EPA Proposes Regulating Stationary Source Greenhouse Gas Emissions Under Federal Clean Air Act

Last week, EPA took a major step in showing that it intends to regulate greenhouse gases (GHGs) under existing Clean Air Act authority. EPA proposed new emissions rules that are expected to affect about 14,000 GHG sources nationwide. The agency estimates that about 11,000 of the affected sources already participate in the Clean Air Act’s Title V air operating permit program, but about 3,000 facilities will be new to the program. The rule also is expected to bring new sources into the Act’s construction permitting program.

Interestingly, only the House version of proposed federal climate change legislation would preempt EPA from acting to regulate GHGs under the Clean Air Act. See Marten Law Group Environmental News, House Passes Energy & Climate Change Bill (June 29, 2009). But the Senate bill proposed last week by Senators Kerry and Boxer would not, leading to the potential for both a cap–and-trade regime and a regulatory regime existing side by side. See Marten Law Group Environmental News, One Way or Another: Senate Climate Bill Introduced (Oct. 1, 2009).

Background on Clean Air Act Construction and Operating Permit Programs

A permitting program for the construction and modification of major sources of air pollution was added to the Clean Air Act in 1977.[1] These included requirements for major facilities that would be located in areas that do not meet national ambient air quality standards for one or more pollutants (so-called “nonattainment areas”), and requirements to avoid degrading air quality in areas already meeting air quality standards (so-called “prevention of significant deterioration” or “PSD” areas). Collectively, these construction permit requirements are referred to as new source review, or “NSR.”

Under the PSD program, a “major source” or “major emitting facility” is one that emits 100 or 250 tons a year (depending on source type) of “any air pollutant.”[2] PSD permits involve developing air quality-based and technology-based emission limits for individual major new sources (or major modifications to existing sources).

PSD’s ambient air quality requirements are designed to be applied to a facility’s emissions of one or more of the six air pollutants (CO, NOx, SOx, ozone, particulates, and lead)[3] for which national ambient air quality standards have been developed.[4] EPA has not established any ambient air quality standards for GHGs. As a result, PSD’s ambient air quality requirements cannot be applied to GHG sources, and EPA has not attempted to do so.

A PSD permit also must include technology-based emission limits that reflect the “best available control technology” (“BACT”) for “each air pollutant subject to regulation under this chapter.”[5] Given the structure of the Act and the PSD provisions’ focus on ambient air quality standards, it would be logical to interpret this reference to “each air pollutant” to mean pollutants for which ambient air quality standards have been established. However, environmental organizations have engaged in an extended campaign of PSD permit appeals seeking a broader reading of “each air pollutant” to include GHG emissions, and a determination that carbon dioxide, in particular, already is an “air pollutant subject to regulation” under the Act. In November 2008, they had some success, when EPA’s Environmental Appeals Board ruled that carbon dioxide was “subject to regulation” and subject to BACT because carbon dioxide monitoring and reporting is required under the Acid Rain program. See Marten Law Group Environmental News, EPA Appeals Board Decision Stirs Pot on Whether to Address Carbon Emission by Regulation or Legislation (Dec. 3, 2009).

In the waning days of the Bush Administration, EPA issued an interpretive memorandum (the “Johnson Memorandum”) clarifying that the definition of “subject to regulation” means the actual control of emissions. The Obama Administration is currently reconsidering that interpretation, but has expressed a preference to adopt its conclusions. Until the agency or a court holds otherwise, EPA does not consider that carbon dioxide or other GHGs are subject to BACT requirements.

But two EPA rulemakings which follow in the wake of the Supreme Court’s 2007 decision in Massachusetts v. EPA, 549 U.S. 497 (2007), will likely change that, and open the door for GHG regulation under the PSD program. First, EPA has proposed finding that GHG emissions from new cars and trucks “cause or contribute to air pollution that endangers public health and welfare.” 74 Fed. Reg. 18886 (Apr. 24, 2009). Marten Law Group Environmental News, EPA Proposes Regulating Greenhouse Gases Under Clean Air Act (Apr. 17, 2009). Finalizing this proposed endangerment finding would not directly control GHG emissions, but would obligate EPA to do so in the near future. Second, in apparent anticipation of a final endangerment finding, EPA has proposed regulating GHG emissions from passenger cars and light trucks under Title II of the Clean Air Act. See 74 Fed. Reg. 24,007 (May 22, 2009). EPA expects to finalize those rules by March 2010, and has taken the position that GHGs regulated under the mobile source rule will be “subject to regulation” under the Clean Air Act and will thus trigger BACT requirements under the PSD program.

The Clean Air Act 1990 amendments added a new Title V to the Clean Air Act, creating a new operating permit program.[6] Operating permits are required for facilities that, considering all of their covered sources, emit more than 100 tons of any air pollutant, or are considered a major source of hazardous air pollutants, or have equipment that is subject to a new source performance standard.[7] The purpose of this new program was to bring together in a single permit all of the existing emission limits and other requirements that apply to a single facility. Prior to creation of this program, a single large industrial facility would have construction permits issued under federal and state programs for a variety of equipment, and could have a substantial amount of equipment that was subject to general requirements specified in regulations that had never been captured in facility-specific permit documents. Operating permits may include “gapfilling” monitoring, recordkeeping, and reporting requirements, but are not a vehicle for imposing new emission limits or other substantive requirements on facilities. Accordingly, an operating permit for a major source of GHG emissions could not impose any new emission limits on those GHG emissions, absent some other regulatory requirement – such as a PSD permit – establishing those limits.

EPA’s Proposed GHG Permitting Regulations

A PSD permit currently is required for all new “major emitting facilities” (i.e., facilities that emit 100 or 250 tons of a “regulated pollutant” depending on source type). Facilities that undergo modifications are required to incorporate BACT if the modification results in a significant net increase in regulated pollutant emissions. But given the ubiquitous nature of GHG emissions, the literal application of these statutory thresholds would capture both large industrial sources such as power plants as well as myriad smaller sources that have never been regulated under the Clean Air Act, such as multi-family residential units, schools, and hospitals. Indeed, EPA estimates that without its proposed “tailoring” rule, the number of facilities annually subject to BACT permits would increase from less than 300 per year to over 41,000 per year, and that the number of facilities annually subject to Title V permitting would increase from 14,000 to approximately 6.1 million.

To narrow the universe of sources requiring GHG permits, EPA has proposed modifying the Clean Air Act’s applicability thresholds for both permitting programs as a form of “regulatory relief.” EPA has proposed a two-phase GHG rule under the PSD and Title V permitting regimes. Under the first phase, new stationary sources that would annually emit over 25,000 tons of carbon dioxide equivalents (CO2e) would qualify as “major sources” under the PSD program and would be required to deploy the best available control technology (BACT) to control such emissions. Furthermore, existing “major sources” that undergo modifications that annually increase greenhouse emissions between 10,000 and 25,000 tons of CO2e would also be required to implement BACT. Finally, all stationary sources that annually emit over 25,000 tons of CO2e would be subject to Title V permitting requirements. Absent these adjustments to the Act’s thresholds, almost any new emitting source, as well as any modification to an existing source probably would trigger permitting for GHG emissions.

EPA relied on two legal theories to justify its departure from the statutory 100/250 ton PSD thresholds: absurd results and administrative necessity. According to EPA, once GHGs become “subject to regulation,” millions of sources would be subject to PSD and Title V permitting requirements under the 100/250 ton statutory thresholds, and permit applications would increase by orders of magnitude. As a result, local and state permitting authorities would face a fiscally-unmanageable onslaught of permit applications which would frustrate many of the Clean Air Act’s policies, including requirements balancing economic growth and environmental safeguards. It is likely that, if finalized, the level at which EPA set its thresholds (as well as the rationale behind establishing new thresholds in the first place) will be challenged by parties seeking more aggressive regulation.

Under EPA’s proposal, facilities already subject to Title V that meet the GHG threshold would not immediately need to revise them, as new permit conditions for GHG emission control (i.e., BACT) would only be required if the facility underwent modification. Title V permits must be renewed every five years, and the renewal process would include estimating GHG emissions in the permit application. EPA estimates that 14,000 facilities would be subject to Title V requirements, including 3,000 facilities that would fall under Title V for the first time as a result of the GHG proposal.

EPA generally determines applicable BACT for a facility on a case-by-case basis, considering energy, environmental, and economic impacts. The proposed rule does not provide any guidance on what types of controls will constitute BACT for various GHG sources. But with respect to power plants, a recent EPA Environmental Appeals Board decision, In re: Desert Rock Energy Co. LLC, EAB Appeal Nos. 08-03-06 (Sept. 24, 2009), may provide some guidance. In that case, the Board remanded the permit to construct a 1,500 MW coal-fired power plant on grounds that EPA failed to adequately explain why integrated combined-cycle gasification (IGCC) should not be considered BACT for the facility. The decision did not conclusively determine that gasification technology (which is technological precursor for geologic sequestration) is BACT for coal-fired plants, but places a burden on EPA on remand to demonstrate that IGCC is not BACT.

The 25,000 ton Title V threshold is identical to the threshold in the GHG reporting rules EPA finalized last month, and which go into effect on January 1, 2010. See Marten Law Group Environmental News, EPA Issues Mandatory Greenhouse Gas Reporting Rule (Sept. 24, 2009). While the final reporting rule and the proposed Title V rule have the same threshold, the proposed Title V rule would apply to more sources due to the limited scope of the reporting rule. Thus, Title V facilities that are not required to inventory and report their emissions under the final reporting rule will likely be required to disclose their estimated emissions as part of the Title V permit renewal process.

The proposed rule also commits EPA to conduct a study during the first five-year phase which evaluates ways in which the PSD and Title V permitting programs can become more effective with respect to GHG emissions. Options that EPA may consider include: (1) modifying the methodology for calculating whether a facility exceeds the applicability threshold; (2) identifying controls for common categories of GHG emission (i.e. presumptive BACT); (3) evaluating general permitting for smaller sources; and (4) electronic permitting. EPA will also evaluate whether the programs may be feasibly administered at lower thresholds. EPA would be required to promulgate new rules (including new applicability thresholds as appropriate) within six years after the initial rules become effective.

The far-reaching potential consequence of direct EPA regulation of GHG sources under the Clean Air Act has been widely regarded as an incentive for legislative action on climate change. Indeed, by announcing EPA’s proposed rules on the same day Senators Kerry and Boxer floated a cap-and-trade bill, the Obama administration appears to have been sending a warning shot across Congress’ bow. But it remains unclear the extent to which EPA’s proposed rules actually would result in near-term GHG emission reductions. As PSD permitting is only triggered when a major new source is constructed, or a major modification is made to an existing source, BACT for GHG emissions would only be required for a small subset of covered sources each year (EPA’s estimate is 400). No new control measures would be required for existing facilities that emit over 25,000 tons per year of GHGs, so long as they do not undergo modifications that significantly increased their GHG emissions. EPA already faces this dilemma with respect to the nation’s fleet of coal-fired power plants, many of which were constructed prior to the adoption of the PSD program and remain exempt from BACT requirements to the extent that they are not modified. EPA’s rule may therefore have the unintended consequence of disincentivizing the construction of new, more efficient electric generation and industrial facilities, while encouraging older facilities with higher emission rates to remain on-line and unmodified.

Conclusion

EPA is accepting comments on the proposed PSD and Title V rules for sixty days after publication in the Federal Register (forthcoming). If you have any questions on how the proposed rules may impact your business, or if you are interested in commenting on EPA’s proposal, please contact any member of Marten Law Group’s Climate Change or Air Quality practice groups.