Don’t Like the Clean Power Plan? Try Cap-and-Trade

The Obama administration offers a carbon trading system as an option for states that don't want to comply with emissions cuts.

States may choose to join a carbon trading program to comply with Clean Power Plan rules
A carbon trading scheme could help states reach emissions targets. Credit: Wikipedia

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If enough states “just say no” to the Obama administration’s Clean Power Plan, refusing to impose limits on the carbon dioxide emissions of electric utilities within their borders, that could hasten the emergence of an interstate cap-and-trade regime designed by the federal government.

This approach is spelled out in a proposed federal implementation plan published by the Environmental Protection Agency on Monday, alongside the final regulations that for the first time govern carbon pollution from power plants that burn fossil fuels.

In the proposal, the agency outlines a model interstate emissions trading scheme that the states could adopt, or that the federal government would impose on any state that does not set up a compliance plan.

That sends a powerful signal that even if recalcitrant states refused to comply with the regulations, electricity producers would still be required to steeply cut emissions, the leading source of climate-changing greenhouse gases.

The EPA proposed that states use several tools—burning coal more efficiently, replacing it with natural gas or renewable energy, encouraging conservation of electricity and so on—based on “a reasonable assumption that all of those things can actually happen,” the agency said in documents released on Monday. “In the federal plan proposed in this action, the agency is ensuring that these things will happen.”

The proposals for carbon emissions trading remain open for comment and revision, and would take a few years to put in place, offering time for opponents to challenge the overall Clean Power Plan in Congress or the courts. But as proposals, rather than final rules, these plans cannot yet be challenged directly in court.

Several states and industry groups have already said they will challenge the overall Clean Power Plan, which was proposed last year and finalized on Monday. The National Mining Association has asked the EPA to stay the rule. Coal companies and attorneys general from several states, including Kentucky and West Virginia, also have said they will sue. They claim that the agency is overstepping its authority.

Earlier this year, Senate Majority Leader Mitch McConnell, a Kentucky Republican, advised states to ignore the proposed rules. The governors of six states have suggested they will not comply with its timetable for writing state implementation plans, under deadlines that begin next year.

The 755-page proposal and the model trading scheme it would incorporate was released along with the Clean Power Plan on Monday, giving the first glimpse at how the EPA would respond to state inaction.

According to the proposal, if a state fails to submit a plan, the EPA will set a cap on how much carbon dioxide each power plant can emit while staying within a state’s overall target, a limit determined by the EPA in its final regulation. The agency will then create a cap-and-trade system that utilities can choose to participate in to make it easier to comply. Under such a plan, power plants that release less carbon than is allowed will generate credits that they can then sell to those power plants that exceed their allowances.

“The EPA is very much interested in pushing the whole system toward trading,” said Daniel Selmi, an environmental law professor at Loyola Law School in Los Angeles, California. The EPA, Selmi said, is building on its previous experience with trading. The agency first implemented a trading program in the early 1980s to reduce lead in gasoline. Since then it has used trading programs to combat acid rain and control smog.

In 2009, Representatives Henry Waxman and Edward Markey proposed a nationwide cap-and-trade bill that would have governed carbon dioxide emissions from all sources across the whole economy, but it failed to pass muster in the Senate.

Economists view cap-and-trade as one efficient way of putting a price on pollution, and letting the market determine the best way to limit emissions. In the case of power plants, that might turn out to be energy efficiency, using wind or solar, or relatively clean-burning natural gas.

If a power plant fails to stay within the emission limits, the EPA can levy fines and ultimately sue the utility to bring it into compliance, according to the new rules.

The proposal released on Monday will be formally published in the federal register soon, following which the EPA will accept public comments for 90 days. Reviewing the comments, conducting public hearings, modifying the plan and publishing it in final form will take about a year, according to the agency.  

Questions about Legality

When the Obama administration announced last year that it planned a federal implementation plan, some environmental lawyers and analysts argued that the EPA did not have the legal authority to impose emission reduction measures that were “outside the fence” of regulated pollution sources.

“The premise of these comments is incorrect,” the proposal said, referring to commenters who questioned the EPA’s legal authority. While the emission standards are federally enforced, it said, the means of attaining them are chosen by power companies, whether under a state plan or a federal one.

Indeed, the federal implementation plan bends over backward to give the states leeway, even a state that initially refuses to play ball.

“It is the EPA’s intention to give the states as much opportunity as possible to set their own course,” the proposal said. Even after a federal plan is imposed on it, a state may come back with a plan of its own, or take whatever additional actions it chooses to comply.

“States may simply choose to accept a federal plan in lieu of developing a state plan at all,” it said. “The EPA does not believe this should carry any pejorative connotation.”

A Model to Follow

The EPA could have gone one of two ways with the federal plan, according to energy policy experts at Resources for the Future, an environmental nonprofit. It could have proposed an inflexible and stringent plan, with high compliance costs, pressuring states to submit their own plans. Or, the agency could have proposed a flexible plan that achieves reductions at the lowest cost possible and serves as a model for states to follow, they said.

The EPA has followed the latter strategy.

“The overall effect is to make the [federal plan] process a little less coercive,” said Selmi, the law professor. “They are trying to make it a more appealing process.”