Clean Power Plan Can be Cost-Effective for States

DURHAM, N.C.—With the right policy choices, the U.S. Environmental Protection Agency’s proposed Clean Power Plan can be flexible and cost-effective for states, according to a working paper from Duke University’s Nicholas Institute for Environmental Policy Solutions.

The Clean Power Plan uses a provision under the Clean Air Act to regulate carbon dioxide emissions from existing power plants in the United States through interim state-level emissions rate goals (2020-2030) and a final 2030 emissions rate limit. It gives states flexibility to decide how to meet their interim and final emissions reduction goals.

“Our analysis shows how important it can be for states to exercise the flexibility afforded to them under the proposed rule,” said Brian Murray, Environmental Economics Program director at the Nicholas Institute and one of the study’s co-authors. “None of the compliance options analyzed raise power sector costs more than a few percent nationally, but these costs could be cut in half or more with a mass-based system with interstate trading of credits like we’ve already seen in some regions of the U.S.”  

Each state’s emissions rate goal under the plan is assigned in pounds of carbon dioxide per megawatt hour, but the proposed plan gives states the option to translate that into a mass-based goal—pounds of carbon dioxide. The study finds that option may be appealing. Nationally, compliance costs are 50 to 57 percent lower than rate-based compliance through 2030, depending on the level of coordination. This savings does diminish by 2050, the authors say.  

The Nicholas Institute used its Dynamic Integrated Economy/Energy/Emissions Model to assess how states can use the policy's flexibility to choose the best and most cost-effective means of meeting their emissions goals.

The Duke study outlines the tradeoffs of three policy options: opting for state-specific, rate-based goals laid out in the proposed plan versus converting that rate into a mass-based standard; identifying how trading credits within state borders or with other states affect the cost of compliance with the rule; and determining whether to include under the rule new natural gas combined cycle (NGCC) units that produce electricity and capture their waste heat to increase efficiency.

It's not clear whether the final rule will allow states to use new NGCC units to stay within their emissions limit, but this study highlights how policy effects can vary depending on this choice.

“Extending policy to cover these emissions sources can reduce incentives to shift into new NGCC units that occur if the rule covers only existing units,” said Martin Ross, lead author and senior research economist at the Nicholas Institute. “Under a mass-based approach, including these new units leads to lower emissions at a slightly higher cost. The opposite reaction occurs in a rate-based system, under which states can more easily bring in new, low-emissions sources to meet policy goals and save money, but at the expense of higher emissions.”

The analysis also explores the implications of states acting together or separately to comply with the plan. It finds that a regional approach will lower national generation costs approximately 20 to 30 percent between 2015 and 2030 when compared to an approach in which all states act alone. Compliance costs can drop even lower if all states operate in a national system that allows trading of compliance instruments within and across all states. 

“This multistate approach to compliance would require states to use a common definition of what a compliance instrument is and ensure that somehow the credits are verified and tracked,” said Dave Hoppock, co-author and senior policy associate at the Nicholas Institute. “The cost savings could increase if instruments from any other state in the country could be used.”  

The study was conducted with funding from The Energy Foundation; model development was supported, in part, by a gift from Bank of America Merrill Lynch. Read it online: http://nicholasinstitute.duke.edu/climate/publications/clean-power-plan-implications-three-compliance-decisions-us-states. A companion study, focused on policy choices for southeast states, is also available online: http://nicholasinstitute.duke.edu/climate/publications/assessing-impacts-clean-power-plan-southeast-states.

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Citation: M. Ross, B.Murray, and D. Hoppock. 2015. “The Clean Power Plan: Implications of Three Compliance Decisions for U.S. States.” NI WP 15-02. Durham, NC: Duke University. www.nicholasinstitute.duke.edu/publications.

Ross, Murray and Hoppock are available for comment by contacting Erin McKenzie, erin.mckenzie@duke.edu or 919.613.3652.