Experts Review State Options for Clean Power Plan Compliance

During a recent CSG eCademy webcast, “EPA’s Clean Power Plan and Interstate Trading Options,” experts discussed potential compliance options for states through the trading of emissions credits. 

The U.S. Environmental Protection Agency’s final Clean Power Plant was released Aug. 3 and aims to reduce carbon dioxide emissions from existing fossil fuel-fired power plants by 32 percent from the 2005 levels by 2030. The plan promotes emissions trading among states by giving states the opportunity to design plans that allow their power plants to use out-of-state emissions reductions to achieve compliance. 

Sarah Adair, a senior policy associate at Duke University’s Nicholas Institute for Environmental Policy Solutions, said there are several key decisions that must be made by states when assessing emissions trading options. 

“Whether to allow trading across state borders in the first place is a big decision point for states,” she said. “To the extent that states are interested in trading, whether to pursue a trading-ready plan or a formal multistate plan, which was the only option in the proposed rule that is still an option in the final rule, is the first order of questions.”  

Adair said trading-ready plans are simpler, and they don’t require an up-front, formal interstate agreement. But some states may have reason to want a multistate plan, including a desire for “certainty about who the other trading partners are.”

States also have to consider how to measure carbon dioxide reductions. The Clean Power Plan allows for states to use either a mass-based goal, measured in the total short tons of carbon dioxide required to be reduced, or a rate-based goal, measured in pounds per megawatt hour. 

The mass-based trading model establishes a tracking system for allowances, “which is essentially a kind of bank account for entities that need the allowances for compliance and any other entity that might be participating in the market,” Adair said. The rate-based model uses emission rate credits, instead of allowances, that can be traded by states. 

Allowances and emission rate credits are not interchangeable, therefore states have to decide which model is best and take into account how other states will measure emissions reductions, Adair said.  

Political economy issues also should be addressed as states come up with their compliance approaches, said Matt Larson, an associate at Wilkinson Barker Knauer LLP. Larson cautioned that implementation of the Clean Power Plan at the state level will not be as straightforward as it might otherwise be due to possible political pressure to distribute emissions allowances more equitably.

“I think there will be pressure to distribute allowances in certain ways,” he said. “I think there will be pressures for free allowances to be given out.” 

Gary Helm, lead market strategist in the Emerging Markets department of PJM Interconnection, a regional transmission organization that coordinates the movement of wholesale electricity in 13 states and the District of Columbia, said the cost to comply regionally is less expensive than if states were to implement plans on a state-by-state basis.
He expects few grid reliability issues under the Clean Power Plan. 

“Natural gas is the elephant in the room that has the largest impact on this,” Helm said. 

Due to the expectation of cheap gas for years to come and the flattening of electricity demand growth, there are ample resources to meet demand, he said. “There is an expectation that there will be a lot more gas on the system” and this will inform states as they make decisions about compliance.