Tuesday, May 5, 2015

A Modular Approach to Clean Power Plan Compliance Could Support Multi-State Cooperation Without Necessitating Congressional Approval

By Amelia Schlusser, Staff Attorney

The Environmental Protection Agency’s proposed Clean Power Plan gives states the option to follow a multi-state approach, which would enable a group of states to collaborate on their implementation and compliance activities. Such an approach could allow participating states to cost-effectively reduce emissions from existing power plants over a multi-state area. However, the Clean Air Act requires congressional approval for binding or obligatory interstate agreements. The Cadmus Group and the Western Interstate Energy Board (WIEB) recently assessed potential multi-state compliance approaches for the western grid, and found that an informal, “modular” approach would enable multiple states to participate in collaborative compliance activities without requiring states to sign onto a formal multi-state compliance plan.

A Modular Approach to Multi-State Compliance

The Cadmus Group recently completed a study for the WIEB that assessed modular approaches to multi-state compliance with EPA’s proposed Clean Power Plan. Under this modular approach, states would develop their own implementation plans to comply with their state-specific emission targets, but these plans would allow the states to participate in a multi-state program that is developed in collaboration with other states. WIEB referred to these collaborative components as “modules.” According to WIEB, a modular approach could be structured in one of three ways. First, states could independently develop and execute a compliance plan that incorporates informal multi-state agreements to develop and implement compliance modules. Second, states could follow a partial multi-state approach in which participating states develop their own individual compliance plans, but enter into formal agreements to cooperate on certain plan components. Third, states could follow a full multi-state approach in which multiple states develop a joint compliance plan that will meet the states’ aggregate emission targets.  

The Cadmus Group study concluded that a partial multi-state modular compliance approach presented a practical and mutually beneficial option for states in the Western Interconnection (i.e. the western grid). This approach would enable western states to develop their own individual implementation plans that incorporate a multi-state trading program for quantifiable emission reductions. The report focused on trading programs for renewable energy credits (RECs) and energy efficiency credits (EECs) in particular, because the western United States already has an established REC trading system. The existing Western Renewable Energy Generation Information System (WREGIS), which is operated by the Western Electricity Coordinating Council (WECC), already provides grid-wide REC tracking and verification. Because WREGIS already operates a system to create, transfer, track, retire, and verify RECs, it would be the optimal entity for overseeing a multi-state REC and EEC trading program under the Clean Power Plan.

According to the Cadmus Group, a modular compliance approach that incorporates a regional trading program would offer “tangible and quantifiable benefits” for participating states. First, such an approach would allow participating states to pursue multi-state emission reduction opportunities without binding individual states to a joint implementation plan. Second, this approach should reduce compliance costs for all participating states by enabling states to share the costs associated with developing and operating an interstate trading program. Third, a modular trading approach would increase compliance flexibility and reduce costs by allowing states with excess renewable energy or energy efficiency to trade credits with other states that have lower comparative advantages. For example, if state A can generate renewable energy at a lower cost than state B, state B would have the option of purchasing RECs from state A to meet state B’s compliance obligations.

Implementing a modular trading approach, however, isn’t as simple as merely extending the existing WREGIS REC market to all states within the western grid. The Cadmus Group identified a series of policy considerations that states must agree on to adapt the current market to facilitate Clean Power Plan compliance. First, states must agree on uniform definitions for RECs and EECs to ensure that these credits represent the same values across the region. Second, states must clarify whether the consuming or producing state owns the RECs and EECs created through Clean Power Plan compliance activities. Third, participating states will significantly decrease trading complexities and challenges if they agree to follow a uniform rate-based or mass-based approach to measure their emissions reductions. If some states choose to follow a mass-based approach and other states choose to follow a rate-based approach, it will be difficult to determine how traded credits contribute to an individual state’s compliance obligations, which increases the potential to double-count emissions reductions.

The Cadmus Group’s modular trading program approach presents a practical and mutually beneficial option for incorporating multi-state cooperation into individual state implementation plans under the Clean Power Plan. A grid-wide REC and EEC market could support grid reliability in the west by encouraging cost-effective renewable energy development in areas with optimal access to renewable resources. A regional trading program could also minimize the need to invest in additional transmission infrastructure, further reducing compliance costs for participating states. And perhaps most significantly, a regional marketplace could encourage states to coordinate their compliance activities without requiring participants to enter into a binding interstate compliance plan.  

A Bolstered Case for a Voluntary “Partial Multi-State” Approach

The Cadmus Group’s “partial multi-state” modular approach may also be more legally defensible than a formal multi-state compliance plan. Senator Mitch McConnell (R-Ky.), the Clean Power Plan’s most outspoken opponent, recently challenged the draft rule’s proposal to allow cooperating states to submit multi-state compliance plans. During a recent Senate appropriations hearing, McConnell threatened to block any multi-state compliance plans under a provision of the Clean Air Act that requires congressional approval for “binding or obligatory” multi-state agreements. (ClimateWire, May 4).

McConnell’s argument focused on section 102 of the Clean Air Act (42 U.S.C. § 7402), which authorizes states to enter into interstate agreements or compacts to prevent or control air pollution, but states that “[n]o such agreement or compact shall be binding or obligatory upon any State a party thereto unless and until it has been approved by Congress.” Because this provision applies to any binding or obligatory agreement to prevent or control air pollution, it means that any formal multi-state compliance plan would presumably require approval from Congress before the plan’s mandatory and enforceable provisions could go into effect. Since section 111(d) of the Clean Air Act requires that each compliance plan “provides for the implementation and enforcement” of mandatory emissions limitations, a formal multi-state compliance plan must be “binding and obligatory” before EPA can approve it.

While section 102 of the Clean Air Act also directs EPA to “encourage the making of agreements and compacts between States for the prevention and control of air pollution,” Senator McConnell asserted that such agreements would constitute “backdoor energy taxes,” and vowed to block them in the Senate.

McConnell’s challenge, however, does not present an insurmountable barrier to multi-state cooperation under the Clean Power Plan. Under the Cadmus Group’s modular approach, states can develop individual, enforceable compliance plans that allow for participation in a multi-state trading program. Participation in this type of marketplace would be entirely voluntary, and thus would not impose any binding or obligatory requirements on participating states. Instead, this voluntary trading program would allow states and regulated facilities to secure emissions reductions at the lowest cost, and offer added financial incentives for renewable energy and energy efficiency investments. A voluntary, modular approach could thus facilitate Clean Power Plan compliance on a multi-state or regional level, without triggering the need for congressional approval.

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