Reed Smith's 4th Quarter Climate Change Report: Slides and Audio Available Here

This post was written by David Wagner.

If you missed Reed Smith's Quarterly Climate Change Teleseminar on December 16, 2010, feel free to listen to an audio recording of the event while watching the slide show. We discussed:

  • Significant developments at COP16 (Jennifer Smokelin)
  • The Impact of California's new "Proposition 26" on the implementation of California's Global Warming Solutions Act (aka "AB 32") (Eric McLaughlin)
  • USEPA's issuance of PSD and Title V Permitting and BACT Guidance for GHG sources subject to the "Tailoring Rule" (Larry Demase)
  • Recent Carbon Capture and Storage Developments (David Wagner)
  • Issues and problems to consider regarding 2011 GHG emissions monitoring & reporting (Douglas Everette)

Reed Smith's (Free) Quarterly Climate Change Teleseminar is December 16

This post was written by David Wagner.

Please join us on Thursday, December 16 from Noon to 1 p.m. (EST) for our quarterly report on climate change. In this one-hour teleseminar, Larry Demase, Jennifer Smokelin, Todd Maiden, Douglas Everette and Dave Wagner will span the globe and discuss:

  • Significant developments at the global climate change conference, COP 16
  • The Impact of California's New "Proposition 26" on the Implementation of California's Global Warming Solutions Act (aka "AB 32")
  • USEPA's Issuance of PSD and Title V Permitting and BACT Guidance for GHG Sources Subject to the "Tailoring Rule"
  • Recent Federal Requirements Related to Carbon Capture and Storage
  • Issues and Problems to Consider Regarding 2011 GHG Emissions Monitoring & Reporting

To register for the event, please click here.

BACT Guidance Analysis: What to Expect Regarding Pending Title V Permit Renewal Applications and Greenhouse Gas Emissions

This post was written by Jennifer Smokelin.

As the first of several “niche” articles analyzing the U.S. Environmental Protection Agency’s (USEPA) “Prevention of Significant Deterioration (PSD) and Title V Permitting Guidance for Greenhouse Gases” (BACT guidance), this blog post takes a look at a specific Title V issue: Title V permitting for sources with pending Title V renewal applications not issued in draft before January 2, 2011 (“Renewal Sources”). 

In the BACT Guidance, Some Things Were Expected

After reviewing the new BACT guidance and the reaction to it, most agree that it does not come as a surprise – for BACT, most expected a recommendation that states focus primarily on energy efficiency while still fully considering any new emerging technologies. We also expected a few other determinations. With regard to Title V, USEPA states that during the first six months of the Tailoring Rule, from January 2, 2011 to June 30, 2011 (“Step 1”), no sources will be subject to Title V permitting requirements solely on the basis of their greenhouse gas (GHG) emissions. Of course, sources that obtain a permit during this time period due to emissions of other pollutants will have to list any applicable PSD requirements for GHGs in their Title V permits. And beginning on July 1, 2011 (“Step 2”), all sources will have to obtain a Title V permit so long as they have the potential to emit 100,000 tons per year of carbon dioxide equivalent and 100 tons of GHGs on a mass basis (remember that sources have up to a year to apply for a Title V permit after commencing operations). Finally, USEPA reiterates that USEPA rules do not require sources to pay Title V fees based on GHG emissions.

Some Surprises in the BACT Guidance

A question is raised when an existing source, chugging along with no modifications, applies to for renewal of its Title V permit. What if the existing source submitted a renewal application, but has not been issued a renewed Title V permit and does not expect one before January 2, 2010. What provisos with regard to GHG emissions can USEPA insert into the draft permit once it is issued in Step 1?[1]

Absent state SIP revisions that address this issue, it appears the answer is none – but we caution that each renewal may require individual scrutiny. This is an issue not directly addressed by USEPA in the BACT guidance (or the Tailoring Rule, for that matter) – yet it is an area that affects the most sources (given the economy, there are certainly more renewals out there than new sources) and thus where the states (and sources) are desperately seeking guidance. It also appears that USEPA can not legally require a supplement to the application to include information regarding GHGs in Step 1.

USEPA’s failure to address GHG emissions in the permit renewal process is a surprise because the Tailoring Rule and the BACT Guidance both state that existing major sources that do nothing to change their operations will be subject to GHG regulation in Step 1 if the existing major source applies for, renews or revises its Title V permit. (Tailoring Rule, p. 54; BACT guidance p. 53 (emphasis added)). 

USEPA has said that Title V generally does not add new pollution control requirements but does require that each permit contain all “applicable requirements” under the Clean Air Act for the Title V source. Further, USEPA states that after January 2, 2010, a source will need to supplement its Title V permit application to include (1) citation and description of any “applicable requirements” (as defined 40 CFR 70.2) for GHG; (2) any information pertaining to monitoring or compliance activities resulting from “applicable requirements” for GHGs; and (3) any other information “considered necessary to determine the applicability of, and impose, any applicable requirements of GHG.” BACT guidance, p. 54. In the case of a renewal source, there is a strong argument (outlined below) that none of these applies.

No BACT/PSD in a Renewal Permit

The question now becomes, what are “applicable requirements” pertaining to GHGs for a renewal source during Step 1? Note that BACT is not applicable to a renewal source since BACT by definition is only applied to new or modified sources. This is consistent with the definition of “applicable requirements” at 40 CFR 70.2 as well as consistent with historical application of the Clean Air Act. In 1977, existing sources, the ones already up and running in 1977 - even the large U.S. fleet of old coal power plants built in the ’40s, ‘50s, and ’60s - were not brought under New Source Review (which is where BACT comes from). They were “grandfathered,” and allowed to operate without a permit until the existing facility made a “major modification.”

No Mandatory GHG Reporting Requirements in Renewal Permit

USEPA also states specifically in the BACT guidance that GHG reporting requirements established under USEPA’s mandatory reporting rule for GHGs (40 CFR part 98) are currently not included in the definition of “applicable requirements” under 40 CFR 70.2, 71.2. Thus, USEPA concludes that the mandatory reporting requirements “do not need” to be included in the Title V permit. (BACT Guidance p. 54). Note, however, that USEPA understates the issue: to the extent these requirements are included by overzealous (or inattentive) permit issuers, they are subject to challenge for removal. Clever states may try to “back door” these requirements by including these mandatory reporting requirements in the state implementation plans (SIPs) approved by USEPA, since “applicable requirements “ for purposes of Title V includes “[a]ny …requirement provided for in the applicable implementation plan approved or promulgated by EPA… including any revisions to that plan promulgated in part 52 of this chapter” but inclusion on that level may be subject to challenge.

If There’s No BACT/PSD and No Mandatory Reporting, What’s Left?

In Step 1 of the Tailoring Rule, nothing. Renewal sources should be issued their renewal permits without having: (1) to supplement their permit application regarding GHGs; or (2) the permits themselves include any requirements pertaining to GHGs. Keep in mind, however, that the approach changes on July 2, 2011 (Step 2) – so we suggest you try to get your renewal applications issued in draft before then!

If you have questions regarding your Renewal Source or questions regarding how the game changes in Step 2, contact Todd Maiden, Larry Demase, Jennifer Smokelin and David Wagner.

[1] The reason the fact that “draft permit has not been issued prior to January 2, 2011” is important because if the existing major source applied for renewal or revision but the draft Title V permit has not been issued as of January 2, 2011, then the source must revise its application to address GHGs under the common doctrine of "Where additional applicable requirements become applicable to a source after it submits its permit application, but prior to release of a draft permit, the source is obligated to supplement its application." (Tailoring Rule, page 73)

Federal Takeover Averted? Recent Survey Reports that 49 U.S. States Will Have GHG Permitting Programs Ready to Go by January 2011

This post was written by David Wagner.

Although this doesn’t make anything official, it’s an interesting development: the National Association of Clean Air Agencies (NACAA) reported yesterday that, with the onset of greenhouse gas (GHG) permitting only two months away, every state but one -- Texas -- is poised to ensure that sources can obtain preconstruction permits under the Clean Air Act come January 2, 2011.

As we’ve discussed on the blog, certain larger GHG emission sources will be subject to permitting requirements for planned construction projects under the Tailoring Rule starting on January 2, 2011. While most states already have the authority to permit GHGs under preconstruction permit – or Prevention of Significant Deterioration (PSD) – programs, USEPA proposed two rules to fill gaps in 13 state permitting programs that do not allow for the regulation of GHG emissions from industrial sources. The first proposed rule seeks to allow states that are not prepared to regulate GHGs to revise their State Implementation Plans. The second rule outlines USEPA's plan to establish a Federal Implementation Plan that would take over permitting programs in states that do not meet the requirements by January 2011.

NACAA, which is an association of air pollution control agencies in the United States, reviewed the air permitting program responses of the 13 states at issue. According to the NACAA report, air permitting agencies in all states on USEPA’s list (except for Texas) “have indicated that they will either revise their PSD rules by January 2, 2011 or very shortly thereafter, or accept a Federal Implementation Plan (FIP) that will give EPA authority to issue the GHG portion of PSD permits until state rules are revised." This provides some assurance that sources required to apply PSD controls to their GHG emissions will be able to obtain the necessary permits and avoid construction delays. NACAA’s state-by-state summary is available here.

USEPA Postpones Public Hearing on Proposal to Take Over Certain States GHG Air Permitting Programs

This post was written by Jennifer Smokelin and David Wagner.

On August 23, 2010, the U.S. Environmental Protection Agency (USEPA) postponed the public hearing on its plan to take over greenhouse gas (GHG) permitting programs related to construction or modification projects. The hearing was scheduled to be held in Arlington, VA on August 25, 2010, and was delayed because the draft rule has not yet been published in the Federal Register. USEPA has not set a new date for the hearing. As we discussed in a blog post last week, USEPA has proposed two rules to fill gaps in 13 state permitting programs that do not allow for the regulation of GHG emissions from industrial sources. The first proposed rule seeks to allow states that are not prepared to regulate GHGs to revise their State Implementation Plans. The second rule outlines USEPA's plan to establish a Federal Implementation Plan that would take over permitting programs in states that do not meet the requirements by next January, when USEPA’s Tailoring Rule would be in effect.

Regulated Entities in Allegheny County (PA) and Certain California Counties, Be Aware: USEPA May Take Over GHG Air Permitting Programs Related to Construction or Modification Projects

This post was written by Jennifer Smokelin and David Wagner.

Here's the issue:  Certain larger emission sources of greenhouse gases (GHGs) will be subject to permitting requirements for planned construction projects starting January 2, 2011.  In 13 states, the permitting programs (known as the Prevention of Significant Deterioration (PSD) permitting program) do not apply to sources of GHGs.  Thus, emission sources in those states would be unable to obtain a PSD permit that covers GHG emissions, and would potentially be unable to undertake construction or modification projects on or after January 2, 2011.  The states are Alaska, Arkansas, Connecticut, Florida, Idaho, Kansas, Oregon, Texas, and portions of California, Arizona, Kentucky, Nebraska, and Nevada.

Here's USEPA's proposed solution:  The Agency recently proposed two rules that would fill the gap in the permitting programs for these 13 states: (1) the SIP call and (2) the FIP.  Under the first proposed rule, the U.S. Environmental Protection Agency (USEPA) would issue a "SIP call," requiring the 13 states to revise their State Implementation Plans (SIPs).  According to USEPA, the PSD program in these jurisdictions is "presumptively inadequate" because they do not allow for the regulation of GHG emissions. All other states would be required to review their rules and inform USEPA if they would not be able to issue PSD permits for greenhouse gas emissions. 

Under the second rule, USEPA proposes to establish a FIP - a Federal Implementation Plan for the 13 "presumptive inadequate" states, and for any other state in which USEPA determines that the state PSD program does not meet requirements for regulation of GHGs. Only the states deemed by USEPA to be inadequate would need the federal plan.  In other words, in any states that do not update their regulations within 12 months after USEPA signs the final action, the second proposed rule would give the Agency the authority to take over until the state can assume the responsibility.

What this might mean to regulated entities:  A state that has to amend its rules, especially the 13 "presumptive inadequate" states, would likely have difficulty making the changes by USEPA's deadline, which is within 12 months after USEPA signs the final action.  If USEPA steps in as planned, new sources and modification projects might be unusually delayed while USEPA works through the GHG portions of permitting applications.

What this might mean in Allegheny County and most California counties:  It's hard to say.  Allegheny County and most of the Air Quality Management Districts in California are in a "grey area" - that is, they are not listed on either the Presumptive SIP Call or the Presumptive Adequate Lists.  USEPA has determined that these jurisdictions (among others) do not have an approved PSD SIP.  See additional discussion below.

What's next:  The two rules have not yet been formally proposed with publication in the Federal Register, and comments on the rules would be due 30 days after publication.  USEPA has scheduled a public hearing on the matter for August 25, 2010 in Arlington, Virginia.

Some Details and Acronyms

Under the first proposed rule, the SIP call, USEPA is proposing a finding of SIP substantial inadequacy for only the 13 states mentioned above (again, the "Presumptive Sip Call List").  For the most part, in all other states USEPA is proposing a finding of SIP substantial adequacy (the "Presumptive Adequate List").  If any of the Presumptive SIP Call List states are not in a position to submit to USEPA a corrective SIP revision within 12 months after USEPA signs the final action, USEPA will promulgate a FIP that will provide authority to issue PSD permits.  USEPA intends to finalize the SIP call on or about December 1, 2010. 

Nonetheless, for each of the presumptive adequate list states, USEPA is soliciting comments in the SIP call on whether their SIPs do or do not apply the PSD program to GHG sources.  USEPA is not at this time proposing a FIP for the states on the "presumptive adequate" list.  However, if EPA concludes after comment on the rule that a state's SIP does not apply to GHG sources, then USEPA will proceed to issue a finding of substantial inadequacy and a SIP call on the same schedule as the already-listed-as-presumptive-inadequate states.  If a newly listed state is not able to submit to USEPA a SIP revision that applies the PSD program to GHG sources by the SIP call deadline, then USEPA proposes to promulgate a FIP for that state without further notice and comment.  Thus, any state listed on the Presumptive Sip Call List (and any state that feels it might be added to such list after the comment period) should consider the comment period for the SIP call notice to be their opportunity to comment on the FIP as well.

Unlisted Jurisdictions: Inter alia, Allegheny County, Pennsylvania and Several California Counties

Again, the 13 states with "presumptive inadequate" SIPs are Alaska, Arizona, Arkansas, California, Connecticut, Florida, Idaho, Kansas, Kentucky, Nebraska, Nevada, Oregon and Texas.  All other states for the most part are on the "presumptive adequate" list - which means they should not expect a SIP call unless USEPA decides to the contrary at the close of the comment period on the SIP call notice. 

There are several unlisted jurisdictions.  An example of this is Pennsylvania.  Pennsylvania is on the presumptive adequate list (the list of states that appear to apply PSD to GHG sources).  However, USEPA specifically excepted solely Allegheny County from the Presumptive Adequate List when listing Pennsylvania.  In addition, Allegheny County, Pennsylvania, does not appear on the Presumptive SIP Call list.  According to USEPA, the Agency has determined that Allegheny County (among others) does not have an approved PSD SIP.  USEPA has determined that in Allegheny County, the applicable regulatory authority is USEPA's regulations, found at 40 CFR 52.21, and presumably has determined that no changes need to be made to apply PSD to GHG sources.  It is worth noting that the docket record reflects that USEPA made this determination without input from Allegheny County, according to USEPA sources.  This could be because Allegheny County did not respond to a 60-day letter request from USEPA regarding adequacy under the Tailoring Rule.  Allegheny County may not have made a determination internally whether its air regulations require revision to apply PSD to GHG sources.  There is only USEPA unchallenged assertion at this point.  Thus it is still not clear whether Allegheny County air regulations require revision - that is, whether conflicting provisions create ambiguity within Allegheny County air regulation as to whether it applies to GHGs.  If USEPA's conclusion remains unchallenged, sources in Allegheny County can expect the proposed FIP (that is, the provisions of 40 CFR 52.21 limited solely to GHGs) to apply to PSD permitting after January 2, 2011 in accordance with the Tailoring Rule and its phased-in approach.

Another example of unlisted jurisdictions is California.  Four California Air Quality Management Districts (AQMD) appear on the Presumptive Adequate list (Mendocino, Monterey Bay Unified, North Coast Unified, and Northern Sonoma County).  One California AQMD appears on the Presumptive Sip Call List (Sacramento Metropolitan). All other AQMDs in California are unlisted  -  presumably because USEPA has determined that these jurisdictions (among others) do not have an approved PSD SIP.  This means that sources commenting on the USEPA proposed action have localized interests - that is, comments on and objections to USEPA's proposed action may vary from site to site.  Companies with multiple facilities in California should coordinate responses carefully.

If you have any questions regarding these proposed rules, please do not hesitate to contact Larry Demase, Todd Maiden, Jennifer Smokelin or Dave Wagner.

The Weakest Link in Greenhouse Gas Regulation? USEPA's Tailoring Rule

This post was written by Jennifer Smokelin.

Implementing the Environmental Protection Agency’s (USEPA’s) regulation of greenhouse gases (GHGs) under the Clean Air Act (CAA) is a three link chain, and each link in the chain is necessary and determinative of the success of the program as a whole. If any link fails, so does USEPA’s ability to regulate GHGs under the CAA. The three links are: (1) the Endangerment Finding; (2) the Tailoring Rule; and (3) the Best Available Control Technology (BACT) guidance. Previous articles in this blog and other blogs as well as teleseminar presentations by Reed Smith’s Environmental Team have discussed the likelihood of success to challenges to the Endangerment Finding. This post will briefly describe challenges to what is likely the weakest link in USEPA’s GHG regulation chain: the Tailoring Rule.

On August 12, 2010 EPA issued the final “Tailoring Rule.” The rule sets forth USEPA’s determination as to which GHG sources will be covered under the CAA and at what point these sources will be covered. Without the Tailoring Rule, even small sources would need to get permits for their GHG emissions when the Agency’s emission limits trigger CAA permitting rules for industrial facilities. The CAA’s emission thresholds for “conventional pollutants” such as lead and sulfur dioxide are 100 or 250 tons a year, but USEPA has indicated that those limits are not feasible for GHGs, which are emitted in much larger quantities.

So far there are numerous challenges to the Tailoring Rule. Last week, the U.S. Court of Appeals for the District of Columbia Circuit consolidated 20 of the lawsuits against USEPA’s Tailoring Rule. The case’s court date has not yet been set. Unlike challengers to the Endangerment Finding who don’t want USEPA to act, most of the challengers to the Tailoring Rule (in particular the environmental groups) don’t think USEPA is going far enough to regulate GHGs under the rule.

These challenges to the Tailoring Rule likely have some merit. The crux of these challenges focus on the threshold and timing determinations in USEPA’s final Tailoring Rule. USEPA initially proposed to regulate industrial sources that emit more than 25,000 tons of carbon dioxide per year, but the final rule set a significantly higher emission threshold with plans to phase in smaller sources over time. Starting in January 2011, only sources that already have to apply for permits for other pollutants and emit more than 75,000 tons of GHGs per year would be affected. And starting in July 2011 new and modified plants that emit more than 100,000 tons of GHGs per year would be affected. This effectively leaves major industrial sources under the 75,000 threshold unregulated until at least 2016 and perhaps beyond. Challenges to the Tailoring Rule claims that this switch from 25,000 to 75,000 tons in the Final Rule is arbitrary and capricious with no scientific basis in the record to support it.

Interestingly, one of the most significant challenges to the Tailoring Rule has been brought by the Center for Biological Diversity (CBD). This challenge, filed on August 2, 2010, has been getting a lot of press lately, likely due to the CBD's impressive track record. This non-profit organization has picked legal battles it is likely to win, claiming that 93 percent of its lawsuits result in favorable outcomes.

Climate Change Legislation is Dead. Long Live Climate Change Regulation!

This post was written by Larry Demase, Jennifer Smokelin and David Wagner.

Although an energy bill is now on the Senate floor, it is limited to energy conservation and issues related to the oil spill. It does not include a price on carbon in the form of cap and trade for any sector, and we are unlikely to see comprehensive climate legislation in September or later this year. So now what? Congressional failure to act now or later in 2010 means that, on the federal level, the U.S. Environmental Protection Agency ("USEPA") will step in and use its authority under the Clean Air Act to regulate greenhouse gases ("GHGs") from the utility, transportation and industrial sectors, and there is a small possibility that such regulation by USEPA will include a cap-and-trade program. To be sure, USEPA has already taken several steps to regulate GHGs. 

The following post discusses what will likely come out of Congress and USEPA's ongoing efforts to enact measures that regulate GHGs.

Federal Climate Change Legislation is Dead in Congress

What's Left of Energy Measures in the 111th Congress and What Will We Get Before the August 9 Recess?

Senate Majority Leader Harry Reid (D-Nev.) has declared that the proposed legislation he will bring to the Senate floor this week will address energy efficiency and will encompass issues related to the oil spill. A draft of the bill, titled "Clean Energy Jobs and Oil Company Accountability Act," discloses that such a bill will raise the $75 million spill-liability cap for oil companies under the short title "Big Oil Bailout Prevention Unlimited Liability Act of 2010." Further, Division C of the bill would provide $5 billion in incentives for the "Home Star" energy-efficiency retrofit program, which would provide sale rebates to encourage homeowners to make energy efficient upgrades. Further, the bill would provide tax breaks for natural gas vehicles and electrification of transportation infrastructure (Division B), and boost money for the Land and Water Conservation Fund (Division D).
In sum, the Senate is moving toward an energy measure that addresses offshore drilling and energy conservation measures. Would the president sign such a bill? Likely yes.

Will There be Action on Comprehensive Climate Legislation in September or in "Lame Duck" November Congressional Activity?

Probably not. Congress is expected to wrap up major legislative action by early September, at the latest – and most say that if any action is to occur, it will occur before the August 9 recess. As indicated above, there will be no comprehensive climate change legislation before the August 9 recess. Following the August 9 recess, the fall campaign season begins for the midterm Congressional elections and the Senate likely would lose focus on GHGs.

There is the possibility of Democrats adding cap-and-trade provisions to a House and Senate energy conference during the November "lame duck" session of Congress. The lame-duck session occurs after the November election, when much of the political pressure on lawmakers has dissipated.

Some observers have speculated that the House-passed Waxman-Markey bill (that includes cap and trade) could be back in play during conference, or that Democratic leaders could use a conference to ratchet up the climate provisions in a final bill. However, Republican leadership is taking pains now to ensure that does not happen. Sen. Mike Johanns (R-Neb.) recently introduced an amendment that would require the support of two-thirds of the Senate, or 67 votes, to include cap-and-trade climate legislation in a House-Senate conference report if the Senate has not already debated and approved it with the normal 60-vote threshold.

There is also the possibility of Congressional preemption of USEPA action. West Virginia Sen. Jay Rockefeller, a Democrat, has proposed suspending the EPA's greenhouse gas regulations for two years. Reid has not yet announced whether he will take up Rockefeller's amendment before the end of the year. Reid may face pressure to do so from within his own caucus, as several moderate Democrats voted against Sen. Lisa Murkowski's (R-Alaska) resolution to revoke EPA's "endangerment finding" on carbon emissions because they were promised a later vote on Rockefeller's toned-down version.

But Federal Climate Change Lives at USEPA: The Agency is Moving Ahead with Technological Controls

The Endangerment Finding

On December 7, 2009, in response to the decision of the Supreme Court in Massachusetts v. EPA, 549 U.S. 497 (2007) that GHGs were air contaminants, the USEPA Administrator made two distinct findings regarding GHGs. The first, known as the Endangerment Finding, is applicable to stationary and mobile sources and concludes that GHGs threaten (endanger) the public health and welfare of current and future generations. The second finding, known as the Cause or Contribute Finding, states these same GHGs, when emitted from new motor vehicle engines, cause or contribute to GHG pollution that threaten public health and welfare. See Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202 of the Clean Air Act, Final Rule, 74 Fed. Reg. 66496 (December 15, 2009). The Endangerment Finding has the effect of triggering USEPA action under the stationary source provisions of the Clean Air Act. The Endangerment Finding has come under attack both through petitions to reconsider and legal challenges. On June 18, 2010, the District of Columbia Circuit Court of Appeals decision set aside one group of challenges to the Endangerment Finding until EPA considers pending petitions to reconsider the Endangerment Finding.

Mandatory GHG Emission Reporting Rule

Prior to the issuance of its Endangerment Finding, on September 22, 2007, USEPA adopted a Rule (40 C.F.R. Part 98) requiring the mandatory reporting of greenhouse gases from certain sources that emit 25,000 metric tons or more of GHGs per year. USEPA's mandatory reporting regulations do not require sources to control their GHGs emissions, but it was not long after the initial rules were promulgated that USEPA moved in that direction, further pressuring Congress to act.

USEPA Acts to Control GHG Emissions from New or Modified Stationary Sources: The GHG 'Tailoring' Rule

On May 13, 2010, USEPA issued a final rule setting thresholds for sources of GHGs that defined when permits will be required for new sources under the Prevention of Significant Deterioration ("PSD") provisions of the Clean Air Act. This rule applies only to relatively large commercial sources of GHGs and is to be implemented in two steps.

The first step (January 2, 2011 through June 30, 2011) will require GHG sources subject to PSD permitting because of other types of emissions to also address GHG emissions. For these projects, GHG increases of 75,000 tpy will, inter alia, trigger the requirement that best available control technology ("BACT") is to be used to control GHG emissions.

In the second step (July 1, 2011 to June 30, 2013), PSD permitting will cover new facilities that emit GHG emissions of at least 100,000 tpy, and modified facilities that increase emissions by at least 75,000 tpy, even if they do not exceed the permitting thresholds for any other pollutant.

Requirements for new sources that are built after June 30, 2013 have not been established by USEPA, but the Agency has said it would undertake another rulemaking in 2011 on a third step for phasing in GHG in which it will address whether certain smaller sources can be permanently excluded from permitting.

This rulemaking is known as the "tailoring rule" because it limits which facilities would be subject to PSD permitting. USEPA promised to provide states with guidance related to BACT requirements for GHG sources.

In the absence of ambient air quality standards for GHGs, it is difficult to see how the Tailoring Rule will be justified under the PSD provisions of the Clean Air Act.

USEPA Cap-and-Trade Programs

USEPA has a number of successful cap-and-trade programs in place. The oldest and most successful is its Acid Rain allowance trading program designed to reduce sulfur dioxide emissions for the utility sector. It was established under Title IV of the Clean Air Act and could be a model for a GHG trading program, particularly if it is limited to electric utilities and retains the simplicity of the Acid Rain Program. There are major differences, however, between the comprehensive, economy-wide cap-and-trade programs proposed by Congress and the Acid Rain Program. Most notably, the Acid Rain Program allows no offsets. Offsets, or emission reduction credits from non-covered sources in a cap-and-trade program, are a large part of many of the economy-wide cap-and-trade programs proposed in Congress, and are widely seen as a great tool for economic development and as a way to "bring in" non-covered sources under the cap. So far, however, USEPA has eschewed cap and trade as a regulatory scheme to regulate GHG and has decided to proceed with technological controls perhaps, in part, because it believes that will encourage industry to support the more flexible cap-and-trade legislation – and, in part, because of USEPA's recent woes in the Federal Circuit Courts of Appeal with getting approval of the Clean Air Interstate Rule ("CAIR") and its progeny (discussed below).

USEPA's Cap-and-Trade Programs Vacated

If USEPA does go ahead and regulate greenhouse gases by a cap-and-trade system, it must consider how to do so with a plan that will survive judicial review. Since 2005, USEPA has seen Bush Administration cap-and-trade programs to reduce mercury, and nitrogen oxide and sulfur dioxide emissions, vacated by the D.C. Circuit Court of Appeals. The Clean Air Mercury Rule ("CAMR") and the CAIR both would have utilized a cap-and-trade system. Both approaches were rejected by the D.C. Circuit Court of Appeals: (1) CAMR was vacated in 2007, NRDC v. EPA, 489 F.3d 1364 (D.C. Cir. 2007); and (2) CAIR was vacated in 2008, North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008). The U.S. Circuit Court of Appeals, however, reinstated CAIR – including the cap-and-trade system – until USEPA issued a new rule, 531 F.3d 896, 901 (D.C. Cir. 2008). On July 6, 2010, USEPA released a draft of the proposed replacement rule, the Transport Rule. It contains limited cap-and-trade provisions. It is obvious that if USEPA decides to adopt a cap-and-trade program without the benefit of legislation, it must do so very carefully. It is therefore likely that if USEPA moves forward to regulate GHGs from the utility and manufacturing sector, it will be under a "command and control" approach and technological (BACT) limitations.


The next few weeks will likely solidify the fact that there will be federal regulation of emission from GHGs sources, but by everyone's "second best" source choice, USEPA. It is important to note that a failure by Congress to come to a consensus on regulating GHG emission leaves the probability (some may say certainty) of GHG emission controls by USEPA in the industrial and utility sectors starting in January 2011.

If Congressional Climate and Energy Legislation Fails to Pass in the U.S., What Happens?

This post was written by Phil Lookadoo and Jennifer Smokelin.

The future of greenhouse gas (GHG) regulation in the United States, as well as the future mix of electric power generation sources, is linked to the fate of climate and energy legislation in Congress. With all eyes on the Senate recently released Kerry-Leiberman comprehensive climate and energy legislation and what by most accounts is its slim chances for passage, let’s consider the possibility that Congress will fail to pass climate or energy legislation.

If that is the case, this does not mean no regulation of greenhouse gases and no energy reform. It simply moves the discussion to another government branch, namely, the Executive Branch, and in particular the U.S. Environmental Protection Agency (USEPA) and the Federal Energy Regulatory Commission (FERC). In other words, if Congressional climate and energy legislation fails to pass, executive branch initiatives gain in importance, and these initiatives will proceed apace regardless of Congressional inaction.

A Shift to USEPA Regulation of GHGs

USEPA can be expected to move forward with regard to regulating GHGs from stationary sources. On December 7, 2009, in compliance with the US Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007), USEPA issued its Endangerment Finding, opening the door to USEPA regulation of GHGs under the existing Clean Air Act (CAA). Although the Endangerment Finding is currently being challenged in the Federal Circuit, challenges to the Endangerment Finding will not likely impede further EPA action to regulate GHGs under the CAA. However, challenges to these USEPA further actions are likely.

USEPA’s Reconsideration of the “Johnson Memo”

On April 2, 2010, EPA published a notice announcing its final reconsideration of the Bush administration's "Johnson memo" (issued December 18, 2008, by former EPA Administrator Johnson), indicating that permit requirements and regulation of GHGs would become effective no earlier than calendar year 2011 and delaying until after January 2, 2011 the date when PSD and Title V regulations will apply to GHGs.  This reconsideration is vulnerable to legal challenge for 60 days, until June 2, 2010. 

USEPA’s Tailoring Rule

Further, on May 13 EPA issued its final "tailoring" rule for GHG emissions, the rulemaking where EPA sets GHG emissions thresholds to define when (at what emission levels) permits under the New Source Review Prevention Significant Deterioration (PSD) and Title V Operating Permit programs are required for new and existing industrial facilities under the Clean Air Act.  Facilities responsible for nearly 70 percent of the national GHG emissions from stationary sources will be subject to permitting requirements under this rule. Emissions from small farms, restaurants, and all but the very largest commercial facilities will not be covered by these programs at this time.  At first, no sources would be subject to Clean Air Act permitting requirements due solely to GHG emissions.  As of Jan. 2, 2011, only sources currently subject to the PSD permitting program (i.e., those that are newly-constructed or modified in a way that significantly increases emissions of a pollutant other than GHGs) would be subject to permitting requirements for their GHG emissions over 75,000 tpy under PSD and operating permit programs.  Come July 1, 2011, for the first time PSD permitting requirements will cover new construction projects that emit GHG emissions of at least 100,000 tpy even if they do not exceed the permitting thresholds for any other pollutant.  This final rule too will likely be open to attack on substantive grounds and industrial and energy sector actors should watch this closely

USEPA’s BACT Guidance

Finally, USEPA will likely publish guidance with regard to how covered sources will be regulated and what constitutes Best Avaible Control Technology (“BACT”) for a covered source.  Although this guidance is not subject to the same appeal provisions as a rulemaking, industrial and energy sector actors should pay special attention to its development.

Another Key Federal Actor:  The Federal Energy Regulatory Commission

In addition to monitoring USEPA actions, the energy sector also needs to keep tabs on certain FERC initiatives.

For example, FERC announced on January 21, 2010, an inquiry into whether its regulatory policies should be modified to efficiently and reliably integrate the rapidly increasing number of variable energy resources into the nation’s power grid.  Variable energy resources include power generation which utilizes any fuel whose availability varies outside of the generator’s control, such as wind, solar and some hydroelectric resources.  FERC seeks public comments on the need for regulatory reforms in order to maintain power system reliability while also efficiently, and in a non-discriminatory manner, integrating such variable energy resources into the grid.

FERC issued its Notice of Inquiry in FERC Docket RM10-11, seeking public comment on whether to reform any of its rules or procedures as the nation’s generation portfolio expands to include more variable energy resources.  Growing use of these types of facilities presents unique challenges to the maintaining the reliability of the electric power system, such as managing the intermittent availability of energy generated by such resources, ensuring that sufficient other, non-variable energy sources are available when the availability of variable energy resources diminishes at various times of the day, and managing the transmission impacts of large variable energy resources being located at remote points on the nation’s grid.  FERC also recognized that increasing use of such variable energy resources also offers significant benefits such as low marginal energy costs and reduced greenhouse gas and other emissions.

Comments from industry continue to be submitted, several thousand pages to date, and the FERC has set no timetable for taking action in Docket RM10-11.  FERC's initiative gains in importance if congressional climate and energy legislation fails to pass

Further, the questions in the FERC inquiry suggest that FERC sees plenty of reason for concern about the prospects for wind and solar power based on the way the grid is run today.  Energy sector actors want to be sure FERC is leading where they can follow and flourish … and the only way to do that is comprehensive responses to inquiries like this one.

In addition, significant new transmission facilities will have to be constructed to enable many wind and solar resources in the U.S. to be developed due to their geographic remoteness from large power markets and the lack of consistent regulatory policies at the state level applicable to the construction of such transmission lines as they cross multiple states’ boundaries.  In FERC Docket AD09-8, FERC requested public comments on transmission planning processes, including (i) whether existing processes consider needs and solutions on a regional or interconnection-wide basis, (ii) whether such processes are capable of handling the challenges of such matters as the integration of large amounts of location-constrained generation and the treatment of demand response and energy efficiency resources, as well as (iii) the allocation of costs of such transmission facilities.  This process has also resulted in thousands of pages of comments from various electric industry participants, including wind and solar generation developers.

Fundamental differences exist in the industry over how the transmission grid should be planned, who should pay to expand it, and how climate benefits of remote wind and solar generation should be recognized in transmission planning and cost allocation.  Other issues have also arisen, such as whether incumbent electric utilities should have a right of first refusal to construct needed new transmission facilities.

Some Conclusions 

What USEPA and FERC will propose in response to these recent announcements and inquiries and what sort of regulatory scheme will ultimately become effective is still open, but those regulatory proceedings are underway and will continue regardless of whether Congress enacts new legislation.

Industrial and energy sectors should not sit still watching Senate developments, or assume the game is over if Congress fails to act.  Significant efforts should be placed on studying and commenting on federal agency actions as well.