EXCLUSIVE INTERVIEW: EPA Clean Power Plan should survive court challenges, unlikely to affect California price fundamentals, says IETA expert

November 10, 2014 by Rahul Rana

The US Environmental Protection Agency (EPA) in June released details of its Clean Power Plan, which under Section 111(d) of the Clean Air Act looks to mandate emissions intensity reductions in the electricity generation sector across the nation. The potential ramifications are significant, and while states assess their various options for compliance, CaliforniaCarbon.info spoke once again to Tom Lawler, the Washington DC representative for the International Emissions Trading Association (IETA) and a veritable expert on federal energy regulation, on the sidelines of Climate Week in New York.

CaliforniaCarbon.info: The section 111(d) regulation has created a lot of interest and intrigue across the US power sector. What exactly is 111(d), and what does it seek to do?

Tom Lawler: 111(d) is a particular section of the Clean Air Act, and the Clean Air Act amendment act of 1990 delineated new source performance standards. While section 111(b) instructs EPA to develop regulations for new power plants, 111(d) – which is essentially a paragraph long – tells EPA to develop new regulations for existing power plants or sources such that they may eventually meet these new performance standards.

EPA was petitioned a number of years ago to develop regulations for power plants under this section of the Clean Air Act, and they have finally got around to doing just that. They did a 111(b) rule and that was developed into the 111 (d). The Clean Air Act is very short and not very prescriptive, which is an important thing from a legal perspective; the more prescriptive the Clean Air Act is, the less leeway the EPA has. So the fewer lines and direction that the Act provides, the more the space between the lines for EPA to fill in gaps. This section of the Clean Air Act has only been used a few times, and not across a broad sector. It is very legally untested.

There have been lots of questions about what the 111(d) standards would look like for the power sector. EPA has come up with a very novel approach, and they have laid-out their rationale behind it. Now the big question is whether the rationale is legally defensible, and there will be plenty of lawyers that will go and have that discussion. Ultimately, it will be in the DC circuit court where it will be decided, but I like to emphasize the fact that there is a lot of space between those few lines, so the court will typically give EPA a lot of deference.

CC.info:  California’s cap-and-trade program has been implemented for almost 2 years now. How could 111(d) actually impact California?

TL: This gets to a broader issue. California has a cap-and-trade program as you said, but 111(d) is an emission rate standard. So it is a little bit of an apples-to-oranges comparison. California has to look at their cap on their power sector, which takes a little bit of math on their part since theirs is an economy-wide approach, and then to compare that to what EPA’s proposed rate standards would be. A comparison will be needed to see if California’s numbers are as or more stringent than what EPA prescribes through 111(d). Most of the analysis that has been done today suggests that if California gets a 2030 target along the same trajectory that they have had for their 2020 target, then its cap will be below what EPA’s rule expects. The state still has to decide what its 2030 cap is going to be, but if they keep their current trajectory then while the 111(d) standard is still going to have some impact, it will figure more as a regulatory exercise than a forced reduction of the cap on the power sector.

CC.info : Do you think that the new standard will have any impact in the California carbon market in general, or CCA prices specifically?

TL: I have a hard time seeing the EPA standard, just to use the cap-and-trade terminology, ‘tightening the cap’ for California, which means that they are not going to constrain or impact prices in California. There could be some impacts for imported power and how that interacts with California, and California has to deal with that. But in terms of straight supply and demand for carbon credits, I don’t think it’s going to be a price drag or a price modifier.

CC.info: Coming to the broader perspective of the US economy and cap and trade, do you think that the promulgation of this new standard will help to promote cap and trade? Will more states will opt for cap and trade?

TL: EPA’s rules do direct a good amount of attention to the benefits of cap-and-trade market mechanisms, and even broadly just the idea of regional cooperation. We have seen a number of states and other groups come to the same conclusion: that it will be easier for individual states to work together. The mid-western ISO came out with an analysis which came with the conclusion that the MISO states working together will cost significantly less for each of the individual states than if they do their own thing; it will be a lot easier in every way. There are still some political challenges for a state to say that they will do a cap-and-trade program and even more for a regional cap-and-trade program to emerge. For states to attempt a regional compact or a cap-and-trade program, it will be difficult, and they will have to try and figure out how to make it work. I think political hurdles and partisanship issues will get smaller as we get closer to the time when states actually have to get their plans approved and implemented.

CC.info: Could you put a timeline as to when comments on the proposed regulation will be made and considered, and when we may see the actual impacts?

TL: The president has laid out a timeline and there are questions over whether EPA is going to meet this timeline, but they appear to want to stick to it and are working very hard to do so. The first step was to have this rule proposed in July, and they did that. The next step is to have the rule final in July 2015. It may be really difficult to have the rule revised and written and ready to go in a year, but assuming they do that, the next step is to come up with the implementation plan. EPA is giving the states another year, that’s 2016, to come up with an implementation plan. If they want to work together and wish to use a multi-state solution, EPA will grant an extension until 2017. Once states come up with their plans, then all power plants in that state can be put under compliance from 2020. EPA has attempted to set up a glide-path, so there is an interim requirement and then a final requirement for 2030.  The way it’s written, EPA are hoping that states build gradually from the ground up, and finally get to a 2030 compliance strategy. How that unfolds, or whether states actually do that or not, is a bigger issue.

CC.info: Do you think that litigation and other kinds of court challenges will happen, and will they delay this plan which you have just outlined?

TL: There is going to be a lot of legal challenges. Some states have already filed challenges, and a lot of them are premature. The way that legal process unfolds is you have to wait till the rule is final to truly unveil the challenges. There will be challenges on all fronts. States will challenge it, utilities will challenge it, and there may even be challenges by environmental groups. All these will eventually be put in one case which will go to the DC circuit. The best case scenario is that the DC circuit would be able to contemplate it by 2016-2017. At the same time there will be state implementation plans and EPA will either approve these implementation plans or deny them, and that’s another avenue for legal challenges regarding whether EPA should have approved a particular plan or not. Challenges to implementation plans actually have a bigger chance of slowing the entire process than challenges to the rule, because, in essence, the rule’s whole purpose is to force these implementation plans from the states. Once the rule is final, states have to start writing their plans and they are going to continue writing until there is a court ruling that stays or vacates the EPA rule. Also, consider that EPA has got a pretty good track record in terms of the rules they have written staying in place. There might be times that the court will ask to rewrite provisions or change things, but very rarely does the court throw a rule out or vacate it. I don’t think the rule is going to be completely thrown out and EPA forced to start again.


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