What will EPA’s proposed carbon standards cost? That — still — depends on who you ask

Source: Nathanael Massey, E&E reporter • Posted: Thursday, June 19, 2014

When U.S. EPA released its draft rule for power plant greenhouse gas emissions earlier this month, it also handed the public a receipt — in the form of a regulatory impact assessment (RIA) — detailing the plan’s expected costs and benefits.

Long before the RIA was ever issued, however, interested parties were already haggling over the bill.

In the weeks and months preceding EPA’s Clean Power Plan (CPP), a handful of institutes, environmental groups and industry associations released separate and sometimes dueling reports on the expected costs of regulating greenhouse gases under the Clean Air Act. The most widely cited of these — an estimate by the Natural Resources Defense Council (NRDC) issued in March, and another by the U.S. Chamber of Commerce released some weeks later — painted highly divergent pictures of how the CPP’s costs may play out with the NRDC’s estimate predicting widespread societal benefit and the chamber’s foreseeing a steadily accumulating economic burden.

So with EPA’s own estimate now before the public, is it time to shelve the prior reports? Not quite, say their authors. While already working to update their projections, both proponents and opponents of the CPP say the rationales that underpinned their past estimates still hold and may provide a basis to challenge the plan in the future.

“Of course the numbers aren’t going to line up perfectly between our assessment and the EPA’s, because our analysis came out before we knew exactly what the rule would look like,” said Matthew Letourneau, senior director of communications for the Institute for 21st Century Energy at the U.S. Chamber of Commerce. “But we actually think the economic impacts of the plan aren’t that far off. EPA is making some very optimistic projections on a number of their assumptions.”

Sparring over the unknowns

In its prior estimate of costs, the U.S. Chamber estimated that to lower emissions from the electricity sector by 42 percent by 2030, the CPP would cost $28 billion a year, on average, for the years 2014 to 2030. While the proposed rule issued by EPA this month aims for a lower target of 30 percent emissions reduction by 2030, the agency’s findings are still much lower, relatively, than the chamber’s estimates with costs rising to $8.9 billion by 2030.

That report drew strong pushback from the agency in late May (ClimateWire, May 29). The U.S. Chamber responded with a counter-critique shortly thereafter.

In part, the discrepancy lies in the chamber’s prior assumption, based on the 42 percent target, that carbon capture and storage (CCS) technology would be needed for new combined-cycle gas power plants, going beyond the emissions performance standards laid out by EPA.

In EPA’s rebuttal, Associate Administrator for External Affairs Tom Reynolds noted that the agency “has indicated frequently that CCS would not be considered for existing power plants. Given that three-fourths of the chamber’s alleged cost estimates come from power plant construction — namely, natural gas with CCS plants — this assumption drives up the topline cost associated with this study.”

Be that as it may, said Letourneau, carbon storage will eventually be needed if the country is to surpass the 30 percent emissions reductions mark. “We’re talking about this like after 2030, the reductions just end,” he said. “At some point, if you’re going to keep cutting emissions, you’re going to need [carbon capture and storage]. Otherwise you reach a point where there’s nowhere to go.”

New Source Performance Standards (NSPS) — which could eventually require CCS for combined cycle plants — are subject to review every eight years, and future changes will likely depend on future context, as well as any rules made over the next several years.

Requiring carbon capture on combined cycle gas plants as part of a future revision of NSPS “will depend on who is president and to what degree the cost and performance of CCS technology improves over the next 5-10 years” said John Larsen, a senior analyst with the energy consulting firm Rhodium Group.

Hope in efficiency?

On the other side of the divide, NRDC contends that EPA’s rules may be hedging their estimates too closely.

The organization ran a number of different scenarios in crafting their proposal and considered reduction targets of varying levels of stringency. Under a moderately ambitious scenario, it found that emissions reductions of 35 percent would be possible by 2020, ratcheting up to 39 percent by 2025, at modest costs.

While those numbers land above EPA’s own estimates, the NRDC believes more ambitious emission reductions are economically achievable under the framework the agency has laid out, said Starla Yeh, a policy analyst with the group’s Climate and Clean Air Program.

One area where the NRDC sees room for more ambitious gains: energy efficiency.

“The target in EPA’s proposal of 1.5 percent of total annual electricity use has already been adopted by a number of states. An effect of EPA’s conservatism in developing its assumptions on energy efficiency is to greatly underestimate the amount of savings possible,” Yeh said. “EPA relies on several assumptions that make efficiency seem more expensive and slower to deploy.

“In NRDC’s analysis, we assumed the total cost [of energy efficiency] to be a little under 5 cents per kilowatt hour,” she said. “The EPA’s assessment is nearly double. That drives a lot of the cost difference we see between the two cost estimates.”

The difference in costs stems from a number of considerations, she said, including EPA’s view that costs escalate as the total savings rate increases. In the NRDC’s view, “it is well supported in the literature that costs decline from economies of scale as programs are implemented at the levels of savings we are dealing with. ”

Estimates subject to change

Perhaps unsurprisingly, the chamber has a very different take on the question of efficiency.

While a few states have hit the 1.5 percent mark in the past, “assuming every state is going to make that kind of gain every year is very optimistic,” Letourneau said.

As the CPP’s comment period unfolds, these and other arguments will likely crop up again, challenging and perhaps even shaping the outcome of the finalized rule next summer. And after that, they may well crop up in all but inevitable challenges that some states will bring through the courts.

What can ultimately be achieved with the proposed rules will depend on up to 49 plans from 49 different states, each of them with a unique mix of resources, background and political will. The flexibility inherent in the rule may ultimately contribute to more or less emissions reductions than what EPA currently projects, but it’s also a way to keep the rule alive, said Rhodium Group’s Larsen.

“From a legal perspective, it appears they left some wiggle room in each of the building blocks,” he said. “Perhaps they could have pushed harder on one of the blocks or another. But there’s also an important argument that EPA makes — if states come back to them and say, we don’t have as much emissions reductions in this one building block as you think we have, the agency can always point to the others as areas where they can do more.”

Click here for the Rhodium Group’s breakdown on differing cost estimates.