The Implications of the U.S. EPA’s Clean Power Plan

By Roger Bezdek
President, Management Information Services, Inc.

On 2 June 2014, under President Obama’s Climate Action Plan and using the authority of Clean Air Act (CAA) section 111(d), the U.S. Environmental Protection Agency (EPA) proposed guidelines, termed the Clean Power Plan (CPP), to reduce CO2 emissions from existing fossil-fueled power generating units.1 In early August 2015, the EPA released the CPP final rule, which is stricter than the initial proposal.1 EPA contends that the CPP would achieve CO2 emission reductions from the power sector of 32% by 2030 compared to 2005 levels.

There is extensive ongoing debate concerning the costs and benefits, economic effects, impacts on the coal, natural gas, power, and related industries, disparate regional impacts, legality, and other issues. While legal challenges certainly lie ahead, it is worth exploring the projections of what the EPA and energy industry experts believe the CPP would accomplish and also what it would cost.

The Clean Power Plan is projected to result in the premature closure of coal-fired power plants in the U.S.

The Clean Power Plan is projected to result in the premature closure of coal-fired power plants in the U.S.

BACKGROUND ON THE CPP

When legislating the CAA, Congress recognized that the opportunity to build emissions controls into a source’s (e.g., power plant or other emissions source) design is greater for new sources than for existing sources. Thus, it established the two separate approaches to set standards:

  • Section 111(b) is the federal program to address new, modified, and reconstructed sources by establishing standards.
  • Section 111(d) is the state-based program for existing sources. EPA establishes guidelines, and states design programs that fit those guidelines.

On 20 September 2013, EPA proposed CO2 emissions standards for new power plants under 111(b) and initiated the process of establishing emissions standards for existing power plants under 111(d).2 The prospect of undertaking such a significant regulatory program under the authority of 111(d)—a little-known provision of the law that has only been used five times in the history of the CAA—is the source of many of the questions surrounding legality.3

The CPP would regulate CO2 emissions of existing generating units through state-level CO2 emission rate standards. The final rule requires that states submit plans to EPA for review and approval. Those plans must identify how each state will impose and enforce the specified standards. The CPP does not make specific orders, such as which measures each state must use or a required level of emission reductions from each type of measure. Instead, each state must determine its optimal plan design and components. If a state refuses to come up with a plan, as several have threatened, the EPA has provided a default emissions reduction plan.

According to the CPP timeline (see Figure 1), initial state plans will be due to EPA for review by September 2016, with final plans due by September 2018, as two-year extensions are available. States will have to continue their emissions reduction efforts through the stages that comprise the rulemaking process.

FIGURE 1. Clean Power Plan implementation schedule1,2

FIGURE 1. Clean Power Plan implementation schedule1,2

After receiving more than four million comments on its proposed rule for existing power plants, the EPA released its final rule. The final CPP rule differs in important respects from the proposed rule. For example, the final rule:

  • Is more stringent than the proposed plan: 32% vs. 30% reductions by 2030 (compared to 2005)
  • Begins compliance in 2022, and has three “step down” periods
  • Broadens the regulatory focus from coal to fossil fuels and reduces the benefit to natural gas
  • Specifies an emission performance rate of 1305 lb CO2/MWh for coal and 771 lb CO2/MWh for NGCC
  • Proposes a Clean Energy Incentive Program (CEIP), designed to incentivize early deployment and increase requirements for renewable energy (RE) as well as energy efficiency (EE)
  • Increases the share of RE generation capacity in 2030 over 25% compared to the proposed rule (28% versus 22%)

PROJECTED ECONOMIC AND ENERGY IMPACTS

As with any new regulation, there are considerable disparities between projections about the benefits and costs of the Clean Power Plan. The EPA claims that carbon emissions from the power sector will decrease 870 million tons per year (based on 32% below 2005 levels) and SO2 and NOx emissions will be reduced by 90% and 72%, respectively. Although the EPA acknowledges an implementation cost of $8.4 billion for the CPP, it justifies this with an estimated $34–54 billion per year in projected health benefits.4

The EPA’s cost estimate differs from those of some industry experts. Between June 2014, when the proposed rule was issued, and August 2015 several comprehensive studies were published by various research firms that analyzed the likely impacts of the proposed rule.5,6 Similar estimates based on the final rule were still under preparation when this article was completed. However, since the final rule is more stringent than the proposed rule, the impacts of the CPP discussed here based on the proposed rule are, if anything, conservative and optimistic, and may even represent a “best case” scenario.

According to multiple studies, the CPP would significantly increase energy costs, and these higher prices “force” the economy to undergo a significant shift in energy utilization and fossil fuel consumption.5,6 Further, there are also significant opportunity costs involved. The huge expenditures required to achieve compliance or replace prematurely one source of electricity generation (coal) with others represents unproductive use of capital, which implies that the spending in pursuit of regulatory compliance will lead to an overall decline in U.S. economic output. The subsequent negative impacts on GDP and employment will reduce disposable incomes and consumer spending.5 Over the forecast period, unproductive capital dedicated to the CPP is projected to result in reduced wages and incomes, lower commercial and industrial output, lower GDP, and lower employment. Note that these job losses are net of any new jobs that may be generated by increased spending on RE, EE, clean coal technologies, or other programs.

With respect to the proposed CPP, researchers at IHS—a global research and analytics firm—found that regulating CO2 emissions at the thousands of existing fossil fuel-fired electricity generating plants in the U.S. would lead to $478 billion in total compliance expense (see Table 1 for details), peak GDP losses over $100 billion, hundreds of thousands of lost jobs, higher electricity costs for consumers and businesses, and more than $200 per family on average every year in lower
disposable income.5

Bezdek Table 1

Much of the cost associated with the CPP would be associated with the unproductive deployment of capital resulting from forcing the retirement of coal-fired power plants as the plan does not encourage the development or deployment of low-emissions technologies for fossil fuels. Under the CPP, IHS has predicted that the U.S. power sector would prematurely retire 114 GW of coal capacity, or nearly 40% of 2013 coal capacity, and replace it with new generating resources that are primarily a blend of combined cycle natural gas turbines (CCGT) and renewables (see Figure 2).5 When added to the coal retirements resulting from competition from natural gas and the MATS rule, about 60% of the U.S. coal fleet, the study found that 199 GW (or more) will retire by 2030.

FIGURE 2. U.S. electricity generation mix under the CPP

FIGURE 2. U.S. electricity generation mix under the CPP

The most salient result of the shift away from coal-fired generation is that much of the compliance costs will be passed on to consumers via higher energy prices (see Table 2). Higher energy prices have the effect of a tax increase, ultimately reducing consumers’ disposable income.7 This affects consumer behavior, forcing reductions in discretionary spending as consumers forgo purchases and lower their household savings rates. The rising costs of electricity will be felt most acutely by those in lower income brackets, by minorities, and by those living on fixed incomes.8 In addition to absorbing higher electricity prices into its cost structures, industrial sector production in the U.S. would decline.
Researchers forecast that GDP will average about $51 billion lower than in the Reference Case to 2030, with a peak decline of nearly $104 billion in 2025 (see Figure 3).5 While higher energy prices will curtail consumption, the dominant driver of lower GDP will be the unproductive investment dictated by the CPP. Not investing in productive initiatives will lead to forgone GDP and lower economic growth, with maximum GDP declines of just over $100 billion in 2025.

Bezdek Table 2

Consistent with the forgone GDP resulting from the CPP, employment levels will be lower. Thus, substantial GDP losses (Figure 3) will be accompanied by large job losses. On average, from 2014 to 2030, the U.S. economy will have 224,000 fewer jobs (Figure 4). These job losses represent lost opportunities and income for hundreds of thousands of people that can never be recovered.

FIGURE 3. Annual GDP impact of CPP, 2014–20305

FIGURE 3. Annual GDP impact of CPP, 2014–20305

FIGURE 4. CPP estimate impact on employment5

FIGURE 4. CPP estimate impact on employment5

POLITICAL OPPOSITION

The projected costs and impact on growth of the CPP have not gone unnoticed. After the EPA published its proposed and final rules, criticism quickly ensued, with some of the most vocal coming from coal-producing states.9 The reason is clear, since by nearly all accounts the CPP will effectively limit or prevent the construction of any new coal-fired power plants in the U.S. and result in the closure of numerous existing plants. However, other fossil fuels are not safe. The final CPP rule starts to lay the groundwork to also phase out natural gas—differing notably from the proposed rule—by its increased requirements for RE and decreased emphasis on natural gas.10

Those opposed to the CPP have raised many concerns, from the computation of state budgets to EPA’s authority to promulgate such a rule.11 For example:

  • The president of the Kentucky Coal Association argued that the EPA had no legal foundation to authorize the rule, warned that discussions need to be held on the continuing reliability of the country’s electricity supply should coal be phased out, and stated that the livelihoods of the 36,000 Kentuckians who depend on the coal industry were being jeopardized.
  • State representatives echoed these sentiments. U.S. Senator Shelley Moore Capito, a Republican from West Virginia, testified that “[w]ith this unprecedented rule, the EPA has gone far beyond requiring existing coal plants operate as efficiently as possible.” She charged that “[t]he federal government has no business picking winners and losers in the energy economy, but that’s exactly what the EPA’s new rule would do.”9
  • As soon as the final rule was released, key lawmakers and industry groups vowed to battle the measure in Congress and in the courts. Senate Majority Leader Mitch McConnell, a Republican from Kentucky (a state that gets 90% of its electricity from coal), declared in the Senate his intention to “do everything I can to fight” the regulation, stating “I will not sit by while the White House takes aim at the lifeblood of our state’s economy.”12
  • In August 2015, 15 states went to a federal court, seeking to temporarily block the CPP while they mount a legal challenge to the rules. The states asked the court to issue an emergency stay blocking the rules, noting that they would be required “to spend significant and irrevocable sovereign resources now” to be in a position to meet the initial deadline of September 2016 for states to submit compliance plans to EPA. This stay was not granted.

While the November 2014 mid-term elections saw Republicans gain control of the Senate and increase their majority in the House, the party does not have the votes to repeal the EPA regulations. Instead, they intend to use their new powers to delay, defund, and otherwise undermine them. For example, Senator James Inhofe, Chairman of the Senate Environment and Public Works Committee and a prominent climate skeptic, has opened investigations into EPA and called for cuts in its funding and to delay the CPP as long as possible.

The 2016 elections will see a new president, who could alter or revoke the Clean Power Plan.

The 2016 elections will see a new president, who could alter or revoke the Clean Power Plan.

The considerable opposition and legal challenges could delay or derail the CPP. In addition, perhaps one of the most important threats are the 2016 elections. A new president unfriendly to the CPP could also halt it, since it was not legislated by Congress. Increasing their majorities in the House and Senate would also allow Republicans greater leverage to stop implementation. The path forward for the CPP will be tumultuous, and is certainly worth continued attention.

REFERENCES

  1. U.S. Environmental Protection Agency (EPA). (2015). Clean Power Plan for existing power plants, www2.epa.gov/cleanpowerplan/clean-power-plan-existing-power-plants#federal-plan
  2. Sidley. (2015, 6 August). EPA’s final greenhouse gas utility regulations: Assessing what’s new in the final rule, www.sidley.com/news/2015-08-06_environmental_update
  3. Nordhaus, R., & Gutherz, I. (2014). Regulation of CO2 emissions from existing power plants under §111(d) of the Clean Air Act: Program design and statutory authority, Environmental Law Reporter, 44, 10366–10394, www.eli.org/sites/default/files/docs/article_2014_04_44.10366.pdf
  4. U.S. EPA. (2015). Fact sheet: Clean Power Plan by the numbers, www2.epa.gov/cleanpowerplan/fact-sheet-clean-power-plan-numbers
  5. U.S. Chamber of Commerce. (2014). Assessing the impact of potential new carbon regulations in the United States, www.energyxxi.org/sites/default/files/file-tool/Assessing_the_Impact_of_Potential_New_Carbon_Regulations_in_the_United_States.pdf
  6. Energy Ventures Analysis. (2014, 17 October). EPA Clean Power Plan: Costs and impacts on U.S. energy markets, www.countoncoal.org/assets/Executive-Summary-EPA-Clean-Power-Plan-Costs-Impacts.pdf
  7. Bezdek, R. (2013, October). Energy costs: The unseen tax? A case study of Arizona, presented at the National Taxpayers Conference, Chandler, Arizona.
  8. National Black Chamber of Commerce. (2015, June). Potential impact of proposed EPA regulations on low income groups and minorities, www.ieca-us.com/wp-content/uploads/NBCC_Minority-Impacts-Report-June-2015-Final.pdf
  9. Arthur, J. (2014, 5 August). Arguments of the opposition to EPA’s Clean Power Plan, Law360, www.law360.com/articles/563360/arguments-of-the-opposition-to-epa-s-clean-power-plan
  10. Bezdek, R. (2015, October). Throw oil and gas under the bus?, World Oil, 29.
  11. Yeatman, W. (2013). The U.S. Environmental Protection Agency’s assault on state sovereignty, published by the American Legislative Exchange Council, alec.org/docs/EPA_Assault_State_Sovereignty.pdf
  12. Warrick, J. & Mufson, S. (2015, 3 August). Foes of clean-air rule plan multiple-front battle, Washington Post, www.washingtonpost.com/national/health-science/opponents-lay-groundwork-for-state-by-state-fight-against-polluton-curbs/2015/08/03/d3418320-3a26-11e5-8e98-115a3cf7d7ae_story.html

The author can be reached at rbezdek@misi-net.com

 

The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.
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