Wednesday, October 19, 2011

New Source Performance Standard’s Unlikely Start in 2011

International Emissions Trading Association (IETA) held a symposium on October 18, 2011, in Washington DC, dedicated to climate change and business risk. Of due significance for the energy industry was a panel discussion on the proposed Environmental Protection Agency’s (EPA) New Source Performance Standard (NSPS), which would step up control on greenhouse gas (GHG) emissions from new, modified and existing power plants and petroleum refineries.  While EPA missed its September 30 deadline to propose NSPS for power plants and it is unclear whether the proposed standards for refineries, scheduled for December 2011, would be also missed, the effort seems to be a tough call at the moment. If NSPS for power plants and refineries are further delayed, they may not come into effect in 2012.  Complicating the matter is a lack of clarity on the design and execution of these regulations, which may make their realization impossible during the election year.  According to one of the panelists, Marisa Buchanan of Bloomberg, implementation of GHG standards would be delayed or thwarted if Obama is not re-elected in 2012. 

A discussion on how the NSPS regulations could potentially work was perhaps the most interesting part of the panel.  While panelists advocated market-based regulations, including emissions trading, it remained unclear what kind of form such regulations would take.  Further, it was not clear what the “standards of performance” would be like; that is, a standard which would reflect the degree of an emission limit.  Steve Cornelli from NRG Energy noted some important caveats on the potential impact of NSPS on power plants.  According to him, attempting to put an acceptable price on industries by adjusting performance standards was not likely to work.  He noted that it was hard “to predict credit prices accurately and current estimates may be overly optimistic.”

The petroleum industry sees inflated benefit estimates from the proposed NSPS regulations, noting that EPA was putting limited government resources on regulation when unemployment in the country was high and the economy was struggling.  The industry representatives expect limited environmental benefits from the new regulations. 

Learning lessons from the past, regulators should be reminded of the difficulty with implementing the lead phasedown from gasoline in the 1970s and 80s in the US.  Back then, EPA relied on market-based regulation to carry out the lead phasedown, i.e. providing market incentives to reduce emissions more cheaply than by imposing the same standard to all sources.  The more the agency relied on market-based flexibility to phase out lead, the more it was riddled with violations by refineries through false reporting.  It ended up being a costly regulation.  A premium is put on greater accountability under emissions trading compared to a command-and-control program. 

If lead phasedown is any lesson, compliance and enforcement under market-based regulations are more difficult and expensive than a command-and-control regulation.  At the same time, a command-and-control regulation would disproportionately impact the economic operation of less efficient power plants and refineries.  At the time of slow economic growth, encumbering the booming shale oil and gas industries or increasing the price of fossil fuel energy in the US with new regulations may meet vast disapproval among the public and energy producers.  So, NSPS is likely to face delay.

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