Waiting for the GHG New Source Performance Standards: A Good Start, But Will EPA's Power Plant Controls Make a Difference?

The Clean Air Act’s potential to address the nation’s greenhouse gas emissions is slowly being unveiled.  EPA’s expected announcement of highly-anticipated new source performance standards for power plants by the end of January will reveal whether the agency has the political will to use its existing authority to re-shape the United States’ dependence upon high-carbon power.  Section 111 of the Clean Air Act is a potentially potent tool. It arguably allows EPA to re-direct new investment away from heavily-polluting coal-fired power and toward less polluting alternatives. It also gives the agency the authority to address on-going emissions from existing power plants.  Weaning the nation from its dependence on coal-fired power is essential to a new energy future.  While EPA may fear the political storm generated by the prospect of change, it has the opportunity to begin a positive transformation to a more sustainable energy infrastructure.

The current rulemaking initiative arose out of a lawsuit brought by states and environmental groups, who argued that EPA was required to develop nationwide performance standards for greenhouse gas (GHG) emissions from new and existing stationary sources.  In December 2010, EPA and the plaintiffs reached a settlement that required EPA to propose performance standards for power plants and for oil refineries.  Although both rulemakings have been delayed,  EPA sent proposed standards for new power plants to the White House Office of Management and Budget in November 2011, and now estimates that it will be authorized to release that proposed rule in late January.

We will not know the full picture of how aggressively EPA plans to use its Section 111 authority to shape the future of fossil fuel use in the electricity sector until EPA actually publishes all of the rules. In the meantime, however, the following is a guide to the issues at stake. The first critical issue is the recent decision to proceed with new source rules and delay proposals for existing sources.  Critical issues for the new source rules are whether they will force a switch away from coal and whether the agency will allow facilities flexibility in meeting the new standards, through mechanisms such as emissions trading.

Needed: Coverage of Existing as well as New Sources

The rules expected this month will cover only new and modified sources, not existing sources.  EPA Assistant Administrator Gina McCarthy said recently that “we have not prepared any proposal for existing facilities at this point.”  On an industry-by-industry basis, Section 111 of the Clean Air Act requires EPA to establish technology-based performance standards for new stationary sources of pollution. That category includes both brand-new sources and “modified” sources -- existing sources that have modified their plants and, as a consequence, increased their emission rates.  For most pollutants, NSPSs are set only for such new and modified sources. 

But for pollutants, like GHGs, that lack national air quality standards and are not categorized as hazardous pollutants, Section 111(d) also requires EPA to develop emission guidelines for existing stationary sources.  Once EPA develops emission guidelines, the states are required to develop implementation plans that demonstrate how they will impose the emission guidelines on their existing sources.

Although EPA stated in its settlement agreement that it would develop performance standards for both new and existing sources, it’s not clear where EPA’s work on the latter stands.  New source standards are, of course, critically important: they are necessary to ensure that long-term utility investments in energy infrastructure reflect the reality of global climate change.  But NSPSs for new sources, alone, are unlikely to make a significant difference. 

Since January 2011, GHG emissions from large new and modified sources have already been subject to regulation under the Prevention of Significant Deterioration program, which requires all such sources to adopt the Best Available Control Technology (BACT) for reducing emissions.  (The PSD requirements are already in effect because they were triggered by a series of EPA GHG initiatives that flowed from the Supreme Court’s determination, in Massachusetts v. EPA, that GHGs are “air pollutants” under the CAA.)  Although there are some differences in applicability, the BACT standard and the impending NSPS will both apply to many of the same new and modified sources.  And even though the standards are set differently – the NSPS is a federally set, uniform standard, while BACT is determined by state permitting authorities on a case-by-case basis – both are likely to impose equipment and operational efficiency improvements. Once the NSPS is set, it establishes the minimum required reduction; state permitting agencies, in their individualized BACT determinations, must impose requirements at least as stringent as the NSPS.  Unless EPA decides to take a novel approach to its GHG NSPS that pushes the bar forward (and that would, in turn, set a more demanding baseline for subsequent BACT determinations), it is possible that the NSPS for new sources will not impose any requirements that would not already have been required in each state’s BACT determination.

While new source controls are essential to shaping future investment decisions, they do not address current emissions.  According to EPA’s inventory of GHGs, stationary sources generated 53 percent of U.S. GHG emissions in 2009.  New data reveals that the power sector generates over 72 percent of the emissions from large stationary sources. Although the northeastern states’ Regional Greenhouse Gas Initiative’s modest cap-and-trade program has imposed some constraints on that region’s power sector emissions, and several other states have launched their own power sector controls, GHGs from most of the nation’s existing power plants are not controlled.

In addition, if GHG standards apply only to new, and not to existing sources, then utilities will have on-going incentives to continue to operate older, less efficient and more-polluting facilities to avoid new source regulation. In the traditional air pollutant context, more rigorous treatment of new sources has created disincentives to invest in newer and cleaner technology, to the detriment of air quality.  If EPA issues GHG standards only for new, and not for existing, sources, it risks creating the same skewed incentives.

Existing source standards might be delayed because of their perceived importance, not in spite of it.  Impacts on our current energy system raise fears about energy reliability and about the economic impact of potential increases in energy costs.  Moreover, vested fossil fuel interests are resistant to regulation.  In the current political climate, the combination could be paralyzing.

These concerns exaggerate the likely impact of existing source regulations. Although some scholars have suggested expansive interpretations of EPA’s existing source regulations that could have a major impact on the energy sector, EPA’s interpretation of the statute is unlikely to be as potent as its critics suggest.  Section 111 requires the agency to consider cost and feasibility; EPA is not likely to impose unduly expensive or unrealistic requirements.  The states, in turn, have some discretion in applying EPA’s emission guidelines to their in-state sources. Most commentators anticipate that the requirements will require utilities to operate more efficiently, achieving a 5-10 percent reduction in GHG emissions. Performance standards for existing sources are therefore unlikely to cause wholesale economic disruption. 

EPA’s promulgation of a GHG NSPS for new and modified sources will provide an important symbolic statement about EPA’s willingness to use the CAA to address climate change.  But for GHGs, the real value-added of CAA section 111 is its focus on the nation’s existing sources and, without that, the CAA cannot effectively reduce stationary source emissions.  Controlling existing sources under the CAA would not cause economic collapse.  In fact, unless EPA takes an expansive view of its powers, existing source standards are more likely to do too little rather than too much.

Will the NSPS Directly or Indirectly Force Fuel-Switching Away from Coal?

Under section 111, EPA must identify relevant industrial categories and establish performance standards for each such category.  A second key question about the proposed power plant rule will be whether EPA sets performance standards for each type of fuel burning technology (e.g., separate standards for coal, natural-gas, and oil) or, instead, establishes “fossil-fuel-power plants” as an overarching category and sets a performance standard based upon the best technology available in the power sector.

If EPA created a sector-wide category, the performance standard might reflect emissions from the lowest-GHG-emitting type of fossil fuel plant: natural-gas fired plants.  For each unit of energy produced, natural gas produces more than 40 percent fewer carbon emissions than coal, and 30 percent fewer emissions than oil.  Because performance standards specify an emissions rate rather than mandating a particular technology, a new coal-fired power plant could conceivably meet the emissions standard not by switching to natural gas, but through carbon capture and storage (CCS).  But given the high cost and technological uncertainty of CCS, in practice utilities might simply turn to natural gas and forego new coal-fired power plants. A “fossil-fuel power plant” standard would not only affect the investment decisions of new facilities; facilities that make modifications that trigger the new source requirement could also need to switch from burning coal to burning natural gas in order to meet the standard.

Whether EPA sets the performance standard for each type of fuel (as it has for traditional pollutants) or, instead, for fossil fuel power plants as a group would have significant emissions consequences.  A standard that effectively requires fuel switching would re-direct energy investment away from coal and toward natural gas, providing substantial GHG (and co-pollutant) benefits given coal’s high GHG and co-pollutant emissions.

If, instead, EPA sets the NSPS by fuel type, the stringency of the reductions would largely be shaped by whether EPA requires CCS.  If so, then substantial reductions could occur.  But given current cost and feasibility challenges, it is highly unlikely that EPA would require CCS, at least in the short-term.  Without CCS, EPA would likely impose much more modest limitations, like more efficient boilers, operational efficiency requirements, and potentially some co-firing with biomass.  While important, these requirements would only marginally reduce GHG emissions from coal-fired power plants.  Coal plants’ emission rates would continue to substantially exceed those from other fuel sources.  A NSPS that continues to allow new coal-fired power plants without CCS cannot significantly reduce future energy sector GHG emissions.

Will EPA Allow Flexible Compliance Options?

A third significant question for the NSPSs is whether EPA will give utilities the option of meeting the NSPS through flexible mechanisms like emissions averaging or, conceivably, a cap-and-trade program.  Emissions averaging would require that the fleet’s average emissions rate meet the performance standard, but allow some facilities to exceed the performance standard so long as others fell below it. Under a cap-and-trade approach, the performance standard would have to be translated into an overall emissions cap. Allowances would be allocated equal to the cap, and the utilities could trade allowances, with low-cost reducers reducing by more and selling allowances, and higher-cost reducers purchasing allowances rather than incurring the expense of emissions reductions.  Both emissions averaging and cap-and-trade are intended to reduce the costs of compliance by encouraging reductions by low-cost reducers and allowing high-cost reducers to avoid actual reductions.  

However, these flexible compliance options appear better suited to addressing emissions from the fleet of existing sources than new sources.  It is difficult to see how they could be applied only to new and modified sources as each is proposed one at a time.  In addition, the Clean Air Act’s NSPS language may not permit this flexibility.  If and when EPA develops performance standards for existing sources, there may be more room – under the statute and as a practical matter – to explore flexible compliance options.

 In sum, the NSPS power plant GHG rules are likely to provide an important statement about the Obama Administration’s willingness to address the sustainability of the United States’ energy infrastructure.  While emissions controls alone will not be sufficient, and a more overt energy policy is essential, limitations on emissions are necessary to divert investments toward more sustainable alternatives.