On June 25, President Obama announced an ambitious plan to reduce greenhouse gas (GHG) emissions and address climate change making good on a promise he made six months ago in his State of the Union Address when he said: “If Congress won’t act soon to protect future generations I will.”
There is no doubt the President’s Plan offers a starting point for renewed debate about climate change policy, though it is not clear whether the President will be more effective in his second term bringing these policies to fruition. The President’s Plan emphasizes that much of it may be accomplished without the explicit approval of Congress. Unlike past efforts that required Congressional action to control carbon dioxide and other GHG emissions, this Plan relies mostly on executive action. However, the President will need to marshall considerable support to fend off opponents as Congressional Republicans and coal-state Democrats are likely to push back hard on aspects of the Plan. This makes it all the more important for stakeholders potentially impacted by the Plan, to weigh in quickly with Congress and the Administration to protect their interests.
The centerpiece of the Plan, as expected, calls for new Environmental Protection Agency (EPA) regulations to reduce carbon dioxide emissions from new and existing coal-fired power plants, but it also touches upon energy, transportation and international trade policies. All told the Plan includes more than 30 new actions, ranging from EPA regulation of coal-fired power plants to expanded use of renewable fuels and improvements in energy efficiency. On the international stage, the President will push for a global climate treaty in negotiations under the United Nations Framework Convention on Climate Change at the next summit in Warsaw, Poland this November. Participating countries hope to finalize a global climate change treaty by 2015. Accordingly, the Plan presents a myriad of risks and opportunities for the diverse range of participants in the US and global energy industry.
Overview of Plan
The overarching goal of the President’s 21-page Climate Action Plan is to meet his 2009 commitment to reduce greenhouse gas emissions by 17 percent below 2005 levels by 2020. The Plan organizes over 30 policy actions around three main pillars - (1) cut carbon emissions, (2) prepare for the impacts of climate change, and (3) lead international efforts to address climate change. Below are the highlights of some of the key actions in the Plan.
EPA greenhouse gas and heavy-duty vehicle regulations. The cornerstone of the President’s Plan is to press forward on EPA’s greenhouse gas regulations. Specifically, the President directed EPA to adopt strict emissions caps on greenhouse gases for both new and existing power plants. In a memorandum accompanying the Plan, the President set a September 2013 deadline for releasing a new proposal for regulating new power plants and a final rule as soon thereafter as possible. EPA’s previous proposal relied upon novel applications of the Clean Air Act to achieve carbon emission reductions from new power plants that would have precluded the development of any new coal power generation, and would have been vigorously tested in the courts. For existing power plants the President directed EPA to propose a rule by June 2014, and adopt a final rule by June 2015. (see, http://www.klgates.com/environmental-policy-quarterly-04-09-2013/).
For mobile sources, the administration has already developed standards for Model Year 2014-2018 for heavy-duty trucks, buses, and vans that are expected to reduce greenhouse gas emissions. The President directed EPA to build on these standards and develop post-2018 standards to further reduce fuel consumption across heavy-duty vehicles.
Expansion of alternative energy. The Plan includes several actions to foster the expansion of alternative energy production within the United States, including a commitment to permit an additional 10 gigawatts of renewable energy managed by private sector entities on public lands. The President also calls on the federal government, particularly the military, to lead by example, committing the Department of Defense to deploy up to 3 gigawatts of renewable energy on military installations (including solar wind, biomass, and geothermal) by 2025 and to reach 100 megawatts of installed renewable capacity across the federally subsidized housing stock by 2020.
Increased funding for clean energy. To reduce the nation’s dependence on carbon-based energy, the President plans to increase funding for clean energy across all federal agencies by 30 percent, up to approximately $7 billion (including advanced biofuels, emerging nuclear technologies such as small modular reactors, and clean coal). An upcoming Federal Register Notice of a draft solicitation would make up to $8 billion in loan guarantee authority available for a wide array of advanced fossil energy projects under the Department of Energy’s Section 1703 loan guarantee program to encourage development of technologies that can avoid, reduce, or sequester anthropogenic emissions of greenhouse gases.
Promote energy efficiency. The President’s Plan directs the federal government to incentivize investment in clean energy, including new standards for domestic energy use - such as dishwashers, refrigerators, light bulbs, and windows - which allow homes to reduce the cost of their energy consumption while reducing energy demand.
Planning for unavoidable consequences of global warming. The Plan calls for greater investment in climate change preparation, particularly with regard to transmission infrastructure and flood prevention. Finally the Plan commits the United States to lead global efforts to address climate change through international negotiations.
Implications
So what does the President’s Plan mean for private business? The Plan appears to produce some potential winners and losers, risks and opportunities for various participants in the energy industry. However, Congress is likely to vigorously exercise its oversight prerogative and carefully scrutinize the appropriations supporting the Plan, and may reshape aspects of the Plan and scuttle others. In addition, some aspects of the Plan may well be judicially tested, so the outcome remains very much uncertain.
Listed below is our take on the industry sectors that appear to have the most to gain or lose.
Green technology: The Plan presents a potentially significant boost for emerging technologies, such as carbon capture and sequestration, algae ponds, and methane controls. The proposed regulation of carbon dioxide emissions from power plants will almost certainly create market demand for technologies that can be applied to meet new carbon emission standards. In addition, the Plan signals the administration’s commitment to allocate existing funds and to seek additional appropriations to support the development of technologies that prevent, mitigate or control GHG emissions. These policies may spur further private investment in the development and application of emerging green technologies.
Energy efficiency: The President’s new and ambitious efficiency goal for appliances and buildings which is intended to reduce carbon pollutants by 3 billion tons by 2030 through carbon efficiencies may provide new market opportunities to various businesses. In particular, companies that produce and market energy efficient products, including building materials, major household appliances and HVAC systems, all stand to benefit by the government procurement policies advanced in the President’s Plan.
Clean fuels: Proposals to further reduce vehicle emission standards, including the emphasis placed on heavy-duty vehicles, present opportunities for companies developing renewable fuels and advanced fuels such as algae biofuels as well as natural gas. Other proposals tout the expanded use of small modular nuclear reactors and clean coal may also provide a boost to companies developing and advancing cleaner fuels.
Natural gas: The President noted, “natural gas is creating jobs… and it’s the transition fuel that can power our economy with less carbon pollution." This should be welcome news to natural gas and liquefied natural gas producers In many parts of the country, coal-fired power generaton is being replaced by natural gas, either by retrofitting existing plants or by the closure of old ones and the development of new plants. The President’s Plan is likely to make it even more difficult for coal-fired generation to survive and may accelerate the transition to natural gas by utilities as well as in vehicles. However, his Plan also directs actions to curb methane emissions from oil and gas development. In addition, in one of the few Congressional asks, the President calls on Congress to approve his budget proposal that would eliminate tax breaks for oil companies, which some in industry believe may significantly diminish investments in natural gas exploration and production.
Heavy-duty vehicles: The President’s Plan call for EPA to develop even lower emissions standards for heavy duty vehicles. The surface transportation sector is currently facing pressure in many States to accelerate the replacement of their fleets with cleaner and more expensive Tier 4 engines that have only recently become available, and to use cleaner burning fuels. A further reduction in emission standards may increase the costs of engines and fuels or encourage switching to cleaner fuels. The magnitude of the impacts, however, will depend on what EPA and the National Traffic Safety Administration (NHTSA) ultimately require in their rulemaking.
Coal producers and coal-fired power plants: Fostering the perception that the President is waging a war on coal, the number one target in the climate Plan is coal and coal-fired power plants. The President directed the EPA to complete its work on regulating greenhouse gas emissions from both new and existing electric power plants. In fact, his statement “I’m directing the EPA to put an end to the limitless dumping of carbon pollution from our power plants” drew loud applause at the President’s speech at Georgetown University. Although not specifically mentioned, the emphasis in the Plan on reducing coal use could also bleed over into coal exports and by extension, ratepayers, particularly in areas dominated by coal generation. They are already bearing the costs incurred by utilities to meet Clean Air Act standards for ozone, particulates and sulfur dioxide, either by installing emission controls or transitioning to natural gas or other fuels, and in some cases ceasing operations altogether. In addition, much of the recent growth in solar, wind and other renewable energy generation has been fueled by ratepayers subsidies imposed by state regulators through portfolio standards and similar requirements imposed on utilities. The costs of new regulatory requirements to reduce carbon emissions, and proposed upgrades to energy transmission systems and new incentives to induce investment in renewable energy generation, will also eventually fall to the ratepayers.
Global partners: While the Plan is largely focused on domestic actions to curb GHG emissions, it also includes several actions which may provide new opportunities to work with our international partners. In particular, the Plan calls for enhancing multilateral engagement with the 17 nations that account for 75 percent of global GHG emissions and expanding bilateral cooperation with major emerging nations including its Strategic Energy Dialogue with Brazil. The Plan also calls for leveraging funds to finance clean energy and technology projects and launching negotiations toward global free trade in environmental goods and services, including clean energy technology. The President’s Plan also calls for ending U.S. government support for public financing of new coal plants overseas except when clean coal technology and carbon capture and sequestration is used. Lastly, the President will push for a global climate treaty in November, at the next United Nations Framework Convention on Climate Change in Warsaw.
Moving Forward
So what will Congress do? For one thing Congress will not sit on the sidelines and let the administration quietly move forward implementing its Plan. In fact, reaction to the President’s speech from Congress was swift and forceful. Democratic Senator Manchin III (WV) stated that “it is clear now that the president has declared a war on coal,” while Senate Majority Leader Reid (D-NV) stated that "President Obama's Plan will create jobs by encouraging investment in clean energy and energy efficiency, and strengthening our nation's resilience to extreme weather and climate impacts.” Reaction was just as swift from the other side of the Capitol. The House Energy and Commerce Committee leadership said that the president’s "unilateral actions will make it much more difficult for American workers to compete in the global marketplace.” We believe that this is just the opening salvo.
Although the President’s Plan does not require Congressional approval, the Plan is going to get Congressional oversight. Congressional Republicans and some coal-state Democrats will continue to criticize the President’s Plan especially the two new EPA GHG rules, which may be the most controversial part. It is important to note, however, that the deadlines the President set for issuing these rules are very aggressive. EPA has already received close to 2 million comments on its proposed rule for new power plants. EPA must work through the States to regulate carbon emission from existing power plants and it will likely draw even more fire from, and will be closely scrutinized by, Congress.
Congressional committees on Capitol Hill will hold hearings on the President's climate Plan but the House and Senate will take very different positions. As has been the case over the past 2 1/2 years, the Republican controlled House will take a critical view of the EPA's regulatory efforts and the impact on jobs and energy policy. For instance, House Speaker Boehner (R-OH) stated that the climate Plan is "essentially a national energy tax through government regulations." Republican leadership on the Energy and Commerce Committee, which has primary jurisdiction over environmental issues, will likely hold hearings and invite witnesses who are critical of the President's proposals.
The Democratic majority in the Senate is generally supportive of the President's environmental and climate initiatives. In particular, the Environment and Public Works Committee under Chairman Boxer (D-CA) has already held hearings to discuss the science and data surrounding climate change and rising temperatures which some believe are primarily due to human factors. Expect Chairman Boxer to hold additional hearings which would show support for the President's Plan. On a related note, in coming weeks, the Senate may consider the nomination of Gina McCarthy to become the next Administrator of the EPA. Her nomination has sparked strong opposition among many Republican Senators. If her nomination comes up for debate, you can expect some Republicans and coal-state Democrats to utilize time on the Senate floor to attack the President's climate Plan.
It is important to note that the House GOP majority approved many bills in the last Congress to restrict or eliminate EPA's authority to regulate greenhouse gases and enact other environmental rules. However, the Democratic-controlled Senate did not take similar action. A similar scenario could play out this year. Republicans may also pursue a non-binding resolution to put Members of the House and Senate on record regarding the President's efforts. An amendment could also be considered to an EPA appropriations bill. Lastly, opponents of the EPA proposals could pursue a challenge under the Congressional Review Act (CRA) which allows Congress to reject regulations. However, this legislative tool could not be utilized until the regulatory proposal is near completion in 2015. Even if the CRA effort passes, the President can veto the resolution.
The Bottom Line
President Obama’s Climate Action Plan is a wide-ranging proposal which promises to have significant impacts throughout the domestic economy. In particular, companies and other stakeholders in the energy and environmental sectors should take notice and be engaged. The Plan provides numerous opportunities for interested parties to shape the development of federal regulations and other policies. Engaging with Members of Congress and Federal regulators to promote a position or discuss a technology should be strong considerations for companies and other stakeholders.
