On Monday, EPA is set to release proposed new rules limiting carbon emissions from existing power plants. Along with many others, we at RFF have studied the potential implications of this policy for the economy and the environment for some time. While Monday’s release is only a proposal, it will for the first time give analysts something concrete to work with.
In what is likely to be the last significant analysis of the coming regulations before their release, the U.S. Chamber of Commerce released a study this week with dire predictions. Among other results, the study finds that the total cost of the existing-source rule will exceed $50 billion per year through 2030 and lead to 224,000 lost jobs every year.
What should we make of these results?
This is not a slap-job affair; it is an expensive study, with methods and writing that cannot easily be discounted. However, the study suffers from quick conclusions, questionable assumptions, and some errors.
First, the authors almost cannot help themselves by blaming the recently observed changes in coal-fired generation and capacity on EPA regulations. We have done careful analysis looking at the effect of natural gas prices, EPA regulations, and both together. When we decompose these effects the change in natural gas supply and decline in natural gas prices explain nearly all of the changes in coal-fired generation and capacity that we have seen to date.
The introduction of greenhouse gas rules and EPA’s separate mercury regulations certainly adds additional pressure on older, smaller, less efficient coal plants. Today, these plants have low fixed costs and can remain in the system, taking advantage of high price periods, but the new regulations require them to make investments to improve their efficiency. So it becomes a go, no-go situation for them. The low natural gas prices mean they would not recover the capital costs of efficiency improvements for many years, so additional retirements are expected, but one cannot simply conclude that recent EPA regulations are solely to blame for these retirements.
Because the EPA rules have yet to be announced, the analysis in the Chamber study is based on a proposal by the Natural Resources Defense Council (NRDC) from last year. The NRDC proposal is quite environmentally ambitious, so it is perhaps not surprising that the Chamber would take it as a starting point.
The Chamber study is defensible and transparent, which is good, but it nonetheless conflates standards for new and existing units. These regulations are not one in the same! Moreover, the study makes a bold assumption about regulatory decisions in the next decade—CCS on natural gas units—that is purely speculative. The study treats this as an outcome associated with the announcement expected on Monday. But that announcement does not even concern new facilities. They tally compliance costs for regulations that might come one or two presidential administrations from now and have never been suggested heretofore. It is not clear where they get this. They assert this assumption links the NRDC proposal with previously stated long-term goals on emissions reductions, but honestly, the NRDC proposal is what it is and is not what it is not.
Specifically, the Chamber report uses NRDC’s proposal for existing source standards, yet the report also decides to tighten NRDC’s proposal after 2030 AND requires strict new source standards for natural gas after 2022. Neither of the latter assumptions are included in NRDC’s proposal. The paper justifies these decisions because the NRDC’s proposal as they model it cannot achieve stated emissions reductions goals of the administration (42% by 2030). That may be the case, but it is not relevant to the announcement expected Monday. In other words, the report is treating the current administration’s goals as mandates and then assuming (costly) policies to fulfill those mandates a decade or more hence, by which time decisions will be based on different technology, costs, economics and other factors.
Nonetheless, taking the Chamber’s hypothetical policy scenario at face value, the cost of $28.1 billion annually (undiscounted) would indeed be the most expensive environmental regulation by a factor of more than two—that is, if someone were actually considering such a policy. As modeled, the policy would incur a cost of $1 per day per household, at its peak in 2025. In this decade, the cost would be somewhat less—about a postage stamp a day, as the folks at NRDC used to claim regarding the Waxman-Markey cap-and-trade bill a few years ago. And the annual job losses predicted by the study are only about 0.1% of current (much less future) employment. Are these effects show stoppers for the U.S. economy?
There is also a strange factual error that is an important distraction. The authors describe electricity demand growth as 1.4% per year in the reference case. But since 2000 it has actually been 0.7% per year. EIA forecasts 0.9% growth through 2040. This difference will contribute substantially to the estimated costs, especially as demand cumulates over time.
Finally, the study says nothing about the benefits of reduced carbon emissions. Exploring the cost side alone is still useful, but “assessing the impact” of the new rules, as the study claims to do, requires consideration of benefits too. Depending on how other countries react, these benefits could be very large.
