In Part One of this two-part blog, we looked at EPA's recently proposed Affordable Clean Energy (ACE) Rule and how it generally compares with the Obama Administration's Clean Power Plan (CPP) Rule. But with many environmental lawyers being closet economists, no contemplation of new environmental regulation is complete without a discussion of cost-benefit analysis.
Costs and Benefits of the ACE
To compare the costs and benefits of replacing the CPP with the ACE, start with the CPP as a baseline. In 2011 dollars, EPA estimated the CPP’s costs from $1.4-$2.5 billion in 2020, to $5.1-$8.4 billion in 2030. EPA estimated climate benefits of $2.5-$20 billion by 2030, health benefits of $14-$34 billion, and net benefits of $26-$45 billion. The Agency calculated that implementing the CPP would prevent up to 3,600 premature deaths, 1,700 heart attacks, 90,000 asthma attacks, and 300,000 missed work days and school days.
How does the ACE compare? Let’s start by looking at EPA’s own Regulatory Impact Analysis (RIA). EPA uses four illustrative scenarios, compared against the CPP “base case,” calculating the regulatory impacts of implementing the ACE for the years of 2025, 2030, and 2035. The first scenario is a full repeal of the CPP, and the other three policy scenarios are based on varying levels of coal plants’ efficiency gains at different prices per unit of electricity. Two of those three scenarios include the proposed new source review revisions. Again, EPA uses both a 3% and 7% discount rate, calculating the present value—from the perspective of 2016—of the ACE’s costs, benefits, and net benefits.
EPA claims ACE will result in $3.4 billion net benefits, or $400 million annually. This may sound impressive, but a closer look shows a range of negative benefits of $0.1-2.8 billion and $2.0-$5.4 billion under its scenarios 1 and 3, and positive benefits of $3.2-$3.4 billion only under the second scenario. CO2 emissions would be 3% higher, relative to CPP, for each of the three policy scenarios by 2035—33% below rather than 35% below 2005 levels. Two other pollutants, SO2 and NOx, would see 4%-5% and 4%-6% increases, respectively, in 2035 relative to the CPP. Forgone climate benefits and ancillary co-benefits—benefits that could have been achieved under the CPP—for 2035 range from $2.9 to $9.8 billion (3% discount rate) to $2.4 to $8.7 billion (7% discount rate).
Indeed, EPA projects emissions will be higher under all scenarios, and notes the possibility of a systemwide “rebound effect.” This occurs because coal plants will be more efficient, which allows plants to run more often and for more hours, and extends their lifetime. Increased generation could boost the total amount of CO2 emitted overall.
In human terms, EPA acknowledges the ACE would result in an increased number of premature deaths—up to 1,400 annually beginning in 2030—and illnesses compared to the CPP, and up to 1,300 particulate matter (PM2.5) and ozone-related premature deaths in 2035.
What about benefits to the coal power industry? EPA touts $6.4 billion in avoided compliance costs on its ACE fact sheet. However, a closer look shows that one of EPA’s own scenarios costs more than the CPP base case. Annually, compliance costs range up to $600 million in avoided costs, to $500 million more in costs by 2035, relative to industry costs under the CPP. EPA attributes this to the sector becoming less carbon-intensive since the CPP was proposed, making complying with the CPP significantly less costly than what the Agency had originally estimated back in 2015. Indeed, the power sector has already cut GHGs by 28%—nearly all of the CPP’s requirements of a 32 percent reduction from 2005 levels by 2030.
What about benefits to customers? EPA itself estimates the impact on retail electricity prices to be very small on average, ranging from one-half of one percent decrease to no change, relative to the CPP.
In fact, the costs may be even higher and the benefits lower than indicated by the RIA, when considering the different way EPA under the Donald Trump Administration calculates the “social cost of carbon” (SC-CO2). In originally calculating costs and benefits under the CPP, the Barack Obama EPA figured the SC-CO2 ranged from $15/metric ton (5% discount rate) to $70/ton (2.5% discount rate) in 2030. But President Trump’s Executive Order No. 13873 disbanded the Interagency Working Group on Social Cost of GHGs, and returned to referencing a prior policy (OMB Circular A-4) in monetizing the value of changes in GHG emissions resulting from regulations. This resulted in EPA drastically recalculating SC-CO2 at a range of $1-$8/metric ton using 3 and 7% discount rates; accounting for only domestic and not global benefits; and disallowing the “co-benefits” of additional decreases in particulate matter and other pollutants. Let’s break down what that means.
First, is the discount rate specific to climate change. A higher discount rate implies we should not pay as much today to avoid harms in the future. This produces a lower social cost of carbon. The Obama Administration opted for lower discount rates of 2.5, 3, and 5%. The Trump Administration returned to an earlier practice of using 3 and 7%. This puts less weight on the harm climate change could inflict on future generations.
Second, the ACE, contrasted with the CPP, accounts only for domestic and not global benefits of reducing CO2. The Agency does acknowledge that GHGs contribute to damages around the world independent of the country in which they are emitted. Further, climate impacts in other countries could indirectly hurt the United States, e.g., affecting the global economy or increasing the number of refugees. EPA does look at global benefits deep in its RIA, and estimates that implementing the ACE results in forgone global climate benefits in 2035 at $460, $490, and $360 million under the three policy scenarios under a 7% discount rate. Under a 3% discount rate, this increases to $3.1, $3.4, and $2.5 billion.
Third, EPA’s calculation of ACE benefits now considers only the benefits of reducing the “targeted pollutant,” or CO2, which omits any “co-benefits” of reducing conventional air pollutants. These other pollutants comprise more than one-half of the CPP’s estimated benefits. Nor does EPA consider other impacts such as environmental justice or the effects of air pollution on cognitive performance.
Putting the ACE Into Context
EPA announced the ACE in a time when coal power plants represent a declining share of the electric power sector. In 2016, U.S. coal production decreased 18.8% year-over-year to its lowest annual production level since 1979, and coal consumption was 8.4% lower than the 2015 level (noting that the electric power sector accounted for approximately 92.8% of total U.S. coal consumption in 2016). EPA acknowledged in its RIA that coal’s contributions to CO2 emissions from the power sector fell from 81.9% in 2006 to 69.6% in 2015.
Reasons for the fall of “King Coal” are varied, and include an aging fleet of coal-fired power plants, the rise of natural gas, and falling price of renewables. Other countries are phasing out coal, even reinventing former coal-burning facilities to biomass, gas, nuclear power, or transitioning out of the power sector altogether.
Further, transportation recently knocked power plants from the top spot as the biggest source of GHG emissions in the United States, at 1.9 billion tons of CO2 annually compared to 1.8 billion tons from the electric power sector. This suggests the next area to watch is the fuel economy rules. The CAA’s “California waiver” allows the Golden State to adopt more-stringent standards, and CAA §177 permits other states to adopt those standards in lieu of the federal standard. EPA and the NHTSA recently proposed rolling back the tailpipe rules, which were set to increase fuel economy to 54.5 mpg fleet average (36 mpg real-world) by model year 2025. The agencies also proposed revoking California’s waiver, preempting both it and other states from setting tougher standards and setting off an anticipated battle in the courts. Twelve states and the District of Columbia, or 40% of the U.S. new vehicle market, are suing to defend those rules.
Where Do We Go From Here?
Near-term, interested parties can submit their comments on the ACE until October 30. What next? Review of the ACE and EPA’s own analysis indicates the Trump Administration is proposing to replace a rule that has never been implemented with a less-effective regulation—in both reducing pollution and costs—in order to save an industry already exiting the electric power sector.
Welcome to D.C., folks. Let the litigation begin.