CHAPTER 8 IMPLEMENTING SECTION 111(D) OF THE CLEAN AIR ACT: THE PATHWAY TO REGIONAL CAP-AND-TRADE PROGRAMS?

• Jurisdiction: United States

Climate Change Law and Regulations: Planning for a Carbon-Constrained Regulatory Environment
(Jan 2015)
CHAPTER 8
IMPLEMENTING SECTION 111(D) OF THE CLEAN AIR ACT: THE PATHWAY TO REGIONAL CAP-AND-TRADE PROGRAMS?
Craig Gannett ¹
Co-Chair, Energy and Environmental Practice Group
Davis Wright Tremaine LLP
Seattle, Washington

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CRAIG GANNETT is Co-Chair of the Energy and Environmental Practice Group at Davis Wright Tremaine LLP in Seattle, Washington. He focuses his practice in the fields of electric utility regulation, renewable energy development, and climate change-related regulation. He advises clients on a broad range of regulatory matters, including those relating to hydroelectric dams, wholesale electricity transactions, transmission lines, creation and trading of renewable energy credits, and the impacts of potential changes to the Columbia River Treaty. As a former Senior Counsel to the U.S. Senate Committee on Energy and Natural Resources, he advises with respect to the Federal Power Act, the Clean Water Act, the National Environmental Policy Act, and the Endangered Species Act, as well as EPA climate change regulations under the Clean Air Act. Craig also teaches Climate Change Law at the University of Washington School of Law, and is a Vice-President of the Henry M. Jackson Foundation.

In June, 2015, the U.S. Environmental Protection Agency (EPA) will likely finalize its Clean Power Plan, thereby requiring the nation's existing fleet of fossil fuel-fired electric generating units to cut carbon dioxide emissions by 30% from 2005 levels by 2030.² If the final rule follows EPA's proposal, it will require each state to meet a set reduction goal, but will also allow states to pool their resources and goals.

This article argues that a regional cap-and-trade system is the best way for most states to meet their obligations.³ By leveraging the economies of scale of the existing regional power system, a regional cap and trade approach would likely allow states and the electricity industry to achieve emission reductions at the lowest possible cost.⁴ With a larger pool of emitters and emission reduction opportunities, states with relatively stringent goals would be able to accomplish them more cheaply, and states with less stringent goals would be able to capture the

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benefits of additional emission reductions in ways that would go unrealized under an every-state-for-itself approach.⁵

These benefits can only be captured if states overcome their political differences sufficiently to work together on a regional basis. The record to date with respect to regional cap and trade systems is mixed, but the additional impetus of federally-mandated goals provides a fresh opportunity for states to seek mutually-beneficial outcomes.

This article begins by providing an overview of the draft Clean Power Plan, including its support for a regional approach. It then reviews the pre-Clean Power Plan efforts, both successful and unsuccessful, to create regional cap and trade programs in North America. Next it turns to the potential benefits of such a regional approach, followed by a discussion of the potential barriers. It concludes with a proposed path forward.

I. OVERVIEW OF EPA'S CLEAN POWER PLAN

A. EPA's proposed best system of emission reduction (BSER) consists of four building blocks

Section 111(d) of the federal Clean Air Act (CAA) gives EPA the authority to regulate emissions of air pollutants from existing sources by requiring states to adopt emissions "standards of performance" for those sources.⁶ The standards of performance must reflect EPA's determination of the "best system of emission reduction [BSER] which ... has been adequately demonstrated."⁷

The Clean Power Plan proposes to regulate carbon dioxide emissions from existing fossil-fuel electric generating units (EGUs).⁸ States would require these "affected EGUs" to reduce emissions through application of a BSER consisting of four "building blocks" that the EPA considers adequately demonstrated in real-world applications to date:⁹

1. Heat rate (efficiency) improvements at coal-fired power plants. ¹⁰

2. Emission reductions by redispatching from coal-fired power plants to natural gas combined cycle (NGCC) plants. ¹¹

3. Expansion of renewables. ¹²

4. Reduced power consumption through demand-side energy efficiency. ¹³

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EPA used these building blocks to develop state emission reduction goals expressed as emission rates (pounds of CO2 emitted per megawatt hour of power generated). However, emissions trading schemes, like the cap-and-trade approach advocated in this article, typically track the total mass of participants' emissions. To accommodate this alternative, EPA has provided guidance for translating the initial rate-based goals to mass-based equivalents.¹⁴

In utilizing the building blocks to achieve their goals, states are authorized by the Clean Power Plan to use "market-based trading programs."¹⁵ A state could thus implement the BSER by participating in a cap-and-trade system that captures the emissions reduction benefits of the building blocks.

B. Each state must submit an implementation plan for EPA approval

Each state must submit a state implementation plan (SIP) by June 30, 2016, unless EPA grants a one-year extension.¹⁶ A SIP must identify the extent of the plan's reach, both geographically (in the case of a multi-state plan) and in terms of which "affected entities" the plan covers--potentially a broader reach than the "affected EGUs" that are the focus of the Clean Power Plan.¹⁷ The SIP must also include the relevant emission target, the detailed standards to be used in reaching it, and an explanation of how those standards will reach the goal at various points in time.¹⁸ The SIP must also describe informational and procedural requirements imposed on affected entities and the states themselves, demonstrate legal authority to implement the plan, and justify the state's various calculations and projections.¹⁹ If a SIP will regulate affected entities other than affected EGUs, it must include projections and monitoring plans for those entities.²⁰

C. The draft regulations strongly encourage a regional approach

The Clean Power Plan offers a number of benefits to states that choose a regional approach, particularly if it "reflect[s] the regional structure of electricity operating systems that exist in most parts of the country."²¹ Partnering states will be given an extra year to develop their SIP,²² and may submit a single SIP on behalf of the group.²³ States can also join an

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existing regional program, rather than creating a new compliance program from whole cloth.²⁴ EPA also projects that a regional approach will result in substantially lower compliance costs.²⁵ In addition, EPA has solicited comments on "other potential mechanisms for fostering multi-state collaboration," suggesting that the final rule may contain further incentives for regional collaboration.²⁶

II. A BRIEF REVIEW OF PRE-CLEAN POWER PLAN EFFORTS TO CREATE REGIONAL CAP-AND-TRADE SYSTEMS

A. The failure of the Western Climate Initiative

1. Initial agreements and loss of political cohesion

In 2007, the governors of Washington, Oregon, California, Arizona, and New Mexico agreed to "collaborate in identifying, evaluating and implementing ways to reduce GHG emissions in our states collectively."²⁷ Toward this end, the states agreed to set a regional goal for emission reductions and develop a "regional market-based multi-sector mechanism, such as a . . . cap and trade program" to reach that goal.²⁸

The agreement, known as the Western Climate Initiative (WCI), also included shared information gathering and management in support of such a system, promotion of renewables and energy efficiency, advocacy for regional and national climate policy, and identification of measures for climate change adaptation in the region.²⁹ By 2008, the governors of Montana and Utah and premieres of British Columbia, Manitoba, Ontario, and Quebec joined the original five states.³⁰ Working together, the 11 jurisdictions released the Design for the WCI Regional Program in 2010.³¹

The program called for a cap-and-trade program spanning "most sectors of the economy" and including almost 90% of the economy-wide emissions from the 11 jurisdictions.³² Each jurisdiction was to implement its own cap-and-trade program.³³ A regional allowance market would link the systems, capturing efficiencies as widely as possible by accepting each jurisdiction's allowances for compliance in any other participating jurisdiction.³⁴ Each

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jurisdiction would have the opportunity to verify that another jurisdiction's program was consistent with its own requirements before linking the two.³⁵

From 2008 to 2011, however, political and economic realities set in. Arizona, New Mexico, and Utah all elected governors opposed to cap-and-trade.³⁶ Meanwhile, state legislatures in Washington, Oregon, and Montana failed to advance toward enactment of cap-and-trade legislation.³⁷ Finally, in November, 2011, six states withdrew from the WCI, leaving only California and the four Canadian provinces.³⁸

Nevertheless, vestiges of the WCI straggle on. Western Climate Initiative, Inc., persists as a non-profit corporation whose board consists of officials from California, British Columbia, and Quebec.³⁹ It provides administrative and technical support to state and provincial governments implementing carbon emissions trading schemes.⁴⁰ These three governments, as well as the provinces of Ontario and Manitoba, continue to work together through the WCI to "develop and harmonize their emissions trading program policies."⁴¹

2. Constitutional barriers to WCI

If the WCI had somehow maintained its political cohesion, it most likely would have been struck down under various provisions of the U.S. Constitution designed to prevent intrusion by states into areas of federal...