On August 3, 2015, President Obama unveiled highly anticipated final Clean Air Act (CAA) rules to address carbon dioxide (CO2) emissions from new and existing power plants. Taken together, EPA’s rules represent the most aggressive action ever taken by the federal government to reduce greenhouse gas (GHG) emissions.

These regulations are projected to accelerate transformations that are currently occurring in the US electricity sector by spurring increased renewable energy generation and use of energy efficiency technologies. They will also allow the US to take a leading role at international climate negotiations in Paris in December 2015. At the same time, the rules are provoking significant opposition from certain states, some industry stakeholders and congressional Republicans, and courts are expected to be reviewing the legality of EPA’s rules over the coming months and years.

The most consequential and controversial of these rules is EPA’s Clean Power Plan (CPP) in which the Agency is setting standards under section 111(d) of the Clean Air Act for CO2 emissions from existing power plants. EPA projects that the CPP would reduce CO2 emissions 32 percent below 2005 levels by 2030, and these reductions are an essential part of the Administration’s international commitment to reduce GHG emissions. The second rule establishes section 111(b) standards for new, modified, and reconstructed electricity generating units (EGUs). Under the final rule, EPA is prohibiting the construction of new coal-fired EGUs unless the facility uses carbon capture and storage (CCS) technology to capture at least 20 percent of that facility’s CO2 emissions. Finally, EPA proposed a federal plan for states that do not comply with the planning requirements of the CPP and a model rule for states interested in developing trading programs.

The basics of the new source rule

EPA’s first rule sets new source performance standards (NSPS) for new, modified and reconstructed EGUs under CAA section 111(b) (new source rule). A new source is defined as a newly constructed EGU that commenced construction on or after January 9, 2014, the date the initial proposal was published. Modified sources are those with physical or operational changes made on or after June 18, 2014 (the date of its proposal) that increase the source’s maximum achievable hourly rate of air pollution emissions. Reconstructed sources are those units that replace components where the capital cost of the new components exceeds 50 percent of the capital cost of an entirely new comparable facility, and such reconstruction occurs on or after June 18, 2014.

As with its proposed rule, EPA set separate standards for two types of EGUs: stationary combustion turbines generally firing natural gas, and electric utility steam generating units generally firing coal. It selected as the statutorily required “best system of emission reductions” (BSER) for each category that the Agency considers adequately demonstrated technology in line with current industry investment patterns. EPA concludes that the rule is not expected to have notable costs nor impact prices or reliability.

Natural gas-fired power plants

For new and reconstructed units, EPA kept its proposed BSER for natural gas plants of 1,000 lbsCO2/MWh-gross, the current standard for the most advanced combined cycle natural gas units. This applies to all baseload generation, regardless of size. Non- baseload units must meet a clean fuels input standard. EPA withdrew its proposal for a standard for modified natural gas plants, saying it did not have sufficient information to set a standard at this time.

Coal-fired power plants

EPA’s original proposed standard for new coal plants, set at 1,100 lbsCO2/MWh-gross, required “partial” carbon capture and storage (CCS) technology at an effective capture rate of 40 percent. EPA loosened the final standard but kept the CCS requirement. The new standard is 1,400 lbsCO2/MWh-gross, which represents a supercritical pulverized coal unit with partial CCS. However, EPA lowered the rate of capture to 20 percent, justifying the change on cost, not availability. This rate would apply to all coal-fired EGUs. EPA continues to assert that CCS is adequately demonstrated and proven technically feasible by looking to sources in the power and other sectors either in use or under construction. EPA also notes it has rules now in place for safe storage of CO2 and envisions the CCS requirement as further driving the technology toward greater development and deployment.

By contrast, modified coal-fired EGUs do not have to meet a CCS standard, but rather their best historical annual performance since 2002. EPA believes these standards could be met by best operating practices and equipment upgrades. EPA is only setting standards for larger modifications, where there is an increase in hourly emission by more than 10 percent relative to the most recent five years of operations. It is withdrawing its proposal for smaller modifications. For reconstructed sources, EPA set a standard of 1,800 lbsCO2/MWh-gross for units with a heat input over 2,000 MMBtu/hr, and 2,000 lbsCO2/MWh-gross for units with lower heat inputs. EPA believes these plants would need to utilize the most efficient generating technology for the type of unit.

Thus, in its new source rule, EPA has made significant changes, especially among the three categories of defined sources, most notably where it loosened the new coal-fired EGU standard but retained a CCS requirement. That requirement generated the most controversy when first proposed, with many arguing that the CCS technology was not yet commercially available. EPA has only minimally backtracked on its position, based on cost alone, and much of the expected criticism on the final rule will focus on that element and whether CCS can really be considered BSER at this time. EPA has estimated the rules will have minimal costs based on the fact that most new plants are natural gas combine cycle and assertions that no new coal plants are planned in the near future. These issues will likely be decided in litigation. The success of the rule is critical to the CPP, since a CAA section 111(d) rule is conditioned on there being a valid section 111(b) rule. One reason EPA likely separated the various new source standards in the new source rule is to bolster the defensibility of the CPP, since it has argued that even if one or both new source standards are vacated by a court, the surviving standards can serve as the precedent for the CPP.

The basics of the Clean Power Plan

Compared to the new source rule above, the CPP is a far more comprehensive and ambitious undertaking. Whereas EPA set its new source standards at levels it believes capture the current construction of new EGUs (with some technology forcing for CCS), EPA intends the CPP to both capture a current trend toward cleaner energy and drive that development well beyond use of fossil fuels. The CPP, more so than its proposal, would move the power sector toward greater use of zero-carbon renewable energy generation and energy efficiency—23 percent of national generation by 2030 would be renewable. Thus, under the CPP, renewables are expected to take a significant portion of the growth originally anticipated for natural gas under the proposed rule. The ambitious nature of the rule, however, also creates significant legal risk. 

In summary, EPA made many significant changes to its proposed rule to address credible concerns raised by states, reliability organizations, generators, utilities and others and to make the rule more legally defensible. At the outset, EPA actually increased the overall stringency of the reductions, seeking to achieve a 32 percent reduction in carbon emissions in 2030 compared to a 2005 baseline, an increase from the originally proposed 30 percent. EPA strengthened the goal based on newer information about the costs and deployment of renewable energy in the future. By and large, most of the other significant changes will increase state flexibilities in meeting targets and better ensure reliability. Many states, including those most critical of the rule, face lighter targets and EPA encourages emissions trading and other cost-effective ways to meet those targets. 

The overall structure of the proposal has not changed dramatically. EPA sets state-specific targets based on 2012 emission baselines, which the states then must meet by 2030, including through a now eight-year interim period that was pushed back two years to begin in 2022. One significant change is that EPA now sets targets as both carbon emission rates and mass-based rates to provide states with additional flexibility. States must develop plans to meet their targets, and mandatory reductions begin in 2022. States which fail to submit plans within the specified timeframes would be subject to a federal plan, described below, which EPA also released in proposed form on August 3.

EPA estimates the environmental and health benefits from the CPP as $34-54 billion per year (including co-benefits from reductions of criteria pollutants) versus an annual cost of $8.4 billion in 2030. It further predicts an initial rise in energy rates but ultimately a $7 per month reduction in rates in 2030, primarily due to energy efficiency measures.

How standards are set

EPA did change its methodology for developing state targets. First, as with the new source rule, it sets as BSER separate rates both for  coal- (and oil) fired EGUs and for natural gas-fired EGUs. These rates apply to all such units across the country. To calculate BSER, EPA also uses three of the four previously proposed “building blocks” in the final rule, but makes significant changes to each. 

  • Building block 1, heat rate improvements at existing EGUs, was lowered from an expected 6 percent efficiency improvement across all plants to a range of 2.1-4.3 percent depending on the region, based on new data.
  • Building block 2, increased dispatch of existing natural gas plants, was changed from an assumed availability level of 70 percent name-plate capacity to 75 percent of net summer capacity, a more accurate measurement of performance.
  • Building block 3, shifting generation to zero-emitting technologies, removes from consideration existing nuclear plants and those under construction as well as existing utility-scale renewable energy projects. This building block does include more use of renewable energy overall based on new information indicating lower costs  and greater availability of renewable technologies. States can still use nuclear generation to achieve their targets, which is especially valuable for mass-based targets.
  • Building block 4, demand side efficiency, was removed from consideration in setting BSER, but states are free and, indeed, expected to use energy efficiency as a key component in their state plans.

In another change to its previous methodology and in recognition of the interconnectedness of the power grid, EPA focuses on three regional electricity interconnections: Eastern, Western, and the Electric Reliability Council of Texas. The Agency applied the three building blocks to all coal and gas-fired plants within each region to produce regional emissions performance rates for each category, and then chose the most readily achievable rate for each category as BSER. EPA then applied that rate to all affected sources in a state to arrive at individual state rate-based and mass-based goals. Hence, each state’s goals are based on its mix of affected sources. State targets vary, but not widely, and fall between 771 lbsCO2/MWh for states with only natural gas plants and 1,305 lbsCO2/MWh for states with only coal. States with mixed generation fall in between those extremes. EPA deferred setting targets for Alaska, Hawaii, Puerto Rico and Guam, and excluded Vermont and the District of Columbia, which have no covered plants.

Giving states greater flexibilities

EPA’s final rule increases the flexibility accorded to states in several important respects. First, states maintain the ability to meet their targets through an “emission standards plan,” where they require the affected sources within the state to meet the targets, or a “state measures plan,” where a state can use virtually any set of measures it chooses, as long as it produces measurable and verifiable reductions, with federally enforceable rules as a backstop. States are now also to provide targets both in terms of emission rate-based and mass-based standards. In addition, states can choose a mass-based approach complemented by new sources if it chooses to combine the rules and use new sources to meet its targets.

Moreover, many relevant timelines have been extended. States can seek two additional years until 2018 to submit final plans, but need to request the extensions and file initial and interim plans in 2016 and 2017, respectively, to indicate their direction. Multi-state plans are also due in 2018. The interim compliance period begins in 2022, rather than as originally proposed in 2020, to avoid the “regulatory cliff” many states complained about. Similarly, the final rule provides states with several options to meet their interim targets. EPA has broken the 2022-2029 time period down into three phases, where a state must step up its reductions, or it can use the eight-year average. States can also set their own interim milestones in their plans as long they meet the interim and final targets. These changes are intended to provide states with maximum flexibility to meet their goals based on their own needs and circumstances.

Encouraging trading

EPA also responded to comments from states and generators seeking features in the final rule that would allow the most cost-effective reductions to be made. EPA explicitly endorsed intrastate, interstate and even international emissions trading as a mechanism to allow low-cost compliance. EPA encourages such trading by including mass-based targets, which readily support trading approaches, and by including “trading-ready mechanisms” for states to place in their plans to avoid the need for negotiating formal multi-state agreements at the outset of the plan. States with rate-based targets can also allow trading through emission rate credits (ERCs). EPA will also support multi-state trading programs by helping to track and implement them, and has provided model trading rules in the proposed federal plan, described below. 

The final rule also recognizes the integrated, cross-border nature of the electricity sector at the US-Canadian border by allowing states to credit renewable energy imports to the US, including Canadian hydro imports. Specifically, EPA states that it “will work with states using the rate-based approach that are interested in allowing the use of renewable energy from outside the US to adjust CO2 emission rates.”  To receive credit, these resources must be incremental and installed after 2012, meet all Evaluation, Monitoring, and Verification (EMV) standards, be connected to the US grid, and have a power purchase agreement or other contract for delivery with an entity in the US. 

EPA  responded to requests for early credit by states that had already implemented renewable and energy efficiency programs. For one, a mass-based approach would favor states that made investments in utility scale renewable energy and demand reduction measures, since those measures were not part of BSER calculations, and thus would reduce the tons needed to meet the target. States can also claim credit in their plans for reductions in emissions through renewable energy projects and energy efficiency measures taken after 2012. Finally, EPA presents a newly crafted voluntary Clean Energy Incentive Program for early reduction credits. This program covers investments in certain renewable energy projects that generate carbon-free power in 2020-2021, and energy efficiency projects in low income areas which reduce demand in those same years. EPA will provide matching credits or allowances to the states that participate in this program. 

Ensuring the lights stay on

EPA was under considerable pressure from many stakeholders to ensure the CPP would not adversely impact electric reliability. The final CPP addresses reliability in a number of ways. First, the rule pushes the interim period back two years and allows states to adopt their own “glide paths”‘ through the interim period, allowing states flexibility to plan and make necessary infrastructure improvements. Moreover, the 15-year period between rule issuance and final goals should allow states to conduct the necessary planning to avoid reliability issues. States also are required to show in their plans they have considered reliability concerns, including by consulting with state reliability or planning agencies. Further, states can amend plans if reliability challenges arise. Most significantly, EPA included a reliability safety valve that is to apply only in unforeseen circumstances or emergencies where continued operation is required for reliability but would violate state CPP obligations.

Concurrent with the CPP, EPA released a memorandum with the Department of Energy and the Federal Energy Regulatory Commission (FERC) detailing how these agencies would coordinate and monitor state programs and implementation for reliability concerns, and act where necessary. Consistent with the role it played during the lead-up to the rule, FERC will particularly focus on reliability issues, impacts on market integrity and necessary infrastructure development. 

The proposed federal rule’s carrot and stick

As mentioned above, EPA issued a proposed federal rule simultaneously with its release of the CPP, which would apply to states that have not submitted compliant plans within the required timeframes. Under the proposed rule, EPA would set either an emission rate-based or mass-based standard for affected units in the state, and is seeking comment on which direction to go. Individual EGUs in a state with a federal plan would need to meet these standards, which would be the same as in the CPP; thus, noncompliant states are not penalized with more controls or higher costs. States under a federal plan can exit the plan upon submission of a compliant state plan, or can submit a partial state plan and regain some control. States under a federal plan may also secure authorization to implement that plan under federal delegation.

The proposed federal plan also sets forth model rules for trading under either a rate-based or mass-based standard. States which develop their own rules can utilize the model rules, which would be presumptively in compliance with EPA guidelines. States could also use only parts of the model rules, for example, those pertaining to EMV. Through these rules and “trading-ready” provisions, EPA is laying a groundwork for multi-state trading networks to ensure cost-effective reductions within the framework of the multi-state grid.

Legal consequences

Nearly all the changes in the final CPP were made in response to significant comments by stakeholders, particularly states, regional system operators and multi-state generators. However, EPA is well aware of the legal challenges the rule faces, having successfully defended several judicial challenges to the proposed rules already, winning largely on procedural grounds. Hence, EPA also made changes in the rules designed to bolster their defensibility, and it took the unusual step of separately releasing a 150-plus page legal memorandum justifyig the CPP. For example, EPA has taken pains to show its BSER is based on source-specific standards, since CAA section 111(d) traditionally focuses on regulated sources. EPA also dropped its consideration of  energy efficiency, determining that sufficient reductions were available elsewhere and acknowledging such “beyond the fence-line” considerations as system demand reduction departed from the traditional focus on affected units. EPA’s further concessions to states in terms of flexibility are designed, in part, to avoid constitutional claims that it is coopting the right of states to set their own energy policies and the “cooperative federalism” of the CAA. Finally, EPA’s delay in timelines will make it harder for petitioners to seek judicial stays of the rule since actual mandated reductions do not begin until 2022.

Nevertheless, EPA still faces daunting legal issues. Despite focusing on source-specific standards, its BSER calculations still contain measures that go beyond the fence-line. More fundamentally, it is still seeking to establish a comprehensive energy policy based on a very limited provision of the CAA, and one that has never before been used for such purposes. EPA has been forewarned by the Supreme Court on two recent occasions not to build such expansive economy-wide programs on provisions with arguably limited authority. Finally, EPA’s new source rule will need to survive legal scrutiny at some level to provide the necessary authority for the CPP. 

Once the final rules are published,  there will no doubt be a flood of petitions for judicial review filed. It can take upwards of two to four years for a judicial challenge to wend its way through the DC Circuit and the Supreme Court, so it may be some time before EPA’s suite of rules are finally adjudicated. Until that time, EPA’s evident hope is that states will continue to move toward cleaner energy and will comply with the CPP to ensure that movement continues and at an accelerated pace

How the rules play on the Hill

The release of the CPP, coupled with the ongoing United National Framework Convention on Climate Change (UNFCCC) negotiations, will likely ensure that climate change will be a marquee issue in the 2016 presidential election, four years after climate change was barely mentioned in the campaign. The success or failure of the CPP will hinge in part on the next administration, and the Democratic contenders to succeed President Obama, including former Secretary of State Hillary Clinton and Senator Bernie Sanders, strongly endorsed the release of the CPP. Democrats and environmental organizations are hoping to increasingly make climate change a “wedge issue” against Republicans, many of whom question the science underlying climate change, but whether this strategy can be successful will play itself out over the coming months in the presidential and congressional campaigns. 

On Capitol Hill, congressional Republicans are readying a legislative response to EPA’s CPP with the Senate Environment and Public Works Committee planning a Wednesday markup of legislation to limit the Agency’s authority to regulate COemissions. Congressional Republicans also might use the Congressional Review Act to force a vote of disapproval on the CPP. Finally, both the House and Senate fiscal year 2016 appropriations bills for EPA include “environmental riders” to block the Agency from implementing COstandards for new and existing power plants. These congressional efforts, however, are expected to ultimately fail since Republicans lack the votes to override a presidential veto even if they are successful in passing a bill to block the regulations through both chambers.

How the rules play globally

The final rule release comes in the broader context of the international climate change negotiations leading up to the Conference of the Parties (COP) to the UNFCCC in Paris in early December. The emerging agreement reflects a new model of international climate governance blending a more “bottom-up” approach but placing those domestic approaches within an international framework for reviewing adherence to these submitted goals. This approach relies on governments submitting their own INDCs with a collective goal of keeping global temperature less than 2 Celsius above 1990 levels. That objective is expected to require an 80 percent reduction in global emissions by 2050. Issuing the final Clean Power Plan rule is the cornerstone of the U.S.> INDC leading into Paris.

From a climate negotiators perspective, domestic action on climate change  by the United States is one of the key signals for other countries to in turn put serious plans on the table. In issuing the rule, President Obama noted that, but for US action, China and other large emitters from emerging economies would not make their own binding emission pledges. The President emphasized that the CPP and other actions under his Climate Action Plan created the opportunity  to reach the recent historical agreement with China on climate change. In that agreement, President Xi Jinping of China announced targets to peak GHG emissions by 2030 or earlier, and to increase the non-fossil fuel share of all Chinese energy to 20 percent by 2030. As part of the bilateral agreement, the US and China agreed to work together towards a “legal instrument or an agreed outcome with legal force” at the 2015 COP in Paris. This high-level commitment injected momentum into the negotiations and has raised expectations for a strong outcome in Paris. This week's issuance of the final rule will be viewed as another step of seriousness and action by the U.S.