EPA's Proposed Power Plant Regs: Solid Legal Footing, Considerable Flexibility

On June 2, 2014, the United States Environmental Protection Agency issued its much awaited and debated proposed Clean Air Act Section 111(d) regulations to reduce greenhouse gas (GHG) emissions from existing electric utility generating units, colloquially referred to as power plants.  And because the largest GHG emitters in this category are coal burning plants, such plants and linked businesses and coal-intensive jurisdictions all have nervously awaited these proposals.  In an earlier blog analysis, I assessed the statutory language and how it provides EPA with considerable latitude to allow for flexibility and trading of pollution.

Now we have the actual proposal, which in turn solicits comments as the next step in the notice and comment process.  Weighing in at 645 pages, this proposal will be scrutinized by  legions of lawyers, environmentalists, and political pundits in the coming months.  Nevertheless, a quick review of this important proposal reveals its basic logic and strong legal basis.  Most importantly, it provides a huge amount of flexibility and room for cost-effective trading and energy efficiency. It also is careful not to punish utilities and jurisdictions that have been leaders in their embrace of GHG reducing strategies and energy efficiency.  If finalized, markets for energy efficiency and reduced energy demand should thrive, as should carbon trading markets.

The proposal is not the President “going it alone,” but rooted in the Clean Air Act’s language

A now almost ubiquitous refrain, mostly from critics of the current administration but sometimes even from the White House itself, is that the President is “going it alone,” acting without Congress, or relying on his “executive” power to make climate change progress.  While it is true that Congress did not pass any of the climate-specific bills proposed early in the Obama Administration, the Supreme Court definitively ruled back in 2007 that GHG emissions were a pollutant that could be regulated under the Clean Air Act.  And with subsequent findings by EPA linked to ever stronger science about climate change harms, plus more recent court decisions, EPA undoubtedly has authority to act here under existing law long ago passed by Congress.  This is action rooted in well-established legal authority.

Second, as discussed in EPA’s new proposal at great length (and discussed in my earlier analysis referenced above), the actual language of the Clean Air Act in Section 111(d) and cross referenced Section 110 provides EPA with considerable latitude to embrace flexible and cost-effective strategies to reduce GHG emissions.  In particular, to recap, Section 111(d)’s mandate to states to derive “standards of performance” for existing pollution sources cross references states’ obligation to derive plans under a “procedure” like that provided under Section 110.  Section 110 is the provision that sets forth what is in essence a state regional cap and trade system for ubiquitous “criteria” pollutants subject to National Ambient Air Quality Standards. And in requiring that states come up with a plan that reflects the “best system of emission reduction . . . adequately demonstrated,” Section 111(d) notably is calling for reductions based on a “system” -based analysis.  These language choices are important to today’s proposal. 

Both the Clean Air Act’s language and the famous Chevron case support the flexible approaches embraced by EPA

With the “procedure,” “plan” and “system that has been . . . adequately demonstrated” language, EPA has a strong textual basis for proposals that are not focused just on a plant-specific basis. In addition, the famous Chevron case, Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842-44 (1984), is cited by EPA in this new proposal, as it virtually always is in calling for deference to an expert agency’s reasonable law interpretation choices in rulemakings. And since several of these key terms do require interpretation, this is an appropriate citation.  But the case provides even more support for EPA than EPA realizes.  In that case, the simple term “stationary source” was interpreted to allow for trading among a “source’s” stacks.  And part of that interpretation was explicitly rooted in the desire to allow for cost-effective pollution trading.  Section 111(d)’s language far more explicitly embraces analysis that looks beyond a single pollution source in its references to Section 110 procedures, planning, and “system of emission reduction.”

The heart of EPA’s proposal is to provide flexibility and cost-effective strategies to reduce GHG emissions

EPA’s proposal is laden with language and strategies meant to provide polluters and states with latitude to embrace cost-effective and flexible means to achieve the proposal’s goal of a 30-percent reduction in GHG emissions from a 2005 baseline by 2030.  EPA does this by building on extensive pre-release discussions and meetings with a broad array of stakeholders.   Coal burning utilities and coal dependent jurisdictions feared being crushed by fast mandated reductions, states feared being, in effect, punished for early and proactive efforts to reduce GHG emissions and improve efficiency, and states and regions and linked businesses feared that existing cap and trade regimes might be sidelined.  And companies developing technologies to reduce consumer and business energy demand wondered about ongoing market demand for their innovations.   EPA responded with a few basic strategies that should lead to cost effective emissions reductions.  These strategies should also provide an invaluable nudge encouraging states and businesses to embrace energy efficiency and resulting reduced GHG emissions.

First, EPA’s proposal provides a broad menu of options.  When EPA discusses strategies to meet the 30-percent reduction goal, it offers states the choice of looking at emissions on an emissions rate basis, or states can convert what that rate-based emissions level means to a “mass-based goal,” meaning the tons of GHG that would be emitted by that plant or, more likely, all plants in the state.  Once that conversion is made, then the percentage reductions would be based on working with a numerical cap.   That option is critical to the diverse flexible strategy menu—called “four building blocks” --that EPA then embraces.

States, and power plants within them, can:

1. Make the reductions at the plant itself;

2. Lock in reductions from other power plants, which in effect is allowing for plant to plant trading to save money;

3. Achieve reductions by “substituting generation . . . with expanded low- or zero-carbon generation,” thereby allowing a shift to cleaner, greener forms of energy production but without dictating what those modes of production might be; and,

4.  Achieve emissions reductions through demand-side energy efficiency that in turn reduces the demand for energy.

These four “building block” options can be mixed and matched by states and power plants, hence allowing for a wide array of strategies.  Other text makes explicit that ongoing utilization of state and regional carbon cap and trade regimes would remain permissible and could be used to lock in required reductions. 

Answering the concern of states that have already started to reduce GHG emissions, adopted cap and trade strategies, or embraced energy efficiency, EPA’s state reductions goals take into account each state’s particular energy profile.  As EPA states,  “proposed goals reflect the EPA’s quantification of each state’s average emission rate from affected EGUs that could be achieved by 2030 and sustained thereafter . . . through reasonable implementation, considering the unique circumstances of each individual state, of the best system of emission reduction adequately demonstrated (based on all four building blocks).”  Proposal page 332.  In addition, the proposal relies on 2005 as its baseline year, setting the floor at a far higher level than if set during the recession, making reductions easier for all (but also meaning the 30-percent reduction will leave levels higher than if starting at a lower baseline).  In addition, past policy experimentation that has worked is considered part of the “best” system of emissions reduction that has been “adequately demonstrated.”

By allowing trading, crediting energy efficiency, providing credit for demand-reducing strategies, and allowing for shifts to lower polluting forms of energy generation—whether gas, nuclear, wind, solar or forms not yet known—EPA will greatly reduce the costs of achieving these reductions.  And diversity in the energy profiles of states is respected by allowing states to adopt the mix of strategies that fit their energy and political needs. As EPA states, “opportunities and preferences for reducing emissions, as reflected in each of the building blocks, vary across states.” Proposal pages 37-38.

Who wins and loses under this proposal?

A bottom line question for any major regulatory proposal is, of course, who wins and who loses?  If you assume that some kind of existing power plant regulation was a legal inevitability, then EPA’s strategies provide broad benefits, even for coal burning utilities, due to all of the flexibility and trading options.  (This assumes that states and EPA can come up with ways to keep track of commitments and reductions and enforce those commitments.) With the wide variety of strategies for compliance, costs to businesses and to consumers should be minimized.  Any businesses based on strategies to reduce energy demand, generate energy in a less carbon-intensive manner, or store energy efficiently, will be big winners.   The losers are states and utilities that have refused to start down a path towards a lower carbon energy future, although the flexible menu will ameliorate the pinch felt.  And while trading options will reduce the immediacy of shifts away from coal, coal-dependent power plants, businesses, and jurisdictions will predictably see even more of a shift towards other energy sources and strategies.  Such a shift has already been underway due to fracking and suddenly abundant and cheap natural gas, as well as increasingly economical solar and wind options.  As states and energy producers hunt for low cost and low GHG modes of energy production or ways to reduce demand, they are unlikely to turn to coal unless means to sequester coal-linked carbon emissions become economical.

Overall, EPA’s proposal reflects an embrace of a lower carbon energy future.  The proposal also offers strategies that should smooth out business disruption, maintain a dependable energy supply, and achieve GHG reductions in a cost-effective manner.  As with any high stakes regulation creating both winners and losers, it will be attacked in the press, in Congress, in comments to EPA, and later in the courts.  Nevertheless, EPA’s proposal is well conceived and especially notable in its efforts to embrace flexibility, respect state innovations and differences, and allow for cost-effective means to reduce GHG emissions.