Comments on EPA s Proposed. Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units

Transcription

1 Comments on EPA s Proposed Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units EPA HQ OAR Submitted by: The National Climate Coalition December 1, 2014

2 TABLE OF CONTENTS PAGE I. Introduction And Executive Summary...1 II. III. IV. EPA Should Permit States To Seek An Adjustment To Its 2030 Carbon Intensity Target At Any Time To Address Errors In EPA Assumptions Or New Information...2 EPA Should Recognize State Authority To Determine Both The Interim Path And Timetable To Achieving 2030 Carbon Intensity Targets...4 EPA Should Only Make Federally Enforceable A State s Commitment To Form And Timeframe Of Progress...7 V. EPA Should Develop Default Compliance Flexibility Mechanisms...8 VI. VII. VIII. EPA Should Establish A Default Adjudication Process To Resolve Interstate Disputes Regarding GHG-Reduction Credit That Respects Corporate Portfolio Investments...11 EPA Should Develop A Streamlined, Alternative New Source Review (NSR) Process For Sources That Trigger NSR Because Of Efficiency Improvements To Comply With The CPP...13 EPA Should Articulate Clear Limitations On The Precedential Effect Of Its System-Wide Approach to BSER...15 IX. Conclusion...16 i

3 National Climate Coalition Comments on EPA s Clean Power Plan Proposal I. Introduction And Executive Summary The National Climate Coalition (NCC) submits these comments on EPA s proposed rule, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units ( Clean Power Plan or CPP ) 1 on behalf of its members, including those in the electric power sector as well as companies doing business in other industry sectors that will be indirectly affected by price or reliability impacts of the CPP and will be directly impacted by future greenhouse gas regulation. 2 A current membership list is attached to this comment submission. The NCC was established for the purpose of engaging in dialogue with other stakeholders and to provide constructive input to EPA in light of the Supreme Court s decision in Massachusetts v. Environmental Protection Agency ( Massachusetts v. EPA ) 3 and EPA s suite of proposed and final regulatory actions with respect to greenhouse gas (GHG) emissions. The NCC incorporates in these comments the attached documents outlining prior NCC recommendations: the NCC paper Using EPA Clean Air Act Authority to Build a Federal Framework for State Greenhouse Gas Reduction Programs and National Climate Coalition Program Design Recommendations, both of which were issued prior to EPA s June 2014 CPP proposed rule. Because stabilizing the concentrations of GHGs in the atmosphere will require the transformation of our energy, transportation and manufacturing systems, the NCC believes that the existing Clean Air Act (CAA) is not the appropriate vehicle for regulation toward that goal. Rather, Congress should craft national climate legislation that balances multiple national priorities, including economic stability, energy independence, national security and defense, and energy reliability and affordability, in addition to environmental goals, and that assigns responsibility across federal departments and agencies according to their respective expertise. The NCC recognizes, however, that such an ambitious, coordinated approach is unlikely to occur in the near term. Instead, EPA needed to respond to the Supreme Court s decision in Massachusetts v. EPA by addressing the question of endangerment under 202(a) and, in doing so, chose to proceed with certain rulemakings. The NCC also recognizes that states and regions already are developing significant regulatory programs to address GHG emissions and that prompt EPA action, if structured appropriately and designed to avoid harmful impacts, may provide a useful national framework for action in the form of a federal program that could avoid difficulties likely to arise under a patchwork of state and regional programs. EPA rulemaking activity may also assist Congress in developing appropriate national legislation. 1 EPA, Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 79 Fed. Reg. 34,830, 34,918 (June 18, 2014). 2 It is especially important that EPA develops effective, workable, and legally-defensible standards for the power sector because these regulations may set precedent for section 111 GHG performance standards for other sectors U.S. 497, 127 S.Ct (2007) (finding that EPA had statutory authority to regulate emissions of GHGs from new motor vehicles and remanding to the Agency for determinations regarding endangerment and manner of regulation). 1

4 National Climate Coalition Comments on EPA s Clean Power Plan Proposal The NCC believes that section 111 of the Act offers EPA the best path for an interim response to Massachusetts v. EPA pending further Congressional deliberation. However, the NCC recommends that EPA s final rule to regulate carbon dioxide (CO 2 ) emissions from existing electric utility generating units (EGUs) under 111(d) should: allow a state to request an adjustment to its 2030 carbon intensity performance target at any time, based on discovery of errors in EPA assumptions and as information becomes available to the state; recognize state authority to determine the interim path and timetable to achieve 2030 carbon intensity targets; only make federally enforceable a state s commitment to the form and timeframe of progress, rather than specific state plan provisions targeting performance under individual Building Blocks ; allow for voluntary state adoption of compliance flexibility mechanisms, including emissions trading and an alternative compliance payment option, that would serve as compliance alternatives and cost-hedging mechanisms in the event that EGUs or other obligated entities cannot achieve expected reductions in the prescribed manner or if compliance costs exceed expectations; establish an adjudication process to resolve interstate disputes regarding GHGreduction credit in a manner that prevents double counting and also respects and encourages corporate portfolio investments; include an alternative, streamlined New Source Review process for sources that trigger the requirement by efficiency improvements undertaken to comply with the CPP; and articulate clear limitations on the precedential effect of EPA s system-wide approach to Best System of Emission Reduction (BSER) 4 in the CPP for potential application to other sectors with certain system characteristics. II. EPA Should Permit States To Seek An Adjustment To Its 2030 Carbon Intensity Target At Any Time To Address Errors In EPA Assumptions Or New Information EPA s final rule should expressly permit a state to seek an adjustment of its 2030 emission performance target at any time to account for either late discovery of errors in EPA assumptions or material new information that becomes available to the state after the close of the comment period on the CPP. While EPA is seeking comment on both the methodology and data used for computing state goals and may adjust the final state goals based on comments, EPA stated in the preamble to the CPP that [o]nce the final goals have been promulgated, a state 4 As explained in prior NCC comments, the NCC supports a source-based BSER combined with voluntary state programs for incorporating system-wide activities that avoid additional emissions. With that noted, the comments that follow are offered to improve EPA s proposal. 2

5 National Climate Coalition Comments on EPA s Clean Power Plan Proposal would no longer have an opportunity to request that the EPA adjust its CO 2 goal. 5 position is flawed for a number of reasons. EPA s On a fundamental level, EPA s proposal sets standards that are dependent not an a specific unit s control options, which are relatively ascertainable, but on the wide range of evolving energy system components, which require various energy supply and demand assumptions and are much less predictable. When asked by Congress about the possibility of an independent reliability study of the CPP, Federal Energy Regulatory Commission (FERC) Chair, Cheryl LaFleur, noted that such a study would require making many assumptions on key factors, such as the extent and distribution of load reductions from energy efficiency, the number and location of new NGCC generation, and economic conditions such as fuel prices and could be more speculative than informative, especially for later years. 6 Accordingly, EPA cannot fix a state s future target because it cannot predict the future. Either an overly aggressive assumption or a change in circumstances affecting the availability of emission reduction opportunities could render the performance goal unachievable for a state. In that way, EPA s proposed refusal to allow later adjustments to the 2030 state goals could directly harm the affected EGUs subject to emission standards within a state and it could indirectly harm major consumers of electricity within a state, including NCC members. Precluding later adjustments to a standard that is based on future projections has both policy and legal implications. 7 It would be harmful, from a policy perspective, to preclude updates to the state-specific predictions and assumptions upon which EPA based the state goals because it may render the CPP targets unachievable (either by the state or by EPA exercising its federal implementation plan (FIP) authority). From a legal perspective, EPA has the initial burden of demonstrating that its standards under section 111 are achievable. 8 To the extent that the standards are based on projections that are later found to be inaccurate, this undermines EPA s BSER determination and the achievability of its standards. The data collection and analysis conducted for EPA s proposal is massive in scope and far more complex than prior 111 rulemakings, given EPA s attempts to predict energy supply and demand. For these reasons, EPA must allow the states to work with EPA to regularly track and test the assumptions and to update the targets, accordingly Fed. Reg. at 34, Responses of Acting Chairman Cheryl A. LaFleur To Committee on Energy & Commerce Subcommittee on Energy & Power Preliminary Questions for the Federal Energy Regulatory Commission at 4. 7 EPA s approach may deprive states and sources of an adequate opportunity to meaningfully comment on the state goals. Some stakeholders claim that insufficient data is available in the administrative record to recreate or fully understand EPA s methodology, data and computations. See, e.g., August 25, 2014 Letter from Jack Conway, Kentucky Attorney General, to Gina McCarthy, Administrator of EPA. The purpose of the CAA requirement that EPA provide a public rulemaking docket with the data and information it relies upon in promulgating a rule, is to provide the public a meaningful opportunity to comment. See 42 U.S.C. 7607(d). 8 See National Lime Assoc. v. EPA, 627 F.2d 416, 431 (D.C. Cir. 1980) (... we think an initial burden of promulgating and explaining a non-arbitrary, non-capricious rule rests with the Agency... ). 3

6 National Climate Coalition Comments on EPA s Clean Power Plan Proposal III. EPA Should Recognize State Authority To Determine Both The Interim Path And Timetable To Achieving 2030 Carbon Intensity Targets In a significant departure from prior section 111 rules, the CPP mandates a highly prescriptive implementation framework, requiring states to meet aggressive near-term carbon intensity targets and to demonstrate compliance with those targets over the ten-year averaging period ( ) prior to the final compliance goals in While EPA stresses that states may choose the path or design of their program by selecting among the four building block approaches and other GHG-reducing options, EPA has proposed to make mandatory the minimum pace of implementation (i.e., the rate of progress). The NCC recommends that EPA allow each state to determine both the interim path and the interim timetable to meeting its 2030 performance goal. Congress created a framework of cooperative federalism within Title I of the CAA. This careful federal-state balance is central to the Act and embedded particularly in sections 110 and 111. As explained in the context of section 110, EPA determines the ends the standards of air quality but Congress has given the states the initiative and a broad responsibility regarding [the] means to achieve those ends through state implementation plans. 9 Thus, Title I assigns EPA and the states distinct roles, consistent with their comparative expertise in our federal system. It tasks EPA with setting the standards and it assigns states the responsibility for determining the manner in which states will achieve those standards at the local level. 10 Consistent with this cooperative federalism framework, EPA may be presumptively 11 prescriptive in the goals it sets for state performance under section 111(d), but states should be permitted to determine the interim path and interim timetable to achieving EPA s goals. Section 111(d) provides that it is the state s role to provid[e] for the implementation and enforcement of the standards of performance for any existing source established by a state plan pursuant to EPA-prescribed regulations. 12 EPA s decision to prescribe the actual interim pace of implementation is incongruent with EPA s acknowledgement of the exclusive state authority to design the actual emission reduction strategy (e.g., the combination of Building Blocks and other measures it selects). 13 While EPA arguably can set a deadline by which the BSER- 9 Virginia v. EPA, 108 F.3d 1397, 1408 (D.C. Cir. 1997). 10 Cf. North Carolina v. EPA, 531 F.3d 896, 923 (D.C. Cir. 2008) ( Under Title I of the CAA, there is a presumption of state-level regulation generally.... ) (citing 7410(a)(3)). 11 As noted above, given that EPA s 2030 BSER targets for each state are based on a number of key assumptions regarding gas supply, a state s ability to affect dispatch decisions and various other subjects that are not wholly predictable or under a state s control, even the final 2030 carbon intensity target should be rebuttable and subject to revision, should circumstances differ materially from EPA s assumptions in setting the 2030 targets U.S.C. 7411(d)(1). 13 See 79 Fed. Reg. at 34,879: It is a well-established principle that states have discretion regarding the measures adopted in their state implementation plans under CAA section 110 to attain the NAAQS. (citation to Train v. Natural Res. Def. Council, 421 U.S. 60 (1975)). The EPA believes that the same principle applies in the 4

7 National Climate Coalition Comments on EPA s Clean Power Plan Proposal determined performance standard must be achieved, only a state can properly evaluate the stateand region-specific energy and other factors relevant to deciding what path and at what pace implementation should occur. And the CAA requires EPA to permit consideration of the remaining useful life of regulated units, which the states would do as they develop their plans and timeline. EPA acknowledges that there are material differences between state plans submitted under sections 110 and The key differences suggest that states would have even more timing discretion under section 111, for which Congress has not set specific attainment deadlines and for which Congress has expressly directed EPA and the states to consider energy and cost considerations. But, even under section 110, notwithstanding its more stringent timing limitations, the courts have consistently recognized a state s primary discretion in setting the pace of implementation. 15 There may be justification for EPA to designate reasonable progress expectations and criteria that EPA will use to evaluate whether a state is on a trajectory to meet the 2030 goals, but EPA s mandatory interim goals and ten-year averaging exceed the authority Congress provided EPA under the CAA. The proposed interim goals effectively require states to make substantial progress towards the emission reductions beginning in But that is not EPA s role. The states should determine the glide path the states should choose both the path and timing for interim progress towards final 111(d) performance targets. Many states have already undertaken actions that EPA anticipates, including plant upgrades, the building and increased use of natural gas-fired and renewable generation, transmission line construction, demand-side efficiency measures and other actions included within EPA s four building blocks. Because such actions come at significant cost to ratepayers, states will need to evaluate the potential economic and other impacts associated with additional near-term and often large-scale investments in their energy systems to determine how much additional cost ratepayers can absorb and how quickly. Only state economic regulators will have the information sufficient to determine the appropriate manner and timing of the further investments necessary to achieve EPA s 2030 carbon intensity target. These difficult decisions are best made by the state within the broader context of assuring that a state s electricity supply remains affordable. context of state plans under section 111(d) as well, such that each state has the discretion to adopt emission reduction measures other than the measures found by the EPA to comprise the BSER, or to place greater or lesser emphasis than the EPA on certain measures, provided that the state s plan achieves the required level of emission performance for affected sources Fed. Reg. at 34, See, e.g., Bethlehem Steel Corp. v. Gorsuch, 742 F.2d 1028, 1036 (7th Cir. 1984)( Congress has given the states the initiative and a broad responsibility regarding the means to achieve those ends through state implementation plans and timetables for compliance.... The Clean Air Act is an experiment in federalism, and the EPA may not run roughshod over the procedural prerogatives that the Act has reserved to the states... )(emphasis added). See also, 42 U.S.C. 7410(a)(2)( Each implementation plan... shall (A) include enforceable emission limitations and other control measures, means, or techniques... as well as schedules and timetables for compliance, as may be necessary or appropriate to meet the applicable requirements of this Act;... )(emphasis added). 5

8 National Climate Coalition Comments on EPA s Clean Power Plan Proposal States are also best positioned, in conjunction with regional transmission entities, to determine resource adequacy implications of implementation timing. For example, states and regions are best able to assess: existing natural gas transportation infrastructure (including, among other components, interstate and distribution pipeline, booster compressors, and storage capacity in a variety of geologic formations underground) as well as natural gas supply and market conditions to determine whether they would be adequate to support the 70% state-average capacity factor for existing NGCC capacity targeted by EPA; 16 existing electric transmission infrastructure to determine whether it would be adequate to support the apparently broad regional or inter-regional dispatchedbased substitution of NGCC generation and increased renewable generation contemplated by the CPP; potential limitations on a state s ability to influence economic dispatch of generation to implement the CPP; 17 the remaining useful life of existing coal-fired (and other) generation resources, particularly where affected sources have made significant investments in such resources to comply with other environmental regulations (e.g., MATS, CSAPR); any legislation that may be required to implement the CPP; the effect of anticipated load growth; particular energy and environmental impacts; and state-specific economic impacts of the interim path and timing. Therefore, consistent with the Congressional division of responsibility in sections 110 and 111, EPA should allow states to set the appropriate pace for implementation prior to the final 2030 performance targets. 16 FERC Chair Cheryl LaFleur has noted gas pipeline adequacy should be considered from a regional perspective, not just a national perspective, due to existing constraints on the system. Responses of Acting Chairman Cheryl A. LaFleur To Committee on Energy & Commerce Subcommittee on Energy & Power Preliminary Questions for the Federal Energy Regulatory Commission at FERC Commissioner Phillip Moeller stated [c]hanging from economic dispatch to environmental dispatch is truly a fundamental change that would require a complete redesign of markets to include essentially a carbon fee on any resources that emit carbon dioxide. Commissioner Philip Moeller s Answers to Preliminary Questions for the Federal Energy Regulatory Commission July 29, 2014 at 3. 6

9 National Climate Coalition Comments on EPA s Clean Power Plan Proposal Special Considerations Raised by EPA s Notice of Data Availability In its recently-published Notice of Data Availability (NODA) regarding the CPP, EPA asks for comment on two alternative adjustments to the interim goal calculations in response to stakeholder concerns that a more gradual phase-in of the standards is needed. 18 First, EPA proposes to phase in reductions under Building Block 2 in a manner that accounts for any infrastructure improvements or expansions needed to support increased use of existing NGCC capacity. Alternatively, EPA proposes to phase in reductions under Building Block 2 in a manner that accounts for stranded investment concerns. 19 Independently, EPA describes alternative approaches proposed in the CPP that would be intended to credit early reductions for achievement of the interim goals. 20 For the reasons set forth above, the NCC urges EPA to recognize state authority to determine the interim path and timetable to achieve 2030 carbon intensity targets. However, if EPA does not defer to the states, the NCC supports adoption of a more gradual glide path that takes into account both natural gas infrastructure needs (e.g. pipelines, booster compressors, and storage) and stranded investment concerns. Such an approach is consistent with the statute, which provides for consideration of energy system impacts and the remaining useful life of the affected source. A more gradual glide path would also likely facilitate deeper long-term reductions. There is likely an inverse relationship between forcing states to reduce greenhouse gas emissions almost immediately (i.e., by 2020) and state ability to shift generation to renewable sources of energy, since early reductions will depend predominantly on natural gas dispatch. Where material additional state investments are required, near-term natural gas commitments may to a significant extent lock in a state s or region s investment strategy thus deferring alternative investment in renewables, energy-efficiency and energy storage. States should retain the authority to select the approach best suited to their needs and to time the reductions accordingly. Finally, the NCC supports crediting early reductions achieved by states and other entities that have invested in emission reduction strategies. IV. EPA Should Only Make Federally Enforceable A State s Commitment To Form And Timeframe Of Progress Unless otherwise requested by a state, EPA should consider to be federally enforceable only a state s commitment to achieve progress in the form (e.g., rate, mass) and over the timeframe the state submits and EPA approves. However, EPA should not require specific state plan provisions, such as targeted performance under individual building blocks or specific state programs, to be federally enforceable. Such a requirement could expose specific programs or projects, such as gas dispatch, energy efficiency or renewable energy projects, to the threat of federal enforcement or citizen suit. Under section 110 of the Act, once submitted by the state 18 EPA, Notice of Data Availability: Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 79 Fed. Reg. 64,543, 64,548 (Oct. 30, 2014). 19 Id. at 64, Id. at 64,545. 7

10 National Climate Coalition Comments on EPA s Clean Power Plan Proposal and approved by EPA, some system commitments (e.g., transportation programs) have been enforced by courts upon citizen suit. See, e.g., Friends of the Earth v. Carey, 552 F. 2d 25 (2d Cir. 1977). Such an enforcement risk would be wholly inappropriate for state energy planning. States should be permitted to avoid this risk for projects implemented to achieve CPP-mandated reductions. As the California Air Resources Board stated in a recent paper on the CPP, federal enforcement requirements should ensure states and covered entities stay on track, while leaving room for state policy innovation going forward A commitment approach is particularly important where, as here, states cannot guarantee specific dispatch outcomes nor ensure the success of specific renewable energy or demand-side efficiency strategies. EPA acknowledged similar concerns and has asked for comment on a state commitment approach to including energy efficiency and renewable energy in state plans. 22 EPA and the states have considerable experience with such an approach. Under CAA section 110, EPA has allowed states to include limited commitments in SIPs in certain circumstances instead of specific adopted measures. 23 And courts have upheld EPA s authority under the CAA and EPA s regulations to approve a SIP containing an enforceable commitment to adopt unspecified control measures. 24 While these examples are in the section 110 context, EPA should have even more flexibility to adopt such an approach in the context of section 111, which arguably defers to state authority and discretion to an even greater extent than section 110. Such an approach would still ensure that reductions are achieved because state plans would likely include provisions for correcting course to address any shortcomings. And EPA would be entitled to issue deficiency determinations and promulgate a federal plan in appropriate circumstances. V. EPA Should Develop Default Compliance Flexibility Mechanisms EPA should develop default mechanisms to ensure that potentially regulated EGUs and other potentially-obligated entities have the maximum degree of flexibility to comply with state plans at reasonable cost. When previously commenting on potential EPA performance targets under section 111(d), the NCC assumed that EPA would establish source-based compliance targets consistent with prior section 111 rulemakings. On that basis, the NCC proposed that EPA confirm the ability of states to provide individual sources with two types of compliance flexibility. The first would consist of traditional emissions trading options, including the ability to purchase both surplus emission reductions (i.e., emission reduction credits) created through 21 California Air Resources Board, Clean Power Plan Proposed Rule (111(d)) Discussion Paper at 4 (Sept. 2014), available at: Fed. Reg. at 34, See EPA, Approval and Promulgation of Implementation Plans; California; 2008 San Joaquin Valley PM2.5 Plan and 2007 State Strategy, 76 Fed. Reg. 41,338, 41,355 n. 27 (July 13, 2011). 24 See. e.g., Envtl. Def. v. EPA, 369 F.3d 193, (2d Cir. 2004) (upholding EPA s approval of enforceable commitments in the New York one-hour ozone SIP for the New York-Northern New Jersey- Long Island nonattainment area); BCCA Appeal Group v. EPA, 355 F.3d 817, (5th Cir. 2003) (upholding EPA s approval of enforceable commitments in the Texas one-hour ozone SIP for the Houston-Galveston severe ozone nonattainment area). 8

11 National Climate Coalition Comments on EPA s Clean Power Plan Proposal over-performance by other EGUs, similar to rate-based lead credit trading under EPA s lead phasedown regulation, and system offsets from surplus energy sector reductions achieved outside of the EGU fence line. The second would consist of a ceiling-price alternative compliance payment (ACP) (i.e., a compliance payment in lieu of achieving on-site reductions) by which a source could make a compliance payment to the state in lieu of achieving on-site reductions and allowing the state to use the funds towards energy system improvements (i.e., greenhouse gas emission reductions outside the source). This degree of flexibility is needed because many EGUs will not be able to make even the required heat rate improvements, while the other building blocks are by definition beyond the control of individual EGUs. A source would use an ACP as a compliance alternative when on-site limitations or regulatory risks (e.g., the risks of triggering NSR) prevent on-site modifications and the costs of credits and system offsets are higher than anticipated. There is CAA precedent for such a cost mitigation instrument. Although the ceiling-price ACP concept was first introduced during Congressional staff discussions during the 1990 Clean Air Act Amendments as a strategy that could address compliance challenges when costs exceeded anticipated levels, the first formal articulation of the idea appeared in President Clinton s July 1997 Memorandum to EPA when EPA revised the National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter. Recognizing that the revised standards could impose an unanticipated level of cost on regulated sources, the Memorandum recommended an ACP option for sources facing control costs at or above a cost-effectiveness threshold to fund reductions from other sources and to stimulate new technologies: There is a strong desire to drive the development of new technologies with the potential of greater emission reduction at less cost. It was agreed that $10,000 per ton of [criteria pollutant or precursor] emission reduction is the high end of the range of reasonable cost to impose on sources. Consistent with the State s ultimate responsibility to attain the standards, the EPA will encourage the States to design strategies for attaining the PM and ozone standards that focus on getting low cost reductions and limiting the cost of control to under $10,000 per ton for all sources. Market-based strategies can be used to reduce compliance costs. The EPA will encourage the use of concepts such as a Clean Air Investment Fund, which would allow sources facing control costs higher than $ 10,000 a ton for any of these pollutants to pay a set annual amount per ton to fund cost-effective emissions reductions from non-traditional and small sources. Compliance strategies like this will likely lower the costs of attaining the standards through more efficient allocation, minimize the regulatory burden for small and large pollution sources, and serve to stimulate technology innovation as well. 25 EPA has in fact approved SIP revisions, under CAA Section 110, that incorporate just such a mitigation fee program. In 1999, the South Coast Air Quality Management District in California amended its Rule 1121 ( Control of Nitrogen Oxides from Residential Type, Natural Gas-Fired Water Heaters ) to include a mitigation fee alternative. This mitigation fee alternative was defined as an emission reduction option, in which monies collected by the District from water heater manufacturers are placed in a restricted fund and are used to fund stationary and 25 Presidential Documents, Memorandum of July 16, 1997, Implementation of Revised Air Quality Standards for Ozone and Particulate Matter, 62 Fed. Reg. 38,421, 38,429 (July 18, 1997). 9

12 National Climate Coalition Comments on EPA s Clean Power Plan Proposal mobile source emission reduction programs targeted at equivalent NO x emission reductions as to those that would have otherwise occurred and have been approved by the District s Governing Board. 26 EPA approved that amendment as part of revisions to California s SIP in The South Coast Air Quality Management District later amended Rule 1121 in 2004, retaining and updating the mitigation fee alternative. EPA also approved that amended version of the rule as a revision to California s SIP in 2009, noting that the rule includes a mitigation fee that can be paid in lieu of meeting interim emission limits As part of the CPP, EPA should provide states the ACP framework as a compliance flexibility mechanism that states could adopt in their Section 111(d) plans. EPA should identify appropriate qualifying criteria for fund investments to ensure that the investments are designed to achieve CO 2 emission reductions. However, the state would control the program i.e., a state would choose whether to implement the fund as a compliance option in its 111(d) plan, would collect the funds, and would identify those investments that best match its energy objectives and CO 2 emission reduction opportunities. Such a program could accelerate investment in energy efficiency, renewable energy, energy storage and carbon capture and sequestration. Consistent with previous ACP applications, EPA also should confirm that the price for a Building Block 1 ACP should reflect the upper bound of EPA s anticipated Building Block 1 cost 29 because the ACP would serve as an alternative to Building Block 1-related reductions. As the Building Block 1 obligations are expected to occur in the early years of the program, the ACP price for that component of the program should not be expected to interfere with the potentially more costly measures contained in some of the other Building Blocks, whose implementation is likely to occur over a longer period of time. Given the stringency of Building Blocks 2-4 and EPA s interim and final goals, these compliance flexibility and ACP concepts should be expanded beyond individual EGU compliance options to cover the entire compliance burden facing EGUs. In addition to confirming state primacy in glide-path planning and timing as recommended above, EPA should outline the conditions under which a state may use both banking and borrowing of reductions, as well as other mechanisms such as market- and Integrated Resource Planning (IRP)-based development of clean replacement power, interstate trading and multi-state energy planning. These tools will protect against the reliability, price and market distortions that are likely to result from excessive compliance costs, while also enabling states to optimize energy planning and ensure that near-term commitments don t compete with longer-term, lower-carbon strategies through the unintended lock-in of more carbon intensive investments. 26 Rule 1121(b)(5). 27 See EPA, Revisions to the California State Implementation Plan, California State Implementation Plan Revision; San Joaquin Valley Unified Air Pollution Control District, and South Coast Air Quality Management District: Direct Final Rule, 66 Fed. Reg. 57,666 (Nov. 16, 2001). 28 EPA, Revisions to the California State Implementation Plan, South Coast Air Quality Management District Sacramento Metropolitan Air Quality Management District: Direct Final Rule, 74 Fed. Reg. 20,880, 20,881 (May 6, 2009) Fed. Reg. at 34,

13 National Climate Coalition Comments on EPA s Clean Power Plan Proposal VI. EPA Should Establish A Default Adjudication Process To Resolve Interstate Disputes Regarding GHG-Reduction Credit That Respects Corporate Portfolio Investments Since the CPP s proposed state performance goals are based on system-wide emission reductions from sources other than affected EGUs, the CPP has significant interstate implications. However, these interstate issues are not adequately addressed in the CPP. EPA should not base its performance goals on measures that have an interstate character without providing clear ground rules for allocating emission reduction credit among the relevant states for the purposes of their individual 111(d) state plans. To avoid or minimize otherwiseinevitable disputes among states, EPA should outline the operative ground rules for allocating credit among states and develop a dispute resolution mechanism to ensure transparency of credit allocation and procedural efficiency. Likewise, EPA should address the need for states to respect corporate portfolio investments in multiple states, as this will be necessary to ensure the desired degree of large-scale private capital investment. In the preamble to the proposed rule, EPA acknowledges that the electricity system and markets are interstate in nature: EGUs in one state provide power across state lines, and power companies often own EGUs in more than one state and manage them as a system. 30 However, EPA offers no mechanism in the CPP to adjudicate disputes that will invariably arise out of interstate nature of the CPP. While EPA recognizes the complexity of accounting for interstate effects and offers many high-level suggestions on how state plans can account for interstate effects, 31 the agency does not acknowledge that disputes will inevitably arise over credit accounting, nor does it propose any system of dispute resolution. The interstate, regional nature of the electric grid means that investments in one state often yield benefits in another. For instance, state A is a net importer of energy from neighboring states. State A invests heavily in a demand-side management (DSM), program, and this will reduce emissions in surrounding states where its imported energy is generated. As a result, EGU emissions may decrease in neighboring state B, a net exporter of energy. In the absence of a multistate agreement, what happens when both states disagree as to which should receive credit for the reduction? EPA offers no mechanism to solve this dispute in the absence of a prior agreement between states (and even if both states are party to a multistate agreement, disputes may arise). This is not a hypothetical problem: currently, many states with renewable portfolio standards (RPS) grant credits for renewable energy generated in other states. EPA acknowledges such rules exist and expresses a desire to retain and recognize such regulations. This is important because a system that does not recognize the validity and tradeability of out-ofstate credits may unduly interfere with established state laws and private contracts. For large, multistate energy companies with diverse portfolios, the problem is compounded. The most efficient compliance strategy would be for such companies to prioritize investment in emissions reductions or renewable energy on a fleet-wide basis investing where the greatest reductions can be achieved at the lowest cost and in the least time. For example, a 30 Id. at 34, Id. at 34,

14 National Climate Coalition Comments on EPA s Clean Power Plan Proposal company may have a coal-fired power plant in state C, and the opportunity to invest in wind generation development in state D. The company will be subject to emissions reductions rules in state C, but the most efficient way to reduce emissions may be for the company to invest in wind generation in state D. However, such an efficient portfolio investment strategy would not be recognized in state C in the absence of a multistate agreement, and even with an agreement, disputes may arise. Companies should be able to maximize efficient interstate compliance options to minimize compliance costs. Unlike criteria pollutants, the effects of GHGs are global, so there is no environmental reason that reductions must occur within a state boundary. The section 111(d) program will only encourage efficient, fleet-wide investments if there are rules for transferring corporate portfolio credit from one state to another and if there is a mechanism to resolve interstate disputes over credit accounting. In its technical discussion paper on state plans, EPA briefly discusses these problems, and lists six potential options which might address interstate effects. 32 For energy efficiency programs, in the absence of a multistate agreement, it suggests a default rule of allowing a state only to receive credit for in-state reductions attributable to the reduction in demand. By contrast, for renewable energy programs, it suggests a default rule of allowing states to take into account all reductions wherever they occur, in line with current state RPS programs. It suggests alternatives to the default rule, which would either restrict credit claims to in-state reductions or alternatively allow broad claims for reductions wherever they occur. It also suggests a variety of multistate agreement approaches, including regional credit trading systems. This high-level discussion is a good start, but EPA must propose and facilitate a comprehensive solution to interstate credit allocation and develop an efficient and fair procedure for resolving potential interstate disputes. Moreover, EPA s six options address only potential disputes among states and fails to address the equally important subject of how to assure credit for corporate portfolio investments. The NCC recommends that EPA recognize as a general default rule that emission reduction credit should presumptively be allocated consistent with the source of funding for the emission-reducing activity, whether by taxpayer (i.e., the state), ratepayer or shareholder. This presumption can apply to both energy efficiency and renewable energy programs: if an importing state s ratepayers invest in energy efficiency in the state, then they should receive credit for the corresponding reduction in GHG emissions in the neighboring exporting state. Similarly, if a company invests in renewable energy in state B to meet energy needs under state A s state plan, then the company should be able to receive credit in state A. Of course, there are numerous instances in which shareholders, taxpayers and ratepayers share investment and should share accordingly in the emission reduction benefits of the investment. This approach has a number of advantages from both a policy and accounting perspective. First, assigning credit for energy efficiency and renewable energy based on which entity made the investment in the programs will avoid double counting because there will be a clear division of the credit for reductions. Second, this approach is preferable from an equity 32 EPA Technical Support Document, EPA-HQ-OAR , State Plan Considerations, (June 2014). 12

15 National Climate Coalition Comments on EPA s Clean Power Plan Proposal standpoint because the reward is given to the entity that made the investment. Finally, this approach is desirable from a policy perspective because it will encourage further investment in energy efficiency and renewable energy programs by ensuring fair return on such investments. There are a variety of potential components that EPA may wish to consider as part of a dispute adjudication system. For example, EPA may want to develop a clearinghouse or multistate inventory for state and private entity registration of emission-reduction actions for which they claim credit. Further, state plans should include a provision outlining the state s own dispute resolution procedure, which should conform to the federal framework. In addition to notice, transparent registration and uniform state and federal procedures, the program should provide for a reasonable period of repose following adjudication to assure states and private parties a reasonable expectation for returns on their investments. In sum, default rules on GHG credit allocation and dispute resolution will allow states and regulated entities to implement the most cost-effective emissions reduction strategies. With credits following funding, energy companies with large portfolios can efficiently reduce GHG emissions at the units where reduction is cheapest, and a credit registry and dispute resolution system will work to protect those investments. Such a system protects against stranded investments, allowing companies to invest in reducing emissions at any of their units, without fearing that subsequent state plan requirements will nullify credit for those investments. By allowing credits to follow investments, EPA can minimize compliance costs and help incentivize continued effective reductions of GHG emissions. VII. EPA Should Develop A Streamlined, Alternative New Source Review (NSR) Process For Sources That Trigger NSR Because Of Efficiency Improvements To Comply With The CPP The CAA s NSR rules require existing major stationary sources that make major modifications to obtain pre-construction permits, incorporating stringent emission control requirements. If the source is in an area in attainment with NAAQS, Prevention of Significant Deterioration (PSD) rules require installation of Best Available Control Technology (BACT). 33 If the source is in a nonattainment area, then the Lowest Achievable Emissions Rate (LAER) must be met, and emissions offsets must be obtained. 34 Modification includes any physical change or change in method of operation of a stationary source which increases net emissions of any air pollutant. 35 There is a risk that power plant modifications intended to reduce CO 2 emissions by improving a unit s heat rate as expected in Building Block 1 could trigger NSR requirements for one or more criteria pollutants if that unit s utilization increases as its heat rate drops. A source could then be required to go through the NSR permitting process and install current BACT (or LAER and offsets, if applicable) for criteria pollutants or precursors in addition to the envisioned efficiency upgrades to comply with section 111(d). Triggering NSR and its potential 33 See 42 U.S.C See id. 7502(c)(5), Id. 7479(2)(C), 7411(a)(4). 13

16 National Climate Coalition Comments on EPA s Clean Power Plan Proposal additional level of emissions control requirements would be an impediment to facilitating the efficiency improvements that the states may need to meet section 111(d) emission performance targets. In previous analysis, EPA has acknowledged that the NSR program has impeded or resulted in the cancellation of projects which would maintain and improve reliability, efficiency and safety of existing energy capacity and that this has resulted in lost opportunities to improve energy efficiency and reduce air pollution. 36 However, EPA s proposal does not resolve the conflict between the CPP and NSR requirements. Rather, EPA states that it expects the situations in which an NSR permit would be required to be few. 37 EPA assumes that states will simply increase renewable energy and demand-side energy efficiency measures in an amount that would counteract any anticipated increased utilization of the modified unit. EPA offers no support for that assumption. EPA should develop an expedited, streamlined and less costly NSR process that would consist of two steps. Under the first step, EPA or the state permitting authority would screen the project to assure that any net criteria pollutant (or precursor) emission increases resulting from efficiency improvements related to the CPP would not interfere with attainment of any NAAQS. To implement this step, EPA or the state would use existing criteria pollutant modeling and monitoring results to establish significance thresholds. The source would use these thresholds to demonstrate that a net increase in a criteria pollutant s (or precursor s) emissions due to increased utilization would not interfere with the area s attainment of the NAAQS for that pollutant. Under the second step, EPA or the state would utilize the multi-pollutant provisions of the NSR program to recognize that the modified unit meets BACT (or LAER, as the case may be) provided that its existing controls, together with the efficiency improvements, represent BACT for the unit as a whole (i.e., taking into account the net benefits of all emissions and energy considerations). To support this determination, EPA or the state would identify the level of control for each criteria pollutant that it considers sufficient for such a determination. This second step would assure that an uncontrolled unit would not escape the NSR control requirement, but would avoid penalizing an already well-controlled unit from having to incur significant cost to update its controls to the most current BACT or LAER level. This two-step, streamlined approach would preserve the air quality protective character of the NSR program without chilling the energy-efficiency investments sought by the CPP. In such circumstances, EPA and the states would have a strong legal and policy basis for such an approach. As early recognized by the DC Circuit, courts frequently uphold streamlined agency [regulatory] approaches or procedures where the conventional course, typically case-by-case determinations, would, as a practical matter, prevent the agency from carrying out the mission assigned to it by Congress. Alabama Power Co. v. Costle, 636 F.2d. 323, 358 (D.C. Cir. 1980). Unlike the NSR exemption disapproved by the courts, 38 such an approach simply recognizes that the benefits of energy efficiency warrant both prompt permitting and, in appropriate circumstances, a regulatory determination that the potential for utilization-driven 36 EPA, New Source Review: Report to the President (June 2002) at 1, available at: Fed. Reg. at 34, New York v. EPA, 413 F.3d 3, (D.C. Cir. 2005). 14

17 National Climate Coalition Comments on EPA s Clean Power Plan Proposal minor net emission increases of otherwise well-controlled criteria pollutants can be considered acceptable under appropriate circumstances. As the CAA already recognizes the appropriateness of taking energy considerations into account in setting BACT for criteria pollutants, 39 EPA may identify circumstances under which utilization-related emission increases may occur and yet would not trigger additional controls using these appropriate safeguards. For increases of GHG emissions, EPA should confirm that compliance with section 111(d) standards would be deemed to satisfy applicable PSD or BACT requirements for GHG reductions, since the standards should represent the maximum degree of reduction achievable, taking into account energy, environmental, and economic impacts and other costs, as emphasized in the statutory BACT standard. 40 In other words, the 111(d) standards should serve as presumptive BACT for sources regulated under the 111(d) program. VIII. EPA Should Articulate Clear Limitations On The Precedential Effect Of Its System- Wide Approach to BSER The logical extension of the CPP s proposed systems-based approach to BSER would create near-boundless EPA authority in the context of EPA regulating other sectors. EPA s proposed approach departs substantially from previous regulation in a number of ways. At the core of EPA s proposal is a goal of reducing the operation of affected EGUs in favor of: (1) other section 111(d)-regulated EGUs with lower-carbon intensity (Building Block 2); (2) EGUs not subject to regulation under 111(d) (Building Block 3); and (3) measures to reduce consumption of electricity (i.e. reducing the electricity consumption of completely independent customers, Building Block 4). The consequence of this approach is that EPA has, in effect, expanded its reach beyond environmental regulation to regulation of the broader, energy system. This broad approach has serious implications for EPA s potential regulation of other sectors. There is no apparent limit to EPA s use of a systems approach to reducing greenhouse gas emissions from the energy and transportation sectors. In theory, EPA could equally apply a systems approach to other sectors of the economy that it may next address, such as the extraction, refining and distribution of fuels; the movement of goods and even the manufacturing of products. It could, for example, establish state carbon intensity targets based on its own determinations regarding the relative carbon intensity of different raw materials or feedstocks, of refining or manufacturing processes or of distribution. It could impose obligations on states, and indirectly on retailers, for the carbon intensity implications of mode choice, such as whether raw materials, fuels, or goods should move by ship, rail, pipeline or by other means of transport. Or in the realm of passenger vehicle use, it could impose state performance obligations based on levels of multiple occupancy that it deems achievable as a strategy to reduce vehicle miles travelled (VMT). There may be significant national energy, transportation and environmental benefits associated with advances in these sectors. But it is highly doubtful that Congress intended for EPA alone to determine the nation s industrial, energy or transportation choices in such a single-purpose manner. As proposed, the CPP does not define the dividing line between its approach to regulating EGUs and the potential for it to address other sectors of our economy U.S.C. 7479(3). 40 See id. (definition of BACT). 15

18 National Climate Coalition Comments on EPA s Clean Power Plan Proposal in similar fashion. We strongly urge EPA to consider and define the limits to its authority to alleviate concern that the CPP s definition of BSER heralds a broad shift in EPA authority beyond Congressional intent. IX. Conclusion The National Climate Coalition appreciates the opportunity to submit these comments and looks forward to providing further input. Statement regarding these comments submitted by the National Climate Coalition: The positions described in these comments regarding EPA s Proposed Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units are intended for this context only. Different positions may be appropriate for other programs under consideration at the national, international or other (e.g., state or regional) level. Furthermore, because this proposal is an integrated package of recommendations that reconciles often conflicting individual company perspectives, no particular position should be attributed to any individual National Climate Coalition member. The Coalition offers these comments recognizing that EPA will receive a variety of comments from other stakeholders. We look forward to continued dialogue with all stakeholders and commit to give serious consideration to and to comment upon constructive ideas offered by others. Counsel: Robert A. Wyman Latham & Watkins LLP ROBERT.WYMAN@LW.COM Stacey L. VanBelleghem Latham & Watkins LLP STACEY.VANBELLEGHEM@LW.COM 16

19 The National Climate Coalition The National Climate Coalition is a multi-industry coalition that was formed in 2008 to provide input to EPA regarding GHG regulation under the Clean Air Act and whose members have included companies in the aerospace and electronics, automotive, cement, consumer products, electricity generation, manufacturing, oil refining and renewable energy sectors. LS Power Group NCC CONTACTS Bob Wyman Stacey VanBelleghem (213) ROBERT.WYMAN@LW.COM (202) STACEY.VANBELLEGHEM@LW.COM

20 Attachment A

21 Using EPA Clean Air Act Authority to Build a Federal Framework for State Greenhouse Gas Reduction Programs The National Climate Coalition The Context for EPA Action The National Climate Coalition (NCC) recognizes the need for Congressional action to address the nation s long-term climate and energy goals. Stabilizing greenhouse gas concentrations in the atmosphere ultimately will require the transformation of our energy and transportation systems. Such an ambitious program must harmonize multiple national priorities, including economic growth, energy independence, national security, energy reliability and affordability. Achieving these goals will require continuous private sector innovation, investment and large-scale deployment of clean energy technologies, with the engagement and support of multiple federal and state departments and agencies, according to their respective expertise and jurisdiction. Ultimately, to be successful, such a comprehensive effort can only be built on the foundation of effective Congressional action. Such an ambitious, coordinated approach is, however, unlikely to occur in the near term. Instead, in light of EPA s legal responsibility to regulate greenhouse gas (GHG) emissions under the Clean Air Act, due to the US Supreme Court decision in Mass v EPA 1 and subsequent EPA actions (e.g., the endangerment finding), the nation faces the challenging task of enacting such regulations in ways that are most consistent with the overall national priorities identified above. The National Climate Coalition was formed by private sector businesses to carefully consider the most appropriate form of EPA action, consistent with both the Act and these important national goals. The NCC believes that section 111 of the Act is the most appropriate tool for EPA to implement a reasonable transitional GHG reduction program, pending more comprehensive Congressional action. In particular, paragraph (d) of section 111 provides a framework that, if properly designed and implemented through a federal-state partnership, could stimulate substantial GHG reductions and facilitate the private sector s development of clean energy technologies. How Should EPA Use Section 111(d)? First, it is important to state that section 111(d) is not a tool to reshape the entire energy economy. It gives neither EPA nor the states authority to impose draconian costs on emitters or require the deployment of technologies that are not yet commercially proven and available. It does not allow EPA to impose any particular federal system of regulation on states that prefer to take their own path forward. 1 Massachusetts v. Environmental Protection Agency, 549 U.S. 497, 127 S.Ct (2007)(finding that EPA had statutory authority to regulate emissions of greenhouse gases from new motor vehicles because such gases fit within the Act s definition of air pollutant and remanding to the Agency for determinations regarding endangerment and manner of regulation). The National Climate Coalition

22 It does, however, authorize EPA to provide the states with guidance on the level of cost-effective GHG emission standards, and to offer the states implementation pathways by which major GHG sources in those states can improve their energy efficiency and reduce GHG emissions at reasonable cost. These EPA 111(d) guidelines and thoughtful model rules can facilitate states ability to: use a uniform national platform for reporting GHG emissions, for tracking and accounting for GHG reduction programs, and for crediting appropriate surplus GHG reducing actions and appropriate early actions by states, sources and others; work together towards efficient regional or national GHG reduction programs that are consistent with the regulatory structure of the power sector entities within the state (e.g., rate regulated integrated utilities or competitive markets at wholesale and/or retail) and of other energy sector sources; reduce the financial impact of achieving the guidelines through voluntary investments in renewable energy, demand-side reductions, energy storage, the retirement and repowering of less-efficient sources, and carbon capture and sequestration (CCS); and stimulate priority cleantech investments within each state through the use of funds generated by alternative compliance payments under a state alternative compliance program. Form of 111(d) Standards Although section 111(d) directs states to develop their own plans to implement performance standards for GHG emissions, EPA must first make certain threshold determinations to guide and frame state actions. As with other programs under the Act, EPA must base its guidance on data regarding sources within regulated source categories, evaluating currently available emission reduction opportunities at those sources and determining both the cost of such opportunities and their potential positive and negative impacts on the overall energy system, among other considerations. In order to make the determinations required by the Act, EPA will need to group sources according to their common characteristics. This is particularly important because emissions performance and emission reduction opportunities will differ according to fuel, power generation technology and other source-specific factors (e.g., manner of use, age). Some individual sources are likely to be better able to reduce their emissions per unit of production, e.g. through on-site efficiency improvements, than others. Other sources may not be able to do so at all. Accordingly, EPA will need to decide whether to identify reductions individually for each source or to allow the use of averaging, banking and trading (ABT) so that the subcategories as a whole can meet anticipated reduction targets within appropriate cost-effectiveness boundaries. The NCC believes that such an ABT approach is warranted under the relevant portions of the Act, and offers one way for EPA s guidance to give states the opportunity to implement regulations under section 111(d) in a cost-effective manner. Unlike criteria pollutant programs, for which each nonattainment area has a limited carrying capacity to guide a determination of what level of emissions can be allowed while still meeting the ambient air quality standards, there is no comparable basis for EPA to set binding overall emission budgets for addressing GHG emissions. EPA will almost certainly be restricted to determining what GHG emissions rate per activity level, or carbon intensity, can be achieved at certain types of sources, considering available technology options and cost. The National Climate Coalition 2

23 To reflect these considerations, we recommend that EPA s 111(d) guidelines: sub-categorize sources according to fuel and technology type; express performance as an emissions rate i.e., a level of emissions per unit of production; 2 select targeted reductions based on EPA s determination regarding what can be achieved by facilities within individual fuel and technology subcategories (e.g., coal, gas) based on the best currently available systems for controlling emissions within an appropriate cost range; 3 and recognize the benefit of allowing sources to average their emissions across multiple units. Because other market-based mechanisms such as inter-source trading and banking would encourage further or early emission reductions, maximize a source s compliance flexibility and reduce cost, EPA should encourage the use of averaging, banking and trading (ABT) as a component of any 111(d) program, consistent with the inclusion of these features in many prior programs. 4 A Building Block Approach and State Equivalent Programs Under the NCC proposal, EPA would develop the basic building blocks for coordinated state action while leaving to the states the choice of approach (i.e., whether to elect to implement one or more of, or its own program instead of, the federal components). In addition to promulgating the emissions performance guidelines for state action, EPA also would develop the regulatory infrastructure. This infrastructure would include national GHG reporting and accounting rules, a model rule available for state use upon election, a federal trading and tracking system and uniform federal creditgeneration protocols for qualified voluntary activities (e.g., demandside efficiency, renewable power, energy storage, carbon capture and sequestration (CCS)) and guidance regarding appropriate levels for an alternative compliance payment feature that states could use to support additional clean energy investments. 2 EPA has considerable experience with rate-based programs, which it has used to remove lead from gasoline and to reduce emissions from various categories of mobile sources. See, e.g., EPA, Regulation of Fuel and Fuel Additives; Gasoline Lead Content; Final rule, 50 Fed.Reg. 9,386 (Mar. 7, 1985; implementing the final segment of a lead phase-out program that EPA launched in 1973); EPA, Final Rule for New Gasoline Spark-Ignition Marine Engines, 61 Fed. Reg (Oct. 4, 1996); Final Rule, NHTSA, Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011; Final Rule, 74 Fed. Reg (Mar. 30, 2009); EPA and NHTSA, 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards; Final Rule, 77 Fed. Reg (Oct. 15, 2012). 3 Section 111(d) requires EPA to consider relative cost-effectiveness in setting existing source standards and does not allow the agency to force technologies that are not yet commercially available. H. Rep , at 11 (1977) ( standards adopted for existing sources under section 111(d) of the act are to be based on available means of emission control (not necessarily technological) ). EPA may set standards that encourage technology advancement and ongoing improvement, but these must be bounded by cost and energy considerations. 42 USC 7411(a)(1); see Essex Chemical Corp. v. EPA, 486 F.2d 427, (D.C. Cir. 1973). 4 Almost all of EPA s rate-based programs have included ABT components for just these purposes. See, e.g., EPA, Regulation of Fuel and Fuel Additives; Final Rule, 47 Fed. Reg (Oct. 29, 1982); EPA, Regulation of Fuels and Fuel Additives; Banking of Lead Rights; Final rule, 50 Fed. Reg. 13,118 (Apr. 1, 1985); EPA, Final Rule for New Gasoline Spark-Ignition Marine Engines, 61 Fed. Reg (Oct. 4, 1996); EPA, Control of Air Pollution From New Motor Vehicles: Tier 2 Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements; Final Rule, 65 Fed. Reg. 6,698 (Feb. 10, 2000) ( Today s action also introduces an averaging, banking, and trading program to provide flexibility for refiners and ease implementation of the gasoline sulfur control program. ); 77 Fed. Reg. at 62,628 (compliance flexibilities for 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards include credit averaging, banking and trading). 3 The National Climate Coalition

24 Program Component EPA Actions Emissions Guidelines Regulatory Infrastructure EPA sets fuel- and technology-specific emissions performance standards based on a determination of what rate reductions can be achieved at the regulated unit with commercially-available, cost-effective technology. EPA develops the regulatory infrastructure encouraging, but not requiring, national uniformity: Uniform national GHG reporting and accounting Model federal rule for state election Federal trading/tracking system upon state election (Trading) Uniform federal protocols for crediting qualifying investments (Credits) State Equivalency Criteria EPA identifies alternative paths states may use to demonstrate that their programs meet federal Guidelines. Program Basic choices State Credit Program Options (using federaldeveloped or approved protocols) Averaging, Banking and Trading (ABT) Cleantech Fund State Options 1. Implement model rule; 2. Participate in regional program (e.g., WCI, RGGI); 3. Implement individual state program; or 4. Implement a combination of the above. Credit incremental investment in: Demand-side energy efficiency Renewable (low-carbon) electricity generation Renewable (low-carbon) fuel supply Carbon capture and sequestration (CCS) Energy storage The model rule would authorize ABT to ensure costeffectiveness and to provide compliance flexibility for existing sources that cannot meet the emissions performance standard. The model rule also would include a ceiling-price alternative compliance payment (ACP) to fund statedirected cleantech investment. The National Climate Coalition 4

25 Although state programs would be required to enforce compliance with minimum reporting, accounting and performance rules, states would remain free to choose how to achieve equivalent GHG reductions from regulated sectors. States would have the option of electing to implement the model rule (including ABT), one or more of the credit generation protocols and an alternative compliance program associated with a state clean technology investment fund. Alternatively, states could choose any path that satisfies any one of three equivalency tests, including: 1. Rate-based equivalency a demonstration that the state program achieves equivalent or better carbon intensity for the regulated sector; 2. Mass-based equivalency a demonstration that the state program achieves equal or greater emission reductions relative to what would be achieved by the default federal approach; 3. Market price-based equivalency a demonstration that the state program reflects a carbon price, through a cap and trade program, carbon tax or other approach, that is comparable to or above the cost-effectiveness benchmark used by EPA in establishing the performance expectations for the regulated sector. Power Sector Example For illustration purposes only, we assume that EPA will determine that in the near term, electric generating units within a subcategory can, on average, improve on-site efficiency and reduce their per-megawatt-hour (MWH) GHG emission rate by some amount (e.g., <1-5% depending on the subcategory, the age of the plant, operating conditions, among other factors). Under such a scenario, EPA could establish carbon intensity standards up to 5% below the current average performance for each subcategory (i.e., at the 45th percentile point of the MWH-weighted average emission rate within the plant or fuel type subcategory). 5 Using such an approach, regulated units with emission rates in excess of the standard would be required either to reduce their carbon intensity through the implementation of such efficiency improvements or to purchase credits from other regulated units with emission rates below the standard (or from available off-site credit programs -- see below). 5 The NCC envisions EPA s guidance establishing glide paths that would gradually phase in such standards over a multi-year period. 5 The National Climate Coalition