Carbon Regulation in the US: Impacts on the Power Sector

Rick Saines and Marisa Martin, Baker & McKenzie

THERE ARE SIGNIFICANT EFFORTS UNDERWAY in the US to control carbon emissions, with the energy sector directly in the cross hairs. The Lieberman-Warner Climate Security Act (S. 2191)—the leading climate bill in the US—is the focus of intense debate as it would require significant greenhouse gas (GHG) reductions on an economy-wide scale, including reductions from coal-fired power plants. There is also increasing pressure from lawmakers and the public to require new or modified coal-fired power plants to geologically sequester or otherwise control carbon emissions now to limit any further traditional development prior to the implementation of comprehensive climate legislation. This has created a whole new world of risks and choices for the power sector. We briefly discuss the Lieberman-Warner bill and the existing developments relating to permitting of coal-fired plants as two examples of the new paradigm for generators.

Lieberman-Warner Climate Security Act (S. 2191)

S.B. 2191 was passed by the Senate Environment and Public Works Committee on December 5, 2007. The bill is expected to be heard on the Senate floor in the summer of 2008. While the bill will certainly undergo further modification, its current form provides a good proxy for what future US climate change regulation will look like. Many elements of the bill—cap-and-trade, scope of covered facilities, percentage of auctioned allowances, inclusion of offsets—are likely to be part of any future GHG program in the US.

The provisions of the bill are primarily targeted at "upstream" fuel providers, and natural gas processors and "downstream" coal users. ¹ These "Covered Facilities" are required to hold emissions allowances for each metric ton of GHG emitted on an annual basis. S.B. 2191 establishes a national cap for GHG emissions starting in 2012. In 2012, the emissions cap is over 5 billion allowances, which is equivalent to the 2005 GHG levels of the Covered Facilities. The emissions cap declines annually through 2050. In 2050, the emissions cap is equivalent to 70% below the Covered Facilities emissions in 2005.

Coal-fired power plants, as Covered Facilities, will need to obtain the necessary emission allowances equivalent to the facilities' annual emissions. Under a cap-and-trade, allowances can be freely allocated to Covered Facilities, purchased at auction or bought on the market. In the Lieberman-Warner bill, initially some allowances are freely distributed but the majority will be either auctioned or bought on the market. Thus, coal-fired power plants will face potentially significant costs related to the purchase of allowances sufficient to cover the facility's emissions. The recognition of domestic offsets and allowances from foreign emissions trading markets in the cap-and-trade program established by the Lieberman-Warner bill should mitigate the cost of allowances to some extent. Other cost containment options are being considered as well, but a hard cap on the price of carbon is not likely to be enacted as part of the final bill.

Under the Lieberman-Warner bill, bonus allowances are provided to facilities that geologically sequester carbon dioxide emissions. The bonus allowances are intended to jump start the deployment of CCS technologies. Both electric generating units and Covered Facilities that are not electric generating units may be eligible to receive bonus sequestration allowances. Coal-fired power plants that sequester carbon dioxide emissions would not only need to hold fewer allowances but would also receive bonus allowances based on the sequestered emissions. If the plant held more bonus allowances than necessary to cover any non-sequestered emissions, the facility could sell the excess allowances in the market.

Permitting of Coal-Fired Power Plants

Even if Congress acts tomorrow and passes a climate change bill, it will likely take several years before any mandatory greenhouse gas reduction requirements would be in place. During this time, significant coal-fired electricity generation could be permitted and installed. As a result, lawmakers, environmental groups and others have focused their near term efforts on the control of carbon dioxide from coal-fired power plants prior to the implementation of a comprehensive GHG program.

The air permitting requirements under the Clean Air Act have been used by environmental groups and others in an effort to regulate carbon dioxide from new or modified coal plants. These efforts were bolstered on April 2, 2007 with the Supreme Court's ruling in Massachusetts v. EPA. The Court's opinion stated that greenhouse gases, including carbon dioxide, fall within the definition of an "air pollutant" under the Clean Air Act. While the case focused on motor vehicle emissions, the definition of "air pollutant" is generally applicable to provisions of the Act related to stationary source permitting. Since that opinion, environmental groups and others have relied on the Supreme Court's language to challenge air permits issued in various jurisdictions when those permits lacked control technology for carbon dioxide. Additionally, the Kansas Department of Health and Environment used the Supreme Court's decision, in part, to deny an air permit to build two 700-megawatt coal-fired generators. ²

Exhibiting similar concerns regarding the installation of coal-fired power plants prior to the commencement of a climate bill, Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) introduced the "Moratorium on Uncontrolled Power Plants Act of 2008" legislation on March 11, 2008. This act would require electricity generators to capture and permanently sequester at least 85% of the unit's carbon dioxide emissions. The legislation would prohibit necessary permitting of new coal-fired power plants unless the permit required the use of "state-of-the-art control technology" to sequester emissions. Under the Act, "coal-fired electric generating unit" means "an electric utility unit that uses coal, petroleum coke, coal refuse, or a synthetic gas derived from coal either exclusively, in any combination together, or in any combination with other fuels in any amount." The bill is proposed as a stop-gap measure until a "comprehensive program" to reduce greenhouse gases is in effect. However, only those programs that would reduce emissions to 80% below 1990 levels by 2050 qualify as "comprehensive programs." Thus, even assuming the Lieberman-Warner bill in its current form passed, the Waxman-Markey bill would continue to prohibit the permitting of new coal plants without sequestered emissions after the cap-and-trade program commenced.

Conclusion

While carbon dioxide emissions are not currently regulated in the US, efforts to restrict emissions from coal plants are progressing rapidly. The Lieberman-Warner bill would have significant impact on coal-fired power plants by requiring coal plants to internalize the cost of their GHG emissions. Even before a comprehensive GHG program is implemented, coal-fired power plants may face permitting challenges and other pressure to take early action to reduce emissions. Coal-fired power plants that are pursuing geologic sequestration will be rewarded under the current version of Lieberman-Warner and would likely face fewer permitting hurdles than those new plants that are not considering new technologies to control emissions. While the precise impact of carbon regulation on coal-fired power plants is uncertain, it is clear that the shift to a carbon constrained economy in the US will significantly affect these facilities.

¹ Other covered facilities include facilities that: 1) process or import natural gas; 2) produce or import petroleum or coal-based liquid or gaseous fuel; 3) produce for sale or import more than 10,000 CO₂ equivalent of chemicals that are greenhouse gases; 4) emit more than 10,000 CO₂ equivalent of hydrofluorocarbons; and 5) produce or import hydrofluorocarbons.

² Legislation passed by the Kansas House and Senate would overturn this decision. However, the bill is expected to be vetoed by Governor Kathleen Sebelius.