With the recent developments in Congress, cap and trade legislation appears to be off the table for the foreseeable future. However, EPA has continued forward on the path of regulating greenhouse gases (“GHGs’) under existing Clean Air Act (“CAA”) authority. On Friday, December 10, the D.C. Circuit denied a stay of many of EPA’s GHG regulations. Thus, GHGs will begin to be regulated under the CAA on January 2, 2011. This client advisory will provide a broad outline of EPA’s GHG regulations to date.

EPA’s path to regulating GHGs began with its December 2009 finding that GHGs endanger public health and welfare (“Endangerment Finding”).¹ In March of 2010, EPA finalized a reconsideration of its December 2008 memorandum on the applicability of the CAA’s permitting programs to GHGs (“Johnson Memorandum Reconsideration”).² Subsequently, in April of 2010, EPA finalized a rule limiting GHG emissions from on-road motor vehicles (“Vehicle Rule”).³ EPA then promulgated a rule that would initially limit GHG permitting requirements to larger stationary sources (“GHG Tailoring Rule”).⁴ Early this month, EPA released long-awaited guidance to help permitting authorities determine Best Achievable Control Technology (“BACT”) for GHGs.⁵ Most recently, EPA finalized a rule requiring states to incorporate permitting for GHGs into their State Implementation Plans (“SIPs”) under the CAA (“GHG SIP Call”).⁶ EPA also proposed a companion proposal that it expects to finalize on December 23, 2010, that would grant EPA authority to issue GHG permits under a Federal Implementation Plan (“FIP”) if states are unable or unwilling to do so (“GHG FIP Proposal”).⁷

In addition to EPA’s actions that will ultimately require control of GHGs, EPA last year promulgated a rule requiring mandatory reporting of GHGs (“GHG Reporting Rule”).⁸ Annual reporting of GHGs for regulated entities exceeding the applicability threshold of 25,000 tons per year (“tpy”) of GHGs (measured in carbon dioxide equivalent, or CO2_e) will begin in March of 2011 for the 2010 reporting year.

The Endangerment Finding And The Vehicle Rule

In its December 2009 Endangerment Finding, EPA made a formal scientific determination that GHGs from mobile sources endanger public health and welfare. The Endangerment Finding created a mandatory obligation for EPA to control GHGs from mobile sources, which EPA did through finalization of the Vehicle Rule in April. The Vehicle Rule limits GHG emissions from passenger vehicles beginning in the 2012 model year.

While the Endangerment Finding and the Vehicle Rule on their face applied only to mobile sources, they promised substantial repercussions for stationary sources as well because stationary source permitting requirements under the Prevention of Significant Deterioration (“PSD”) and Title V programs would be triggered once GHGs were “subject to regulation” under the CAA. An open question remained as to precisely when the Vehicle Rule would make GHGs “subject to regulation.”

Reconsideration of the Johnson Memorandum

In December 2008, EPA issued a memorandum known as the “Johnson Memorandum” outlining EPA’s interpretation of when a pollutant would be “subject to regulation” under the CAA. EPA concluded at that time that GHGs would be subject to regulation, and PSD requirements would thus be triggered, upon promulgation of a regulation requiring “actual control” of GHGs. Under this interpretation, the mere promulgation of the Vehicle Rule would have immediately triggered PSD and Title V requirements for GHG emissions at stationary sources.

In March 2010, on the eve of promulgating the Vehicle Rule, EPA modified its position and found that GHGs were subject to regulation not upon the promulgation of a final rule regulating GHGs or the legally effective date sixty days after promulgation, but rather on the date that a regulatory requirement “takes effect,” or has enforceable requirements. Under this construction, EPA concluded that GHGs would not be subject to regulation until January 2, 2011.

GHG Tailoring Rule

While the reconsidered Johnson Memorandum delayed the onset of PSD and Title V requirements for an additional nine months, it did not address impacts on smaller sources that would result from applying PSD and Title V under existing statutory thresholds originally intended only for conventional pollutants. In an effort to avoid these unintended consequences, EPA promulgated the GHG Tailoring Rule, which initially limits the scope of PSD and Title V permitting requirements to large emitters of GHGs.

The GHG Tailoring Rule will phase in regulation of GHGs in three stages. In the first stage, from January 2, 2011, to June 30, 2011, PSD will apply to new sources with a potential to emit 75,000 tons of CO2_e per year or modifications that will increase GHG emissions by the same amount, so long as the source would be required to undergo PSD because of non-GHG pollutants. Similarly, a source need only include GHGs in a Title V permit if it is applying for a new permit or renewal based upon other pollutants. EPA has deemed these PSD and Title V sources to be “anyway” sources. However, the 75,000 tpy threshold does not apply to Title V. Any source applying for, revising, or renewing a Title V permit for pollutants other than GHGs must address GHGs (so long as the statutory 100 tpy GHG threshold is met) and include any “applicable” GHG requirements and associated monitoring, recordkeeping, and reporting requirements. However, for these sources, there will be no applicable requirements for the near term. EPA has recently clarified that the GHG Reporting Rule is not an applicable requirement for Title V purposes.

In the second stage, from July 1, 2011, to June 30, 2013, PSD would continue to apply to the “anyway” sources described above, but would also apply to new sources that emit or have the potential to emit 100,000 tpy of GHGs, or to existing sources that emit or have the potential to emit 100,000 tpy and also undergo a modification that will result in an increase of 75,000 tpy. With regard to Title V, the “anyway” permitting requirements under stage 1 will continue to apply, and facilities that emit 100,000 tpy or more must obtain a Title V permit if they do not already have one.

For the third stage, EPA has committed to proposing a rulemaking in 2011 that would determine the applicable thresholds after July 1, 2013. EPA has established an enforceable commitment to complete this rulemaking by July 1, 2012, but is not now proposing thresholds because it would like to gain experience and gauge permitting burdens over the next several years. EPA has also committed to proposing viable “streamlining” approaches in the step 3 rulemaking. Potential streamlining approaches include presumptive BACT, general permits, and other approaches that would greatly reduce administrative burdens.

Importantly, EPA has committed to not decreasing the major source and major modification thresholds to below 50,000 tpy before April 2016, when it has committed to completing an additional rulemaking either extending PSD and Title V applicability to additional smaller sources, permanently excluding such sources, or maintaining the thresholds promulgated in stage three.

EPA chose not to grandfather facilities with pending PSD permits at the time that any stage of the GHG tailoring rule takes effect. EPA did make allowance for facilities that obtained a PSD permit prior to stage 1 but do not commence construction until after January 2, 2011. EPA confirmed that these facilities would not be subject to reopening of PSD permits to include GHG requirements as long as construction is commenced within a reasonable time, consistent with prior PSD precedent.

GHG SIP Call and GHG FIP

EPA’s GHG SIP Call and proposed GHG FIP would apply to states that administer their own PSD programs through a SIP. In these states, EPA’s PSD rules (including the GHG Tailoring Rule) do not apply directly. Rather, they apply through state law provisions that EPA deems to be consistent with federal regulations. The majority of states implement PSD through such EPA-approved SIPs. In the remaining states, EPA either administers the PSD program itself through a FIP or state or local agencies administer the federal program under delegation from EPA. As EPA and delegated states already have authority to administer PSD for GHGs through the GHG Tailoring Rule, EPA believes no further action is needed for permitting authorities in these states and regions to be able to issue PSD permits for GHGs beginning on January 2, 2011.

In the GHG SIP Call, EPA found that the SIPs of 13 states were substantially inadequate to comply with the GHG permitting requirements of the CAA. EPA set deadlines ranging from December 22, 2010, to December 1, 2011, for states to conform their SIPs to allow GHG permitting. If states cannot or will not alter their SIPs by their respective deadlines, EPA would immediately implement the GHG FIP rule, which EPA plans to finalize on December 23, 2010. All states but Texas have either accepted the December 22, 2010, deadline or indicated that a later deadline (i.e. January-March 2011) would not inhibit permitting because they do not expect to issue GHG PSD permits in the near term. Texas alone has a deadline of December 1, 2011, but EPA has indicated that it will take other actions to ensure that Texas has authority to issue GHG permits by January 2, 2011.

BACT

While PSD and BACT requirements will be implicated for some facilities beginning January 2, 2011, EPA only recently provided guidance on how permitting authorities should determine BACT for GHGs. EPA’s BACT guidance does not state what BACT will be for any particular emissions unit. Rather, EPA stated that it will apply BACT for GHGs using the same facility-specific five-step process that is currently used for other regulated pollutants.

While BACT will remain a case-by-case determination relating to the feasibility and cost effectiveness of a particular control for a particular project, EPA indicated that in most cases BACT will, at least initially, be limited to energy efficiency improvements. EPA further noted that for modifications BACT will be limited to the changed emission unit, though for new units EPA may look to potential energy efficiency improvements that can be achieved throughout the facility. In addition, EPA clarified whether permitting authorities can redefine the source during the BACT process, specifically for new sources. Redefining the source would require consideration of fundamentally different industrial processes/plant designs not included in the original application and not merely the best control technologies for the facility as included in a permit application. For example, questions have arisen as to whether natural gas firing could be considered BACT for a proposed coal-fired plant. While EPA stated that in most cases permitting authorities should not attempt to redefine the source in making BACT determinations, it maintained that permitting authorities enjoyed such authority under the CAA. However, EPA instructed permitting authorities to determine if redefining the source would be consistent with the fundamental business objectives of the proposed project.

Ongoing Litigation

Most of the above mentioned final rules and agency actions have been challenged in the D.C. Circuit, which recently denied a stay of their implementation. Thus, the rules will be legally effective when the D.C. Circuit hears these cases in 2011. Industry will also likely challenge the GHG SIP Call and the GHG FIP shortly, arguing that EPA’s aggressive implementation schedule is inconsistent with CAA requirements that states be given a reasonable amount of time to conform state rules to federal regulations.

In addition, in a related development, on December 6, 2010, the Supreme Court agreed to review the issue of whether common law public nuisance principles could be used to limit GHG emissions from utilities and other sources of GHGs. A core issue before the Court will be whether EPA’s climate regulations, including the vehicle rule and PSD requirements for stationary sources, preclude consideration of common law nuisance claims.

GHG Reporting Rule

The GHG reporting Rule applies to facilities that directly emit more than 25,000 tpy of GHGs, as well as upstream suppliers of fossil fuels and industrial gases that will ultimately be emitted at levels exceeding the 25,000 tpy threshold. The rule 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. Initial reports for the 2010 reporting year are due in March 2011.

Next Steps

Absent Congressional preemption of EPA authority under the CAA (such as a two year stay of GHG regulation proposed by Senator Rockefeller), regulation of GHGs from stationary sources under the CAA will begin to be phased-in on January 2, 2011. Kelley Drye is closely monitoring these developments and can provide expert advice on the implications for your industry.

¹ 74 Fed. Reg. 66496 (December 15, 2009).

² Available at http://www.epa.gov/nsr/documents/psd_memo_recon_032910.pdf.

³ 75 Fed. Reg. 25324 (May 7, 2010).

⁴ 75 Fed. Reg. 31514 (June 3, 2010)

⁵75 Fed. Reg. 70254 (November 17, 2010)

⁶ 75 Fed. Reg. 53892 (September 2, 2010)

⁷ 75 Fed. Reg. 53883 (September 2, 2010)

⁸ 74 Fed. Reg. 56373 (October 30, 2009)

Recent EPA Greenhouse Gas Regulatory Developments