Economists at The Brattle Group issued a policy brief today that examines the compliance and implementation challenges facing states and utilities under the Environmental Protection Agency’s (EPA) proposed CO2 emissions standards for existing fossil units under the Clean Air Act (CAA) Section 111(d), known as the Clean Power Plan (CPP). The brief also highlights potential issues with relying on the EPA’s Regulatory Impact Analysis (RIA) for making informed decisions concerning CPP implementation.

Among the key issues highlighted in the policy brief are:

  • The different CO2 emissions standards allowed by the EPA for compliance are not equivalent in many important dimensions. Under the CPP, the EPA provides states with several rate- and mass-based implementation options to choose from in setting their state plans. The authors find that the standards under each option do not result in equivalent emissions reductions or compliance costs. A key consideration is the “headroom” affected generation units have to increase their output going forward relative to 2012; states with significant headroom are likely to find rate-based standards result in lower emissions reductions and compliance costs than under a mass-based standard.
  • State decisions concerning allowance allocations and additional complementary policy measures will be critical to projecting compliance costs and resource decisions. While allowance allocation decisions are not expected to impact future emissions, the choice of how to allocate allowances (for states with mass-based standards) and whether to pursue additional complementary policies will have significant impacts on compliance strategy preferences, resource-specific revenues, resource development, and market prices for compliance instruments. Such decisions are likely to be politically contentious and driven by each state’s specific policy objectives.
  • Compliance outcomes expected under each state’s implementation decision will largely depend on the decisions of other states. States will need to consider decisions by its “Neighbors” (states that are electrically connected in a pooled market area) and its “Friends” (states with compatible CPP programs). The role of Neighbors and Friends in a state’s implementation mechanism significantly complicates the analysis of options and the decision process itself. The challenge of encouraging Neighbors to adopt a uniform approach to CPP implementation may prove insurmountable and states may find it more productive to seek Friends outside of their region.
  • The RIA is unlikely to provide useful information for states deciding between alternative implementation approaches. A review of the RIA finds that EPA assumptions result in outcomes that are not indicative of expected state-level impacts under alternative implementation approaches. The limited impact of the CPP implementation on coal retirements and EPA-modeled restrictions on allowance trading under a nationwide mass-based approach are two examples. Assumptions about early coal plant retirements and intensive energy efficiency programs may also prove to be unfulfilled. For this reason, states and stakeholders should view these cost guidepost results with caution as they consider their compliance options going forward.

The policy brief, “The Clean Power Plan: Focus on Implementation and Compliance,” is available for download below. The Brattle Group has an extensive team of experts capable of helping states and utilities identify efficient, effective responses to these new environmental standards.

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