EPA Clean Power Plan Explained!

What to give thanks for this year….my wife, the Milwaukee Bucks, doughnuts…or how about the leaders of two world superpowers coming together and agreeing on new carbon emission reduction standards for 2030!  Oh, and when I say superpower, I mean global leaders in carbon pollutants.  Who better to set the example?

Obama and Chinese President Xi Jinping met last week and agreed on separate reduction goals for 2030.  Xi has agreed to stop emission growth in his country by 2030, and Obama agreed to cut all emissions by 26-28% by 2025  (compared to 2005 levels).  The plan was in the works for 9 months, and hopefully this will provide inspiration for a global climate agreement next year.

This meeting and accord has generated much attention, which is wonderful, but it coincides with a lesser known domestic policy action taken by the executive branch that is just as important.  The White House released the Environmental Protection Agency’s (EPA) Clean Power Plan in June to not as much fanfare, but this is as crucial a step toward reducing emissions at home and setting an example abroad.  The plan is currently gathering critiques before releasing a final, revised version next year, but I thought I’d go over some of the details.  These initiatives don’t make the headlines as often, and finding digestible explanations can be difficult – I’m here to try to fill in the gap!

Figure courtesy of [1]

Figure courtesy of [1]

So what is this Clean Power Plan all about anyway?

The plan focuses on fossil-fuel-based power plants, aiming to reduce emissions from such sources to 30% below 2005 levels by 2030.  Electricity generation from these types of plants accounts for 40% of all US emissions, so this is a major target for policy and action.  Within the plan, the EPA will regulate emissions by:

1) laying out acceptable methods of decreasing emission, keeping it as flexible and general as possible- this could be improving efficiency of existing plants, increasing the renewable sector, etc.

2) setting emission reduction standards state by state – this theme of state-specific standards will keep returning, as it’s the key way to keep the plan flexible enough to have as many states as possible comply.

3) relying on states to design their own methods to reduce emissions – again, keep the plan as state-specific as possible and harness local ingenuity to find ways to get rid of all that carbon.

OK, that’s great for carbon emissions – but will this hurt the economy?

Actually, no!  Many projections have been done to understand the economic benefits and costs, and most analyses indicate around a 70 billion dollar net benefit from the Clean Power Plan.  This benefit comes from climate change risk reduction – less damages to pay for from increased tornadoes, lightning strikes, extreme weather, sea level rises, etc.  Also, nonclimate effects were included, namely less pollutants in the air due to decreased fossil fuel emissions, leading to decreased health care costs.

What’s the best thing about how the EPA has implemented this policy?

The plan oozes flexibility and it’s the best thing about it.  States are always wanting to do their own thing, understandably, and usually state officials will know the details of their economy best.  The plan is structured in a very similar fashion as what are known as ‘standards’ in the renewable energy policy world.  Standards just set a goal to reach by a given date, and the states must figure out how to reach it.  This lets market forces and capitalism work at its best, finding the most efficient way to reach the goal.

(As an aside, capitalism is ONLY most efficient when taking into account all external costs, which is why we’re in this mess in the first place.  We know the costs of fossil fuels and solar cells, but we don’t include some of the fossil fuel costs in the accounting books.  If we did – say, for example, taking into account the fact that fossil fuels are adding to the over 400 ppm of CO2 in the atmosphere – then solar cells would be viable RIGHT NOW because its cost would be equally compared to ALL the costs, both external and internal, of fossil fuels.)

Anyway, the EPA is confident that this flexibility will entice states to get on board.  States can choose more natural gas, or more renewables, or partner with other states to trade emissions or combine resources for combined emission reductions.

Everything sounds dandy!  What’s the catch?

The catch may be in how emission reductions have been defined in the plan.  Instead of using a concrete amount of tons of CO2 reduced, the EPA uses a ratio defined as:

(Pounds CO2 emitted)/(Total electricity generated),

in some form of the same units.  The reasoning behind this is that it gives states more options (again flexibility) in how to meet the standard.  Yes, straightforward pounds CO2 can be reduced, but efficiency improvements can also be included that are added to the denominator (thus making the ratio smaller to reach the goal).

This might be too much flexibility, though.  Remember that the goal is the reduce total emissions – the magnitude of emissions matters!  When using this ratio, a state could keep the pounds CO2 emitted constant, but just increase the amount of electricity generated using low-carbon sources, like solar cells, to reduce the ratio.  This doesn’t really accomplish the point of all this, then, which is to reduce TOTAL emissions.

A solution to this is to ditch the ratio and just use a total mass of CO2 emissions for each state as a standard to reach.  We’ll see if that’s updated after this current rounds of critiques.

Overall, the plan appears solid and is a great step forward toward reducing emissions.  The flexibility is key and it’s great to see national policymakers understanding the psychology of state politics and implementation.



Fowlie, M., Goulder, L., Kotchen, M., Borenstein, S., Bushnell, J., Davis, L., Greenstone, M., Kolstad, C., Knittel, C., Stavins, R., Wara, M., Wolak, F., & Wolfram, C. (2014). An economic perspective on the EPA’s Clean Power Plan Science, 346 (6211), 815-816 DOI: 10.1126/science.1261349

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