EPA Issues Clean Power Plan To Control Power Plant Carbon Emissions

At a White House ceremony on August 3, 2015, President Obama and the U.S. Environmental Protection Agency ("EPA") issued the Clean Power Plan ("CPP"), the administration's regulatory plan to reduce carbon dioxide ("CO2") emissions from existing fossil fuel power plants to 68 percent of their 2005 levels by 2030. The latest salvo in the administration's "war on coal" also includes a proposed plan to impose the CPP on states that refuse to adopt it on their own and additional carbon emission standards for new, modified, and reconstructed sources. The CPP is expected to further reduce coal-fired power generation. It will further depress demand for coal and lead to additional economic distress and bankruptcy for companies in the coal mining sector. An open question is whether the government can be called upon for compensation for these losses.

The CPP represents the most far-reaching single action EPA has ever taken under the Clean Air Act ("CAA"). Far from simply regulating certain emissions from certain industrial sources, the plan essentially seeks to dramatically restructure the U.S. power system to reduce the contribution of coal from 36 percent of total generation capacity today to 27 percent over the next 15 years, while stimulating much broader deployment of renewable technologies as an alternative to both coal and natural gas. Indeed, opponents of the plan assert, and plan to argue in upcoming legal challenges, that many elements of the plan extend beyond the bounds of environmental regulation and simply exceed the authority Congress conferred on EPA in the CAA. EPA's attempt remake the power system will affect not only electricity producers and energy suppliers but also every sector of the economy that relies upon electricity by potentially affecting electricity's reliability and pricing.

EPA has relied on section 111(d) of the CAA as authority for the plan. That section does not permit direct regulation of existing power plant emissions but rather authorizes EPA to require state implementation plans based on the "best system of emissions reduction" that has been "adequately demonstrated" for the emissions at issue. In the CPP, EPA concludes that the best system for reducing CO2 emissions from existing fossil fuel power plants consists of three "building blocks": (i) increasing the operational efficiency of such plants; (ii) shifting generation from higher emitting plants, generally coal-fired, to lower emitting plants, generally natural gas-fired; and (iii) increasing generation from "zero-emitting" energy sources, primarily wind and solar. As initially proposed by EPA in 2014, the plan included a fourth building block—improving demand-side energy efficiency, such as better insulation of homes and the use of LED light bulbs. Although energy efficiency is not a formal building block in the final version of the plan, EPA continues to emphasize the importance of the concept in the text.

Consistent with section 111(d), the plan does not directly regulate any existing sources. Instead, EPA has specified emission rates that each state in the continental U.S. must achieve by 2030 and a set of regulatory methods that the states may use to achieve those rates. While 2030 may seem a long way off, the requirements of the CPP will begin affecting states much sooner. Proposed plans must be submitted to EPA for review by September 6, 2016, and the final plans must be submitted within two years after that. In addition to the reductions that must be achieved by 2030, the plan establishes interim targets that must be achieved between 2022 and 2029.

EPA also proposed a "federal implementation plan that would be used to achieve the necessary reductions in states that either decline to participate or fail to submit a state implementation plan that EPA finds approvable." Emission trading, either within a single state or across multiple states, is not required by the final plan, but EPA strongly endorses the concept and encourages states to view emission trading as a market-based tool that allows emission reductions to occur in the most cost-effective manner. A group of nine northeastern states has already been administering an emission trading program for power plants, known as the Regional Greenhouse Gas Initiative, for six years and California began implementing a multisector cap-and-trade program several years ago. Moreover, EPA's proposed federal implementation plan for states that do not submit approvable state plans is based in large part on emission trading.

Predictable political battle lines were well-established even before the final CPP was released. A coal company and a group of 15 states, largely Republican-led, attempted to have the U.S. Circuit Court for the District of Columbia block the plan even before it was finalized, while a similarly sized group of states, largely Democrat-led, publicly supported EPA's proposal. While the D.C. Circuit deemed the legal challenge premature pending a final plan, that litigation will presumably resume as soon that the final plan is formally published in the Federal Register, probably in September. Trade groups and other states will likely file their own actions challenging the plan, while environmental groups and additional states will undoubtedly weigh in on the side of EPA.

In addition to arguments that the CPP's broad regulation of energy markets exceeds EPA's authority under the CAA, opponents have raised the more specific objection that EPA lacks authority to regulate power plant emissions under section 111(d), because EPA is already regulating such emissions under the Act's "air toxics" program. In a fascinating issue of statutory construction, this argument turns on the fact that the Senate and the House of Representatives passed different versions of the key language back in 1990, a discrepancy that Congress never resolved. It seems likely that the legality of the plan will ultimately be decided by the U.S. Supreme Court several years from now.

The CPP is 1,500 pages long, not counting its companion proposal for a federal implementation plan, which adds another 755 pages. In addition, EPA issued a 768-page final rule for new, modified, and reconstructed electric generating units ("EGUs"). In the following sections, we outline the structure, requirements, and legal issues associated with the two final rules and the proposed federal implementation plan. First, we examine new source performance standards for carbon emissions from new, reconstructed, and certain modified existing EGUs. Next, we move to the final rule regulating carbon emissions from existing EGUs analyzing the modified building blocks, subcategory-specific CO2 emission performance rates, state plans, compliance timelines, the reliability safety valve, remaining useful lives of units, and environmental justice considerations. Finally, we summarize the federal implementation plan.

NEW SOURCES, RECONSTRUCTED SOURCES, AND MODIFIED SOURCES

Concurrently with the issuance of the final rule regulating carbon emissions from existing EGUs, EPA issued a final Carbon Pollution Standards rule ("CPS Rule"), establishing a new source performance standard ("NSPS") for carbon emissions from new, reconstructed, and certain modified EGUs. The NSPS standard is established pursuant to section 111(b) of the CAA and identifies the best system of emission reduction ("BSER"), which is then used to establish a final standard of performance.

Applicability of the NSPS Carbon Emissions to EGUs

To be subject to the NSPS carbon emission standards, the units must have a base load rating greater than 250 MMBtu/hr of fossil fuel (either alone or in combination with any other fuel) and serve a generator capable of selling more than 25 MW of electricity to a utility power distribution system. Exempt units include those with permits that limit annual net-electric sales below specified standards, municipal waste combustors, commercial or industrial waste incineration units, and those using primarily non-fossil fuels with permit conditions limiting the use of fossil fuels below specified standards. The EGUs also must have commenced construction after January 8, 2014 or reconstruction or modification after June 18, 2014.

Carbon Emission Standards for Coal-Fired Units1 Subject NSPS

The final standards of performance (along with BSER) for new, modified, and reconstructed EGUs firing coal are summarized in the table below:

Generating Units BSER Final Standards of Performance New Fossil Fuel-Fired Steam Generating Units or Integrated Gasification Combined Cycle ("IGCC") Units Efficient new supercritical pulverized coal utility boiler implementing partial carbon capture and storage ("CCS") 1,400 lb CO2/gross MWh Modified Fossil Fuel-Fired Steam Generating Units or IGCC Most efficient generation at the affected EGU achievable through a combination of best operating practices and equipment upgrades Sources making modifications resulting in an increase in CO2 hourly emissions of more than 10 percent are required to meet a unit-specific emission limit determined by the unit's best historical annual CO2 emission rate (from 2002 to the date of the modification); the emission limit will be no more stringent than: 1,800 lb CO2/gross MWh for sources with heat input of more than 2,000 MMBtu/hr OR 2,000 lb CO2/gross MWh for sources with heat input of 2,000 MMBtu/hr or less. Reconstructed Fossil FuelFired Steam Generating Units or IGCC Most efficient generating technology at the affected source (supercritical steam conditions for the larger; and subcritical conditions for the smaller) Sources with heat input greater than 2,000 MMBtu/hr are required to meet an emission limit of 1,800 lb CO2/gross MWh. Sources with heat input of 2,000 MMBtu/hr or less are required to meet an emission limit of 2,000 lb CO2/gross MWh. Although the final rule identifies CCS as BSER for new units, the final standard of performance increased to 1,400 pounds of CO2...