It is a fundamental tenant of financial planning that you need to hedge against risk.  Investors are always cautioned to diversify their portfolios (i.e. have a mix of stock, bonds and cash).  Further diversify by investing in both U.S. and foreign companies.  As you age, become more conservative in your investing to hedge against risk.

With recent developments on climate change, many parallels exist between making decisions regarding regulations of greenhouse gases and financial planning.  Even if you are a doubter of climate change, most would acknowledge there is some risk that climate change is occurring and that humans are increasing the risk through emissions of greenhouse gases.  The following statement is from NASA regarding the degree of scientific consensus that climate change is caused by human activities:

Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are extremely likely due to human activities. In addition, most of the leading scientific organizations worldwide have issued public statements endorsing this position.

Intergovernmental Panel on Climate Change October 2018 Report

Back in 2016, the Intergovernmental Panel on Climate Change (IPCC) was commissioned to prepare a special report on the impacts of global warming over 1.5 degrees Celsius above pre-industrial levels.  In assessing the current global warming trends, the IPCC states the following in its report:

Human activities are estimated to have caused approximately 1.0°C of global warming
above pre-industrial levels, with a likely range of 0.8°C to 1.2°C. Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.

The IPCC issued a dire warning it its report.  Immediate action must begin to keep warning at a maximum of 1.5 Celsius by 2030.  If warming exceeds that level, the risk of drought, floods, extreme heat and poverty increases dramatically for millions of people.

Impacts are not just in remote corners of the globe.  The United States is already beginning to experience the risk associated with climate change.  The Global Change Research Act of 1990 mandated that the U.S. Global Change Research Program (USGCRP) deliver a report to Congress and the President.  The 4th National Climate Assessment (NCA4) was released on the heels of the IPCC report.  The report is the culmination of work by thirteen federal agencies, including NASA and the Defense Department, with contributions from 300 scientists. The report states the climate change impacts are already occurring in the United States.

National Geographic highlighted the risks discussed in the NCA4 report:

As the report makes clear, different parts of the country face different risks posed by climate change. In vulnerable Southeastern states, coastal flooding is projected to increase dramatically; Charleston, South Carolina, could experience 180 tidal floods in a year by 2045, compared to 11 per year in 2014. In the Southern Great Plains, extreme heat could cause thousands of premature deaths and billions in lost work-hours by the end of the century.

Drought conditions worsened the recent California wildfires.  Fortune reported that the recent California wildfires destroyed 6,700 structures.  The total cost to the state, homeowners and insurers is expected to exceed $19 billion.

The recent IPCC and NCA4 reports show the dramatic risk climate change presents.  If such risk is analyzed in a similar fashion to financial risk, prudent decision making would include taking appropriate steps to mitigate that risk.

U.S. Rolls Back Climate Change Regulations

The Trump Administration has rolled back climate change regulations and has announced its intention to remove the United States from the Paris Climate treaty.  Some of the climate change deregulation includes the following:

With regard to the NCA4 Report, as reported on VOX, President Trump even recently stated he “didn’t believe” the report prepared by his own federal agencies.  Even if the President doubts climate change or the likely impacts to the U.S. in the coming years, a prudent course of action calls for managing against the risk.

Even Those in the U.S. Who Still Question Climate Change Should Be Persuaded to Take Action

In discussing risk associated with your investment portfolio, Forbes comments “the higher the level of risk your portfolio has, the more likely you are to experience loss or injury, and the more significant that loss or injury may be.”  If you face greater risk, your financial advisor would counsel you to rebalance your investments to reduce your risk.

As discussed above International and U.S. governmental agencies warn the risk of significant impacts due to climate change are increasing dramatically.  According to U.S. EPA, the U.S. is the second largest emitter of greenhouse gases in the world.  As a result, the climate change risk profile to the U.S. EPA is severe.

Even for those conservatives that are concerned with the impacts to the U.S. economy from climate change regulation, the U.S. risk profile demands taking prudent action to reduce greenhouse emissions.

With headlines in the United States of intense wildfires out West and more frequent hurricanes hitting the Gulf and East Coasts, concern that the U.S. is already beginning to experience the impacts of climate change is growing.  While most recognize climate change is occurring, the debate over how to effectively address climate change by reducing greenhouse gas emissions rages on.

The Washington Post recently noted carbon taxes have been cited by the United Nations as, perhaps, the most efficient and effective tool to reduce greenhouse gas emissions:

The United Nations contends taxing carbon dioxide emissions is an essential component of halting a steady rise in global temperatures.  It was a key element of the world body’s major October report predicting Earth’s atmosphere may warm by up to 2. 7 degrees Fahrenheit over preindustrial levels as soon as 2040, potentially triggering a global crisis decades earlier than expected.

However, imposing new taxes also can have significant economic impacts, particularly on the middle and lower class.

Over the weekend, Reuters reported that Paris was the scene of some of the worst rioting France has seen in a generation.  One reason for the protests is a fuel tax imposed by the French government to combat climate change.  The fuel tax is one tool in an aggressive plan to reduce carbon emissions by 40 percent by 2030.  The purpose of the tax is put incentives in place to encourage less usage of fossil fuel powered vehicles and to create an incentive to convert to electric vehicles.

The protesters believe the fuel tax demonstrates that the French government caters to the rich and elite.  They believe the government does not understand that the fuel tax disproportionately impacts the lower and middle class.

U.S. Considers First Bi-Partisan Carbon Tax Bill 

The goal of a carbon tax is to impose a price on sources of greenhouse gas emissions in order to create an economic incentive to move toward more efficient and less polluting sources.  In the U.S., Congress has yet to act on any comprehensive climate change legislation.  That could change with the introduction of a bi-partisan bill that would impose a carbon tax.

In November, a five members of the House introduced the “Energy Innovation and Carbon Dividend Act” which would impose a tax on carbon.  As discussed in the Miami Herald, the goal of the proposal is to reduce greenhouse gas emission by 40 percent within 10 years with a 91 percent reduction by 2050.  The reductions would be achieved by initially charging $15 per metric ton of carbon emitted and increase the price by $10 every year.

However, unlike other proposals, that would use tax revenues to fund infrastructure or reduce the deficit, the Bill would return the revenue back to citizens in the form of a dividend to offset higher energy costs.  The Bill is similar to a proposal put forward by the Climate Leadership Council, led by former Republican Secretaries of State James A. Baker III and George P. Schultz.  The Climate Leadership Council proposal called for a $40 per ton price on carbon dioxide emissions with the price rising thereafter.  Citizens would receive rebates starting at $2,000 per year for a family of four.

In October 2018, the Climate Leadership Council released a new report titled “The-Dividend-AdvantageThe 10 Reasons Why Rebating All Carbon Fee Revenue Directly to the American People Offers the Most Popular, Equitable and Politically Viable Climate Solution”  Some of the 10 reasons include:

  • Returning revenues to citizens has the highest public support
  • Carrots trumps sticks- creating incentives to reduce emissions is better than mandates
  • Most equitable- avoids regressive taxes that put the burden on the least fortunate.

It is the last bullet point that ties directly to what is occurring in France.  The French Government has directed the revenues from its fuel tax to pay down the deficit rather than returning it to the citizens.  This means that the increased cost of fuel is being directly felt by the consumers at the pump.   The French Government defends the allocation of the tax revenues by stating that citizens need to be encouraged to do their part to reduce usage of fossil fuels.

The U.S. carbon tax proposal would address the concern that carbon taxes would disproportionately impact lower income Americans by increasing energy prices.  As the recent protests demonstrate, climate strategies must be properly balanced so as to not disproportionately impact citizens more vulnerable to prices and tax increases.  The French protests are a real world example of failing to account for those impacts.

In a much anticipated move, the Trump Administration has proposed the Affordable Clean Energy (ACE) rule as a replacement for the Obama Administration Clean Power Plan (CPP).  While the CPP was controversial from the start for it broad regulation of the power industry, the ACE rule will be controversial as it signifies a 180 degree turn from aggressive climate change regulation of the energy sector.

Overview of CPP

The CPP was finalized on October 23, 2015.  The fundamental goal was to reduce CO2 emissions from the energy sector (one of the largest contributors to greenhouse gas emissions) by 32% by 2030 compared to 2005 levels.  The reductions were to be achieved through significant emission reductions from coal power plants coupled with incentives to move toward renewable energy and energy efficiency.

The CPP was touted a being flexible by giving states freedom to choose among various “building blocks” to achieve the necessary reductions.  States could either choose to regulate emissions from individual power plants or set a statewide cap of total CO2 emissions from its power sector.

Each state was given its own target for reductions (i.e. hard cap on emissions).  Under the rule, states must submit their plans (referred to as State Implementation Plans or SIPs) by 2018 and start achieving reductions by 2022.  If a state failed to adopt an approvable SIP by the deadline, EPA would impose its own Federal Implementation Plan (or FIP) to achieve the necessary reductions.

The CPP was controversial from the start. Many believed the structure of the plan as an overall regulation of the energy sector went significantly beyond EPA’s legal authority. The entire CPP hinged on the EPA’s authority under Section 111 of the Clean Air Act.  Under Section 111, the CPP set emissions standards across the entire energy sector thereby changing the mix of production to natural gas and renewables. The  crux of the legal challenge to the CPP was that Section 111 only allowed EPA to impose controls at individual power plants (i.e. within the “fence line”), not broadly across the energy sector. In February 2016, in a rare move, the Supreme Court issued a stay of the effectiveness of the CPP while the legal challenges to the CPP were heard in lower courts.

Why Replace the CPP?

The Trump Administration exited the United States from the Paris Agreement, the international accord on climate change.  President Trump and former Administrator Pruitt repeatedly questioned whether climate change was occurring.  Trump called the CPP a “job-killing regulation.”  Then why not simply repeal the CPP  with no replacement?

To repeal the CPP, the Trump Administration must go through the formal rulemaking process.  The Administration would have to justify, legally, why it is getting rid of the plan.  Complicating any effort to simply get rid of climate change regulation of the power sector was the Supreme Court prior ruling in Massachusetts. v. EPA  that the regulation of greenhouse gas emissions was required under the Clean Air Act.  Furthermore, the Obama Administration had already asserted that Section 111 of the Clean Air Act provide EPA the legal authority to regulate CO2 emission from power plants.  Therefore, given the prior Supreme Court ruling and EPA’s prior legal statements, it would be very difficult for the Administration to develop a legal justification for why there should be no regulation of CO2 emissions from the power sector.  The Administration likely decided a more prudent move would be to replace the CPP with a more flexible and less stringent rule.

Affordable Clean Energy Rule

The ACE rule reconsiders EPA’s authority under Section 111 of the Clean Air Act.  While EPA still maintains it has authority to regulate C02 emissions, it believes that authority is limited to requiring specific improvements at individual coal fired power plants  (i.e. within the “fence line).  The standards in ACE are based on a list of candidate heat rate improvement measures (either technologies or operational changes).  ACE removes the push toward natural gas and renewables.  ACE also removes the ability of states to set statewide CO2 caps on emissions as well as the trading program that would have allowed states to trade amongst themselves to more cost effectively achieve necessary emission reductions.

Under the ACE rule, each state must develop custom compliance schedules that include the selected emission standard and compliance deadlines.  States must submit the plans for EPA’s review within three years of the final EPA rule.  This effectively pushes the compliance deadline for states from 2018 under the CPP to likely 2022.  However, units are given up to 24 months to comply, which effectively pushes compliance deadlines further to 2025.

ACE also aims to encourage energy efficiency by redefining the applicability of the New Source Review (NSR) rules for power plants.  Under NSR, a facility must apply for a permit every time there is a “major modification” to an existing plant.  Under the existing NSR rule a change to facility is considered a “major modification” by measuring the change in annual emissions.  Critics of this approach argue this actually discourages energy efficiency upgrades because: 1) utilities may not adopt energy efficient upgrades due to the lengthy permitting process required; and 2) utilities may want to run plants that are more efficient more often and determining whether a upgrade constitutes a “major modification” based on annual emissions discourages increased operation of more efficient plants.  ACE proposes to change the measure for major modifications to an hourly emission test.  This change could greatly reduce the applicability of NSR to existing plants thereby avoiding the lengthy permitting process and encouraging operations of more efficient plants.  Critics argue NSR ensured the plants could not extend there useful life without adopting new emission reduction technologies.

Despite the radically different approaches to regulate CO2 from the power sector, EPA projects that the reductions under ACE are very similar to CPP.  This is because market forces will continue to push more closures of coal fired power plants as the country moves more to natural gas.  However, critics argue ACE contains no hard cap on emissions, therefore, the projected reductions are not guaranteed.

What is Next for CPP and ACE?

ACE must undergo a sixty day comment period before the rule can be finalized.  If ACE is made final, numerous legal challenges will certainly ensue.  Once again, the future of climate change regulation in the United States will be decided in the courts.

The D.C. Circuit Court of appeals issued a major rebuke to those who believe climate change is no longer relevant in environmental reviews.  In Sierra Club v. FERC, No. 16-1329 (D.C. Cir. Aug. 22, 2017), the Court agreed with environmental groups, including the Sierra Club, that the Federal Energy Regulatory Commission (FERC) failed to adequately analyze greenhouse gas emissions as part of a $3.5 billion dollar natural gas pipeline project.  The project involves construction of a 500 mile long pipeline through Florida.   

FERC Review Authority

The Natural Gas Act (NGA) provides FERC the authority to review and approve interstate pipeline projects, including the environmental impacts associated with the project.  Section 7 of the NGA requires the pipeline owner to obtain a "certificate of public convenience and necessity" from FERC (i.e. Section 7 Certificate).  One component of the Section 7 review is compliance with the National Environmental Policy Act (NEPA) which includes FERC’s preparation of an "Environmental Impact Statement" (EIS).  

The Sierra Club argued that the FERC, in performing it EIS, failed to adequately consider the impacts of emission of greenhouse gases associated with the project.  Specifically, the pipeline would supply natural gas to power plants in Florida which would generate additional greenhouse gas emissions by burning natural gas.  

The Court said NEPA required FERC to consider both direct and potentially indirect impacts from those emissions.  

  • Direct Impacts– quantitative estimate of the downstream greenhouse
    emissions that will result from burning the gas transported by the pipeline or explain in detail why such a estimate cannot be provided;
  • Indirect Impacts- the court did not specify what indirect impacts, which leaves open the question of whether the EIS must analysis whether greenhouse gas emissions will result in more severe storms, agricultural impacts, etc.

Impact of the Decision

First, the decision demonstrates greenhouse gas issues are still alive and well.  FERC must take steps to analyze greenhouse gas emissions as part of its EIS review.  

Second, the decision doesn’t mean the Court took a negative view of natural gas pipelines.  In fact, the Court specifically stated there can be both negative and positive impacts in terms of greenhouse gas emissions from these project.  For example, burning natural gas made available via the pipeline may allow higher emitting coal fired power plants to shut down thereby reducing greenhouse gas emissions overall.

Third, perhaps the biggest impact will be seen on challenges to other projects that must get FERC approval.  The requirement to include evaluation of impacts of projects on greenhouse gas emissions could result in other projects being successfully challenged in Court and may also delay some projects in order to allow required analysis to be included as part of the EIS.

With the surprising and sad news over the weekend of Justice Scalia’s passing, many critical decisions before the Supreme Court suddenly got more interesting. This is certainly the case with the Clean Power Plan. 

Last Week, in the first time in history the Court issued a stay of the effectiveness of the rule while the rule was still under challenge in the lower D.C. Circuit Court of Appeals.  This was a highly unusual move both because the D.C. Circuit denied to grant the stay and because the Court never had taken the step previously.  Many speculated that the Supreme Court’s decision signaled the likelihood that the Clean Power Plan would not survive the legal challenge.

The stay was issued in a 5-4 decision along ideological lines.  It seemed likely that the Court’s ultimate decision as to the legality of the rule would be issued along similar ideological lines.

With Justice Scalia’s passing, the Supreme Court is now split down the middle, with four liberal justices and four conservative justices. 

What this ultimately means for the Clean Power Plan is somewhat uncertain, depending on the timing of the appeal.  First, it appears unlikely the Court will revisit the stay that was issued last week.  This comment appeared in the Atlantic Monthly:

"There is currently no reason to assume the Court will revisit the stay order," said Richard Lazarus an environmental-law professor at Harvard, "It is final as voted by the full Court at the time and is not subject to revisiting any more than any other rule by the Court before the Justice’s passing."

Second, it appears more than likely that the case will be heard by the Supreme Court before a justice can be appointed to replace Justice Scalia.  Based upon the political rhetoric that has ensued since news broke regarding Justice Scalia’s passing, it appears highly unlikely that the Senate will confirm a new appointee by President Obama.  Also, based on current timing, with a decision expected this fall by the D.C. Circuit and a decision next spring by the Supreme Court, it also appears very unlikely the new President will have a replacement Justice confirmed before the Court issues its decision.

I had commented in my previous post on the Supreme Court’s decision to issue the stay that the D.C. Circuit’s decision on the merits regarding the legality of the rule was merely advisory. This comment was based on the assumption the Supreme Court would hear any challenge an render the ultimate decision on the legality.

Assuming no new justice is appointed before the Supreme Court hears the challenge to the Clean Power Plan, the D.C. Circuit Court’s decision would likely decide the fate of the ambitious Clean Power Plan. Assuming no new Supreme Court Justice is appointed, and assuming the Court does vote on the legality of the plan along ideological lines, this could mean the Court would be deadlocked in a 4-4 tie.  If this were to occur, the D.C. Circuit Court decision on the merits would likely be the law of the land.  

The current panel at the D.C. Circuit seems to favor upholding the Clean Power Plan.  The case will be decided by a three judge panel.  Justices Judith Rogers (a Clinton appointee) and Karen Henderson (a George H.W. Bush appointee) have been inclined to vote in favor of EPA’s efforts to regulate greenhouse gases in prior Court decisions.  The third Judge- Sri Srinivasan is an Obama Appointee.

With developments over the weekend, it appears the most significant piece of environmental regulation in decades may have new life.

Yesterday, the Supreme Court issued a stay of the Obama Administration’s Clean Power Plan (CPP) after the lower Court had denied to grant such relief.  Currently, the legal challenge to the validity of the rule is pending before the D.C. Circuit Court of Appeals.  The Supreme Court had never previously issued a stay of a rule in which the legal challenge was pending before the D.C. Circuit.

In a surprising move, the Supreme Court made the stay effective all the way until the Supreme Court weighs in on the legality of the rule. This makes the D.C. Circuit case little more than a preview of the arguments since the rule cannot be implemented until the Supreme Court renders its decision.

The stay was sought by 29 different states and state agencies, as well as various business groups. The decision to grant the stay was made in a 5-4 decision along ideological lines.  

Those seeking a stay must demonstrate that there would be irreparable harm if they were forced to comply while the legal challenges were pending.  The states seeking the stay argued that, despite the fact the most significant compliance deadlines were a couple years away, they were spending significant resources now trying to determine how to comply with the rule.

All deadlines imposed by the rule are on hold until the Supreme Court rules on the plan’s legality. The first deadline was September 6, 2016, when States were required to either submit their implementation plans or request a two-year extension.  

The Clean Power Plan is an ambitious effort to change the fundamental aspects the energy sector in the United States.  It requires power plans to reduce carbon emissions by 32% from 2005 levels by 2030.  The States are called upon to enact individual plans for how they will achieve the required reductions.  Under the rule, State must submit their plans (referred to as State Implementation Plans or SIPs) by 2018 and start achieving reductions by 2022.  

Not only does the stay prevent implementation of the rule until two appeals are concluded (one before the D.C. Circuit and a second before the Supreme Court), it also signals that a majority of the justices question the legality of the rule. Those challenging the legality of the rule must demonstrate that they have a substantial likelihood of success in proving the rule is illegal.  

The crux of the CPP is based upon EPA’s authority under Section 111 of the Clean Air Act.  At issue is whether that provision only provides EPA with authority to regulate technology at the powerplants themselves (i.e. within the "fence line") or whether EPA can set emissions standards across the entire energy sector thereby changing the mix of production to natural gas and renewables. Despite the fact the Court issued the stay order without an explanation as to its findings, its decision to issue the stay signals the Supreme Court may agree EPA has exceeded its authority.  
 

I was fortunate enough to be asked to participate in a radio interview with Jeff St. Clair, WKSU Radio, regarding the Clean Power Plan.  It was an interesting discussion of the legal questions surrounding the plan as well as a broader discussion of the state of environmental regulation in the United States.

Here is an excerpt from the story:

Energy policy through the courts, instead of Congress
“The courts are not the ideal place to be sorting out your environmental policy or your energy policies,” says Koncelik.

Koncelik has the admittedly utopian view that Congress should decide these environmental issues. But he acknowledges that in today’s dysfunctional political system a reasonable compromise from happening.

“So,” he says, “the EPA is forced to act and when they act they do things that are questionable and vague because you’re dealing with laws that are outdated and technology that is radically different than the 80’s.”

“That’s what we’re left with as a country,” says Koncelik, “and until we have real compromise and real discussion, what we’re going to end-up with is regulatory uncertainty which is not good for the economy.”

Congress Fails to Pass Significant Environmental Legislation in Twenty Five Years

One of the points we discussed in the interview is that Congress has not passed new environmental legislation nor significantly amended an existing statute since the 1990 amendments to the Clean Air Act.   Despite Congressional failure to act, EPA has moved forward with thousands of pages of new regulations.  

EPA’s new regulations are based upon authority granted to it by Congress.  However, those regulations often rely on vague terminology or ambiguity in underlying environmental statutes. What results is constant litigation regarding the extent of EPA’s authority or legality of the new regulations.

For example, I am certain that in 1990, Congress never envisioned that the Clean Air Act would be used as the basis to address climate change.  The Clean Air Act principally deals with local or regional air pollution issues, not a complex international issue like climate change.  Remember, even EPA said that the Clean Air Act was "ill suited" to address the issue of climate change prior to embarking on its massive new regulations.

Most recently, the Obama Administration decided to move forward with its Clean Power Plan to address climate change relying upon questionable EPA legal authority under the Clean Air Act. As a result, the are multiple legal challenges pending to this very significant new rule.

Due to the inability of Congress to enact significant changes to existing environmental laws or pass new ones, EPA fills the void.  EPA constantly develops new regulations which are almost always challenged in the Courts.  This results in uncertainty for businesses and, at best, inconsistent environmental policy in the U.S. 

On August 3rd, the Obama Administration and U.S. EPA released the much-anticipated final Clean Power Plan designed to curtail greenhouse gas emissions to combat climate change.  The regulations promise to be the most comprehensive, complex and costly regulatory program ever launched without specific authorization from Congress.   

How the Plan Works

The final plan calls for a 32% reduction in the amount of 2005-level carbon emissions that existing power plants must eliminate by 2030.  How does EPA achieve the reductions?

Performance Rates

EPA establishes both interim and final CO2 emission performance rates for two subcategories of fossil fuel-fire electric generating units (EGUs):

  • Fossil fuel-fired electric steam generating units (coal and oil-fired power plants); and
  • Natural gas-fired combined cycle generating units

Interim performance rates must be met between 2022 and 2029.  The final emission rate by 2030.

The EPA reviewed prior determinations made under Section 111(d) regarding "best system of emissions reduction" (BSER) that has been demonstrated for a particular pollutant and a particular group of sources by looking at technologies already being used.  

Statewide Goals

The rates were established geographically by applying three different strategies to existing fossil fuel power plants. Those building blocks include the following:

  1. Operate Existing Coal Fired Power Plants More Efficiently- reducing carbon intensity of electricity generation by improving the heat rate of existing coal-fired power plants.
  2. Switch from Coal to Natural Gas-  substituting increased electricity generation from lower-emitting existing natural gas plants for reduced generation from higher-emitting coal fired power plants.
  3. Switch from Coal to Renewable Energy- substituting increased electricity generation from new zero-emitting renewable sources (like wind and solar) for reduced generation from existing coal-fired power plants.

By applying the building blocks to the existing plants, EPA determined the average coal plant can reduce emissions in from 2,160 pounds of CO2 per MWh down to 1,305 pounds/MWh by 2030.  Natural gas combined-cycle plants can go from 894 lbs/MWh to 771 lbs/MWh by 2030.  

The emissions rates are then used to establish state wide goals based upon the mix of existing coal and natural gas power plants in the state.  

States can also elect to use a rate-based goal or a mass-based target.  With mass-based targets, the states will have a total amount of CO2 emissions in 2012 and a final goal for 2030.  In otherwords, total metric tons of CO2 emission will be calculated for the 2030 versus individual plant average emission rates.

What are some the pro’s and con’s of rate-based versus mass-based?  EPA believes mass-based will be slightly cheaper to comply with and will allow for emission trading.  Whereas, rate-based allow overall emissions to increase with economic growth (i.e. all power plants must average a certain carbon intensity).

State Complaince Plans

State can elect from a variety of strategies to meet these goals.  Examples of strategies include:

  • Develop renewable energy sources
  • Switch to natural gas from coal-fired power plants
  • Build nuclear or increase production from nuclear
  • Energy efficiency programs
  • Emission trading (i.e. cap-and-trade programs)

Important Changes from Draft to Final Rules

Emission reductions are phased in between 2022 and 2030.  This was in response to criticism by states that the original plan demanded reductions too quickly.

As discussed below, EPA dropped energy efficiency out of concern it weakened the legal authority for the plan. 

The final plan shows more favor toward renewable energy sources to the detriment of natural gas. The final rule calls for 28% (instead of 22%) of all power generate to come from renewable energy sources.

The final rules gave an extension to states to submit compliance plans, from 2016 to 2018.  Also, compliance periods were pushed out from 2020 to 2022.

Legal Basis for the Rules

Fifteen states, including Ohio, have pledged to challenge the legal authority for the Clean Power Plan in Court.  Nine other states have pledged to defend it.  

EPA asserts that it has broad authority under Section 111(d) of the Clean Air Act – New Source Performance Standards (NSPS)- to craft the rules.  At issue is the definition of the term "standard of performance" as used in Section 111.  Does that term apply to the plant itself or can EPA use it to set standards for each state in terms of emissions from its power sector?

Opponents argue the EPA authority under Section 111(d) is limited to requiring certain technologies be installed at the plant itself.  Opponents argue that fuel switching, renewables and a trading program are all well beyond its authority.  If the opponents are successful in their challenge, the fundamental building block of the Clean Power Plan will be eliminated.

The final rule removed one of the strategies proposed for meeting reduction goals- energy efficiency. Many commentators speculate that EPA removed this component from the plan because it was the least legally defensible under Section 111(d) authority.

Another challenge to EPA’s authority will be that Section 111(d) only applies to new sources.  The Clean Air Act Section 112 provides EPA the authority to regulate existing power plants.  Section 112 covers regulation of hazardous air pollutants (HAPs) from existing power plants.

EPA argues there is ambiguity between Section 111(d) and Section 112.  Therefore, where the Clean Air Act contains ambiguity, the Agency argues it entitled to deference so long as it articulates a "reasonable interpretation" of the provision.  See, Chevron USA Inc. v. Natural Resource Defense Counsel.

Chevron was the at issue in the recent MATS decision discussed in my prior post.  In that instance, the Supreme Court held that EPA went way beyond a "reasonable interpretation" of its authority.  However, in other instances, such as the Cross-State Air Pollution Rule, the Court found the EPA did articulate a "reasonable interpretation."  Therefore, it is hard to review the prior Supreme Court cases and discern definitive guidance as to whether the Court would uphold the Clean Power Plan.

The Supreme Court has shown a willingness to support EPA’s effort address climate change.  First, the Court upheld EPA determination that greenhouse gases were pollutants regulated under the Clean Air Act in Massachusetts v. EPA. Second, it upheld the major components of EPA initial greenhouse gas regulations in its Tailoring Rule- UARG v. EPA.  While the Court upheld major components of EPA’s authority to address climate change, the Clean Power Plan is the most ambitious effort to date.

Making matters more difficult to predict how the Supreme Court may rule is the lack of case law interpreting EPA’s authority under Section 111(d).  

On Monday, the U.S. Supreme Court issued the next major climate change decision in Utility Air Regulatory Group v. EPA (UARG).  In reading commentary across the web it appears most think the Court’s decision isn’t really a big deal.  After all, the Court upheld EPA’s permitting authority to regulate greenhouse gases (GHGs) from stationary sources.  This from the Guardian:

"The US Supreme Court largely upheld Barack Obama’s plans to cut carbon pollution from power plants on Monday, delivering critical support for his climate action plan."

The Court’s ruling did limit EPA authority, but most commentators note that the difference in covered emissions is only 83% of the sources instead of 86% of the sources.  So, really what is the big deal?

The Court’s ruling is, in fact, a very big deal for two principle reasons:

  1. The Court held EPA has discretionary authority to regulate GHGs under major source permitting authority, not a mandate as EPA claimed; and
  2. The Court took EPA off its frightening path of ever increasing regulation of smaller and smaller sources of GHGs.

The news media have largely focused on the 83% versus 86% figure in concluding EPA got most of what it wanted.  However, the impact of the decision is more complicated then this simple figure. A review of how EPA got before the Supreme Court is important in order to understand the significance of its ruling. 

Massachusetts v. EPA

The Supreme Court already determined that EPA had authority under the existing terms of the Clean Air Act to regulate GHGs.  At issue in the Court’s landmark decision in Massachusetts v. EPA
was the language in Section 202(a)(1) of the Clean Air Act (CAA) which requires the Administrator of EPA to set emission standards for "any air pollutant" from motor vehicles "which in his judgment cause(s), or contribute(s) to, air pollution which may reasonably be anticipated to endanger public health and welfare."

Back in 2003, the Bush Administration was trying to delay or avoid regulating GHGs under the Clean Air Act.  One action it took was to deny a petition from twelve states and several cities to regulate GHGs under Section 202(a)(1).  EPA took the position that it did not have the authority to regulate GHGs under the CAA and EPA should be more deliberate before embarking on such a massive regulatory expansion.

In a 5-4 climate decision, the Court ruled against the Bush Administration in Massachusetts v. EPA. The Court pointed to the extremely broad definition of "air pollutant" under the CAA and held that EPA was required to evaluate whether GHGs endanger public health and welfare (i.e the so called "Endangerment Finding")

Following the ruling, the Obama Administration attempted to pass comprehensive climate change legislation (cap and trade).  One argument the Administration used to support the proposed legislation was  the threat that without such legislation it would have no choice but to move forward with promulgating rules under the existing CAA.  Even then the Obama Administration commented that the CAA was ill-suited to regulate GHGs.

While legislation was close to passing, health care was the priority, and cap-and-trade died in the Senate.  The Administration soon moved forward with its Endangerment Finding and regulation of GHGs from motor vehicles.

Point of No Return?

EPA has asserted that once the rulemaking process under the Clean Air Act was initiated, there was no turning back.  EPA argued that once it issued its Endangerment Finding and GHGs became a "regulated pollutant" under the CAA, other regulatory provisions under the Act pertaining to stationary sources were automatically triggered.  

Of grave concern was the stationary major source permitting provisions (PSD and Title V programs) which were triggered anytime a source emitted 250 tons or, in case of Title V, 100 tons of a pollutant.  While these thresholds only captured truly large sources when applied to emissions of traditional pollutants, this would not be the case with GHGs.

EPA warned that applying the 100/250 ton threshold to GHGs would result in an unprecedented expansion of regulatory authority over even small sources.  In fact, thousands of previously unregulated sources would be captured and EPA would be overwhelmed with the new permits.  

When EPA was questioned as to why it would embark on regulating GHGs under the PSD and Title V programs when it would cause such dramatic results, EPA said it had no choice.  The Agency claimed the plain language of the Act as well as the decision in Massachusetts v. EPA, legally compelled the Agency to regulate GHGs under the PSD and Title V programs.

In an effort to mitigate the impact of such regulations, EPA published the Tailoring Rule.  EPA said the rule was necessary due to the fact application of the 100/250 tons threshold to GHGs would produce "absurd results."  Therefore, due to these absurd results, EPA claimed it had authority to tailor the thresholds to more practical thresholds.  

EPA’s Tailoring Rule set the GHG trigger at 100,000 tons per year of GHGs and 75,000 tons for existing sources making major modifications.  However, EPA clearly stated that its authority to rewrite the CAA in this manner was only temporary and over time it would be forced to apply the 100/250 tons threshold to GHGs.  In other words, EPA would eventually regulate thousands of new small sources of carbon emissions.

Supreme Court Finds EPA has Discretion But Cannot Rewrite the Clean Air Act

On June 23, 2014, in another 5-4 climate change ruling, the Supreme Court found EPA (as well as the D.C. Circuit Court) were incorrect when it asserted regulation of GHGs from motor vehicles mandated regulation of GHG emissions from major sources under the PSD and Title V programs. The Court held EPA had a choice whether to regulate GHGs under the PSD and Title V program.

The Court also ruled that EPA could not rewrite the CAA through its Tailoring Rule raising the 100/250 trigger thresholds to 100,000 tons.  The Court ruled that the absurd results that would come from application of the 100/250 ton threshold to GHGs really meant the PSD and Title V requirements were not meant to apply to sources solely on basis of their GHG emissions.  Rather, new pollution controls to address GHGs would only be required if the source emitted a previously regulated pollutant over the 100/250 ton threshold (so called "Anyway Sources").

Why the Ruling is So Significant

First, the Court has invalidated EPA’s Tailoring Rule.  The Court said the history behind the 100/250 ton threshold established by Congress showed the legislature’s intent that they not apply to pollutants such as GHGs.  As a result, regulations will not be slowly ratcheted down to cover thousands of previously unregulated sources.  

Second, the Court clearly held that EPA has discretion whether to include regulation of GHGs under the PSD and Title V programs.  It is much easier to justify a large regulatory expansion when you can argue it is mandated under the law.  The Court’s decision eliminates that justification.  This means the Agency actions to regulate GHGs under the PSD and Title V programs could be undone by a future Administration.  

 

 On June 2, 2014, U.S. EPA released its Clean Power Plan Proposal to address carbon dioxide (CO2) emissions from existing power plants.  EPA continues to move forward with climate change initiatives as gridlock in Congress persists over the issue.  EPA’s strategy has been to target transportation and the power sector, the two largest sources of greenhouse gas emissions.

The Clean Power Plan is an interesting mix of federal regulation while attempting to provide maximum flexibility to the states to achieve emission reductions.  EPA would require a 30% reduction in CO2 emission from existing power plants from 2005 levels by 2030.  

However, rather than establishing specific emission limits for each plant, the regulation would establish "goals" for each state to achieve by 2030.  The goals were established by examining each state’s current carbon output and the potential to reduce those emissions.

Formula for Arriving at Goals

EPA has authority under Section 111(d) of the Clean Air Act (CAA) to regulate and set emission standards (42 U.S.C. Section 7411(d)).  Under Section 111(d), EPA must determine the "best system of emission reduction" (BSER) for existing sources.  EPA then must apply the system to determine the level of emission reductions required (referred to as "emission guidelines").

State’s are then tasked with developing their own plans to meet the emission guidelines.  This is where the flexibility comes in.  Rather than specifying each plant must meet a specific emission limit, EPA is allowing the state’s to choose from a variety of options on how to achieve their emission guidelines (i.e. "goals").

EPA provide four general approach to achieving the reductions and refers to those approaches as "building blocks."  These include:

  1. Reducing the carbon intensity at individual power plants through heat rate improvements;
  2. Reducing emissions from the plants that produce the most CO2 emissions by using those sources less frequently;
  3. Replacing high carbon intensity plants (i.e. coal) with low or zero-carbon generation (which means renewable sources or natural gas);
  4. Implementing demand-side energy efficiency programs that reduce the amount of generation needed in the state.

In its proposal, EPA takes the four building blocks and applies them to each individual state through a seven step process.  This formula generates a state-specific CO2 emission performance goal which is measured in average pounds of CO2 per net megawatt hour from all sources in the state.  

(To see the CO2 emission-rate goals for each state click here)

State Flexibility

After determining the amount of reductions needed in each state, EPA then defers to each state to develop its plan for achieving the emission reduction goals.  States can use any component of EPA’s four building blocks or even develop an entirely different methodology for achieving its state goal.

States are also given the option to utilizing either a rate-based or mass-based emission reduction goal.  Under a rate-based approach, emission reductions are determined by comparing the rate of CO2 emission per unit of electricity output (expressed in emissions per megawatt hour).  To establish a rate-based emission limit in the power sector, EPA has traditionally looked at the difference between coal-fired units and natural gas units.  

Under a mass-based approach, the emission reduction is based upon a quantity of reduction from an established baseline.  For example, 30% reduction of the state’s total power plant C02 emissions from 2005 baseline.

States have argued that rate-based method forces states to shut down coal plants and switch to natural gas.  A mass-based approach provides states more flexibility to choose from a menu of options to achieve reductions.  (See, Kentucky’s Comment Letter to EPA on Greenhouse Gas Reduction Policy)

After Congress failed to pass national cap-and-trade legislation in President Obama’s first term, the option is back on the table. State’s can develop an in-state only program or join with other states, such as has already been done by the Western States and Eastern States (RGGI).  Cap-and-trade, while criticized, has proven to be the most cost effective means of achieving emission reductions. 

State’s even have flexibility when it comes to compliance deadlines.  While initially states will be required by 2016 to create a plan that will include some emission reductions, states can qualify for extensions of 1 or 2 years.  

No matter when plans are submitted, states will have to achieve interim goals for reductions between 2020-2029, then meet the state final goal no later than 2030.  By providing for this flexibility, the states can choose when to accelerate their emission reductions.  

In commenting on the flexibility provided states under the rule, the New York Times reported:

“I’ve never seen anything like this, where states get this much flexibility. It’s astounding,” said Dallas Burtraw, an expert on electricity markets with Resources for the Future, a Washington research group. “The E.P.A. is signaling maximal deference to the states.”

Criticism of the Proposal

Too Strong

 Those criticizing the proposal, concentrated on the costs of achieving the proposed reductions.  Business groups, utilities and Midwest states were harshly critical of the proposal.  Opposition is probably best summed up by Indiana Governor Pence who was quoted in the New York Times as stating:

“These proposed regulations will be devastating for Hoosier workers and families,” Mr. Pence said. “They will cost us in higher electricity rates, in lost jobs, and in lost business growth due to a lack of affordable, reliable electricity. Indiana will oppose these regulations using every means available.”

Too Weak

EPA had been criticized for utilizing 2005 as a baseline.  As noted in Bloomberg, half of the emission reductions required have already been met without even a single new regulation being adopted. 

Criticism also is directed at the overall emission reductions required under the proposal.  Some think the cost of compliance has dropped dramatically in recent years.  As noted Harvard Business Review– the cost of renewable have come way down; states have already implemented regional cap-and-trade programs; and natural gas has displaced coal as the fuel of choice.

Comment Period

EPA will accept comments for 120 days after the proposed rule is published in the Federal Register.  Due to the sweeping nature of the proposal,  EPA will, no doubt, be inundated with comments.  

[Photo courtesy www.TheEnvironmentalBlog.org]