What to Watch for in EPA Carbon Regulations for Existing Plants

The U.S. Environmental Protection Agency (EPA) is expected to propose first-of-a-kind greenhouse gas (GHG) emission limits for existing power plants by June 2014. The EPA will do so under a rarely used provision of the Clean Air Act, known as Section 111(d). Here are some of the key questions that the EPA faces in crafting its forthcoming regulations.

What Kind of GHG Limits Will Be Imposed?

Section 111(d) authorizes the EPA to prescribe performance standards for existing sources that emit GHGs. Although the EPA has identified six primary GHGs that endanger the world’s climate, carbon dioxide (CO2) is the most prevalent (measured in terms of its potential global warming impact), and fossil fuel electric generating plants are the largest source of CO2 emissions in the U.S. Since the EPA is not required to regulate all GHGs or to regulate all sources that emit a particular GHG, the EPA will likely start its regulatory regime by proposing performance standards only for fossil-plant emissions. The EPA will likely reserve similar authority to impose, in the future, performance standards under Section 111(d) for other GHGs, such as methane and nitrous oxide, and upon other industrial sources that emit significant CO2 or other GHG emissions.

Will the EPA Prescribe Uniform or Differentiated Limits?

Performance standards are typically expressed as maximum rates of emissions per unit of output, for example, pounds of CO2 per MWh. As a very rough approximation, existing coal-fired plants produce approximately twice as much CO2 per MWh as combined cycle plants. This CO2 performance differential is attributable to the higher carbon content in coal and higher heat rates of coal plants.

The EPA might prescribe a uniform, national power-sector performance standard. Alternatively, the EPA might prescribe higher performance standards for coal-fired steam boilers than for combustion turbines, both simple cycle and combined-cycle. Further differentiation may be introduced because Section 111(d) relies upon state implementation plans, rather than a uniform national plan. Thus, the EPA might prescribe different performance standards for each state, based on its historic generation mix.

How Will the EPA Justify the Stringency of Performance Standards?

From a climate policy perspective, the EPA’s goal is to achieve substantial reductions in the aggregate level of power sector CO2 emissions. President Obama has established an economy-wide target for reducing the nation’s GHG emissions to 17% below 2005 levels by 2020. A key challenge for the EPA is whether it can prescribe performance standards that will lead to CO2 emission reductions from the power sector at least as large and as quickly as the president’s overall target.

From a legal perspective, Section 111(d) might constrain the EPA’s discretion to set the stringency level of proposed CO2 performance standards. Section 111 requires that performance standards “reflect the degree of emission limitation achievable through the application of the best system of emission reduction which… the Administrator determines has been adequately demonstrated.” Among the most controversial issues confronting the EPA are how to determine the “best system of emission reduction” (BSER) for power plant CO2 emissions, and how to determine that BSER has been “adequately demonstrated.” Some commentators contend that BSER must be determined based on emission reduction strategies and technologies that operators can implement “within the fence” of the power plant. Other commentators contend that BSER may be determined for the electricity sector as a whole based on regulatory measures that can be imposed “beyond the fence” to reduce aggregate load (for example, by end-use energy efficiency and demand side management measures) or to force a shift in generation mix away from coal to natural gas and to renewables (such as by pricing carbon in electricity dispatch models or imposing renewable portfolio standards).

How BSER is determined matters greatly because “within the fence,” existing coal and natural gas plants might not be able to achieve more than 4% to 5% reductions in heat rates and CO2 emissions. However, “outside the fence” policies and measures might reduce demand for fossil-fuel generation and induce a shift in the sectoral fuel mix that could, in the aggregate, achieve CO2 emission reductions of at least 17% to 25% from the existing fleet.

How Will State Implementation Plans Reduce the Overall Cost?

Section 111(d) is enforced through the EPA-approved state implementation plans. This opens up the possibility that, however BSER is determined, the EPA might encourage state adoption of sector-wide policies and measures that enable a target level of CO2 emission reductions to be achieved at least cost for the electricity sector as a whole. The EPA might endorse statewide or region-wide emissions trading systems, similar to those in California or under the Regional Greenhouse Gas Initiative. The EPA might also encourage state deployment of energy efficiency measures and renewable portfolio standards.

Given that the starting point for regulation will be the EPA-prescribed performance standards only applicable to power plants, states may need to design creative trading and crediting systems that translate CO2 emission reductions achieved throughout the electricity sector into compliance obligations imposed on fossil fuel power plants. ■

Mark Perlis (markperlis@dwt.com) is a partner in Davis Wright Tremaine’s energy practice group in the firm’s Washington, D.C., office.