Market Gateways, Not the EPA, Determine Power Sector Decarbonization

Today, the Environmental Protection Agency (EPA) finalized new rules on carbon dioxide emissions from power plants. It imposes requirements on existing coal plants and new gas plants, while punting on rules for existing gas plants. The legally dubious rule underscores why command-and-control regulation is inefficient climate policy, while the real regulatory issue is removing barriers to development.

Weak Merits

The rule requires qualifying plants with a utilization rate over 40 percent to eliminate 90 percent of their carbon emissions. The justification is based on the EPA’s interpretation of the “best system of emissions reduction” under the Clean Air Act, which has varied wildly between presidential administrations. Apparently, the EPA believes carbon capture and storage (CCS) is “available and cost-effective,” despite no evidence of it being adequately demonstrated.

Only one domestic commercial-scale power plant employs CCS at scale. Its economics were justified by selling the carbon for oil extraction, which is a niche market. CCS is only scalable across a fleet with favorable sequestration economics, which does not exist. CCS remains constrained by factors beyond an individual power plant’s control. These include legal and regulatory barriers to carbon transport, especially pipeline approvals, as well as underground storage, such as sufficient subsurface property rights. The EPA could only justify this determination based on projections of technological innovation and future subsidy assumptions. Courts friendlier to the EPA have not viewed such “crystal ball” forecasts as passing muster, so one could imagine the reaction by the conservative Supreme Court.

Misstated Environmental Drivers

The EPA claims the rule will reduce 1.38 billion metric tons of carbon. That is well and good, but the assumptions underpinning the EPA’s analysis are suspect. Given unfavorable CCS economics, the rule is unlikely to drive much investment in innovative emissions controls. Rather, it will prompt unimaginative responses that take advantage of exemptions.

An exemption-centric compliance strategy was foreseeable in the proposed rule, which also applied to the existing gas fleet. For example, a compliance simulation of the proposed rule by the New England grid operator found that affected gas units reduced output by 19 percent, while exempted smaller combustion turbines would increase 119 percent. While the EPA’s final rule for the existing gas fleet remains to be seen, the key is how much the new rule deters new gas development overall or simply morphs its configuration. For example, if a firm planned to build a “baseload” natural gas plant with a utilization rate of 80 percent, it could instead build twice that capacity and operate it half as much to comply with the rule. This strategy would shift investment patterns to lower efficiency gas plants—specifically more combustion turbines than combined cycle facilities—which would increase per unit emissions.

Coal plant compliance would similarly prioritize exemptions. The coal fleet’s utilization rate has steadily declined over the past decade from 61 percent in 2014 to 42 percent in 2023. This will probably drop further given influxes of renewable energy that will dispatch ahead of coal plants, likely to the point that the average coal plant would fall below the rule’s 40 percent exemption threshold. However, coal plants in remote areas may remain outliers, which is where grid reliability exemptions in the rule will be especially important to implement.

The X-factor in all of this is load growth paired with high restrictions on new power plant development, aside from the EPA’s rule. The fundamental grid reliability challenge heading into the 2030s is that governments will not let markets build what they are motivated to finance, even without subsidies. In theory, supply restrictions paired with high-load growth could force markets to operate fossil plants above the EPA’s exemption threshold.

The environmental imperative to reduce supply restrictions was evident before the EPA even drew up their latest rule. In 2021, just before the Supreme Court narrowed the EPA’s authority to set carbon rules for power plants, over 930 gigawatts (GW) of zero-emission and 75 GW of natural gas generation sought to interconnect to the grid. This is more capacity than the existing fossil fleet. Now, 2,600 GW await interconnection. To be fair, much capacity seeking interconnection is “testing the waters” and not commercially viable, but it is nevertheless a remarkable demonstration of commercial interest. The real problem is a regulatory setting that delays power plants by a decade in many regions.

The message is clear: Government no longer needs to force the power sector to address climate change. It needs to clear the path.

Proper Regulation

Regulatory reform requires more gateways, not hammers. Markets are clogged by gatekeeping regulation. Reforms to outdated generator interconnection, transmission, and permitting rules will determine the power industry’s emissions trajectories into the 2030s, not EPA regulation.

Recall, the EPA must issue such regulations to comport with the law. But 15 years after the legal finding that made this so, we have yet to see a legal and politically durable rule. The EPA’s rule warrants a critique of its substance, not general existence.

It is time for a critical mass of industry, the environmental community, and other stakeholders to press Congress for an end to EPA climate regulation and replace it with efficient, market-based environmental policy. Perhaps there’s the potential to roll such reforms into a package that resolves what really matters for power sector decarbonization: free, competitive markets.