Obama’s Clean Power Plan

In June 2013, U.S. President Barack Obama announced a “new national climate action plan” to make America a “global leader in the fight against climate change.”  

As a key part of this plan, Obama directed the U.S. Environmental Protection Agency (EPA) to promulgate first-ever U.S. regulations limiting carbon dioxide (CO2) emissions from new and existing power plants, which account for approximately 31 percent of U.S. greenhouse gas emissions. 

In March of this year, Obama pledged to reduce U.S. greenhouse gas emissions by 26 to 28 percent below 2005 levels by 2025. And just this summer, the EPA finalized the so-called Clean Power Plan (CPP) to strictly reduce CO2 emissions from existing power plants.

Obama’s climate program is timed for forthcoming international climate talks at the UN summit in Paris this December. The goal is a climate framework to replace the Kyoto Protocol of 1997. To do that, President Obama is trying to convince developing countries such as China and India to agree to large CO2 emissions reductions that could harm economic growth.
However, EPA’s new CO2 regulation is in trouble at home.

The 1,560-page rule is expected to impose higher electricity costs across the country, as Obama once predicted. The calculated climate benefits are negligible, even indiscernible.

Moreover, the rule is under challenge as violating both the U.S. Constitution and the Clean Air Act. For that reason, more than a dozen states have sued the EPA, and several governors have expressed an intention to not submit state implementation plans to the agency.

With states opting out, it is unclear whether the EPA has the capacity to implement and administer multiple federal plans for the states. The rule’s regulatory framework was designed for states to submit their own plans, rather than having EPA regulators step in as electricity experts. These legal and political challenges could jeopardize the future of the regulation, and in turn, the president’s international climate change goals.

Background 

EPA’s “Clean Power Plan” requires, by 2030, an aggregate CO2 reduction from existing power plants of 32 percent from baseline 2005 levels, with each state assigned an emissions limit. Eight states are required to cut emissions by at least 41 percent, while four states have no emission target.

The EPA claims the authority to regulate greenhouse gases from existing power plants under Section 111(d) of the Clean Air Act, which sets “standards of performance” for existing stationary sources using the “best system of emission reduction” (considering cost) that has been “adequately demonstrated”.

The EPA asked states to submit compliance plans based on a set of “building blocks.” For the sake of simplicity, these building blocks require states to 1) improve the efficiency of coal-fired power plants; 2) close coal-fired generators and replace them with natural gas-fired power plants; and 3) expand renewable energy generation. Until now, neither the EPA nor any other federal agency has had a role in determining the electricity-generation resource mix.

Historically, decisions over the production, transmission and consumption of electricity have been a state matter, with the federal government playing a limited role. Each state has a Public Utility Commission, sometimes called a Public Service Commission or Corporation, that regulates electric utilities, while state legislatures reserve the right to determine from what sources electricity is produced and consumed.

The federal role is largely reserved to the Federal Energy Regulatory Commission (FERC) – which regulates interstate electricity transmission – and Regional Transmission Organizations, which are independent grid operators responsible for electricity transmission within their boundaries (several of which span multiple states). This decentralized system is based on the principles of federalism enumerated in the Constitution.

The CPP, however, seeks to upend this system. CPP rules will require states to, in effect, restructure the nation’s electricity system, putting the federal government, specifically environmental regulators, in charge of decisions previously reserved to states and electrical engineers. While designed to give the appearance of letting states take the lead, critics charge the regulation amounts to a federal takeover of the nation’s electricity system.

For instance, the EPA claims its “building blocks” are nonbinding and give states the freedom to design their own implementation plans (those plans are due by September 2016 unless states request an extension). The EPA touts this approach as a “fair, flexible” framework that leaves states in control, but the federal instructions will force states to make expensive and otherwise unnecessary changes to transform the way Americans produce and consume electricity.

Cost estimates 

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EPA’s “building blocks” effectively require states to close coal-fired power plants and build new sources of electricity, including natural gas, wind and solar.

In its Regulatory Impact Analysis, EPA projects coal-fired generation to comprise 27 percent of total U.S. generation in 2030, compared to 39 percent in 2014. Generation from non-hydro renewable – mostly wind and solar – rises to almost 12 percent of total generation in 2030, compared to about 5 percent today.

Meanwhile, the U.S. Energy Department’s Energy Information Administration (EIA) projected 50 gigawatts of coal-plant closures from 2014 to 2040 due to the CPP, compared to the baseline scenario, most of which occur by 2020. That is enough capacity to provide electricity to tens of millions of households.

This mandated transition away from hydrocarbon energies will raise electricity costs by shifting America’s fuel mix away from the most affordable energy sources and toward the most politically favored, which happen to be some of the most expensive. FERC Commissioner Phillip Moeller calls this “substituting environmental dispatch for economic dispatch” and warns that it could “disrupt” the country’s competitive wholesale electricity markets.

Critics have documented how “environmental dispatch” will come at a high cost. Using data from the EIA and FERC, a recent study commissioned by the Institute for Energy Research compared the cost of electricity from existing generation sources to new sources.

Our study found that electricity generated from existing coal-fired power plants is one-third the price of electricity generated from new wind installations, the administration’s preferred source. ($38.40 per megawatt-hour for existing coal compared to $112.80 for new wind coming online in 2019). Existing coal is also, on average, about half the price of new combined cycle natural gas, which EIA calculates to cost $73.40 per megawatt-hour. These figures are derived from self-reported data the government collects annually from individual generators.

Requiring states to close existing coal plants and build new facilities from more expensive energy sources will necessarily raise electric rates. This logic is revealed in several economic analyses of the proposed rule. A study by NERA Economic Consulting, for instance, found the regulation would cost the economy $366 billion between 2017 and 2031, with residents of 43 states seeing double-digit percentage increases in their electricity bills.

A separate study conducted by Energy Ventures Analysis found that residential electric and natural gas bills would be $293 higher in 2020 compared to 2012, an increase of 15 percent.

Since energy is a key input for virtually every commercial and industrial process, these price hikes will ripple throughout the economy, eliminating jobs and slowing growth. Vulnerable populations that spend a larger share of their budgets on energy – including low-income households, the elderly, and those on fixed incomes – will suffer the most. EPA Administrator Gina McCarthy admitted this point in a recent interview, when she stated, “We know that low-income minority communities would be hardest hit.”

EPA “benefits” rebutted 

While EPA acknowledges some price increases under the rule, inflicting the most harm on those who can least afford it, the agency believes these costs are small and outweighed by climate and health benefits. The EPA claims the rule will result in net benefits of $26 billion to $45 billion annually in 2030.

Critics, however, point out that the agency does not consider the full range of costs. As Wisconsin PSC Commissioner Ellen Nowak testified, “…the EPA failed to adequately consider the total costs of the proposed rule,” including “necessary upgrades to the gas and electric transmission infrastructure that will add significantly to the cost of compliance. EPA also does not include provisions to avoid stranded costs and it is not clear that the agency considered the remaining useful life of these generators when determining the cost and impact of the rule.”

Montana Public Service Commission Chairman Brad Johnson remarked, “Not only will this rule destroy thousands of quality jobs in Montana’s coal industry, the double-digit increase in electricity rates that will likely result constitute nothing less than a new tax on energy, and there is no tax that places a more disproportionate burden on middle and lower income Montanans than a tax on energy.”

In congressional testimony, Indiana Department of Environmental Management Commissioner Thomas Easterly explained, “At a time when Indiana is doing all that it can to grow its economy and create jobs, the EPA’s proposal creates the very real possibility that increased energy costs will slow our economic progress and raise people’s utility bills.”

The Ohio Public Utilities Commission wrote in its EPA comments, “Given the combination of higher direct electricity costs and the fact that these costs would flow to every part of Ohio’s economy, Ohioans would undoubtedly face financial hardship as a result of the CPP’s sweeping reforms if the rule is finalized in its proposed form.” Electricity experts from other states echo these sentiments.

Symbolic benefits 

While the CPP imposes serious economic costs, it does not accomplish the administration’s stated goal of addressing climate change. In fact, EPA’s own models calculate the rule’s global-warming reduction as a miniscule 0.018 degrees Celsius by 2100, an imperceptible amount.

Any marginal reduction in U.S. CO2 emissions is swamped by expected emission increases in developing countries like China and India, which are using more energy and emitting more CO2 as their economies expand and they lift people out of poverty. Indeed, while U.S. CO2 emissions have declined by 10 percent between 2000 and 2012, Chinese and Indian emissions have risen by 156 percent and 85 percent, respectively, and are expected to rise further in the coming decades.

By itself, the EPA’s carbon regulation is symbolic. Its goal is to show the world that the United States, as the world’s largest economy and second largest greenhouse gas emitter, is leading on climate change and the rest of the world should follow suit. In fact, the administration cited the CPP and other elements of the president’s “climate action plan” as evidence the United States is “leading on the international stage to bring nations large and small to the table to pledge to act on climate change.”

Such logic reverses the historical record. Large, developed countries like America became rich by burning natural gas, coal and oil, which are the most abundant, reliable, and affordable fuel sources. Developing countries like China and India are taking the same consumer-driven route, using fossil fuels to alleviate poverty and build a middle class.

Their leaders have expressed reluctance to give up these affordable energy sources, especially given that developed countries are only symbolically taking the lead on emission reductions. With the Paris summit just months away, countries responsible for about two-fifths of global greenhouse gas emissions, including India, have yet to submit emission targets to the UN.

Meanwhile, domestic legal and political challenges threaten to delay or even defeat the EPA’s carbon regulation. Even if these challenges ultimately fail, the appearance that the president’s signature climate-change regulation may not survive could undermine his efforts to negotiate an international climate change agreement.

Legal challenges 

More than a dozen states have sued EPA on the grounds that the rule violates states’ rights under the U.S. Constitution and the Clean Air Act. In a request to stay the final rule, the states outline a variety of legal issues, including that it “unlawfully violates the States’ authority to best determine the contours of their own intrastate energy sector.”

Respected legal scholars from across the political spectrum agree with the states’ assessment. Constitutional scholar and Harvard Law Professor Laurence Tribe has described the rule as “burning the Constitution,” including the Tenth Amendment. As Tribe explained in oral testimony before Congress, the regulation relegates states to “puppets dancing to the tune of a federal puppeteer.”

A paper authored by David Rivkin and others for the Federalist Society magazine Engage concurs, explaining that the rule “violates the Tenth Amendment’s anti-commandeering doctrine and therefore exceeds the federal government’s constitutional authority.”

Constitutional questions aside, legal experts believe the regulation also runs afoul of the Clean Air Act. According to a brief filed by Murray Energy Corporation, EPA has no authority to regulate existing power plants under both Section 111(d) and Section 112 of the Clean Air Act. As the states explain in their request for stay, “The Clean Air Act bars EPA from regulating power plants under Section 111(d) because the agency is already regulating those same sources under Section 112 of the Act. Section 111(d) prohibits the regulation of ‘any air pollutant’ emitted from a ‘source category…regulated under [Section 112].’ 42 U.S.C. § 7411(d).”

State resistance 

The Clean Air Act was designed to incorporate the principles of cooperative federalism, which is to say the federal government sets broad goals and states take the lead implementing those goals. This arrangement makes sense, as states possess the best knowledge of their local and individual circumstances. States are also closer to affected parties and are thus easier to hold accountable for their actions than the federal government.

EPA’s carbon regulation under Section 111(d) sets a national emission target and individual state goals and gives states the opportunity to submit plans showing how they intend to reach their emission target. The EPA then has the opportunity to either accept or reject state implementation plans. States also have the right to not submit implementation plans, in which case the EPA would impose a federal plan.

Several governors do not intend to submit state plans. Oklahoma Governor Mary Fallin, for instance, signed an executive order in April, stating: “As Governor, I will not submit a Section 111(d) SIP to ensure Oklahoma’s compliance with such a clear overreach of federal authority.” In addition, about half of the states have introduced or enacted legislation requiring legislative approval before a state environmental agency submits an implementation plan to EPA.

While less strong than a governor stating he or she will not submit a plan, legislative hurdles could delay EPA’s timeline for implementation.

Such resistance has created an unanticipated problem for EPA. The Clean Air Act was designed so that states would to take the lead and submit plans. But with holdouts under the CPP, environmental regulators would suddenly find themselves in the electricity business. As FERC Commissioner Moeller has warned, “The most radical change may be that state air regulators and other state officials without a background in the electricity sector are now going to be charged with developing a state compliance plan.”

Conclusion 

With the UN climate summit approaching, President Obama intends to hail his “climate action plan” to demonstrate U.S. leadership on the issue. But will this be enough to secure an international agreement to limit greenhouse gas emissions, especially from developing countries more concerned about economic growth than global climate change?

The president’s signature climate program is in trouble if the analyses of numerous state agencies, many without an ideological opposition to climate-change policy, are to be believed. Saddling ratepayers with higher electricity costs is at odds with the mission of many state regulators to ensure reasonable rates, especially given the CPP’s imperceptible impact on global warming.

There is real doubt whether the CPP will survive legal and political scrutiny. Fence-sitting countries at the UN climate summit have much to think about regarding President Obama’s ability to hold up his end of the bargain.
 

 

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Alex Fitzsimmons

Alex Fitzsimmons is the Manager of Policy and Public Affairs at the Institute for Energy Research. In his role, Alex manages research, communications, and outreach for various IER initiatives. Prior to this position, Alex worked at an award-winning research, public affairs, and advertising firm and in the communications department of a bipartisan association serving state legislatures. Alex holds a B.A. in political science from The George Washington University
 

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Robert L. Bradley, Jr.

As the author of seven books, most recently Edison to Enron: Energy Markets and Political Strategies (John Wiley & Sons, Scrivener Publishing), Bradley has applied the classical liberal worldview to recent corporate controversies and energy policy debates. His energy primer (coauthored with Richard Fulmer) is Energy: The Master Resource.   He is currently a member of the International Association for Energy Economics, the American Economic Association, Southern Economic Association, and the American Historical Association.

Robert L. Bradley, Jr.
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Institute for Energy Research

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