Earlier this month, the Obama Administration released the final version of the Clean Power Plan (CPP), an effort to curb carbon emissions nationwide. The final rule uses a combination of renewable energy and significant limitations on carbon emitting plants to achieve this goal.

It is worth noting that the overall reductions required by the final rule were increased from the proposed rule. Under the final CPP, renewable energy sources will be required to make up approximately 28% of the nation’s energy capacity by 2030. This represents a significant increase from the 22% renewable requirement in the proposed rule. And carbon-emitting power plants must cut 2005-level carbon emissions 32% by 2030, a seven percent increase in the overall amount of reductions from the proposed rule.

Clean Energy Incentive Program

To help drive overall carbon emission reductions, US EPA will run the Clean Energy Incentive Program, which rewards early investment in renewable energy generation as well as energy efficiency programs if those programs create carbon-free energy or reduce energy demands in 2020-2021. Participating states can receive matching allowances (or Emission Rate Credits (ERCs)) up to 300 million short tons of CO₂ emissions. There is a bias toward increasing efficiency on the demand side in low-income communities, as compared to development of wind or solar projects. Energy efficiency projects in low-income communities will receive 2 ERCs for 1 MWh of avoided generation. Wind or solar projects will receive 1 ERC per 1 MWh of generation.

In the final rule, US EPA openly states that it “will drive deeper decarbonization after 2030 than in the proposed rule” and that the final rule is clearly designed to aggressively put pressure on the carbon generating sector of the energy industry. The final rule does not rely on natural gas to reduce carbon emissions. In fact, natural gas use remains relatively flat over time.

Reduction of Carbon Emissions, One Way or Another

Beginning in 2022, there are three step down periods to achieve the CPP’s CO₂ reduction goals. States are required to create and submit state implementation plans (SIPs) to demonstrate how each state will meet applicable targets. SIPs must be submitted to US EPA by 2016, or 2018 with an extension. There are three methods for state compliance:

1. Use the specific emission performance rate of 1,305 lb CO₂/MWh for fossil fuel steam (coal) and 771 lb CO₂/MWh for natural gas combined cycle (NGCC) steam.

2. Ensure that the state achieves compliance with state-specific rate-based goals.

3. Ensure that the state achieves compliance with the state-specific mass-based goals that includes a state-specific cap for new natural gas plants.

For those states that do not adopt their own SIPs, US EPA intends to adopt a federal implementation plan (FIP). The FIP would use either a mass-based approach or a rate-based approach to achieve the same levels of emissions performance as required of state plans under the final existing source performance standard (ESPS) rule.

The mass-based approach uses an emissions budget that sets the total tons of CO₂ that may be emitted by electric generating units (EGUs) in a given state under the final ESPS rule. Emissions allowances are distributed to EGUs based on historic generation. Each EGU must have enough emissions allowances to account for its actual emissions for the corresponding compliance period. EGUs may trade and bank emissions allowances, or may earn extra allowances by participating in qualifying renewable energy projects. This is US EPA’s preferred approach.

Under the rate-based approach, the final ESPS rule sets the emission rate standard that sources must meet. Sources whose emissions exceed the applicable emission rate must acquire enough emission rate credits to cover their actual CO₂ emission rate. An ERC is the equivalent of a zero-carbon-emitting MWh. US EPA will administer a program that grants ERCs to EGUs or other entities that supply zero- or low emitting electricity.

Conclusion

The CPP is, on its face, an incredibly aggressive rule for the reduction of CO₂ emissions. The final rule focuses on developing additional wind and solar early in the program, before EGUs are required to begin reducing CO₂ emissions. After that, states must quickly and aggressively begin reducing CO₂  emissions. The implications of the final rule will likely be far reaching. Already, the final rule is being challenged.  Fifteen states, led by West Virginia (Alabama, Arkansas, Florida, Indiana, Kansas, Kentucky, Louisiana, Michigan, Nebraska, Ohio, Oklahoma, South Dakota, Wisconsin, and Wyoming), filed in the D.C. Circuit an emergency petition for an extraordinary writ to stay the final rule pending resolution of threshold legal issues, also asking that the case be consolidated with a prior case filed by Murray Energy, where petitions for rehearing are pending.