US utilities support cap-and-trade option for next EPA gas plant rule

Some power companies awaiting the US Environmental Protection Agency's plan to cut carbon emissions from existing natural gas-fired generation are embracing carbon trading programs as a compliance option. Such mechanisms could allow power companies to keep some plants operating once strict emissions limits are in place.

"EPA should make explicit its willingness to consider both new and existing state trading programs for existing sources for inclusion in state implementation plans," the Edison Electric Institute (EEI) told the agency in recent comments.

The EEI specifically cited the Regional Greenhouse Gas Initiative in the Northeast and state greenhouse gas programs in the West as good examples. Such programs should be among a "range of compliance flexibilities" the EPA should offer states, the trade group wrote.

The EPA has asked for stakeholder input as it develops a proposed rule for reducing greenhouse gas emissions and other pollutants from more than 2,000 gas-fired plants operating across the US. The EPA sought feedback on several issues, including whether carbon trading should be an option to help cut plant emissions, and many industry players support the idea.

The EEI is among plaintiffs suing the EPA over its selection of carbon capture as the main compliance option in the agency's final greenhouse gas rule for coal-fired plants and new natural gas-fired power plants issued in April. Regulations for already-operating natural gas-fired power plants were omitted from that rule after the agency decided to include so-called criteria pollutants under a broader rulemaking.

If nascent carbon capture technology is a nonstarter for both existing and new gas-fired plants, the EEI and some power companies suggested cap-and-trade as a palatable alternative for plants in operation today. Such a market mechanism could allow utilities to purchase allowances to continue to operate some gas-fired plants deemed critical for ensuring uninterrupted electricity service.

Industry wants flexibility

Under the US Supreme Court's historic ruling in West Virginia v. EPA, the agency is prohibited from setting an emissions cap to drive "generation shifting" through a carbon trading program. But states are allowed to, and utilities weighed in on how to shape such markets.

The Electric Power Supply Association, PPL Corp. and several other utilities separately asked the EPA to propose a model rule to help states craft cap-and-trade programs similar to the agency's acid rain and cross-state air pollution programs.

A trading program "must provide sufficient allowance allocations for utilities to operate units necessary to maintain grid reliability," wrote Philip Imber, PPL's environmental compliance director. "Guidelines that impede the operation of existing natural gas-fired combustion turbines could substantially undermine the transition to a cleaner energy future."

Ameren Corp. also cautioned against a market designed to reduce emissions.

"Mass-based trading mechanisms should continue to provide flexibility in meeting reliability needs through fixed cap allowances, rather than mechanisms that reduce allowances over time or require 'generation shifting' as a compliance mechanism," Michael Hutcheson, the utility's manager of environmental services, wrote in comments.

Others see carbon trading as a cost saver in addition to offering reliability guarantees.

"Allowing flexibility for implementation of the standards through emissions averaging or a trading program will lower compliance costs and achieve greater emissions reductions than would be achieved without such flexibility," wrote Wilbourne Markham, a senior regulatory affairs manager at the Tennessee Valley Authority. "Flexibility is also important for reliability purposes as it helps industry transition away from fossil fuels."

Natural gas accounted for 43% of US electricity generation in 2023, according to the US Energy Information Administration. Many utilities are now looking at expanding their gas fleets in response to growing demand.

One of those utilities, Duke Energy Corp., cautioned the EPA to "proceed cautiously" in light of the legal uncertainty over the regulations issued thus far. "This is not the time to impose impractical or impossible standards on existing gas sources," the utility wrote.

Ultimately, the EPA will get to decide the standards that can meet Clean Air Act requirements, Nat Keohane, president of the Center for Climate and Energy Solutions, said in an interview. The US already has more than 30 years of successful cap-and-trade experience with the Acid Rain Program and the Cross-State Air Pollution Rule that reduced sulfur dioxide and nitrogen oxides from power plants, so utilities being open to the trading idea makes sense, Keohane said.

"It's not surprising that utilities want both flexibility and the ability to continue to run their plants," Keohane said. "It's what one would expect. But what you want to buy with that flexibility are more ambitious emission reductions."

The EPA will be focusing on the rule for existing natural gas plants "in the coming weeks and months," Joe Goffman, head of the EPA's Office of Air and Radiation, said during a webinar hosted by Resources for the Future in early May. The EPA does not have an official timing for the proposed rule, an agency spokesperson said in an email.