The Environmental Protection Agency (EPA) has released its initial plan to cut carbon emission by 30%, in line with a pledge made by President Obama early in his presidency, with plans to finalize the rules by June 2015 requiring states to comply by June 2016. While the reductions aren’t as extreme as they seem at first glance, the rules will still meet legal opposition as the EPA changes its approach to regulating air pollution.

Carbon Emissions coal prices

Carbon emission measured against 2005 levels

One of the energy industry’s biggest worries as it waited to hear the EPA’s proposal was the year it would use as a baseline. Energy consumption is closely related to economic activity, and carbon emission have fallen significantly in recent years because of the recession. Since the EPA has decided to measure against 2005 levels, the country has already reduced carbon emission by 15%, so the 25% and 30% reductions that we have to hit by 2025 and 2030 respectively aren’t quite as harsh as they sound.

The EPA is also giving states plenty of options including cap-and-trade deals both between power plants within a state and between states, converting to natural gas or nuclear energy, conservation efforts and more.

But even with the padded numbers and built in flexibility, the EPA can (and likely does) expect legal challenges to the way that it is interpreting Section 111(d) of the Clean Air Act, a statute that has been mostly unused until now and that doesn’t have much legal precedent behind any particular interpretation.

Inside v outside the fence

“Critics of the EPA plan will likely focus on the legal inability for the EPA to set compliance mandates beyond individual existing electric power plants and argue it can only set mandates for physical improvements made on the plant itself,” Sterne Agee analysts Michael S. Dudas and Satyadeep Jain. “We note that Appellate and Supreme Courts have more often than not give strong deferential abilities to regulatory entities such as the EPA.”

Utilities make a distinction between ‘inside the fence’, what happens on the premises of a power plant, and ‘outside the fence’, which refers more broadly to all of a company’s operations, and critics argue that the EPA has limited its regulatory actions to what happens ‘inside the fence’ in the past. Setting state-wide goals, and allowing systems like cap-and-trade, are ‘outside the fence’ rules that require the EPA to interpret its mandate more broadly than it has in the past. Dudas and Jain don’t necessarily think that the new rules will be overturned, but they do expect to see legal pushback.