Free Market Allies Challenge Legality of EPA’s Clean Energy Incentive Program

On behalf of policy analysts from 13 non-profit free-market organizations and seven independent scholars, I have submitted a joint comment letter to the Environmental Protection Agency (EPA) challenging the legality of the agency’s proposed Clean Energy Incentive Program Design Details Rule (CEIP). The CEIP is a major component of EPA’s so-called Clean Power Plan, on which the D.C. Circuit Court of Appeals heard oral argument on 27th September.

The CEIP is what’s known in climate policy parlance as a “credit for early action” program. Under such programs, companies that begin to cut their greenhouse gas emissions before the start of a regulatory compliance period earn credits they can later use to meet their obligations during the compliance period. They can also sell the credits to other regulated entities.

The comment letter argues the CEIP is unlawful on both procedural and substantive grounds.

Turning first to the procedural defects, neither EPA’s proposed Power Plan rule  nor the agency’s subsequent notice of data availability outlined the basic program elements EPA would later adopt as the CEIP in the final Power Plan rule. Specifically, the public had no warning EPA would establish an early action credit program, provide bonus credits through a federal-state “matching pool,” and exclude from the program early actors who reduce carbon dioxide (CO2) emissions by either improving the heat-rate efficiency of coal power plants or shifting baseload generation from coal to gas.

Under Sec. 307(d)(7)(B) of the Clean Air Act (CAA), “Only an objection to a rule or procedure which was raised with reasonable specificity during the period for public comment (including any public hearing) may be raised during judicial review.” By keeping the public in the dark about CEIP program specifics during the Power Plan comment periods, EPA illegitimately denied opponents the opportunity to challenge the CEIP in the controversy before the Court of Appeals.

In addition, the CEIP Design Details rule flouts the Supreme Court’s decision, on February 9, 2016, to stay the Power Plan. The rulemaking is inconsistent with a major purpose for which the stay was granted: shield States from having to expend additional unrecoverable resources. The CEIP is both a method of complying with the Power Plan and a tradable credit program potentially affecting the bottom lines of hundreds of regulated entities. Therefore, Power Plan opponents can ill-afford to sit out this rulemaking. To participate effectively, opposing States will have to devote additional resources of time, money, and agency expertise. As Milton Friedman might have put it, there’s no such thing as a free rulemaking.

Invoking the Supreme Court case of Nken v. Holder (2009), EPA argues that a stay is not an injunction or stop-work order, all it does is divest a proceeding of its enforceability; hence the agency may continue to develop the Power Plan even though the rule has been stayed. But in Nken, the Court held that a stay ”operates upon the . . . proceeding itself.” Since the proceeding at issue now is the Power Plan, additional work on it should stop.

The Court also held that a stay prevents an action ”by temporarily suspending the source of authority to act.” T​he source of EPA’s authority to act on the CEIP is either the Power Plan (the final rule of which the CEIP is a part and without which it has no validity), or the agency’s interpretation of CAA 111(d), the putative statutory basis of both rulemakings. Since EPA’s source of authority to act has been temporarily suspended, the current rulemaking is out of bounds for that reason as well.   

Turning now to the CEIP’s substantive defects, EPA has no statutory authority to establish a greenhouse gas early action credit program. Three lines of evidence—statutory analysis, legislative history, and regulatory history—compel that conclusion.

To briefly summarize, CAA Sec. 111, EPA’s putative authority for the Power Plan, contains none of terminology associated with an early action program (“early,” “voluntary,” “credit,” “allowance,” “allocation,” “transfer,” “award,” “participant”). It is thus unlike CAA Sec. 404(e), which directs EPA to establish an early credit program for sulfur dioxide (SO2) emissions from power plants. Sec. 404 was enacted via the 1990 CAA Amendments, which also revised Sec. 111. It is therefore obvious that when Congress wants EPA to establish an early credit program, it has no trouble making its intention clear.

The Supreme Court has stated that, “where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” The reasonable presumption is that Congress intentionally and purposefully excluded early crediting language from Sec. 111.​

Credit for early action was an issue of recurrent legislative and regulatory controversy during the late 1990s and early 2000s. However, the one point on which all the experts eventually agreed is that no federal agency has authority under existing law to award or certify regulatory credits for “early” greenhouse gas reductions.

A major legal objection to the Power Plan generally is that it is chiefly a strategy to expand the market share of renewables rather than to improve the “environmental performance” (lower the CO2 emission rate) of existing coal and gas power plants. CAA section 111(d) authorizes EPA to regulate emissions from stationary sources, not to pick energy market winners and losers. By subjecting existing, decades-old coal and gas power plants to CO2 standards that are infeasible and unaffordable even for new, state-of-the-art power plants, the Power Plan effectively forces owners of those facilities to reduce output, shut down their facilities, or invest in new renewable generation.

Such compliance methods do not lower the emissions rate of existing fossil-fuel power plants. “Produce less electricity,” “close the plant,” or “subsidize your competitor’s wind farm” are not valid CAA performance standards. Rather, such directives are non-performance mandates.​

The CEIP compounds the illegality of the Power Plan by denying early action credits to utilities that achieve pre-compliance period CO2 reductions through coal plant efficiency upgrades and generation shifting from coal to gas. Unlike any greenhouse gas early action program ever proposed, the CEIP does not award credits on a non-discriminatory basis to all early actors. Rather, only early CO2 reductions from renewable energy and demand-side energy efficiency projects are eligible.

That is all the more shocking because improving the heat-rate efficiency of coal power plants and shifting base load power from coal to gas are two of the Power Plan’s three “building block” strategies for determining the “best system of emission reduction” for existing power plants.