The nation's power companies are advocating for a large and flexible carbon trading system under a federal plan to cut greenhouse gas emissions, but environmental advocates say certain restrictions are needed to ensure the best climate outcomes.

U.S. EPA will need to weigh both sets of concerns in finalizing model trading rules and determining what to do in states that don't write their own blueprints for cutting emissions under the Clean Power Plan, comments submitted to the agency last week made clear.

Hundreds of pages of feedback from key groups reveal a brewing battle over how companies should be able to use carbon trading to meet their individual emissions standards -- one that could divide the country into a patchwork of different trading systems that might result in higher costs.

EPA says trading would lower costs, add flexibility and facilitate compliance, the investor-owned utility trade group Edison Electric Institute points out.


"However, full attainment of these benefits is dependent on the development of a broad, transparent and competitive emissions trading market," EEI said in comments. The group says the model rules "take many steps" to do that but also may need to be strengthened to "fully realize competitive markets" and to "not constrain state flexibility."

The American Public Power Association urged similar revisions. If the rule holds up in court, "the workability of the trading programs may be the only economic protection left for many consumers," APPA said.

Environmental advocates, on the other hand, argue EPA should favor certain kinds of carbon trading that would encourage more carbon cuts and greater investment in green energy over time.

The Sierra Club said the flexibility for states to craft their own emissions reduction strategies may help ensure against power outages and limit costs, but it "comes with a price."

"Some compliance pathways achieve greater emission reductions than others, and many states may well choose state plans that do not yield the same quantity of emission reductions that might occur under other plan forms," the Sierra Club wrote.

Fighting the rule -- with backup plans

EPA proposed the model rules and federal plan in August while issuing the final version of the Clean Power Plan, which asks states to find ways to scale back greenhouse gas emissions from power plants starting in 2022.

It's unclear at this point whether any states might require a federal plan. Even many of the 27 states that are challenging the rule in court are working on backup options and will request a two-year extension in September to send EPA a plan.

States supporting and opposing the Clean Power Plan used the comment deadline as another chance to further their legal cases.

North Dakota, which faces some of the toughest carbon reduction targets under the final rule, laid out a seven-point argument against the regulation, saying "the flaws with EPA's proposed rule are many."

But South Dakota, which is suing along with North Dakota and other states, offered some constructive criticism, expressing concern about the agency's "one-size-fits-all" approach in the federal plan.

Rather than impose an inflexible regulation, South Dakota recommended that the agency "conduct a case-by-case analysis of all options to ensure what EPA implements in a state will provide reliable and affordable electricity not only in that state but the neighboring states."

Both industry interests and environmental groups shared that concern.

One-size-fits-all vs. a tailored approach

States are exploring using various kinds of trading systems, regardless of whether they adopt EPA's model rules or get stuck with a federal plan (ClimateWire, Jan. 19).

Coal plant operators that fall short of their goals could pay to take credit for emissions reductions made in other parts of the power sector by shifting to natural gas or building up renewable energy, for example. The trading systems would incentivize the least expensive compliance paths, economists say.

States can pick between capping emissions or achieving an average rate of carbon based on the amount of power produced. And the two types of systems cannot link.

EPA would like to pick one type of plan as the federal version.

EEI, like South Dakota, says EPA should tailor any federal plan required in a state to account for regional differences in how neighboring states eventually decide to comply.

Environmental advocates argued the same. They said any federal plans should be tailored to a state's specific regional situation.

At the same time, the Natural Resources Defense Council, the Sierra Club and other environmental groups widely favor capping emissions, or using what is known as "mass-based" trading. They want to limit emissions from both existing and new plants to avoid a natural shift to new facilities that might undermine the regulation. And they believe trading systems should auction allowances and use the proceeds to further climate goals, rather than distributing them based on historical generation.

Green groups: no free allowances

All of those arguments could be political sticking points in states writing plans, and they could lead to incompatible trading systems.

For example, the nine-state Regional Greenhouse Gas Initiative, a Northeast cap-and-trade program, wants EPA to encourage all of those same elements environmental advocates support. They want EPA's federal plan to look like the RGGI system, according to comments. RGGI may only link with states that assimilate to their sort of trading regime.

EPA's Thursday public comment deadline was the first chance for a wide variety of interests to weigh in on carbon trading's role in the Clean Power Plan -- which EPA greatly expanded under the final rule.

Though united in their support for the climate regulation, major environmental groups outlined a series of concerns with the agency's proposed framework.

For one, they objected to EPA's proposal to give out emissions allowances to power plants based on how much electricity they historically have produced.

Reviving a long-standing debate in the cap-and-trade world, the NRDC argued that freely allocating "creates the potential for windfall profits" and "fails to promote investment in non-emitting resources."

Advanced Energy Economy said EPA might be rewarding "utilities locked into the electricity system of the 20th century and [penalizing] those moving towards the electricity system of the 21st century."

Grid operators share market worries

The groups want EPA to require states to auction carbon allowances and use the money toward achieving further emissions reductions.

They also are urging the agency to guard against carbon "leakage," a situation where utilities might shift electricity generation to the new natural gas plants that are not being regulated along with existing sources of carbon, rather than turning to renewable energy.

Under the Clean Power Plan, states writing their own plan must either show they will prevent that shift or use a "new source complement" to limit carbon from new plants by using a higher cap that includes them. The Sierra Club says EPA should require that new source complement.

Environmental justice groups, meanwhile, have been ramping up attacks on carbon trading, raising concerns that it will help keep coal plants online in low-income and minority communities.

The New York-based WE ACT for Environmental Justice wrote in its comments that "any type of trading, allowances or credits should be prohibited from being exchanged in any areas where the air is already compromised."

Grid organizations have been big proponents of carbon trading as a way to prevent localized power shortages as the sector continues a yearslong transition away from fossil fuels and toward renewable energy.

But they also issued their concerns about the trading rules.

Disputing reliability

In the final rule, EPA required states to conduct reliability reviews as they write their plans.

A coalition of grid organizations -- including the PJM Interconnection LLC, Midcontinent Independent System Operator, California Independent System Operator and Southwest Power Pool -- said in comments that a federal plan should do the same. They also argued for a "reliability safety valve," a backstop in case allowances or credits for some reason are not available or are too expensive for companies in states operating under a federal plan.

MISO said in separate comments that EPA must consider "the availability of functioning carbon trading markets."

"A trading ready plan is only as good as the trading options that exist to facilitate the ability to obtain allowances or credits, especially if they are needed to manage a reliability issue," MISO said.

The National Rural Electric Cooperative Association similarly argued for more reliability protections. NRECA has insisted trading might work for big utilities with diverse power portfolios, but it won't be as easy for small, coal-reliant co-ops.

On that point, environmental groups and renewable energy advocates disagreed.

"The proposed federal plan will not create reliability problems and thus no additional reliability provisions are necessary," NRDC wrote. "Indeed, additional unnecessary provisions could prove counterproductive by unnecessarily delaying compliance."

Reporter Daniel Cusick contributed.