Catching Fire

Deck: 

Climate policy heats up after the Great Recession.

Fortnightly Magazine - February 2014

It’s been smoldering for a while. 

Last decade, climate regulation seemed inevitable. The year 2003 saw the Regional Greenhouse Gas Initiative emerge in the Northeast. Gov. Arnold Schwarzenegger signed California’s AB32 in 2006. Dozens more states established their own climate action plans. And in 2009, early in the Obama administration, the Environmental Protection Agency (EPA) issued its famous “endangerment finding,” setting the stage for federal regulation of greenhouse gas (GHG) under the Clean Air Act. 

Still we watch for sparks of flame.

The Edison Electric Institute (EEI) in 2009 lent support to the Waxman-Markey cap-and-trade bill, which passed in the U.S. House but went nowhere in the Senate. Climate change got pushed to the back burner, usurped by TARP, ARRA, and Obamacare – not to mention the backlash from a newly elected House Republican majority. 

Nevertheless, the smoldering continued. The courts upheld EPA’s endangerment finding, while turning away nuisance lawsuits in the context of impending regulation. Hundreds of cities across the country advanced separate efforts to reduce GHG emissions. RGGI grew (and shrank when Gov. Chris Christie took New Jersey out of the group). And renewable and clean energy initiatives at federal and state levels proceeded and (mostly) expanded, with GHG-abatement lurking as a key policy driver.

Now, here we are, halfway through Obama’s second term, and GHG regulation actually looks to be emerging. The EPA’s rules face legal opposition; probably they’ll be waylaid in court longer than Obama remains in the White House. But nevertheless the agency has proposed its final rule for new power plants, and rules for existing plants are due in June.

The climate fire has re-ignited. How fast it spreads from here might depend less on the actions of the federal government, and more on actions of the states that will feel the heat.

Coal, Shale, and EPA

Some of the EPA’s most strident opponents say its proposed rules will effectively outlaw any new coal-fired power plant in the United States, setting an emissions standard that can’t be achieved commercially. In a suit filed in January, for example, Nebraska argues that EPA based its standards on technologies demonstrated at federally funded carbon capture and sequestration (CCS) projects, which violates the Energy Policy Act of 2005. “The impossible standards imposed by EPA will ensure no new power plants are built in Nebraska,” stated Attorney General Jon Bruning. “This federal agency continues to overstep its authority at the detriment of Nebraska businesses.” 

For its part, EPA counters that the standards aren’t based solely on the federally funded CCS demonstrations, but on other projects and commercially available options. How the courts sort out such disputes will be interesting, and likely the outcome will affect resource planning and plant operations in the future. For the time being, however, it’s a moot point; nobody is building a coal-fired plant anywhere in America, largely because natural gas is so cheap. No other fuel can compete – with the notable exception of renewables, which are required and subsidized to meet state quotas.

Moreover, most regions of the country still are operating with a substantial glut of generating capacity. When Nebraska’s A.G. asserts that “no new power plants” will be built in the state, he’s probably right irrespective of regulations; Nebraska’s planning region maintains a more-than-ample reserve margin – almost double NERC’s reference level through at least 2023.1

In the big picture, of course, new GHG regulations will certainly affect how we generate electricity in this country. If they didn’t, what would be the point? The real question is how will they do that: with a prescriptive and painful top-down regime, or with flexibility for market-based innovation? 

Rights and Wrongs

This issue of Fortnightly contains two articles addressing these questions. First, in “Putting a Price on Carbon,” Maine PUC Commissioner David Littell calls upon state lawmakers to look at existing alternatives for GHG regulation and consider how to adapt their frameworks to the changing energy landscape. Next, in “Complying with 111(d),” David Farnsworth at the Regulatory Assistance Project offers RGGI as a market-based “equivalency” model that could meet EPA’s requirements and produce cost-effective carbon-reducing investments. 

A single theme forms the center of both of these articles. Namely, that the federalist underpinnings of the U.S. Constitution call for an approach that allows states to continue taking the lead in reducing emissions – even as EPA promulgates so-called “guidelines,” in Clean Air Act parlance. 

And some states are in fact taking the lead on a range of initiatives to attain a cleaner energy economy. Some of these initiatives explicitly aim to help utilities through the transition. For example, Hawaii’s legislature last year provided incentive returns for investing in infrastructure to support clean energy – including demand response, energy storage, and solar integration. The New York PSC in December launched a regulatory overhaul process that aims not only to remove disincentives to utility investments in efficiency, but to make it an integral part of the utility business model. And last October, Kentucky Gov. Steve Beshear responded to EPA’s proposed GHG regulations with a framework for compliance that his administration considers cost-effective and workable in the state. (Note: Beshear, a Democrat, retires as governor in 2015.)

These initiatives represent tangible progress by the states, and they uphold the principles of federalism, while encouraging innovation and establishing clearer pathways for the transition to a cleaner energy economy. Assuming we still believe in the power of federalism and free markets, we might expect the solutions that emerge from these efforts to be more cost-effective than those imposed by a central authority. But we also might call that a straw-man argument, saying those solutions wouldn’t be necessary if the central authority would stop fanning the flames of carbon regulation.

Accordingly, many states are digging in their heels for any number of reasons – including climate skepticism, coal-industry interests, and good old-fashioned politics. Note that in the 2012 election campaign, Nebraska’s Bruning spent nearly $2.5 million in his second unsuccessful bid for U.S. Senate. 

So we face an ironic and unfortunate political dichotomy. States like Nebraska, which seem intent on fighting GHG regulation, eventually could find themselves forced to comply with an inflexible set of EPA mandates. Meanwhile, states that take their cue from EPA might foster new investment through flexible, market-based regulation. Federalist ideals might motivate both responses, but innovation will first become necessary in the states that accept the challenge of global climate change.

Endnote:

1.  2013 Long-Term Reliability Assessment, North American Electric Reliability Corp., December 2013.