EPA’s final (sort of) rule on carbon
On August 3, 2015, the United State Environmental Protection Agency (EPA) released the final rule 111(d) for carbon pollution emission guidelines for existing stationary sources (a.k.a. power plants). The carbon rule is arguably the biggest single environmental regulation since the Clean Air Act of 1990. The final rule received modification from the proposed rule released last year in response to criticism, as well as in an effort to strengthen the rule from certain legal challenges. The new objective is to reduce carbon emissions by 32 percent from 2012 levels. Interestingly, the Energy Information Agency tweeted on August 5, 2015 that monthly power sector carbon emissions reached a 27-year low of 128 million metric tons in April 2015.
The revised final rule now possesses three main building blocks:
1. Improved heat rates at affected coal-fired steam EGUs;
2. Substituting increased generation from lower emitting natural gas fired units offsetting generation from higher-emitting affected units; and
3. Substituting increased generation from new, zero emitting renewable energy capacity.
The final rule made modifications to the four building blocks of the proposed rule, eliminating energy efficiency as an explicit means of compliance, but permitting states to include it as a tool in the state implementation plan. The Energy Information Agency projects that in 2030 the rule will result in the following power generation breakdown:
• Coal— 25 percent
• Natural gas—31 percent
• Nuclear and other sources—18 percent
• Renewables—25 percent
In order to comply with the rule, states are required to submit their state implementation plan by September 6, 2016; however, in the interest of flexibility, the EPA can grant up to a two-year extension until September 6, 2018 for states that elect to go it alone or who partner with other states. Regardless, EPA expects that even states seeking an extension should file an initial submittal by September 6, 2016. Complicating this timing is the inevitable litigation surrounding this rule. States, industry and other non-governmental groups have already publicly stated that they intend to litigate this rule. Much like the Mercury and Air Toxics Standard (MATS), though, the lengthy litigation likely would end up in states working to comply, while utilities, independent power producers, and others would invest billions of dollars to comply with the proposed rule and business decisions would be made that could not be unwound making the rule a fait acompli even if modified or rejected by the Supreme Court as a result of these legal challenges.
Those states who elect to reject the requirement to submit a SIP run the risk of having a federal implementation plan (FIP) imposed on them. The risk of a FIP is that federal requirements eliminate state control on compliance plans. There is a consensus forming that the EPA will not be patient in waiting for states to file their SIPs; that is, if a state fails to submit their SIP by September 6, 2016, then EPA will impose a FIP forcing a state to comply with the federal plan imposed on it. This end result has the potential to dramatically impact how a state complies with the requirements of 111(d) and without the benefit of state specific control over the issues. For those making the states rights or EPA overreach argument, it is no judgment on the validity of their argument, but it would have a profound impact on the application of the rule.
As a new item in the rule, the Clean Energy Incentive Program is created. Under the CEIP, states that choose to file their compliance plan early and start the process will be able to participate in the program whereby renewables and demand side energy efficiency will be incentivized but require results be demonstrated in 2020 and/or 2021 (depending on when the SIP is actually filed). States that choose not to file early or that elect now to file a SIP at all will likely lose out on this opportunity. The clear intention is to encourage early compliance and a dramatic expansion of renewables deployment. The goal of the CEIP is to “help sustain the momentum toward greater [renewable energy] investment in the period between now and 2022 so as to offset any dampening effects that might me created by setting the period for mandatory reductions to begin in 2022, two years later than the [proposed rule].”
Additionally, although Congress could not or would not pass cap and trade legislation in the past, the Clean Power Plan and this rule clearly strive to achieve that goal. The rule itself states, “... the final rule greatly facilitates flexibility for [energy generating units] by establishing a basis for states to set trading-based emissions standards and compliance strategies.” Some states already participate in a carbon trading program (e.g. California and the RGGI states in the northeast) but most do not. Some have argued that establishing a cost of carbon is the means to solve the carbon question. This rule would put that axiom to the test.
Much remains to be studied and learned about the details of the final carbon rule. In the coming weeks there will certainly be additional questions raised and answers uncovered concerning the application of the carbon rule. Even the EPA agrees that energy prices will increase in the short term – questions remain unanswered and are likely unknowable with any degree of certainty about the actual long-term price impacts. This rule will have profound impacts on energy intensive businesses and industry as well as residential customers who will bear the brunt of increased energy costs. Thus, the application of the state implementation plans will be costly and in turn, will mean higher rates for energy customers.