Introduction

After passage of the American Clean Energy and Security Act (aka “Waxman-Markey”) in the House this summer, the Senate has released a draft climate bill. However, given the political climate and the need for a filibuster-proof margin in the Senate, it appears increasingly uncertain as to whether the Senate will pass climate legislation this year. Thus, attention is turning back to EPA, which started the alternative regulatory path to control greenhouse gas emissions (“GHGs”) under the Clean Air Act (“CAA”) with a series of regulatory actions following the Supreme Court’s decision in Massachusetts v. EPA. These regulatory developments include the recently finalized GHG Reporting Rule and several proposed rules. First, EPA has proposed to determine that GHGs endanger public health or welfare (“Endangerment Finding”). Second, EPA has proposed a rule limiting GHGs emissions from on-road motor vehicles (“Vehicle Rule”). Finally, EPA has proposed a rule that would limit consequences of both the Endangerment Finding and the Vehicle Rule by limiting key CAA provisions to larger stationary sources (“GHG Tailoring Rule”).

These EPA rulemakings are being driven by both legal and policy considerations. First, EPA must respond to the Supreme Court’s ruling in Massachusetts v. EPA. Second, EPA movement on regulation of GHGs under an imperfectly suited statute such as the CAA may spur increased support for legislation specifically tailored to climate change in Congress. Finally, with the prospects for new legislation unlikely, EPA regulatory action will provide the Administration with a positive story to tell at the December 2009 UN Climate Summit in Copenhagen.

Final Rules

GHG Reporting Rule

EPA was instructed in the 2008 Consolidated Appropriations Act to develop a GHG reporting rule using existing CAA authority. Accordingly, EPA proposed the GHG Reporting Rule last spring and finalized the rule on September 22, 2009. The GHG reporting rule applies to stationary sources that emit greater than 25,000 tons of GHGs (measured in carbon dioxide equivalent, or CO₂e). It contains reporting protocols for determining process emissions from a variety of industrial sources as well as a general protocol for reporting emissions from combustion sources. Facilities would not be responsible for reporting “indirect emissions” from electricity purchases.

Unlike the endangerment finding and the subsequent Vehicle Rule, the GHG Reporting Rule will not trigger other CAA provisions (at least under EPA’s current legal interpretation of the CAA). However, the GHG Reporting Rule will give EPA the required data, at least for sources that meet the 25,000 ton threshold, to propose GHG regulations for stationary sources in the future, likely in the form of a cap and trade system. The GHG Reporting Rule also has a similar threshold to existing legislative proposals and would thus enable more aggressive lead time in a Congressional cap and trade proposal.

Proposed Rules

The Endangerment Finding

Massachusetts v. EPA held that GHGs were pollutants under the CAA and that EPA must regulate them if it determines that GHGs from on-road vehicles can reasonably be anticipated to cause or contribute to air pollution that endangers public health or welfare. On April 24, 2009, EPA issued a proposed finding that GHGs from on-road vehicles can indeed be reasonably anticipated to cause or contribute to air pollution that endangers public health or welfare. Thus, EPA’s proposed endangerment finding would ultimately compel regulation of GHG emissions from vehicles under the CAA. Further, both the endangerment finding and the motor vehicle regulation would also ultimately affect stationary sources and other classes of mobile sources. First, similar endangerment language exists under other CAA provisions. If EPA finds that GHGs from on-road vehicles endanger public health or welfare, it would likely make the same finding for GHGs from other source classes. Second, even without an additional endangerment finding, a GHG vehicle regulation would likely trigger regulation of GHGs at stationary sources under the Prevention of Significant Deterioration (“PSD”) and Title V permitting programs, discussed below.

Vehicle Rule

On May 22, 2009, EPA and the Department of Transportation (“DOT”) issued a notice of intent to conduct a joint rulemaking on GHG emissions from vehicles. EPA has since proposed regulations under CAA Section 202(a) that would be effective in the 2012 model year and culminate with a standard of 250g/CO2 per mile in 2016. DOT would effectuate the EPA standard through Corporate Average Fuel Economy (“CAFE”) standards. Thus, once this rule becomes final, GHGs would be regulated under the CAA. EPA currently anticipates a final vehicle emission rule by March of 2010, as that is considered minimum lead time deemed necessary to assure compliance by the 2012 model year.

GHG Tailoring Rule

EPA has long been aware that regulation of vehicle GHGs could result in unintended and perverse consequences for even small stationary sources under the CAA through the PSD and Title V programs. The PSD program applies to the construction or modification to a major source. A major source is defined as a facility that emits 250 tons or more (or 100 tons for specified source categories) of a “regulated NSR Pollutant,” which includes “any pollutant otherwise subject to regulation under the Act.<¹ A “major modification” includes any physical change or change in the method of operation that results in a “significant” increase of a regulated NSR pollutant. Both the construction and modification provisions present potential problems as they relate to GHGs, as 250 tons of GHGs is a relatively small amount that would bring thousands of previously unregulated sources under the CAA. Regarding modifications, significance levels are established by regulation, and where there are none, as in the case with GHGs, EPA believes the appropriate significance level would be zero. Thus, under current regulations, once GHGs are “pollutants subject to regulation under the Act,” a modification that results in any increase in GHGs would subject a source to PSD review and require installation of the Best Available Control Technology (“BACT”).

The potential universe of affected sources for Title V purposes is even greater. Title V would require an operating permit for all sources that emit or have the potential to emit 100 tons per year of an air pollutant.

In order to avoid these unintended consequences, EPA has proposed the GHG Tailoring Rule, which would limit the scope of PSD and Title V permitting requirements prior to the finalization of the GHG Vehicle Rule. Under such a scenario, by the time GHGs become “regulated NSR pollutants,” the GHG Tailoring Rule would be in place to limit potential impacts on smaller sources.

EPA has proposed tailoring provisions similar to those it explored in last year’s ANPR. Specifically, EPA has proposed to initially limit the applicability of PSD and Title V requirements to new sources that emit more than 25,000 tons of CO₂e (the threshold used for the GHG Reporting Rule) and to modified sources that increase emissions above a significance threshold, which EPA proposes to define as between 10,000 and 25,000 tons of CO₂e. Notably, these thresholds are federal thresholds, and EPA states in the preamble that it will not deny PSD SIPs and Title V programs for states that opt to have lower thresholds. Thus, states will retain authority to administer the PSD and Title V programs under much lower applicability thresholds.

EPA is not proposing to permanently exclude smaller sources from PSD and Title V. Rather, the proposed thresholds for new and modified sources would apply for no more than 6 years from promulgation of the rule. In the sixth year, EPA would conduct an additional rulemaking with revised thresholds (although EPA could choose to maintain existing thresholds) or streamlining provisions that would reduce administrative burdens. In the intervening years, EPA will conduct further study on streamlining provisions mentioned in last year’s Advance Notice of Proposed Rulemaking. These include issuing general permits, changing the definition of “potential to emit” to exclude sources that are only used periodically (such as seasonal boilers), and issuing “presumptive BACT” determinations for smaller sources that would avoid burdensome case by case BACT proceedings.

EPA estimates that the proposal would result in roughly 400 PSD permits per year for GHGs, more than the current 200-300 issued per year for all pollutants, but far less than the 2,000-3,000 that EPA estimates would be required without a GHG Tailoring Rule.

For Title V, EPA estimates that roughly 13,600 facilities in total would be required to obtain or update Title V permits to include GHG emissions under its proposed 25,000 ton C0₂e (the same universe of sources as those required to report emissions under the GHG Reporting Rule). Notably, most of these facilities already have Title V permits. While there are currently no “applicable requirements” for GHGs that would require a permit re-opening to address GHGs, GHGs would ultimately have to be included upon permit renewal or re-opening due to PSD or the promulgation of applicable GHG requirements for stationary sources.

Whether the proposed rule would withstand judicial review is an open question, as many of the proposals are contrary to the plain language of the CAA (although mainstream environmental groups have pledged not to challenge the rule). For example, the CAA explicitly defines a major source as one that has emissions above the 250/100 ton threshold. It is doubtful that EPA could successfully convince a reviewing court that it has discretion to raise this threshold by a factor of 100, although EPA has identified several legal theories, including administrative necessity and avoidance of absurd results, that it may be able to rely on in defense of the GHG Tailoring Rule.

Conclusion

As the likelihood of Congressional action wanes, stakeholders must continue to monitor the parallel regulatory track at EPA. The increasing prospect of imperfect and highly inefficient CAA regulation may ultimately spur Congressional action. In fact, the Administration is likely counting on such a legislative stimulus. Accordingly, stakeholders can expect a flurry of final rulemakings and new proposals in the coming months. It now appears that EPA’s desire to impose tailpipe emission standards on 2012 vehicles will be the driving force for several pending regulations. We expect that EPA will finalize the Endangerment Finding and the GHG Tailoring Rule sometime before the new tailpipe standards are finalized in March 2010.

Kelley Drye & Warren LLP

Kelley Drye’s Environmental Law Practice Group specializes in providing comprehensive solutions to complex problems. We provide both advice and representation for clients participating in rule-making and policy-making activities by federal regulatory agencies, including the U.S. Environmental Protection Agency and the Occupational Safety & Health Administration, and similar state agencies.

For more information about this Client Advisory, please contact:

John L. Wittenborn
(202) 342-8514
jwittenborn@kelleydrye.com

1 EPA has previously interpreted “subject to regulation under the Act” to require “actual control” of emissions (i.e. not monitoring and reporting). This interpretation was memorialized in a memorandum by former Administrator Johnson. New Administrator Lisa Jackson has since granted a petition to reconsider this interpretation. However, as noted in Section III.B, EPA plans to issue vehicle standards requiring actual control of GHGs in the Spring of 2010. Thus, the issue of the meaning of “subject to regulation under the Act” will likely be mooted before EPA acts on the petition for reconsideration.

EPA Greenhouse Gas Developments