Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

Challenge to the Endangerment Finding

The endangerment finding in December 2009 established that GHGs contribute to climate change and threaten the public health and welfare of the American people. USEPA is likely to prevail that its determination was proper.

The petitioners’ challenges can be grouped loosely into two arguments (1) USEPA did not have the scientific basis to make its endangerment finding and (2) USEPA should have considered policy issues other than pure scientific basis in making the determination. With regard to former issue, it is likely the D.C. Circuit will hold that its place is not to second guess the scientific basis for USEPA’s determination. On the latter issue, looking at the express language of the statute and to the U.S. Supreme Court’s decision in Massachusetts v EPA, policy considerations are not properly part of an Endangerment Finding under Section 202(a) of the Clean Air Act.

Challenge to the Tailpipe Rule

The Tailpipe Rule allows USEPA to establish carbon standards for light-duty vehicles. In this challenge, USEPA is likely to prevail, at least with respect to the four GHGs that are actually emitted from light duty vehicles. After USEPA makes an endangerment finding, Clean Air Act 202(a) provides, “Administrator shall by regulation prescribe…, standards applicable to the emission of any air pollutant from… new motor vehicle engines…” Petitioners argued that the Tailpipe Rule was not necessary even after US EPA issued its endangerment finding. To hold for the petitioners, the D.C. Circuit would effectively be holding that the “shall” language under Clean Air Act § 202(a) does not mean “shall”. Further, it is interesting to note that the auto industry itself (the regulated entities under the Tailpipe Rule) supported USEPA’s position. The industry petitioners who challenged the Tailpipe Rule were doing so not because they were affected by the Tailpipe Rule from a regulation standpoint – they challenged them to preserve industry’s arguments on the issues discussed below.

Challenge to “Grounds Arising After” Case

It appears that USEPA will probably prevail here. Under the Clean Air Act Section 307 and the Administrative Procedure Act (APA) , there is a 60-day window to challenge a regulation – after which the window closes and there is rarely subsequent right to assert a challenge . Under Massachusetts v. EPA, GHGs are an “air pollutant” under the Clean Air Act. Here, the petitioners challenged the inclusion of GHGs under the PSD regulations (the “GHG PSD Rule”) more than 60 days after USEPA expressly confirmed the applicability of PSD to any pollutant regulated under the Clean Air Act, including specifically all non-NAAQS pollutants. (USEPA confirmed this in regulations issued in 1978, 1980 and 2002 (collectively, the “PSD Applicability Rules”))

Petitioners argued that that the GHG PSD Rule, specifically the inclusion of GHGs in the PSD scheme, raised “unexpected difficulties” that could not have been foreseen at the time of the original PSD Applicability Rules and/or that the GHG PSD challenges raised now were not “ripe” at the time the PSD Applicability Rules were finalized. USEPA countered that these arguments could have been raised at the time of the PSD Applicability Rules’ finalization. The Court seemed relatively unsympathetic to Petitioners view on this point.

Challenge to “Tailoring” and “Timing” Rules

The ‘Timing Rule” is EPA’s ruling regarding when regulations of GHGs would begin (in this case, concomitant with regulation of tailpipe emissions) and the “Tailoring Rule” establishes what sources are subject to regulation. Petitioners’ strongest case would appear to be the challenge to the Tailoring Rule. The Tailoring Rule has always been considered the “weakest link” in USEPA’s GHG regulations. The reason for this is that the Tailoring Rule “tailors” applicability for GHG PSD regulation to sources that emit 75,000 or 100,000 tons per year (tpy) of carbon dioxide equivalent (CO2E). The problem is the express language of the Clean Air Act regulates sources that emit either 100 tpy or 250 tpy of a given pollutant. USEPA raised policy arguments to justify its rejection of this express language under the Clean Air Act (among them, the “absurd results” doctrine), but ignoring express statutory language is always a tricky business.

Assuming petitioners prevail on this issue and the Tailoring Rule is vacated (as opposed to remanded with Tailoring Rule left in place during reconsideration), what is the possible outcome? Ironically for the industry petitioners, the effect of reversing the Tailoring Rule means that many more sources would be subject to GHG regulation under the Clean Air Act. In fact, if the Tailoring Rule is completely abrogated, every source that emits more than 100 or 250 tpy of CO2E would be potentially subject to regulation under the Clean Air Act. This would be expensive to industry and potentially overwhelming to USEPA, at least from a paperwork standpoint.

But industry beware: a decision vacating the Tailoring Rule (or the GHG PSD Rule or the Timing Rule) would not affect USEPA’s authority to regulate GHGs under the New Source Performance Standards (NSPS) under Clean Air Act § 111. This is because the Tailoring Rule and the Timing Rule are linked to the PSD Rule but USEPA’s NSPS authority exists independent of any PSD authority. NSPS for GHGs have not been finalized yet but are expected in 2012. NSPS are promulgated sector by sector and USEPA is slated to finalize NSPS that include GHGs for the utility and refinery sectors this year. In fact, USEPA is under a court ordered settlement to do so. Thus, even a complete victory by petitioners under the GHG PSD Rule does not abrogate USEPA’s authority to regulate GHG emissions from stationary sources under the Clean Air Act

A decision by the D.C. Circuit panel is expected as soon as June of this year. 

1. Offshore Wind Power Generation (Robert Vilter, New York)

The Obama Administration is pursuing the development of 10 gigawatts of offshore wind-generating capacity by 2020, and 54 gigawatts by 2030. This would produce enough energy to power 2.8 million and 15.2 million homes, respectively. However, because of complicated and overlapping federal and state regulations, it takes anywhere from seven to 10 years to receive approvals and to fully permit an offshore wind project – more than double the amount of time it takes to permit an offshore oil or natural gas platform. The U.S. Department of the Interior has announced a “Smart from the Start” wind energy initiative to facilitate siting, leasing and construction of new projects in an effort to shorten this time line. Keep in mind that offshore wind farms, such as Cape Wind, also face local hurdles to development, oftentimes in the form of opposition by well-funded citizen groups.

2. Renewable Energy Incentive Programs (Arnold Grant, Chicago)

The cash grant program enacted under Section 1603 of American Recovery and Reinvestment Act in order to help renewable energy developers has expired except for projects that (i) began construction before January 1, 2012, and (ii) are placed in service before a specified date. The date varies depending on the type of project. The major remaining federal tax benefits are the energy tax credit under IRC Section 48, the production tax credit under IRC Section 45, and accelerated tax depreciation under IRC Section 168. Various structures are available to help renewable energy developers monetize these incentives.

3. Hydraulic Fracturing Regulation (Larry Demase, Pittsburgh)

Hydraulic fracturing or “fracking” is a practice of stimulating and maximizing production of natural gas in shale formations that has been in use in the United States for more than 50 years, but which has recently gained public attention. It involves pumping, under high pressure, a mixture of very large quantities of water and very small quantities of chemicals and proppants to create fissures in the shale and to hold fissures open so that gas will flow in greater quantities to the well bore. The controversy over its use concerns the amount of water being withdrawn from ground and surface resources, alleged contamination of drinking water from the fracking fluid and the disposal and treatment of waste water. In 2011 the U.S. Environmental Protection Agency (EPA) announced it will study the impacts of hydraulic fracturing on drinking water resources. The results of EPA’s study are intended to provide decision makers with some answers to fundamental questions about the effect of fracking on drinking water. The results will also no doubt be the impetus for regulatory and policy changes that could have a significant impact on the shale gas industry. A panel of experts will analyze the effect of fracking using reported cases of alleged groundwater contamination, laboratory studies, toxicological assessments of chemicals used in hydraulic fracturing, their degradation and/or reaction products, and naturally occurring substances that may be released or mobilized as a result of fracking.

There will be two reports resulting from EPA’s study with the first to be completed in 2012. An additional report based on long term study projects is to be issued in 2014. In the meantime, look for states to address these issues in various ways.

4. Aggregation (Larry Demase, Pittsburgh)

As we’ve discussed in previous posts, aggregation is the process of determining whether emissions from multiple operations should be aggregated into a single source for air permitting purposes. A significant issue related to oil and gas operations is whether emissions from individual operations, such as wells, processing plants and compressor stations, should be combined so that they become major sources for permitting purposes, subject to Title V requirements and New Source Review.

In 2011, a number of public interest groups challenged air permits issued by the Pennsylvania Department of Environmental Protection (DEP) on the grounds that DEP should have included multiple sources of emissions in those permits so that they would be considered “major” permits. The Clean Air Council, Group Against Smog and Pollution, and Citizens for Pennsylvania’s Future have asserted before the Pennsylvania Environmental Hearing Board and the United States District Court for the Middle District of Pennsylvania, that DEP failed to properly apply the three-part test for deciding whether sources should be “aggregated” together for permitting purposes. One case asserts that the permittee should be penalized for failing to submit an “aggregated” permit application. Decisions in these cases could result in precedents that will impact development of the shale gas industry in Pennsylvania.

Initial decisions in all three cases are expected in 2012, but final results could be extended if the losing parties seek appeals.

5. Greenhouse Gas Litigation (Jennifer Smokelin, Pittsburgh)

Regarding greenhouse gas (GHG) litigation, there are two main areas to watch in 2012: (i) the United States Supreme Court (and the Ninth Circuit) in the aftermath of American Electric Power v. Connecticut (AEP), and (ii) four consolidated cases in the D.C. Circuit challenging the endangerment finding slated for argument at the end of February.

Before the Supreme Court ruled in Massachusetts v. EPA, certain states sued the nation’s five largest coal-fired electric power corporations in the Southern District of New York under federal and state common law, charging AEP and other defendants with contributing to the public nuisance of global warming and seeking an injunction to cap and reduce their carbon dioxide emissions. The AEP Court voted unanimously that federal common law had been “displaced” by the Clean Air Act (and the Obama Administration’s efforts to regulate emissions), and thus states cannot use federal common law to restrict greenhouse gas emissions. The AEP ruling leaves open the question of (i) whether states can sue under state law, and (ii) whether climate change victims can seek damages through the courts. The issues are likely to be litigated in 2012 in a case, Kivalina v. Exxon Mobil.

Following the decision in Massachusetts v. EPA, but before AEP was decided in the U.S. Supreme Court: (i) EPA published two endangerment findings under the Clean Air Act, triggering a mandatory duty for EPA to adopt regulations to control emissions from power plants, industries, motor vehicles, and other sources; (ii) EPA issued tailpipe emission standards for new cars and trucks under the Clean Air Act; and (iii) EPA issued Best Available Control Technology (BACT) guidance for new sources and New Source Performance Standards (NSPS) for existing sources of GHG emissions under the Clean Air Act. Four cases are consolidated in the D.C. Circuit that challenge EPA’s Endangerment Findings. The cases are Coalition for Responsible Regulation Inc., et al. v. EPA, case numbers 09-1322, 10-1092 and 10-1073; and American Chemistry Council v. EPA, case number 10-1167, in the U.S. Court of Appeals for the District of Columbia Circuit. Argument will take place February 28 and 29, 2012. This is a very complex series of cases that will affect not only utilities but many other industries as well, since the fundamental underpinning to all GHG regulation under the Clean Air Act is essentially up for review.

6. California’s Cap-and-Trade Program (Todd Maiden, San Francisco)

In October 2011, the California Air Resources Board approved final regulations implementing a “cap-and-trade” program under the state’s climate law (more commonly referred to by its legislative bill number, “AB 32”). These regulations became effective January 1, 2012, and many consider California a possible test case for similar programs in other parts of the country. Regulated entities under the first phase of this program include utilities and large industrial facilities (i.e., emitters of greater than 25,000 metric tons of CO2 equivalent per year). The regulations trigger two 2012 auctions for buying and selling rights to emit, and requires entities to comply with a series of progressively stringent emission caps beginning January 2013.

7. California's Green Chemistry Initiative (Todd Maiden, San Francisco)

In October 2011, California’s Department of Toxic Substances Control (DTSC ) released revised “informal” draft regulations of its Green Chemistry initiative titled the “Safer Consumer Products Regulation.” DTSC’s new informal draft makes substantial changes, specifically in the areas of timeframes, the prioritization of chemicals and products, alternative assessment compliance, and exemptions. The informal draft also significantly broadens the chemicals that will initially be regulated to include an estimated 3,000 Chemicals of Concern without limits on which product categories may initially be considered. These draft regulations are highly controversial, yet DTSC is projecting that it will likely finalize these regulations – or something close to them – in spring 2012.

In a related development, California’s Office of Environmental Health Hazard Assessment recently finalized separate regulations that regulate the hazard traits in chemicals of concern. While finalized, these regulations remain controversial within the regulated community, and we anticipate administrative or litigation challenges to these regulations as well.

8. New Mercury Standards for Coal and Oil-Burning Power Plants (Douglas Everette, Washington, D.C.)

The final version of EPA's Mercury and Air Toxics Standards, or MATS rule, was signed December 21, 2011. For the first time in history, power plants will have to reduce all of their air toxic emissions, not just mercury, arsenic and lead – but a wide range of toxic chemicals. For coal-fired generators, the MATS rule sets emissions limits for mercury, particulate matter (a surrogate for toxic metals), and hydrogen chloride (a surrogate for acid gases). For oil-fired units, limits are set for particulate matter, hydrogen chloride and hydrogen fluoride. Also revised are new source performance standards for power plants to address emissions of particulate matter, sulfur dioxide and nitrogen oxides. According to EPA, approximately 1,400 existing coal and oil-fired units are affected. Existing sources are required to comply within three years of the effective date of the MATS rule, with case-by-case extensions up to five years beyond the effective date for documented electric reliability issues. These extensions are not offered to new or reconstructed sources. Vigorous debate centers on the practical implementation of the MATS rule deadlines and whether the electric grid will have enough capacity to avoid outages stemming from coal power plant retirements.

9. Fallout from Burlington Northern and Santa Fe Railway Co. v. U.S. (Robert Frank, Philadelphia)

In Burlington Northern and Santa Fe Railway Co. v. United States (BNSF), 556 U.S. 599 (2009), the U.S Supreme Court decided two key issues for parties facing Superfund liability: the standard for establishing “arranger” liability and the standard for establishing divisibility of liability. Since then, more than 100 courts have cited the decision. On arranger liability, including two at the federal appellate level, the cases illustrate that courts are following the Supreme Court’s directive to conduct a fact-intensive inquiry into a defendant’s purported “intent” to dispose of a hazardous substance. It’s fair to say that courts have been more reluctant to establish liability under an arranger theory than in the era preceding BNSF and look for that trend to continue in 2012.

For example, last year, the Ninth Circuit issued its first “arranger” liability decision under CERCLA since being reversed by the Supreme Court in the 2009 Burlington Northern decision.

In Team Enterprises, LLC v. Western Investment Real Estate Trust, 647 F.3d 901 (9th Cir. 2011), plaintiff argued that the requisite "intent to dispose" element necessary to trigger CERCLA arranger liability could be inferred from the fact that the dry cleaning machine was designed in a way that made disposal inevitable. Plaintiff also argued that the fact that the manufacturer exercised control over the disposal process provided a sufficient basis to infer the requisite intent necessary to trigger CERCLA arranger liability. The Ninth Circuit held that a manufacturer of equipment used to recycle wastewater from dry cleaning machines, as a matter of law, had neither the intent nor the control necessary to be held liable as an arranger. The court held that, to sustain an arranger claim against a “company selling a product that uses and/or generates a hazardous substance as part of its operation,” the plaintiff must prove “that the company entered into the relevant transaction with the specific purpose of disposing of a hazardous substance.” The holding underscores the high bar plaintiffs must meet in order to establish CERCLA arranger liability following the BNSF decision.

Regarding divisibility, there have been fewer cases applying the Supreme Court’s divisibility holding in BNSF. Generally, the courts looking at whether a “reasonable basis” for apportionment exists have reviewed the evidence that defendants have submitted to determine whether they have met their burden of proof. These cases have been very fact-intensive and, so far, it is difficult to identify a trend.

10. Final Rules for Conflict Minerals (David Wagner, Pittsburgh)

Section 1502 of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to issue disclosure and reporting regulations regarding manufacturers’ use of conflict minerals from the Democratic Republic of Congo (DRC) and adjoining countries. The SEC was required to issue its conflicts minerals rules last year but missed the deadline. Look for the final rules – and plenty of implementation concerns – sometime in 2012. The legislation for conflict minerals is part of a broader multilateral effort to require manufacturers and other users of certain minerals to closely track and publicly disclose where their raw materials originate. It is designed to suppress end-use demand for minerals produced in certain high-risk areas where minerals operations and revenues have been linked to violent and repressive rebel groups.

The law focuses on forcing supply chain transparency for users of certain minerals (which are used primarily in electronic components, engine components, aerospace equipment, jewelry and other industries). It does not directly impose restrictions on mining or metals companies, or create any sort of embargo on the DRC.

By 2014, USEPA estimates that the Cross-State Rule will reduce emissions of sulfur dioxide by 6.4 million tons per year from covered states compared with emissions in 2005, the last year before CAIR came into effect. This represents a 73 percent reduction from 2005. The corresponding figures for nitrogen oxide are a reduction of 1.4 million tons, representing a 54% change. Less stringent reductions will be required by 2012.

The states are allocated initial emissions allowances, and the new rule, like CAIR, establishes a cap-and-trade marketing scheme. However, because of the circuit court's holding in which it vacated CAIR in 2008, out-of-state trading is only allowed to a limited extent.

Further details of the Cross-State Rule’s implementation will become apparent as USEPA issues federal implementation plans for each of the states impacted by the rule. It is intended that the federal implementation plans will ultimately be replaced by state implementation plans. Furthermore, the reductions required of electric generating units in the near future may be further increased by USEPA’s new fine particle NAAQS and reconsidered ozone NAAQS, both of which are proposed to be released later this summer.
 

So when the Kyoto Protocol faces a regulatory gap, what will become of the CDM? The CDM is basically a way to get developing nations to reduce GHG emissions. Under the Kyoto Protocol and the European Union's Emission Trading System, CDM offset credits (known as Certified Emissions Reductions or CERs) can be used in lieu of allowances for compliance. But with the Kyoto Protocol facing a regulatory hiatus, will the demand for CDM offsets from the EU's Emission Trading System alone be enough to sustain the CDM? It's hard to say but it certainly does not bode well for any new CDM projects. Beyond 2012, the only unconditional demand for CDM offsets is from EU's Emission Trading System and that demand is estimated at 1.7 billion tons. Experts agree existing CDM projects are sufficient to fulfill that demand, and the market senses this: the value of primary trading in CERs has been trending downward for the last three years, with the market falling 48% in 2010 to $1.5 billion according to the World Bank. Given the fact that the CER market was valued at $7.4B in 2007, this drop is significant.

What does this mean for business? First, the global carbon market is shrinking, not just the CDM market. After 5 years of rapid growth, global carbon market is now stalled. The global carbon market grew from $15 billion in 2005 to $144 billion in 2009. But in 2010, it fell to $142 billion. This contraction is due to sliding CDM markets, for sure, but is also compounded due to a weak regional greenhouse gas credit market and the weak demand for assigned amount unit (AAU) credits (the so-called "hot air credits" under the Kyoto Protocol.) It is significant to note that the global carbon market shrunk even as global economy stabilized -- not a good sign for the market and businesses dependent on it. Second, with the Kyoto Protocol likely to be in regulatory hiatus, there will be little international pressure for comprehensive domestic climate change legislation. This may bring a sigh of relief to domestic industrial operators. However, this does not mean an end to regulation of GHGs by the U.S. Environmental Protection Agency (USEPA). USEPA's regulation is driven by statutory mandate -- not international pressure -- and domestic GHG regulations would not be affected by a regulatory gap under the Kyoto Protocol. Third, look out for a carbon tax, particularly in the European Union. Even with the Kyoto Protocol's regulatory gap, the EU's regulatory scheme to comply with Kyoto Protocol (including the EU-ETS) is mandated to be in effect through 2020, with ever-increasing, more stringent regulation of GHGs. Absent comprehensive repeals of these EU regulatory schemes, expect to see further regulation of GHGs in the EU. Given the current disfavor (and incidences of fraud) associated with the EU's Emission Trading System, expect EU regulators to look at other ways to regulation carbon, specifically taxation.
 

How We Got Here

Back in December 2000, USEPA announced a finding that it was “appropriate and necessary” to regulate coal- and oil-fired electric utilities under Section 112 of the Clean Air Act. This finding, known as the Utility Air Toxics Determination, triggered a requirement for USEPA to propose regulations to control air toxics emissions. A few years later, on March 15, 2005, USEPA issued the final Clean Air Mercury Rule (CAMR). It established “standards of performance” limiting mercury emissions from new and existing utilities, and created a market-based cap-and-trade program to reduce nationwide utility emissions of mercury in two phases.

At the same time that USEPA issued CAMR, it issued a determination that regulation of electric-generating utilities was not “appropriate and necessary” under Section 112. CAMR instead regulated emissions under Section 111 of the Clean Air Act. The two regulatory actions were appealed by various parties, and CAMR was vacated February 9, 2008, by the United States Court of Appeals for the District of Columbia Circuit. The court also vacated USEPA’s determination that regulation under Section 112 of the Clean Air Act was not required. Last week’s proposed regulation is intended to replace the vacated CAMR, and has been proposed in compliance with the December 2000 “appropriate and necessary” determination.

In addition to replacing the 2005 CAMR, the proposed regulation replaces amendments to
the New Source Performance Standards (NSPS) for particulate matter (PM), sulfur dioxide (SO2), and nitrogen oxides (NOx) that were promulgated February 27, 2006. During the course of litigation over this regulation, USEPA requested, and was granted, voluntary remand without vacatur.

Summary of the Proposed Regulation

The proposed regulation would generally apply to existing and new coal- and oil-fired units that sell electricity equal to more than one-third of their potential electric output capacity, and greater than 25 MWe electrical output to any utility power distribution system. The regulation would also apply to units that burn solid oil-derived fuel (petroleum coke-fired) and units that burn processed coal refuse. In addition, the regulation would apply to integrated gasification combined cycle (IGCC) units that utilize coal or petroleum coke as their energy source.

The proposed regulation would set emission limitations on coal-fired units for total particulate matter (a surrogate for toxic non-mercury metals), hydrogen chloride (a surrogate for toxic acid gases) and mercury. For liquid-oil fired units, the regulated pollutants would be total hazardous air pollutant (HAP) metals (determined through fuel analysis), hydrogen chloride, and hydrogen fluoride. All subcategories would also have a work practice standard for organic HAPs, including emissions of dioxins and furans.

For the revised NSPS, USEPA has an unusual proposed plan. For facilities that begin construction between February 28, 2005 and one day after publication of the proposed new rule, the emission standards set in the 2006 final rule would apply. For new construction after that date, the proposed regulation would apply amended standards for PM, SO2 and NOx.

The regulation contains numerous other provisions, including alternate limitations for demonstrating compliance; new monitoring and testing requirements; new Startup, Shutdown and Malfunction requirements; and the ability to demonstrate compliance through emissions averaging.

The regulation would also require installation of a mixture of control systems. USEPA does not identify a specific set of controls to be installed, as this will be dependent upon the type of fuel being burned, the age of the boiler, the type of boiler, and other site-specific factors. USEPA has identified the types of technologies that are applicable, including wet and dry scrubbers, dry sorbent injection systems, activated carbon injection systems, and baghouses. Each facility will need to make an individual determination of the appropriate control technologies for its system.

Brief Analysis of the Real Costs and Benefits

The proposed regulation is somewhat misleading. The proposal is considered by many to simply be a regulation of mercury emissions by coal-fired power plants which is intended to replace the 2005 Clean Air Mercury Rule. However, an analysis of the facts behind the regulation make it clear that the expected benefits from mercury controls are minimal compared with the other claimed benefits from the regulation. In fact, analysis of the mercury control section of the regulation alone shows a very poor cost-to-benefit ratio. Depending upon the discount rate selected, the estimated benefits from mercury controls are in the range of $450,000 to $5.9 million per year. However, the annual costs for mercury controls are much higher. USEPA puts the annualized costs for Activated Carbon Injection (ACI) control at more than $2 billion per year. ACI technology would only be required for control of mercury emissions.

The main benefit from the new regulation comes from control of particulate matter, in particular, control of very small particles that are less than 2.5 microns in diameter (PM2.5). USEPA estimates that economic benefits from control of PM2.5 would range from $53 billion to $140 billion per year, dwarfing the costs of the new regulation. USEPA obtained these benefits by determining that the controls would prevent 6,800 to 17,000 premature deaths, 11,000 nonfatal heart attacks, 5,300 hospitalizations for respiratory and cardiovascular diseases, 850,000 lost work days and 5.1 million days when adults restrict normal activities because of respiratory symptoms exacerbated by PM2.5. It is interesting to note, however, that USEPA is not specifically regulating PM2.5, but particulate matter in general. The main reason for this is the difficulty in accurately sampling and analyzing particles of that size.

Another interesting and controversial finding (at least in today’s political atmosphere) by USEPA is that the proposed regulation would result in $570 million per year in carbon dioxide-related benefits. By benefits, USEPA of course means a reduction in carbon dioxide emissions. A reduction in carbon dioxide emissions means a reduction in the use of coal to generate electricity. Even though USEPA is projecting only a 2 percent reduction in coal usage as a result of this regulation, and even though it states that it does not expect a major change in the electricity generation mix, it is almost guaranteed that many people will characterize the regulation as a back-door attempt by USEPA to control greenhouse gases and reduce coal usage.

Next Steps

Following publication of this regulation in the Federal Register, the public comment period will run for 60 days. USEPA will also hold public meetings during the comment period. With respect to a final rule, USEPA is operating under a consent decree requiring it to publish a notice of final rulemaking by November 16, 2011. However, look for a very large number of comments and a possible extension of the deadline.

This regulation will have a significant cost impact, both upon the regulated industry and upon the general public. Interested parties are strongly urged to closely review this proposal and the associated documents (such as the Regulatory Impact Analysis), and provide input and comments to USEPA during the review period. Please contact us with any questions.
 

First, why does biomass get special treatment? In short, two words: carbon cycle. The combustion (direct or indirect) of biomass as a fuel indisputably places CO2 in the atmosphere. But this carbon is part of the current carbon cycle: it was absorbed during the growth of the biomass over the previous few months or years and, provided the land continues to support growing plant material, a sustainable balance is maintained between carbon emitted into the atmosphere and absorbed into the biomass. In sum, the carbon used to construct biomass is absorbed from the atmosphere as carbon dioxide (CO2) by plant life, using energy from the sun.

Second, what is biomass? While it can mean different things to different people, this post cares about how USEPA defines it. USEPA defines biomass as “biogenic CO2 emissions,” in turn defined as emissions of CO2 from a stationary source directly resulting from the combustion or decomposition of biologically based materials other than fossil fuels. Examples include, but are not limited to:

• CO2 generated from the biological decomposition of waste in landfills, wastewater treatment or manure management processes
• CO2 from the combustion of biogas collected from biological decomposition of waste in landfills, wastewater treatment or manure management processes
• CO2 from fermentation during ethanol production
• CO2 from combustion of the biological fraction of municipal solid waste or biosolids
• CO2 from combustion of the biological fraction of tire-derived fuel
• CO2 derived from combustion of biological material, including all types of wood and wood waste, forest residue, and agricultural material

It is important to note that non-CO2 emission from combustion of biomass (methane, nitrous oxide) are not part of USEPA’s definition and thus are not subject to the Proposed Deferral and Guidance.

The applicability to both PSD and the Title V programs is dependent on whether the stationary source meets certain emissions thresholds. On June 3, 2010, USEPA issued the Tailoring Rule and established two steps to implement PSD and Title V. Tailoring Rule Step 1 began January 2, 2011. Step 1 applies to sources subject to PSD or Title V anyway because of their emissions of other pollutants (“anyway” sources) and that have the potential to emit 75,000 tpy CO2e (or to increase emissions by that amount for modifications). Tailoring Rule Step 2 begins July 1, 2011. In addition to anyway sources, Step 2 applies to new facilities emitting GHGs in excess of 100,000 tpy CO2e, and facilities making changes that would increase GHG emissions by at least 75,000 tpy CO2e, and that also exceed 100/250 tpy of GHGs on a mass basis.
The question raised by these threshold determinations is: does biomass “count” for purposes of meeting these thresholds?

To answer this question, USEPA published a Call for Information in July 2010 to obtain scientific and technical information concerning GHG resulting from the use of biomass and PSD. Some data supported the conclusion that certain biomass materials, such as waste whose inevitable decomposition will result in greenhouse gas emissions anyway, have only very limited climate impacts when combusted as fuel. However, other data indicated that the use of certain other biomass as fuel could have more significant climate impacts.

This contradiction led USEPA to announce January 12, 2011 that it will undertake an expedited rulemaking to be completed by July 1, 2011 to defer application of pre-construction permitting requirements to biomass for a period of three years. During that time, USEPA proposed to initiate a scientific examination with partners from other federal agencies and scientists outside the government with relevant expertise to assist the agency in determining how CO2 emissions from biomass should be handled under PSD. Further, in the interim, USEPA indicated it will issue guidance that states and local agencies can use to conclude that BACT for GHG at biomass sources is combustion of biomass fuels alone.

Summary of Three Significant Issues in Proposed Deferral and Guidance
As noted above, the Proposed Deferral and Guidance take significant actions with regard to (1) timing, (2) applicability, and (3) the co-firing question.

Timing and the Proposed Deferral
First, note that no biomass source is deferred until the Proposed Deferral is finalized as a final rule. USEPA indicated final action on the Proposed Deferral by July 2011. This is a very ambitious timeline, particularly in light of the admissions by USEPA in the Proposed Deferral that the deferral of biomass will require State Implementation Plan revisions for certain states under the Clean Air Act. These facts call into question whether USEPA can meet the deadline of July 2011. And keep in mind that as the deadline is extended, it increases the likelihood that PSD and Title V permitting provisions will apply to biomass sources.

Applicability and the Proposed Deferral and Guidance
The scope of the Proposed Deferral is wider than the scope of the Guidance. Whereas the Proposed Deferral applies to “all sources of biogenic CO2 emissions,” the Guidance applies merely to “bioenergy facilities.” This means that to the extent a biomass facility does not fit into the definition of “bioenergy facility,” the source is left without guidance (except as biomass is addressed in the GHG BACT guidance) with regard to the applicability of the PSD and Title V programs until the Proposed Deferral is finalized (again, potentially a longer period of time than optimistically estimated by USEPA).

The good news is that the Guidance definition of “bioenergy facility” is quite broad and defined as “a facility that generates energy via the combustion of biologically-derived material other than fossil fuels, for example, wood, biosolids, or agricultural products. This could be undertaken either alone or in addition to traditional fossil fuels.” See Guidance, footnote 1. The last sentence of the definition includes co-firing or mixed fuel facilities – and greatly extends the reach of the Guidance.
However, even if the facility qualifies as a “bioenergy” facility, USEPA has left the door open to walk away from a strict application of the Guidance by stating that USEPA believes the analysis described in Guidance will be sufficient in most cases to support the conclusion that utilization of biomass fuel alone is BACT for a bioenergy facility.
 

The Co-Firing Question
The Proposed Deferral states that for stationary sources, co-firing fossil fuel and biologically based fuels and/or combusting mixed fuels (e.g., tire-derived fuels, municipal solid waste), the biogenic CO2 emissions from that combustion are included in the deferral. However, the fossil CO2 emissions are not.

USEPA acknowledged that various methods are available to calculate that fraction of biogenic CO2 emissions from co-firing facilities. USEPA is specifically requesting comments regarding: (1) whether the deferral should specify whether co-firing biomass faculties should use a specific method for determining biogenic CO2 emission; and (2) other ways to ensure there is an accurate estimate of how much biogenic CO2 is subject to deferral at co-firing facilities, particularly when combusting mixed fuels. This is an important opportunity for co-firing facilities’ voices to be heard on this important issue.

The meetings began with a presentation from USEPA giving an overview of the Draft Study Plan, along with a discussion of the proposed case studies, which include both retrospective and prospective case studies to be conducted in North Dakota, Texas, Pennsylvania, and Colorado. In the Marcellus, two retrospective studies are planned for Bradford and Susquehanna Counties and Wetzel, Greene and Washington Counties. Prospective studies are planned in Washington County at a Range Resources site and also at a Chesapeake site that will likely lie outside of the Marcellus, but has not yet been selected. After the overview concluded, public comments were heard. Public Commenters included Gary Slagel of Consol Energy on behalf of the Marcellus Shale Coalition, Tim Stewart representing the Western Energy Alliance, Susan Olliver, a New York landowner in favor of natural gas production, Dennis Degner of Range Resources, Cynthia Lane of the American Water Works Association, Sara Gingold of Food and Water Watch, Amy E. McDonnell from the Chesapeake Bay Foundation, Lauren Pagel of Earthworks, Briana Mordick of the Natural Resources Defense Council, Lynn Howard Ehrle from the International Science Oversight Board, Jeff Zimmerman from Damascus Citizens for Sustainability and Friends of the Upper Delaware River and Deborah Cowden, a physician. Generally, the commentators raised issues regarding the breadth and scope of the plan, some arguing it is too broad and others believing it is too narrow, concerns about the sources being used, and calls for unbiased information to be provided to the public as quickly as possible. Concerns were also raised about the treatment of wastewater before it is discharged, particularly in the Marcellus region, and the impact on humans from multiple chemical exposure. Copies of the speakers' written comments are available here.

Once the public comment period concluded, the panel discussed its 5 charges from Director of the Office of Science and Policy and the contents of the draft plan. Those charges generally asked the panel to comment on the appropriateness of the water lifecycle identified by USEPA to characterize hydraulic fracturing to be used as the framework of the plan, whether the research questions identified by USEPA are correct questions, whether the research approach identified is sufficient, whether the proposed research activities adequately answer the questions, and whether the proposed research will be able to identify the key impacts, if any, of hydraulic fracturing on drinking water resources and provide relevant information on the toxicity and exposure pathways of chemicals associated with hydraulic fracturing. Lively discussion, and at some points debate, ensued as the experts discussed comments, critiques and questions about the proposed plan. In particular, it seemed that the panel wanted some of the terms used, such as "water quality," to be better defined. The panel also agreed that the research questions were too general and needed to be made more specific to comply with the requirements of a scientific approach to answering the questions. Another overarching theme to the discussion was the need to study the interrelatedness of not just the many steps to drilling, but also the impact of increased drilling in a region over many well sites.

Once completed, the Panel will provide comments to the USEPA for consideration before the final Study Plan is published.

Requirements for Boilers at Major Source Facilities

For boilers located at major source facilities, the following requirements are being implemented:

• For all new and existing natural gas- and refinery gas-fired units, the final rule establishes a work practice standard, instead of numeric emission limits. The operator will be required to perform an annual tune-up for each unit. Units combusting other gases can qualify for work practice standards by demonstrating that they burn “clean fuel,” with contaminant levels similar to natural gas.
• For all new and existing units with a heat input capacity less than 10 million British thermal units per hour (MMBtu/hr), the final rule establishes a work practice standard instead of numeric emission limits. The operator will be required to perform a tune-up for each unit once every 2 years.
• The final rule establishes a work practice standard instead of numeric emission limits for all new and existing “limited use” boilers. The operator will be required to perform a tune-up for each unit once every 2 years. These units are operated less than 10 percent of the year as emergency and backup boilers to supplement process power needs.
• The final rule establishes numeric emission limits for all other existing and new boilers and process heaters located at major sources (including those that burn coal and biomass). The final rule establishes emission limits for:
  • Mercury
  • Dioxin
  • Particulate Matter (PM)
  • Hydrogen Chloride (HCl)
  • Carbon Monoxide (CO)
• The final rule requires monitoring to assure compliance with emission limits. The largest major source boilers must continuously monitor their particle emissions. All units larger than 10 MMBtu/hr must monitor oxygen as a measure of good combustion.
• Existing major source facilities are required to conduct a one-time energy assessment to identify cost-effective energy conservation measures.

Requirements for Boilers at Area Source Facilities

Area source facilities will be required to meet the following:

• For new boilers, the final rule requires the following:
  • Coal-fired boilers, with heat input equal or greater than 10 million Btu per hour, are required to meet emission limits for mercury, PM, and CO.
  • Biomass and oil-fired boilers, with heat input equal or greater than 10 million Btu per hour, must meet emission limits for PM.
  • Boilers with heat input less than 10 million Btu per hour must perform a boiler tune-up every two years.
• For existing boilers the final rule requires the following:
  • Coal-fired boilers, with heat input equal or greater than 10 million Btu per hour, are required to meet emission limits for mercury and CO.
  • Biomass boilers, oil-fired boilers, and small coal-fired boilers are not required to meet emission limits. They are required to meet a work practice standard or a management practice by performing a boiler tune-up every 2 years. By improving the combustion efficiency of the boiler, fuel usage can be reduced and losses from combustion imperfections can be minimized. Minimizing and optimizing fuel use will reduce emissions of mercury and all other air toxics.
  • All area source facilities with large boilers are required to conduct an energy assessment to identify cost-effective energy conservation measures.

What This May Mean: More Gas and Less Coal

The obvious result from these new regulations will be to drive a move away from the use of coal as a fuel supply and to replace coal usage with natural gas. The majority of the existing coal fired boilers in the country will need to be retrofit with new, potentially very costly, air pollution control devices. Facilities which burn natural gas as a fuel can expect to see much lower costs for compliance with the new regulations. Facilities affected by this new rule will need to look closely at their costs for compliance in order to determine the most cost-effective solution for their situation.

Specific industries will also have compliance issues which are not adequately resolved in the current regulation. For example, manufacturers of coke for the iron and steel industry generate excess coke oven gas (COG) from their operations. These gasses are typically burned in a boiler to recover the heat value as opposed to flaring. However, COG may not qualify as a “clean fuel”. It may be necessary for coke plants which burn COG to install new controls on their boilers, even if they do not burn coal.

But Are They Really Final?

These new regulations have generated significant industry interest, and numerous and detailed comments were submitted during the draft period of the regulations. Most industry groups feel that USEPA has significantly underestimated the costs for compliance, and that EPA’s determination of the emission limitations is incorrect from both a technical and statistical basis. USEPA has recognized the continued debate, and has announced that they may reconsider certain portions of the rules and has requested additional comments and data submissions by the affected parties.

The final rules are due to be published in the federal register sometime this month.
 

1.         The Start of USEPA’s “Tailoring” Rule

Despite a lot of buzz, proposed bills and speculation, the U.S. Congress failed to comprehensively address GHG emissions last year. In filling the void, USEPA has taken several steps to regulate GHGs, including promulgation of the Tailoring Rule, the first rule under the stationary source provisions of the Clean Air Act controlling GHG emissions. It applies only to new and modified sources; certain larger GHG emission sources will be subject to permitting requirements for planned construction projects under the Tailoring Rule starting January 2, 2011. For further details on this and related issues, please contact Larry Demase, Lou Naugle, Todd Maiden, Harley Trice or Jennifer Smokelin.

2.         The Application of USEPA’s BACT Guidance for GHGs

USEPA recently released a key piece of the GHG permitting puzzle, a guidance entitled “PSD and Title V Permitting Guidance for Greenhouse Gases.” With the January 2011 implementation of the Tailoring Rule requiring large industrial sources to obtain permits for GHG emissions, this guidance aims to assist permitting authorities in enacting GHG permitting programs. In particular, the 97-page document addresses Prevention of Significant Deterioration (PSD) applicability to GHG and BACT (Best Available Control Technology), and other PSD requirements. The guidance also discusses Title V applicability requirements and GHGs, as well as permitting requirements for Title V permits with regard to GHGs. We’ve analyzed these BACT issues on our blog and discussed them in our quarterly climate change teleseminars. For further details on this and related issues, contact Larry Demase, Jennifer Smokelin or David Wagner.

3.         With the Defeat of AB 23 in California, the State Continues to Pursue Cap and Trade

Proposition 23 would have suspended California's Global Warming Solutions Act of 2006, also known as AB 32. AB 32 is one of the most aggressive and forward-thinking environmental laws in the United States, and sets targets to reduce greenhouse gas emissions to 1990 levels by 2020 and obtain 33 percent of the state’s power from renewable sources by 2020. California's voters’ rejection of a ballot measure to effectively suspend the implementation of AB 32 means California remains on track to issue aggressive cap and trade regulation of GHGs come 2012. For further details on this and related issues, contact Todd Maiden, John Lynn Smith, or Eric McLaughlin.

4.         SEC’s Corporate Disclosure Requirement Regarding Climate Change

Early last year, the Securities and Exchange Commission voted to adopt interpretive guidance addressing public company disclosure standards in connection with climate change. While this interpretive guidance is not intended to impose new standards, it continues to serve as an important reminder for public companies, potentially as part of their disclosure controls and procedures, to assess whether climate change may have a material impact upon their business and financial condition. For further details on this and related issues, contact Lou Naugle or Jennifer Smokelin.

5.         Following COP Failures in 2009 and 2010, Will 2011 Reverse the Trend?

This United Nations-sponsored conference of the parties (“COP”) in Copenhagen at the end of 2009 (also know as COP 15, as the 15th conference of parties under the UNFCCC) was thought to be the vehicle for a treaty on the reduction of GHG gases, but produced almost no significant results. Further, last month’s COP 16 did not seem to make any significant progress on major issues, but it did serve to affirm the UN as the venue for international climate action. With several UN climate meetings in 2011, including COP 17, we’ll again look for significant international agreement on climate issues in 2011. For further details on this and related issues, contact Larry Demase, Jennifer Smokelin or David Wagner.

6.         Increasing Interest in Regulations Related to Carbon Capture and Storage

Although carbon dioxide (CO2) is a valuable and marketable commodity, there are several barriers to the near-term deployment of commercial-scale carbon capture and storage (CCS) projects in the United States. They include cost and the related lack of economic drivers, regulatory uncertainty, and an inadequate legal framework for CCS. There is, however, a growing federal interest in CCS, and Jennifer Smokelin recently discussed a few examples of this interest, including USEPA’s BACT guidance and a GHG reporting rule. In particular, a USEPA rule requires permit holders to create a CO2 monitoring, reporting and verification plan, and to report the amount of CO2 sequestered using a mass balance approach under the Clean Air Act. Regulated entities must collect data in 2011 and begin submitting reports to USEPA by March 31, 2012. Also, in 2011, look for more CCS activity on the state level, including recommendations in support of a comprehensive legal/regulatory framework for permitting proposed CCS projects in California. Internationally, we expect the International Energy Agency to work with countries to implement its CCS Model Regulatory Framework. To learn more about CCS issues, please contact Jennifer Smokelin or David Wagner.

7.         Mandatory GHG Emission Monitoring and Reporting Requirements

GHG reporting requirements from certain sources that emit 25,000 metric tons or more of GHGs per year are due March 31, 2011. Douglas Everette addressed issues and problems to consider regarding GHG emissions monitoring and reporting in Reed Smith's 4th Quarter Climate Change Report. In addition to this rule and the GHG reporting requirements related to carbon capture and sequestration (discussed above), USEPA finalized a rule that requires the annual reporting of GHG emissions from qualifying facilities in the upstream oil and natural gas sector, including onshore production. USEPA is operating on an expedited timetable, requiring applicable industries under these rules to begin collecting data January 1, 2011, and begin submitting the first round of reports to USEPA by March 31, 2012. For more information on the rules, please go to Jennifer Smokelin’s post or send her an email.

8.         Single Stationary Source Determinations for Oil and Gas Operations

Here’s an air issue of particular relevance to Marcellus Shale well sites: whether and to what extent air emissions from the exploration, extraction and production activities related to well sites should be aggregated. The aggregation of gas (and oil) activities by regulatory bodies will influence whether they must obtain a minor source permit or a major source permit for purposes of Title V permitting, new source review and prevention of significant deterioration. With respect to Marcellus Shale, the pollutant-emitting activities include individual compressor stations, such as internal combustion engines, boilers, and emergency generators, and multiple compressor stations connected by pipelines. In 2011, aggregation will be an issue related to USEPA’s upcoming air quality standards for ozone and fine particulate matter (PM 2.5), technical guidance developed on the state level (including by Pennsylvania’s Department of Environmental Protection), and the scope of the federal requirement to report GHG emissions for “all petroleum and natural gas equipment … located in a single hydrocarbon basin.” To discuss these issues, please contact Lou Naugle, Larry Demase, Jennifer Smokelin or David Wagner. 

9.         For the First Time, USEPA Will Issue GHG Emission Standards

Under a recent settlement filed in federal appeals court, USEPA will propose GHG emissions standards for power plants by July 2011 and for refineries by December 2011. The standards, known as New Source Performance Standards, would set the level of GHG emissions new facilities may emit and also address emissions from existing facilities. For more information, contact Larry Demase, Lou Naugle or Jennifer Smokelin, or visit Larry’s blog post on this development.

10.       With the Approval of the Cape Wind Renewable Energy Project in Nantucket Sound, Other Approvals Are Expected in Late 2011

In early 2010, the federal government approved the Cape Wind energy project in Nantucket Sound, a $1 billion wind farm in the U.S. Outer Continental Shelf. According to the government, the Cape Wind project will generate enough power to meet 75 percent of the electricity demand for Cape Cod, Martha's Vineyard and Nantucket Island combined, and, as compared with conventional power plants, will cut carbon dioxide emissions by 700,000 tons each year. Building on the Cape Wind lease, the U.S. Department of the Interior announced in November that it would work quickly to identify priority areas and expedite leases for offshore wind projects in the Atlantic Ocean. The first leases are expected to be offered in Maryland, Delaware, New Jersey, Virginia, Rhode Island and Massachusetts waters by the end of 2011, to be followed shortly thereafter by New York, Maine, North Carolina, South Carolina and Georgia. For questions related to this issue, including applications for offshore transmission lines, please contact Larry Demase or David Wagner.

11.       The Clean Development Mechanism and the Uncertainty in the Carbon Markets Created by HFCs

The United Nations’ Clean Development Mechanisn (CDM) allows industrialized countries to invest in emission reductions wherever it is cheapest globally, and certified emission reductions (CERs) are a type of carbon credit issued by the CDM Executive Board for emission reductions achieved by CDM projects.  In late November, the CDM Executive Board decided to revise the rules governing hydrofluorocarbon-23 (HFC-23) destruction on the basis that carbon credits related to HFC-23 are creating windfall profits and threatening the integrity of the carbon market.  The CDM Executive Board’s decision came just days after a European Commission proposal to ban the use of HFC-23 in the EU Emissions Trading Scheme as of January 2013. The Commission explained that “the acceptance of credits from industrial-gas projects has been controversial for some time. Certain gases [such as HFC-23] have a very high global-warming potential, and abatement is very cheap. This can create huge financial rewards for project developers.” A majority of CERs issued to date have come from HFC-23 projects, mostly in China and India, and these two countries, especially China, are not happy. As Larry Demase anticipated in Reed Smith's 3rd Quarter Climate Change Report, this issue is creating significant uncertainty and it could have a destabilizing effect on the CER market. To learn more, please contact Larry Demase or Jennifer Smokelin.

Unexpected in these settlements, which were filed in the U.S. Court of Appeals for the District of Columbia Circuit, is the agreement by USEPA to propose guidelines for existing EGU and Refinery sources, since they were not the subject of the original litigation by the states and environmental groups. See State of New York v. EPA, No. 06-1322 (EGUs) and American Petroleum Institute v. EPA, No. 08-1277 (Refineries). EPA’s agreement, however, is consistent with the Obama Administration’s promise to achieve its climate change goals through existing regulatory authority, since new enabling legislation appears to be foreclosed by the make up of the new Congress. It is also possible USEPA may extend its rulemaking to sources other than EGUs and Refineries.

NSPS must reflect the degree of emission limitation achievable through the application of the best system of emission reduction the USEPA determines is cost effective and has been adequately demonstrated. In the agreements USEPA states that it believes there are cost effective control strategies for reducing GHGs from both EGUs and Refineries. Once the NSPS rules are formally promulgated, states may develop and submit to USEPA a procedure for implementing and enforcing them within the state. Once the guidelines for existing sources are issued, EPA will issue calls to the states to amend their implementation plans to include a plan for controlling GHG emissions based on those guidelines. States may take into consideration the remaining useful life of existing sources within its borders in applying GHG emission limitations to those sources. See Section 111(d)(1) of the Clean Air Act.

The agreements do not specify the content of the NSPS or the guidelines.

As background, new major stationary sources and major modifications at existing major stationary sources are required under the Clean Air Act to obtain an air permit before commencing construction. If the new source or major modification is planned for an area in which the national ambient air quality standards (NAAQS) are met or are “unclassifiable,” PSD requirements apply. PSD requirements obligate any new major stationary sources and major modifications to apply BACT for the source. Since there are no NAAQS for GHGs (or any proposed by USEPA), the entire United States is “unclassifiable” for GHG and subject to PSD, so all new major stationary sources and major modifications to which GHG emission regulations apply will require BACT for GHG emissions.

So . . . what is BACT in the context of GHGs? And how would a regulated entity achieve BACT? Broadly speaking, BACT is an emissions limitation that is based on the highest degree of control that can be achieved by a particular facility. But the guidance does not define or require a specific control option for a particular type of source because BACT is to be determined on a case-by-case basis. This new guidance provides the basic information that permit writers and applicants need to address GHGs. With regard to PSD and GHGs, not surprisingly USEPA recommends that permitting authorities use the BACT process to look at all available emission reduction options for GHGs. After taking into account technical feasibility, cost and other economic, environmental and energy considerations, permitting authorities should narrow the options and select the best one. USEPA anticipates that, in most cases, this process will show that the most cost-effective way for industry to reduce GHG emissions will be through energy efficiency.

Interestingly, USEPA is soliciting public feedback on the guidance over the next few weeks on any aspect of the guidance that contains technical or calculation errors, or where the guidance would benefit from additional clarity.

In the next week, we will be providing analysis on portions of the guidance that should be of interest to you and your facilities. The first of these niche publications will address Title V permitting under the guidance for sources with pending Title V renewal applications not issued in draft before January 2, 2011. Stay tuned.

GAO’s report includes several recommendations to USEPA and indicated that these recommendations are already “in process” at the Agency:

• Complete its plan to issue a Significant New Use rule for nanomaterials.
• Modify Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) pesticide registration guidelines to require applicants to identify nanomaterial ingredients in pesticides.
• Complete its plan to clarify that nanoscale ingredients in already registered pesticides, as well as in those products for which registration is being sought, are to be reported to EPA and that EPA will consider nanoscale ingredients to be new.
• Should consider revising the Inventory Update under TSCA so that it will capture information on the production and use of nanomaterials and so that the agency will receive periodic updates on this material."
• Make greater use of the Agency’s authorities to gather information under existing environmental statutes. Specifically, USEPA should:
  • complete its plan to use data gathering and testing authorities under TSCA to gather information on nanomaterials, including production volumes, methods of manufacture and processing, exposure and release, as well as available health and safety studies; and
  • use information-gathering provisions of the Clean Water Act to collect information about potential discharges containing nanomaterials.

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.

Geologic sequestration research and development (R&D) projects (projects that receive federal funding for researching monitoring techniques and practices) would not be required to develop MRV plans or report the additional information required for geologic sequestration, but could choose to opt-in to these requirements.

For those facilities that inject CO2 for the purposes of enhanced oil and gas recovery and only report injection data, USEPA estimates the annualized cost of reporting for each facility to be $4,000. For those facilities that inject CO2 for the purposes of long-term geologic sequestration, additional reporting and monitoring would be required as indicated above and the estimated annualized cost of reporting for each facility required to report geologic sequestration is $300,000.

Most facilities that inject CO2 underground hold permits through USEPA’s Underground Injection Control (UIC) permitting program under the Safe Drinking Water Act. This rulemaking does not change any of the requirements to obtain or comply with a UIC permit. Through a separate rulemaking effort USEPA has proposed federal requirements under the UIC program for the underground injection of carbon dioxide to ensure protection of underground sources of drinking water. This action fulfills a separate but complementary goal which is to track the total amount of CO2 sequestered and to confirm that it remains sequestered and is not emitted to the atmosphere over the long term.

The first annual reports of CO2 injection amounts would be due to USEPA by March 31, 2012 for injection that occurs in 2011. The public comment period for this proposed rulemaking will be open for 60 days after publication in the Federal Register. In addition, a public hearing on this proposal will be held on April 19, 2010, in Arlington, VA.

In the United States’ continued effort to woo the world, today’s special guest at the US Pavilion was Secretary of Commerce Gary Locke.  Secretary Locke called for a “unified international action” that calls on “each of us” to do our part.  Not surprisingly, his speech focused on green job and how green commerce can spur the economy.  Retreating from Secretary of Interior’s statement regarding coal use in the future, Secretary Locke was clear that the days of fossil fuels, and fossil fuel subsidies, are “gone”. 

Secretary Locke specifically said we need to rely on the entrepreneurs and inventors an all countries to come up with ideas and ways to get us out of the climate crisis and create a “new model for economic growth”.  The transition to a clean energy economy, Secretary Locke said, will not be easy, but we can look to the Danish example that accomplished a two-fold increase in GDP while keeping energy consumption the same since 1970.  The change to a clean energy economy will take regulatory reform in zoning, permitting for renewables, as well as a gas tax and removal of any oil subsidies to promote renewable fuel.  To the naysayers that call cap and trade an “Armageddon”, Secretary Locke pointed to the success of the United States acid rain sulfur dioxide allowance trading program. He failed, however, to address the “scale” issues inherent in such a comparison: the acid rain program included a little over 100 sources; the proposed cap and trade system includes over 10,000 sources which is an increase by TWO orders of magnitude. Think of it this way: just because you can serve a nutritious dinner to 4 people and make sure everyone eats their vegetables, that does not mean it is just as easy or the food is as good when you prepare a meal for 4000. 

Also, the leaders of the AWG-KP were asked to name their biggest frustration so far in the negotiations, and all unanimously agreed that “lack of time” haunted them.  If it is to meet its mandate under the Bali plan (again, see Day 2 post), the AWG-KP only has two days to finalize negotiations and report to the COP.  AWG-KP leaders admitted there was still no consensus on major issues: what gases would be covered under the Kyoto Protocol in the new compliance period, what the length of time was for the new compliance period, the base year applicable to the new compliance period, and most important, the reduction commitments by Annex B countries (remember, not the United States) for the new commitment period. 

The most interesting question came from the floor regarding Canada’s lack of compliance and what, if anything, the AWG-KP was doing about it in this or the next compliance period. The Chair answered quickly and correctly that the commitment period under Kyoto Protocol ends in 2012, followed by a true-up period that ends 2015. So it’s not until 2015 that any determinations regarding non-compliance can be made. If there is a party in non-compliance, the Chair said there was a “complex committee” who would deal with that. He joked, “Thanks for the heads up” regarding Canada and they would be on the lookout for Canada’s compliance.

USEPA and its Endangerment Finding: Still in the News

Also today, David McIntosh, USEPA’s Associate Administrator in the Office of Congressional and Intergovernmental Relations, addressed BINGOs.  Perhaps to allay industry’s fears of little transparency if USEPA is solely responsible for regulating GHGs and in contrast to many expert opinions that the Endangerment Finding is “the most significant” action of USEPA in recent years, Mr. McIntosh stressed that the Endangerment Finding triggers three (and only three) USEPA actions under the Clean Air Act.  First, he said it triggered the GHG reporting rule.  This might be a bit disingenuous as my understanding was the GHG reporting rule was triggered by a congressional mandate buried in a budget bill.  Nonetheless, in an attempt to preempt challenges to the reporting threshold of 25,000 pounds, Mr. Mcintosh explained that the mandate required reporting at “reasonable” level and USEPA set that at 25,000 carbon dioxide equivalent, or roughly 2300 times the carbon footprint of the average US household. 

Second, Mr. McIntosh explained that the Endangerment Finding required USEPA to take steps under the Clean Air Act to regulate mobile sources. To meet this mandate, USEPA proposed (in September 2009) and will finalize in March 2010 the rules for light duty vehicles for model years 2012-2016.  Mr. McIntosh clearly inferred that these were the only rules USEPA would publish - that this covered all mobile sources.  This is clearly disingenuous as Title II of the Clean Air Act covers all mobile sources (that is, anything with wheels, aviation included) not just light duty vehicles.  Finally, McIntosh explained that the only other automatic implication of the Endangerment Finding is that once the light-duty rule is finalized (that is, as of March 2010), any new (or major modification to an existing) large stationary source must include GHGs in the best available control technology (BACT) demonstration for permitting.

Most experts agree it will be harder for Congress to act to preempt USEPA with regard to regulating GHG from stationary sources once USEPA actually starts to regulate GHGs from stationary sources, so one could view the March 2010 date stated by Mr. McIntosh as a deadline given by USEPA to Congress and industry, that is, if you want cap and trade, pass it by March 2010 – otherwise you’ll get BACT and command and control permitting.  To ease industry’s fears with regard to BACT permitting, USEPA is preparing guidance.  Such guidance will focus on “available” technology, and Mr. McIntosh specifically said, for example, that the Agency would not consider carbon capture and storage as “available”.  In fact, the guidance will likely rely on merely requiring state of the art efficiency for existing stationary sources rather than require (at least immediately) any new control equipment for GHGs.  Mr. McIntosh also stated that USEPA will be coming out with carbon capture and storage regulations under the Safe Drinking Water Act, but such regulations will not address any CERCLA and RCRA concerns that may arise under carbon capture and storage.

Instead of Marvin Gaye, the Secretary of Interior Sings from the US Pavilion

Today at the US pavilion, Secretary of Interior Ken Salazar (accompanied by Deputy Secretary of Interior, David Hays) addressed a SRO crowd, stating the US understands the danger that climate change presents and that the United States is committed to confronting that danger “together with our partners in the international community”. As for its part to combat climate change, the U.S. Department of Interior (DOI) has three roles: (1) promote renewable energy (particularly mentioned at least in the near term was solar and wind, although nothing was ruled out), (2) identify the right places on public lands for carbon capture and storage, and (3) promote certain adaption measures (address shifting water supplies, wildlife corridors, and raising sea levels).  Specifically, Secretary Salazar stated that by the end of 2010, DOI expects to have more than 5300 MW worth of new solar and wind projects ready for construction - enough to meet the needs of 1.6 million houses and create 56,000 new jobs.  He elaborated on DOI’s recent announcement to open up a new office for renewable energy permitting in the Atlantic states, to promote, among other things permitting for wind energy on the outer continental shelf in Delaware and New Jersey.  In conclusion, Secretary Salazar stated his belief that those who believe climate change is not real are “wrong”, and that as a nation we will pass comprehensive energy and climate change legislation, we will build a clean energy future, and we will establish a comprehensive international framework to address GHGs.

So with that, it’s time to head for the best tasting “kaffe” I can find.

While it takes two in Copenhagen, it also takes two in Washington, DC. After Laurie Fulton, U.S. Ambassador to Denmark introduced USEPA Administrator Lisa Jackson, Ms. Jackson’s first comment was to note that “each of us” has responsibilities regarding GHG reduction to “make up for lost time”. She then touted USEPA accomplishments in addressing responsibilities to this point – the Administration’s Clean Energy incentives including $80 billion in renewable energy, the largest such investment in renewable energy in history, Energy STAR, Clean Cars program, GHG reporting requirements, and newly published Endangerment Finding. 

At the mention of the last, the room erupted into spontaneous applause. But Administrator Jackson was careful to clarify the significance of the Endangerment Finding. She stated that 2009 marks the year that the United States “seriously addresses” climate change, and stressed that USEPA only intends to continue as it always has under the Clean Air Act to address GHG - that is, to take “reasonable efforts” and “meaningful commonsense steps” to address GHG under the Act. She stressed that the Administration still expects to “work closely with Congress to pass Clean Energy reform” because only through Congressional action can the US get economy-wide legislation that sends a clear signal regarding the United States’ commitment to GHG and accomplish the buy-in that is necessary for national legislation through “give and take”. What does this mean? Again, it takes two. 

It also means that the Endangerment Finding opens the door to USEPA regulation of GHGs under existing regulation through the Clean Air Act and, although a blunt tool, technically no congressional action would be necessary to move forward with GHG regulation in this country. So when President Obama shows up here for negotiations next week, it is not necessary for him to only agree to GHG limits that Congress would agree to. But on the international level, Congress still holds the upper hand, because Senate approval (by a two-thirds vote) is required to ratify any international treaty. 

So unless Administrator Jackson wants a repeat of what happened in Kyoto (delegation agrees to certain limits, only to have that agreement repudiated by Congress), the President must be careful from a political standpoint how he uses the Endangerment Finding. And based on Ms. Jackson's statement, the Administration is carefully signaling that regulation of GHGs in this country is “both/and” not “either/or” when the question is whether Congress or USEPA will regulate GHGs. Ms. Jackson also took pains to calm what might be jittery corporate nerves (corporation worry about the “lack of transparency” if USEPA solely has authority over regulation of GHG) by stating at least twice that any move by USEPA to regulate GHG under the Clean Air Act would be through “reasonable” and “common sense” approaches that has served as the hallmark of regulation under the Clean Air Act since its inception in 1970. 

So the Endangerment Finding should not be veiled as a red flag to be waived in the face of Congress with a warning that USEPA will act in the face of continued congressional inaction. Nor should it be viewed as a carte blanche pass for negotiation of the US delegation at the COP. Rather, according Administrator Jackson, it is merely a “clear signal” (to other countries and industry) that the United States “is on the road to putting price on carbon”. The Administrator also took a moment to refute the recent attack on climate science (i.e., Climategate) saying that climate change is a household word and that the data and the science behind it has been extensively “peer reviewed”. This statement anticipates the likely court challenge to the Endangerment Finding that will make the argument that there is no “scientific basis” for such a finding.

Potentially, USEPA’s endangerment finding could trigger a series of steps by the Agency beginning with the designation under the Clean Air Act of greenhouse gases as “criteria” air pollutants and concluding with development of new source performance standards for major categories of new and modified stationary pollution sources along with state implementation plans which contain enforceable emission controls for existing pollution sources within individual states. See Sections 108(a)(i), 111 and 110(a) of the Clean Air Act. On December 2, 2009 in anticipation of the endangerment finding the Center for Biological Diversity and an organization called 350.org filed a petition with USEPA asking the Agency to go forward and regulate greenhouse gases pursuant to the provisions of the Clean Air Act. Petitioners propose that EPA establish national primary and secondary pollution “caps” for greenhouse gases pursuant to Section 109(a) of the Clean Air Act and expeditiously facilitate and aid the states in the state implementation process. This petition has been criticized within the environmental community as being counterproductive to the development of comprehensive legislation.

            USEPA’s decision to announce its action has two apparent purposes. The first is to encourage the House and Senate to move forward with climate change legislation because it is generally seen in most quarters that, if USEPA undertakes to control greenhouse gases under the Clean Air Act, it will bring litigation, uncertainty and more onerous requirements than a comprehensive economy-wide legislative approach. At present both the House and Senate bills being debated contain provisions which would prevent or limit USEPA’s regulation of greenhouse gases under the Clean Air Act, so a vote for the legislation could allow legislators some cover even if it had provisions that were not constituent friendly. The second apparent purpose is that yesterday was the first day of the United Nations Climate Change Conference in Copenhagen and USEPA’s action will help President Obama reinforce his leadership position in Copenhagen, and according to Ms. Jackson will demonstrate to the world the United States’ strong commitment to action on climate change. Reed Smith attorneys are attending the conference as delegates.

            The greenhouse gases covered by the endangerment finding are carbon dioxide, methane, nitrous oxide, hydrofluoro carbons, perfluorcarbons and sulfur hexafluoride.