Inside the judges’ questions on carbon trading

By Emily Holden, Debra Kahn | 09/29/2016 08:31 AM EDT

Coal-heavy states and companies have centered their political challenges to U.S. EPA’s Clean Power Plan on arguments that the rule is unachievable. But those arguments didn’t fare well this week in front of federal judges.

Coal-heavy states and companies have centered their political challenges to U.S. EPA’s Clean Power Plan on arguments that the rule is unachievable. But those arguments didn’t fare well this week in front of federal judges.

A range of studies have shown that many states’ power companies are already near the 2030 greenhouse gas levels EPA has assigned. Those that are not could use carbon trading to get there while keeping costs low for consumers.

The rule would allow companies that do not shut down enough coal units to reach their own carbon levels to purchase allowances or credits from companies with greener portfolios.


The lawyers for the 27 states and many trade groups opposing the rule Tuesday told the 10 judges at the U.S. Court of Appeals for the District of Columbia Circuit that might not work. But judges seemed to disagree.

Judge Brett Kavanaugh, a Republican appointee, suggested other EPA rules and many states have used trading programs successfully. He questioned whether now is the right time for opponents of the rule to argue that trading wouldn’t work.

"It’s simply too early in the game" to address these very specific state concerns, added Judge Judith Rogers, a Democratic appointee.

Judge Patricia Millett, an Obama appointee, added that states could always come back to EPA if trading doesn’t work out.

While concerns about carbon trading don’t seem to be key to the legal outcome for the Clean Power Plan, they are incredibly important to the rule’s success if it moves forward. Power companies largely want the flexibility that carbon trading would allow. But coal states say they continue to worry a system may not materialize because states have big philosophical disagreements about how trading should work. They say if green states that will hold the most credits don’t want to work with them, the rule could be much more expensive.

Calif. linking rules at issue

Questions over the value of "generation shifting" and carbon trading have divided the opponents of the rule, lawyers noted this week.

Jeff Holmstead, an attorney and industry lobbyist with Bracewell LLP, said that "all the challengers agree that EPA is not allowed to use generation shifting to set the standard." But some want to be able to use generation shifting to comply with the rule, he said.

From just minutes into arguments Tuesday, judges seemed to back EPA’s view that the regulation is really advancing a shift that’s already happening (ClimateWire, Sept. 28).

Challengers to the rule this week, though, argued EPA doesn’t have authority to make coal plant owners depend on a build-out of cleaner power to reach their goals. And they questioned whether carbon trading would work, focusing on the idea that greener states might withhold their allowances or set strict rules for trading partners.

Hunton & Williams LLP attorney F. William Brownell told judges that 18 or 19 states are facing goals that are tougher than a national performance rate that EPA set. Those states are most likely to need out-of-state allowances.

EPA decided what states must achieve based on how much coal power they use. In a change from the draft to final rule, EPA gave states with more coal power harder goals, responding to complaints from states that have been working to lower their emissions.

Brownell pointed to Kentucky in particular, arguing power owners there could not reach their assigned goal without buying credits. He said some states, including California, have signaled they don’t want to sell those credits to coal states.

Both sides of the case traded legal briefs in the days before court over California’s plan for complying with the Clean Power Plan (E&ENews PM, Sept. 26).

A California market expert said the state’s rules on linking could very well limit the use of trading under the Clean Power Plan. A 2012 state law specifies that California’s Air Resources Board may only link markets with other jurisdictions that are as or more environmentally strict as its own, a requirement that has so far been satisfied only by the Canadian province of Quebec.

"I think ARB’s going to keep an open mind only because they don’t want to be seen as stifling national ambitions for cap and trade, but all other things being equal, the threshold California has to reach for anybody to link with them is very significant," said Andre Templeman of the consulting firm Alpha Inception LLC. "I don’t think the concept of them selling their surplus into an outside jurisdiction is very politically palatable or even feasible."

California is currently considering how and whether to link to jurisdictions like Washington state, which has adopted a market-based system that would allow Washington emitters to use California carbon credits for compliance. But California utilities are wary of such a linkage, arguing that it could increase costs for in-state market participants.

Templeman said the Regional Greenhouse Gas Initiative among Northeast states would be better suited to mesh with the Clean Power Plan.

"I could see people emulating RGGI because it’s power-only," he said. "California’s really doesn’t work unless you take a California approach: economywide and essentially equivalent regulations. CPP is more of a RGGI clone, so it makes more sense to link up with RGGI."

RGGI insiders, however, have raised similar concerns about linking with other states under the Clean Power Plan as they work through a program review (ClimateWire, July 12).

‘I think we’re going to see a lot of fights’

Ray Gifford, an energy lawyer with Wilkinson Barker Knauer LLP, said while as a legal matter the argument on carbon trading didn’t seem to help challengers, "as a practical issue, it’s huge."

"I don’t think it’s appreciated by EPA. I don’t think it’s appreciated at the state level either," Gifford said.

While environmental advocates and industry insiders insist that companies will figure out a way to make carbon trading work, some aren’t so sure.

RGGI, for example, took years to set up, and the nine states involved had similar policy goals and ideas about how carbon trading should work, Gifford noted.

That power-sector cap-and-trade program auctions allowances and distributes revenue to states to use for green energy and electricity-saving programs. Conservative states aren’t so sure that allowances should be put up for sale. Some think they should be distributed to power companies based on how much they emit now. They say that will cut back on compliance costs for customers.

Environmental groups say that not auctioning allowances would give a "windfall profit" to polluters, basically giving them allowances that have monetary value because they currently emit a certain amount of carbon.

The design of carbon-trading systems could also divide companies.

"I think we’re going to see a lot of fights between utilities, if I’m in good shape and you’re in bad shape," Gifford said. "I’ve got one political play if I’m in bad shape. Get your credits for free."

Jim Matheson, the former Democratic congressman from Utah who is now CEO of the National Rural Electric Cooperative Association, said carbon trading is vulnerable to people gaming the system. He voted against a national economywide cap-and-trade system in 2009. He said allowances wouldn’t have been divided fairly.

"The devil’s in the details," Matheson said. "Whenever you create a new trading structure, watch out. There are a lot of trapdoors. It’s a market with a lot of smart people trying to get an advantage."