GHG Regulation Under the Clean Air Act: What Can We Expect?

Scott J. StoneFrederick R. Eames

Hunton & Williams LLP

Wye Workshop: Strategic Initiatives for CCS

Deployment Queenstown, Maryland

November 19, 2009

GHG Regulation Under the Clean Air Act: What Can We Expect?

Scott J. StoneFrederick R. Eames

Hunton & Williams LLP

Wye Workshop: Strategic Initiatives for CCS

Deployment Queenstown, Maryland

November 19, 2009

Regulation of GHGs Under the Clean Air ActBackground

April 2007 – In Massachusetts v. EPA, Supreme Court finds that EPA does have authority to regulate GHGs under the Clean Air Act. GHGs fall within the Act’s definition of “air pollutant.” EPA to reconsider petition for rulemaking for GHGs from

mobile sources. EPA to look at question of “endangerment” – notably did

not tell EPA what it had to do with regard to endangerment issue.

Regulation of GHGs Under the Clean Air ActBackground

July 2008 – EPA issues Advance Notice of Proposed Rulemaking Regarding Regulation of Greenhouse Gases under the Clean Air Act. EPA acknowledged that regulation of GHGs under one

provision of the Clean Air Act could have substantial ramifications under other provisions of the Clean Air Act.

Sought comment on broad array of issues related to regulation of GHGs under the Clean Air Act.

Comments filed in November 2008.

Regulation of GHGs Under the Clean Air Act EPA’s Proposed Endangerment Findings

April 2009 – EPA issues proposed Endangerment Finding. Two proposed findings:

1. Six GHGs endanger public health and welfare: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.

2. Combined emissions of four of those GHGs (bolded above) from new motor vehicles and new motor vehicle engines contribute to air pollution that is endangering public health and welfare.

Impacts of Endangerment Finding

Final endangerment/contribution finding will not impose any obligations or regulations. But it would obligate EPA to regulate GHG emissions

from motor vehicles and engines pursuant to CAA § 202(a)(1).

It also arguably sets the stage for regulation under other CAA programs.

Endangerment finding sent to OMB on Nov. 4th – possibly for release during Copenhagen climate talks. But early release raises questions over what other CAA

programs are triggered and when.

Motor Vehicle GHG Emissions Rule

September 28, 2009 – EPA releases proposed rule to set GHG emission standards for motor vehicles and engines. These standards would control GHG emissions by imposing

CAFE-like fuel efficiency standards on cars and trucks Stringency of current DOT-administered CAFE standards

effectively increased by some 30%. Rule expected to be finalized by March 2010 Concurrent DOT CAFE rule also expected to be finalized at same

time, per statutory requirement that CAFE standards be completed 18 months before model year begins (Oct. 1st, 2011, for model year 2012).

Implications of Motor Vehicle Rule

EPA’s view is once an air pollutant is subject to an emission limitation or control requirement under any part of the Act, that pollutant automatically becomes subject to the new source review (“NSR”) stationary source permitting program.

Under EPA’s view, newly constructed and modified power plants will need to have NSR permits that will impose “best available control technology” (BACT) emissions control requirements for GHGs. The need to obtain a permit could delay the implementation of

projects at existing plants. BACT has never been imposed on GHG emissions, so significant

uncertainty as to what might be required.

What Is BACT for GHGs?

BACT likely will require efficiency improvements. But environmental groups and possibly state/federal

permitting authorities could argue that BACT should be more stringent: Fuel switching? CCS? IGCC?

PSD ‘Tailoring Rule’

September 30, 2009 – EPA proposes PSD “Tailoring Rule” to limit applicability of CAA requirements to large stationary sources.

Once the tailpipe standard is issued, EPA’s view is that GHGs are regulated under the Prevention of Significant Deterioration (“PSD”) component of the NSR program. PSD permit is required when: (1) a new “major source” of regulated

pollutants is constructed; and (2) an existing major source is modified in a way that causes a significant emissions increase of regulated pollutants.

CAA specifies that a major source is any source with the potential to emit more than 250 tons per year (or 100 tons per year for specified source types, such as utility boilers) of a regulated pollutant. CAA also specifies that any emissions increase (i.e., any increase above

zero) at an existing major source is significant under the PSD program, unless EPA specifies a higher “significant level” through rulemaking.

Implications of PSD for GHGs Without ‘Tailoring Rule’

GHGs emitted in far greater amounts by a far greater number of sources than other pollutants currently covered by the PSD program. Commercial buildings with more than 100,000 square feet of floor

space likely would qualify as major sources of GHGs under the statutory thresholds.

Imposes substantial burdens on a vast number of sources that heretofore have not been regulated under PSD. EPA estimates that instead of 300 new PSD permit applications

per year, there would be 40,000. Burdensome for state regulators responsible for PSD program. Expands PSD applicability throughout energy sector, causing even

trivial projects at typical facilities to trigger PSD.

‘Tailoring Rule’ Proposal Overview

EPA concerned that broadly applicable PSD program could undermine its GHG regulatory program.

First phase of tailoring rule: Sources of 25,000 CO2e tons/yr will be considered “major sources” for

PSD purposes. Modifications to major GHG sources will trigger PSD at “threshold” levels

in the range of 10,000 – 25,000 CO2e tons/yr. Sources of 25,000 CO2e tons/year will be subject to Title V permitting.

First phase runs for 5 years; after which EPA will reassess – an attempt to stave off legal challenges. Legal discussion runs ~90 pages and ~20,000 words (D.C. Circuit briefs

limited to 14,000 words). Even with higher thresholds, PSD for GHGs still easier to trigger for power

plants than for conventional pollutants such as SO2 or NOx.

‘Johnson Memorandum’ Reconsideration

February 19, 2009 – Administrator Jackson granted administrative reconsideration of the “Johnson Memorandum.”

EPA historically has interpreted the term “subject to regulation” to mean subject to some emissions limitation or control requirements. But environmental groups have argued that “subject to regulation”

means “susceptible to regulation.” Under this interpretation, GHGs became subject to regulation years

ago because GHGs could have been regulated under the CAA all along.

If this interpretation is correct, it would mean that PSD already applies to GHGs, raising the specter of retroactive liability for stationary sources under the PSD program.

‘Johnson Memorandum’ con’t

Johnson Memorandum was an “interpretive rule” issued December 18, 2008, declaring that a pollutant is not “subject to regulation” under the CAA until the pollutant is subject to an emissions limitation or control requirement under the CAA.

Reconsideration likely to become moot once EPA finalizes motor vehicle rule. But would help support future action if other steps

overturned on legal challenges. EPA management reportedly recognizes significant

problems if retroactive liability were to apply.

Emission Standards for New and Existing Stationary Sources

EPA is pursuing the development of new source performance standards (“NSPS”) and existing-source guidelines for CO2 and other GHG emissions from power plants.

Given the press of other GHG regulatory activity, work in earnest has not yet begun on these standards. Significant uncertainty over what technologies might be used to

define such standards, and how to coordinate any rules with anticipated congressional action.

Work on these rules likely to accelerate in 2010. W-M / K-B would establishes performance standards for new coal-fired

power plants. 50% reduction for new plants started after 2008, subject to CCS

availability, but no later than 2020. 65% reduction for new plants started after 2020.

Preemption in Waxman-Markey: Federal

Preempted some, but not all, sections of CAA: Sec. 108(a) – No GHG added as criteria pollutants for climate impacts. Sec. 111 – Performance standards not to apply to “capped” GHGs. Sec. 112 – No GHG added unless it meets criteria independent of its

climate impacts. Sec. 115 – Not applicable to air pollutant regarding its climate impacts. NSR – Not applicable if initially permitted/modified after 1/1/09. Title V – No stationary source required to apply or hold Title V permit

solely due to GHG emissions regulated for climate impacts. Limited preemption problematic:

Applies only to GHGs for climate impacts. Other issues under other statutes fair game (e.g., ocean acidification

under CWA).

Preemption in Waxman-Markey: States

Temporary preemption of state/regional cap-and-trade programs: RGGI, others blocked from 2012-2017. Non-cap-and-trade forms of GHG regulation still allowed, including

absolute caps, efficiency standards, etc. States also can establish requirements that can be satisfied with federal

allowances, allowing States to draw down emissions cap unilaterally. Exchange of state-issued allowances based on cost, not ton-for-ton. Kerry-Boxer is substantially similar.

Preemption in Waxman-Markey: Torts

No explicit preemption of common law nuisance actions in bill. Includes various ‘liability savings clauses,’ including a ‘no effect on

liability’ clause in penalty provisions: A covered entity that violates the cap-and-trade program but pays

EEP and holds surplus allowances in future year to compensate still remains exposed to any liability occurring from its non-compliant emissions under any other law.

Findings attribute climate impacts & other horribles to emitters of GHGs.

Kerry-Boxer is same, but revised mark issued in wake of 2nd and 5th Circuit decisions and Kivalina Federal District Court decision.

Preemption in Kerry-Boxer: Federal

Section 128(g) of the revised chairman’s mark of Kerry-Boxer (S. 1733) amends the following provisions of the Clean Air Act to preempt regulation of GHGs: Sec. 108: Prohibits listing GHGs as air pollutants on the basis of their climate

impacts. Sec. 112: Prohibits listing GHGs as hazardous air pollutants unless a GHG,

independent of its climate impacts, meets the criteria described in subsection (b) of this section, which in addition to adverse human health effects from exposure also includes “adverse environmental effects whether through ambient concentrations, bioaccumulation, deposition, or otherwise.”

Sec. 115: Provides that this section does not apply to GHGs with respect to their climate impacts.

Sec. 169: Amends the definition of “major emitting facility” to (a) exclude GHGs from the 100 and 250 ton thresholds for air pollutants, and (b) add a 25,000 CO2e ton threshold for GHGs.

Sec. 508: Exempts from Title V permitting requirements any stationary source emitting less than 25,000 CO2e tons of GHGs per year, provided that such GHGs are regulated solely due to their climate impacts.

Federal Preemption Comparison

Waxman-Markey barred the application of all of Part C of Title I to GHG emissions from major emitting facilities initially permitted after 2008. Kerry-Boxer would only preempt PSD for GHG emissions for facilities

emitting less than 25,000 CO2e tons annually, effectively codifying EPA’s “tailoring rule.” PSD would apply to EGUs, effectively undermining various arguments under

existing law against this result. Waxman-Markey provided for the complete preemption of Title V permitting

requirements for stationary sources solely due to GHG emissions. Kerry-Boxer only preempts Title V for stationary sources emitting less

than 25,000 CO2e tons per year, also codifying “tailoring rule.” Waxman-Markey also preempted the application of performance standards for

new and existing sources under Sec. 111 to emissions of “capped” GHGs from stationary sources. Kerry-Boxer does not preempt Sec. 111.

Consequences of No Preemption

Estimated rulemakings/major agency actions from H.R. 2454: Less than 1 year following date of enactment: 11 rulemakings/major

actions. By 1 year : 11 more. Between 18 months and 2 years: 20 more. By 2012 start date: 17 more. Between 2012 and 2020: 13 more.

This means 40+ rulemakings/actions in 24 months, or almost 2 rulemakings/actions per month.

Without preemption, EPA also must implement NSR, PSD, NSPS, etc. for GHGs.

Consequences of No Preemption, Con’t.

EPA has limited resources: Meeting at least some of the deadlines may mean

missing others. What parts of cap-and-trade program get priority?

EPA already has a lot of work to do. Staff at OAR currently have full time jobs. If climate gets priority, what gets dropped?

Possible Solutions to Preemption Problem

Preempt both federal and state authority to regulate GHGs outside Titles VII and VIII of CAA.

Eliminate ‘no effect on liability’ savings provisions. Block common law tort suits against emitters of GHGs for

climate impacts.

Scott J. Stone(202) 419-2160

sstone@hunton.com

Scott J. Stone(202) 419-2160

sstone@hunton.com