Dear President Obama: For Clean Air,
Do We Dial 111, Boxer, Or Waxman?

The EPA is slated to pass regulations on power plants this year under the Clean Air Act, while Senators Boxer and Waxman work to inject a carbon price back on to the federal agenda. Here are a few reflections on the undercurrent of discussion on how tradable mechanisms for climate mitigation might figure into federal GHG regulations down the line.

This piece originally appeared on the EKO-ECO blog moderated jointly by Ecosystem Marketplace and EKO Asset Management Partners. Read the original here.

25 March 2013 | We’ve seen the United States achieve significant emission reductions for the transportation sector through the Clean Air Act, but power plant emissions – representing almost 70% of US emissions – require a unique fix. Last week in Washington, DC, I attended a symposium hosted by Senator Tom Carper (D-DE) where panelists explored possibilities for achieving meaningful reductions of power plant emissions under Section 111 of the Clean Air Act – and without hurting the US economy.

Through the Clean Air Act, the US Environmental Protection Agency is slated to finalize New Source Performance Standards for GHG emissions from new power plants this year under Section 111(b), and expected to propose standards for existing power plants under Section 111(d).

What would meaningful reductions at reasonable cost look like under Section 111? Conrad Schneider from the Clean Air Task Force walked through calculations by the Northbridge Group for different levels of GHG reduction targets, invoking the most stringent example – 28% reductions by 2020 compared to 2005 levels – as a strawman argument. Costs to run the program would approximate $23/tCO2e. Schneider said that if phased in properly, increases in natural gas prices could be limited to 1% a year.

David Doniger from the Natural Resources Defense Council argued that these emission reductions could be achieved at a lower cost than Schneider proposes – thus it really comes down to the model and set of assumptions used.

While I can’t pass judgment on these models per se, what interests the Ecosystem Marketplace Carbon Program of course is how GHG regulations might leverage market mechanisms to make these numbers more favorable for compliance and ultimately for political and industry buy-in.

Because there it is – legislatively elusive yet referenced everywhere these days: President Obama’s State of the Union address call to Congress to pass a “bipartisan, market-based solution to climate change.” What enabling power does this phrase really have? What’s the federal legislative hook that might enable the US to achieve greater emissions reductions at reasonable cost and with legal certainty?

Against all political odds, if and when Congress stops dragging its feet, the US could see passage of a new climate bill – perhaps in the form of a federal carbon tax as promoted by Senators Barbara Boxer (D-CA) and Henry Waxman (D-CA) through their respective new carbon tax plans. But in the interim, Congress has the potential to provide clarity on how markets could fit into existing Clean Air Act legislation, which Monday’s panelists believe could create a clearer pathway for market-based solutions at a federal level.

Expanding existing EPA regulation:

Within Section 111’s regulation of power plants, there are a couple of grey areas relevant to markets. Kyle Danish – who advises companies from energy and other sectors at Van Ness Feldman – explained these at Monday’s symposium:

1. The EPA has yet to clarify whether compliance activities can include “beyond-the-fence” reductions outside of the power plant. There is no case law yet on compliance options for 111(b). Using industry preferences as the litmus test for legislative outlook, assuming regulations will require some level of GHG emission reduction target, it seems that industry members prefer to have flexibility in how they meet their compliance requirements. As Danish put it, “All companies in the industry place a high priority on having requirements that are at modest cost, provide for some flexibility all other things being equal, and have legal certainty.” Following on this, the business case seems to point in favor of use of a market-based approach that allows some level of flexibility through trading. The aggressiveness of emission reduction targets could in turn vary depending on the level of flexibility provided.
2. There is a lack of legal clarity on how much discretion states would have in determining their own plans in relation to the federal EPA directive. Industry’s receptiveness to GHG regulations varies by state, depending on how much companies rely on coal or natural gas for power generation. Already, many states feature market-based mechanisms – California’s cap-and-trade scheme, the Regional Greenhouse Gas Initiative, and the 35+ US states operating mandatory or voluntary renewable portfolio standards to name just a few. How these would plug into federal legislation is still up for discussion.

What about a fresh climate bill?

Beyond the Clean Air Act, the carbon tax candle is still burning. Sen. Barbara Boxer and Sen. Henry Waxman – historically cap-and-trade proponents – are both incubating carbon tax plans with the intention of restarting the conversation and pushing their plans through Congress.

The quick and dirty:

• Price tag: $20/tCO2e, +5.6% annually for 10 years
• Revenues: $1.2 trillion over 10 years, with 60% rebated to US residents and 40% to incentives for clean energy and research
• Emission reductions: 20% from 2005 levels
• Next steps: hearings this spring in the Environment and Public Works committee, Senate floor vote this summer

The plan (see discussion draft) backed by Sen. Henry Waxman (D-CA) and Sen. Sheldon Whitehouse (D-RI), like Section 111, hones in on power plants.

• Price tag: $15/$25/$35/tCO2e, +2-8% annually
• Revenues: TBD, possibly going toward mitigating energy costs for consumers, reducing Federal deficit, protecting jobs of workers at trade-vulnerable, energy intensive industries, reducing tax liability for individuals and businesses, and/or investing in other carbon mitigation activities
• Emission reductions: TBD
• Next steps: Public comments on draft due April 12

How Boxer and Waxman relate to 111

Going into the Q&A, I asked the panel to provide their frank assessment of the prospects for these new bills compared to working within Section 111 legislation. Dirk Forrister, head of the International Emissions Trading Association, said that based on his conversations with those involved with the new carbon tax plans, “Part of the interest in these new carbon tax plans is to allow discussion on options or proposals that might follow a path like Australia’s, which began as a fixed price that looks like a tax and then shifts into an emissions trading program.”

Forrister noted that a new carbon tax bill would have advantages in terms of providing legal stability (compared to patchwork provisions for markets using Section 111) and some basis for harmonization with carbon markets abroad, but that it’s probably “a long, slow path.”

Van Ness Feldman’s Danish shared two views on the interplay between the EPA moving forward with legislation this year and how that might affect Congressional willingness to act. “On one hand, some people take the position that the EPA moves forward to regulate this area and then Congress can take a pass because they won’t have to act,” he explained.

“On the other hand,” Danish continued, “some folks find that for the EPA to move forward with legislation will create the kind of friction needed for Congress to act. So it depends on which side you fall down on in that debate.”