The Clean Power Plan: Will States Choose to Comply?

EPA recently announced that, as it works toward finalizing the Clean Power Plan (CPP), it will develop a model Federal Implementation Plan (FIP). This plan would backstop the state planning process and lay the groundwork   for direct federal enforcement of the CPP in states that fail to meet their responsibilities.      

Previously, EPA had been silent on how it would treat states that balk at implementing the CPP. But it’s now clear that EPA is prepared to use federal authority to carry out the CPP in recalcitrant states and will describe in advance what actions it will take if state compliance falls short.

As EPA moves toward a model FIP, there will undoubtedly be renewed debate on the strategic choices facing states once a final CPP is in place next summer.  It’s likely that many states – particularly in the Northeast and on the West Coast — will develop implementation plans acceptable to EPA.  But states with serious reservations about the CPP may be tempted to boycott the implementation planning process. EPA’s model FIP will help these states evaluate the wisdom of this choice by spelling out the consequences of ceding control over implementation to the federal government.

The Just Say No School

Some law firms and political strategists have been advocating a “just say no” approach to the CPP. They argue that, by abstaining from CPP implementation, states can avoid accountability for the disruption and burdens that they fear the CPP will impose and minimize the expenditure of resources while the CPP is under judicial review. They add that EPA lacks meaningful authority and political will to impose federal mandates in non-complying states and therefore the CPP will collapse of its own weight if enough states abstain from implementing it.  

This is dangerous thinking that could backfire by depriving states of control over environmental and energy policy choices that the CPP commits to their discretion and exposing them to a federal regime that will be considerably more rigid and less accommodating of state flexibility.   

Cooperative Federalism and the Clean Air Act

The CPP is based on the “cooperative federalism” model that is a cornerstone of the Clean Air Act (CAA). Under this model, national emission limits for pollutants are set by EPA but states have latitude to decide how to achieve them and are responsible for developing and executing implementation plans.  If states do not develop such plans or they are inadequate, EPA has backstop authority to impose a FIP.

Despite many tensions in the state/federal relationship, this process has worked remarkably well in setting and achieving national ambient air quality standards for ubiquitous pollutants like ozone and particulate matter.  To be sure, states have at times been unhappy with EPA’s air quality standards and differed with EPA on how best to implement them.  But overwhelmingly states have stepped up to their implementation responsibilities.  The FIP authority has been used rarely and mainly on an interim basis as states and EPA resolve their differences and states regain control of their programs.

State Policy Choices under the CPP

Consistent with the cooperative federalism model, the CPP sets performance goals for reducing greenhouse gas (GHG) emissions but looks to states to develop and enforce implementation plans. CPP opponents argue that this scheme is in reality highly “prescriptive” because states have little discretion in choosing emission reduction strategies.   But the only legally binding elements of the CPP are its state-by-state emission reduction goals, the timeline for meeting these goals and the procedures and deadlines for developing implementation plans.  EPA’s much-discussed four “building blocks” for lowering GHG emissions, often depicted as dictating state energy policies, merely provide a general framework for emission reduction.  The CPP does not prescribe the precise mix of emission reduction strategies states must adopt or prevent states from using other approaches beyond the four building blocks  in meeting their goals. 

Thus, states can choose how much emphasis to place on increasing natural gas generation, accelerating growth of renewables, reducing electricity demand, or lowering emissions through other means. If they opt for rapid growth in renewables, they can decide what type of renewable power to encourage, over what timeframe and with what combination of incentives and policies. Or if they focus on energy efficiency, they can chose between building retrofits, replacement of older appliances and lighting, combined heat and power or smart-metering and other demand management tools.  And they can decide whether to place responsibility for renewables or energy efficiency on existing power generators, retail power distributors or third-parties like state agencies. 

As proposed, the CPP allows states to express emission reduction goals as a cap on emissions (mass-based limit) or a restriction on emissions per unit of power output (emission rate cap) and gives them free rein in deciding how to apply these limits to individual power plants.  Thus, states can impose cap-and-trade programs, environmental dispatch requirements or perhaps even carbon-based surcharges on wholesale power sales.  They can also set higher emission standards for coal-fired power plants essential for the reliability of electricity service so these plants can continue operating. And importantly, the CPP gives states the ability to collaborate on a regional basis, lowering the cost of compliance through interstate trading of emission allowances or renewable or energy efficiency credits.

The Loss of State Discretion under a FIP

Like a state plan, a FIP would be designed to meet the state’s emission reduction goal but would use a more limited range of tools than the state itself could employ.  The FIP could not mandate new state initiatives to boost renewables or energy efficiency. Nor could it shift compliance responsibilities from electric generating units to power distributors or other third-parties. As a result, the FIP’s requirements would likely fall entirely on power generators, whose GHG emissions would probably be limited through a system of permits or allowances.

Commentators have suggested that these FIP requirements could only compel power generators to implement “inside the fenceline” measures, such as improving plant combustion efficiency, and that states should welcome FIPs because they will result in a fraction of the impacts of state plans (and much smaller emission reductions).  Granted, EPA’s authority to define the “best system of emission reduction” to include actions outside the fenceline is one of the main legal disputes surrounding the CPP and a successful legal challenge on this issue would narrow the scope of both state implementation plans and FIPs. But if EPA’s reading of the law prevails, then it seems likely that EPA could use FIPs to require the same level of emission reduction that it seeks to achieve through state implementation plans and that power generators will need to take the steps required to make these reductions, which may include traditional inside the fenceline measures but also shifting generation to under-utilized natural gas plants and reducing the power output and emissions of coal plants. .  A less stringent approach would be difficult to defend  given that the purpose of the FIP is to remedy the gap created by an inadequate state plan. A FIP that provided significantly less environmental improvement  than an acceptable state plan could not fulfill this function and, indeed, would be a disincentive to the exercise of state responsibility because it would reward states who stayed on the sidelines.  

Thus, a FIP would likely require power generators to achieve reductions sufficient to achieve the state goal but without the benefit of state programs encouraging greater growth in renewable resources or improvements in energy efficiency. To some extent, EPA might overcome this constraint by designing the FIP to include a GHG allowance trading program that recognizes renewable energy and efficiency credits, incentivizing power producers to invest in these emission reduction strategies.  (The CAA authorizes FIPs to include economic measures, such as marketable permits or auctions of emission allowances). But even with these mechanisms, compliance with the FIP would necessarily be less flexible and more costly than compliance with state plans supported by the full range of policy tools and incentives available under state law.

Why States Should Stay in the Game

States may have deeply-held concerns about the legality of the CPP and its impact on the electricity supply system. The rulemaking process provides an initial forum for raising these concerns and offering constructive recommendations, as many states have done in their comments on the CPP proposal. Judicial review will be available once the CPP is final. But states that go further and opt out of the implementation process will lose the opportunity to shape the critical path for reducing emissions using the broad discretion provided by the CPP and instead abdicate to a less flexible, more costly FIP that does not reflect state policy choices.  It’s a foolhardy gamble to believe that states will fare better under a FIP than their own plan because EPA will hesitate to use its FIP authority or settle for insignificant emission reductions. The best protection for states – and ultimately the best assurance of a thoughtful and cost-effective GHG reduction strategy that benefits the state’s citizens — is to stay in the implementation game, whether state officials like the CPP or not.