Making Sense of EPA's Climate Regulations
Although the U.S. House of Representatives passed the Waxman-Markey climate bill (H.R. 2454) by a narrow margin over seven months ago, the U.S. Senate continues to consider its own version of the climate bill - a process which politicians from both sides of the aisle indicate might not happen in 2010. However, even in the absence of federal legislation, the Obama Administration has taken unprecedented strides to address climate change during its first year in the White House.
While numerous agencies within the Obama Administration have helped make the shift toward low-carbon policies in the United States, the bulk of greenhouse gas (GHG) regulation has been handed down by the U.S. Environmental Protection Agency (EPA). Since EPA Administrator Lisa Jackson was appointed by President Obama in early 2009, the EPA has picked up the ball which had been punted by the Bush Administration in regards to GHG regulation following the Supreme Court's landmark Massachusetts v. EPA decision in 2007.
The following discussion provides an overview of Mass v. EPA and explains how the subsequent climate-related regulations tie in with one another.
A group of 19 private organizations filed a rulemaking petition with the EPA on October 20, 1999, requesting that the EPA regulate "greenhouse gas emissions from new motor vehicles under § 202 of the Clean Air Act." On September 8, 2003, the agency issued an order denying the rulemaking petition, providing two reasons for its decision. First, using reasoning that contradicted opinions by previous EPA General Counsels, the agency alleged that the Clean Air Act does not authorize the EPA to issue mandatory regulations to address global climate change. Second, the agency reasoned that, even if it had the authority to set GHG emission standards, it would be unwise to do so.
When petitioners, environmental organizations and state and local governments sought review of the EPA order in the United States Court of Appeals for the District of Columbia Circuit, the Court denied the petition for review because two of the three judges on the panel agreed, "the EPA Administrator properly exercised his discretion under § 202(a)(1) in denying the petition for rule making." Mass v. EPA, 415 F.3d 50, 58 (2005).
On appeal, the U.S. Supreme Court issued a landmark decision when it ruled on April 2, 2007 that due to the rise in sea level, Massachusetts had standing to challenge the EPA’s denial of the rulemaking petition. Massachusetts v. EPA, 549 U.S. 497 (2007). Although the Court found that sovereign interests have standing to sue in climate-related cases, it was silent on the issue of standing for private litigants. (As an aside, in late 2009, both the Second and Fifth Circuit Courts asserted that private litigants do, in fact, have standing to bring suits against emitters of GHGs. See, Connecticut v. American Electric Power Corp. et al., 582 F.3d 309 (2nd Cir., 2009) and Comer v. Murphy Oil, 585 F.3d 855 (5th Cir. Miss. 2009)).
The most significant part of the decision, which provides context for the EPA regulations discussed in the following section of this post, was the Court's ruling that the EPA has the authority to regulate GHG emissions. Thus, the Court remanded the petition to the EPA, holding that, “[u]nder the clear terms of the Clean Air Act, EPA can avoid taking further action only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.”
Upon remand, the Bush Administration delayed a decision until July 2008 when it announced that it would punt the issue to the next administration. However, in her first year on the job, the new EPA Administrator Lisa Jackson picked up the ball (and to extend the metaphor, the EPA has run the ball down the field farther than any previous administration). Each of the following actions are discussed in detail below. The EPA has:
(i) finalized two distinct findings that (a) GHGs constitute a threat to public health and welfare, and (b) that the combined emissions from motor vehicles cause and contribute to climate change;
(ii) finalized a rule that mandates the largest emitters of GHGs submit annual reports to the EPA;
(iii) proposed a rule that would include GHGs in the permitting requirements for large industrial facilities;
(iv) proposed more stringent fuel economy standards, in conjunction with the Department of Transportation; and
(v) finalized a rule to increase the level of renewable fuel consumed in the transportation sector.
"Endangerment" and "Cause and Contribute" Findings
Under the "Endangerment" finding, the EPA - and thus, the Federal Government - acknowledges for the first time that the current and projected concentrations of the six GHGs recognized in the Kyoto Protocol - carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) - threaten the public health and welfare of the United States.
Also, the "Cause and Contribute" finding asserts that the combined emissions of CO2, CH4, N2O, and HFCs from new motor vehicles and vehicle engines “cause or contribute” to the atmospheric concentrations of these key GHGs.
Although the “Endangerment” and “Cause and Contribute” findings do not by themselves regulate GHG emissions from any source, these two findings are significant because they pave the way for the regulation not only of emissions from motor vehicles, but also those from stationary sources.
Due to these policy implications, the findings are being challenged both in the judiciary and before Congress. On December 23, 2009, a group of companies, members of Congress and trade associations filed a legal challenge to the "Endangerment Finding" in the U.S. Court of Appeals for the Federal Circuit in Washington, DC (click here for a copy of the Dec. 23rd filing). The plaintiffs include the top Republican on the House Energy and Commerce Committee, Rep. Joe Barton (R-TX), the Georgia Motor Trucking Association, the National Cattlemen's Beef Association and a Georgia car dealership that sells General Motors and Ford vehicles. However, Attorneys General from Arizona, California, Connecticut, Delaware, Iowa, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington are hoping to intervene in support of the EPA finding.
In the Senate, Lisa Murkowski (R-AK) sponsored a joint resolution (S.J. Res. 26) disapproving of the "Endangerment" finding. Similarly, on the House side, a bipartisan-sponsored bill was introduced by Representatives Ike Skelton, (D-MO), Collin Peterson, (D-MN), and Jo Ann Emerson, (R-MO) that would amend the Clean Air Act to prohibit regulation of greenhouse gases as it relates to global climate change. However, both bills are likely to fail because, in order to become law, these bills would have to be signed by President Obama, which would negate the very policies that were promulgated by his administration and for which the administration allocated $43 million in the EPA's 2011 annual budget "for regulatory initiatives to control greenhouse gas emissions under existing Clean Air Act authorities.” Further, considering the current level of support for climate-related legislation in the Congress, it is unlikely that the necessary two-thirds of both the House and the Senate would vote to overturn a presidential veto on this issue.
Mandatory Reporting Rule
This rule establishes an economy-wide system for mandatory reporting of GHGs that provides much broader scope and detail than a previous EPA rule requiring reporting of greenhouse gas emissions from electric generation facilities (see 40 C.F.R. Part 75.13 and 75.64). The EPA anticipates that the new rule will apply to approximately 10,000 facilities that account for approximately 85% of GHG emissions in the United States.
Facilities subject to the rule consist of entities from a wide spectrum of industries. The industries with the most number of covered entities include utilities, waste treatment, natural gas suppliers, manufacturers of paper, steel and cement, and oil refineries. These facilities were required to begin emissions monitoring in January 2010. The information accumulated during this mandatory monitoring is required to be submitted in detailed annual reports to the EPA beginning in 2011 and will be made available to the public, while other data submitted to EPA (e.g., production and process data) may be protected under the agency’s procedures governing confidential business information.
Although the EPA Mandatory Reporting Rule will provide consistent information among covered entities, many public companies will not qualify for the EPA program because only approximately 10,000 entities will be covered by the new EPA rule. This means that more than 70,000 entities emitting at least 1,000 million tons of GHGs will be without consistent reporting standards. However, this rule is expected to create new opportunities for industry and government policy.
(i) New Opportunities for the Private Sector
It is expected that such reporting standards will create incentives for these facilities to reduce their GHG emissions because monitoring of a company’s emissions might expose opportunities for reducing energy consumption and, thus, operating expenses. The rule creates an opportunity for many facilities to identify major sources of emissions along with potential emission reduction options. It also prescribes a separate GHG monitoring and reporting methodology for each affected sector. Additionally, many affected facilities will be required to sample and test fuel, or install accurate devices to measure facility output and emissions.
The proposed rules regarding New Source Review and Title V Permits, as discussed below, will also provide opportunities for reducing energy consumption, GHG emissions and cost because it requires large emitters to acquire permits that would demonstrate they are using the best practices and technologies to minimize GHG emissions.
Further, as with companies that rank high on the EPA’s Toxic Release Inventories (TRI) list, companies that report a high level of GHG emissions under the new EPA rule may face public scrutiny and pressure to reduce emissions. This would certainly create incentives for public companies to improve their management of GHGs because the stock market reacts negatively to evidence of poor environmental management.
(ii) Accuracy in Future Greenhouse Gas Emissions Caps
Previous experiences from emissions reduction schemes in both the United States and the European Union suggest that the data generated through the new EPA rule has the potential to help establish effective GHG emissions caps in the United States. In response to the 1990 Clean Air Act amendments, the EPA measured the average emissions of sulfur dioxide and nitrogen oxide over a 3-year period in order to establish a cap-and-trade program regulating power plants’ emitting of these gases. The U.S. program used average emissions from 1985 to 1987 as the baseline against which to measure reductions required to begin in 1995 and 2000, thereby providing greater certainty that the program achieved reductions relative to past emissions levels. The program was a great success because, three years ahead of schedule, it reduced emissions by half while also reducing cost to emitters. Although the Congressional Budget Office had estimated that the program would cost industry $6 billion a year, the actual economic impact came instead to between $1.1 and $1.8 billion a year.
When compared with the United States’ sulfur dioxide emission trading scheme of the 1990’s, the failure of the European Union’s Emissions Trading Scheme (EU ETS) during Phase I revealed that historical data spanning several years is the most accurate way to measure emissions data. The importance of accurate emissions data was revealed by the price collapse of EU ETS allowances (EUAs) in 2006, resulting from the release of emissions data that showed an over-allocated of EUAs in Phase I. The supply of EUAs was greater than its demand, in part, as a result of the uncertainty surrounding the data used to set the emissions cap and distribute allowances. This occurred following the ETS directive, which allowed member states just six months to identify which entities to regulate under the ETS, obtain baseline emissions data for the covered entities, establish an emissions cap that would be consistent with its Kyoto target, and determine how many allowances to distribute to each covered entity.
The short period made it difficult to overcome various data limitations. First, EU member countries generally based their emissions caps on business-as-usual projections and allocation decisions on recent baseline emissions data voluntarily submitted by covered entities. According to the U.S. Government Accountability Office, the reliability of this data is questionable because of the potential incentive for covered entities to inflate emissions, which results in more allocated credits. The inherent uncertainty of these business-as-usual projections was compounded by the assumptions underlying the models used to forecast emissions, such as economic growth and relative fuel prices.
Second, the significant decline in the price of carbon was derived from the relatively optimistic assumptions that EU member states made about economic growth, thus resulting in higher projections of emissions.
Finally, the EU member countries did not have baseline data that separated emissions on a facility-specific basis. This was necessary to determine both the total emissions released by all entities covered under the ETS as well as how many allowances each particular entity would need to cover its annual emissions. However, the data generated from the EPA Mandatory Reporting Rule offers the U.S. accurate facility-specific statistics that can be used to design an effective national emissions trading scheme.
GHG emissions standards in New Source Review and Title V Permits
The EPA issues two types of air permits: construction permits and operating permits. Construction permits for new and modified major facilities (e.g., power plants), are required under the EPA’s Prevention of Significant Deterioration (PSD) program, as mandated by the Clean Air Act, to install the “best available control technology” (BACT) if they increase emissions of pollutants “subject to regulation” in areas that currently meet national air quality standards. Because it applies only to new sources or major modifications, the PSD program is commonly referred to as “New Source Review.” In addition to the requirement for construction permits under the PSD program, Title V of the Clean Air Act requires the EPA to issue operating permits (known as “Title V” permits) to contain emissions limits for all “regulated pollutants” from major stationary sources.
Since the EPA added six new GHGs to its arsenal of regulated air pollutants in the “Endangerment” and “Cause and Contribute” findings (see above), the agency is expected to finalize a rule to guide the application of New Source Review and Title V permits to large emitters of GHGs by the end of March 2010. Under this regulation, known as the “Tailoring Rule,” both the PSD and Title V permitting programs would apply to new facilities with annual emissions of GHGs equivalent to at least 25,000 tons of GHGs and to modifications at existing facilities that result in an increase in emissions of between 10,000 and 25,000 tons of GHGs per year. These thresholds would “tailor” the New Source Review and Title V programs to limit which facilities would be required to obtain permits. Overall, this regulation would cover facilities responsible for approximately 70% of the nation’s GHG emissions from stationary sources, while excluding small businesses and farms.
Even though the "Tailoring Rule" has not yet been finalized, the first PSD permit with a limit on GHG emissions was issued in February 2010 after Calpine Corporation, in anticipation of a new federal rule, voluntarily sought a standard for GHG emissions in its application for a PSD permit at the company’s planned 600-megawatt Russell City Energy Center located in Hayward, California.
Fuel Economy Standards
In response to the 1973-74 oil embargo, the U.S. Congress passed the Energy Policy Conservation Act (EPCA) in 1975, which established, among other provisions, fuel economy standards for passenger cars and light trucks (commonly referred to as “Corporate Average Fuel Economy” or "CAFE" standards). These CAFE standards have remained at 27.5 mile-per-gallon (mpg) since 1990 (to put it into context, the last time that CAFE standards were raised, there was no internet, the Soviet Union was still one country, Saddam Hussein had yet to invade Kuwait while George W. Bush was known simply as the President's son and part-owner of the Texas Rangers, and most baby-boomers were still in their 30's).
However, in September 2009, U.S. Department of Transportation Secretary Ray LaHood and EPA Administrator Lisa Jackson jointly proposed a rule establishing an historic national program that would begin to improve vehicle fuel economy and reduce GHGs. The coordinated standards will apply to light-duty trucks as well as passenger vehicles covering model years 2012 through 2016. The aim of the standards is to build a national fleet of passenger cars and light-duty trucks that begins to address the issue of the major emissions from the domestic transportation sector in the US.
The new CAFE standards are expected to be announced by the end of March 2010 in order to meet the statutory requirement that CAFE standards be completed 18 months before the next model year begins in October so as to provide manufacturers with enough lead time to make extensive necessary changes in their automobiles.
Renewable Fuels Standard
Finally, under the Energy Independence and Security Act of 2007 (EISA 2007), the EPA is responsible for revising and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel, which are produced from plant or animal products or wastes, rather than from fossil fuels. The best known renewable fuels today are ethanol and biodiesel.
While at least 7.5 billion gallons of renewable fuel must be blended into motor-vehicle fuel sold in America by 2012, the new Renewable Fuel Standard program will increase the required volumes of renewable fuel to 36 billion gallons by 2022.
