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June 3, 2015

EPA’s Allies Telegraph Plan to Force States into Cap-and-Trade

June 3, 2015
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Recently, two organizations sympathetic to the Environmental Protection Agency’s proposed carbon dioxide restriction on existing power plants published separate papers detailing options for states to comply with the new rule. The papers are certainly illuminating, but perhaps not in the way the authors intended—both reinforce how costly, convoluted, and unworkable EPA’s proposal is. They also confirm critics’ worst fears: that the proposed rule pressures states to impose by regulatory fiat the familiar, failed policies of cap-and-trade, carbon taxes, and renewable energy mandates—despite EPA insisting otherwise. And finally, they serve as a reminder that states should refuse to submit an implementation plan, lest they become willing participants in EPA’s plan to drive up electricity costs for Americans. Despite all their rhetoric about flexibility, these papers shine a light on the stranglehold EPA threatens to have over states through its carbon dioxide regulations.

NACAA’s Menu of Mandates

The first paper, released by the National Association of Clean Air Agencies (NACAA), is a 465-page “menu of options” states could choose to comply with EPA’s rule. While allegedly designed to “help states develop plans” to comply with EPA’s rule, in reality, the paper reveals EPA’s goal of pressuring states to “voluntarily” adopt costly tax and regulatory schemes that the American people have rejected year after year. Consider the following chapters:

  • Chapter 16: Renewable Portfolio Standards: “Purchase obligations imposed on utilities and retail suppliers by state governments have been arguably the most successful legal and regulatory policy mechanism for spurring growth in clean energy technology deployment.”
  • Chapter 24: Cap-and-trade: “The cap-and-trade approach demonstrates the value of allowing regulated entities the flexibility to meet requirements in a manner that best suits their specific needs.”
  • Chapter 25: Carbon taxes: “Pricing mechanisms can be an important element in any effort to reduce electric-sector greenhouse gas (GHG) emissions. Pricing will be most effective when combined with related policies to encourage the use of other, less carbon-intensive resources.”

These policies raise energy costs, limit energy choices for American families, and do not have enough support from Americans across the country to have any chance in Congress. NACAA would like us to believe these are cutting-edge policies when, in fact, each has been proposed and has failed to gain traction on the federal level, while RPS’s are being rolled back in states.

First, Renewable Portfolio Standards (RPS) require utilities to purchase electricity from renewable sources—regardless of whether the energy is wanted or needed. And it often isn’t: several states, including Ohio, North Carolina, Kansas, Texas, and West Virginia, have taken steps toward freezing or repealing their renewable mandates. EPA’s rule would effectively force these states to reinstitute policies they would rather do without. There is currently no federal RPS, despite repeated failed attempts from Members of Congress such as Senator Ed Markey.

Second, cap-and-trade is a political albatross and a practical failure. Federal legislation instituting a national cap-and-trade scheme was unable to pass a Democrat-controlled Senate in 2010, even though it was a priority for President Obama. Where regional cap-and-trade has been tried, it’s failed. Consider the Regional Greenhouse Gas Initiative, a multi-state emission-trading compact. While NACAA claims that RGGI “has produced positive economic impacts while administration of the RGGI program has proceeded smoothly,” the reality is that electricity prices in RGGI states have risen faster than the national average—52 percent since 2005, according to EIA data. Meanwhile, California’s cap-and-trade and RPS policies have helped make the state’s electricity prices among the most expensive in the country.

Third, a tax on carbon dioxide emissions is another plan that has failed to attract any interest from the American people. A carbon tax would not only be an unprecedented federal intrusion into all Americans’ livelihoods, but more disturbingly amounts to a regressive energy tax on the poor. Low-income households, minorities, and those on fixed incomes spend a higher percentage of their household budgets on energy, which means any tax on energy hits them harder than the rest of the country. A recent CBO report that modeled the effects of an implied $20 per ton carbon tax found that it would drain $1.2 trillion out of the economy over the first decade, but reduce U.S. CO2 emissions by just 8 percent.

States have always been free to concoct their own combination of these policies, or none at all. The simple facts that RPS’s are facing repeal, cap-and-trade regimes are causing ill effects, and carbon taxes are non-starters should give readers pause each of the 65 times they come across the word “flexibility” in NACAA’s report. EPA’s carbon dioxide regulations are neither flexible nor federalism—they are brute force.

AEE’s Cap-and-Trade 2.0

The second paper comes from Advanced Energy Economy (AEE). AEE’s white paper urges EPA to design a Federal Plan that encourages interstate cap-and-trade schemes. Such a system would have utilities purchase emission reduction credits from “advanced” energy sources, including the wind and solar companies that comprise AEE’s membership.

This is clear rent seeking on AEE’s part. AEE is a lobbying group whose board is stacked with executives from renewable energy companies that stand to gain financially from EPA’s rule—apparently nobody thought this was worth mentioning given recent griping over disclosure. While EPA’s rule will be a big win for the wind and solar companies that AEE represents, renewables would benefit the most—and Americans hurt the most—if EPA designs a federal plan that calls for cap-and-trade, as opposed to reducing carbon dioxide emissions at existing facilities.

AEE makes no effort to hide the fact that it’s seeking preferential treatment. In the executive summary, AEE urges EPA to “leverage advanced energy for maximum benefit in implementing” the CO2 rule. However, it isn’t clear that EPA has the legal authority to design a federal plan that includes a cap-and-trade system. EPA and AEE appear to have their fingers crossed that state policymakers will walk into such a scheme of their own free will.

Beyond its dubious legal basis, there are serious policy flaws with AEE’s cap-and-trade scheme:

  • It turns the concept of electricity resource management on its head. Currently, utilities choose energy sources based on the economic value to the power system. This new scheme would incentivize utilities to choose sources that maximize the value of their carbon dioxide credits, to the detriment of the customers—every day families—they serve.
  • It pressures states to adopt or expand renewable energy mandates even as some states are curtailing their RPSs. AEE lists such mandates among “complementary policies” states could pursue in conjunction with cap-and-trade to achieve emission goals. Here, AEE echoes NACAA’s guidance on using a carbon tax “combined with related policies.”
  • It discriminates between states. States with higher emission rates and significant renewable mandates stand to gain because they can generate more renewable credits and sell those credits to other states with less renewable generation. Again, this creates the incentive for utilities to focus on profiting not by delivering higher quality service at affordable prices, but by exploiting the carbon-trading scheme. If Enron were still around, its executives would be salivating over the potential for trading in and gaming a carbon dioxide permit scheme.

The AEE white paper also suffers from the same delusion of EPA flexibility as the NACAA report. In its 16 pages of text, the AEE white paper mentions “flexibility” 17 times, sometimes glowingly:

AEE applauds the Clean Power Plan’s proposed approach of providing states the flexibility to choose between designing a compliance plan to meet an EPA-determined rate-based interim and final goal or to elect instead to translate those into mass-based goals.

This is not flexibility. This is EPA’s attempt to convince states to shackle themselves with unwise policies that EPA lacks the authority to impose on its own. 


These new papers from NACAA and AEE reinforce Senate Majority Leader Mitch McConnell’s argument that states should refuse to submit a state plan. NACAA and AEE, both of which support the proposed rule, have revealed EPA’s true agenda: to impose by administrative diktat the same costly RPS, cap-and-trade, and carbon tax policies that are either dead on arrival in Congress or are being repealed in the states. States that submit compliance plans to EPA will be complicit in the Obama administration’s federal energy takeover.

IER Economist Travis Fisher and Policy Manager Alex Fitzsimmons authored this post.

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