The Clean Power Plan: Friend or Foe of California's Climate Policy?

• Jurisdiction: United States,Federal,California
• Author: by Elena Saxonhouse
• Publication year: 2016
• Citation: Vol. 25 No. 1

The Clean Power Plan: Friend or Foe of California's Climate Policy?

by Elena Saxonhouse^*

The United States Environmental Protection Agency finalized the Clean Power Plan ("CPP"), the first federal rule to limit carbon dioxide pollution from existing power plants, in October 2015. At the time, California's Global Warming Solutions Act to reduce greenhouse gases (commonly known as AB32), was already nearly a decade old. As a result, the state is several steps ahead of EPA in regulating climate-changing air pollution. California is in its fourth year administering a cap-and-trade program for heat-trapping gases and on track to meet AB32's mandate to reduce greenhouse gas pollution to 1990 levels by 2020.

Even while touting the state's own progress, California's leaders have emphasized the importance of national and international action on climate change to stave off threats like prolonged drought, increased wildfires, coastal erosion, flooding, and damage to the state's fruit and nut production.¹ They have sided strongly with EPA in defending the CPP, describing it as a critically important step toward international action to stabilize the climate.² California policymakers and the state's energy stakeholders also have reason to be optimistic about the effect of the CPP on California's efforts to implement its climate goals in the state and region. The CPP could put pressure on other states to enact similar programs, increase demand for California's clean energy technologies and generation sources, and lower costs of compliance for California sources by expanding the market for allowances - all while encouraging ever deeper cuts in greenhouse gases across the region. But the new overlay of federal regulation also poses challenges for California, casting a shadow of uncertainty over that rosy picture.

I. CALIFORNIA'S APPROACH TO GREENHOUSE GAS REGULATION

Enacted in 2006, AB32 required the California Air Resources Board (CARB) to adopt regulations to reduce greenhouse gases to 1990 levels by 2020. The centerpiece of CARB's efforts to achieve this goal is a cap-and-trade program for six heat-trapping gases. The program began with the power and industrial sectors in 2013, and expanded to cover transportation fuels and residential and commercial use of natural gas in 2015. The state auctions a capped number of trade-able allowances, which declines by 3% each year.³ To demonstrate compliance, regulated sources must surrender one allowance for each ton of greenhouse gas emitted.⁴

The design details of California's cap-and-trade program were developed in collaboration with the Western Climate Initiative, formed by a group of western states and several Canadian provinces. Pursuant to principles developed by the WCI to facilitate linkage among cap-and-trade programs, California and Quebec have linked programs and jointly auction pollution allowances. Currently, California is the only state still participating in WCI, but it is still in active discussions with other states about linking carbon markets. Even while seeking to facilitate linkage, California must abide by a requirement that it link only with programs that are "equivalent to or stricter than" California's.⁵

Beyond its leadership in developing an effective cap-and-trade system - the first in the nation to cover several major sectors emitting greenhouse gases - California also provides one example of how revenues from the sale of allowances can be reinvested in public programs. Auction proceeds are used to further reduce greenhouse gases or other harmful air pollution. After receiving input through public workshops, a team of state agencies submits to the Legislature and Governor a recommended three-year plan for the funds, a portion of which must benefit disadvantaged communities.⁶ Funded projects include a variety of initiatives to promote energy efficiency, public transit, low-carbon transportation and affordable housing.

The Environmental Defense Fund's assessment of the first two years of California's program found it to be a resounding success: "California is proving that it is possible to limit, price, and reduce the state's greenhouse gas pollution while spurring continued growth of the state's economy."⁷ California's GDP growth outpaced national growth in 2012 and 2013, and the state experienced robust job growth while emissions decreased by nearly 4%. Participation in the market for allowances was strong and the allowance price stable. By the end of 2014, the state had collected $2.65 billion through the sale of pollution allowances.⁸ The Legislature and Governor appropriated $1.4 billion for a variety of clean energy and community projects in the 2015-16 fiscal year.⁹

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In addition to the cap-and-trade program, California has a number of complementary programs to reduce greenhouse gases, including a low-carbon fuels standard, a renewable portfolio standard ("RPS") for utilities, and requirements to make buildings more energy efficient. Last year, the Legislature amended the RPS to require that utilities procure 50% of their energy from renewable sources by 2030. Renewable energy accounted for more than 22% of the power produced in the state in 2014. With the full suite of programs, the state intends to reduce greenhouse gas emissions to 40% below 1990 levels by 2030 and 80% below 1990 levels by 2050. California is a recognized leader in its efforts to reduce greenhouse gases across multiple sectors of the economy and to create an electric grid that is not dependent on fossil fuels.

II. ENTER THE CPP

Whereas AB32 gave CARB broad latitude to implement regulations to address climate-changing pollution,¹⁰ the CPP stems from a narrower set of legal requirements. Under section 111 of the Clean Air Act, EPA must adopt nationally applicable "performance standards" for new facilities that emit dangerous air pollution.¹¹ Once EPA adopts these new-source performance standards ("NSPS") that cover certain pollutants for a category of sources, it must also establish emissions guidelines for existing sources in the category. States are then tasked with developing plans with standards of performance to reduce those pollutants from existing sources within each state's borders. Section 111 standards of performance - for both new and existing sources - must reflect the emission reductions achievable through application of the "best system of emission reduction" (BSER) that EPA finds has been "adequately demonstrated" after taking into account costs, energy requirements, and any non-air quality health and environmental impacts.¹² EPA formally proposed the NSPS for CO2 emissions from new fossil-fuel fired power plants in January 2014, and the following summer proposed performance standards for existing sources in this category - the CPP. EPA finalized both proposals in October 2015.¹³

The general framework of the CPP is similar to that of many other Clean Air Act programs. EPA quantifies the pollution reductions required and states must craft plans that establish standards of performance requiring their sources to achieve those reductions. If a state chooses not to create a plan for the state's sources, EPA will do so.

The CPP provides one nationally-applicable carbon dioxide performance standard for existing fossil steam (primarily coal-fired) power plants and another for natural gas combined cycle (NGCC) plants. These rates are expressed in pounds of CO2 emitted per megawatt-hour (MWh) of electricity generated. EPA derived the rates by calculating the CO2 reductions that could be achieved by (1) running coal-fired plants more efficiently; (2) replacing generation from coal-fired plants with generation from NGCC plants; and (3) replacing generation from both coal and gas plants with generation from renewable energy. These measures reflect recent trends in the electric sector that are expected to continue.

The CPP performance rates begin in 2022 and become more stringent over the course of several multi-year compliance periods. The rates stop declining in 2030, but state plans must require sources to comply with the 2030 rate in perpetuity.¹⁴ EPA expects that by 2030 the regulated sources will have reduced CO2 emissions by 32% compared to a 2005 baseline nationwide. The CPP required that states submit an implementation plan or a request for extension to EPA by September 2016, but this requirement was effectively eliminated by the Supreme Court's February 2016 order staying the rule.¹⁵

Many regulated sources, particularly fossil steam plants, will find that even with on-site efficiency improvements, their CO2 emissions will exceed the required performance standard. These sources will need to purchase or earn "emission rate credits" (ERCs) to "adjust" their rates. ERCs are a new instrument unique to the CPP. Depending on how a state crafts its plan, these credits (measured in MWh) can be awarded to new renewable and nuclear energy projects, as well as to programs that result in verified energy efficiency savings. Several other resources, like biomass, combined heat and power, and certain existing gas plants, can also earn ERCs, though the accounting is more complicated. The project proponent earning the ERC can use the credit to help its own covered power plants demonstrate compliance - adding the MWh to the denominator of its rate, thereby lowering the whole rate - or sell it for another's use.

If this regulatory structure sounds quite different from California's approach, it is. EPA recognized that this "rate-based" framework would be difficult to implement and might complicate pollution control efforts in states that already run cap-and-trade programs based on emission allowances. Thus, EPA gives states the option of instead limiting the total CO2 emitted by regulated sources in the state in each compliance period -...