EPA’s Existing Source Carbon Rule: Former EPA General Counsel Discusses Legal Issues

by Marlo Lewis on June 3, 2014

Today on E&E TV, Roger Martella, a partner at Sidley Austin and former EPA general counsel, discussed some of the legal and economic issues raised by EPA’s carbon “pollution” rule for existing power plants, which the agency released Monday (June 2, 2014).

The rule requires states, on average, to achieve a 30% reduction in power-plant carbon dioxide (CO2) emissions below 2005 levels by 2030. It allows states to meet their respective targets through four main strategies: increase the efficiency of coal electric generation, substitute natural gas generation for coal generation, substitute renewable and nuclear generation for fossil-fuel generation, and reduce electric demand by industry and other end-users. To implement those strategies, states may use various policy options including cap-and-trade, renewable electricity mandates, and demand-side management programs.

In this brief post, I will state the gist of some of interviewer Monica Trauzzi’s questions and excerpt from Martella’s responses.*

Q: How much flexibility is EPA actually giving states to comply with the rule?

RM: On the one hand, the word that was probably used the most during Administrator McCarthy’s presentation [on Monday] was “flexibility,” and she kept her promise to give the states as much flexibility as possible. And from one perspective that’s true. I think EPA’s basically saying any way you want to reduce greenhouse gas emissions, we’ll find a way to make it work. But what she didn’t discuss as much was the other side of that coin, which is the numeric targets that EPA’s set for individual states, now, I think 49 states, state-by-state numeric targets. In some cases those are extremely aggressive, not flexible, and EPA makes it very clear these will be mandatory, binding targets on these states.

Q: Some states have widely disparate CO2 reduction targets. Why are some in the 20s in terms of percentage and some up near 60?

RM: EPA’s applied a very complicated kind of four-factor formula, and from what we can tell, what it seems to do is bias against those states that have existing coal facilities but the potential for natural gas renewables and nuclear. And what EPA seems to be doing is saying when you have the potential for other types of energy, we’re going to put the pressure on you to really phase out your coal and take advantage of that capacity that you have in those states.

Q: EPA measures emission reductions against a 2005 baseline. Does that make the rule more or less stringent than would a later (e.g. 2012) baseline?

RM: Depends on what state you’re in. I think for many states the EPA would say, “We’re giving you a head start. We’re going back to an era where greenhouse gas emissions were higher than they are today, so we’re giving you that little leap forward.” But for a state like Texas that because of the growth of its economy has actually seen greenhouse gas emissions increase over the years despite more efficiency, it’s actually a significant setback for them. I think we’re going to see Texas, as is not uncommon, be the state most adversely impacted by this. I’m hearing numbers of 52 to 60 percent reductions in greenhouse gases by 2030 because of the issue we talked about with the coal and the gas, as well as the base-line effect on it.

Q: EPA expresses the states’ CO2 reduction requirements as rate-based goals (lbs. CO2 per megawatt hour) rather than mass-based goals (tons CO2 avoided or reduced). Why did EPA set rate-based standards?

RM: I think there’s probably twofold. There’s a technical reason and a political reason. On the technical side, I assume they decided that they could come up with a more uniform methodology on a rate-based approach and say, “We’re going to apply a standard formula, come up with rates for each individual state, it’s harder to do on a mass-based approach.” I also think from a political perspective mass-based sounds more like cap and trade, and I have to imagine a couple months ahead of the midterm elections nobody wanted to be talking about cap and trade today. Having said that, EPA does put the option in for states that are already adopting a mass-based approach. They can switch over and do a conversion, but they don’t make it mandatory.

Q: Administrator McCarthy promoted multi-state, market-based programs. Is that a smart option for most states?

RM: Well, I think the winners today are California and the RGGI states. California, which has A.B. 32, just in the last 12 months adopted a new regulation that says, “We will allow other states to link with us.” If you’re a state that can participate with California, you’re looking at this burdensome, 700-page regulation, and you’re looking at the existing California system. It’s probably going to be pretty tempting to say, “Well, maybe we should work with these guys, who’ve already figured it out.”

Q: How difficult will it be for states to meet their targets with existing technologies?

RM: I think that for some states like Texas they’re going to say that this is definitely going to be impossible, shutting down the growth that they’re already achieving.

Q: How legally defensible is the rule?

RM: EPA is for the first time allowing renewable energy and end-use energy efficiency to be a factor in setting a standard for coal and gas facilities, and some of the standard-setting we talked about like with Texas I think will be borderline arbitrary and capricious. So it’s going to raise a host of legal issues come next year, when no doubt this rule will be challenged.

Q: Is the existing source rule consistent with the new source rule that EPA published in January?

RM: I’ve always looked at an existing source rule as a subset of what EPA’s trying to do in the new source rule, something that doesn’t go as far. This actually goes much farther than a new source rule in terms of reach — in a new source rule they say for coal facilities we’re only going to look at coal facilities in setting the standard. For existing sources for coal facilities, they say, “We’ll look at coal, gas, nuclear, renewable energy and end-use efficiency. And, by the way, we’re not only going to hold coal operators liable; we’re going to allow states to hold everyone else liable, including renewable energy providers, under the standard as well.” So this is a much, much broader interpretation than even the new source rule was.

* Lightly edited for grammar with RM’s permission.

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