On Tuesday, President Obama announced that he has ordered
EPA to develop a new set of greenhouse gas emissions regulations for power plants,
which commenters have guessed might actually mean power plants and other
emitters as well. Certainly, it will include new and existing power plants (which have never before been even
discussed as a target for greenhouse gas regulation), and my guess it that the
EPA will have its hand plenty full without trying to expand its list of
enemies.
As I have continued to stump for a carbon tax, it has become
clear that messaging has to be directed at politicians that do not believe
climate change is actually happening. There are plenty of Republicans and
fossil-state Democrats that say they
don’t believe the science is settled, but don't believe it, but do feel like they cannot antagonize Tea
Party voters that will punish heretics. The new stump speech has to be oriented
at providing cover to those who know a carbon tax is the right thing, but are
afraid of a challenge from Tea Party candidate who is adroit enough to avoid
use of the word "rape" in a sentence.
Part of my new stump speech is this: the Clean Air Act is
not going away. The Obama Administration has set a timeline that will pretty
much ensure that regulations will be in place by the time he leaves office. The
key to that is the deadline June, 2016, by which date states will be required
to submit their State Implementation Plans required under section 110 of the
Clean Air Act. After that, you can bet that the new EPA regs will be here to
stay.
President Obama did not reveal any details of what the new
regulations will look like, a bit of a disappointment to environmental
organizations. But it is clear that the new regulations will include a New
Source Performance Standard for new power plants and a regulation for existing
power plants as well, the latter being the most controversial part. The new
regulation will be a rate standard, requiring that power plants emit no more
than a certain rate of emissions per Megawatt-hour, and most watchers believe
that the standard will be something like 1,000 pounds of carbon dioxide per
Megawatt-hour. There will also likely be a threshold emissions amount, below
which a power plant would not be regulated, and if the tailoring rule is any
indication, that threshold emissions amount be 25,000 tons of CO2 per year. If
all of the above turns out to be true, then there will be approximately 1,000
power plants that will have to do something to comply with the regulation
(plants that emitted at least 25,000 tons of CO2 and emitted CO2 at a rate of more than 1,000 pounds per
Megawatt-hour.
Interestingly, the President said he has directed EPA to
make use of market base instruments in implementing the new rule. What that
means is unclear, but it is probably not cap-and-trade, since that is likely
not authorized by the Clean Air Act. It could involve some other form of
emissions trading, such as allowing permits to be bought and sold to enable
individual emitters to comply with the regulation.
How might that work? It is not unprecedented, as EPA had,
earlier in its history allowed trading to achieve compliance. EPA's bubbling
policy did not seem to offend any legal strictures under the Clean Air Act.
My guess is that the policy will involve emissions trading,
but not cap-and-trade, at least not in form. Firms emitting over 25,000 tons of
CO2 will have to get their emissions rate down to 1,000 pounds per
Megawatt-hour, and they will be able to buy credits to meet that. That is, the
emissions rate, measured over a year (that is my guess as to the relevant time
period that EPA will set), is just the calendar year emissions divided by the
electricity generated during that same calendar year. If a plant emitted 25,100
tons of CO2 in a year, and generated 50,000 Megawatt-hours of electricity that
same year, its CO2 emissions rate would be 1,004 lbs/MWhr, over the limit by 4
lbs/MWhr. It cannot "buy" 4 lbs/MWhr, but must instead buy the 100
tons worth of credits necessary to get its rate down to 1,000 lbs/MWhr. My
guess is that an emitter would be allowed to buy the credits to get it below
25,000 tons for a year and therefore out from under regulation altogether; that
could potentially allow some small but super-dirty emitters to continue to
operate for a relatively small tax.
Oddly enough, this could, under some perfect market
assumptions, amount to something like cap-and-trade after all. If we assume
that there are no transaction costs, and we assume that there will be trading
as long as the price of credits is greater than zero, then this program amounts to
cap-and-trade. Here is why. Just imagine now that the CO2 emissions and
electricity produced from 2009 are fixed, and will be the same in some future
regulated year, say 2018. In 2009, there were 1011 plants that emitted over
25,000 tons of CO2 and at a rate exceeding 1,000 lbs/MWhr; 483 below that rate.
The total emissions from those 1,493 plants was 2,395,790,827 tons, or about
2.4 Gigatons, or about 4.8 trillion pounds of CO2. Total electricity generated
by these plants was 2,777,582,189 MWhrs, for a total, 1493 plant-wide average
of 1,725 lbs./MWhr. Something's gotta give in order for all 1493 of these
plants to get to 1,000 lbs./MWhr. Some will have to cut back, some will switch
to gas, and some will use carbon capture and storage (maybe), but there cannot
be enough buying and selling to get everybody under 1,000.
If we assumed that no plant became more efficient in terms
of CO2 emissions per MWhr, and we assumed that the exact same amount of
electricity produced in 2018 as in 2009, then it would be a straight
cap-and-trade with the cap at 2,777,582,189 MWhrs x 1,000 lbs =
2,777,582,189,000 lbs, or 1,388,791,095 tons. That's a reduction of about
Gigaton off a baseline of 2.4 Gigatons.
But here is the catch, and it is the big one: if combustion can be made less
carbon-intensive, then there could be an increase
in emissions. Imagine a natural gas-fired power plant in emitting below the
1,000 lbs/MWhr rate (natural gas-fired power plants generally do) and
generating electricity. Such a plant would have excess credits to sell. What if
it doubled in size? Then it would have twice as many credits to sell. It could
then turn around and sell those credits until its rate creeps up to 1,000
lbs/MWhr. Notice that nothing in this scenario happened except one natural
gas-fired power plant doubled its capacity, and all of a sudden the cap is
looser.
This has been just an exercise. There are lots and lots of
rules and adjustments that EPA would make, many of them to address the problems
highlighted by this blog entry. We have seen a lot of them before in the Clean
Air Act Amendments creating the sulfur dioxide cap-and-trade program. The
upshot is that this is going to be a very complicated piece of regulation,
putting a lot of lawyers to work. As a law professor, I guess that is good
news. For the rest of you, it is a tax.
Now, does a carbon tax start to sound better?
