Abby L. Harvey
GHG Monitor
5/23/2014
As the Environmental Protection Agency works to finalize new emissions standards for existing power plants, the American Public Power Association released a study this week that suggests a unified market-based approach in the form of a price on emissions may be more effective. “The guidelines to be issued in the coming weeks by the Environmental Protection Agency (EPA) concerning CO2 emissions from existing electric generators are not expected to include the kind of nation-wide program that could send consistent and predictable price signals needed for market efficiency, because of statutory limitations on EPA’s authority,” says the report, which was prepared by the consulting firm Navigant Economics.
Yet another impediment to efficiently reducing CO2 emissions is the state of regional electricity markets, many of which “currently operate with significant limitations that will impede the ability of the EPA to address CO2 emission reductions,” the report says. “The current problems are most apparent in regional electricity markets that rely on capacity markets to incent new investment. Those capacity markets are already floundering over existing challenges and will be severely stressed by the added complexity of maintaining reliability while shifting to a lower CO2 emission portfolio”
Because of the wide variety of electricity market structures in the country, any EPA regulation will have to be designed in such a way that it can be applied to all of these different structures, some of which will present more complex complications for the EPA. “Substantial emission reductions will be a challenge in all states, but achieving the necessary investments will be particularly difficult in those states where decisions are made by unregulated firms on the basis of short-term energy and flawed capacity markets, coupled with potential disparate markets (or no markets) for CO2 emission credits. There is no reason to expect efficient investment decisions with these flawed market incentive,” the study says.
While a unified market-based approach would be the most efficient moving forward, it is unlikely in the United States due to the limited authority of the EPA in enacting such a measure, the study says. “There is no indication that EPA will propose options based on either a comprehensive national tax or cap-and-trade system. It would appear that there is consensus that such a comprehensive approach would fall outside of EPA’s authority. This sets in place two challenges. First, how a comprehensive approach might be crafted that falls within EPA’s legislated authority — with legal challenges virtually certain regardless of what approach might be attempted. And second, what efficiencies can be achieved over both the short and longer terms based on an approach that is forced to deviate from a theoretically optimal alternative,” the study says.
Because of the limited power of the EPA in instituting a market based approach to reducing CO2 emissions, the path to the goal of a low carbon future will be more difficult, the study says. “It should be expected that EPA’s current efforts to reduce CO2 emissions from existing generators will be done with less efficiency, and at higher costs, than could be achieved through a more comprehensive approach such as a carbon tax,” the report said. The decreased efficiency and increased cost will likely cause nation-wide issues in a number of ways, the study concludes. “New requirements for CO2 emission reductions will change the operation of all electricity markets. Costs will be incurred and suppliers compensated under whatever policy choices are made. If policy options create unnecessary volatility in those costs and revenues, it will increase costs that will ultimately be passed on to customers. It could also lead to reliability issues,” the study says adding, “This is not a problem for programs involving a CO2 price based on a tax rate which should be predictable. But, programs where the price changes in response to supply and demand can introduce considerable uncertainty.”
