stakeholders to gather input. The agency held hundreds of meetings across the country, and received 4.3 million comments, including thousands of detailed submissions of analysis, information, and arguments. Dozens of reports, workshops and studies were generated by the utility industry, states and state organizations, and experts in energy technology, economics and other relevant fields. The public process and the information, ideas and analysis it generated were expressly reflected in a great many of the features of the Clean Power Plan, including the way EPA set the standards and the broad flexibility afforded to states and utilities in achieving reductions.