EPA Carbon Rules Set Modest Goals but May Enhance Decision Opportunities

The EPA’s proposed rules to reduce electric power plant carbon emissions to 30 percent below 2005 levels by 2030 will help maintain the recent trend of reducing greenhouse gas emissions. According to press reports, power plant carbon emissions already have fallen 14 percent below 2005 levels.  Moreover, 13 states already have cut carbon emissions by 30 percent below 2005 levels.[1]

While the proposed rules are a major change in EPA’s institutional role, the substantive carbon emissions reduction goal seeks to keep recent momentum going rather than accelerate it. The most interesting questions are why progress in reducing carbon emissions occurred and the future prospects; and the impact on electricity costs to customers.

Coal and Natural Gas

Most reductions in carbon emissions have occurred by switching from coal to natural gas-fired electricity, which produces slightly less than half the emissions of electricity from coal. Natural gas provided 17 percent of U.S. electricity in 2003, increasing to 29 percent in 2013. In 2003, coal provided 51 percent of electricity, decreasing to 39 percent in 2013. Since 2010, 150 coal fired power plants have been retired or scheduled for retirement by 2017. The USEIA projected in 2012 that one-sixth of U.S. coal plants will be taken out of service by 2020.

Because coal produces about 75 percent of greenhouse gas emissions in electricity production, the removals of coal plants from front line electricity production may get the U.S. to 30 percent reduction before the target year of 2030.

Removal of many of these coal plants would not interrupt amortization of their construction costs, because more than 60 percent of coal plants are over 40 years old. The older plants are less efficient. New coal plants, which have been rare, produce electricity at higher cost than new natural gas combined cycle power plants. In addition, current natural gas electricity generating plants are not operating at full capacity. Boosting their use and substituting them for coal can reduce emissions quickly.

Consequently, reducing the role of coal in producing electricity by substituting natural gas for it should not increase average electricity prices, although prices may rise in the service areas of some power companies.

Why Have Carbon Emissions from Electricity Generation Gone Down?

There are several likely reasons:

• Anticipating an EPA intervention, power companies and state regulatory agencies may have planned ahead, acting gradually before they were forced to act precipitously.
• Natural gas has become more plentiful, costs less, and long-term supplies seem reliable, so power companies have followed standard economic incentives to substitute natural gas for coal.
• State governors, legislatures, and regulatory bodies have taken the lead in reducing carbon emissions, with 30 states having established Renewable Portfolio Standards for adding renewable energy to states’ electricity sources.
• Households and businesses have reduced demand, which has enabled power companies to retire old coal-fired power plants.

Because of the switch from coal to natural gas, the cost and availability of natural gas may be the main explanation, but that is not the entire story. Looking ahead, emissions reductions are possible beyond implementing the EPA’s 30 percent emissions reduction goal.

Reduced Household Electricity Demand

Demand for electricity is not fixed. Energy use per household went down 21 percent from 1990 to 2009, according to the Residential Energy Consumption Survey (RECS). Much of this reduction occurred because of tighter construction of new houses, retaining more heat. Greater appliance efficiency also helped. These trends more than offset the increase in number of devices using electricity, including televisions, sound systems, computers, and cell phones in the larger houses that were built after 1990.

In addition, household heating and cooling behavior can become more effective at reducing energy use. Thermostat settings in 2009 in many households were much higher in winter and lower in summer, compared with Department of Energy recommendations.  Thermostat settings remained nearly as high, or low, when household members were out of dwellings as within them.

Many households have mistaken beliefs about which decision uses less energy. For example, some people believe that keeping interior temperatures the same year round and leaving lights on when out of rooms uses less energy than varying thermostat settings and turning lights off.

Cost information for renters often is inadequate. Many landlords include utilities in rent so that renters lack information about how their behavior choices lead to higher or lower energy costs. Both greater efficiency in appliances and more attention to how behavior is related to energy expenditures have potential for large household energy savings.

For households, the proposed EPA rules can be used to get the attention of household members who must agree on a course of action. Daily energy decisions, occasional purchases, and conservation investments are shared decisions. The proposed EPA rules are a decision-making opportunity for households to focus on how to reduce household energy costs.

Reduced Business Demand

What about businesses? Two major sectors are manufacturing and big box retailing. Manufacturing depends on plentiful energy, mainly electricity. From 2002 to 2010, manufacturing reduced energy use by 17 percent, while expanding output. The EPA rules and the role of natural gas in manufacturing processes are opportunities to continue focusing on energy efficiency.

Some of the largest retailers have turned their rooftops into significant solar electricity producers. In 2013, Wal-Mart had 89.4 megawatts of installed solar energy capacity at 215 rooftop installations in 12 states. Costco was second with 47.1 megawatts of installed capacity, and Kohl’s was third with 44.7 megawatts. As a percentage of facilities, IKEA led other retailers with solar collectors on 89 percent of its facilities in 20 states.

While augmenting energy supply, these retail solar installations reduce demand for electricity produced by coal and supply some peak period electricity to the distribution network. They reduce emissions without adding high cost utility-scale solar resources.

Substituting new combined cycle natural gas electricity for new and old coal power plants, reducing household demand for electricity, and adding some distributed solar electricity from large businesses should reduce demand and lower costs, other things being equal.

From a unit cost perspective, the proposed EPA rules will, on average, have little effect on costs. The main limitation is that the EPA proposal may be too modest to alert households and businesses sufficiently to pay attention to cost-cutting opportunities. This opportunity to address wasteful energy use may be missed, because the EPA rules will have little impact in many states, and the impact they have will be long, drawn out, and difficult to trace.

Some information in this post is taken from a book manuscript in progress with the working title Rebalance: Climate Change Mitigation and Resilience through Infrastructure Adaptation, Behavioral Economics, and the Social Psychology of Everyday Life.

[1]  Edison Electric Institute, as cited in the Wall Street Journal; Sierra Club, based on US. Energy Information Administration (USEIA) data, as cited in the Washington Post.