EPA Readies Carbon Cuts For Utilities

Regulations Would Give States Flexibility on Gas Emissions

Washington — With less than two weeks to go, the Environmental Protection Agency is readying a climate rule for power plants that requires steep carbon reductions while allowing states and companies broad flexibility in how they limit their overall greenhouse gas emissions.

While key aspects of the proposal are still under discussion, according to several individuals briefed on the matter, the measure will spur regional carbon trading regimes on the East and West coasts and is likely to spur a legal challenge from some utilities. As currently drafted, the rule would cut greenhouse gas emissions from the utility sector by 25 percent, but the baseline for that reduction has not been finalized.

The EPA plan resembles proposals made by the Natural Resources Defense Council, which would allow states and companies to employ a variety of measures — including new renewable energy and energy efficiency projects “outside the fence,” or away from the power plant site itself — to meet their carbon reduction target. The exact level of reduction will vary by state, according to those familiar with the rule, and it will consist of a two-step process that will have smaller reductions at first and larger ones by 2030.

Coal-intensive utilities, coal mining companies, the U.S. Chamber of Commerce, conservative think tanks and a dozen or so state attorneys general have lined up to challenge the basis for the EPA’s impending draft regulations for limiting carbon dioxide emissions at existing coal plants. They have taken aim both at the likelihood that the EPA will set emissions targets and at any approach that isn’t limited to a specific plant site.

“Any standard that is predicated on reductions happening outside the fence line are illegal and would be overturned by the court,” said Joseph Stanko, who heads government relations at the law firm Hunton and Williams and represents several utility companies. “And I think they know that.”

The proposed rule, which will be announced June 2, represents the centerpiece of President Obama’s climate action plan. Utilities account for roughly 40 percent of the nation’s carbon dioxide emissions, with much of it coming from the aging, coal-fired fleet.

Kelly Speakes-Backman, who is both commissioner of the Maryland Public Service Commission and chairs the board of directors of the Regional Greenhouse Gas Initiative, a nine-state emissions trading compact, said in an interview last week that a “mass-based” system allows states and utilities to cut carbon in a more efficient and cost-effective way. Under this system, which is what the EPA is poised to adopt, states will have to meet an overall greenhouse gas limit rather than a specific rate per hour for each power plant.

“What are we ultimately trying to do? We’re trying to reduce carbon in the atmosphere,” she said, adding: “What RGGI has been doing sets almost a plug-and-play model for other states to adopt.”

Some, like Washington state, are eager to follow the example of the East Coast and California, both of whom have adopted emission-trading schemes. The RGGI program applies only to power plants while California’s system is much broader; the states participating in the RGGI system cut their emissions by more than 40 percent between 2005 and 2012.

EPA Administrator Gina McCarthy is traveling this week to Utah, Washington and Oregon, where she will meet with each state’s governor and also hold public events. Washington Gov. Jay Inslee, D, has pressed the EPA to adopt a strict carbon standard and is currently pushing for several policies so his state can meet its goal of reducing its overall emissions 20 percent by 2020.

Stu Clark, air program manager at the state’s Ecology Department, said the EPA has conducted “an unprecedented outreach” in crafting the rule. He added that depending on how stiff the requirements are, Washington may need to strike a regional compact with other states even though its utility sector is relatively clean.

“If it’s a really stringent standard, we will need to look at a broader suite of tools,” Clark said.

Other states are more resistant. Oklahoma Attorney General E. Scott Pruitt, for example, argued at the National Press Club Tuesday that the Clean Air Act gives states the power to determine what pollution standards should be and how to achieve them. Only later, he said, can the EPA reject a state’s plan and impose its own, so the EPA’s task now is to design a procedure and general emissions guidelines. He said it was reducing the states “from a substantive to an administrative role.”

“I find it offensive that the EPA feels regulators in states are not interested in air quality or pollution,” he said. And he said that the EPA has a “dictatorial attitude that as long as you agree with us, everything is kosher.”

Pruitt also said that EPA can only regulate single sites “unit by unit” rather than offer states and utilities the flexibility of meeting new guidelines through energy efficiency programs or renewable investments that might not be on the site of a regulated coal plant. Pruitt said that in such an approach “EPA is using its power to pick winners and losers.”

But David Doniger, policy director for NRDC’s climate and clean air program, said the EPA does have the authority to set an overall carbon limit. Since there was a limited amount of improvement to boost the efficiency of existing coal plants, he said, using the broader approach could help meet deeper reductions in carbon emissions at lower costs.

Doniger said that the EPA’s authority had been clearly recognized by the Supreme Court both in American Electric Power Co. v. Connecticut and in Massachusetts v. EPA. “I don’t think there’s much ambiguity there,” he said.

NRDC supports establishing a three-year baseline for power plant emissions, starting either in 2005 or 2008, and allow states and utilities to take credit for anything - new nuclear plants, energy efficiency, carbon capture and storage - that reduced carbon emissions.

Pruitt also attacked a plan drawn up for Kentucky that he said was based on “mass emissions.” He said it would act as a “cap and trade system — without the trading.”

In fact, the EPA’s proposal is likely to more closely resemble renewable portfolio standards already in effect in about 30 states and the District of Columbia. Those states would likely have an easier time meeting new guidelines for existing plants if the EPA opts for an “outside the fence” approach to power plants.

Utility executives say that the retirement of coal plants dating back to the Eisenhower era could also help meet targets if companies are allowed to average steps taken at one site with emissions at another.

Some companies who have invested heavily in nuclear power - such as Exelon, where nearly 91 percent of its fleet is nuclear - backs a strict carbon standard for existing plants. Joe Dominguez, Exelon’s senior vice president of governmental, regulatory affairs and public policy, said several of its 24 units may not be economically viable if the EPA’s proposal is not stringent.

“We think the reality is in the absence of carbon policy, it’s going to be difficult to keep the existing baseload of clean energy in service,” he said.

The wind industry is also lobbying for an “outside the fence” approach so that companies can add wind power as a strategy. “The EPA rule is going to be doable and affordable assuming wind and other renewables count,” said Tom Vinson of the American Wind Energy Association. Rob Gramlich, senior vice president for public policy at AWEA added: “if EPA rules only apply inside the fence, less stringent standards will be needed.”

Vinson said existing coal plants could achieve no more than 3 to 5 percent efficiency gains, far less than the carbon emission cuts the EPA is expected to demand.