Last fall I described how President Obama’s draft federal Clean Power Plan (CPP) gave Oregon and Washington a chance to leap into a clean energy future. The final federal rule is out, and it clears and fortifies the path for states. The CPP is a carbon-pricing powerhouse: it gives Oregon and Washington’s governors the opportunity to use a price on carbon pollution—either alone or in combination with other states—to comply with the federal law.
The Environmental Protection Agency’s (EPA) Clean Power Plan is the progeny of the US Supreme Court’s 2007 holding that the Clean Air Act covers greenhouse gas emissions. The Clean Air Act uses a “cooperative federalism” approach; EPA sets goals for each state. It then lets the states write their own implementation plans for reaching their goal. States must submit plans by September 2016 and comply with the final goal by 2030. Last year’s draft plan aimed to cut nationwide power sector emissions about 30 percent below 2005 levels by 2030, but the final plan estimates it will get down to 32 percent below 2005 levels. While cutting global warming pollution, the CPP will also avoid 90,000 asthma attacks and 3,600 premature deaths.
1. The CPP encourages state and regional cap-and-trade programs.
The CPP is more than 1,500 pages long, but the bottom line is: it steers states towards creating interoperable cap-and-trade programs.
During the comment period on the draft rule, states and advocates urged EPA to make it easier for states to use cap-and-trade as their compliance strategy. For decades, EPA has been using cap-and-trade under the Clean Air Act to cost-effectively cut acid rain pollution. If states can use cap-and-trade, they can simplify regulations, save money for electricity customers, and generate revenue they can reinvest.
EPA responded in spades. The final plan provides states and utilities with a panoply of tools to encourage them to use cap-and-trade in their states compliance plans.
The draft plan only included a “rate-based” (pollution intensity) goal telling each state how many pounds of pollution per megawatt-hour of electricity it should aim to produce. In its final rule, EPA also set a “mass-based” (pollution) goal for every state. States can easily use their EPA-given pollution goals to write a compliance plan that creates a state cap on electricity sector pollution or joins an existing American cap-and-trade program.
Some states have limited administrative capacity to set up trading infrastructure by themselves, so EPA offers to provide “resources and capacity” to create a tracking system for allowances. If many states take EPA up on this offer, it will grease the wheels for national trading by putting many states on the same tracking platform. Because many electricity providers operate across multiple states, being able to use the same tracking platform across state borders will be attractive. For example, Pacific Power serves customers in Oregon and Washington and also in California, Idaho, Utah, and Wyoming. It will be affected by each of those states’ CPP compliance plans. If all those states use the federal allowance platform, Pacific Power will be able to use a single compliance instrument for all its operations, instead of different state instruments for each.
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If a state doesn’t have the administrative capacity to write its own state-specific plan, it can use EPA’s off-the-shelf “model rule.” The model rule is—you guessed—cap-and-trade.
If a state wants to write its own state-specific plan but not use cap-and-trade, it can still meet certain criteria, such as standards for reporting and monitoring pollution and ask EPA to certify its plan as “trade ready.” A “trade ready” state would have the option, at some point in the future, to authorize electricity companies within its borders to buy or sell allowances. This option could help utilities keep costs down.
If a state decides to thumb its nose at the federal government and refuses to write a plan—as six governors have already threatened they will do—the federal government will take over that state’s compliance responsibilities and impose a federal implementation plan. The proposed federal plan is… cap-and-trade.
2. States could also use a carbon tax to comply.
Cap-and-trade gets so much attention that it appears to be EPA’s favored compliance approach, but the CPP also mentions that states could use fees as part of their compliance plan. For example, a state could enact a carbon tax and use it to comply with the federal Clean Power Plan, if the tax was enough to achieve the state’s goal. However, the state would have to authorize a tax.
3. States can get credit for investing in renewables and efficiency, particularly in low-income communities.
EPA pushed the initial compliance deadline back from 2020 to 2022. But in order to encourage states to start slashing pollution sooner, it is creating a Clean Energy Incentive Program. States that build solar, wind, or energy efficiency after submitting their compliance plan but before 2022 can get credit for every megawatt-hour generated or saved. Efficiency projects implemented in low-income communities get double credit. This provision dangles a big carrot for Oregon and Washington to accelerate their clean energy transition and help low-income communities.
4. Renewables keep getting cheaper.
To calculate each state’s goal, the EPA modeled three “building blocks” that states could use to cut pollution: (1) operate coal plants more efficiently; (2) run natural gas plants more often and coal plants less often; (3) ramp up renewable power. Renewable prices keep coming down. By incorporating the latest renewable cost information, EPA found it reasonable that the United States might achieve 28 percent of its power from renewables by 2030 (up from 22 percent in the draft plan), so it increased the pollution it estimated states could cut using building block 3. (States do not have to use these building blocks or achieve a particular percentage of renewables. The building blocks are simply the analytical tools EPA employed to set each state’s goal.)
5. Every state will have to do its part.
The draft plan leaned heavily on states with cleaner power generation—like Oregon and Washington—to get even cleaner. The final plan remedies that by requiring states with dirtier power to do more.
Previously, EPA assigned Oregon and Washington ambitious goals of reducing pollution intensity rates 48 percent and 72 percent below 2012 levels by 2030, respectively. The states’ final “rate-based” goals require reductions of 20 percent and 37 percent, respectively. These goals are less stringent than the statewide pollution reduction goals Oregon and Washington have already set for themselves. If the Beaver and Evergreen states enforce their own state targets, they will gain some headroom under the federal rule and will have some important decisions to make about what to do with that margin.
In contrast more coal-dependent Kentucky and Wyoming had draft goals requiring them to reduce 18 percent and 19 percent, respectively, below 2012 levels by 2030. Their final goals are 39 percent and 44 percent.
The Clean Power Plan is just one piece of President Obama’s broader efforts to curtail pollution, but in it, EPA sets states on a promising path toward what could become a power sector cap-and-trade system on carbon pollution for many US states. Oregon and Washington could set out boldly, building renewables and investing in low-income efficiency projects in early years and joining hands in a regional trading program as the program gains steam. As Governor Kate Brown and Governor Jay Inslee continue to look for ways to hold polluters accountable, with or without legislative action, the CPP offers them the authority to put a price on pollution in the electric sector.