EPA proposes carbon trading to deal with reluctant states

By Emily Holden, Evan Lehmann | 08/04/2015 08:11 AM EDT

Republican governors who refuse to comply with President Obama’s new climate plan might find themselves facing a more detested option: cap and trade.

Republican governors who refuse to comply with President Obama’s new climate plan might find themselves facing a more detested option: cap and trade.

In addition to the Clean Power Plan released yesterday, EPA also publicized a proposal revealing how it will handle states that refuse to submit their own plans for emission reductions from the power sector. The agency plans to impose a federally enforced carbon trading program.

It would fall predominantly on conservative states. Sen. Mitch McConnell (R-Ky.) has encouraged Republican governors to defy EPA’s rules, and a handful have vowed to decline to submit proposals.


"I think it’s very questionable whether it’s legal to do backdoor cap and trade," Sen. Ben Sasse (R-Neb.) said yesterday. "It’s 1,600 pages of legislating through a regulatory agency. That’s not how it’s supposed to work."

The final Clean Power Plan released yesterday didn’t include EPA’s plan to deal with obstinate states. That proposal is an additional 755 pages, much of which is devoted to the idea of carbon trading. EPA expects to complete it next year after accepting feedback from states and other parties.

Under the proposed federal implementation plan, or FIP, EPA would either assign a cap on emissions and allow for the trading of pollution credits or require a state to meet an average emissions rate across its electricity fleet. A rate-based standard with trading could technically allow emissions to grow, as long as generators only emit a certain amount of carbon per megawatt-hour of power produced. A state with a rate around the same level as a natural gas plant could theoretically keep building more and more natural gas plants and stay in compliance.

The agency plans to settle on one of the two strategies in a final federal plan in summer 2016, shortly before states that are writing plans are expected to submit initial drafts in September 2016. EPA will be gathering comments on the draft federal plan and holding public meetings.

The federal plan would be directed at electricity generators, effectively bypassing states that refuse to implement carbon cuts.

"While states may impose the emission rates directly on their affected [electric generating units], states also have the option of submitting more tailored plans that meet state-specific emissions goals," the proposal says.

Legal experts have said aiming the rule’s requirements at generators is more legally defensible, because the power units themselves — not states — are regulated under the Clean Air Act.

Generators are unlikely to risk breaking federal law, and they have some familiarity with trading, environmental advocates add (EnergyWire, July 30]).

States may still have some say in imposing a federal plan

EPA reiterates that states should take the first stab at cutting emissions.

"While it has been the EPA’s longstanding view that the statute identifies states as the preferred implementers of Clean Air Act (CAA) programs, the agency makes clear in the [emission guidelines] that states cannot and will not be penalized for failing to participate in this program," the proposal says. "However, if a state does not submit an approvable plan under section 111(d) of the CAA, the EPA will develop, implement, and enforce a federal plan to reduce CO2 from the fossil fuel-fired power plants in that state."

EPA says it aims to gives states flexibility even when imposing a federal plan.

"This is wholly consistent with the ‘cooperative federalism’ structure of the CAA and many of our nation’s other environmental laws," EPA argues in the proposal.

For example, "states may take delegation of administrative aspects of the federal plan in order to become the primary implementers."

That could respond to some complaints from states that have argued the Clean Power Plan would set a precedent for the federal government to take control of state electricity policy decisions.

"States may submit partial state plans in order to take over the implementation of a portion of a federal plan," the proposal adds.

Even after EPA assigns a federal plan, states may have an opportunity to replace it with their own blueprint.

The proposal issued yesterday is also meant to serve as a model plan for states that want a ready-to-go option that they can tailor to suit their needs. Many states had asked for details on how they could work together and trade compliance credits for building renewable energy or cutting power demand.

"Often, federal plans can be used as a tool for states that are developing plans to sort of see where the agency is headed towards types of approaches that are deemed acceptable," said Matt Stanberry, vice president of market development for green business group Advanced Energy Economy.

Ken Colburn, a principal at the Regulatory Assistance Project, said the federal and model plans are important because "states have huge flexibility, but essentially no guidance under 111(d)."

"Although state officials are certainly appreciative of flexibility (vs. not having it), absent ANY guidance they are more likely to default to their prior experience," which reflects solely on less flexible sections of the Clean Air Act, Colburn said in an email.

"What EPA has done by putting the Federal Plan proposal out there now is to implicitly and adroitly provide ‘guidance’ to states regarding what IT is thinking about," he added. "States, naturally, could reasonably assume that were they to undertake something similar to that federal plan, it would be approvable."

Republican opponents of Obama’s plan described EPA’s rules as illegal, impossible and expensive. But they might not have anticipated being forced to shoulder a federally imposed version of cap and trade, one of the most controversial pieces of legislation to rattle around Congress in the last decade.

Return of a much-maligned alternative

At more than 1,500 pages, the Clean Power Plan resembles in length the ungainly cap-and-trade bill introduced by former Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), now a senator, in 2009. The attacks it aroused led many observers to describe the system as politically dead.

Now it’s back. And it could affect the states that are most ardently opposed to the president’s plan. More than a dozen states have filed suit to fight the regulations.

Several lawmakers said they were not aware of the FIP proposal released in tandem with the Clean Power Plan yesterday.

"I would say it’s not good for Wisconsin families," Sen. Ron Johnson (R-Wis.) said when asked about cap and trade.

His state under Gov. Scott Walker (R) has bucked the idea of abiding by EPA’s new rules, making it a potential candidate for a federally enforced carbon trading program. A regional cap-and-trade program was pursued by Walker’s predecessor, former Gov. Jim Doyle, a Democrat.

Other Republicans seemed resolute in their opposition to EPA’s climate program, even when faced with the threat of cap and trade. Sen. John Barrasso (R-Wyo.) noted that a handful of GOP governors have said they’ll defy the Clean Power Plan. He wants to see that number grow.

"I’m going to encourage additional governors to do the same thing," Barrasso said.

EPA doesn’t view cap and trade as punishment for oppositional states. The trading system is highlighted throughout the Clean Power Plan as a cost-effective way to lower emissions.

"The EPA views an emission budget trading program as a highly efficient, market-based approach for reducing CO2 emissions," the plan says.

Is a carbon tax a viable alternative?

Some conservative groups that oppose the Clean Power Plan were somewhat buoyed by its inclusion of market-based trading options. The R Street Institute strongly opposes the regulations, hoping instead that Congress will pass a revenue-neutral carbon tax.

But the complexity of the plan’s trading options could push states, even those that voluntarily comply, into a "complicated and layered cap-and-trade scheme," said Catrina Rorke, who oversees energy policy at R Street.

She noted that states can join a regional trading program or go it alone, swapping credits with other solo states that establish similar programs. But there are many options in the design process, she said, meaning that there might be a patchwork of trading programs.

"I hate to say it, but this makes Waxman-Markey look pretty elegant," Rorke said.

Overall, many regulatory experts and grid operators have said trading and broader regional approaches would help to keep electricity prices lower. The final Clean Power Plan also adds guidance on how states that don’t adopt a model plan can work together to trade compliance credits.

"Trading programs in general tend to open up additional flexibility for compliance entities and in doing so give them access to more cost-effective resources," Stanberry said.

Although Stanberry thinks the federal plan does a lot to provide flexibility, he said that "developing a state plan is still the most flexible route that states have for complying with the Clean Power Plan."