Obama’s final Clean Power Plan: Merging strong climate goals with flexible implementation

Yesterday’s announcement of the Obama administration’s final Clean Power Plan (CPP) moved the debate over decarbonizing the U.S. power sector to a new stage. The CPP is a centerpiece of the administration’s climate strategy and a bold effort to shrink the carbon footprint of U.S. power production. When initially proposed, the CPP elicited sharply divided views. Now that the CPP is final, the key question is how well the administration navigated the minefield of competing comments and recommendations to create a broader consensus for the CPP’s reductions in power plant emissions.

Reconciling competing objectives for the CPP

There was never an expectation that the final CPP would placate its harshest critics and, indeed, attacks on the plan began as soon as its details began to filter out. But the hope of the administration and the plan’s defenders was that the many adjustments in the final version would overcome the doubts of the constituencies most vital to the CPP’s success – politically moderate states historically dependent on coal-based electricity, traditional utilities with a diverse mix of fuel types, investors in energy infrastructure, utility rate regulators, and energy-intensive industries. Swayed by constructive changes in the CPP, it was hoped that most states would move toward constructive engagement in implementation, recognizing that a few die-hard governors and members of Congress would remain adamantly opposed.

At the same time that it sought to create a less costly and more flexible path to implementation, the administration faced another, potentially conflicting imperative. President Obama had staked out a strong leadership position in the run-up to a new global agreement on climate change later this year in Paris, pointing to the U.S.’s aggressive emission reduction goals as a rationale for other countries to raise their level of ambition. As the White House surely understood, any weakening of the CPP would undermine that strong message and create the perception of a lack of political will at the very time the President sought to hold other countries’ feet to the fire.

How well did the administration reconcile these competing objectives? A definitive answer requires close study of the final rule but, upon initial review, the administration deserves considerable credit: the final CPP is a thoughtful and generally successful effort to balance greater implementation flexibility with a firm and even enhanced commitment to the President’s climate goals.   

Creating a smooth implementation path

A common refrain from states and utilities during the comment period was that the CPP’s interim 2020-2029 reduction goals were front-loaded, requiring an abrupt transition in the power plant fleet before the necessary infrastructure was in place  and placing unrealistic demands on state agencies to rework their energy and environmental policies under severe time-constraints. The final rule addresses this concern by delaying the initial compliance date from 2020 to 2022 and creating “step down” targets which allow a more gradual reduction in emissions between 2022 and 2029. It also extends the deadline for state plan submissions from 2016 to 2018, allowing more time for analysis, stakeholder consultation, and plan development.

The extension of interim compliance dates and more gradual glide path toward 2030 reduction targets make it less likely that delays in constructing gas pipelines or new transmission lines will threaten the reliability of the power grid, a concern raised by some reliability organizations and state utility regulators. EPA has also addressed this concern by creating a “reliability safety valve” enabling power plants to exceed emission limits where extraordinary circumstances require them to increase generation to meet reliability requirements. States can likewise modify their implementation plans where unanticipated reliability challenges arise. These steps will go far toward preventing loss of grid reliability (never a high-probability risk to begin with).    

The final CPP also includes a new methodology for setting state goals intended to eliminate the proposal’s glaring disparities between state emission targets, which created a perception of arbitrariness and unequal treatment and aroused the ire of states who felt their goals were unworkably stringent. At the same time, the rule no longer ratchets down emission targets in states where new nuclear capacity is under construction, a concession certain to be welcomed in Georgia, Tennessee, and South Carolina, whose acceptance of the CPP would be a powerful signal to other conservative states.

Reducing costs through interstate trading

In a major advance on the proposal, the final rule eases the obstacles to interstate trading of emission credits. States are allowed to develop “trading ready” implementation plans, under which power plants in the state will be able to buy or sell allowances in other states with compatible compliance mechanisms without the need for a formal interstate agreement. This approach will be a big impetus to the development of trading markets for carbon, renewable energy and energy efficiency credits.

Market-based programs for conventional pollutants under the Clean Air Act (CAA) have a successful track record in reducing compliance costs, stimulating improvements in technology, and accelerating emission reductions. These benefits should be attractive to states looking for a broader range of compliance options and to power generators seeking greater opportunities to offset carbon emissions cost-effectively. Although a national trading system may not take hold for several years, the CPP’s incentives for interstate trading will catalyze movement toward carbon pricing, a strategy advocated by mainstream economists and supported by many global companies as providing predictability in business planning.

Raising the bar on emission reduction

As administration officials have emphasized, EPA’s responsiveness to state and industry concerns has been coupled with an overall strengthening of the CPP. The 2030 national emission reduction target is now 32 percent below 2005 levels, as opposed to 30 percent in the proposal. Thus, while states and utilities may be able to ramp up more slowly than under the proposal, they will need to do more to reduce emissions by 2030. The glide path may be more gradual but it’s still challenging: by 2025, EPA predicts that emissions will be 29 percent below 2005 levels.

The higher level of ambition in the final CPP is necessarily tied to a strengthened definition of Best System of Emission Reduction (BSER), the key concept in section 111(d) of the CAA that drives emission reduction targets. In the proposal, EPA identified four emission reductions strategies – or building blocks – as BSER. The final rule drops one of these building blocks – energy efficiency – but recasts the remaining building blocks so they achieve equal or greater emission reductions overall. Since building block 1 (more efficient coal plants) is now less ambitious than before and building block 2 (increased natural gas utilization) is about the same, the bulk of this increase is due to strengthening building block 3 (increased production of renewable power).   

The result of this approach is to project a dominant role for renewables in producing electricity within 15 years.  EPA estimates that renewables will account for 28 percent of the national energy mix by 2030, coal will drop to 27 percent, and natural gas will increase modestly but then decline. This vision is considerably more radical than the projected energy mix in the proposal, which assumed a slower ramp-up of renewables, a rapid shift to natural gas in the early years of implementation, and a more gradual decline in coal.   

The administration’s embrace of renewables at the expense of fossil fuels may reflect wariness about building out the infrastructure to support replacement of coal with natural gas: it may fear that natural gas will be difficult to dislodge and replace with zero-emission technologies as reduction targets become more stringent in later years. This perspective would represent an important policy shift by an administration that has espoused an “all of the above” energy strategy and would place new pressures on utilities, for whom greater reliance on natural gas has been a low-cost and painless way to replace retiring coal plants. On the other hand, the wind and solar industries and their financial backers will tout the unlimited potential of renewables and argue that rapid reductions in cost and improvements in technology have created the conditions for rapid expansion.

Finding the sweet spot between implementation flexibility and strong climate goals

The administration seems to be betting that the highest priority for states and utilities is implementation flexibility, fairness and certainty and that a rule which achieves these goals will be broadly accepted even though it reflects more ambitious emission reduction goals and a more rapid transition away from fossil fuels.

This tradeoff won’t be appealing to fossil-fuel interests or to state officials and members of Congress who resent federal encroachment and believe that the CPP will raise the cost of energy and disrupt the power grid despite EPA’s predictions that energy costs will actually decline. But the public’s strong appetite for clean energy and concern about the climate threat will be a powerful counterweight to these voices. In the end, the administration’s gamble may pay off if energy prices don’t rise and the power grid remains reliable.

Ultimately, if enough states agree that the CPP is a heavy but manageable lift and that EPA has provided the tools for successful implementation, CPP opponents may lose momentum. If this occurs, the CPP would have a solid base of support among the mainstream regulators and power companies most critical to carrying out its requirements and the stage would be set for a historic decline in power plant emissions.

Bob Sussman recently completed four and a half years of service in the Obama administration, first as co-chair of the Transition Team for the EPA and then as senior policy counsel to the EPA administrator. He was a senior fellow at the Center for American Progress in 2008, writing and speaking about climate change and energy. In 2007 he retired as a partner at Latham & Watkins. He previously served in the Clinton administration as the EPA deputy administrator, chief operating officer, and regulatory policy officer.