Trapped Tar Sands or Coal: Obama to Decide

On June 14, Bloomberg Businessweek reported that the Obama administration is planning on rolling out a climate package in July, which may or may not be coupled with his answer on the Keystone XL pipeline. President Obama reportedly told a group of donors at a closed-door fundraiser that he will unveil a series of climate proposals in the coming weeks.

In his State of the Union address earlier this year, the president vowed to take executive action to reduce greenhouse gases if Congress failed to act. Congress has predictably done nothing, and so environmental groups have been urging President Obama to live up to his commitment.

Executive action would likely come through the Environmental Protection Agency (EPA). However, earlier this year, the EPA missed a deadline to finalize greenhouse gas limits for new power plants, which would have effectively banned new plants using coal. The EPA argued that it needed time to revise the rule in order to withstand legal challenges.

Businessweek reports that the upcoming climate proposals may include not only the previously proposed limits on new power plants, but also greenhouse gas limits for existing power plants – a much bolder course of action. After all, the EPA limits for new power plants would essentially confirm a fait accompi: it is increasingly difficult for utilities to build new coal-fired power plants anyway – even without EPA greenhouse gas limits – due to their cost.

Although new coal plants are expensive, the same is not true for existing power plants. Nearly three-quarters of all coal plants in the United States are at least 30 years old. Many of these plants are paid off, and so operating them is cheap. This creates the incentive for the utilities to run the plants as long as possible. Left to their own devices, the utilities would retire these plants gradually over time. EPA limits on existing plants could quickly and dramatically alter this equation by forcing many coal plants to shut down earlier than scheduled.

Huntington Power Plant, Utah (Photo: Utah State Government)

The other sticky issue is the Keystone XL pipeline. Environmental groups have ratcheted up the pressure on the president to reject the pipeline. A recent report from Goldman Sachs concluded that the pipeline was key to the Canadian tar sands being economically viable. Without the pipeline, the tar sands could be “trapped in the province of Alberta.” In this scenario, RBC Capital Markets predicts that $9 billion in future investment over the coming decade would be deferred.

It is a no-win situation for the White House. Should the president approve the project, he will do irreparable harm to his support from environmentalists, but blocking it will raise the ire of the energy and gas lobby and its allies in Congress.

Based on the President’s comments to private donors, it seems his administration is leaning towards approving the pipeline but coupling it with the EPA limits on greenhouse gases. He may somehow seek to make one conditional on the other. However, this will likely spark a firestorm in Congress, as a group of 24 Republican senators sent a letter to the president in May warning against such a move. “We are concerned by recent proposals that you pair approval of the Keystone XL pipeline with enactment of new environmental regulations and energy taxes,” they wrote.

On balance, if the EPA can actually implement limits on carbon dioxide, the benefit to the climate may considerably outweigh the downsides of approving the pipeline.

Still, after years of putting climate change on the backburner, the president may be ready to make these issue a priority, or at least take some action to address them.