How Obama's Clean Power Plan actually works — a step-by-step guide

It's easy enough to describe the basics of the Clean Power Plan, President Obama's sweeping new policy to reduce carbon dioxide emissions from America's power plants. Heck, we can do it in a single paragraph.

The EPA is giving each state an individual goal for cutting power plant emissions. States can then decide for themselves how to get there. They can switch from coal to natural gas, expand renewables or nuclear, boost energy efficiency, enact carbon pricing ... it's up to them. States just have to submit their plans by 2016-2018, start cutting by 2022 at the latest, and then keep cutting through 2030. Oh, and if states refuse to submit a plan, the EPA will impose its own federal plan, which could involve some sort of cap-and-trade program. Done.

When the dust settles, EPA expects US power plant emissions will be 32 percent lower in 2030 than they were in 2005. A significant cut, though still just a tiny piece of what's needed to halt global warming.

So then why does the rule need to be 1,560 pages long? Because that synopsis above still leaves tons of questions unanswered. How did the EPA actually come up with each state's emissions target? Why does every state have a different target? What, exactly, can states do to cut emissions? What if they want to work together? If states refuse, what sort of federal plan gets handed down from on high?

This fine print will matter a lot. So, for those curious about how the rule actually works, here's a more detailed step-by-step guide to what EPA is doing:

1) The EPA is setting individual emissions goals for 47 states

This is a key starting point. There isn't a single nationwide policy here. Instead, the EPA is setting different targets for 47 states — that is, 47 separate state goals for reducing carbon dioxide emissions from power plants by 2030.

Why just 47 states? Vermont and Washington, DC, are exempt because they don't have any large fossil fuel or electric power plants, so there's nothing to cut. Meanwhile, Alaska and Hawaii aren't covered under the rule for now because the EPA is still mulling how to deal with their unique grid situations. The agency says they'll get regulated eventually.

2) State emissions goals are set by a complicated formula

Blame this guy. (Shutterstock)

So how did the EPA actually set each state's target? This part is a tad more complex, and it's completely different from how the agency calculated state goals in last year's draft proposal of the Clean Power Plan. I'll walk through the broad steps involved:

— First, take stock of the nation's fossil-fuel power plants. The EPA started by tallying up all the coal, oil, and natural gas power plants across the United States, placed them into two broad categories, and then figured out their average emission rates in 2012 in each of the country's three main electric-grid regions.

So in the Eastern Interconnection — the grid system that spans the eastern half of the United States — EPA found that coal/oil steam plants emitted 2,160 pounds of CO2 per megawatt-hour of electricity produced, on average. Meanwhile, natural gas combined cycle plants emitted 894 pounds of CO2 per MWh, on average.

That's the starting point. This is what our power plants are currently emitting, as of 2012.

— Second, estimate how much these power plants can reasonably cut. Before regulating air pollution under section 111(d) of the Clean Air Act, the EPA has to figure out what the "best system of emissions reductions" for these power plants is. That is, EPA has to show that power plants can cut emissions using methods that have been adequately demonstrated and can be done at a "reasonable" cost.

What EPA decided is that utilities could reduce emissions from their coal and natural gas power plants using three different methods — these methods are known as "building blocks" in the rule:

Building Block 1: Operate coal plants more efficiently. Operators of coal-fired power plants often carry out "heat rate improvements" that allow more electricity to be produced while burning less coal. This might include things like improving boiler operations or optimizing cooling systems. Depending on the part of the country, EPA estimated that operators could reasonably improve coal-fleet efficiency an extra 2.1 to 4.3 percent. That, in turn, would curb carbon-dioxide emissions.

Building Block 2: Run gas plants more often, coal less. Burning natural gas for electricity produces less CO2 per megawatt-hour than burning coal does. So if states ran their gas plants more often and coal plants less, they could reduce emissions while generating the same amount of electricity. EPA decided it'd be reasonable for states to increase the utilization rate of their existing natural gas combined cycle fleet to 75 percent — which would curtail coal use and emissions.

Building Block 3: Ramp up renewable power. Finally, if states built more wind, solar, geothermal, hydropower, or biomass, they could reduce the overall carbon intensity of their power plant fleet. EPA conducted a detailed study of what level of clean energy growth was reasonable in each region, based on historical trends, cost curves, grid reliability, and so forth. EPA didn't assume each region would install the maximum feasible amount of clean energy. Instead, it aimed for a target deemed "reasonable," cost-wise. Even so, this building block is bolder than what was in the draft proposal, in part because wind and solar prices have dropped in the past year. In setting this building block, the EPA argued it would be feasible for renewables to provide somewhere around 26 percent of US electricity by 2030.

Now, these three building blocks are not what states actually have to do to cut emissions. These building blocks are only there so that EPA can calculate what a reasonable reduction from fossil-fuel power plants looks like. States can pick their own preferred route to cutting emissions if they want. This is just how EPA sets the baseline for cuts.

(Also, note that Building Block 3 is the most controversial one here — because it relies on actions outside of the power plant, or "outside the fence line," to reduce emissions. Industry groups are certain to challenge this building block in court, and if it's nullified, the plan's emissions targets will become correspondingly weaker.)

— Third, figure out the effects of applying these three "building blocks" to power plants. Next, the EPA calculated what would happen if these three building blocks were applied throughout the entire Eastern Interconnection.

The average coal/steam plant would go from emitting 2,160 pounds of CO2 per MWh down to 1,305 lbs/MWh by 2030 — in part because we're factoring in clean energy outside of the power plant.

Meanwhile, the average natural gas combined-cycle plant would go from emitting 894 lbs/MWh down to 771 lbs/MWh by 2030 — again, factoring in clean energy outside the plant.

These plant numbers were the basis for setting statewide goals. What's more, since the power-plant targets in the Eastern Interconnection were the least stringent of all three grid regions in the country, EPA decided to adopt them nationwide. (Again, they keep emphasizing "reasonable cost" over maximum stringency throughout the rule.)

— Fourth, apply the power-plant targets to each state. Finally, EPA applied the new power-plant targets to individual states, depending on each state's power mix.

So let's take Indiana as an example. Indiana currently has a bunch of fossil-fuel plants — 88 percent are coal/steam, and 12 percent are natural gas combined cycle. In 2012, those plants emitted 2,021 lbs/MWh of CO2, on average.

So, to figure out Indiana's statewide goal for 2030, EPA looked at what would happen if its plants all applied the building blocks above, with this little formula:

(0.88 * 1,305 lbs/MWh) + (0.12 * 771 lbs/MWh) = 1,242 pounds of CO2/MWh.

And that's it. That's Indiana's goal. The state has to get its power plants' emissions down from an average of 2,021 lbs/MWh in 2012 to 1,242 lbs/MWh in 2030.

Simple, huh? If you want the more complicated, math-heavy explanation, here's how EPA describes the process. And here are some spreadsheets where you can follow along with EPA's math. Good luck.

3) Every state has a different interim goal and a final goal

Okay, so the EPA applied its fancy formula to all 47 states, and derived a different emissions target for each one. You can find them all listed on this page. The EPA has also posted a more detailed set of goals for each state that looks like the table below — we'll use Indiana again as our example:

(Environmental Protection Agency)

Let's walk through this, because it's important. Remember, Indiana's coal and gas power plants emitted about 2,021 lbs/MWh in 2012, on average. That number is already expected to drop to 1,882 lbs/MWh in 2020 — even before the Clean Power Plan takes effect. That's because Indiana was already scheduled to close some coal plants and replace them with natural gas generation.

Now, starting in 2022, Indiana will have to steadily reduce its power plant emissions even further, until that rate falls to 1,242 lbs/MWh by 2030. Indiana also has to meet certain interim targets along the way, so it can't just procrastinate until the very last minute. Again, Indiana's plan to achieve these cuts can include virtually any measures it sees fit — as long as it hits these targets.

(There's an important footnote here: If Indiana decides to take action between 2020 and 2022 to boost clean energy or take certain steps to improve energy efficiency in homes and companies, it will get extra credit against these targets. In other words, states have incentive to take some actions before 2022, though they're not required to.)

Now comes another thrilling twist. So far, we've been talking about Indiana's "rate-based" goals: the amount of CO2 per megawatt-hour of electricity produced. But alternatively, Indiana could come up with a plan to stay below a "mass-based" target — that is, the total amount of CO2 the state's power plants are emitting. If Indiana chose this option, it would have to reduce its overall power plant CO2 emissions from 107.2 million tons in 2012 down to 76.1 million tons in 2030.

EPA tried to make sure the rate- and mass-based goals were roughly equivalent. (The formula for converting between the two is even more byzantine, and if I delved into it here I'd lose my last two readers.) But there are pros and cons to adopting one or the other. If a state adopts a rate-based goal, then emissions can technically increase over time with economic growth — it's just that the carbon intensity of power plants has to go down. By contrast, EPA estimated that mass-based goals might be a little cheaper to comply with, as well as more useful for setting up cap-and-trade programs.

Finally, there's a third option in that chart above: "Mass Goal (Existing) & New Source Complement." This is meant to deal with the fact that it would be tricky for a state to adopt a mass-based goal and build new fossil-fuel power plants. Multiple regulations would come into play. So this third option is available if states want to streamline this whole process.

4) It's not always obvious which states will have to make the toughest cuts

Climate Central has created an excellent interactive map showing every state's "mass-based" targets, as well as the percentage cuts that each state will have to make between 2012 and 2030:

As you can see, some states have to make bigger cuts, percentage-wise, than others — although the differences are much less pronounced than in the draft rule. But it's not always obvious which states will have to do the most work to hit their goals. It really depends on a state's specific situation.

Take New Hampshire. It has to cut power plant emissions 14 percent by 2030. But as Sam Evans-Brown points out, the state might be able to get much of the way there by simply continuing to participate in RGGI, a cap-and-trade program for power plants in the Northeast that has been running since 2009.

Other states, by contrast, have a tougher slog. Ken Ward Jr. reports that West Virginia, which is facing a 29 percent cut, may have to revamp its state energy policies pretty significantly to comply (particularly since it doesn't currently have any natural gas plants). The only way to judge the stringency of the cuts is to scrutinize each state in detail. This interactive map from E&E Publishing can help with that — it offers a rough overview of how ready each state appears to be.

5) States will have a lot of flexibility to meet their targets

(Shutterstock)

Now that the EPA has set its goals, states have to submit plans by 2016 for how they'll meet those emission targets. If they have a good excuse, states can get an extension and submit a plan by 2018.

These state plans can include a vast array of different techniques. States can ramp up renewable energy to hit their targets, for instance. They can reduce output from their existing coal plants and ramp up output from natural gas plants. They can build nuclear plants or increase output from existing nuclear plants. (That said, states no longer get extra credit for prolonging the life of existing nuclear plants at risk of closing — a feature of the draft rule.) States could figure out how to reduce losses from their power lines. Utilities could even enact programs to help homes and businesses use energy more efficiently.

Or states could go more radical still. They could implement a carbon tax (yes, EPA allows this). They could even join existing cap-and-trade systems — like RGGI in the Northeast — or start new ones. Indeed, the EPA's final rule makes it easier for states to join such trading programs.

The only real limitation here is the EPA. The agency will have to look over each state's implementation plan and judge whether the state is likely to meet its emissions goal — and then approve or deny the plan. This is why the next president is so crucial to how the Clean Power Plan works, since he or she will likely be overseeing that whole approval process.

By the way, because states have so many different options, you should be very wary of any projections for what the US energy mix will look like in 2030 under this plan. Lots of press reports have been suggesting that natural gas will lose under this plan, or renewables will win out or whatnot. But as Michael Levi points out, the truth is we simply have no idea right now. So much depends on how states react and what their plans actually look like. "No one knows," Levi writes, "what mix of renewables, natural gas, and efficiency will result from the plan."

6) If any state refuses to comply, the EPA will step in — with a federal cap-and-trade plan

Now, it's entirely possible that some states may simply refuse to submit their own plans to meet the EPA's targets. Indiana Gov. Mike Pence has suggested he might not comply, as have at least five other Republican governors. Maybe they're bluffing, maybe not.

If that happens, the EPA will implement its own federal plan to regulate those state's emissions. Or, alternatively, if a state fails to meet its interim goals, the EPA can step in with its federal plan. You can read the EPA's proposed federal plan here — it's 755 pages long.

The short version is that EPA is proposing a cap-and-trade system for recalcitrant states. The agency is mulling over two options: Either it would put a cap on overall power-plant emissions in a state and then allow utilities to trade pollution credits with each other. Or the EPA would impose a rate-based standard on a state's power sector and allow trading within it. As with any federal air-pollution rule, utilities would face fines and other penalties if they failed to comply.

The EPA is still deciding which of these two options to pursue, and it's expected to settle on a final federal plan by 2016. See this great piece by Emily Holden and Evan Lehmann for more on the nuances here.

7) The "32 percent emissions cut" isn't a requirement — it's a projection

One final point about the proposed EPA rule. Many outlets have suggested that the EPA rule would "require" US power plants to cut their emissions 32 percent below 2005 levels by 2030.

That's not actually true. Again, what the EPA rule does is set emissions goals for 47 states. The EPA then project that, if all states complied and met those targets, US power-plant emissions would fall roughly 20 percent below 2012 levels by 2030 — or about 32 percent below 2005 levels.

But this is just a modeling exercise. Power plant emissions might not actually fall 32 percent below 2005 levels. Imagine, for instance, that states adopted rate-based goals — i.e., goals for carbon dioxide per unit of electricity produced — and electricity use ended up increasing faster than EPA expects, because of rapid economic or population growth. In that case, overall emissions would also be higher than EPA expected.

(Relatedly, the EPA isn't using a 2005 baseline to set its state emissions targets. The targets are based on state emission rates in 2012, as explained above. The EPA only uses 2005 as a comparison point for its estimate of the rule's overall effects — because that's the baseline the US has been using for its international climate pledges. See Nathan Richardson for more on this widely misunderstood point.)

Further reading

-- By now, hopefully it should be clear that we still don't really know the ultimate impact of this rule. So much depends on what states do, how utilities respond, whether courts uphold this rule, how the next president treats the rule. Read David Roberts' piece for more on this.

-- I also took a look at how this rule fits into global climate efforts. By my calculations, the rule would cut overall US greenhouse-gas emissions 6 percent between today and 2030. That's sizable, but certainly not enough to solve climate change. Better to think of this as just one piece in a much broader Obama climate plan.

-- Nathan Richardson of Resources for the Future had a great look at some of the changes between the initial draft proposal and the final rule.

-- There's a staggering amount of insightful analysis of this rule over at E&E News, as well as at Common Resources. (And I'm probably missing dozens of other places.)

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