Under Clean Power Plan, Utilizing Market-Based Credit Trading Would Allow Power Plant Owners To Meet Targets through Advanced Energy Measures that Reduce Emissions at Low Costs in States Where EPA Imposes a Federal Plan

[Washington, D.C.] – The U.S. Environmental Protection Agency’s backstop plan for states that fail to craft their own strategies to comply with EPA’s proposed Clean Power Plan can make full and effective use of energy efficiency, renewable energy, and other advanced energy technologies to lower the costs of reducing carbon emissions, according to Advanced Energy Economy (AEE), a national business association. 

In a white paper published today, AEE lays out design principles for a proposed Federal Plan to implement the Environmental Protection Agency’s Clean Power Plan in states that do not submit a satisfactory state plan. EPA will release for public comment a draft Federal Plan this summer, along with the final Clean Power Plan.

The white paper, Design Principles for a Rate Based Federal Plan Under EPA’s Clean Power Plan, is available here.

“EPA is required under the Clean Air Act to draft a Federal Plan for states that choose not to participate with their own compliance strategies. This Federal Plan can also to provide guidance for states in developing their own,” said Malcolm Woolf, Senior Vice President of Policy at AEE. “Our paper shows that a Federal Plan can reduce costs for states by making full use of energy efficiency and demand response, renewable energy, and other advanced energy technologies. Utilities, independent power producers, and their parent companies are already investing in these and similar resources. Even in states that decline to develop their own implementation plans, EPA can slash compliance costs by allowing voluntary trading of emission reduction credits generated by these resources, a practice very familiar to the agency and industry.”

Under the draft Clean Power Plan, states are free to utilize a “portfolio approach” for compliance by instituting state policies that employ energy efficiency, renewable energy, and other technologies to reduce emissions. But some critics, including the U.S. Chamber of Commerce and some Members of Congress, have asserted that the Clean Power Plan cannot mandate state policies that would make use of energy efficiency or renewable energy for compliance, and thus could only require measures taken at power plants themselves.

AEE does not suggest that a draft Federal Rule could impose state policy, but rather that it does not need to. This paper shows how a Federal Plan could help the electric power sector capture the value of advanced energy resources, many of which are “beyond the fence line,” through its traditional jurisdiction over EGUs. In the process, the outlined approach would reduce the cost for states that do not submit their own plans. Utilizing this marketplace would be fully optional and would be a decision made by Electric Generating Unit (EGU) owners.

As AEE described in comments submitted to EPA, current electric sector practices demonstrate that owners of EGUs have ample ability to directly invest in advanced energy or to procure credits associated with advanced energy investments as a means of offsetting their units’ output and associated emissions. To use this approach in a Federal Plan, EPA need only allow for market-based trading of credits, which would enable EGUs to capture the emission reduction benefits of these investments, as the agency has done for Federal Plans in prior Clean Air Act regulations, such as the Clean Air Interstate Rule and Cross State Air Pollution Rule.   

In its Federal Plan, EPA could propose an emissions rate-based or a mass-based approach to compliance. AEE takes no position on the relative merits of one versus the other, but focused this paper on an emissions rate approach to address some of the complexities involved. On that basis, AEE recommends that the Federal Plan:

• Utilize the market-based mechanism of rate-based trading, allowing interstate credit trading among states under the Federal Plan and with any state under a state plan that includes appropriate links to the Federal Plan;

• Allow EGUs to comply, in part, through purchase of emission reduction credits generated by a wide array of advanced energy providers – including zero- and low-emission generation resources and demand-side resources – in an amount based on the contribution to the state’s emission reductions;

• Require verification and participation in a tracking registry for any resource seeking to generate tradable credits; and

• Phase in the emission limitation for each unit to provide both a clear market signal and sufficient flexibility for appropriate planning through the use of emission reduction milestones coupled with flexibility mechanisms such as multi-year compliance periods and banking of emission credits (including credits generated before the 2020 mandatory compliance start-date). 

“A trading system would allow utilities and other power producers to obtain credits from renewable energy generation and demand reduction efforts sufficient to meet their EPA emission targets,” said Woolf. “Credit trading would also create market demand for advanced energy companies. The result will be lower emissions at lower cost, and further acceleration of this fast growing sector of the nation’s economy.”

About Advanced Energy Economy

Advanced Energy Economy is a national association of businesses that are making the energy we use secure, clean, and affordable. Advanced energy encompasses a broad range of products and services that constitute the best available technologies for meeting energy needs today and tomorrow. AEE’s mission is to transform public policy to enable rapid growth of advanced energy businesses. AEE and its State and Regional Partner organizations are active in 26 states across the country, representing more than 1,000 companies and organizations in the advanced energy industry. Visit AEE online at www.aee.net 

Media Contact

Monique Hanis, AEE, 202-391-0884, mhanis@aee.net