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Analysis of Michigan's Options Under the EPA's Clean Power Plan

On August 3, 2015, the U.S. Environmental Protection Agency (EPA) issued the Clean Power Plan (CPP) final rule. The goal of the CPP is to reduce carbon dioxide (CO2) emissions from existing coal- and natural gas-fired power plants across the country. Through the CPP final rule, the EPA allows states to develop their own plans for achieving their CPP emissions goals.

The Niskanen Center retained Anderson Economic Group (AEG) to evaluate potential regulatory scenarios that would allow Michigan to achieve compliance under the EPA’s Clean Power Plan rule. In this report, we perform a multi-year analysis of the economy and electricity demand in Michigan under three scenarios:

  1. A baseline scenario that accounts for ongoing changes in power generation and energy efficiency, as well as other economic trends, but does not assume any additional state measures to comply with the EPA’s CPP final rule;
  2. A cap-and-trade system in which permits to emit CO2 to generate electric power are sold, increasing prices of electricity and generating revenue to the state government; and
  3. A carbon tax implementation in which an excise tax on CO2 is levied, increasing prices of electricity and generating revenue to the state government.

For both CPP compliance scenarios, we identify potential options for revenues, including a specific cut in Michigan state taxes, and estimate the net effects on Michigan’s economy and electric power sector.

Among the findings are:

  • Under a baseline scenario, Michigan's economy continues to grow, with nominal personal income increasing to $605 billion by 2030. In this scenario, the electric power sector is likely to generate 62 million short tons of CO2 emissions by 2030.
  • The EPA final rule requires covered power generators to emit no more than 48.1 million short tons of CO2 in 2030. This implies reductions in emissions that are far too large for Michigan's power generators to comply with the EPA's final rule under the “no new policy” baseline.
  • Under both the modeled cap-and-trade and carbon tax scenarios, Michigan's power plants would incur an additional $2.2 billion in annual regulatory emissions costs by 2030. The resulting increase in electrical prices and reductions in electricity demand would reduce emissions from the electric power sector to about 48 million short tons in 2030.
  • Both of the modeled regulatory scenarios would slow the economy and reduce personal income. In 2030, we estimate that Michigan's personal income would be over 12% lower under the cap-and-trade scenario than under the baseline and over 10% lower under the carbon tax scenario.

 

For the Niskanen Center’s press release for this report, visit niskanencenter.org.

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