On June 19, the U.S. Environmental Protection Agency (EPA) put the final nail in the coffin of the Obama administration’s signature environmental policy.
The EPA’s newly released Affordable Clean Energy (ACE) rule replaces the Clean Power Plan (CPP), which was intended to reduce greenhouse gas emissions from the power sector by 32 percent in 2030 compared to 2005 levels. The plan, which went into effect but was almost immediately put on hold by the courts, would have allowed states to meet those goals through a variety of means, including switching from burning coal to natural gas, which produces significantly less greenhouse gases, or increasing renewable energy sources. It would also have made it difficult to build new coal-fired power plants. By contrast, the new rule aims to reduce power plant carbon emissions without actually setting limits on them. Instead, the rule calls for efficiency improvements at generating stations and directs states to take the initiative on how they choose to regulate power plant emissions.
Supporters applaud the rule’s flexibility, empowerment of states and legal defensibility. Critics say the change will lead to higher emissions, damage the health of people and the environment and slow the transition to a clean-energy economy.
Sivas: I thought the Trump administration might just suspend the Clean Power Plan and delay doing anything else at all. But I’m sure lawyers for the administration have figured out that under the Clean Air Act and court precedents, EPA actually must take action to abate greenhouse gas emissions. So, rather than ignore the law entirely, the administration has promulgated a final, much weaker rule.
Kolstad: I am struck that EPA’s previous approach – replace the CPP with the ACE – has been scrapped, due to logical flaws in their arguments, I presume, in favor of a two-step approach. First, declare the CPP as having no effect on emissions as well as having other flaws and then repealing it. Secondly, show that the ACE is a cost-benefit improvement on the new status quo of no CPP – impressive. It’s a sleight of hand.
Wara: I think the most important aspects of this rule have to do with how the benefits of reduced air pollution are treated. The Trump EPA has – from the beginning – emphasized the uncertainty of benefits associated with reducing emissions of particulates and ozone. They continue this approach under the final ACE rule. This is likely to have knock-on effects for future air pollution regulations, and will be a precedent that is hard to undo even if a future administration wants to count these benefits. That will make further reductions in ozone and particulate matter harder to achieve.
Kolstad: The main problems with coal power in the U.S. are cheap natural gas and risks associated with investing in it. Neither CPP nor the ACE are critical to the industry’s outlook. It is interesting to note that the Dow Jones index of coal stocks had dropped about 10 percent from when Donald Trump took over. The introduction of the ACE caused the index to rise about 7 percent – a modest sign of the extent to which markets think the ACE will help the U.S. coal industry. My sense is that the ACE will have very little impact on the continuing decline of coal-fired electricity production over the coming decade.
Wara: The ACE rule forthrightly acknowledges that coal power is struggling economically in the U.S. Indeed, the rule points out that the Obama Clean Power Plan targets are set to be achieved ahead of time and without any regulation. Unless there is a dramatic change in the price of natural gas, coal-fired electricity is likely to continue to decline in importance while natural gas and renewable energy will increase as sources of power.
Sivas: A flurry of lawsuits by states and conservation groups will probably start soon and continue well beyond the 2020 election. That likely means that for the next few years, today’s rule will have little on-the-ground impact. Given the legal uncertainty, there is a substantial question of how the power sector will respond in the short term to market risks. But if today’s rule is upheld by the courts and if Trump is reelected, the overall result of EPA’s action could be some extension of the life of coal-fired plants. It all depends on how markets respond to the legal and political uncertainty.
Wara: No. But the Trump administration has taken the position that efficiency improvements are all that the legal authority provided by the Clean Air Act will allow. Heat rate improvements at coal- and gas-fired power plants will only go so far. Ultimately, we need to replace coal and gas-fired power plants with zero-carbon resources if we are to have any hope of avoiding dangerous climate change.
Sivas: Increased efficiency is a good thing, of course, because it reduces the pollution generated for each unit of energy produced. It remains to be seen whether the power industry will conclude that it is cost-effective to retrofit existing coal or other natural gas plants for increased efficiency – as opposed to looking toward renewable energy or options that allow consumers to reduce or shift their electricity usage in response to financial incentives. The problem from a climate perspective is that EPA’s focus on retrofitting existing coal plants entirely ignores that switching to cleaner energy sources and demand-response policies is, in fact, the best way to reduce emissions. Energy efficiency improvement alone will never bend the greenhouse gas emissions curve the way we need to.
Kolstad: None from the feds, except for generating efficiency improvements. But states have many other reasons for wanting to reduce carbon emissions. Carbon emissions are clearly in the crosshairs. Maybe not for this federal administration but quite possibly the next. Financial markets consider carbon emissions a financial risk, and the populations of many states, such as California, Oregon and Washington, want to clean up their act.
Wara: Under ACE, states have to ensure that power plants within their borders meet efficiency requirements. These are essentially rate-based standards set at the power plant level. Under the Clean Power Plan, by contrast, states had to achieve a statewide standard. Given the evolution of the power system due to low natural gas prices, neither rule would create strong incentives for states to control emissions.
Sivas: In the proposed rule, EPA was able to reach a different result than the Clean Power Plan through various sleights-of-hand. For instance, the EPA has changed how it calculates the social cost of carbon. The rule also ignores the incidental public health benefits – beyond reduced greenhouse gas emissions – associated with reduced power plant pollution. In certain ways, the rule narrowly reinterprets EPA’s authority under the Clean Air Act. All of these changes, collectively, allowed EPA to significantly weaken the rule as compared to the Clean Power Plan and still claim it is in compliance with the Clean Air Act.
Kolstad: A reduction of 10 million tons is nice, but it is about a half a percent of current power sector emissions. The benefits are probably understated since the Trump administration controversially cut the social cost of carbon by about an order of magnitude, compared to the Obama administration’s $40 per ton for damages from CO2.
Sivas: The Clean Power Plan projected emission reductions at full implementation of 870 million tons. So if that is an apples-to-apples comparison, it pretty much says it all. With respect to the monetary benefits, it all depends on how one calculates the social cost of carbon and whether non-GHG [greenhouse gas] emissions reductions are factored into the “benefits” calculation – things like reduced particulate emissions that have serious morbidity and mortality effects. Playing with those benefits assumptions, as EPA did here, pretty much renders the resulting numbers meaningless.
Wara: The Clean Power Plan utilized a novel interpretation of the Clean Air Act to allow for more stringent regulation of polluting sources. The ACE sticks to the traditional interpretation of the New Source Performance Standards section of the act. So it does have less legal risk in that sense. However, various aspects of the rule’s approach to quantification of benefits and costs will no doubt be challenged in court, perhaps successfully. Both rules were radical, albeit in different ways. I think there’s a decent chance of this regulation failing to pass muster before the courts.
Sivas: The courts will ultimately decide, I guess. Wheeler’s statement turns largely on the Trump administration and power industry argument that the Clean Power Plan illegally considered “best system for emission reduction” under the Clean Air Act to include such “beyond the fenceline” options as fuel switching and demand response. Indeed, the only way that the current EPA arrived at energy efficiency as the best system for emission reduction was by saying that any activity beyond retrofitting of the existing power plant itself could not be considered in setting standards and developing the rule. Wheeler’s new interpretation of the law is definitely much narrower than the pre-2016 interpretation, but that doesn’t necessarily mean it is more legally defensible. EPA’s regulations implementing this provision of the Clean Air Act have historically allowed for practices like emissions trading schemes to meet standards. It is hard to guess what the courts might do with all of these complex, interwoven pieces.
Charles Kolstad is a senior fellow at the Stanford Woods Institute for the Environment, the Stanford Institute for Economic Policy Research and the Stanford Precourt Institute for Energy, and a professor of economics in the Stanford School of Humanities and Sciences. He is co-director of the Stanford Bits & Watts Initiative.
Deborah A. Sivas is the Luke W. Cole Professor of Environmental Law, director of the Environmental and Natural Resources Law and Policy Program and director of the Environmental Law Clinic at Stanford Law School, and a senior fellow at the Stanford Woods Institute for the Environment.
Michael Wara is a senior research scholar and director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment.