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10.25.2012

The Clean Air Act to the Climate Rescue?


President Obama and Governor Romney are making their final push for the White House, talking up their economic, energy, and foreign policy plans. But one issue is getting the silent treatment this year: climate. You’ll probably hear more about the tired memes of Big Bird, Binders of Women, and Horses and Bayonets in the final weeks than you’ll hear about the climate.  Frontline aired a great piece 
the other night about how climate has gone from a key political issue in 2008 to untouchable in 2012.  Regardless of climate policy getting the cold shoulder, researchers will continue studying potential impacts, risks, and explore policy solutions.

This week Resources for the Future (RFF) released an interesting discussion paper by Dallas Burtraw and Matt Woerman that found the US is nearly on pace to meet its pledge to reduce greenhouse gas (GHG) emissions by 17 percent from 2005 levels, despite lacking comprehensive climate policy.  In fact, the authors found that if the US adopted the 2010 Waxman-Markey climate bill, emissions would have only declined 13.6 percent by 2020.  I’ll go out on a limb and say climate policy opponents are loading that finding into their arsenal in case momentum builds for climate legislation again.  Regardless, the paper – “US Status on Climate Change Mitigation” – is an insightful and thought-provoking read (ok, maybe if you are an energy/climate econ wonk).

Michael Levi from the Center on Foreign Relations commented on the paper over at his blog, and I share his curiosity about the paper, as well as his skepticism. 

RFF found that the greenhouse gas (GHG) reduction measures in the Clean Air Act (CAA) will account for about 10 percent of the 16.3 percent emissions reductions by 2020. Waxman-Markey would have also reduced emissions, but not as much as the CAA alone according to the RFF paper. Additionally, the Waxman-Markey bill would have preempted CAA measures, thus leading to higher emissions than our current trajectory.  I am skeptical, however, of the CAA’s ability to regulate GHG emissions from existing stationary sources (e.g., power plants, refineries) and significantly reduce emissions.

For one, the CAA’s existing stationary sources standard is not yet finalized, and it is unknown what the standard may even look like (or if it's perpetually delayed). In regards to the political uncertainty surrounding the regulation, Levi writes in his blog, “[W]hether you think emissions would have been higher or lower under Waxman-Markey depends fundamentally on what you think the prospects for regulation of stationary sources (particularly existing ones) under the CAA are. This is almost entirely a matter of political, rather than economic, projection.”

I’m staying away from political projections, but I will walk through why I believe one CAA proposal being considered won’t result in emissions reductions – and may actually increase carbon emissions. 

In proposed rulemaking, the EPA noted that existing power plants could achieve modest efficiency improvements of about 2-5 percent, which, as cited in the RFF paper, results in a comparable reduction in emissions without changing electricity output from the facilities.  The problem is electricity output would change at plants that improve their efficiency.  Their production would increase because of what economists call the “rebound effect.”

The rebound effect is a phenomenon in which energy savings from efficiency gains are offset by increases in consumption. The RFF paper reviews the rebound effect in regards to Waxman-Markey, but the same principle holds true for the potential CAA standard.

To improve the efficiency by 2-5 percent, coal-fired power plants would need to install new equipment like fans and turbines. The upgrades not only improve the unit’s heat rate[1]  - and therefore make the unit cheaper to operate – but new turbines can increase the capacity of the unit. The table below shows a simple hypothetical example of the efficiency gains, cost reductions, and CO2 emissions at a 100 MW coal plant, before and after efficiency upgrades.


Prior to the upgrade, the 100 MW plant has a 10 MMBTU/MWh heat rate.  Assume that it consumes coal at a cost of $3.50/MMBTU, resulting in a production cost of $35/MWh and an annual capacity factor of 60 percent. The plant would emit 538,740 tons of CO2 per year (Column 2 in table).   If a new turbine is installed (Column 3) and improves the heat rate by 5 percent, the production cost falls to $33.25/MWh. The lower production costs means the unit moves down the supply curve and  likely dispatches more often. So assume the capacity factor increases modestly to 63 percent. The annual CO2 emissions are 537,393 tons in this scenario – a reduction of only 0.25 percent from the “Prior to Upgrade” scenario.  

As I mentioned earlier, new turbines also increase the capacity of units. Let’s assume the new turbine improves the heat rate by 5 percent and adds 3 megawatts of capacity, while keeping the capacity factor steady at 63% (Column 4). The CO2 emissions in this scenario increase above the “Prior to Upgrade” scenario by 2.7 percent, leading to annual emissions of 553,515 tons.

In my opinion, mandating efficiency upgrades at coal-fired power plants is not a particularly attractive option for emissions reductions, and may actually increase emissions in some cases.  I don’t have an answer as to what a GHG standard for existing sources might look like under the CAA. However, I do believe a mechanism like cap and trade that increases the marginal costs of production for high-emitting sources  – rather than decreasing their costs like efficiency gains – is a more efficient policy option for reducing emissions in the long-run.

This is not meant to take away from the RFF report – I think it is a valuable piece of research. Moreover, I think we need more critical research like it. That way we can understand the complex interactions and ensure we achieve the policy goal of GHG reductions in an economically efficient manner. That is, of course, if any politician still has that goal…



[1] Heat rate is the measure of a unit's efficiency of converting fuel into electricity.