Clean Energy Incentive Program: New Unlawful Element in EPA’s Power Plant Rule?

EPA’s recently finalized Clean Power Plan (CPP) contains a key policy initiative not discussed or even mentioned in the proposed rule: the Clean Energy Incentive Program (CEIP). Through the CEIP, EPA will award extra emission allowances and emission rate credits to states that “act early” to increase generation from wind and solar power and/or reduce electricity demand via energy-efficiency measures. By “early,” EPA means before the 2022-2030 CPP compliance period.

You might suppose EPA would explain the legal authority for a substantive policy change affecting potentially hundreds of regulated entities, but there appears to be no discussion of the CEIP’s statutory basis in either the final rule, the CEIP fact sheet, or EPA’s proposed “backstop” Federal Plan.

What accounts for this curious omission? Does EPA not explain the legal basis for the CEIP because it can’t?

In the climate policy debates of the late 1990s and early 2000s, “credit for early action” was an issue of recurring controversy. What most policymakers, interest groups, and activists eventually acknowledged is that current law does not authorize any federal agency to award regulatory credits for “early” or “voluntary” reductions of greenhouse gases. Ironically, some of today’s most aggressive CPP advocates helped forge the ‘consensus’ that federal agencies lack statutory authority to implement an early action credit program.

Background: Clean Power Plan Basics

Before examining the CEIP’s legality, let’s review some of the basic elements of the Clean Power Plan and their associated legal flaws.

The CPP establishes carbon dioxide (CO2) emission standards for “existing” (already-built) coal and natural gas power plants. Its ostensible authority is §111(d) of the Clean Air Act (CAA). Before EPA may promulgate §111(d) performance standards for existing sources, it must first (or concurrently) promulgate §111(b) performance standards for “new” (future) sources. So on the same day EPA finalized the CPP (August 3, 2015), it also finalized its so-called Carbon Pollution Standards rule for new coal and gas power plants.

This pair of rules might be called the regulatory odd couple. For the first time in the history of the CAA, EPA finalized existing source performance standards that are more stringent than the corresponding new source performance standards. Specifically, the standard for existing coal power plants is 1,305 lbs. CO2/MWh; that for new coal power plants is 1,400 lbs. CO2/MWh. Similarly, the standard for existing natural gas combined cycle (NGCC) power plants is 771 lbs. CO2/MWh; that for new NGCC plants is 1,000 lbs. CO2/MWh.

This topsy-turvy pairing would appear to defeat the logic of the Act, which is to use the experience gained from regulating new sources under §111(b) to develop standards under §111(d) that take into account existing sources’ technological limitations and sunk costs.

EPA’s logic, however, is political rather than statutory. The Obama administration’s goal is to de-carbonize the electric power sector. To accomplish that, EPA could not do what it has always done — establish performance standards that existing sources can meet through design and operational improvements. Rather, EPA had to mandate the non-performance of coal and gas generation. So EPA set §111(d) standards that states can meet only by replacing fossil generation with renewable generation.

Among the CPP’s many legal flaws, two are perhaps most critical.

(1) Although the CPP nominally sets separate performance standards for coal and gas power plants, what the rule actually enforces is a collection of statewide emission rate targets or tonnage caps. In other words, the CPP treats each state’s electric power sector as if it were one big stationary source. That flouts the clear text of CAA §111, which defines “stationary source” as “any building, structure, facility, or installation which emits or may emit any air pollutant.” A sector is a market process, not an individual physical object. CAA §111(d) provides no authority to regulate the wider economic marketplace, networked industry, or sector of which a source happens to be a part.

(2) To comply with the CPP, states must revise their electricity laws and regulations to shift base-load generation from coal to gas, adopt or increase renewable electricity mandates, and increase consumer conservation incentives. In other words, states will have to change their laws and regulations regarding dispatch policy, fuel mix policy, and demand management policy. The CPP thus vitiates states’ longstanding authority over intrastate generation and consumption of electricity, recognized in the Federal Power Act, which confines federal regulation to “the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce” [16 U.S.C. § 824(a)].

Background: Credit for Early Action Basics

As explained above, the CPP is a plan to reorganize states’ electric power sectors. The granddaddy climate policy for restructuring energy markets is, of course, cap-and-trade. Unsurprisingly, the CPP repeatedly encourages states to meet their CO2-reduction targets via emission trading programs, and EPA’s proposed Federal Plan provides “model rules” for two different types of emission trading.

So how does the CEIP fit in? Credit for early action has long been a common feature of cap-and-trade advocacy and regulation. Although the accounting rules of an early credit program can be complex, the basic idea is simple. Companies that ‘volunteer’ to reduce their emissions before the start of a mandatory compliance period receive regulatory credits they can later use to meet their obligations under a future regulatory program.

As explained in this testimony, early credit proposals debated during the 105th-109th Congresses were intensely controversial because they were designed to build a corporate lobby for cap-and-trade. Credits worth peanuts in the ‘early action’ period could someday be worth big bucks if – but only if — policymakers eventually decide to restrict the right to use carbon-based energy by imposing a cap on CO2 emissions. Thus, every ‘early actor’ has an incentive to lobby for a cap stringent enough to turn his otherwise worthless Kyoto coupons into tradable permits worth millions of dollars.

One other general point bears mentioning. Although touted as ‘voluntary’ and ‘win-win,’ an early credit program actually sets up a coercive, zero-sum game. To avoid credit inflation (busting the cap), the supply of emission allowance in a future mandatory program must be reduced by the exact number credits awarded for early reductions. This means that in the mandatory period, those who did not act early have to pay higher prices for a smaller supply of emission allowances and/or buy additional ‘surplus’ credits from the early actors. Consequently, many firms will ‘volunteer’ just to avoid being pushed to the shallow end of the credit pool under a future trading system. That impels even more firms to ‘act early,’ growing the mass of rent seekers lobbying for a cap in order to monetize their credits.

Some such political calculus likely informs EPA’s decision to create the CEIP. The program will swell the ranks of energy-rationing profiteers mobilized to defend and promote the CPP in the legal and political battles ahead.

EPA offers a different although not inconsistent explanation why it created the CEIP. During the CPP comment period, environmental groups and renewable energy interests worried that the proposed CO2 emission caps for state electric-power sectors would shift investment from coal to natural gas rather than from coal to wind and solar power. So to make sure the CPP rigs the market against all fossil generation, the final rule includes additional incentives to jumpstart investment in renewable energy (RE) and energy efficiency (EE).

EPA describes the CEIP as a “matching program,” which works as follows:

• EPA will provide matching allowances or Emission Rate Credits (ERCs) to states that participate in the CEIP, up to an amount equal to the equivalent of 300 million short tons of CO2 emissions.
• Wind or solar projects will receive 2 credits for 2 MWh of generation (i.e., 1 action credit from the state and 1 matching credit from the EPA).
• Demand-side EE projects implemented in low-income communities will receive 2 credits for 1 MWh of avoided generation (i.e., a full early action credit from the state and a full matching credit from the EPA).

Legally Challenged

Let’s assume for the sake of argument that, under the U.S. Constitution, the “laboratories of democracy” are free to fleece their own ratepayers for the benefit of special interests through Soviet-style production quota (renewable portfolio standards), cap-and-trade, and other market-rigging interventions. If such policies and measures are constitutional, then states certainly have the authority to award regulatory credits for ‘early’ CO2 reductions.

EPA, however, is not a sovereign state. An administrative agency of the federal government, EPA has no authority save that delegated to it by Congress. EPA’s putative authority for the Clean Power Plan is CAA §111. That provision does not contain the terms “credit” or “allowance.”

This is not the first time an administration undertook to create an early credit program without bothering to check whether it had statutory authority to do so.

On February 14, 2002, President G.W. Bush directed the Secretary of Energy to enhance the “accuracy, reliability, and verifiability” of the Department of Energy’s Voluntary Reporting of Greenhouse Gases Program (VRGGP), established by §1605(b) of the 1992 Energy Policy Act, and “to give transferable [tradable] credits to companies that can show real reductions.”

To carry out Bush’s directive, DOE conducted one of the most extensive rulemakings in its history. Over a three-year period, DOE convened four public comment periods, two national workshops, and four regional workshops on its proposed revisions of the 1605(b) reporting program. The length and scope of the proceeding is a reflection of what was at stake: the accounting rules under which regulatory credits, potentially worth billions of dollars under a future emissions trading scheme, would be divvied up.

Some 80 organizations filed comments in the first comment period, which closed June 6, 2002. Several commenters pointed out that DOE had no authority under the 1992 Energy Policy Act, or any other statute, to award credit for early reductions. The clear implication — explicitly stated in some instances — was that no federal agency had such authority under current law.

The critics prevailed. At the last major stakeholder meeting, the facilitator announced, unceremoniously and without explanation, that DOE’s general counsel had determined the agency lacked statutory authority to provide transferable credits.

Unfortunately, DOE has long since removed the rulemaking docket from its Web site. I have a request in to the agency for access to the docket. If I obtain it, I will add an appendix to this post with links to relevant comment letters.

Fortunately, I kept the comment letters I wrote on the topic. This one debunks the argument, put forward by Electric Power Industry Climate  Initiative (EPICI), that current law authorizes DOE to award regulatory credits for voluntary reductions. This one contains excerpts from other commenters who challenged the legality of early credits. Let’s look at those excerpts first, then consider some points in my EPICI rebuttal.

Natural Resources Defense Council (NRDC), joint letter with National Wildlife Federation, National Environmental Trust, Union of Concerned Scientists, U.S. Public Interest Research Group, World Wildlife Fund, and Minnesotans for an Energy Efficient Economy:

• First, it is clear that section 1605(b) confers no authority on the administration to give credits against future global warming emissions limitations on companies that have made filings under that section. In fact, the 1992 EPACT legislation pointedly rejected proposals made at the time to confer credit status on reported reductions. [NRDC, p. 9, emphasis added]
• This [the President’s February 14, 2002 announcement] appears to be a request for legislative recommendations, because the administration has no authority under section 1605(b) or any other current law to ensure penalty protection or to give out transferable credits. [NRDC, p. 7, emphasis added

Northeast States for Coordinated Air Use Management (NESCAUM):

• We are skeptical of the authority to use 1605(b) to guarantee any future emission credits and strongly suggest that such a claim not be made without new legislation. [NESCAUM, p. 1]
• 1605(b) was not designed for public recognition, baseline protection or the creation of early credits. Nor was it designed as the infrastructure for emissions trading…we are skeptical about how these [mandatory reporting and credit for early reductions] could be made legally binding without new legislation. [NESCAUM, Attachment, p. 1]
• However, though we support giving some form of credit to those participants that can show real reductions, including the transfer of reduction certificates, we are concerned about 1605(b) making promises about the future value of transferable reductions without first receiving authority from Congress. Under the current 1605(b) legislation, there is no congressional mandate that emission reductions will be recognized under future regulations. [NESCAUM, Attachment, p. 7]

Generators of Clean Air (GCA):

• Providing absolute assurances that companies will receive baseline protection and transferable credits may necessitate a federal statute authorizing DOE to enter into GHG mitigation agreements with participating companies or sectors. See U.S. v. Winstar Corp., 116 S.Ct. 2432 (1996). [GCA, p. 3]

Pew Center on Global Climate Change (Pew):

• The Pew Center’s review of existing statutory authorities indicates that the Executive Branch currently lacks authority to assure that current efforts to reduce GHG emissions receive credit under a future law. If a baseline protection program is to have binding effect, it must be authorized by law. [Pew, p. 12, emphasis added]

Let’s now consider a few points from my EPICI rebuttal.

In the U.S. Congress, former Sen. Joe Lieberman (D-Conn.) was the chief promoter of early action credit legislation. During deliberations on the 1992 Energy Policy Act, Lieberman introduced an amendment similar to Rep. Jim Cooper’s (D-Tenn.) section 1605 language in H.R. 776, the House-passed version of the energy bill. The House version of 1605(a) directed DOE to establish, “by rule,” a greenhouse gas reduction accounting system that provides “opportunities for entities to receive official certification of net greenhouse gas emission reductions relative to the baseline for purposes of receiving credit against any future Federal requirements that may apply to greenhouse gas emissions.”

When House and Senate conferees produced the 1992 Energy Policy Act in its final form, they re-wrote Cooper’s language. The provision as enacted directs DOE to issue “guidelines” for reporting emission reductions, not a “rule” for certifying credits. Contrary to the Bush administration’s careless assumption, the 1992 Energy Policy Act provides no authority to award or certify emission-reduction credits, as visual inspection of the one and a half page 1605(b) provision easily demonstrates.

Why is this legislative history relevant today? House and Senate conferees considered and rejected the option of establishing an early action credit program. The Supreme Court’s admonition in INS v. Cardoza-Fonseca 480 U.S. 421 (1987) seems apt:

Few principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language.

To his credit, Lieberman never pretended that statutory authority for early action credits could be spun out of 1605(b) or any other provision of current law. Accordingly, in the 105th and 106th Congresses, he sponsored legislation to provide that missing authority.

Section 2 of Sen. Lieberman’s “Credit for Early Voluntary Reductions Act” (S. 2617), introduced October 10, 1998, in the 105th Congress, states:

The purpose of this Act is to encourage voluntary greenhouse gas emission mitigation actions by authorizing the President to enter into binding agreements under which entities operating in the United States will receive credit, usable in any future domestic program that requires mitigation of greenhouse gas emissions, for voluntary mitigation actions before 2008. [Emphasis added.]

The bill was co-sponsored by Sens. John Chafee (R-R.I.) and Connie Mack (R-Fla.). Senators do not usually introduce legislation to authorize the President to do something they believe he already has authority to do. It is abundantly clear from Section 2 of S. 2617 that Sens. Lieberman, Chafee, and Mack believed the President — hence all executive branch agencies – had no authority under existing law to award regulatory credits for voluntary greenhouse gas reductions.

In the 106th Congress, Sens. Chafee, Lieberman, Mack, Warner (R-Va.), Moynihan (D-N.Y.), Reid (D-Nev.), Jeffords (I-Vt), Wyden (D-Ore.), Biden (D-Del.), Collins (R-Maine), Baucus (D-Mont.), and Voinovich (R-Ohio) introduced S. 547, the “Credit for Voluntary Reductions Act.” This legislation, which differed from the previous bill only in minor details, also had the clearly stated purpose of providing authority that as yet did not exist:

Credit for Voluntary Reductions Act — Authorizes the President to enter into legally binding early action agreements with any person under which the United States agrees to provide greenhouse gas reduction credit usable beginning in the compliance period (during which a domestic greenhouse gas regulatory statute is in effect) if such person reduces greenhouse gas emissions or sequesters carbon before the end of the credit period. [Emphasis added.]

In his floor statement introducing the House companion bill to S. 547, Rep. Rick Lazio (R-N.Y.) stated, in pertinent part:

It [H.R. 2520, the Credit for Voluntary Reductions Act] is simply authorizing companies to reduce greenhouse gases without fear of punishment later. [Emphasis added.]

Section 4–Authority for voluntary Action Agreements. This section provides the authority for entering into these agreements to the President and allows delegation to any federal department or agency. [Emphasis added.]

Section 5–Entitlement to Greenhouse Gas Reduction Credit for Voluntary Action. Provides authority for credits for: certain projects under the initiative for Joint Implementation program; prospective domestic actions (includes a significantly revised sequestration); and retrospective past actions. [Emphasis added.]

The foregoing remarks clearly imply that, absent such legislation, the President lacks authority to award credits, and no agency has such authority under existing law.

The Pew Center for Global Climate Change was a key backer of the Chafee-Lieberman legislation. In her March 24, 1999 testimony before the Senate Environment and Public Works Committee, Pew Center Executive Director Eileen Claussen stated:

Solving this problem requires leadership from Congress. An analysis undertaken by the Pew Center and published in October 1998 finds that federal agencies do not have sufficient legal authority to provide the certainty that firms need to make significant early investments. Congress must provide the legislative framework to remove the disincentives to early action. [Emphasis added.]

Despite advocacy by Pew, Environmental Defense Fund, other environmental groups, corporate rent-seekers, and the Clinton-Gore administration, the early credit bills went nowhere. Leiberman’s legislation attracted only 12 co-sponsors on its second go-round. Lazio’s House companion attracted a mere 15 co-sponsors. Neither bill ever came to a vote in committee, much less on the Senate or House floor. Neither came anywhere close to winning majority support in either chamber.

Big Picture

In Utility Air Regulatory Group v. EPA, the Supreme Court admonished EPA not “rewrite clear statutory terms to suit its own sense of how the statute should operate.” EPA apparently believes rewriting (“tailoring”) is no longer necessary to suit its own sense of how §111(d) should operate.

The implicit logic of EPA’s final Clean Power Plan would appear to be as follows:

(1) Replacing fossil generation with renewable generation is self-evidently desirable, so the Clean Air Act must authorize EPA to pursue that objective.

(2) Traditional §111(d) performance standards that require improvement in the design and operation of existing facilities won’t achieve the objective, so the provision must authorize EPA to set non-performance standards that states can meet only through cap-and-trade and renewable energy quota.

(3) Credit for early action programs will facilitate states’ adoption of cap-and-trade and renewable energy quota, so §111(d) must also authorize EPA to establish an early credit matching program.

(4) All of these program elements so perfectly accord with the agency’s “sense of how the statute should operate” that EPA had no need to solicit public comment on the CEIP before announcing it in the final rule.