One of the fundamental premises of the Clean Air Act is that harmful emissions will be reduced over time by EPA periodically tightening standards. The Clean Power Plan is no exception to that rule. While the Act contemplated that most reductions would occur via the more stringent standards being applied to new facilities (or to existing facilities when they are modified), EPA has also done so even with the equivalent, but typically less onerous, 111(d) standards for existing sources. In fact, last year EPA proposed such a downwards revision (in the direction of less pollution) to the emission standards for municipal landfills.
Now that the Clean Power Plan is final and is winding its way through the D.C. Circuit on its way to the Supreme Court (the D.C. Circuit briefing was completed last week and an extraordinary two-day argument has been scheduled for June 1-2), it is time for policy makers, utilities, and regulators to start thinking about what comes next, since from its perspective EPA—intentionally—left much on the table in terms of emissions cuts.
They did so because challenges to EPA regulations come in two basic forms:
- “The regulation is illegal because the statute does not give EPA the authority it is exercising,” and
- “EPA has the authority to regulate, but it is impossible to meet the standard that EPA has imposed”.
From Day 1, it was clear that the legal issue of whether the Clean Air Act gave EPA the authority to go outside the fence line—requiring emissions reductions far beyond what could be accomplished by simply improving the efficiency of coal-fired power plants—would be in play. Thus, by making the regulations less stringent between the proposed and final rules, EPA largely took the issue of whether it was feasible to meet the standards off the table.
This helps explain the collective shrug from the utility industry as to whether they would be able to reach the CPP targets. This may reflect private deals to award cap-and-trade allowances for free, as the utilities almost universally request. But we note that earlier this month Dominion Resources, one of the country’s most notoriously anti-regulation utilities, showed up in the D.C. Circuit to support the CPP. Dominion argued that the rulemaking:
… is compatible with current trends toward additional renewable and natural gas generation in the power sector based on market conditions and customer demands, as well as already-finalized state and federal environmental requirements aimed at pollutants that have long been subject to federal regulation under the Clean Air Act.
In other words, for them at least, no big deal.
But, assuming that the Supreme Court upholds EPA’s authority and Hillary (or Bernie) becomes President, EPA will be under enormous pressure, both domestically and internationally, to revise those standards. The domestic pressure will come from environmentalists who believe the CPP is too lenient and unambitious. The international pressure will come because (in our view), the United States will miss its 2025 Paris target. Significant additional reductions from the power sector will be necessary in order to reach that target by 2030.
The Supreme Court will decide the CPP’s fate very late in 2017 or in early 2018. Assuming that the Court upholds EPA’s authority, it will send the CPP back to EPA to figure out new timelines for states to submit their implementation plans. That will provide the EPA with the perfect opportunity to simultaneously revise the 2030 targets.
The $64 question is how much more will EPA ratchet up the 2030 CPP targets. We hesitate to guess since there are so many variables in play:
- Come 2018, what will overall U.S. and power-sector emissions be?
- What will be the projections for both of those numbers in 2025 and 2030?
- Is the economy – and electricity demand – growing strongly or is it still stagnant?
- How did Hillary do in the coal-heavy critical swing states of Pennsylvania and Ohio?
- Is the shale gas production revolution and accompanying low gas prices still in full swing?
As a legal matter, EPA would be constrained only by the Act’s requirement that the agency take into account the standards’ cost. However, the whopping benefits numbers generated by the agency’s use of the Social Cost of Carbon—and additionally the assumed benefits of the reductions in emissions of other pollutants—mean that there would be a considerable way to go before the costs of lowering the CPP’s CO2 cap outweighed the apparent benefits of doing so.
Politically, the assessment will perhaps be somewhat different. The business community has already cried foul over the existing CPP burdens. Going beyond what is seen as feasible through fuel switching and a smooth integration of new renewable capacity is another matter, especially if it means taking away a big part of the revenue windfall the utilities have mentally already booked for those free allowances (since many less would be available to them). And that’s where the political context described above will come back into play.
But make no mistake about it. If Hillary wins in November, the EPA modelers down in Research Triangle, North Carolina, will get the green light to start (or we suspect, continue and intensify) work on the CPP 2.0 standards. And they will be tighter than what we’re contemplating today.
 Procedural challenges – and they are at issue in the CPP case – are a third flavor but, as the name implies, do not challenge the substance of the agency’s action.