Later this summer, the US Environmental Protection Agency (EPA) will release its final Clean Power Plan, setting carbon emissions goals for existing power plants. This is the fourth post of ten in a new series—What to Watch For in EPA’s Final Clean Power Plan—in which RFF experts address what to look for when the final regulations are released.
Perhaps the greatest challenge in EPA’s Clean Power Plan proposal is coordination among states. EPA intentionally avoided explicitly introducing a nationwide cap-and-trade program after Congress declined to do so and instead has provided sweeping discretion to states to decide how to meet regulatory goals. Coordination would reduce the costs of compliance and is important to the smooth operation of power markets. In the proposal, EPA would allow states to develop multi-state compliance plans in order to reduce costs, but that planning process could be cumbersome. The coordination challenge is magnified because states are assigned individual goals that vary substantially around the country. For this and several other reasons, states will have differing interests that will make cooperating in a regional plan hard.
The most exciting development in the collective thinking of various stakeholders and researchers is a proposal that goes a substantial way toward resolving the coordination problem, making interstate trading possible without complex up-front negotiations. The proposal calls for EPA to identify a set of criteria for state plans that, if met, would qualify state authorities to allow compliance entities in their state to use out-of-state compliance instruments from other states that also qualify. This eligibility would not require the use of out-of-state instruments, but if a state decided to allow it, the state would be preapproved to do so without needing to revise its plan. And, this approach would not require the development of a regional plan. Rather, it requires only that state plans meet specific criteria. Examples of such criteria might include consistent metrics and accounting frameworks, penalties for noncompliance, transparency in reporting and monitoring, and so on. Many authors have articulated versions of this idea as trading ready, state compatibility, or common elements. These proposals vary in their descriptions but, ultimately, not very much in their content.
In emissions trading programs, states do not trade with states. Rather, companies trade with companies. The state compatibility approach positions companies to advocate for interstate flexibility to reduce costs for themselves and their ratepayers. State officials might promote trading from the outset, but they also might prefer a cautious role. Some states might want to limit the amount of trading to help achieve related local air quality goals or to promote in-state investments in clean generation. Nonetheless, at the hour of compliance, a state that is preapproved for trading has the option to exercise that authority and provide greater flexibility to the regulated generators within their borders. By meeting EPA’s trading-ready criteria, a state can defer the decision of when and whether to trade, greatly simplifying its planning process.
Moreover, that state then has a guaranteed solution to the potential concern that the Clean Power Plan may challenge the reliability of its electricity system. The state compatibility approach would make emissions allowances (in a cap-and-trade system) available at a price. At that price, a firm can solve a potential shortfall in its compliance and resolve any potential reliability issue. The state can always buy allowances from out of state to assure compliance. The currency of power markets is a price, and with a price on emissions (analogous to prices on fuels and other inputs), these markets work well.
Preapproval for an emissions rate system might be possible, but it is more difficult to imagine. For example, the credit for avoided emissions varies across states. Credit for renewable investments and energy efficiency also varies, as does how energy efficiency is evaluated. A template for interstate exchange of rate-based credits may not be achievable, but EPA could provide guidance on how these various issues can be resolved in a regional setting.
In our view, this proposal preserves the state authority embodied in the Clean Power Plan but provides a template for coordination that may be necessary to achieve economic efficiency. Further, the template may become a feature of the federal plan that EPA will develop for native lands and states that fail to develop an adequate plan on their own. The outcome may be quite similar to the operation of the NOx Budget Trading Program, which involved 19 states and the District of Columbia in emissions allowance trading. Those states each had the option to go it alone, but every state opted into the program and the outcome was an environmental success story. The idea of preapproval for trading sets the stage for a potentially similar outcome.
The most exciting change in the Clean Power Plan, and one we expect to see, is for EPA to make precise the process for preapproval for trading among states with similar program designs.
Read the other posts in the series, What to Watch For in EPA’s Final Clean Power Plan:
- Timing: An Easy Concession for EPA?
- Inside the Fence: Keep an Eye on Cofiring under the Clean Power Plan
- What Will EPA Do If States Won’t Play Ball?
- Controversy over the New Source Rule, but Does It Even Matter?
- More Guidance from EPA on “Outside the Fence” Measures
- Protecting Electricity Reliability
- Can EPA Head Off Legal Challenges?
- When Do New Plants "Exist"?