A few months ago the EPA recently released a proposed rule to regulate greenhouse gas (GHG) emissions from existing power plants. Although the proposed rule only requires states to limit GHG emissions from existing power plants, states may choose instead to regulate GHG emissions from a wide range of other industries and emissions sources either directly or indirectly. Executives and managers of facilities with high electricity usage or GHG emissions should closely monitor the development of the regulatory plans in the states in which they operate. These plans will likely pose regulatory challenges for some and business opportunities for others.
The EPA’s proposed rule sets a nationwide GHG emission reduction target from existing power plants of 30% below 2005 emission levels by 2030. To achieve this goal, EPA has proposed binding emission reductions targets for each state, taking into account each state’s current level of carbon dioxide emissions and electricity generation sources. States are then given two or three years to develop plans (which must be approved by EPA) to achieve these emission targets. In its proposed rule, EPA has put forth four “building blocks” which the states may utilize in their plans to achieve the required GHG reductions from existing power plants. The four building blocks are:
1. Increasing efficiency at fossil fuel fired power plants.
2. Substituting generation from high emitting power plants (e.g., coal-fired) with generation from lower emitting power plants (including natural gas fired plants).
3. Substituting generation at fossil fuel fired plants with low or zero carbon generation, such as renewables.
4. Implementing demand–side energy efficiency programs that reduce the amount of electricity generation required.
Although carefully drafted to always reference emission reductions from power plants, since the EPA does not have the legal authority under this rule to directly regulate emissions from other sources, the rule actually provides a pathway for states to regulate other industries and facilities through their climate change plans.
Building block 4 allows states to achieve emissions reductions through encouraging or mandating greater energy efficiency from end users. With approximately 57% of all electricity in the U.S. used by industrial and commercial customers, demand-side programs implemented by the states will almost certainly target these entities as they present a large source of potential demand reduction. Industries with particularly high electricity energy needs, such as steel production, information technology providers with large servers, or owners of large buildings, could prove to be particularly attractive targets for demand reduction programs under state plans.
The approaches available to states that choose to implement demand-side efficiency programs are varied and include financial incentives to adopt energy efficient processes and technologies, building codes mandating greater energy efficiency, and mandated efficiency standards for equipment and appliances. Thus, depending on the state or states in which a company operates, it could be faced with a patchwork of building and equipment efficiency regulations and/or financial incentives to participate in efficiency programs. These programs could impose significant costs on facilities if they are required to install more efficient equipment or otherwise invest in energy efficiency-related capital improvements. Conversely, demand-side programs may be a boon to manufacturers of energy efficient products.
EPA’s proposed rule could also result in the regulation of entities beyond power plants through the implementation of state cap-and-trade programs. EPA directly sanctions the use of cap-and-trade systems in order to meet the emissions limitations in the proposed rule. Some states and regions have already established cap-and-trade systems that apply only to the electricity generation sector. However, there is nothing in the proposed regulation preventing a state from implementing a cap-and-trade regime involving a broader swath of the economy as part of its state plan. Indeed, the proposed rule specifically notes that California’s economy wide cap-and-trade program has resulted in a significant reduction in emissions from the power sector, as well as other regulated sources. If including existing power plants, as well as other emitting sources and industries, in a cap-and-trade program reduces implementation costs, produces other efficiencies, or advances state policy goals, then some states may choose to implement an economy wide cap-and-trade program to meet its obligations under the proposed rule. If a state were to pursue this route, entities such as cement manufacturers, chemical manufacturers, and refineries would be likely targets for inclusion in such a program given their relatively high levels of GHG emissions.
The EPA’s proposed rule regulating GHGs from existing power plants has not yet been finalized and will undoubtedly face numerous legal challenges. However, if finalized the approaches taken by the states in developing their regulatory programs are likely to be varied and, in many cases, will include either direct or indirect regulation of facilities other than existing power plants. Companies with significant direct GHG emissions or large electricity usage should closely review the EPA’s final rule and, more importantly, monitor the development of the implementation plans for the states in which they operate or do business. Depending on the various approaches taken by the states, some facilities and industries could face additional regulatory challenges. However, the inclusion of end user energy efficiency in EPA’s proposed rule may provide business opportunities for other industries, such as manufacturers of energy efficient equipment. While the exact impacts of EPA’s proposed rule cannot be determined at this time and will vary considerably depending on state and region, if EPA’s proposed rule is upheld in its current form, it is almost certain that its impacts will be felt beyond the electric power industry. Failure by executives and facility managers to pay close attention to the respective state plans and their requirements could lead to instances of non-compliance with applicable standards or missed opportunities to participate in financially advantageous energy efficiency programs.
Adam Riedel is an attorney in the Energy, Environment and Natural Resources practice in the Washington, D.C. office of law firm Manatt, Phelps & Phillips. His practice focuses on the resolution of environmental enforcement matters, compliance counseling, climate change regulation and the management and resolution of environmental issues in transactional contexts. Mr. Riedel previously served as the Associate Director of the Columbia Law School Center for Climate Change Law. He can be reached at (202) 585-6522 or [email protected]