An ETS in the USA via an EPA back door

President Obama could implement an emissions trading scheme on the power sector via a back door mechanism that would not require approval from Congress.

The U.S. government can only overcome industry resistance to planned carbon emissions limits on coal-fired power plants by offering a wide range of options to comply, from buying credits to making renewable energy or efficiency improvements.

Even then, it faces an environmental battle to rival the fight over the Keystone pipeline serving Canadian oil sands development.

Green groups see regulation of existing power plants as the best route to major emissions cuts in President Barack Obama's second term, given that it would by-pass Congressional approval by using the Environmental Protection Agency (EPA) instead.

Economy-wide climate legislation including national carbon caps wilted under Republican opposition previously and bipartisan prospects look no better now.

The EPA has already proposed rules limiting new coal plants, after the U.S. Supreme Court 2007 allowed regulation of carbon dioxide as a pollutant under the Clean Air Act (CAA), but they will have little impact since no-one is building coal plants in an era of cheap gas.

Far more significant will be a constraint on the existing coal fleet which accounts for 37 percent of U.S. power generation.

The EPA committed to finalise emissions standards for existing power plants by May last year, as authorised by Section 111 of the CAA, but has failed to meet that schedule.

One immediate problem is that the only available technology option for eliminating carbon from fossil fuel power plants - carbon capture and storage (CCS)- is expensive and unproven at commercial scale.

Any new standard would therefore have to be phased in gradually and applied sector-wide, and be flexible, for example using crediting schemes which allowed polluters to meet emissions limits by investing in various low-carbon alternatives or else buy reduction credits.

It would still face a backlash in federal courts with coal groups arguing for a Congressional mandate.


Britain, the United States and Canada have already shown varying flexibility in proposed emissions limits on new coal-fired power plants.

They have proposed thresholds of 0.42 to 0.45 tonnes of carbon dioxide (CO2) per megawatt hour (MWh), which would force new coal-fired power to fit CCS, but exempt less polluting natural gas.

Unabated coal plants emit on average 0.9 tonnes of CO2/MWh, meaning the new thresholds would require generators to apply CCS (which is expected to capture 90 percent of emissions) to about half their power output.

Canada and Britain would calculate the limits annually.

The EPA standard is averaged over 30 years.

"New coal-fired units could meet the standard either by employing CCS of approximately 50 percent of the CO2 in the exhaust gas at startup, or through later application of more effective CCS to meet the standard on average over a 30-year period," says the EPA.

Plants could delay fitting CCS for up to 10 years, although they would still have to meet the latest efficiency standards in the meantime.

The Canadian scheme allows operators to defer compliance until 2025 provided they can show they are taking steps to meet them by then.

The British scheme softens the rules for CCS demonstration plants to account for uncertain costs.


Proposals for existing U.S. power plants will have to be far more flexible, however, to head off an industry backlash.

The CAA allows for such a flexible approach, concluded a 2011 paper written by legal experts, "Prevailing Academic View on Compliance Flexibility under Section 111 of the Clean Air Act".

"Section 111(d) gives states extra authority to consider 'other factors' when regulating existing sources," found the authors, from the Columbia Law School, New York University School of Law and the think-tank Resources for the Future.

Such "other factors" could open the door for average grid carbon intensity targets which allowed operators to meet coal plant limits by deploying renewable energy or efficiency improvements equivalent to the required carbon cuts.

Another policy option might be a scheme of tradable CCS certificates issued per tonne of coal carbon emissions, from a quota of allowances which met the state cap. Power plants deploying CCS could sell certificates to those without.

Such certificates could be exchangeable with carbon emissions allowances in regional cap and trade schemes, in a possible boost to schemes where California this year joined north-east states.


Environmental groups have not been slow to offer the EPA suggestions for regulation.

In December, the Natural Resources Defense Council (NRDC) proposed a state-specific scheme which capped fossil fuel emissions based on a coal benchmark which would force emissions cuts, ratcheted over time.

Operators could retrofit CCS, but more likely invest in low-carbon alternatives including renewables and efficiency, or co-fire coal with biomass, or tweak dispatch decisions to burn more natural gas.

Alternatively they could acquire tradable emissions reduction credits per tonne of avoided carbon dioxide.

The World Resources Institute think-tank this week chipped in with similar proposals, where a "middle of the road scenario" envisaged near 20 percent emissions cuts from coal by 2021, compared with the NRDC scheme which implied a 27 percent cut in coal carbon.

Whatever choice the EPA makes, there will still be a backlash from some in the industry and conservatives who already oppose the proposed limits on new coal plants.

The eventual outcome could impact investment choices between coal, natural gas and renewables not only in the United States but further afield, as the European Union casts around for ways to meet its own long-term emissions targets, possibly through emissions performance standards.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles