The Administration’s Clean Power Plan (the "Plan"), released on June 2 and published on June 18, confirms that climate change mitigation goals are now a key driver of both environmental and energy policy. By imposing total power sector CO2 emission reductions of 30 percent (from 2005 levels) by 2030, the Plan is likely to trigger both a wholesale shift of power production fuel usage from coal to natural gas and renewable energy, and a critical debate about energy resource priorities.

The Plan reflects the latest development in a multi-year conflict over climate change legislation and energy policy. Early in the Administration’s first term, a "cap and trade" approach was proposed by Congressional Democrats and opposed by most Congressional Republicans. The opponents prevailed, effectively blocking the legislation.

The Plan substitutes a "command and control" approach for cap and trade legislation. Although less economically efficient than cap and trade, the Plan’s compelling advantage is that it can be implemented under existing provisions of the Clean Air Act (in this case, Section 111(d)). In other words, EPA can enact the Plan without Congressional action or approval.

Key elements of the Plan include the following:

  • States must implement carbon dioxide limits that result in total power sector emission reductions of 30 percent (from 2005 levels) by 2030.
  • States can use any or all of four "building block" approaches to achieve the Plan’s objectives, including (i) improved power plant efficiency, (ii) increased use of lower-emitting fossil fuel-fired power plants, (iii) increased use of non-emitting generation resources (e.g., solar and, wind), and (iv) increased end-user efficiency.
  • States may act on their own or "collaborate" on multi-state plans for achieving the targeted emission reductions.

Substitution of the Plan for cap and trade legislation highlights a recurring and daunting set of issues. In a sector full of government subsidies and other incentives, how can policy create a marketplace where all manner of energy resources compete on a level playing field? Equally important, how can policy reforms "internalize" the environmental costs of greenhouse gas emissions where an entire industry has been built on the assumption that carbon emissions from fuel combustion are cost-free?

When it becomes final, the Plan is certain to reduce emissions from coal-burning plants. However, the Plan’s real success will turn on whether it facilitates sustainable choices between natural gas and renewable resources. Natural gas has advantages over coal – most notably lower carbon content – but is less than ideal from an environmental perspective. Methane, the primary component of natural gas, produces about 30 times the greenhouse gas effects of carbon, raising concerns that natural gas well and pipeline leaks could erode the sustainability of natural gas as a fuel.

Natural gas is also subject to price volatility. The so-called "gas bubble" of the 1980s illustrates the boom-to-bust cycle that results from a gas-focused power sector. By contrast, renewable resources have thus far proven to be more economically sustainable, with prices likely to remain stable-or even decrease-for years to come.

With fast-ramping generation and storage technologies that support reliable production, renewable resources are a viable alternative to a gas-centric economy. Moreover, policy reforms that address key regulatory issues (e.g., federal versus state authority to mandate demand response programs, rate incentives for "ancillary services" and new approaches for reducing fugitive emissions from natural gas wells and pipelines), and promote innovative technologies and know-how, will further enhance the Plan’s effectiveness.

The United States cannot be competitive in a global economy if it is saddled with burdensome energy and environmental costs. However, prior experience with cap and trade regimes (e.g., EPA’s "Acid Rain" Program) and other models demonstrate that mandated emission reductions stimulate technology innovations and spur economic growth.

The Plan complements market based approaches implemented by various states. Over 28 states have adopted renewable energy portfolio standards and at least 15 states have committed to some form of regional "cap and trade" regime. Even emerging markets in Latin America (eight of them to date) have enacted or announced programs to mitigate climate change, including (in at least one case) a carbon tax.

In short, the Plan is more than an air-emission regulation. It advances the dialogue regarding how best to evaluate the relative merits of natural gas versus renewable resources and creates incentives for innovation in all manner of power generation facilities. Finally, while it may not present a complete solution to the challenges of climate change, it sets the stage for developing sustainable energy resources through mutually reinforcing energy and environmental policies.