Carnegie Mellon University
April 28, 2015

Researchers Analyze Economic Effects of EPA’s Carbon Emission Guidelines

By Tara Moore / 412-268-9673 /

Researchers in Carnegie Mellon University’s College of Engineering demonstrate in a recent paper that states may not have the incentive to cooperate in reducing carbon emissions from electric power plants, even though such cooperation would lower costs nationwide.

In their study of the Environmental Protection Agency’s (EPA’s) recently proposed carbon pollution emissions guidelines for electric power plants, the researchers also examined the distribution of compliance costs between producers and consumers, the effects of compliance on electricity prices, and the changes in net revenues for coal and natural gas power plants under a compliance scenario.

The paper explores the EPA’s “111(d) rule,” which the agency recently proposed using its authority under the Clean Air Act, and which would lead to a 30 percent reduction in electric power sector carbon emissions below 2005 levels by 2030. The rule provides states with options for achieving emissions reduction goals, allowing them to act individually or to cooperate, and also allowing the choice of a rate-based standard or a mass-based standard.

“A rate-based standard basically limits the average emissions rate of affected electricity generating units (EGUs), while a mass-based standard limits the mass of CO2 emitted by affected EGUs,” said David Luke Oates, the lead author on the paper who recently completed his Ph.D. in engineering and public policy (EPP) at Carnegie Mellon.

In their paper, Oates and his co-author, EPP Assistant Professor Paulina Jaramillo, considered the effects each option would have on the economic performance of the electric power system. They determined that, if states cooperate to comply with the rule, electricity generation costs are lower nationwide than if states comply individually. However, costs in some states actually increase when they cooperate with their neighbors. The authors therefore suggest that there may be an opportunity for the EPA to encourage states to work together. The paper also shows that mass-based compliance results in lower production costs compared to rate-based compliance.

“Of the six compliance scenarios considered, production costs were lowest under mass-based compliance with national cooperation and highest under rate-based compliance with no cooperation,” Jaramillo said.

The paper’s analysis also found that complying with the rule increased electricity prices, increased net revenues for natural gas combined cycle EGUs, and decreased net revenues for coal units. Oates notes, however, that the study did not include revenue generators may earn from other sources like payments to ensure adequate system capacity (capacity payments), or payments from providing grid support like reserves (ancillary services). These additional payments may be able to compensate generators that lose revenue in the energy markets.

“The rule's complexity and the significant flexibility allowed to states in deciding how to comply mean that the rule may have some potentially counterintuitive effects,” Jaramillo said. “Accounting for these effects may help state governments and other affected entities to make more informed decisions when complying with the rule.”

Read the full paper, titled “State Cooperation Under the EPA's Proposed Clean Power Plan,” published in The Electricity Journal: