Closing the Leakage Loophole in the Clean Power Plan

In June, the United States Environmental Protection Agency published the Clean Power Plan to regulate emissions from existing stationary sources (mainly power plants). When Dan Lashof and David Weiskopf at NextGen Climate America reviewed the proposal they noticed a potential loophole called leakage and enlisted the help of RMI to better understand the implications this could have on the final impact of the rule. Over the next six months NextGen, with help from RMI Associate Devi Glick, explored how the emission reductions expected under the rule will be impacted if states are allowed to comply through the leakage loophole. This blog post from Weiskopf summarizes what leakage is, the potential for leakage RMI’s model found, and solutions the EPA can adopt to mitigate leakage.

The Clean Power Plan will be an essential step forward to end the unlimited dumping of carbon pollution into our atmosphere from the largest source in the United States—existing power plants. It’s up to states to decide what the best way is for them to achieve these pollution reductions and to write their own plans for how to get there, but in order for a plan to be approvable, there is one catch: the state has to actually cut carbon pollution.

After an unprecedented public process to develop its proposal, EPA proposed a comprehensive and flexible rule that bases carbon pollution reduction targets on a technical and economic assessment of the opportunities each state has to reduce emissions from the regulated sources covered by the standard. Before the December 1 comment deadline on the proposed rule, the agency received over 8 million comments from members of the public with suggestions for how to improve the standards, statements of support, constructive criticisms, and assorted nay-saying and whining.

NextGen Climate America has written in support of the rule, and we have urged EPA to close one major potential loophole that could significantly erode the benefits of this important standard: EPA should explicitly require states plans to prevent emissions leakage.

What is leakage?

Leakage is an accounting trick that creates the illusion of pollution reductions where no reduction occurs. It’s like when a sibling in a shared room tries to “clean” her side of a shared room by pushing all the toys and clothes on her side of the floor across an imaginary line into her sister’s side of the room.

In the Clean Power Plan, leakage occurs when a state claims credit for reducing pollution but really has only moved that pollution somewhere else. That “somewhere else” could be geographical — like when a state relies less on its own power plants and imports more electricity from other states. Or it could be a purely legalistic “somewhere else” — like when a state relies less on an existing power plant and more on a new power plant that may be just as polluting but may not be covered by this rule.

Either way, it means that a state might claim to be meeting its requirements under the Clean Power Plan while the actual emissions reductions it claims fail to materialize. Technically, some states could rely entirely on leakage to demonstrate compliance with the proposal by shifting generation into states with higher rate standards or replacing existing generation with new sources that may emit at a higher rate. Under reasonable economic assumptions and transmission constraints, leakage could eliminate nearly 30% of the expected emissions reductions from the Clean Power Plan under some scenarios.

Where does leakage come from?

One source of potential leakage is the difference in emissions rate standards among states that exist on a shared electrical transmission system. If State A has an emission rate standard of 1000 lbs/MWh and State B has an emission rate standard of 1500 lbs/MWh, then shifting 1 MWh of generation from State A to State B will increase emissions in State B by 1500 pounds and decrease emissions in State A by 1000 pounds. The shift in generation results in a 500-pound net increase in total emissions.

This leakage potential gets even worse if a state that adopts a mass standard increases electricity imports from a state with a rate standard. In the example above, if State A adopts a mass limit on total carbon pollution, and increases imports from State B, emissions in State A might not go down at all, while emissions in State B can increase at a rate of 1500 pounds CO2 for every incremental megawatt-hour it sends to State A.

But the shift in emissions doesn’t have to be from one state to another. If emissions from a source regulated by the Clean Power Plan are shifted to a new power plant that is regulated only by the new source performance standard, leakage can occur within a single state. This leakage potential exists because the emissions rate limit for new power plants is equal to 1,000 – 1,100 pounds CO2 per megawatt-hour. For leakage purposes, a state with a lower rate standard than that in the Clean Power Plan or any state that adopts a mass standard can “import” power from these new sources and create leakage in exactly the same way as if it were importing from another state.

How do we stop up the leaks?

For state plans to be approvable by the EPA, the plans must demonstrate that they achieve a level of environmental performance equivalent to or better than what would be achieved if the state adopted the Best System of Emissions Reduction that EPA relied on when it calculated state targets. This system assumed import and export relationships don’t change and measured real in-state emissions reductions each state could achieve. Leakage threatens to erode a significant portion of these reductions, but with good planning, states can prevent these losses pretty painlessly. So for state plans to be approved by EPA, the agency should require all states to show that they are actually making these reductions—not just shoving them across the border into their sister’s side of the room.

How states prevent leakage may be left up to them, but EPA can give states a head start by making a few clarifications to the proposed rule and suggesting a few options for states to include in plans. Because leakage results from changes in net imports or exports, EPA may choose as a default that all states that increase exports must make additional emissions reductions to correct for the leakage created as a result. Alternatively, EPA could place this same requirement on states that increase imports. Either way, EPA could provide states with the option of making an alternative demonstration of compliance, perhaps by entering into a multi-state agreement.

EPA should also provide a consistent rule for how new sources are treated so that states cannot comply with the standards for existing sources merely by shifting emissions to new sources. Right now, EPA provides one version of a mass emissions standard that accounts for total emissions from both new and existing sources, but it has not yet provided a mechanism for correcting for leakage in the version of the standard that only looks at existing sources. EPA should require states to account for shifts in generation from existing to new sources regardless of what form of standard the state adopts.

The principle that state-level implementation must meet or surpass the minimum standard set by the federal government lies at the heart of the Clean Air Act’s cooperative federalism framework. But where state plans do not include measures to prevent and correct for potential leakage, our analysis shows that the environmental performance of the Clean Power Plan may be seriously compromised. It is therefore incumbent upon EPA to require state plans to include measures to prevent leakage as part of this demonstration of equivalence and enforceability.

David Weiskopf is an attorney with NextGen Climate America. This blog post originally appeared on NextGenAmerica.org. Reposted with permission.

Image courtesy of Shutterstock.