Some thoughts on 111d

September 23, 2015 by Mike · Leave a Comment 

Now that most of the law firms have done their bit with respect to the Clean Power Plan, I thought a few very brief thoughts would be helpful.  Please don’t hesitate to contact me with questions and comments.

Final rule.  It is important to note at the outset that the final rule differs substantially from the proposed rule.  By creating a common currency for emissions reductions and making the rate-based option practically impossible with respect to timing and implementation, it now tilts the playing field definitively in favor of State participation in both statewide and regional cap and trade.  Even the model federal implementation plan simply dumps a non-compliant State into the common currency.

In short, the Administration has constructed a rule that drives States, even non-compliant States, towards a cap and trade regime because that regime is the option with the lowest cost and the fewest complications.  By changing the locus of regulation from States to powerplants and constructing emissions budgets subject to trading, the Agency has greatly reduced both the friction costs and the overreach involved in the proposed rule.  The final rule’s emphasis on emissions budgets (rather than a State measures approach) hews closer to Clean Air Act; consequently, the difference between a likely State implementation plan and the proposed federal implementation plan is less significant.

Timing.  It is important to note that the final rule has established a two-step process in which a State is required to make a good faith showing of compliance efforts one year after publication of the rule in order to gain an additional two years to submit a fully compliant plan.

This two step process is crucial for two reasons.  First, and most importantly, it is a major victory for those who have advocated for a just say no strategy.  The singular goal of that effort was to delay the imposition of a federal implementation plan and inject enough uncertainty into the system to either to succeed in court (more on that in a bit) or see the inauguration of a Republican President who would administratively stay the rule.

The schedule for the submission of state implementation plans laid out in the final rule guarantees that the current Administration will not be able to impose a federal implementation plan.  Even if a State refuses to submit an initial plan, the Administration will have insufficient time to note the deficiency, offer it for public notice and comment and then move to imposition of a federal implementation plan prior to January 2017.

Second, because the submission of an initial, relatively simple plan is required to gain an extra two years of compliance time to submit a final state implementation plan, many States – even those who ultimately intend to submit a plan that is less than fully compliant — will want to avail themselves of this option.

Finally, and we have mentioned this before, it is important to remember that at any point in the process a State has the option of submitting a fully compliant plan.  In fact, it is probably best to think of the interaction between the EPA and a State on almost any State implementation plan as a negotiation that almost never results in a federal implementation plan.  This situation will be no different.

The utility of legal action.  For some, an important part of thinking about the rule involves questions about its legal sturdiness.

Let’s make it simple.  The weight of experience and history indicates that litigation has rarely, if ever, materially altered or stopped a rule.  Litigation delays rules, it sometimes results in their alteration, but in more than two months of searching, we have been unable to discover a single rule stopped by litigation.

This is a crucial point.  The Obama Administration’s carbon mandate may be the first rule ever stopped by litigation, but that is certainly not a likely outcome.  Even if the rule is vacated in whole or in part, the courts will simply send it back to the Agency for a rewrite.  Obviously, a Democratic Administration will fix the legal defect and send it back on the path towards implementation.

Similarly, if the next Administration is Democratic, questions about submissions of final State implementation plans will be consumed by the reality that federal implementation plans will be forthcoming at some point.

Taken together, these two factors – the inevitability of federal implementation plans (or a reconstructed rule) in a Democratic Administration and the reality of the limits of litigation – would lead a rational person to conclude that the only way the rule will not substantially be implemented is if an appropriate Republican (one not named Bush) becomes President.

Consequently, for those thinking about the likelihood of the rule remaining mostly intact, it might be useful to think about who might be the next President.  There are some structural elements that might be helpful to examine.  It is difficult for any party to win the Presidency three times in a row.  Since the war, only George Bush did it in 1988, but he had an extraordinarily skilled campaign staff.  All of the likely Democrats would be older than 69 on Election Day; only one person (Reagan) was elected for the first time at that age.  The Republicans have won the popular vote just once in the previous six cycles; of course, the Democrats have received more than 50% just twice in those same six cycles.

Last thoughts.  There are three final thoughts that are worth noting.

First, much of the actual implementation of the rule is not knowable right now.  Something as elemental as how efficiency will or can be counted (both with respect to baseline and reductions) will ultimately be decided in interactions between States and the agency.  It is almost certain that some or all of the rule will be vacated by a court at some point.  The agency is trying to do something at the very edge of its legal and administrative competence.  The courts will, over the next few years, take a hand in shaping the rule.

Taken together, all this means that there will be more uncertainty injected into the system.  The least likely outcome is that the rule that eventually appears in the Federal Register will be the final rule to which regulated entities will need to adhere.  It also means that 2022 as a compliance date is a fiction.  Like all government programs, this will take longer than everyone thinks to be fully realized.  The longer an entity can wait before initiating compliance, probably the better.  I have noted this on a few occasions; the truth is that EPA is not an enforcement-first organization.  They are much more interested in ultimate compliance.  There will be no penalty for those who wait, but there may be penalties for who move early.

Second, EPA never does anything that makes costs obvious to most consumers (or, if you prefer, voters).  The agency has an abiding preference for mechanisms and approaches which hide or minimize costs.  When absolutely pressed, EPA finds ways to ignore, finesse, or explain away regulatory and statutory obligations that would result in noticeable, transparent pain to consumers.  Think about the Renewable Fuel Standard.  The statute clearly requires refiners to either blend advanced biofuels or find credits.  The theory is that the higher the credit price, the more likely it is that product will be blended.  The reality is that with cellulosic ethanol either not available or available only at 9 dollars a gallon, the agency decided to alter the enumerated volumes outlined in the statute.

The story is the same on ozone, on the tailoring rule, on CAFÉ, etc.  The agency understands that the best approach is keep steady downward pressure without doing anything that scares the horses.

In the current instance, the rule sets up a common currency which will drive entities towards a cap and trade system.  Such an approach is very susceptible to hiding and minimizing costs.  It seems very likely that the agency will develop (perhaps immediately or perhaps over time) a bank of “extra” or “bonus” allowances or even a price ceiling or collar.  The point is that for those expecting to make money in the credit allowance, caution is probably the order of the day.  What the agency gives, it can just as easily take away (it has happened before).  For those who are worried about exposure to additional costs, know that the agency will try to keep the screaming to a minimum.  More specifically, people should not expect a price of zero or a price much beyond 20-25 dollars per ton.

Third, the structure of the rule is such that coal-fired powerplants may remain open, but will not run very much.  The difference between the fleet average of coal (around 2200 lbs/mwh) and the rule’s goal (1305 lbs/mwh) essentially guarantees that coal-fired generation will consistently be the last to be dispatched.  Interestingly, and probably the first thing a judge will notice, the rule for new coal-fired sources sets the numerical standard at 1400 lbs/mwh.  So the standard for existing is more rigorous than that for new sources.  Not only does that approach make no sense, it stands the entire architecture of the Clean Air Act on its head.

The story is not much better on the natural gas side.  There, the fleet average is around 900 lbs/mwh, and the rule requires 771 lbs/mwh.

Oddly enough, the other loser in the rule may be rooftop solar.  The rule only counts metered generation, which, depending on how net metering works out, means that States may have an incentive to use utility-scale solar rather than emphasize distributed generation.