Generating Controversy: EPA's Clean Power Plan
• The EPA’s Clean Power Plan (CPP) is expected to reduce total CO2 emissions by 32% from their 2005 level by 2030
• The CPP is projected to raise electricity prices and lower GDP somewhat
• The CPP is controversial. Many states oppose the CPP and manufacturers will likely have different views regarding the CPP’s benefits and costs
The Clean Power Plan
The EPA issued its initial Clean Power Plan (CPP) in June 2014 with the aim of reducing carbon emissions from existing fossil fuel electricity–generating plants. The final rule, released on August 3, 2015, reflected a number of significant changes. States must begin to implement the CPP by 2022 and attain the emission targets by 2030; there are also interim targets between the two years. The EPA estimates that implementation of the CPP will reduce total CO2 emissions by 32% from their 2005 level.
The state targets for emission reductions, based on levels in 2012, vary widely. Connecticut and Idaho will need to cut emission levels by just 7% and 8%, respectively, while Illinois, Montana, and Wisconsin are expected to achieve reductions of more than 40%.
States can reduce emission levels through various approaches. Reductions from the generation of electricity from newly constructed nuclear plants will be counted, but the most important steps will be the substitution of gas-fired electricity generation for coal-fired generation and increased use of non-hydro renewable energy (primarily wind and solar) for electricity generation. States can also get credit for improvements in energy efficiency.
Implications of the CPP for Electricity Generation
Although the final rule differs from the proposed rule, an EIA analysis of the original CPP provides an approximation as to the expected breakdown of the reductions and the impacts on different sources of energy (Figure 1). A caveat in Figure 1 is that the contribution from non-hydro renewable energy is anticipated to be greater in the final rule than in the original proposal.
In a review of various studies of the CPP, Jeff Hopkins of the Center for Climate and Solutions concluded that increasing energy efficiency is the least-cost strategy to meet the emission targets. Switching from coal to natural gas is the next most important step, though if pushed too far, such a strategy would raise the cost of natural gas. Increased reliance on wind and solar electricity generation will help, but the CPP does little to drive additional zero-carbon generation beyond what was already projected in long-term baseline scenarios that did not include the impact of the CPP.
A Controversial Proposal
The CPP will differentially affect states, utilities, manufacturers, and consumers and thus create winners and losers, many of whom will join the debate surrounding the CPP. The environmental community views the health and long-term climate benefits from reduced CO2 emissions as significant. The climate change agreement reached in Paris in December will provide a further argument for going ahead with the CPP. The EPA and those pushing for adoption argue that the costs of reaching the EPA’s CO2 emission targets are not substantial and that there is flexibility as to how the targets can be reached.
Opponents include the coal industry, many electric utilities, and states. At last count, 24 states have filed lawsuits over the CPP. In early December, the House passed two joint resolutions to kill the plan. Some law professors, including Harvard’s Lawrence Tribe, find the proposal unconstitutional.
Potential Economic Impacts
The plan is expected to raise electricity prices relative to projected prices from the EIA’s long-term baseline case that did not factor in the impacts of the CPP. The EIA’s analysis of the original CPP found that by 2030, electricity prices would be 4.0% higher than in the baseline case. Further, the CPP’s emission targets for 2030 could be extended (in what the EIA labeled the “policy extension” case) so that additional emission reductions could be required out to 2040. In this case, the price of electricity would be raised by 5.9% above the baseline projection. Since these projections reflect average electricity prices for the U.S. as a whole, the impact on electricity prices will vary by state.
In terms of macroeconomic impacts, GDP is lower with CPP than in the baseline case because more investment is required to generate electricity from low- and zero-carbon sources. With the plan, cumulative GDP is reduced by 0.15% to 0.25% over the period from 2015 to 2040. If the CPP is extended out to 2040, the cumulative reduction in GDP is approximately 0.26%. In terms of the actual reduction in GDP with the CPP, the present value of the cumulative reduction out to 2030 is approximately $660 billion, based on a 4% discount rate. If the CPP is extended out to 2040, the present value of reduced GDP (in 2009 dollars) exceeds $900 billion.
Some have found much higher costs than those estimated by the EIA. For example, a study by NERA calculated that total “energy system costs” could rise by $335 billion to as much as $479 billion over the period from 2017 to 2031, depending on what happens to the price of natural gas, the demand for which will grow as coal-fired generation units are phased out.
Effects on Manufacturing Companies
Manufacturers will likely have quite different views on the CPP. Some will support the plan in part because it will boost the amount of electricity generated by wind and solar power, both of which require a wide range of sophisticated manufactured products. There may also be a boost in investment for energy-efficient products. On the other side, manufacturers whose businesses are tied to the coal industry may oppose the plan. Manufacturers that purchase large quantities of electricity will be adversely affected because the CPP is expected to raise the price of electricity.
The fate of the CPP is far from settled, as legal challenges will keep it tied up in the court system for a while and it could face continuing challenges in Congress. With or without the CPP, it is clear that the share of electricity generation from coal-fired plants will continue to fall, in large part because natural gas–fired generation is replacing generation from coal-fired plants. In addition, electricity generation from wind and solar power will continue to grow, as will improvements in energy efficiency.
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