As U.S. EPA crafts proposed standards for existing power plants, which policy mechanisms hold the most promise in meeting the interests of key stakeholders? During today's OnPoint, Susan Tierney, managing principal at the Analysis Group, discusses the policy design challenges facing the agency and the market factors that could affect the regulations' success.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Susan Tierney, managing principal of the Analysis Group. Sue, thanks for coming on the show.
Susan Tierney: Thanks, Monica.
Monica Trauzzi: Sue, last month you testified before the House Energy and Power Subcommittee, giving some context for congressional consideration of the Whitfield-Manchin bill, and that bill is seeking to limit EPA's ability to regulate greenhouse gas emissions under the Clean Air Act. Why do you believe that the concerns over EPA's regulations are misplaced? What are some of the market factors that you're looking at?
Susan Tierney: Well, several things. One of them is that there's a lot of human cry from coal country that Washington is trying to, you know, put coal to bed. And, of course, there are some people in Washington trying to do that, but in fact, what we see right now is head-to-head competition between natural gas, an amazingly abundant fuel, domestic supply and very cheap that's putting on huge pressure on coal. So I think that there's some understandable concern of folks who are not going to be able to have the same kinds of jobs that they've had in coal mining, although I should say, interestingly, coal production has stayed up, even as coal consumption has gone down in the U.S., because we've been exporting more.
Monica Trauzzi: So if we have low natural gas prices already that are sort of providing a hit to the industry, then won't EPA regulations compound that?
Susan Tierney: If I thought that there was a whole queue of coal plants ready to be built in the absence of EPA regulations, or if I thought that there weren't health justifications for dealing with mercury, which is one of the reasons that, eventually, there will be some more pressure on coal -- 2015, 2016 period. If I didn't think either of those would be a concern, then I would say, yes, you're right, these are putting an extra hit on. But we have a significant compelling pollution problem from carbon and from toxic air pollutants.
Monica Trauzzi: When we had the National Mining Association's Hal Quinn on the show recently, I asked him what he saw as the biggest risk to the coal industry, whether it was the EPA regulations or natural gas prices, and he said regulations. Why do you think that is?
Susan Tierney: I think that's a, that's an easy boogeyman. If it were only EPA regulations or principally EPA regulations, coal plants have many more years of operations before they would need to retire, for reliability purposes or a number of other things, but the owners of many of those coal plants are saying they just are not economically sustainable today given low gas prices. So I think that there's, it's a convenient thing, and I don't think that talking about natural gas helps the coal companies. They say, yes, we know that natural gas, but we really want to focus on some kind of alleged war on coal.
Monica Trauzzi: Policy design. It's going to be a critical element in the rollout of EPA's existing source standards. There are several models that are being considered by the agency as it moves forward. What do you think has the most promise in sort of meeting the interests of states, EPA, industry, all the different stakeholders?
Susan Tierney: Well, interestingly, there's just been a lot of creative work and analysis done by lawyers and economists and policymakers on that question, and I think that having EPA stand on a standard or a set of guidelines that is not as far as some of my friends in the environmental community want it to go provides an opportunity for EPA to withstand court cases, which I think are really important, but immediately, once EPA issues the guidance, it's really the states that are in the driver's seat, and they're already doing a number of things that are really helpful to them in going well beyond that, and I think that, I won't be surprised if EPA doesn't create a lot of different pathways for much greater opportunities to reduce pollution based on their standard.
Monica Trauzzi: And other thing that some stakeholders are in favor of is this idea of a mass-based approach. What do you think the pros and cons are there?
Susan Tierney: I think that one's pretty cool, not necessarily as the one the EPA proposes, but as one that EPA would gladly accept in response to maybe something that's more based on the emissions from particular plants. And the reason I say I think it's pretty cool is it's an approach that's designed to really allow much more economical savings between places where you can get, you can sculpt out really cost-effective production reductions from places where it's pretty cheap to get them, and I think it's something that provides a tidy mechanism to see what's happening with renewables and their effect on dispatch of fossil fuel power plants and their emissions. It allows you to see what's happening with nuclear and allows you to see what's happening with energy efficiency. So I think it provides a lot.
Monica Trauzzi: What's your sense of the level of commitment that exists between the various stakeholders -- EPA, states, utilities -- on finding sort of some common ground on this final proposal?
Susan Tierney: Well, I think the things that I hear are already common ground. There's a very large chorus of people saying EPA needs to create something that provides every state with an opportunity to make improvements. EPA understands that this is a, you know, cooperative federalism model that is used in many parts of the Clean Air Act where EPA sets the destination and the states figure out the root to get there, and so I think that that's something that'll be very helpful for dealing with. Each state can address things given their economic climate, their mix of power plant generation, their progress toward energy efficiency, and there may be ways to actually have different timing of stringency come into effect where states really need that to do their job.
Monica Trauzzi: So is your sense that utilities are gearing up for these regulations or are they planning to fight them in hopes that they don't ever come online?
Susan Tierney: I will be willing to bet that someone is going to fight these, but I also think that I really detect a different tenor of the conversation this time relative to the mercury rules or relative to the air transport rules. This one is really how can we make it work, and how can we make it work in our state and how can we have the time to make changes that are necessary in transitions. That's a really positive tone.
Monica Trauzzi: What does the Regional Greenhouse Gas Initiative and the work that's been done there kind of show the rest of the country about the impacts of carbon pricing on electricity markets?
Susan Tierney: Oh, that's great. Some colleagues and I did a study of the first three years of the Regional Greenhouse Gas Initiative, and what we discovered was, even though it had a very tiny effect, really less than 1 percent effect on electricity prices, it was a net benefit economically for the states for a number of different reasons, so that's a model in which nine states today share, create a big bubble around their emissions from their power sector. Anybody generating electricity with fossil has to have enough carbon allowances to cover their pollution, and if they'd rather not operate and avoid paying for those, they do that. So it's a relatively efficient mechanism. The states are ratcheting down the cap for the next couple of years starting in January, and it's a very workable model. It operates seamlessly in the electricity markets, and when states are selling the allowances to the marketplace, to power plant companies, the states then use that money for a variety of things, including energy efficiency programs, renewable projects and other things. So it's kind of a nice virtuous cycle.
Monica Trauzzi: All right, Sue, we're going to end it right there. Thank you as always.
Susan Tierney: Thank you, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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