Yesterday’s Action

EPA yesterday took its long-anticipated step of regulating greenhouse gas (GHG) emissions under the Clean Air Act (CAA).  EPA issued rules requiring motor vehicles to reduce GHG emissions beginning with model year 2012 and continuing to model year 2016.  The rules were issued in tandem with regulations issued by DOT’s National Highway Traffic Safety Administration (NHTSA) under NHTSA’s Corporate Average Fuel Economy (CAFE) program.  The NHTSA standard requires an estimated 34.1 mpg for the combined industry-wide fleet for model year 2016.  Because credits for air-conditioning improvements can be used to meet the EPA standards, but not the NHTSA standards, the EPA standards would be equivalent to 35.5 miles per gallon if all reductions came from fuel economy improvements. 

Stationary Source Regulation to be Triggered

The effect of the new regulations is not limited to just motor vehicles.  By regulating GHGs from motor vehicles, EPA has made GHGs “regulated air pollutants” for purposes of the Prevention of Significant Deterioration (PSD) permit program.  All new and modified major stationary sources of regulated air pollutants under the PSD program must obtain a preconstruction permit and undertake Best Available Control Technology (BACT) for the regulated air pollutants in question.  Hence, new and modified major sources of GHGs will now be required to obtain PSD permits and undertake BACT for their GHG emissions.

As we have reported in previous client alerts, EPA has been struggling to define both the GHG emissions threshold above which a source will be considered to be “major” for purposes of triggering PSD requirements and the date on which such requirements will commence for GHG-emitting sources.  EPA last year proposed two actions to address these questions:  the tailoring rule and a reconsideration of the so-called Johnson Memorandum. 

Under the tailoring rule proposal, for a six-year period, only sources with the potential to emit at least 25,000 tons per year (tpy) of carbon dioxide-equivalent would be subject to PSD as a result of their GHG emissions.  After the six-year period, sources with the potential to emit at least 250 tons per year of carbon dioxide-equivalent would be subject to PSD as a result of their GHG emissions.  The initial 25,000 tpy threshold was intended to defer GHG regulation for potentially millions of small sources.  Nevertheless, the proposed tailoring rule was subject to considerable legal controversy since it appeared to disregard the plain language of the CAA specifying that a “major” emitting source for PSD purposes was one that had the potential to emit at least 250 tpy of a regulated air pollutant.  This statutory language would seem to bar deferral of PSD requirements for sources with the potential to emit less than 25,000 tpy of carbon dioxide-equivalent.

EPA last year also proposed in the Johnson Memorandum reconsideration to commence GHG regulation under the PSD program when the motor vehicle GHG regulations became legally effective for purposes of the Congressional Review Act, which is sixty days after those regulations are published in the Federal Register.  With the motor vehicle GHG regulations expected to be issued (as they were) on April 1, 2010, this would trigger PSD requirements for new and modified major GHG-emitting sources by mid-June of this year, assuming it took a week or two for the regulations to be published in the Federal Register.

These proposals, however, were severely criticized by many groups.  State environmental regulators, which are responsible for administering the PSD permit program, told EPA in comments that they could not administratively handle the many new permit applications that would be submitted under EPA’s proposal, even at the 25,000 tpy threshold set forth in the proposed tailoring rule.  A resolution was introduced in the Senate by Senator Murkowski to disapprove EPA’s endangerment finding that underpins the motor vehicle GHG rules, and similar resolutions were introduced in the House.  Responding to these pressures, EPA Administrator Lisa Jackson last month indicated in a letter to a number of Senators and then in testimony on the Hill that EPA would revise the proposed tailoring rule and Johnson Memorandum reconsideration to delay GHG regulation for all sources and then to phase it in more slowly.

Johnson Memorandum Reconsideration But No Tailoring Rule

On Wednesday of this week, EPA promulgated the Johnson Memorandum reconsideration.  In a departure from the reconsideration as proposed, the reconsideration as issued on Wednesday states that GHG regulation under the PSD program will not commence for any source until the motor vehicle regulations “take effect,” which EPA deemed to be January 2, 2011.  The reconsideration did not specify which sources would be regulated at that time nor did it provide any information about what the phase-in plan would be.  EPA said those details would be supplied when the tailoring rule is finalized.  Nevertheless, based on previous EPA statements, it is known that, as of January 2, 2011, any source subject to PSD permitting for its non-GHG pollutants will be required to undertake BACT for its GHG emissions as well.  Thus, any source that, under pre-GHG regulatory requirements, would be required to obtain a PSD permit and undertake BACT for its non-GHG emissions will now be required to undertake BACT for its GHG emissions.

Meanwhile, as of this writing, there is no sign that publication of the final tailoring rule is imminent, and it does not appear that the rule has yet been sent for final review to the Office of Management and Budget, a necessary last step in the process of issuance of an agency rule.  This delay suggests that EPA may be having difficulty working out the details of its phase-in plan.

Several aspects of the Johnson Memorandum reconsideration are worth mentioning because they suggest that sources that emit GHGs may be subject to regulatory requirements under the PSD program even before January 2, 2011. 

1.         Consideration of GHG control measures now.  EPA told states that prior to January 2, 2011 they could utilize their authority over a source’s non-GHG emissions in the PSD process to leverage GHG emission reductions.  It opined that BACT requires consideration of collateral environmental impacts and that this could include climate change impacts.  It also said that states could possibly consider efficiency improvements as BACT for non-GHG emissions, and this could result in reduced GHG emissions as well.  EPA stated that it would issue guidance to aid states in these determinations.

2.         Delays of Permits in Process.  EPA told states that when GHGs become subject to regulation on January 2, 2011, GHG BACT requirements will apply to any pending PSD permits no matter how far advanced in the process the permit is.  EPA justified this ruling by stating that most PSD permit applications in process now should be completed by the end of this year, a statement that may be questionable at least for some projects.  As important, some states may choose to delay permit issuance in expectation of the GHG standards.

 3.         State Authority to Require GHG BACT under State Law.  EPA told states that they could require GHG BACT for any source sooner than January 2, 2011 if the state concludes that it may do so under state law.  In other words, if state law authorizes regulation of GHGs under the state’s PSD permit program, EPA will not stop the state from so regulating.  This authorization, however, would not apply to the seven states which essentially act as EPA’s agent in administering EPA’s PSD permit requirements.

Title V

Notably, although the Johnson Memorandum and EPA’s grant of reconsideration of the Johnson Memorandum only addressed the PSD program, the Johnson Memorandum reconsideration also addressed consideration of GHGs under the Title V operating permit program.  EPA stated that it would commence GHG requirements under the Title V permit program at the same time and in the same manner as under the PSD program – GHGs will be deemed subject to regulation as of January 2, 2011, and regulation will be phased in under the tailoring rule.

Still No Economic Study

In issuing yesterday’s motor vehicle GHG rule, EPA continued its refusal to undertake a study of the economic impacts that would result from regulation of GHGs under the PSD program.  A number of parties submitted comments on the proposed motor vehicle GHG rule to the effect that EPA should study such economic impacts because that rule automatically makes GHGs regulated air pollutants, thereby triggering PSD requirements for GHG emissions.  In responding to these comments yesterday, EPA stated that it was under no legal obligation to study the economic effects of GHG regulation under the PSD program because those effects flow only “indirectly” from the motor vehicle rule.  As a result, EPA has not done an economic or cost-benefit analysis of regulating GHGs under PSD.

Electric Vehicles, Fuel-Cell Vehicles and Plug-In Hybrids Must Count Upstream GHG Emissions

In a departure from EPA’s original proposal, EPA’s final motor vehicle GHG regulations require electric vehicles (EVs), fuel-cell vehicles (FCVs) and plug-in hybrid electric vehicles (PHEVs) to count the upstream GHG emissions produced by the electricity they use in determining compliance with EPA’s GHG standards.  Under the regulations, such upstream emissions are not required to be counted for up to the first 200,000 EV/PHEV/FCV vehicles produced by a given manufacturer during Model Year (MY) 2012-16 (for a manufacturer that produces less than 25,000 EVs, PHEVs, and FCVs in MY2012), or for up to the first 300,000 EV/PHEV/FCV vehicles produced during MY2012-16 (for a manufacturer that produces 25,000 or more EVs, PHEVs, and FACVs in MY 2012).  For any production greater than this amount, the compliance value for the vehicle will be set at a level that reflects the vehicle’s net increase in upstream GHG emissions in comparison to the gasoline vehicle it replaces.  EPA stated that this provision is needed because “at this time … there is no … comprehensive program addressing upstream emissions of GHGs.”  EPA stated that it would reassess the upstream emissions issue for MY2017 and beyond in the future “based on the status of advanced vehicle technology commercialization, the status of upstream GHG control programs, and other relevant factors.”

The Future Remains Murky

EPA has now completed three of the four initial steps it intends to take to regulate GHGs under the CAA, those steps being the endangerment finding, the motor vehicle GHG rule, the Johnson Memorandum reconsideration and the still-to-be-finalized tailoring rule.  Yet the future appears to be as uncertain as ever for stationary sources that emit GHGs.  For instance, although EPA has informally indicated, pending finalization of the tailoring rule, which class of sources will be required to undertake GHG BACT as of the beginning of next year, there remains considerable uncertainty as to exactly what GHG BACT means.  EPA has talked in the past about issuing guidance on this subject, but it has not done so nor specified whether it still intends to do so and, if so, when.  And, in the end, since states primarily administer PSD, the determination of what constitutes GHG BACT will be determined over time in case-by-case BACT determinations, further extending the uncertainty. 

Moreover, until the tailoring rule is finalized, the many sources across the economy that have the potential to emit GHGs above the 250 tpy statutory threshold do not know what requirements will apply to them.  And even when the tailoring rule is finalized, the uncertainty as to EPA’s legal authority to seemingly rewrite the statutory 250 tpy threshold will persist for a number of years.

Indeed, there are likely to be lawsuits on all four aspects of EPA’s initial GHG regulatory program.  Lawsuits on the endangerment finding are already pending.

Finally, it is not known what Congress will do on GHG regulation.  The issuance of the motor vehicle GHG rule and the determination that GHG regulation under the PSD program will commence in less than a year – or sooner if states choose to regulate – will likely intensify efforts to preempt or delay EPA regulation in Congress, either through the Murkowski Resolution or through some other vehicle.  Additionally, there may be new focus on the efforts of Senators Kerry, Graham and Lieberman to develop cap-and-trade legislation.  Even before yesterday, the extent to which that legislation might preempt EPA GHG regulation had emerged as a significant issue.