J.Pollock Blog

Adverse Impacts of Poor Governance

Continuing from my last post regarding poor governance, both the EPA and Federal Appeals Court have taken recent actions that will affect grid reliability and future electricity costs.  

With respect to the EPA, on April 5, the EPA moved to strengthen a mercury pollution rule for coal-fired power plants on the assumption that the vast majority of affected generators are capable of compliance. However, the EPA concedes that it will result in an additional 12.2 GW (of 22.7 GW) of coal capacity would retire by 2028. With over half of the coal fleet retired, it is hard to believe that reducing the already low mercury emission standards required to comply with the MATS rule would have any appreciable health benefits that would outweigh the costs of losing 12.2 GW of dispatchable generation at a time when NERC and others are sounding the alarm about inadequate capacity and energy supply.

The article below discusses the dismissal of an appeal by ten states by a Federal Appeals Court panel that reinstated the use of an Obama era policy setting the social cost of carbon initially to $51 per metric ton. The panel asserted that the states have no standing because it purportedly requires speculation (a chain of hypotheticals) that there would be a severe financial impact on the affected industries if the $51 CO2 fee were applied in actual practice.  

Obviously, the impact cannot be zero if the practical result of applying a CO2 fee would be to accelerate replacing dispatchable (fossil-fuel) generation with non-dispatchable renewable generation. The adverse impact on grid reliability alone would certainly not be cost free.  Further, it should be obvious that a CO2 fee, in conjunction with generous federal tax credits that subsidize more capital intensive/lower capacity-factor renewable generation (which makes existing generation less competitive) clearly tips the scale in favor of the former, resulting in higher electricity costs. The panel obviously doesn’t consider less reliable more expensive electricity, which will have a financial impact all consumers – including manufacturers – is worthy of its consideration. 

The dismissal smacks of a Court acting as a both an executive and a legislator, rather than ruling on the legal merits of Executive Orders and EPA practices that, according to a recent U.S. Supreme Court Opinion (West Virginia et.al.), are well within the exclusive purview of the Congress.

Appeals court upholds climate metric in new blow to red states’ legal challenge EXTRA

Thursday, April 6, 2023 11:43 AM CT

By  Karin Rives
Market Intelligence

A federal appeals court upheld the Biden administration’s decision to reinstate an Obama-era social cost of greenhouse gases estimate that federal agencies can consider when developing new policies.

The April 5 ruling by three judges with the US Court of Appeals for the 5th Circuit found the 10 largely Republican-led states that challenged the cost metric had no standing because the harm that they alleged was speculative.

As a result, the court vacated a lower court’s preliminary injunction — which the 5th Circuit had previously stayed — prohibiting federal agencies from using the cost calculation in their regulatory analyses.

Cost estimates

Before proposing significant action, federal agencies have to assess the cost and benefits of any new regulation. Federal agencies for many years had included the costs of greenhouse gas emissions in that analysis in their own ways, but the Obama administration formed an interagency working group to standardize those cost estimates.

The National Academies of Science published a report in January 2017 reflecting the working group’s findings. The Trump administration disbanded the group two months later, deeming its work “no longer representative of government policy.” As a result, agencies reverted to making their own individualized cost estimates.

President Joe Biden later issued an executive order reconvening the working group. That group published an interim estimate, reflecting the prior working group’s 2016 findings, of $51 per metric ton of carbon with a 3% discount rate used during the Obama years.

The 10 Republican states sued in April 2021 and asked a Louisiana district court for a preliminary injunction barring federal agencies from using the Biden cost metric. The lower court granted that request, but the 5th Circuit in March 2022 stayed the preliminary injunction pending a decision on the merits of the case. The states then filed an emergency application with the Supreme Court, which the high court rejected in May 2022.

The 5th Circuit’s ruling

The 5th Circuit has now dismissed the lawsuit altogether and vacated the lower court’s preliminary injunction. In doing so, it rejected the 10 states’ allegations that their energy industries and chemical manufacturing sector are suffering from the use of the Biden cost metric in “job-killing regulations.”

“Plaintiffs’ allegations of ‘injury in fact’ rely on a chain of hypotheticals: federal agencies may (or may not) premise their actions on the interim estimates in a manner that may (or may not) burden the states,” wrote Judge Jacques Wiener, who penned the court’s decision. “It is well accepted that the mere ‘possibility of regulation’ fails to satisfy injury in fact.”

The judge also noted that federal agencies take into consideration public comments on proposed rules to ensure the social cost of carbon is not arbitrary or capricious as the states alleged.

The three-judge panel went on to reject the plaintiffs’ argument that the climate cost metric will force states to change their own policies, admonishing the states for contemplating injuries that are “several steps removed” from the Biden administration’s decisions.

“The states cannot do away with their alleged parade of horribles in a single swipe at the duly elected executive,” Wiener wrote.

The 10 states — Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, South Dakota, Texas, West Virginia and Wyoming — have the option to ask the entire 5th Circuit to review the three judges’ ruling.

“I suspect there is a decent chance that the median judge on the circuit would not be so friendly to the administration, in which case en banc reversal might be possible,” Daniel Walters, a professor at Texas A&M University’s School of Law, wrote in an email. “But on the other hand, the law here is super clear. Challenges to Trump’s regulatory executive orders were generally dismissed on standing grounds because the agencies had yet to act on the executive orders, and the same should be true here.”

The decision comes as the US Environmental Protection Agency is proposing to update the US cost of carbon estimate to as high as $190 per metric ton, roughly the same as what other countries use today.

Joining Wiener in the opinion in Louisiana v. Biden (No. 22-30087) were Judges Stephen Higginson and Cory Wilson.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.