On EPA’s carbon rule, economists say interstate coordination will be key
As a result, the process could result in as many different approaches to carbon reduction as there are states covered under the rule.
But weighing in on the Clean Power Plan (CPP) in the journal Science last week, a group of the nation’s leading carbon economists had this advice for states: If you want to reduce emissions cheaply, you’ll need to work together.
Ideally, states will opt to coordinate their approaches through regional carbon markets, said co-author Michael Greenstone, a former Obama adviser now with the University of Chicago.
“While the EPA has allowed states to achieve emissions reductions through multiple approaches [in the CPP], the best way to minimize costs and facilitate economic growth is by joining regional trading programs,” he said. “Even better would be if all states joined in the same trading market.
“EPA should do everything possible to encourage all states to join together in a single market,” he added.
Power over the border
Given the political realities facing the plan, it’s unlikely that all states will rush to join such a system, he said. But even acting on their own, states will need to coordinate their approaches, given the integrated nature of U.S. networks.
The fact is that, while the CPP’s targets may be delineated by state lines, the power sectors they oversee are often not, said Merideth Fowlie, an associate professor in the Agricultural and Resource Economics Department at the University of California, Berkeley. Power flows freely among many states, and power networks have themselves become geographically integrated, she said.
“That complicates compliance when you’re talking about state-specific standards,” she said.
By setting different standards for two power plants in the same network — even if those power plants are in different states — there is the potential to skew power markets toward the lower standard, she said.
In a blog post for Berkeley’s Haas School of Business, Fowlie offers the example of Arizona, whose emissions rate target under the CPP is less stringent than that of nearby California. “Increasing the flow of power exports from Arizona to California could offer a means of bringing both states closer to compliance without delivering real emissions reductions,” she writes.
Setting a cap on Arizona’s emissions — as is the case for states participating in the Regional Greenhouse Gas Initiative — could provide a check on such action. But the CPP’s targets for individual states are rate-based, rather than mass-based, meaning that the plan mandates no specific level of emissions reductions. Instead, states are required to lower their emissions levels relative to the amount of electricity they generate.
EPA drafted the plan based on projections of future energy demand and estimates that, given those forecasts, its targets will lower emissions from U.S. power plants by 30 percent from 2005 levels by 2030. But if electricity demand rises faster than projected, there is no mechanism within the plan to prevent a corresponding rise in emissions.
EPA in captain’s seat
In fact, the authors note, a state could actually increase its emissions — a coal-heavy state could add more natural gas capacity, for example — while lowering its overall emissions rate at the same time.
While a rate-based approach may present some potential pitfalls in the context of multistate, integrated power markets — the theoretical case of Arizona and California, for example — the issue can be addressed with appropriate oversight from EPA and the states, said study co-author and Stanford economist Lawrence Goulder.
The appeal of a rate-based approach is that it allows state economies some room to expand or contract, he said. “My view is the [CPP] can be relatively cost-effective whether or not states meet their standards through a rate-based or a mass-based approach,” he said.
EPA has indicated that states may be able to elect for a mass-based target if they opt into a regional plan.
The report’s authors note that EPA has a critical role to play in promoting coordination among states and suggest that the agency draft specific guidelines on which states can model their own rules. “EPA has assumed this coordinating role in past programs to reduce administrative difficulties that impede coordination across state boundaries,” they write.
And however coordinated or integrated states’ approaches prove to be, the Clean Power Plan itself represents a major step for the United States in addressing its emissions. “When history is written, I think it will say that this was the moment that the U.S. took a serious stand on climate,” Greenstone said.
The authors, including economists from Harvard University; Yale University; the University of California, Davis; and the Massachusetts Institute of Technology, are currently preparing a detailed comment to be submitted to EPA before the CPP’s comment period closes Dec. 1.