EPA Carbon Mandates Generate Bad Economic Forecast
12/15/15
The University of Montana recently released an analysis, an economic impact statement, if you will, commissioned by NorthWestern Energy, of the economic costs Montanans will incur as a result of Obama Administration carbon dioxide mandates imposed on the state through the Clean Power Plan, the authority for which the administration has asserted derives from the Clean Air Act. A summary excerpted from the University of Montana report follows.
The Economic Implications of Implementing the EPA Clean Power Plan in Montana
On August 3, 2015, the U.S. Environmental Protection Agency released its final rule for its Clean Power Plan directed at reducing emissions of greenhouse gases. As was the case with the preliminary rules announced in June 2014, those rules require states, including Montana, to submit plans that would result in reductions in state carbon emissions from new and existing electric generation facilities that hit a specified target by year 2030.
While there is in principle some flexibility in how states construct plans to comply with the emission targets set forth in the rule, the final rule’s state-specific mandates for CO2 reductions for Montana power producers have been set at a level that drastically reduces the choice set for our state. A comparison of CO2 emission rate targets for year 2030 to their baseline levels by state shows Montana’s 47 percent reduction to be the highest of any state included in the rule.
The EPA Clean Power Plan final rule–often referred to as 111(d) for the portion of the Clean Air Act that is cited as giving the Agency the authority for its actions–is the most significant economic event to occur in Montana in more than thirty years. Compliance with the rule raises the very real prospect of the premature closure and decommiss-ioning of the Colstrip Steam Electric Station, a coal-fired generator in southeast Montana that is the largest industrial facility in the state. It will also require significant new investment in replacement generation assets, as well as in the transmission system improvement necessary to support them. As the regulation rolls out nationwide, it will significantly impact the price of wholesale and retail electric power.
As a means of helping Montana policymakers, businesses and households understand the implications of 111(d), NorthWestern Energy contracted with the Bureau of Business and Economic Research at the University of Montana to conduct an economic analysis of the impacts on the state economy that could result from actions necessary to comply with the rule. The findings of that analysis are contained in this report.
Summary of Findings
While Montana’s final compliance plan for 111(d) is not due to be submitted to the EPA until next year, any compliance scenario will contain three changes from the status quo:
—the closure and decommiss-ioning of existing generation facilities in Montana, with consequences for upstream (e.g., coal mine) and downstream (transmission line) assets, required to reduce CO2 emission rates in compliance with the rule;
—the construction and operation of new, less CO2-intensive generating facilities, with the necessary infrastructure (pipelines, transmission system improvements) to maintain the safe, reliable provision of electric power to Montana businesses and households, and
—changes in wholesale and retail electricity markets that reflect capital investments and the changing mix of generation regionally and nationally.
The size of the required CO2 reductions imposed by the Clean Power Plan, and limited options available raise the prospect that compliance will result in the complete closure of the Colstrip generating station. Indeed, the scenarios that leave portions of that facility in operation hinge on outcomes–such as the availability of low-cost emissions credits in sufficient quantities from markets that do not exist today –that depend in part on outcomes and events beyond our control. Thus the compliance scenario presented here is timely and relevant.
We have developed a specific scenario of compliance that contains each of the components listed above, in conformance with the rule.
The (U of M) Bureau of Business and Economic Research (BBER) used an economic model specifically calibrated to the Montana economy, to project two economic futures for our state. The first is a reference, status quo projection. The second is a projection of a future under a scenario of compliance with 111(d). This future reflects all of the actions required to comply with the final rule, as well as changes in wholesale and retail electricity markets that result. These changes bring the economy to a different, lower, resting point as investment flows, population, and spending by businesses, governments and households respond.
The Economic Implications
The difference between these two economic futures measures the economic impact of changes made to comply with 111(d). The impacts represent a significant loss to the state economy of jobs, income, output, tax revenues and population. Within three years of implemen-tation of the compliance plan, the state economy
—suffers a job loss of more than 7,100 jobs, reflecting not only the regular and contractor jobs at all four units of the Colstrip generation facility, but also the neighboring coal mine, as well as the local government jobs supported by the significant property tax bills those facilities pay, and all of the changes elsewhere in the economy that result from those losses;
—incurs a loss of over $500 million in annual income received by Montana households which is made larger by the fact that the jobs lost due to 111(d) pay well in excess of the Montana average;
—realizes a loss of more than $1.5 billion in gross output (sales) by Montana businesses and other organizations, as Montana swings from being a state with significant energy exports to a state that must rely on imported power from other states and regions in periods of heavy load or during generation curtailments;
—ultimately realizes a decline in population, particularly in working-aged families and their children, as economic opportunities in our state worsen relative to other states.
The economic impacts of 111(d) in Montana have a wide footprint, both geographically and across industries. But their effect is especially pronounced in eastern Montana, where both the Colstrip generation facilities and the Western Energy Company coal mine that supplies them are located. The more than 4,000 jobs lost in eastern Montana counties as a result of 111(d) comprise almost 7 percent of all jobs in the region, and two thirds of the decline in output that occurs statewide is incurred by businesses and other organizations in the eastern 14-county region of the state. Yet as the figure below makes clear, other regions of the state are significantly impacted by 111(d), through the impact of higher electricity prices as well as declines in state and local property tax revenues.
The impacts of 111(d) in Montana are large in some industries you would expect, namely, utilities and mining. The shutdown of the Colstrip SES and the closure of the Western Energy Company mine contribute to those declines directly—But these are not the two industries that are hit the hardest in terms of job losses in year 2025. The job decline of 1,760 jobs suffered by construction industries and the 1,510 jobs lost in state and local government are significantly larger than those two sectors which would seem to have a closer connection to the power plant itself.
The relative size of these negative job impacts among industries comes about for several reasons. First, both utilities and mining are capital-intensive industries, and so the jobs lost understate the economic scale of the changes. The construction industry is just the opposite, with labor representing a large portion of total industry expenses. Declines in that industry come about–especially in the beginning of the compliance period–as the sudden decline in demand creates a situation where both residential and commercial stocks of capital are much higher than needed. Government job declines occur due to the significant declines in both population, which reduces demand for government services, and property tax and other tax revenues, which fund those services.
There is considerable variability in the impacts of the compliance scenario over time, although for the entire period studied by BBER those impacts remain large. Before 2022 there are some positive impacts on the economy as construction projects for a new gas turbine, gas pipeline and new transmission infrastruc-ture that is necessary to serve Montana customers is underway. From 2022 forward, however, impacts are dominated by (i) the upstream and downstream impacts of the closure of Colstrip, as well as the facility’s contribution itself, whose sizable economic contributions were noted in earlier research (Barkey and Polzin, 2010), (ii) the rate increases borne by Montana businesses and residents to pay for the significant new investment needed to provide replacement baseload generation, and (iii) the changes in electricity prices borne by all wholesale and retail purchasers of electrical power as market prices for merchant power move upwards.
Not all of the changes which are due to 111(d) produce negative impacts. The construction and operations of a 250 MW combined cycle combustion turbine, including building a new pipeline to serve its natural gas needs, the remediation activities at the Colstrip site, and even the reduction NorthWestern Energy’s property tax bill from shedding generation assets that is partially passed to rate payers all result in some increases in economic activity. But the net result of all the changes, as is demonstrated above, is profoundly negative for every year studied after year 2022.
Other important findings of the economic impacts include:
—With income of Montana households down by more than half a billion dollars per year due to the effect of 111(d), the spending power of Montanans as a group is significantly lower. The annual after-tax income of Montana households is lower in total by $440.60
—Compliance with the 111(d) final rule has a disproportionate impact on higher income jobs. The average earnings of the jobs lost in year 2025 is almost $66,000 per job, growing to nearly $80,000 per job (expressed in terms of 2015 spending power) by year 2045. This takes our state in the opposite direction we need to go to close the earnings gap with other states.
—The tax implications of 111 (d) compliance are significant, for at least two reasons. First, electric power generation and coal mining are capital intensive businesses, with a large footprint in the mix of taxable value as part of local property taxes. Also, the coal business contributes significantly to state tax receipts through severance taxes and lease payments. We estimate the decline in state and local tax and non-tax revenues due to 111(d) to be in excess of $145 million per year in 2025.
—The loss of jobs and job opportunities from implementation of 111(d) in Montana results in working age people leaving the state, taking their children and future children with them. The decline in school-aged population, particularly in smaller communities, could challenge the viability of schools. The population declines due to 111(d) peak at over 10,700 people overall, with school-aged populations declining by about 3,000.
The scale of these negative economic impacts can be seen by comparison with other economic events. The half billion dollar decline in personal income sustained in year 2025 due to the implementation of the Clean Power Plan in Montana is roughly half as large as the decline in personal income that occurred in 2009 in Montana as a result of the Great Recession. The loss in personal income due to 111(d) is greater than the total personal income of all but 12 Montana counties.
The question for many is, why are the impacts described here so sharply negative? We believe that there are several reasons.
The first and perhaps the most obvious is that the operations of the Colstrip SES ultimately support a lot of economic activity across the state. That was the clear conclusion of the 2010 study, and those impacts are quite apparent in this analysis as well. In terms of economic activity, this facility–including the adjacent mine–is a powerful generator of wealth as well as electricity. Its purchases are dominated by a made-in-Montana product, coal. It is capital intensive and thus pays high wages, and it exports a high value product outside the state, thus bringing income from the spending of those outside Montana back to the state.
Closing that facility before the end of its productive life terminates those benefits. Bringing on new capacity–and paying for it–before the end of the old capacity’s productive life entails higher costs than would otherwise be the case.
Another factor that is prominent in these results is what might be call the “terms of trade” between coal-fired generators and other sources of power generation. What replaces Colstrip has a much smaller economic footprint. Not only is the natural gas-fired 250 MW generator considered in this study much smaller from a capacity point of view, the number of jobs it supports is a tiny fraction of those supported by Colstrip. Part of this is due to the fuel and the technology–for example, there are no material-handling processes at work in a natural gas plant as there are for a coal-fired generator.
Finally there is the important role that the Colstrip generator plays in our state’s power grid. Because of Colstrip, we have a high capacity 500 KV line that greatly facilitates the import and export of power. Because of Colstrip, purchasers of power in the state see lower prices. Because of Colstrip, Montana has been a net exporter of electrical energy for more than 30 years. All of these advantages could be seriously challenged, if not reversed, in a future that complies with 111(d), and that is why the ultimate economic outcomes have turned out as described in this report.
Direct Effects of the Clean Power Plan
Economic changes of the magnitude reported here come about because of the nature of the changes required as a result of the Clean Power Plan. It is useful to categorize these changes into three groups:
—Direct effects: changes in income flows, tax payments, employment, and other spending resulting from closures or new investments conducted by power producers themselves to bring CO2 emissions rates into compliance;
—Indirect effects: changes in non-utility businesses closely linked to generation activity (e.g., the Western Energy Company mine);
—Induced effects: the ultimate reaction of trade flows, investment, migration, and spending in the economy at large by consumers, businesses and governments as they respond to changes in sales, job opportunity and demand.
At the beginning of this causal chain are these direct effects—the sequence of decisions and changes deemed necessary to comply with the final rule. While the state’s plan has not been specified, the dominance of coal-fired generation in Montana’s overall portfolio of generating assets, and 111(d)’s target of a 44 reduction by year 2030 in CO2 emission rates by year 2030 appears unachievable without closure of coal fired generation. The scenario we have analyzed in this study has three components:
—the premature retirement of generation and transmission assets, including the closure of units 1-4 of the Colstrip SES, which go offline in 2022, closure of the adjoining Western Energy Company coal mine, and the deactivation of the 500 KV transmission line west of Colstrip.
—construction and operation of new, gas-fired generation and transmission to serve Montana load;
This includes the construction and operation of a 250 MW CCCT in Billings, with construction of a gas supply line to serve its gas needs and other connecting infrastructure, and the construction and operation of a 230 KV transmission line between Three Forks and Great Falls.
—changes in regional/national electricity markets due to 111(d) implementation;
Based on a NERA state-by-state analysis of the old, preliminary rule, we project that average electricity prices will go up by an average of 12 percent nationwide and by 16 percent for Montana.
Compliance with 111(d) combines actions that have a dispro-portionate impact on eastern Montana (closure of Colstrip) with other changes that propagate statewide (loss of property/severance tax revenues, higher electricity prices). The results of this analysis reflect the nature of these direct impacts.
Estimates of Economic Impacts
The basic tool used in this study to assess the economic implications of 111(d) is an economic model, calibrated to represent the interactions in the Montana economy, leased from Regional Economic Models, Inc. The REMI model is one of the best known and most respected analytical tools in the policy analysis arena, and has been used in more than a hundred previous studies as well as dozens of peer-reviewed articles in scholarly journals. It is a state-of-the-art econometric forecasting model.
The model used in this study disaggregated the state economy into five regions: Northwest, Southwest, North Central, South Central, and Eastern. It explicitly recognizes trade flows that exist between these regions, as well as between the regions and the rest of the world.
The model utilizes historical data on production, prices, trade flows, migration and technological change to calibrate the relationship between five basic blocks of the regional economy: output, labor and capital demand, population and labor force, wages and prices and market shares. The changes in production, labor demand and intermediate demand caused by the changes that occur due to 111(d) cause these blocks of the economy to react and adjust to a new equilibrium. As described above, the difference between the baseline and the alternate scenario is the ultimate impact of compliance with the Clean Power Plan.
The essential philosophy of the model is that regions throughout the country compete for investment, jobs, and people. When events occur in a region, they set off a chain reaction of changes where dollars flow towards better investment and production opportunities, followed over time by a flow of workers and households towards employment opportunities and higher wages. The model embodies an 82-sector input-output matrix that describes the technological interdependence of production sectors of the economy, as well as extensive trade and capital flow data to determine the share of each sector’s demand that can be met by local production.
Conclusion
This study reports on what could potentially be the largest economic event to occur in Montana in more than three decades. The sequence of events that would have to occur to bring the emission rates of Montana’s electric generating facilities into compliance with the target rates called for in the EPA’s Clean Power Plan–percentage reductions which are higher in Montana than any other state in the country–could exact a toll on economic activity in terms of jobs, income, sales, tax revenues and population. While these economic impacts would fall most heavily on eastern Montana, the nature of the changes required by the regulation as well as the changes in electricity prices overall would impose sizable negative impacts on all regions of the state.
Our basic finding is that the circumstances of the Montana economy, the central role played by coal-fired generation on our power grid, and the size of the CO2 emissions reduction required by 111(d) combine to make compliance with the regulation costly to the state economy in terms of jobs, income, production and sales.
Bureau of Business and Economic Research, University of Montana