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Five Takeaways on the EPA’s Clean Power Plan

August 3, 2015

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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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.

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