Plausible Scenarios for GHG Regulation of Existing Power Plants under the Clean Air Act

1. Plausible Scenarios for GHG Regulation of Existing Power Plants under the Clean Air Act Dallas Burtraw Presentation for Princeton Carbon Management InstituteApril 16, 2014 Acknowledgements: Art Fraas, Josh Linn, Brady McCartney, Karen Palmer, Anthony Paul, Nathan Richardson, Matt Woerman and researchers at EPA and DOE Funding: RFF general support along with Bechtel Foundation, EPA, DOE, Mistra’s CLIPORE and INDIGO programs

2. Roadmap • Consideration of multiple criteria • Four “bookend” policy designs • The coordination dilemma

3. Multiple Criteria in Statute • Criteria in 111(d): emissions rates, emissions, cost, environmental outcomes, remaining useful life of facilities • Policies that reduce emissions (tons CO2) have a different effect on emissions rates (tons/MWh) and other pollutants • Expanding flexibility could reduce cost or enable an increase in ambition along any one of these metrics, but it can lead to ambiguous results with respect to other metrics • Program design will balance of multiple criteria

4. Multiple criteria indicate several plausible paths • Emissions rate approach / intensity standard (tons/MWh) • This approach is not new; lead phaseout • Questions: Covered sources? Trading? Subcategories? • Emissions budget (tons) • This approach is not new; NOx budget program • Questions: Trading? Allocation? • Portfolio approach / resource planning – RE, EE, secular trends • This approach also is not new; myriad existing state programs • Question: Measuring stringency? • Consideration: Spectrum of legal and regulatory risk • Key observation: Each design implies an assignment of asset value created by a carbon/other constraint

5. Four Policies Assign Asset Values Differently • Tradable Emissions Rate Performance Standard (rate based): The net compliance obligation stems from the difference between the benchmark and actual emissions rates • Output subsidy to producers • Emissions Fee or C&T with Allocation to Local Distribution Companies (California type): • Consumption subsidy to consumers (GRE & Brattle Group analysis) • Emissions Fee or C&T with Allocation to LDCs & Energy Efficiency (RGGI type): Lifetime undiscounted cost $40/MWh (Arimura et al. 2012) • Consumption and investment subsidy to consumers • Emissions Fee or C&T with Revenue-Raising Auction (Tax): EPA could not introduce a revenue-raising policy; states might • Asset value to government

6. A Conjecture on Stringency • 367 million short ton reduction from baseline in 2018, escalating linearly to 400 in 2020 and 650 in 2035 • Results in CO2 emissions reductions well past 16 percentage points for US in 2020 relative to 2005 (situation is less encouraging for other GHGs) • A technical basis for determining stringency? • EPA’s technical findings (Sargent & Lundy 2009; Linn et al. 2014 JAERE) identify “cost-effective” measures at existing power plants • EPA might pivot on this finding to establish state milestones • Coincidentally, the marginal costs are less than the Inter-Agency Working Group (2013) estimates of social cost of carbon

7. Structure and Cost Effectiveness of Bookend Approaches400 million short ton reduction from baseline (19%) Amer. Econ. Rev. 2014 forthcoming

8. State-level coordination is microcosm of global issues • Modeling assumes all states do the same policy. They might not. • State borders are incongruous with energy markets / power pools. • Investments in energy efficiency may not facilitate state compliance. • Mixing approaches can create a federalist’s dilemma.

9. Compare one region TPS policy with four region mixed policy Four Regions (3 capped regions and one large TPS policy region)Emissions Reductions = 352 mtyin 2020 One Region (TPS policy)Emissions Reductions = 400 mty in 2020 • Output subsidy in TPS region attracts investment & generation driving up emissions • Greater electricity transmission from TPS to budget regions • Emissions in budget regions are capped; generation falls and emissions intensity up • This suggests cost-effective design may require coordination. Does this influence the best system of emissions reduction?

10. Attributes of Coordination • Lessens the “federalist dilemma” • Better coordination in power markets • Resiliency to electricity supply or demand disruptions • Broader coordination in achieving “other environmental outcomes” including air quality goals • Stronger coalition to influence federal policy • Cost shifts? • A general result: Gains are greater than losses in aggregate • Relationships lead to cooperation and likely shared savings

11. General Equilibrium Considerations • General equilibrium considerations • Change in gas price (8-27% in 2020) affects rest of economy. • The hidden tax-interaction effect hinges on changes in product. prices. The small price change mitigates this (Goulder, Hafstead and Williams 2014) and mitigates competitiveness effects. • Nonetheless, small price changes fail to incent energy efficiency. Other regulatory design needed (NRDC proposal).

12. Three exceptional characteristics of 111(d) Thank you! Multiple evaluation criteria are relevant:emissions rates, emissions, cost, cost effectiveness, environment benefits, remaining useful life of facilities, innovation State-based process expected Best System of Emissions Reduction implies flexibility

13. Additional Slides

14. Simulation Modeling • Each of these approaches is modeled using a detailed electricity sector planning model (Haiku; see Paul et al. 2009a) that solves through 2035 for 22 linked regions, three seasons, four times of day, three customer classes • Econometrically estimated opportunities to improve heat rates at coal units (Linn et al. 2013) • Roughly 2/3 of consumption represented in cost of service regions; rest in competitive regions • Demand and other parameters calibrated to EIA AEO 2012, with gas prices updated to 2013 • Partial adjustment demand system captures dynamic long-run adjustments to short-run price changes (Houthakker et al. 1974; Paul et al. 2009b) • Detailed representation of other environmental constraints (CAIR, MATS) and state renewable standards, cap and trade

15. National Uniform Tradable Emissions Rate Performance Standard (TPS) Emissions Reductions = 400 mty in 2020 Colors indicate credit flows by fuel and state Total value approaches $10 b Note some states both win and lose

16. One Region: Matching Emissions Rate from TPS ResultThree Regions: Emissions Budgets from TPS Result Emissions Reductions = 352 mtyin 2020 • Output subsidy in TPS region attracts investment & generation driving up emissions • Greater electricity transmission from TPS to budget regions • Emissions in budget regions are capped; generation falls and emissions intensity up • Cost-effective design may require coordination. Does this influence the best system of emissions reduction?