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.