Economists at The Brattle Group issued a policy brief that examines the primary features and implications of the Environmental Protection Agency’s (EPA) proposed CO2 emissions standards for existing fossil units under the Clean Air Act (CAA) Section 111(d). The brief also outlines key questions that states and electric industry participants will need to evaluate while assessing the reasonableness of the EPA’s proposed rule, evaluating their carbon abatement options, and establishing their State Implementation Plans (SIP) for meeting the standards.

Among the key issues highlighted in the policy brief are:

  • The state-by-state standards do not directly indicate relative burdens to comply. First, the standards are defined in terms of an unintuitive emissions “rate” that includes fossil generation in the numerator and fossil plus selected non-fossil supply and demand resources in the denominator. This means, for example, that states with little fossil generation can achieve relatively large “rate” reductions through small percentage increases in renewable generation or energy efficiency. Second, since some states will have more low-cost carbon abatement opportunities than others, compliance costs will not be proportional to required reductions.
  • The standards are based on numerous simplifying assumptions that contribute to target reductions that may diverge from what is readily possible. In estimating the reductions each state can achieve, the EPA assumes, for example, that all states within a region have the same renewable generation potential. They also assume implicitly that all nuclear plants are at the same risk of retirement.
  • The rule treats resources with similar emissions asymmetrically. Compliance with the standard will be measured in a way that does not count retention of most existing, zero-emitting nuclear or hydro resources the same as other existing renewables, new renewables, or new energy efficiency investments. This could distort investment and retirement decisions and raise compliance costs. However, states will have the flexibility to adopt compliance programs that restore a more symmetric treatment and reflect CO2 abatement benefits from all resources.
  • Commenting on and preparing for the rule will require considerable analysis. After understanding the basics of the rule, states and utilities will have to analyze how different strategies would affect their expected costs, risks, and flexibility of compliance. For example, states will have to choose between a rate-based standard and a prospectively-equivalent mass standard, which would affect not only the state’s ultimate target (if the world evolves differently from projections), but also how it would want to structure interstate CO2 emissions trading arrangements. The various compliance approaches will also differentially alter the prevailing market prices for power and shift incentives for different kinds of resource development or use.

The policy brief, “EPA’s Proposed Clean Power Plan: Implications for States and the Electric Industry,” is available for download below.

View Brief