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Why EPA Regulations are Important: an Implicit Price for Carbon Emissions

While climate legislation is stalled in Congress, the Environmental Protection Agency (EPA) has pushed forward regulations of pollutants besides carbon dioxide that will drive progress toward cleaner power generation fleets and cleaner air. The major new regulations include Utility MACT (also known as the Mercury and Air Toxics Standards (Mg), the Cross-State Air Pollution Rule (SO2/NOx), 316B of the Clean Water Act (H20), and the Coal Combustion Residuals regulation (coal ash). States, utilities, and legislators have shown both support and opposition in the face of these proposed regulations. Over the last year, there have been many movements to limit the EPA’s power to enforce these standards, most recently 25 states opposing Utility MACT, including the Kansas and Texas lawsuits,Senators Hoeven and Conrad’s legislation, and the FERC Commissioner stating the EPA pace is “too aggressive.” On the other hand, multiple states recently filed motions in support of the EPA, making now a good time to examine some key points and evaluate the synergistic effect of all the regulations.

How will regulations impact coal power generation and the grid?

There are multiple industry studies that analyze the EPA regulations (Credit SuisseNERCICF-FineDBBrattleCRA,ICF-EEIEPABernsteinCERAEIANERABPC). While estimates vary based on different policies and assumptions within each study, they conclude that a combination of all the EPA regulations may result in 25GW to a little over 50GW of coal generation units (2-5% of total electricity generation) to go offline by 2015. This range matches assessments made by Bryan Mignone, a Senior Policy Advisor at the Department of Energy, at the Wharton Energy Conference 2011, an article by energy policy expert Susan Tierney, and an estimate made by Natalie Rolph, chief economist from Black & Veatch, whom I spoke with at Black & Veatch’s Power Industry Briefing.

While the new regulations don’t directly set mandates for CO2 reduction, they do still create a carbon price signal. Some rough assumptions and calculations demonstrate that the marginal cost of abatement to meet the new EPA regulations would be close to ~$7-25/metric ton of CO2e. While a carbon tax would certainly be much more cost effective than the current patchwork of EPA regulations, it’s the only policy approach on carbon the Administration and the EPA have for the foreseeable future.

As coal plants are being retired from the grid, many industry players are pursuing alternate methods of generation to transition to cleaner, and more reliable sources of energy. Natural gas continues to be one of the more popular alternatives as its production yields low emissions and it is projected to have longevity in the market.

Why are the EPA regulations beneficial?

Many birds can be hit with one stone. While compliance costs will vary widely among companies in the industry, from a social cost-benefit standpoint, the cost of compliance is highly reasonable considering the long-term savings in healthcare and environmental expenses. Coal power generation (without advanced pollution controls) emits 99% of all human caused mercury emissions, distributes a hefty amount of SO2 and NOx across state boundaries, blows out ash, sucks in an incredible amount water, and has the highest ratio of carbon to energy output. According to the Energy Information Administration, in 2009, coal power production was responsible for 81% of all the GHG emissions from electricity generation while only producing 48% of electricity. While complying with a single rule like the Cross-State Air Pollution Rule might be financially expensive in the short term for limiting NOx/SO2, it results in relatively cost effective reductions for other pollutants like mercury, coal ash, and most importantly, climate altering CO2. According to EPA studies, Utility MACT and the Cross-State Air Pollution Rule combined will lower health care costs and prevent ~20,000-50,000 premature deaths annually.

Which utilities are best positioned to handle the EPA regulations?

Utilities in the market that anticipated carbon legislation and focused on clean energy will have an easier time handling the new regulations. The heads of eight major utilities (all members of the Clean Energy Group) sent a letter in December 2010 to the Wall Street Journal, titled “We’re OK with the EPA’s New Air-Quality Regulations.” The letter showed their collective agreement that compliance with the regulations can yield “important economic benefits, including job creation, while maintaining reliability.” John Rowe, CEO of Exelon, reiterated his support saying that the majority of the nation’s coal fleet “has or is already in the process of making the kinds of cleanup that is required.” These utilities have understood for a while that coal pollutants are interconnected and that carbon deserves a price. These same companies will benefit as that interconnectedness becomes an implicit reality overtime—that is, if congress does not entirely derail the power of the EPA.

Topics: Sustainability

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