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The Facts Behind EPA's Greenhouse Gas Regulations

Adam Peshek
April 3, 2012, 5:35pm

After the defeat of his carbon dioxide cap-and-trade legislation in 2009, President Obama told a room of reporters that there was “more than one way to skin a cat.” And in the new political era of regulation without legislation, the President’s EPA has released standards on carbon dioxide that do just that.

In perhaps its most sweeping regulatory approach to date, the EPA under Lisa Jackson recently released New Source Performance Standards (NSPS) for carbon dioxide, which aim to cut greenhouse gases emitted by the U.S.

In today’s post, I will look at the logic behind the rule and its fundamental flaws. In later posts I will look at what’s next for carbon dioxide regulations and an examination of the very idea of regulating carbon.

How EPA Skins a Cat

The NSPS requires all newly constructed power plants to meet an emissions standard of 1,000 pounds of CO2 per megawatt-hour (MWh) regardless of the type of fuel. The average coal-fired power plant puts out 2,000 pounds of CO2 per MWh and newer, more efficient models emit about 1,800 pounds per MWh. Simple math shows that the future of coal-fired electricity in the U.S. looks bleak, even for the industry’s best facilities.

Advocates for the new rules (who apparently must portray themselves as pro-coal) say that the new rules will not hurt the coal industry. That is because the rule only calls for 1,000 pounds of CO2 per MWh over a 30 year average. So in theory, a coal plant could emit 1,800lbs of CO2 for the first 10 years of operation, so long as it implemented yet-to-exist technologies to cut its emissions to 600 pounds per MWh by year 11.

If only it were that simple.

EPA’s rationale for the feasibility of the regulation is two-fold: (1) technologies will be available in the next decade that allow the capture and storage of CO2 emissions from coal and (2) the abundance of cheap natural gas that has flooded the market in the past few years.

The (Un)available Best Technology

The section of the Clean Air Act (CAA) that details the NSPS directives requires EPA to create regulations based on the “best system of emission reduction” that “has been adequately demonstrated,” taking into account costs, environmental impacts, and energy requirements.

The technology EPA points to with this regulation is called "carbon capture and sequestration" (CCS). CCS involves the capture of carbon dioxide from power plants before it is emitted and then the storage of the captured gas underground. The problem with using CCS as a “best available technology” is that it is not in use anywhere in the U.S., and is only in use in experimental, highly expensive sites in a handful of sites in Europe. It is nowhere near the point of viability technologically or financially.

EPA’s own, typically bullish analysts themselves admit that CCS viability is at least a decade away. To make this pass muster, EPA applied the 30-year average requirement. In doing so, EPA is saying “yes, the technology is not available today, therefore, apply the best technology available and in a decade apply CCS when it is viable.” Government agencies are prone to the conceit that they can predict the future, but this is a stretch even by EPA standards.

Aside from the technological and financial problems involved with CCS, there is also the problem with citing plants in places that can eventually store CO2 underground. This leads to even larger permitting headaches. How can you predict permitting requirements for a technology that is not yet in use and thus has not been subject to federal, state, or local permitting requirements? It is not merely a matter of building a new, modern plant and hoping you chose a site that is adequate for CCS.

Gas, Naturally!

The second, seemingly more logical, rationale for the rule’s approach is the abundance of cheap natural gas that is making coal less economically appealing.

It is true that in the near term, low natural gas prices are already making coal uneconomical, with utilities rushing to refurbish or build new natural gas plants to take advantage of its record low prices. As I mentioned in a post two weeks ago:

A gold rush of shale gas plus the ability to get eight-times the amount of energy from one well has caused gas supplies to skyrocket, driving down prices. With low prices, companies are fleeing the historically inexpensive and dirty coal-fired plants and maximizing natural gas plants, which emit roughly half the greenhouse gases. According to the study, the U.S. emitted nearly 9% less CO2 (the chief greenhouse gas) in 2009 than it did in 2008, mostly because gas prices dropped from $12 per million British thermal units in June 2008 to less than $4 per MMBtu in September 2009. During that time, the cost of generating electricity from natural gas plants fell an average of about 4 cents per kilowatt. With average natural gas prices at $2.30 MMBtu today, it is safe to say this trend will continue. Utilities are shutting down coal-fired plants at record pace and replacing them with new or expanded gas-fired plants.

On average, coal supplies roughly 40 percent of U.S. electricity. But according to the Energy Information Agency (EIA), coal-fired electricity dropped below the 40 percent mark last December for the first time in over 30 years. Coal consumption will likely drop another 5 percent this year according to the EIA. The agency expects natural gas to pick up the slack, with a 9 percent increase this year, or a record high of 22.7 billion cubic feet a day.

However, it’s important to note that these have all been the economics of a struggling economy with a drop in electricity demand. But, as we know, energy needs fluctuate. During last summer’s heat wave, every single unit scheduled for retirement was running to meet increased demand, including coal. Had these facilities been taken off-line there would have been sweeping brown outs across the warmest areas of the U.S.

So, according to EPA’s own analysis, natural gas’s affordability makes NSPS rule unnecessary. Economic factors – not environmental concerns – are already giving utilities more than enough incentive to switch from coal to gas. As noted in my earlier post, this leads to cheaper energy and a cleaner environment. But the Agency is following its usual path of imagining what the future will look like today. With natural gas prices and energy demands locked at 2011 levels, an emissions standard of 1,000 pounds per MWh makes sense. But they refuse to note that maybe, just maybe, market conditions will change. If natural gas prices and electricity demand rise simultaneously, this rule will be enormously costly and may have an effect on keeping the lights on in certain regions.

A New Type of Regulation

From a regulatory standpoint, this is a first for EPA.

As noted above, NSPS requirements in the Clean Air Act require the Agency to create regulations based on the “best system of emission reduction” that “has been adequately demonstrated,” taking into account costs, environmental impacts, and energy requirements. The statute does not allow EPA to prescribe specific technologies, only an emissions level for the source to meet.

For 40 years, the EPA has regulated NSPS based on specific fuel types (oil, gas, coal, etc.), as laid out in statute. For this regulation, however, EPA has chosen not to distinguish between fuel types. Instead, it requires coal to meet the emissions level of natural gas, which can easily meet the requirement. In other words, it implicitly asks coal to meet the emissions levels of gas with a technology that has not been demonstrated as technically or financially viable. If you asked natural gas to reach the emission levels of nuclear, you would also effectively ban natural gas plants. This is not a game EPA has played before, and it is a dangerous precident to set without legislation to point to.

***

Unlike most EPA regulations, NSPS are binding once it is printed in the federal register. This is problematic for two reasons. First, it has effectively put a ban on the construction of new coal plants. Second, any legislative action to deal with this issue is hamstrung by the fact that the rules are not officially “final,” and thus could get around being subject to legislative review. It could easily be more than a year until EPA addresses all the comments and proposes a final rule.

Luckily for the coal industry, there is still a global market for coal. Metallurgic coal is in high demand in China where is used for steel making. Energy-dense bituminous coal is highly valued in places like India where it is burnt for power and heat. In fact, if you look at the countries across the globe who have growing economies, just about all of them are building new, state-of-the-art coal plants.

Electricity demand is flat thanks to a struggling economy, so the results may not be immediate. The question is its effects long term once the economy rebounds.

A big part of this will be whether or not EPA releases regulations on current coal facilities, as they have said they would do. Most observers believe that Obama will issue such regulations if he earns a second term in office.

My next post will look at the implications of a similar regulation on existing sources.


Adam Peshek is Research Associate


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