On June 2, 2014, President Obama advanced his “Clean Power Plan” by having the United States Environmental Protection Agency (EPA) release proposed rules to regulate “carbon pollution” from existing fossil-fuel power plants in the U.S. (the Proposed Rule). The Proposed Rule is targeting the 32% of U.S. CO2 emissions produced from the power sector,1 75% of which is produced from coal-fired electricity generation. It is also anticipated to facilitate growth in the U.S. natural gas, renewables and nuclear sectors in a manner that is not an impediment to trade in U.S. natural gas.

The release of the Proposed Rule was well timed to precede intercessional negotiations of the United Nations Framework Convention on Climate Change (UNFCCC) and put pressure on the other Umbrella Group of Countries (including Canada, Japan, Australia, Russia) to take further action to reduce their domestic CO2 emissions.  

President Obama was unable to get congressional approval of any legislative action on climate change during his first term of office, and therefore has aggressively used his executive power to have the EPA regulate CO2 emissions from fossil-fuel power plants. The Proposed Rule sets state-specific emission rate-based CO2 goals and directs each individual state to develop an implementation plan on or around June 30, 2016, (June, 2018 for multi-state plans) in order to meet that goal by 2030. The Proposed Rule provides guidelines for the development, submission, and implementation of the state plans.

While battle lines are already being drawn, with years of legal challenges likely, EPA has downplayed the challenges presented by the Proposed Rule, claiming it is designed to leverage existing efforts already underway in many states and within the energy industry. EPA has stated that the Proposed Rule would achieve nationwide CO2 emissions reductions of approximately 30% from 2005 emissions levels, resulting in net climate and health benefits of $48 billion to $82 billion over that time period, while still maintaining coal and natural gas as the leading sources of electricity in the U.S. The specific details of the Proposed Rule follow.

Clean Air Act Section 111(d) state plans

The Proposed Rule regulates CO2 emissions from existing fossil-fuel power plants (steam generating unit IGCC plants, or stationary combustion turbine) under Section 111(d) of the Clean Air Act, which authorizes EPA to require each state to submit a plan establishing “standards of performance for any existing source for any air pollutant.” This is a significant development as the Proposed Rule would apply to existing gas-fired power plants as well as coal-fired plants. Section 111(d) permits EPA to review and approve state plans, issue its own plan for a state that either submits a deficient plan or fails to develop any plan at all, and enforce state plan requirements if the state fails to enforce its own requirements. States with fossil-fuel power plants that commenced construction prior to January 8, 2014, must submit a state plan.

Each state’s standards of performance must be based on the degree of emission limitation achievable through the application of the “best system of emission reduction.” EPA is tasked with establishing the best system of emission reduction through evaluation of the costs of achieving the reductions and any non-air quality health and environmental impacts and energy requirements.  

EPA has determined that the best system of emissions reductions for existing fossil-fuel power plants consists of four “building blocks,” individually, or in combination. These building blocks are:

  • reducing carbon intensity of generation at individual plants through heat rate improvements (plant efficiency improvements);
  • substituting generation from the most carbon-intensive plants with less carbon-intensive generation from other plants (fuel switching, coal, gas);
  • substituting generation from the most carbon-intensive plants with low- or zero-emitting plants (renewables); and
  • reducing emissions from fossil-fuel plants by decreasing demand due to energy efficiency (demand reductions, consumer efficiency).

The Proposed Rule states that these four building blocks constitute the best system of emissions reductions because they, in combination, “achieve[] greater emission reductions at a lower cost, take[] better advantage of the wide range of measures that states, cities, towns, and utilities are already using to reduce CO2 from [power plants] and reflect[] the integrated nature of the electricity system and the diversity of electricity generation technology.” (Proposed Rule at 34-35.)

By selecting these building blocks as the best system of emissions reductions, EPA gives states the option of placing the burden of compliance on existing fossil-fuel power plants, or developing other types of programs, such as efficiency and renewable portfolio standards that reduce demand on existing power plants, decreasing emissions. The Proposed Rule states that these building blocks permit states to continue to pursue policies that use a diverse set of energy resources, ensure reliability, ensure affordability, recognize investments and progress already underway, and are tailored to the specific needs of each state. 

Despite establishing these building blocks, the Proposed Rule does not require that states only implement these types of measures – states may incorporate other technologies and strategies not specifically addressed in the building blocks, as long as they yield emissions reductions. EPA discusses the potential for cap-and-trade programs and construction of new natural combined cycle units, nuclear plants, and carbon capture and sequestration as examples of alternate strategies.

However, EPA does not clearly state whether all aspects of existing state emission reduction programs (offsets, banking, RECs) can be incorporated into a state plan and acknowledges the challenges in developing plans that seek to utilize these types of measures. For example, EPA does not definitively state whether a plan can include offsets from outside of the sector for compliance. EPA states that:

[a]ll of the emission reduction measures included in the agency’s determination of the [best system of emissions reductions] reduce CO2 emissions from affected [power plants]. As a result, the EPA is notproposing that out-of-sector GHG offsets could be applied to demonstrated CO2 emission performance by affected [power plants] in a state plan. However, emission limits for affected [power plants] that are included in state plans could still include provisions that provide the ability to use GHG offsets for compliance with the emission limits, provided those emission limits would achieve the required level of emission performance for affected [power plants].  

(Proposed Rule at 429).

In short, offsets are not expressly prohibited, but if they are used potential compliance limits and restrictions on the use of offsets have yet to be determined. EPA similarly acknowledges the challenges created by the use of efficiency measures, imported power, and RECs, especially in interstate electricity systems, but addresses this issue only by putting the onus on states to account for these issues in their plans and by requesting comments from the public on how to address issues like double-counting, from which it will issue guidance on compliance.     

State-specific goals

The Proposed Rule contains state-by-state CO2 emissions rate goals (CO2 emissions per MWh of net energy output from affected power plants), including “Interim Goals” to be achieved by 2020 and maintained up to 2030, and “Final Goals” to be achieved by 2030 and maintained in subsequent years.

States can convert the rate goal to a mass-based performance level, which is the total tons of CO2 emitted by all affected power plants during the performance period. EPA explains that this attenuated timeline is necessary for longer-term compliance approaches, such as increased demand-side efficiency, to take hold. To set each state’s goals, EPA analyzed existing state plans for “practical and affordable strategies,” and considered the fuel mix of each state. These strategies include increased efficiency at existing fossil-fuel power plants, increased priority of low-carbon and renewable sources, and increased efficiency in homes and businesses.

Baselines and emission reduction goals  

EPA calculated baseline emissions for the states’ data by analyzing total quantities of CO2 emissions, net generation (MWh), and capacity (MW) from all affected power plants, based on 2012 reporting with estimates for power plants not in operation in 2012.

Then, EPA applied each of the four building blocks to each state, using assumptions for each (for example, it applied a six percent reduction in emissions for all coal-fired steam plants based on EPA’s conclusion that this type of reduction is technically achievable at a reasonable cost; in states with under-utilization (<70%) of combined cycle natural gas plants, existing renewable generation, and under-construction or preserved nuclear generation, it adjusted emissions from these sources to reflect increased utilization and proportionately decreased emissions from coal- and oil/gas-fired steam plants; and it calculated reduced emissions resulting from increased demand-side efficiency based on an assumed rate).

EPA then totaled the results of the application of each building block for each year from 2020 through 2029 to determine the Interim and Final Goals, with the Interim Goal as the simple average of the annual rates calculated for 2020-2029, and the Final Goal as the result for 2029.

Because the inputs to these state-by-state calculations vary widely, the Interim and Final Goals also vary widely, although states with existing emissions reductions programs seemingly are much better off, as the rates in their goals more closely reflect existing conditions, rather than rates achievable only through significant changes in power generation in the state. For example, California’s 2020 goal is 556 Pounds CO2 Per Net MWh, Texas’s 2020 goal is 853 Pounds CO2 Per Net MWh, and West Virginia’s 2020 goal is 1,748 Pounds CO2 Per Net MWh.  

Components of state plans

While the Proposed Rule does not dictate particular state plans, it does list essential components and parameters on compliance strategies and timing.

Each state plan must set enforceable emission performance levels that meet EPA’s state-specific CO2 goal. The plans must include compliance standards, implementation measures, and enforcement mechanisms. Implementation measures may include traditional command-and-control limits on power plant emissions limits or other programs designed to reduce emissions from the power plants through decreased use, such as efficiency measures, as long as they are quantifiable, verifiable, non-duplicative, permanent, and enforceable. States can choose whether to place the burden of compliance solely on the power plants, or they can assume responsibility for achieving aspects of the plan. The specific requirements of each plan are:

  • Identification of affected entities;
  • Description of plan approach and geographic scope;
  • Identification of state emission performance level;
  • Demonstration that plan is projected to achieve emission performance level;
  • Identification of emissions standards;
  • Demonstration that each emissions standard is quantifiable, non-duplicative, permanent, verifiable, and enforceable;
  • Identification of monitoring, reporting, and recordkeeping requirements;
  • Description of state reporting;
  • Identification of milestones;
  • Identification of backstop measures;
  • Certification of hearing on state plan; and
  • Supporting material.

EPA will evaluate state plans for approval based on four criteria: (1) enforceable measures that reduce power plant CO2 emissions; (2) ability to meet EPA’s emissions goals according to EPA’s timeline; (3) quantifiable and verifiable emissions reductions; and (4) process for measuring achievement, reporting to EPA, and implementing corrective action as needed. State plans can consist of new measures and reduction measures already in place. If a state with affected power plants fails to submit a plan, or submits an unsatisfactory plan, EPA is authorized to establish a plan for that state.

Multi-state plans

The Proposed Rule also permits the development of multi-state plans, to allow for states with interconnected power systems to work together to achieve their respective goals. It is unclear whether the EPA has jurisdiction to provide for linkages with non-U.S. jurisdictions, like the current California-Quebec linked cap-and-trade systems. Multi-state plans must demonstrate CO2 emission performance jointly for all affected fossil-fuel power plants in all included states. For multi-state plans with rate-base performance standards, performance must be measured average emission rate for all affected plants; for mass-based performance standards, performance must be measured by total CO2 emissions in tons for all affected plants in the multi-state plan. A multi-state plan must contain a formula to calculate emissions prevented as a result of standards in the plan.  

Reliance on existing emissions reductions approaches

The Proposed Rule permits a state to include existing emissions programs to meet performance standards in the state’s plan and to project expected compliance, as long as the actions taken under the existing programs occur after the rule is final and are quantifiable, verifiable, non-duplicative, permanent, and enforceable. This supports California’s currently operating cap-and-trade system.

Timing

EPA plans to finalize the Proposed Rule by June 1, 2015, comport with President Obama’s Climate Action Plan. State plans would be due one year later, on June 30, 2016, although states could extend that deadline to June 2017 (individual state plans) or June 2018 (multi-state plans) by submitting an initial plan that explains the need for more time. EPA will then take up to 12 months to review and approve the plans. States will have to report on their plans’ performance every two years beginning in 2022.

Regarding the rulemaking, EPA will begin accepting public comments regarding the proposed rule after it is published in the Federal Register, with the comment period closing 120 days after publication. Norton Rose Fulbright would be pleased to assist you should you have further questions on this process or submissions. EPA will hold four public hearings at the end of July in Atlanta, Denver, Pittsburgh, and Washington, D.C.  

Impact on NSR, Title V, other air regulations

EPA acknowledges that the Proposed Rule may interact and overlap with several existing air regulations, including New Source Review requirements, Title V permitting, MATS, and SIPs for criteria pollutants. EPA does not directly address the issue of potential overlap, stating that the flexibility the Proposed Rule provides to the states should allow them to plan for and address potential overlap within these existing rules.

For example, EPA suggests that state plans can account for potential impacts to NSR by increasing the use of renewable sources or decreasing demand through efficiency, so that modification of an existing fossil-fuel power plant will not trigger NSR. Alternatively, EPA suggests that states can impose limits on emissions for modified sources, preventing an increase in net emissions that would trigger NSR. EPA also requests comments on whether a state could create a provision as part of its Section 111(d) plan that would deem, as a matter of law, a fossil-fuel power plant undergoing modification as not increasing its emissions, as long as it is meeting its Section 111(d) plan requirements. This appears to be a potential carrot for states with plants that are eager to avoid additional regulatory requirements.

Looking forward

Even before the official announcement of the Proposed Rule, political opponents of President Obama’s Climate Action Plan began decrying it as economically infeasible, especially those hailing from states heavily dependent upon coal. However, a review of industry commentary shows a mix of criticism and support. This is to be expected, as many utilities have already started shifting their portfolios due to existing state regulation, and the Proposed Rule offers the potential for increased consistent energy policy across state borders.

Given the heavy emphasis EPA placed on leveraging existing state approaches to CO2 reduction, it appears that states with more mature climate change programs, such as the RGGI states and California, will have little heavy lifting to do in order to develop state plans that comply with the Proposed Rule. States that have put off emissions reductions, in contrast, may face significant challenges – even if their EPA-imposed goals are much higher than their more climate-focused counterparts.

Legal challenges  

Detailed consideration of implementation of the Proposed Rule may be marred by the litigation that is anticipated to ensue. Legal challenges over EPA’s authority to require state plans for CO2 under Section 111(d) seem inevitable, and legislators from both sides of the aisle in West Virginia have announced plans to introduce legislation to limit EPA’s authority. If the Proposed Rule is finalized, additional litigation over individual state plans is likely a foregone conclusion, especially if EPA disapproves a plan or imposes a federal plan due to state refusal to comply.

There is also the question of whether Section 111(d) and related regulations support EPA’s broad interpretation of the “best system of emissions reductions” as supporting the building block approach or any other strategies that yield emissions reductions, like cap-and-trade, rather than mandating control technology or a command-and-control approach to regulation. In New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008) challengers of EPA’s Clean Air Mercury Rule contended that Section 111(d) did not permit cap-and-trade as a best system of emissions reductions because, among other reasons, existing control technologies already exceeded the emissions reductions projected under the cap-and-trade scheme (the D.C. Circuit vacated the Clean Air Mercury Rule on other grounds, and thus, never reached the issue).