Last year, we reported on President Barack Obama’s Climate Action Plan[1] (“Plan”) and his directive to the U.S. Environmental Protection Agency (“EPA”) to push forward with rulemaking to reduce carbon dioxide (“CO2”) emissions from power plants. On June 18, 2014, the EPA published in the Federal Register a signature piece of the president’s Plan, a sweeping proposal (“Proposal”) to regulate CO2 emissions from existing fossil fuel-fired electric generating units (“EGUs”). The Proposal sets state-wide targets for reducing CO2 emissions from 2012 levels, based on the application of four broad strategies, or “building blocks,” while giving each state the flexibility to decide how best to meet its target. For comparison purposes only to demonstrate the nation’s progress in curbing CO2 emissions, EPA has indicated that, by 2030, the rule would achieve nationwide CO2 emission reductions from the power sector of approximately 30% from CO2 emission levels in 2005—a year when CO2 emissions were peaking.

Unlike EPA’s October 2013 proposal to regulate CO2 emissions from new EGUs[2], the Proposal reduces CO2 emissions from existing EGUs, resulting in more far-reaching consequences. The Proposal seeks to reshape energy policy in the states by proposing carbon emission standards that may be achieved only through a combination of producing energy more efficiently, reducing energy demand and shifting away from coal-fired generation toward natural gas, nuclear power and renewable energy, and through state and regional policies, such as renewable portfolio standards and cap-and-trade programs.

Widespread and Uneven Effects
Everyone involved in the generation or use of electricity would be affected in some way by the Proposal. The coal industry would, again, be a hands-down loser under this Proposal, which seeks to reduce the amount of coal-fired power generation in the United States. Some states more than others would be required to fundamentally reexamine their energy policies, a potentially costly and politically painful exercise.[3] Electric rates would likely increase, at least in the near- to mid-term, and areas served predominantly by coal-fired generation and energy-intensive industries would be especially hard hit by rising energy costs. The transportation sector may be affected by the reduced demand for the rail and waterborne movement of coal. Others may fare better: the Proposal would incentivize further investment in renewable energy (e.g., solar, wind, hydro), and demand-side management technology, and endorses the continued development of nuclear power, including the delayed retirement of existing nuclear generation.[4]

EPA is soliciting comments on the Proposal until October 16, 2014, and expects to issue a final Rule by June 1, 2015.

The Proposal
EPA proposed the rule pursuant to Section 111 of the Clean Air Act (“CAA”).  That section authorizes EPA to address new and modified stationary sources under Section 111(b) and existing stationary sources under Section 111(d). Specifically, Section 111(b) of the CAA authorizes EPA to establish standards of performance for categories of new and modified stationary sources that EPA determines “cause[], or contribute[] significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” EPA has previously made such findings for fossil fuel-fired EGUs, and now relies on those findings to set limits on CO2 emissions. Performance standards must reflect “the degree of emission limitation achievable through the application of the best system of emission reduction (“BSER”) which (taking into account the cost [and other factors]) the Administrator determines has been adequately demonstrated.” In October 2013, EPA proposed CO2 emission limits for new fossil fuel-fired power plants, based on its determination that partial carbon capture and geologic sequestration (“CCS”) is the BSER, but has yet to finalize this proposal.

Section 111(d), a rarely used part of the CAA, requires EPA to establish emission guidelines for states to use in establishing performance standards for existing sources, when standards are not already set under other parts of the CAA. Emission guidelines developed under Section 111(d) are also based on EPA’s determination of the BSER and a corresponding emission limit, but allow states to consider the remaining useful life of the source and similar factors in establishing performance standards for existing sources, in this case EGUs. States must submit plans to EPA for approval, similar to state implementation plans, outlining how emission reductions would be achieved, consistent with the guidelines.

An Expansive Regulatory Approach
The Proposal takes a novel and expansive view of how EPA may determine the BSER for existing EGUs.  Rather than limit its analysis to the process changes or air pollution control technology available to reduce CO2 emissions from individual EGUs (i.e., “inside the fence line” controls), EPA also considered, and ultimately relied upon, the actions that may be taken by the entire electric generation and distribution system to reduce CO2 emissions from fossil fuel-fired EGUs operating within that “system.” In this way, although the source category subject to regulation remains fossil fuel-fired EGUs, the “system” of emission reduction that EPA determined is the best system, is the constellation of state and regional energy policies that affect the demand for electricity and how it is produced. The CO2 emission reduction goal assigned to each state is the performance standard that corresponds to the BSER.

The Proposal seeks to distinguish the power industry from other source categories by its unique degree of integration and the fungibility of electricity, which according to EPA, justifies this unprecedented approach to establishing emission guidelines for existing EGUs under Section 111(d). The state-specific goals reflect the degree of CO2 emission reduction that EPA has determined is reasonably achievable by taking into account the four so-called “building blocks” that reflect each state’s unique mix of electric generation (e.g., coal, natural gas, nuclear, solar, etc.), existing energy policies and the opportunities to reduce CO2 emissions.  

The Building Blocks
The four building blocks EPA uses to determine the BSER and to calculate state specific CO2 emission reduction targets include the following:

Inside-the-Fence Controls

• Block 1: Heat rate improvements at individual EGUs. By applying best practices (e.g., turning off unneeded pumps, using digital controls and more frequent tune-ups) and equipment upgrades that improve the efficiency with which EGUs convert fuel heat input to electricity, the Proposal estimates that coal-fired EGUs could reduce CO2 emissions by an average of 6%.

Beyond-the-Fence Controls

• Block 2: Changes in regional dispatch policies to use more energy generation from lower CO2-generating EGUs. Some EGUs, such as coal-fired power plants, are high in CO2 emissions, but relatively low in cost to operate, and are typically dispatched first by regional grid operators. Other EGUs, such as natural gas-fired combined cycle units (“NGCC”), emit CO2 at a lower rate.  Block 2 proposes to change the priority in which the regional electricity grid operators call upon various power plants to supply energy, increasing the utilization of NGCC plants and reducing the dispatch of coal-fired generation, thereby reducing CO2 emissions.
• Block 3: Policy changes to further induce investments in renewable energy utilization. Block 3 focuses on investments in the further development of very low- or zero-emitting sources, such as renewables or nuclear energy. The Proposal estimates renewable energy usage of 13% beginning in 2030.
• Block 4: Reducing energy demand.  Block 4 proposes CO2 emission reductions through the use of demand-side energy efficiency. Reducing the demand for electricity would reduce the amount of energy that must be generated and, thereby, reduce CO2 emissions. The Proposal estimates 10.7% cumulative savings beginning in 2030.

State Flexibility to Pick and Choose Compliance Methods
As noted above, the Proposal sets state-specific CO2 emission reduction targets based upon EPA’s assessment of the extent to which each state may reasonably apply some combination of these four building blocks, in light of the existing generation mix, current energy policies and similar considerations in each state.

The Proposal, however, allows states to apply other policies and methods to achieve the targeted CO2 emission reductions, and does not mandate the use of any one building block, so states are free to pick and choose, provided the target is met. For instance, a state may develop its own cap-and-trade program or participate in a regional program. The Proposal offers additional flexibility by setting rate-based CO2 emission limits, but also allows states to convert those limits to “massed-based” targets, effectively setting a cap on the overall amount of CO2 that may be emitted in order to support a cap-and-trade program.
This is, of course, is a mixed blessing: states would be free to adopt the energy policies that best suit their circumstances and priorities, but may be left with politically difficult choices, as many strategies are likely to lead to higher energy costs, at least in the near term, and some will result in job dislocations. Moreover, some states may view the Proposal as a weighty overlay on top of their energy policies, usurping state prerogatives by asserting precedence over current state policies that prioritize low electricity rates or the maintenance of a divergent fuel mix, in the service of an omnibus federal climate change policy.

States have until June 30, 2016, to submit their state plans to EPA, although extensions may be granted until June 30, 2017, for qualifying individual state plans, and until June 30, 2018, for qualifying multi-state plans. States failing to submit approved state plans will become regulated by a federal plan. The Proposal calls for the achievement of emission reduction goals by 2030, but also includes interim goals that states must achieve by 2020. In 2030, EPA will compare the actual reductions achieved with the projected reductions and determine whether additional measures are needed.

Going Forward
President Obama directed the EPA to finalize the Proposal by June 2015. That will be a tall order: the Proposal is complex, particularly in the way it correlates the application of the building blocks with specific emission reduction goals, and EPA will need to carefully examine and address the thousands of comments it is expected to receive from states and others who would be affected by the Proposal.

EPA will also face significant political and legal headwinds. The Proposal is built on the premise that EPA has authority under Section 111(d) to determine that: (1) a grab bag of potential state and regional energy policies that influence the demand for electricity and how it is produced may qualify as the “best system of emission reduction” available to reduce CO2 emissions from fossil fuel-fired EGUs, and (2) establish purportedly corresponding CO2 emission limits at the state level and not the individual source level, which, to be achieved, depend upon the actions of a wide range of actors that are outside the source category and “beyond the fence line.” 

EPA acknowledges the Proposal takes an expansive view of its authority, but relies upon the absence of any explicit prohibition in the CAA or judicial decisions interpreting it, and the deference courts apply to EPA’s interpretations when the meaning of statutory terms, such as “system,” are ambiguous. These foundational underpinnings of the Proposal will be vigorously challenged in court. This includes likely challenges to the method the EPA used to calculate state-specific CO2 emission reduction goals that correspond to the BSER, to the extent that method can be discerned at all from the Proposal.

EPA will also have to reconcile its seemingly conflicting determinations that for new EGUs, the BSER outlined in its October 2013 proposal is partial CCS, but for existing sources, the BSER is the exceedingly more effective and less expensive approach detailed in its June 2014 Proposal. Finally, under Section 111, EPA must finalize its proposed CO2 emission standards for new and modified fossil fuel-fired EGUs before it may adopt emission guidelines for existing sources. That proposal for new sources, which would require the use of partial CCS at a cost of about $1 billion per EGU, is also entangled in significant political challenges and will be vigorously tested in court.

On the political front, the Proposal is already a lightning rod issue in some mid-term election contests, and it will undoubtedly continue to play out in the presidential contest. In Congress, Republicans in both the House and Senate along with rank and file members are strongly opposed to EPA’s proposal. One day following EPA’s release of the regulation, 41 Republican Senators signed a letter urging the president to scrap the proposal.  Many Democrats support the Proposal; however, some from coal-states have been critical of the rulemaking.

Two committees with jurisdiction over EPA, the Senate Environment and Public Works Committee and the House Energy and Commerce Committee, quickly scheduled dueling hearings. The Senate hearing featured four former EPA administrators, William Ruckelshaus, Christine Todd Whitman, William Reilly and Lee Thomas, all of whom served under Republican presidents and endorsed EPA efforts to regulate greenhouse gases. To counter this, the next day the House Energy and Commerce Committee grilled Janet McCabe, the head of EPA’s Air office.

Beyond hearings, the Republican leadership has already begun the process to defund EPA through the appropriations process so that it cannot move forward on this rule, and will also likely file a resolution of disapproval under the Congressional Review Act.

This proposal has the potential to fundamentally change the way electric power is produced and how the CAA is implemented. EPA’s action and novel approach on this proposal should be carefully scrutinized by interested stakeholders.

Notes:
[1] Public Policy and Law Alert President’s Climate Action Plan—Real policy change or another political dogfight in Washington by Cliff L. Rothenstein, Scott Aliferis, John F. Spinello, William C. Cleveland, IV, Michael W. Evans  June 27, 2013

[2] Public Policy and Law Alert EPA Proposes Strict Greenhouse Gas Emissions Standards On New Electric Utilities by Cliff L. Rothenstein, John F. Spinello, Scott Aliferis, Christine A. Jochim, Michael W. Evans  October 1, 2013

[3] In light of the factors EPA used to set the CO2 reduction target for each state, including the use of a 2012 baseline year for measuring carbon intensity in each state as further discussed below, the target each state must meet varies significantly. For example, Washington State in 2012 had the fourth-lowest CO2 emissions rate, measured in pounds of CO2/megawatt hour, and will need to reduce its carbon emissions by 72% by 2030; West Virginia, with the fourth-highest CO2  emissions rate will need to reduce its emissions by 20%.

[4] EPA’s approach for determining BSER and state CO2 targets excludes existing nuclear energy from the calculation which may discourage the use of nuclear energy according to some in industry.