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Dec 31, 2015

Clean Power Plan Breathes New Life into Carbon Reduction Efforts

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On August 3, 2015, President Obama announced the publication of the Clean Power Plan (CPP), which EPA promulgated pursuant to Section 111(d) of the Clean Air Act. The CPP represents the first ever national standards to address CO2 pollution from existing power plants.19

Under the plan, EPA is establishing interim and final state wide goals for CO2 emissions from affected power plants. EPA’s CPP assigns each state an emissions rate goal, in pounds of carbon dioxide (CO2) per megawatt hour (MWh), but also gives states an option to translate this goal into a mass based goal, in pounds of CO2. 

The CPP is expected to sharply reduce carbon pollution by shifting our electric power system toward cleaner energy sources at a steady and predictable pace. Enforceable CO2 limits will commence in 2022 and be in full effect by 2030.

Overview

The plan establishes uniform national CO2 emission performance rates (measured in pounds of CO2 per MWh of electricity generation) for certain types of electric generating utilities (EGUs) that were in operation, or had commenced construction, as of January 8, 2014. Affected EGUs include fossil fuel fired electric steam generating units, such as oil, natural gas or coal units, and stationary combustion turbines, including natural gas combined cycle units.

In most cases, states will rely on a variety of measures. CPP supported options consist primarily of (i) shifting to cleaner energy; (ii) promoting the use of renewable energy sources; (iii) improving the emissions performance of existing facilities; and (iv) adopting or promoting energy efficiency measures to reduce overall energy demand.

The CPP encourages states to develop customized plans to ensure that affected power plants meet both interim (during the 2022 2029 time frame) and final CO2 emissions performance rates (in 2030). States have up to three years to write implementation plans, applying their knowledge of their utilities and the programs that have worked in the past. Participating states will be required to submit to EPA either an initial plan with a request for an extension, or a final “approvable” plan by September 6, 2016. EPA may grant extensions of up to two years, until September 6, 2018. If EPA grants an extension, the state must submit a progress report by September 6, 2017. States may submit individual plans or multi state plans, as described in greater detail below. A “Federal Implementation Plan” will be finalized for any state (with covered EGUs) that EPA determines has not submitted an approved Section 111(d) plan by the designated compliance date.

Two Approaches

The CPP provides guidelines for the development and implementation of state plans to achieve interim and final CO2 emissions rates for EGUs. States can choose between two types of plans: an “emissions standards” approach or a “state measures” approach. An emissions standards approach imposes federally determined standards directly on affected EGUs. In contrast, a state measures approach allows states to achieve state wide, rather than facility specific, emissions reductions.

The emission standards approach will measure emissions in pounds of CO2 emissions per megawatt hour (MWh) of electricity generation. This approach includes source specific requirements.20 If a state chooses the emission standards approach, it would implement specified emission rate standards for all affected EGUs in the state. This approach could involve multiple states and allows for the creation of an emission rate trading system.

A state measures approach allows a state to achieve the equivalent of the CO2 emission standards approach by using some combination of federally enforceable standards for EGUs and elements that would be enforceable only under state laws. Examples of such elements include renewable energy and/or energy efficiency requirements that could be applied to affected EGUs or other entities. States opting for this approach will be required to use a mass based target to ensure that the proposed state measures achieve overall emission reductions. Options for cutting emissions include investing in renewable energy, energy efficiency, natural gas and nuclear power, and shifting away from coal fired power.

The CPP paves the way for states to design compliance strategies that are “trading ready,” and gives states the option to work with other states in multi state approaches to reduce emissions, including via regional emissions trading platforms or exchanges. As a result, out of state ERCs or allowances would likely be used by states and regulated EGUs to meet emission reduction requirements. This component of the plan also incentivizes the development of cost effective renewable energy resources, since regional trading programs would reward clean burning power sources by providing credits that could be sold to heavy polluters to offset CO2 emissions.

Clean Energy Incentive Program

As part of the CPP, EPA created incentives for future development of renewable energy projects. Specifically, the CPP established the Clean Energy Incentive Program (CEIP), which is expected to be a preferred option for states considering compliance strategies. The CEIP begins on January 1, 2020 and runs throughout 2020 and 2021. States that have expressed interest in participating in this program in their final plans are eligible.
According to EPA, the CEIP is designed “to reward early investments in renewable energy generation and demand side energy efficiency measures.” A corollary environmental benefit is to limit the growth of natural gas, especially in light of the new CO2 emission limits established by the CPP. Under the CPP, states that invest in wind and solar projects that commence construction after a state’s compliance plan is finalized (to help meet their emission reduction targets) will generate credits for renewable energy generation in the years 2020 and 2021, ahead of the CPP’s 2022 start date. Energy efficiency investments in low income communities are also incentivized by the CEIP. 

Participation in the CEIP is optional. States that act early to cut CO2 pollution, either with renewables or energy efficiency, would be rewarded with emission reduction credits, which they could use to meet their targets or sell to other emitters.

The CEIP sets up a system to award credits to energy efficiency projects in low income communities and renewable energy projects (only wind and solar) in participating states. The credits are in the form of emission rate credits or emission allowances, depending on whether a state uses an emission rate or mass based target, respectively. The credits could be sold to or used by an affected emission source to comply with the state specific requirements. Under the CPP, renewable energy projects would receive one credit (either an allowance or ERC) from the state and one credit from EPA for every two megawatt hours (MWh) of solar or wind generation. Energy efficiency projects in low income communities would receive double credits ─ for every two MWh of avoided electricity generation, energy efficiency projects will receive two credits from the state and two credits from EPA.

EPA will match up to 300 million short tons in credits during the CEIP program life. The amount of EPA credits potentially available to each participating state depends on the amount of emission reduction each state is required to achieve compared to its 2012 baseline. As a result, states with greater reduction requirements will have access to a greater share of the EPA credits.

Looking Ahead

A range of legal and legislative challenges await the CPP in 2016, as well as more limited financing options for coal operators. In addition, and as discussed above, initial state plans with requests for an extension or final plans must be submitted to EPA by September 6, 2016.

As of the date of this publication, the Republican Congress has passed bills in both houses of Congress to invalidate the CPP. On December 1, the House of Representatives passed a resolution, previously passed by the Senate, to repeal the CPP. The resolutions would both nullify the CPP and prevent “substantially similar” rules from being introduced in the future. These resolutions, however, are expected to be vetoed by President Obama. It is unlikely that opponents of the CPP will be able to mobilize the votes needed to override a presidential veto in 2016.

Similarly, utility and industry groups, including the coal industry, have commenced legal challenges against the CPP. In addition, a group of 24 states, led by West Virginia, Oklahoma and North Dakota, have also challenged the rule. These challenges allege, among other items, that EPA lacks the authority under the Clean Air Act to mandate carbon emission cuts from EGUs and that EPA is prohibited from issuing rules under Section 111(d) of the Clean Air Act because EGUs are already regulated under Section 112. It is likely that some of these challenges will be heard by the US Supreme Court.

In late November, Morgan Stanley and Wells Fargo announced plans to reduce involvement in, and funding for, coal projects. Morgan Stanley’s “Coal Policy Statement” includes a commitment to decline financing transactions that “directly support the development of new or physical expansions of coal fired power generation, unless there is sufficient carbon capture and storage equivalent emissions and pollutant reduction technology in place.” Morgan Stanley has also committed to “continue to reduce [its] exposure to coal mining globally” and not to provide financing where the “specified use of proceeds would be directed towards” mountaintop removal mining. It also indicated that it would not provide financing to any company that does not have a plan to eliminate existing mountaintop removal operations in the foreseeable future.

Wells Fargo’s Environmental and Social Risk Management policy commits the bank to “limit and reduce [its] credit exposure to the coal mining industry.” In response to concerns about mountaintop removal mining, Wells Fargo’s policy states that its involvement with mountaintop removal mining “is limited and declining.”

Conclusion

The CPP is a Clean Air Act initiative to cut CO2 emissions from certain power plants and to spur the development and growth of renewable energy. At its core, it reflects the first uniform effort to reduce CO2 emissions from existing fossil fuel fired power plants. Under the CPP, states may choose to meet specified CO2 emissions reduction targets or opt to join together in multi state or regional compacts to find the lowest cost options for reducing CO2 emissions, including via emissions trading programs. No matter the choice, one thing appears clear: CO2 emissions from fossil fuel fired power plants appear to be on track to decrease significantly by 2022 and are projected to be 32 percent below 2005 emissions levels by 2030.


19 Under the Supreme Court decision in Massachusetts v. EPA, greenhouse gases meet the definition of air pollutants under the Clean Air Act. Under the CAA, air pollutants must be regulated if they could be reasonably anticipated to endanger public health or welfare.  EPA made this determination in 2009.  In June 2013, President Obama directed EPA to work closely with states, power plant operators and other stakeholders in developing carbon standards for existing power plants.  EPA released its proposed rule in June 2014 and the final rule in August 2015.
20 EPA uses the state-specific emission rate targets to calculate equivalent state-specific mass-based targets, measured in metric tons of CO2.

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