Every stone thrown in the ocean creates a ripple. But some stones create bigger ripples than others. The Environmental Protection Agency’s (EPA) “Clean Power Plan” to reduce greenhouse gas emissions (GHG) from existing power plants undoubtedly falls under that latter category. When finalized, the proposal will fundamentally shift the nation’s energy economy for generations to come. It will also test market assumptions regarding the supply and demand of energy, how natural resources and underlying commodities are produced and procured, as well as how energy is consumed. In the absence of Congressional action addressing the regulation of carbon dioxide, the Clean Power Plan will set further legal precedent on the outer bounds of the federal government’s ability to address environmental challenges that the nation may face in future years. Consequently, the rule may well represent a sea change in our nation’s environmental and energy policy.
Broadly speaking, the proposal would require state governments to implement plans to reduce carbon dioxide emissions (CO2) from existing power plants by 30 percent by 2030 using a 2005 emission level as a baseline. According to EPA, the proposal would cost between $7.3 billion and $8.8 billion to implement but lead to an estimated $55 billion to $93 billion in public health and social benefits. While there will certainly be debate and analysis over the veracity of those estimates, the proposal represents one of the most significant changes in environmental policy since Congress enacted the Clean Air Act amendments of 1990.
In this Client Alert, we summarize how the EPA arrived at this rulemaking, describe the key elements of the proposed standard, and evaluate a number of questions that stakeholders should consider as the EPA rulemaking process unfolds over the next year.
How We Got Here
The Clean Power Plan is another critical piece of the Administration’s broader strategy to cut U.S. carbon emissions. In a December 2009 speech before the United Nations Climate Change Conference, President Obama pledged his Administration’s commitment to ambitious GHG emission reductions, establishing a reduction goal of 17 percent below 2005 levels by 2020, and over 80 percent by 2050. While the backdrop for that speech was ensuing Congressional action on the American Clean Energy and Security Act (more commonly referred to as Waxman-Markey), the Administration continued to build its case on addressing GHG reductions by implementing Executive Order 13514. That order mandated GHG emission reductions across all federal agencies. However, after the collapse of the Waxman-Markey legislation in 2010, the Administration continued working on its clean energy agenda.
Those efforts reached a crescendo at this time last year when the President unveiled his Climate Action Plan. The plan consists of three pillars: (1) continued reduction of U.S. carbon emissions; (2) preparing the United States for the effects of climate change by addressing climate adaptation and making communities more energy resilient; and (3) leading international efforts to combat climate change and prepare for its impacts. As part of his efforts to cut U.S. carbon emissions, the President released a memorandum that same day directing the EPA to issue regulations governing carbon emission standards from both new and existing power plants. The President’s memorandum included strict deadlines for both sets of regulations.
On September 20, 2013, the deadline set by the President’s memorandum, EPA released proposed carbon emission standards for new power plants. The proposed standards would, for the first time, establish uniform national limits on carbon emissions from new power plants, encouraging investments in cutting-edge energy technology.
The EPA’s proposed Clean Power Plan addresses the memorandum’s second directive: to reduce carbon emissions from all existing power plants. The regulations rely upon Sections 111(b) and 111(d) of the Clean Air Act, the primary U.S. law addressing air pollution. While we anticipate further debate and legal scrutiny regarding the EPA’s interpretation of those sections, by attempting to regulate carbon emissions from existing power plants across the United States, the Clean Power Plan is arguably the most significant proposal released by the Obama Administration related to mitigating the impacts of climate change.
Major Elements of the Proposal
The Clean Power Plan proposes to reduce GHG emissions from existing fossil fuel-fired power plants by as much as 30 percent by 2030, and would impact plants that were in operation or had commenced construction as of January 8, 2014. As a result of the EPA utilizing Section 111(d) of the Clean Air Act, implementation of the final rule would fall to the individual states. The proposal’s macro-level 30 percent reduction target is based on individual state reduction targets which are generally based upon existing rates of pounds of carbon emitted per megawatt hour of energy generated in each state.
States must submit plans (State Implementation Plans or SIPs) to implement those individual reduction targets by June 30, 2016, though EPA also established a process for states to request extensions. And while states must demonstrate progress toward meeting their targets by 2020, states will have a 10-15 year window to meet those targets after the rule is finalized.
The EPA describes the proposal as “flexible,” and under the rule as proposed, states would be able to design their own plans to meet the emissions targets outlined in the rule. This approach eschews a one-size fits all reduction approach that is the hallmark of other EPA standards authorized by the Clean Air Act. As such, states will likely adopt diverse approaches that respond to the unique nature of their existing generation sources and state regulatory structures. States could, for example, develop requirements for source-based emissions, adopt renewable energy portfolio standards that mandate increased use of wind, solar, or nuclear power, or focus instead on individual incentives for alternative energy use and efficiency, including tax or other incentives for the deployment of innovative technologies, market-based emissions trading programs, and other “demand side” programs
States would also be allowed to meet targets by participating in existing regional carbon trading programs called “multi-state market-based programs,” or newly devised carbon trading programs. Existing regional carbon trading programs that already exist span the Northeast (10 states), the Midwest (six states and one Canadian province) and the West (seven states and four Canadian provinces) in the United States. EPA is encouraging the creation of new carbon trading programs to fill gaps where none exist currently.
Stakeholder Opportunities to Impact the Process
The sheer size, scope and potential impact – both economic and otherwise – of the Clean Power Plan will have a substantial impact on the U.S. energy economy and regional economies across the United States. The proposal will impact all 50 state governments, local governments, utilities, rate-payers, private and public investors (including pension funds), manufacturers, technology companies, public health advocates and various energy production stakeholders, just to name a few. For this reason, the EPA is providing stakeholders ample opportunity to comment, as the agency will hold at least four public meetings and will hold the public comment period open for 120 days after the proposal is published in the Federal Register. We also anticipate that the rule will undergo great scrutiny in the halls of Congress and in many state capitols around the country, as well as internationally. Two Congressional committees have already indicated their intent to holding hearings on the rule, with the House Energy and Commerce Committee leading the way during the week of June 16.
Consequently, stakeholders and interested parties will have a number of opportunities to influence EPA’s decision making process and comment on the proposed rule over the ensuing weeks and months. The proposal presents myriad critical public policy and legal questions and will be one of the most heavily scrutinized environmental regulatory proposals in recent years.
Outlook
At this point, affected stakeholders and interested parties are in the process of analyzing and evaluating the proposed rule. By design, the EPA’s proposal impacts all facets of the U.S. energy economy. The proposal will stimulate both supply and demand for cleaner-burning fossil energy as well as renewable energy, and energy-efficiency and conservation measures in order to satisfy the long-term generation needs of utilities that will bear the economic brunt under the Clean Power Plan. Development of those resources will require significant investments in the nation’s energy infrastructure. As a result, opportunities will emerge for strategic and private investors (both domestic and foreign) to shift resources into the nation’s energy infrastructure.
The EPA’s proposal implicates these and many other issues that will ultimately emerge upon further review of this groundbreaking regulatory proposal. The attorneys and professionals at Squire Patton Boggs stand ready to work through and explore these complex issues with you.