The Clean Air Act provides the current regulatory framework for climate policy in the United States. A key component of US policy as called for in President Obama’s recent memorandum to the US Environmental Protection Agency (EPA) will be the use of flexible approaches in achieving reductions in greenhouse gas emissions. EPA is expected to regulate existing stationary sources using tradable performance standards (averaging) under section 111(d) of the act. This section requires states to develop plans to implement the regulation. EPA will issue guidelines for states and may provide a model rule representing their ideal regulation for states to potentially incorporate in their plans, but many states are expected to propose additional flexibility mechanisms.

With coauthor Matt Woerman, we recently completed a paper that considers a variety of policy approaches that EPA will need to evaluate, whether as part of a model rule or if introduced by states. Unlike other parts of the Clean Air Act, section 111(d) requires consideration of multiple criteria. This section has a technological basis, so emissions rate changes would be a justified metric. The eventual outcome of interest is environmental performance, so emissions reductions are also meaningful. This section also calls for consideration of costs, and evaluation of policies according to a common marginal abatement cost could be used to compare stringency.

This approach is especially interesting because it leads to cost-effective regulation among the affected sources, and could be observed in the modeling that states will provide to support their implementation plans. We find that expanding flexibility enables an increase in ambition along any one of these metrics (emissions rates, reductions, and costs), but it can lead to ambiguous results with respect to other metrics, suggesting that multiple criteria should be balanced to fit the legal justification of the regulation.

Using RFF’s Haiku model, Matt Woerman and I simulated a tradable performance standard regulation at coal-fired power plants to achieve a 4 percent reduction in the average emissions rate based on recent engineering studies that identify technical opportunities to improve plant efficiency. The regulation results in a reduction of 93 million short tons of carbon dioxide emissions.

We then expanded flexibility by enlarging the set of generators that could contribute. At the same marginal abatement cost, a tradable performance standard that covers all generation sources results in nearly four times the emissions reductions. This approach maximizes net benefits, achieving more than $25 billion per year in net benefits (2009$ in 2020), split roughly evenly between climate-related benefits and reduction of other air pollutants, with an electricity price increase of only 1.3 percent.

These reductions could be expected to take the United States past 15 percentage points of the 17 percentage-point reduction from 2005 levels that President Obama pledged in Copenhagen in 2009. President Obama has asked his cabinet to look across federal rules and regulations to identify further opportunities to reduce emissions. Calibration to a consistent marginal abatement cost would be important to achieve cost-effectiveness in this effort. The marginal abatement cost we model in the electricity sector builds on a technical foundation of what is achievable at existing coal-fired power plants. Coincidentally, it is similar to recent estimates of the social cost of carbon dioxide emissions, suggesting a focal point for coordinating other regulatory efforts.

About Dallas Burtraw

Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, and economic deregulation. He is particularly interested in incentive-based approaches for environmental regulation, the most notable of which is a tradable permit system, and recently has studied ways to introduce greater cost-effectiveness into regulation under the Clean Air Act.

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