On June 2, 2014, the Environmental Protection Agency (“EPA”) proposed guidelines for regulation of carbon dioxide (“CO2”) emissions from existing power plants.  The guidelines, christened EPA’s “Clean Power Plan,” are projected to reduce CO2 emissions from the power sector by 30 percent (%) from 2005 levels.  Consistent with the principles of cooperative federalism embraced throughout the Clean Air Act—and, in particular, by Section 111(d)—a key feature of the Clean Power Plan is the flexibility it affords states in tailoring their own plans to meet the emission performance goals established by U.S. EPA.  In furtherance of such flexibility, EPA proposes a “portfolio approach” to expand the types of measures that can be included in states’ plans for meeting the goals for each individual state.  In response to calls from many states and other stakeholders that the guidelines look more broadly at reductions that can be achieved throughout the integrated electric grid, EPA has set each state’s individual goal—a set of rate-based performance levels, expressed in pounds of CO2 per MW-hour generated—based, not only on efficiency improvements that can be achieved at the affected power plants themselves, but also on measures designed to reduce demand for generation from such plants, including increased generation by renewable or lower carbon generation sources (i.e., displacement of load to cleaning generating sources), and energy efficiency and other demand-side reductions (i.e., reductions in consumption of power).  Further, in a nod to the two active carbon trading programs in the U.S. to date—the Regional Greenhouse Gas Initiative (“RGGI”) and California’s Cap-and-Trade Program—EPA has provided a clear roadmap in the proposed guidelines for states participating in such market-based programs to demonstrate that the reductions achieved through their implementation meet the participating states’ performance goals. 

Ambitious in scope, the Clean Power Plan would largely fulfill President Obama’s commitment to take significant action to reduce greenhouse gas (“GHG”) emissions and address climate change in the absence of Congressional action.  While the final regulation is certain to be challenged in the D.C. Circuit and possibly by subsequent lawsuits in the various U.S. Circuit Courts of Appeal challenging EPA’s approval of individual state plans (or publication of a plan for states that fail to submit one), assuming EPA should succeed in defending its actions, the Clean Power Plan is likely to hasten cleaner generation and energy conservation throughout the electric sector, particularly in those states that have not moved forward with the adoption of aggressive renewable generation and energy efficiency goals.  It also is likely to result in reduced generation from the nation’s coal fired generating fleet and may lead to the retirement of even greater coal-fired capacity than is already slated for retirement due to secular changes in the energy market and other EPA rulemakings. 

President Obama’s Climate Action Plan

President Obama released his Climate Action Plan on June 25, 2013, which proposed a series of measures aimed at reducing U.S. GHG emissions.[i]  Chief among these measures is reducing GHG emissions from fossil fuel-fired power plants, which are responsible for approximately 40% of all annual GHG emissions in the United States.[ii]  Accordingly, in a separate Presidential Memorandum, President Obama directed the EPA to propose performance standards to regulate CO2 emissions from both new and existing fossil fuel-fired power plants.[iii]  To that end, on September 20, 2013, EPA issued proposed New Source Performance Standards (“NSPS”) applicable to new fossil fuel-fired power plants pursuant to section 111(b) of the CAA.[iv]

The Clean Power Plan’s regulation of existing power plants is the second, and far more significant, piece of President Obama’s directive to EPA to reduce GHG from the U.S. power sector.  The EPA’s authority to issue guidelines regulating CO2 emissions from existing power plants is derived from CAA Section 111(d), which only applies to existing sources (1) of any pollutant that is neither a criteria pollutant nor a hazardous air pollutant (“HAP”) and (2) to which an NSPS would apply, if the existing source were a new source.[v]  Putting aside a potential legal issue associated with the failure to reconcile two versions of section 111(d) when the 1990 Amendments to the Clean Air Act became law,[vi] EPA would appear to have authority to regulate the CO2 emissions of existing power plants because (1) CO2 is a pollutant that is neither a criteria pollutant nor a HAP and (2) existing power plants would need to comply with a CO2NSPS, if they were new sources (upon EPA finalizing the NSPS regulating GHG emissions from new power plants).  The section 111(d) planning process begins with EPA’s issuance of a guideline document (i.e., the Clean Power Plan) for states to use in developing their respective plans for regulating existing sources for the relevant source category (“State 111(d) Plans”).[vii]  Specifically, such guidelines provide information for the development of State 111(d) Plans, including (1) an applicable standard of performance reflecting the application of the best system of emission reduction (“BSER”) that has been adequately demonstrated for designated facilities,[viii] and (2) the deadline for compliance with the standard of performance.

The Clean Power Plan And Its Building Blocks

On June 2, 2014, EPA Administrator Gina McCarthy proposed the highly anticipated GHG emissions guidelines for existing power plants.[ix]  Under the Clean Power Plan, EPA projects a 30% reduction in carbon emissions from the electric generating sector by 2030, relative to 2005 levels, which would amount to a reduction in CO2 emissions from the sector of approximately 500 million metric tons.  Building on an earlier proposal developed by the Natural Resources Defense Council (“NRDC”),[x] the Clean Power Plan produces two alternative formulations of the BSER from existing power plants: a more limited potential formulation on which the EPA solicits comment, and a proposed formulation which the EPA explicitly prefers.  Both formulations consist of combinations of strategies that may be implemented by states to achieve the required GHG emissions reductions.  These measures are grouped into four categories, which the EPA calls “building blocks”:

  1. Heat rate (i.e., efficiency) improvements at individual power plants;
  2. Moving dispatch to units with lower carbon emissions (i.e., switching from coal to natural gas combined cycle (“NGCC”) units), with a target NGCC utilization rate of 70%;
  3. Replacing electricity generated by fossil fuel-fired power plants through expanded renewable energy capacity; and
  4. Reducing emissions from fossil fuel-fired power plants by increasing demand-side energy efficiency that reduces the amount of generation required.[xi]

The first two blocks represent changes that are achieved at individual fossil fuel generating units or among the fleet of fossil fuel generating units.  The latter two blocks reach more broadly beyond the fenceline of individual plants or the existing fossil-fuel fired fleet.  The first formulation of the BSER (the “potential” formulation upon which EPA is seeking comments) is comprised only of strategies from building blocks 1 and 2; the second formulation (EPA’s “proposed” formulation) includes strategies from all four building blocks.[xii]  The guidelines compute both interim and final state-specific emission performance goals based on application of the proposed BSER to each state’s particular mix of fossil fuel-fired generating sources and potential to achieve reductions in emissions from such sources through expansion of renewable energy capacity and demand-side energy efficiency.[xiii]  The final goals, expressed in pounds of CO2 per net MW-hour generated (lb/MWh), range from a low of 215 lb/MWh for Washington, to a high of 1,783 lb/MWh for North Dakota.  This approach creates a seemingly odd result; in some cases, the final goal for particular states is lower than EPA’s proposed performance standards for new sources.  If any of the building blocks is found to be an invalid basis for the development of BSER, the goals will be adjusted to reflect the emission reductions possible from the remaining building blocks.[xiv]

State Plans And The Portfolio Approach

CAA section 111(d) gives states the primary responsibility for designing their own State 111(d) Plans for submission to EPA.[xv]  Accordingly, the Clean Power Plan refrains from prescribing how an individual state should meet its goal, instead allowing each state to design its program based on the combination of building blocks most relevant to their specific circumstances and policy preferences.  In addition, each state can identify technologies or strategies that are not specific to the building blocks as part of their overall plans, such as market-based trading programs[xvi] or construction of new NGCC units.  Although EPA has established rate-based CO2 performance goals for each state, states are also permitted to adopt an equivalent mass-based goal, which would allow for market-based trading programs such as a cap-and-trade system to be implemented to meet the goal.  Further, acknowledging the integrated nature of the electric grid and the fact that the implementation of measures such as energy efficiency in one state could result in reductions in emissions from affected fossil fuel generating units in another state, EPA is also allowing states to pursue multi-state approaches, so long as the state’s plan “would achieve the equivalent in stringency, including compliance timing, to the state-specific rate-based goal set by EPA.”[xvii]

EPA’s proposed “portfolio approach,” which would allow other enforceable measures such as renewable energy (RE) and demand-side energy efficiency (EE) measures that result in reduced utilization of (and therefore reduced CO2 emission from) fossil fuel-fired power plants to be included in State 111(d) Plans,[xviii] could be either “utility driven” or “state driven” depending on the utility regulatory structure in a particular state.  Under a utility-driven approach, a state plan could include “measures that directly apply to affected power plants (e.g., repowering or retirement of one or more electric generating units) as well as RE and demand-side EE measures that avoid power plant COemissions.”[xix]  Under a state-driven approach, in addition to standards that affect power plants, the measures could include “requirements that apply directly to entities other than affected power plants, for example, renewable portfolio standards (RPS) or end-use energy efficiency resource standards (EERS), both of which often apply to electric distribution utilities.”[xx]  Importantly, these measures would impose legal responsibilities to achieve the necessary emission reductions on entities other than the power plants themselves. 

Likely Challenges To Broad Scope Of Plan

Prior to Monday’s announcement, many stakeholders and commentators questioned whether a State 111(d) Plan proposing a system of emissions reductions measures falling “outside-the-fenceline” of individual power plants was legally permissible under Section 111(d).  This chorus is only likely to get louder given that the Clean Power Plan anticipates such measures as a part of its latter two “building blocks” and essentially forces fuel switching from coal- to gas-fired power plants as its second building block.  Historically, EPA has issued only 13 emissions guideline documents under Section 111(d), most of which contain traditional unit-based emissions limits achievable through installation of a technology control device.  A notable exception to this pattern was the Clean Air Mercury Rule (“CAMR”), which would have established a cap-and-trade program for mercury emissions from coal- and oil-fired power plants, but the D.C. Circuit in New Jersey v. EPA struck down the rule on unrelated grounds.[xxi]  Thus, there is fairly limited precedent on what constitutes BSER for existing plants and how broadly EPA may look beyond the individual affected unit’s fenceline in establishing the “best system of emission reduction.” 

EPA acknowledges that the terms of section 111(d)(1) do not explicitly address whether entities other than affected power plants may be subject to requirements that contribute to reducing power plant emissions or whether state plans may include other measures for achieving the emission performance level.  However, building on the momentum from recent decisions upholding important rulemakings affecting the power sector by both the U.S. Supreme Court in EPA v. EME Homer City Generation and the D.C. Circuit in White Stallion Energy Center, LLC v. EPA, EPA cites to the U.S. Supreme Court’s decision inChevron U.S.A. Inc. v. NRDC[xxii] as providing the agency with the discretion to fashion a broad and flexible interpretation of the statute.[xxiii]  EPA’s conclusion is based, in part, on the requirement under section 111(d) that states set performance standards “for” affected sources.  According to EPA, standards, such as RE and EE standards, can reasonably be considered standards “for” affected sources, because they would “caus[e] reductions in affected power plants’ CO2 emissions by decreasing the amount of generation needed from affected power plants.”[xxiv]  In other words, regardless that such standards would not apply directly to the affected fossil fuel generating units, their implementation will necessarily result in a reduction of emissions from such units. 

Further, EPA concludes that, even if measures in the portfolio approach do not themselves constitute “standards of performance” for the affected sources, states may include measures that “implement” or “enforce” a standard of performance in their plans.[xxv]  For example, if a State 111(d) Plan achieves the emission performance level “through rate-based emission limits applicable to the affected sources, coupled with a crediting mechanism for RE and demand-side EE measures,” EPA proposes that such measures be included in the plan as “implementing measures” because they “facilitate the sources’ compliance with their standards of performance.”[xxvi] 

EPA also interprets section 111(d)(1) to allow State 111(d) Plans to include measures that would reduce emissions from affected sources, “even if those measures are neither ‘standards of performance for existing sources’ nor measures ‘for the implementation and enforcement of such standards of performance.’”[xxvii]  EPA notes that “there is no specific language in CAA section 111(d) or elsewhere in the Act that prohibits states from including additional measures in State 111(d) Plans, provided that they reduce emissions from affected power plants.”[xxviii]  According to EPA, its interpretation of 111(d) in this respect is consistent in the principles of cooperative federalism, “which is one of the foundational principles of the Clean Air Act and which supports providing flexibility to states to meet environmental goals (provided minimum CAA statutory requirements are met).”[xxix]  As noted throughout the Preamble to the Clean Power Plan, EPA is proposing to give states broad discretion to develop plans that best suit their circumstances and policy objectives particularly with respect to the range of measures that a state could include in its plan.  EPA recognizes that its interpretation and approach in this regard could result in enforceable state plan obligations accruing to a diverse range of affected entities beyond affected power plants, and that there may be challenges to practically enforcing against some such entities in the event of noncompliance. 

If finalized as proposed, EPA’s Clean Power Plan is likely to face challenges to EPA’s authority to establish numerical goals for individual states in the first instance and to base each state’s goal on the level of reductions that can be achieved by both displacing generation from high-emitting coal-fired power plants towards lower- and no-carbon generation options and reducing energy consumption.  To be sure, a rate-based performance standard has seldom, if ever, reached so broadly in identifying the level of reductions that can be achieved from affected sources.  Although the flexibility to credit reductions throughout the power system was sought by many states (in particular, those with well-developed renewable energy and energy efficiency programs), EPA’s proposal is likely to be criticized by other states as amounting to an intrusion into their energy policy, notwithstanding the unprecedented level of flexibility afforded to the states in crafting their individual plans. 

The Clean Power Plan lends credibility to the efforts of individual states that have sought to achieve significant reductions in carbon pollution in the absence of any coordinated federal action.  While the question has often been asked as to why a state like California would seek to reduce its own contribution to a global problem, when the reductions achieved are likely eclipsed by increases in China and elsewhere, the Clean Power Plan resoundingly answers the question: By moving first and establishing a framework for achieving dramatic reductions in power sector emissions, states like California have established a template that could then be drawn upon by EPA in determining what constitutes the “best system of emission reduction” for even those states that are lacking the initiative or political will to do so.

Whether or not the Clean Power Plan will motivate other states to join with California or RGGI in implementing market-based programs or to develop their own similar programs is unclear.  By merely allowing states to rely upon such market-based programs in their individual or multi-state plans, EPA is not forcing states to put a price on carbon emissions, as Congress declined to do several years ago.  In terms of practicality, setting up a cap-and-trade program would require participating states to reverse engineer the rate-based goals set forth by the Clean Power Plan and convert them into mass-based goals.  However, the certainty the cap would provide in assuring both that the required reductions are achieved and that the obligation to achieve them ultimately rests upon the affected generating units could motivate states to nevertheless place such programs at the centerpiece of their plans.  Multi-state trading plans would also automatically account for the fact that implementation of building blocks 3 and 4 (RE and EE) in one state may result in cognizable reductions in emissions in another state.  Thus, it is not unreasonable to think that states which have thus far declined to participate in RGGI or stalled in their efforts to participate in the Western Climate Initiative might revisit those decisions and see either program as offering a plug-and-play solution to an otherwise daunting task. 

IMPLEMENTATION TIMELINE

According to the President’s Climate Action Plan, EPA is required to finalize the rulemaking by June 1, 2015 and the states are then required to submit their Section 111(d) plans to EPA by no later than June 30, 2016.  In its Clean Power Plan, EPA provides an opportunity for states to seek an extension for an additional year for a state plan or an additional two years for a multi-state plan, in light of the additional level of coordination that may be required to develop and submit multi-state plans. 

After what EPA describes as an unprecedented level of public outreach in advance of unveiling its Clean Power Plan, EPA is holding a series of four public hearings across the nation and an extended, 120-day public comment period (from the date of the proposed rule’s publication in the Federal Register), in part in response to the requests of members of Congress. 

CONCLUSION

Broad in its scope and ambitious in its ultimate goals, EPA’s Clean Power Plan reflects the extent to which President Obama is willing to make significant action to address climate change a centerpiece of his administration.  EPA is relying on a seldom used provision of the Clean Air Act to undertake a program that could catalyze significant changes throughout the U.S. power sector, from changes in the units which generate electricity to the way in which it is consumed.  While many of these changes are already largely being driven by market forces (in particular, the increased reliance on existing and proposed NGCC plants, as opposed to coal-fired units, to provide baseload power), EPA is acting boldly to require deep cuts in emissions of CO2 from the nation’s existing coal-fired generating fleet and, in so doing, will undoubtedly face opposition from states that rely heavily on coal-fired power and their Congressional delegations.