Offsetting Not An Option In
Upcoming EPA Carbon Rules: NRDC

Forestry, land use and other types of offsets are likely to be shut out of the carbon regulations soon to be proposed by the US Environmental Protection Agency. But the Obama administration will be supporting such projects through other programs as part of its efforts to ensure the US follows through on its emissions reduction pledge.

9 August 2013 | Power plant owners will have plenty of options to comply with whatever carbon regulations the US Environmental Protection Agency (EPA) releases next month, but offsetting will not be one of them, according to a Natural Resources Defense Council (NRDC) official.

The US has committed to reducing its greenhouse gas (GHG) emissions by 17% from 2005 levels by the end of this decade. In June, President Barack Obama laid out his vision for ensuring that the US can meet this goal, using his executive authority in light of inaction on climate policy by Congress, and making it “very clear that addressing climate change really is a key priority for his second term,” says Dan Lashof, Director of the NRDC’s climate and clean air program.

Obama has directed the EPA to complete carbon pollution standards for both new and existing power plants in recognition of the fact that power plants are the largest concentrated source of US emissions, accounting for about one-third of domestic GHG emissions.

The presidential memorandum instructed the EPA to issue a new proposal for regulation of new units by no later than September 20, 2013. “It’s a quite ambitious schedule, but I think it’s one that they will meet because it has the president’s signature on it,” Lashof said Thursday at an event sponsored by consultancy ICF International.

The EPA released initial rules for these new facilities in March 2012, but they had not been finalized. The regulations would have required new plants emit no more than 1,000 pounds of carbon dioxide (CO2) per megawatt-hour (lb/MWh). Coal power plants typically produce about 2,100 lb/MWh, while natural gas-fired plants emit 1,000 lb/MWh or less.

The new proposal reportedly could feature structural changes such as the possible inclusion of subcategories for coal and gas-fired plants rather than the uniform approach the EPA took in its original proposal.

“But we don’t expect the overall performance levels to change substantially and we don’t expect it will change the impact of the new source standards, which will make it illegal to build new coal plants that don’t capture at least part of their CO2 emissions,” he says. “Given that the market has already basically moved away from coal, the real importance of the new source standard is the legal predicate for regulating existing power plants.”

Obama requested that the EPA issue proposed standards, regulations or guidelines for existing facilities by June 1, 2014, with the final requirements published no later than June 1, 2015, and states submitting their implementation plans to the agency no later than June 30, 2016.

The president’s speech and the accompanying Climate Action Plan document did not provide many details about the upcoming EPA regulations, which would be developed as New Source Performance Standards (NSPS) under Section 111(b) for new plants and Section 111(d) for existing plants under the Clean Air Act.

In December 2012, the NRDC offered “the first and still only definitive proposal” outlining a potential vision for NSPS regulation of existing power plants under Section 111(d), ICF vice-president Steve Fine notes. “The proposal has engendered some criticism, but it has also engendered some support,” he says.

The NRDC suggested the EPA set state-specific emissions rates and give power plant owners and states broad flexibility to meet standards in the most cost-effective way. Under the proposal, the EPA would first tally up the share of electricity generated by coal and gas-fired plants in each state during the baseline years of 2008-2010 and then set a target emission rate for each state for 2020, based on the state’s baseline share of coal and gas generation. A state such as North Dakota, where coal represents 82% of the generation mix, would have a baseline standard of 1,500 lb/MWh, while California, where natural gas has the dominant share of the energy mix at about 50%, would have a 1,000 lb/MWh standard.

The proposal outlines a number of compliance options, including plants reducing their own CO2 emission rates by retrofitting with more efficient boilers. “The problem with that is that it’s a pretty expensive way to get emissions reductions … and it just doesn’t get you very far,” Fine says.

Owners of multiple power plants could also average the emissions rates of their plants, meeting the required emission rate on average by running coal plants less often, and ramping up generation from natural gas plants or renewable sources instead, according to the NRDC proposal. They could retire coal plants and build new natural gas and renewable capacity, with low or zero-emitting sources such as wind and solar earning credits that generators could use to lower their average emissions rate. But this part of the proposal has earned criticism from observers who believe that Section 111(d) cannot be used to establish a crediting system that involves renewable energy sources.

“They’re not regulated and they’re not regulated under our proposal, but they directly result in a reduction in the emissions from the fossil fleet,” Lashof responds.

The NRDC plan also allows trading of credits between companies within a state and across state lines among states that allow it, which lowers the cost of compliance. The organization is urging the EPA to allow states to join multi-state compacts that would allow them to trade credits across state borders, he says. The president explicitly acknowledged state leadership in forming cap-and-trade programs in his speech, providing an apparent boost to compliance markets in California and the Northeast’s Regional Greenhouse Gas Initiative that could be submitted by the participating states as achieving equivalent or greater reductions than the federal template.

“We don’t necessarily think the EPA should mandate that, but we think they should encourage it,” Lashof says.

The NRDC also recommended that state-regulated energy efficiency programs earn credits for avoided power generation and avoided pollution, with generators allowed to purchase and use those credits towards their emissions compliance obligations. This would effectively lower their calculated average emissions rate and provide a cost-effective compliance option to slash emissions, according to the proposal.

But despite the professed support for compliance flexibility by the Obama administration, offsetting would not be available as an option under the NSPS regulations developed by the EPA for legal reasons, Lashof says.

“We don’t think EPA can or should allow true offset credits, say offsets from land or emissions reductions from other sectors,” he says. “We think that the universe of measures that have to be considered need to be limited to measures that have a direct impact on the emissions from the fossil fuel generating units.”

However, the president’s Climate Action Plan notes that GHG emissions from deforestation, agriculture, and other land use constitute about one-third of global emissions, highlights REDD+, and addresses the role of the US in mitigating carbon emissions by reducing agriculture-driven deforestation. Other US agencies such as the Forest Service and the Department of Agriculture run a range of programs designed to increase soil sequestration and to protect forests that could support offsetting projects, Lashof says.
“I think the overall 17% reduction target is guiding a range of policies,” he says. “Those are important goals and the administration will be pursuing them through other measures.”

The previous proposal for new sources envisioned a significant role for carbon capture and sequestration (CCS) technology, allowing new plants that install CCS to use a 30-year average of CO2 emissions to meet the proposed standard rather than meeting the annual standard every year.

“I believe CCS will still be a key part of the technical basis for the performance standard for coal,” he says.

ICF modeling showed that the NRDC’s plan could result in emissions reductions of 500 million tonnes by 2020 compared to the reference case.

The NRDC estimates the overall compliance cost of its proposal at about $4 billion on an annual basis by 2020 compared to the benefits of reducing CO2 and traditional pollutants such as sulfur dioxide, pegged between up to $25 to $60 billion. The lower end of that range was based on a previous estimate of the costs of social carbon, but in June the Obama administration raised that estimate to $35 per tonne, up from $21/t per tonne.

The plan would also stimulate investments of more than $90 billion in energy efficiency and renewables between now and 2020, according to the NRDC.

Despite the ambitious schedule, the standards are unlikely to come into play until at least 2018, given the implementation work that the states will need to do, Lashof says. However, utilities thinking about potential investments now have a very specific schedule to guide those decisions.

“I think the reality is the fact that some kind of standards are forthcoming has already started to affect the market,” he says. “Now that the president has actually said it and put his name on the schedule, I think they believe it. It would be only prudent to assume there is going to be some kind of cost or penalty for CO2 emissions.”

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