- Industry: Energy & Utilities
Regulations governing the generation, transmission, and distribution of energy and the mix of fuels used to generate it vary considerably from state to state. Therefore, it is not surprising that the expected impacts of the Clean Power Plan (CPP) will wary considerably on different states when the full regulations go into effect in 2022.
Much of the analysis following President Obama’s press conference unveiling the final CPP on August 3rd has focused on the disparate impacts on states (see articles from Forbes, Fortune, and the Brookings Institution for just a few examples). While there were some changes between the draft version and the final Plan (see “EPA Responds to Stakeholder Comments with Key Changes in the Final Clean Power Plan”) that were meant to alleviate concerns about time to prepare for compliance and other details, the impact on coal and states that depend on it for base load generation actually became more significant. This is not surprising since coal is the most carbon intensive of the fossil fuels used in electricity generation and thus must be limited if the goal for a 32% reduction in emissions is to be met.
With the final version of the Plan, the EPA shared a suite of materials meant to help states as they design strategies to comply with the new regulations – the “Clean Power Plan Toolbox for States.” These include a compilation of 47 fact sheets (one for each state except for Vermont, Hawaii, and Alaska, which are exempt from CPP regulations because of unique, isolated energy infrastructure and/or a lack of plants that fall under the regulation) that explain current emissions, emissions targets, and how those targets compare to those of others states. An example summary from Clean Power Plan: State at a Glance, West Virginia is included below:
The final rate goals for states in 2030 range from 771 pounds of CO2 per megawatt-hour for Rhode Island to 1,305 pounds per megawatt-hour for West Virginia. For states that are closer to the upper end of this goal range, such as Wyoming (1,299 pounds per megawatt-hour) or Illinois (1,245 pounds per megawatt-hour), the regulations are described as “least stringent.” For states with lower emissions rate goals, such as Connecticut (786 pounds per megawatt-hour) or Colorado (1,174 pounds per megawatt-hour), these regulations are described as “more stringent” or “moderate” respectively.
This is not necessarily the best way to look at this, however. If the assessment of stringency is meant to capture the difficulty each state will have in meeting their respective goals, then the emissions targets are only half of the equation. How much of a shift does the target for 2030 require from the baseline (2012) emissions? What will this shift cost, both directly (capital expenditures on new generation technology or emissions abatement) or indirectly (frictional unemployment or stranded assets)?
Generated from state data at Clean Power Plan State-Specific Fact Sheets
Of course, it is possible to argue that the 7% reduction required of Connecticut will be more costly on a marginal basis than the 37% reduction for West Virginia. It is generally true that the cost of abatement or avoidance per unit of emissions becomes greater as more units are abated since the low hanging fruit have already been picked.
No matter which perspective one takes, however, it is clear that attempting to assign these limits strictly on a state basis will be inefficient for the market as a whole. It has been shown historically that setting limits on emissions through permitting, and then allowing for trade amongst states, or other regulated entities, will lead to the most efficient allocation of permits and abatement. Those that can abate cheaply will do so until their marginal cost of abatement is equal to the price of permits. They will sell their excess permits at the market rate. States where the costs of abatement (or different technology altogether) are much higher than the price of permits, will purchase those instead of abating. In the end, the desired level of abatement is reached at the least possible cost. This system was incredibly successful in regulating SO2 emissions in the 1990s, under the Clean Air Act and the resulting Acid Rain Program. More recently, this approach has been adopted with greenhouse gas emissions as well under programs such as the Regional Greenhouse Gas Initiative (RGGI).
At the National Association of Regulatory Utility Commissioners (NARUC) Summer Committee Meetings in July, there were several panels dedicated to the Clean Power Plan and paths to compliance in anticipation of the Plan’s upcoming release. While some of this focused on concern about the disparate impacts between different states discussed previously, at least one of the panels presented the possibility of trading emissions allowances amongst states as an efficient path to compliance if the final CPP were structured to allow such coordination amongst the states (for example, mass-based approaches vs. rate-based approaches were touted as preferable for trading schemes, and the final CPP includes both paths). Such a system will also require the development of metrics, methodologies, and uniform tracking in groups of states with very different regulatory targets and political climates. Coordination may be difficult but it might be a preferred path to compliance for many states. For guidance in pursuing multi-state solutions, NARUC recommended the Eastern Interconnection States' Planning Council (EISPC) Report: “Multistate Coordination Resources for Clean Power Plan Compliance. Sample Documents for Consideration.”
Whether one is most concerned with realizing CO2 emissions reduction targets or minimizing the potential impacts of regulations meant to bring them to fruition, emissions trading presents a reasoned and sound approach to reach goals. Artificially confining emissions standards to geographic and political boundaries is unrealistic, especially given an energy system where electricity is traded across borders, Regional Transmission Organizations (RTOs) cover multiple states, and the impacts of CO2 emissions are not exclusively local.
By: Matthew Daly