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Five Takeaways on the EPA’s Clean Power Plan

by Michael Levi
August 3, 2015

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The final version of President Obama’s Clean Power Plan (his carbon dioxide regulations for new and existing power plants) will be released later today by the Environmental Protection Agency (EPA). Many details are already online. The new rules are an important step forward but certainly not without their flaws. Here are five important things, good and bad, that today’s dueling press releases might not tell you.

This is an impressively creative “save” given legal and political realities – particularly on the international front

The President’s proposed regulations on existing power plants (released last year; today’s rules are the final version) were central to meeting the U.S. target of a 17 percent emissions cut below 2005 levels by 2020. But the EPA received extensive feedback from industry and analysts claiming that meeting the 2020 goals proposed in the draft rule would require a dangerously rapid transformation of the U.S. electricity system late this decade. This apparently led the EPA to delay the first year during which states must comply with the new rule from 2020 to 2022. But that left a big problem: the United States would be unlikely to deliver on its international commitment to cut emissions 17 percent by 2020.

So the administration came up with a clever save: a proposed “Clean Energy Incentive Program” that will reward states that cut emissions in 2020 and 2021 by in essence giving them weaker targets from 2022 to 2030. In principle, if states fully utilize that program, the United States will still be in the neighborhood of meeting its economy-wide 2020 target. (“In the neighborhood” because there’s enough uncertainty in the U.S. energy system to make 2020 emissions unpredictable even with the best policies possible.) At the same time, the EPA strengthened its emissions targets for 2030, offsetting the new headroom created by the incentive program and keeping projected 2025 emissions similar to those in the draft plan.

None of this matters much when it comes to aggregate emissions. But it matters a lot for how the United States is seen internationally. On that count, the administration deserves applause.

No one really knows whether the United States will meet its 2020 target

The biggest weakness in the draft Clean Power Plan was its vulnerability to litigation. In particular, its emissions targets were determined in part by calculating how much emissions could be reduced through improved energy efficiency, a tactic that made the whole rule vulnerable to being struck down by the courts. (This is ostensibly a rule governing power plants, but power plants can’t improve consumer efficiency.) The administration wisely ditched that element, leaving the plan on much firmer legal ground.

But reliance on the Clean Energy Incentive Program introduces a substantial new source of uncertainty. To conclude that the United States will still meet its 2020 goals, the administration is assuming that states will fully utilize the opportunities created by the incentive program. The program gives special credit for electricity generation from new wind and solar installations and from new energy efficiency in low income communities. But it’s entirely plausible that the special credit won’t be enough to get states to make power plants install all the wind and solar that the EPA is assuming they will. (It’s also fair to say that the odds of every state fully utilizing its opportunities is close to zero.) And, the farther states end up away from fully utilizing the incentive program, the farther the United States will be from its broader 2020 target without other policies. Which leads to…

The United States may need additional policies to deliver on the 2020 target

The administration is now relying heavily on wind and solar to meet its 2020 target. But if the Clean Energy Incentive Program isn’t enough to incentivize investment there, the U.S. government will need additional policies on that front. The most obvious place to look is an extension of the Production Tax Credit (PTC) for wind and Investment Tax Credit (ITC) for solar. But these are going to get very expensive (and perhaps politically unsustainable) if they remain in their current forms while investment ramps up to the level that the EPA envisions. Expect renewed administration focus on crafting some sort of legislative deal that would reform and extend the PTC and ITC, perhaps with a sunset around 2020-2021 as the Clean Power Plan phases in.

No one knows what mix of renewables, natural gas, and efficiency will result from the plan

There is a lot of reporting, including by many who should know better, claiming that the plan will result in massive amounts of renewable generation and no increase in natural gas above business as usual in the long run (2030ish in this case). This reporting is based on two things. First, the EPA, in developing its targets, uses “building blocks” – new renewables, improved coal plant efficiency, and extra coal-to-gas switching – and the new rule reportedly relies heavily on the renewables block. Many are concluding from this that states will be requires to massively increase renewables use. But – and this is really important – the “building blocks” tell you nothing about what measures states will actually use to comply. Once the building blocks are used to determine state targets, the states decide how to meet those targets. At that point, it’s as if the building blocks never existed. If a state wants to use only solar to meet its targets, it can do that. If it wants to use only natural gas or nuclear, it can do that too.

The second reason you’re hearing that the final plan will rely largely on efficiency and renewables is that when the EPA models the real-world impact of the rule, it reportedly foresees lots of new efficiency and renewable energy, and not much new coal to gas switching. But this is a feature of the EPA model, not something that the rule requires. In particular, the EPA model is well known to predict huge increases in efficiency. If, as many experts assume, it is substantially overestimating the efficiency response, you’ll see more coal-to-gas switching (and more renewables investment) in the real world response. Something similar applies to misestimates of renewables investment, though it’s not as clear there what the weaknesses of the EPA model may be.

This plan, while good, is far from perfect – but much of that is simply a reflection of political reality

The EPA estimates benefits well in excess of costs for the plan. Even if they’re way off, it’s likely that benefits will still exceed costs, making the new rules an important step forward.

That said, this is certainly not the best of all worlds. There’s no economic and little environmental rationale for restricting the new Clean Energy Incentive Program to wind and solar rather than including nuclear, coal with carbon capture, or coal-to-gas switching (with reduced credit to account for the carbon content of gas) – all the restriction really does is increase the cost of delivering the targeted emissions cuts. It also increases the risk that the United States won’t meet its international commitments for 2020. This one is an own goal – the EPA could have taken a more expansive approach to early compliance it if wanted to.

Beyond that, though, theoretically superior tools were basically out of political reach. Economy-wide carbon pricing legislation could have gone further in creating nationally uniform incentives for emissions reductions. (Of course, in the real world, economy-wide legislation would have had its own myriad carve-outs and distortions for various preferred technologies and industries.) It could have created incentives that cut across sectors (e.g. electric power and industry). It also could have generated revenues to reduce the federal deficit, help low income consumers, and assist industry in transitioning. The Clean Power Plan, in contrast, generates no revenues for any of this, though individual states might still raise money through their own implementation plans. But economy-wide legislation, whether cap-and-trade or a carbon tax, has been a political non-starter for years; one can’t fault the administration for not doing something that was politically impossible.

Bottom line: Politics has greatly constrained the realm of the possible for emissions cutting policy. A fundamental shift in U.S. politics could in principle yield something substantially better – but that isn’t the universe we’re living in. For the time being, the principal alternatives to the Clean Power Plan as it stands are inaction; a different set of EPA regulations that’s far less flexible (and hence less economically sound) or far weaker; or, potentially, large subsidies to a range of zero-carbon energy generators. The Clean Power Plan is a vastly superior way forward.

Post a Comment 12 Comments

  • Posted by Scott Hayes

    I support the President’s clean energy initiative. It’s big picture stuff. Yet the photo in this article points to the best solution to curb carbon emissions and slow climate change. It illustrates the path humans can take to meet our electrical needs.

    The President’s plan broadly addresses power plant pollution. But the goal to reduce the climate-changing impacts of fossil fuel power plants is actually being met around the kitchen table.

    During mealtime, someone mentions the neighbor’s solar panels. An investigation of costs and options ensues. A decision is made to invest in solar energy. Collectively these actions become exponential, and sometime in the not-too-distant future, power companies will exist to provide transmission facilities and power during the night time hours.

    We made this kitchen-table solar power decision three years ago. Producing over 31 million watt hours – enough to power our home – we know that the solution is local… solar local.

  • Posted by w d

    Well, maybe this “Clean Power Plan” will produce lower cost and cleaner energy. Maybe it will help us move at a faster pace in energy efficiency and “green power” sourcing, all of which sound positive. Maybe we can favorably influence others internationally.

    As one who has been working to reduce personal energy consumption, I think the direction is correct. I never thought we’d attempt to get there through executive fiat. Feels Monarchical. Maybe that’s what it takes. A shame. Maybe we can turn out the lights in Congress and save some energy.

    Maybe it will all work out for the best. Children are expected to swallow the medicine. It doesn’t matter whether they agree or not. After all, ” (it) is a vastly superior way forward”. Maybe.

  • Posted by Rick Veleke

    With implementation of new technology all emiissions can endure a process of phase transition. Changing from a gaseous state to a solid state, known as deposition, makes the toxic waste manageable. For everything from cars to coal plants. Catch pollution at its source. A whole new sector of waste management may create jobs and make a 100% target achievable. Good luck!

    Thank you

  • Posted by Dybee

    This proposal is all very nice in its way, but my kids and grandkids will still be facing a global warming nightmare.

  • Posted by Mark Graven

    Type your comment in here… President Obama’s carbon reduction plan is ridiculous because it interferes with Big Coal’s ability to earn an honest b buck, which is the American Way. Why should we be afraid of climate chage. Americans have alwas been able to overcome things like drought, hurricanes, rising ocean levels, elimination of important species to our habitats. If we can maintain the profits of Big Coal, that money will trickle down to help the victims of extreme weather events.

  • Posted by Mark Graven

    With all this hype about climate change i think we should remember the indomitable Captain edward Smith of the H.M.S. Titanic. Captain Smith heard reports of unususl flows of icebergs in the North Atlantic. But did he let that slow him down. No, he continued full speed ahead. Granted, his ship ended up on the bottom. But at least he had the courage to stand up to Mother Nature. Which is more than you can say for President Obama.

  • Posted by Dennis McConaghy

    What implicit carbon price are you using to contend that this initiative represents net economic benefit?
    Surely it doesn’t unless there is the contention that some unaccounted for cost is being dealt with.
    Is that cost equal to the current Obama administration estimates of the social cost of carbon?
    The biggest critique of this CPP is that there is no apparent scope for compliance by simply paying for compliance.
    Your own summation conceded that an economy wide carbon tax , ideally with no exceptions, would have been a superior policy instrument.
    Why is that compliance option not on the table?
    Or, is the only objective here physical emission reductions or accounting for the unaccounted for cost?
    Does this expose the Obama administration for what is – regulation over market mechanisms?

  • Posted by Sean

    Rather than regulate our existing infrastructure and extract more steam from our economy, the Obama administration should try to inspire a realistic transition to cleaner and forms of energy that look more appealing worldwide.

    A better executed plan can leave the United States ahead of the pack when it comes to clean energy. Leading by example- what the US did in the past and is now failing to do?

  • Posted by Michael Wara

    I was struck in your post – and hadn’t thought about – the final rule’s impacts on our Copenhagen/Cancun and INDC compliance trajectories. So thanks for walking through that.

    Still, isn’t the thing that the developing countries really care about with respect to these commitments the $100B/y? And we are a lot farther away from compliance on that commitment than our much more modest emission reduction commitments – no matter how one does the accounting.

  • Posted by Alex Majthenyi

    My backyard was a glacier with mile high ice a mere 10,000 years ago. I am glad it warmed up since then.

  • Posted by Trenth

    It’s a start, full or pork for big donors like most political stuff.

    Just phasing out the gov breaks for fossils and nuclear, and removing tariffs and local anti solar and wind regulations would have had more effect.

    Start doing more bottom up citizens stuff instead of always relying top down, which we knows is ineffective.

    Instead of big breaks for utility solar, do a feed in tariff for the citizens ad proven way to drive down prices and costs.

  • Posted by Gerald Wilhite

    Proposed editorial correction of this article’s conclusion:

    “For the time being, the principal alternatives to the Clean Power Plan as it stands are inaction, which is a vastly superior way forward compared to a Clean Power Plan that will keep the world’s poorest people trapped in energy starvation.”

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