The Clean Power Plan’s Legal Path

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Background

The Clean Power Plan (CPP) issued by the U.S. EPA in August 2015 represents a hallmark in regulatory and judicial actions.  However, on February 9, 2016, the U.S. Supreme Court stayed implementation of the CPP by a 5-4 vote pending judicial review at the lower court level.  This decision in no way reflects a decision on EPA’s rule itself.  Rather, the Supreme Court ruling—made before the death of Associate Justice Antonin Scalia—has simply delayed implementation of the EPA rule pending review at the U.S. Court of Appeals for the District of Columbia (DC Circuit).  The DC Circuit is scheduled to hear the case on June 2, 2016 with a decision to be rendered later in the year.  The DC Circuit is likely to be favorably disposed to EPA’s plan as our analysis below shows.  Their ultimate ruling is critical because if the Supreme Court is later deadlocked at 4-4 on an appeal of the DC Circuit’s ruling, then the DC Circuit decision will stand (although it could be reviewed again later once a full complement of nine justices is empaneled).

The CPP issued by EPA is based on Section 111 of the Clean Air Act (CAA) authorizing performance standards for both new and existing sources.  The plan seeks to reduce power plant emissions through state compliance plans (SCPs) to be implemented by 2022.  More detail on the CPP can be found here: https://www.epa.gov/cleanpowerplan.  However, despite flexible compliance mechanisms, 27 states and other manufacturing groups filed to appeal the CPP rule.

Prior legal challenges to block EPA from finalizing CPP rules had failed up until the Supreme Court stay in February.  Generally, CPP opponents claim EPA is overstepping its authority under Section 111(d) of CAA, and since EPA’s plan extends deeply into unchartered legal territory, the Supreme Court decided to stay further actions.  While EPA cannot compel the states to take additional action on the CPP right now, it can still advance understanding of emissions trading and benefits of greenhouse gas (GHG) regulation.  Almost 20 states are still moving forward with development of their SCPs.

Legal Issues

When the Clean Air Act was enacted and later amended in 1990, there were two different versions of Section 111(d) in the final statue from the House and Senate.  These differences were never reconciled in Conference Committee before being signed by the President.  Indeed, EPA chose to follow the Senate version of this section in the CPP because it prohibits the agency from writing a second rule controlling a pollutant that is already regulated.  Since GHGs are not regulated from power plants elsewhere in Section 112, the EPA would be free to regulate them under Section 111. In fact, EPA believes it is simply upholding current law following its 2009 Endangerment Finding that GHGs (including CO2) meet the necessary guidelines to be regulated under the existing Clean Air Act, and thus the CPP is not intended to foster conflict but merely adhere to existing law.

The CPP’s definition of the “best system of emission reduction” is also being challenged. EPA believes this system can be applied to entire power sector on a statewide basis.  In contrast, opponents believe the system is limited to individual emitting sources, since all emission sources within a state are not equally integrated into the power sector.  CPP proponents favor EPA’s expertise and flexibility in determining the scope of the rule.

Additionally, federalism is being advanced as an issue by some states that do not wish to implement a national policy that runs counter to state authority.  This same issue has arisen related to water and healthcare with the states as well.

Timing is also a challenge. While the DC Circuit plans to rule on this case later in 2016, because of the annual rotation of law clerks in the DC Circuit every August, appellate justices could lose research continuity and support soon after the hearing thereby impeding progress.  Separately, if the Supreme Court elects to hear an appeal of the DC Circuit decision in early 2017, a final decision is likely not until 2018 from the Supreme Court on the merits of the case.  Regardless, the final outcome could hinge on the 2016 elections, as the party that wins the White House will likely appoint the next justice to the Supreme Court (replacing Justice Scalia).

Precedent and Conclusion

History shows a judicial deference to EPA decisions.  The authors reviewed all judicial rulings at the DC Circuit since President Obama took office (2009-present) in cases where EPA was the Appellee and an Appellant was challenging an EPA policy (or ruling) previously upheld at a lower court.  Out of the 289 cases reviewed, EPA’s record at the DC Circuit was 239 wins, 30 losses, and 20 mixed results.  Only slightly more than 10 percent of the time did EPA lose outright on cases decided before the DC Circuit, evidence of deference to EPA at the Appellate Court level.  Recall the DC Circuit’s ruling might prove to be pivotal because lower court rulings stand when the Supreme Court has a tied vote (e.g. 4-4).

The international Paris Agreement in December 2015 adds broader interest and pressures for GHG regulations.  The Paris commitments may need additional policies in the U.S. beyond the CPP and tax incentives to succeed—an opportunity for tools under existing law to be used for the first time to reduce emissions.  For example, Section 115 of the Clean Air Act could support GHG action beyond the power sector in the U.S. by offering broad country reciprocity over any air pollutant anticipated to harm or threaten public health or welfare in a foreign country.  The U.S. already treats GHG emissions as pollutants and the United Nations Framework Convention on Climate Change offers the U.S. the reciprocity required to pursue Section 115.

The CPP is a part of an ongoing public debate in the U.S. regarding energy and environmental policy.  Pivotal to that public debate will be the judicial rulings on the CPP likely to arrive in early 2017 by the DC Circuit.  With the prospect of Congressional action on climate policy unlikely, all eyes are on the courts to decide if the first, nationwide policy limiting GHG emissions in the U.S. will take effect or not.

Addendum: On May 16, the DC Circuit announced that oral arguments will be delayed until September 27, 2016.  Furthermore, the case will be heard en banc by the full panel of DC Circuit judges, rather than the usual, smaller three-judge panel.  Experts believe that the en banc review at this step of the judicial review will expedite final resolution of the legal issues surrounding the Clean Power Plan.

CE3 Blog by Daniel H. Karney, Department of Economics and Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3. May 2016.

 

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Carbon Pricing and Better Market Signals Will Help U.S.

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Rather than perpetuate the current uncertainties from the European Union and stalled domestic legislative/regulatory efforts to revitalize the failing Kyoto Protocol platform, we might need a clean slate in the U.S. to make progress towards the upcoming international greenhouse gas (GHG) negotiations in Paris in 2015. Prudent future planning for large energy users must incorporate a price assumption for CO2 emissions to evaluate resource investment decisions for electric generation assets with longer useful lives.

A fresh start
A better domestic regulatory approach might let markets discover prices for carbon and sustainability efforts which could elicit bipartisan support. For example, even a seemingly straightforward cap-and-trade system requires extensive government involvement and impacts price discovery by the setting of mandates, price collars, allocations of allowances and other similar provisions. This impedes the market’s organic pricing process—arguably the best way to address carbon and solve regional energy challenges worldwide. Countries could establish their own targets consistent with international norms and seek to achieve regional or hemispheric goals. Or, an even better approach might be built around a strategy devised by independent power producers for the management of a subset of options, such as mercury emissions and combined power and heat (CHP) projects. This approach would incentivize the right economic conduct in a free marketplace promoting accurate price discovery. To be most impactful, regulatory efforts should be structured on a hemispheric basis for the next decade (2020-30) and rolled up globally thereafter, encouraging regional partnerships for progress in the interim.

Under a fresh start where domestic regulations promote a free market approach, we could provide every stationary source and mobile source of GHG emissions an allowance of carbon per megawatt hour (MWh) or mileage per tank of fuel, or delivered power, heat or cooling content, no matter what the technology, fuel, age of plant, location or past carbon emissions levels. Exceptions could be provided for small commercial and industrial users to protect small business. Using various modeling techniques based on U.S. Energy Information Administration (EIA) data to verify total carbon emissions per unit, the U.S. could implement a strategy that sets a declining schedule for allowances over the next 10-20 years. The U.S. Department of Energy with EIA assistance could annually update the table of carbon values to correct for actual consumption levels of heat, fuel and electricity in the U.S. Rising heat or electricity usage would not increase the cap on carbon emissions. The market would decide thereafter how to limit and implement effective carbon management in the economy to meet national goals.

How it would work
Parity is key. A new biomass plant would get the same carbon allowance as a new or existing coal plant. The same for a wind installation or a new gas-fired plant. The market would determine the price valuation for the carbon allowances. Any improvements in efficiency boosting the miles per gallon or the MWh from a specific volume of fuel would increase available allowances for trading purposes. Additional efficiency improvements would be funded by selling extra carbon allowances on the open market. In this scenario, owners of the older, less-efficient plants using coal or oil face the true market-based costs of their carbon management strategy as determined by the market each year. Historical least-cost dispatch becomes “least-emissions dispatch” because the external costs of the environmental and emissions dumped into our ecosystems are now assessed. For these outdated plants, their choice becomes clearer—use clean coal technologies, use a different fuel, upgrade and increase efficiency, retrofit, alter the mode of operations from base-load operations, purchase carbon allowances, or close the facility. This decision would not be able to be postponed for old, stale plants until 2030; action would start in the marketplace a year after enactment of the new regulations. This will then launch a march to competitiveness, jobs recovery, efficiencies and energy infrastructure modernization. Expect changes to occur even in states using 19th-century fuels in facilities built in the 20th century, without the infrastructure necessary to compete and solve 21st-century challenges and problems. A united, national energy policy could emerge based on this fundamental policy reform grounded in sound economics and proper reflection of fossil fuel costs to our socioeconomic system.

The learning curve
All prior carbon pricing systems since the Kyoto Protocol have failed in their ostensible goal of environmental protection and carbon reductions. Our policymakers are ardently striving to find proper price discovery for the cost of removing carbon and other forms of degradation. But in all instances, the wealth transfer is generated to the older and worst carbon-polluting facilities, and older fossil allowances for convenience generate false cost savings. The best choices for the future are not made when allowances are provided by regulatory or government fiat based on continued levels of emissions. Right now allowances under trading schemes are provided for the favored; nothing of real economic or environment value is created, and minimal environmental benefits are achieved. The EU trading system has borne that lesson out, while newer U.S. trading models in California and New England seek to correct the issue.

Only 16% of allowances are directly transferred to end-use customers, others are only filtered through intermediaries or shareholders. This tends to transfer the economic rents to the utilities, as 40% of all world carbon suppliers consider those allowances as pass-through costs in their rates from customers, while retaining the rent values for their shareholders. In the U.S., many of these same utility power plants have already qualified for stranded cost recovery or the separate beneficial outcome of tax normalization. Market-based outcomes are foregone; and rent transfers have occurred with no improvement in the assets or infrastructure or competitive energy policies since 1978. The customer is not served: markets do not work properly and the customer effectively pays twice for the underlying generation assets and choices in carbon management made by the utility. Can the U.S. EPA achieve better objectives in rulemaking under its endangerment finding? We will soon find out in 2015.

A new path
Let’s not repeat the same errors from the EU carbon trading over the past decade. U.S. experiences with SOX, NOX, and mercury offer better guidance to build upon. We cannot afford to make this mistake in a global economy where developing country markets do not carry the burdens of such legacy decisions and ratemaking schemes. The accurate inclusion of costs for carbon are essential to strategic company planning, competitive products and market positions under a sound U.S. energy policy. U.S. products, strategies and solutions for carbon management will offer the innovation sought by companies and countries in the global marketplace for growth, innovation, and ideas to foster a better outcome for the capitalist business model.

CE3 Blog by Michael J. Zimmer, Executive in Residence & Senior Fellow, Ohio University; Edited by Elissa E. Welch, Project Manager, CE3

Little by Little

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To some people, “environmentally-friendly” car manufacturing means electric cars or ethanol-fueled engines—“big ticket” items. Admittedly, I was one of those people, especially concerning cars. It’s easier to think about the “big” things when it comes to evolving technology—an entire car or an entirely different way to make gasoline. I’d always thought of driving a car as an “all or nothing” decision between convenience and environmental responsibility. I was very impressed, then, how Honda of North America has streamlined their manufacturing processes to take the little steps towards greater energy efficiency, those that are incorporated before they complete a finished product.

Honda changed its process of painting cars by thinking outside the box. Shubho Bhattacharya, senior staff engineer for Honda, featured in a video shown at CE3’s energy workshop in September 2013, created an algorithm for a system that completely changed Honda’s painting processes and has helped Honda to reduce its emissions targets. Bhattacharya’s work has created huge economic and environmental gains for the company.

In the same way that Bhattacharya was able to translate the abstract idea of changing the world into a tangible outcome, every day companies worldwide make small changes to their operations, creating positive impacts for the environment. Often their effect cannot be immediately seen, but their impact can be immediately felt. Oftentimes, impact is noticed in accolades and public recognition.

Honda has continued to gain industry, national and international recognition for their efforts to reduce some of the byproducts associated with their operations. In 2011, Honda achieved its goal of sending zero waste to landfills from its manufacturing operations in North America. In January 2014, the U.S. EPA recognized two of Honda’s Ohio plants with Energy Star Certifications for the eighth year in a row. Energy Star certified companies perform in the top 25 percent of all companies in their industries in energy efficiency.

Not only does Honda efficiently use its energy, it also generates industry-leading solutions to reduce CO2 emissions. The company began 2014 with a new wind turbine farm used in the company’s Russell’s Point Transmission Plant in Logan, Ohio. Honda is now the first major auto manufacturer with a plant that gains the majority of its electricity from on-site wind power. This is just another “small” step for Honda making an impact through its operations and on industry standards.

CE3 engages companies like Honda to build networks of peers to share the ways in which they have incorporated energy or environmental practices into their operations and remained profitable. During CE3’s “Workshop for Efficiency, Emissions and Energy Choices in Ohio” in September 2013, businesses from industries as diverse as paper production to home insulation showed how such small changes can have large impacts on the environment—little by little. Many organizations discussed the steps they believed would yield the best results for their company to while complying with U.S. EPA requirements and maintaining profitability. Here are a few takeaways from the workshop:

  • Include everyone’s input. Ask for and incorporate ideas from employees ranging from the CEO to those on the shop floor. Each and every position brings a different perspective and fresh insight to an issue. Communication, cooperation and coordination are key to cutting-edge innovation.
  • Think small steps with a big impact. Gradual changes can still lead to large benefits over time without excessive costs. Each small step represents movement toward the goal of improved energy efficiency for a better environment.
  • Use federal regulations to your advantage. Federal regulations can be an opportunity for the company to set new goals and engage in new projects. Instead of thinking of regulations as restrictions, use them as a chance to be innovative and grow the company’s sustainability message.
  • Share your successes. Forums like CE3’s energy workshops and webinars are a great opportunity to share your progress and exchange ideas with a diverse group of energy efficiency leaders—your peers. Watch for strategies from different industries that can be fine-tuned and applied to your own.

 

Following all those steps may not lead to emissions reductions as big as Honda’s right away, but each small step can make large impacts in bettering the environment. Corporations, groups of people, and individuals can make a collective effort to improve our natural environment. In the words of renowned anthropologist Margaret Meade: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.

By Seaira Christian-Daniels, CE3 Undergraduate Research Scholar