I interviewed Sean Penrith who discussed EPA’s 111 (d) Rule.
It’s great to speak with you again, Sean. It’s been a while since we’ve talked. I’m looking forward to hearing your views today on a new topic. Before we start, can you provide a brief background of yourself?
Sure, I’m happy to. Nice to connect once again. I joined the Climate Trust as the executive director one year ago literally to the day. Before that I actually served on the board as vice chair to the Climate Trust for several years while I was running another energy and sustainably organization here in Portland for seven years. My background is really from the for-profit sector, although I’ve spent some time in the nonprofit center, with a primary focus on sustainability, energy efficiency, and climate change.
Thanks. My first question is: What is the EPA 111 (d) rule?
It’s essentially, at the current stage, it’s a set of guidelines that the EPA released under the Clean Air Act. It essentially regulates, its intent will be to regulate the emissions from electricity-generating units, or EGUs, as they are known. The design of the plan is fairly interesting because it essentially gives a huge amount of flexibility under the Clean Air Act section 111 (d) to the implementing state. Each state is essentially tasked with a rate-reduction goal. In Oregon, for example, our goal is 372 pounds per megawatt hour of energy generated. The state is free to design the approach to meet the goal.
There’s a lot of flexibility in the guidelines. Remember, it’s just a set of guidelines the EPA’s going to formalize by June next year, and the following year the states have to submit the state plan, which would indicate how they’re going to reach the goal that’s been set for their respective state. The guidelines allow various mechanisms to achieve the goal. What they don’t do is allow any type of offset activity, and that’s specifically because it regulates the electric-generating sector, so any type of carbon offsetting is not allowed because it’s not connected to the grid, if you will. But it does allow for reusable energy credits and energy-efficiency credits to come in to play as part of enabling states to reach their goals. I’ll stop there in case you have a question.
How does this rule impact state plans for moving to some type of carbon mechanism?
That’s a really good question. In 111 (d) a state can opt to—there are a couple of options they have. They can go to loan and design their own state plan to meet the target, or they can look at a multistate plan so they can link up with other states and essentially create a trading system for reusable energy and energy-efficiency credit. In that scenario the amalgamation of the states is considered as one entire target instead of the individual state. The states also have the ability to choose, they can stick with the rate-based emission target that the EPA has given them, or they can choose to convert the rate-based approached to what’s known as a mass-based approach. What that essentially means is that the state of Oregon, for example, could decide that they’re going to convert to the mass-based approach under which the entire state is essentially kept under an emissions umbrella, if you will.
Instead of accounting for the emissions under each electric-generating unit within the territory or the state, the state then considers the overall net of emissions underneath this mass-based approach. Because of that, a lot of people have argued that EPA is paving the way to some sort of capped and trade mechanism because the mass-based approach essentially does cap the emissions within a state. It’s kind of interesting because it definitely does pave the way because states are offered a mass-based approach, who then also go for a multistate avenue to reach compliance and to link up with other states to essentially design a caps and trade multistate trading system to meet compliance under 111 (d).
This is, of course, important because California, which has a cap and trade, and the Regional Greenhouse Gas Initiative, which is the nine most eastern states, all have a trading block amongst those nine states. California and RGGI wanted to make sure that they were in compliance of 111 (d), given the design of their own emission-reduction schemes that they have in place. Long story short, if a state were to go for a max-based approach for the multistate linkage, they could opt to join California as a root to compliance, or they could emulate RGGI or join RGGI. This is interesting because the state is considering a carbon tax, for example, and not a cap and trade system, then opting for a mass-based linked state approach might be a carbon tax.
It really starts begging the question: What does the state do in terms of a carbon mechanism that dovetails with a 111 (d) compliant scenario. I’ll stop there because I’ve said a few things that were out of context.
What are your recommendations or are there any implications for business executives?
I think the implications for business executives fall a little further afield and down the line from 111 (d). If EPA’s successful with releasing this rule next year without further challenges and electric-generating units, the electricity center is essentially regulated under 111 (d), what’s going to happen is other sectors are ultimately going to follow suit.
We’re going to start regulating just like they do in California; industrial sources, transportation’s going to come online in 2015. Executives running multinational corporations had best be advised and keep a watchful eye on what sectors are going to be capped, that are going to pursue the 111 (d) effort. Expand into the sectors for the states or regions are designed for reaching carbon-reduction goals is going to have to consider how to account for other sectors beyond the electricity sector. I think this is what some people in the country are concerned about, is that 111 (d) creates a glide path, if you will, to managing carbon emissions across multiple sectors. In the carbon world, with Climate Trust, we think that’s essential if we’re going to be serious about managing the carbon impacts. We think it’s a welcome development. Executives in sectors need to watch what’s going to happen in regulation, especially if states start to follow the path of California or RGGI.
It could create a domino effect where states realize that joining these other systems is a lot easier than designing their own, is an economy of scale that’s built in efficiencies because California and RGGI have gone down the hard part of designing these systems, and if those systems comply with 111 (d), you can see why states would opt for joining them. And then that impacts Washington state and north while it’s considering both carbon tax and caps and trade, it does have a taskforce in place for specifically looking at caps and trade and how a linkage to California might make sense to that state. You see it already in these early days of 111 (d).
Thanks, Sean, for sharing your views today on the EPA’s 111 (d) rule.
My pleasure. Thanks, Dustin.
About Sean Penrith
Executive Director at The Climate Trust