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EPA Appeals Board Decision Stirs the Pot on Whether to Address Carbon Emissions by Regulation or Legislation

December 3, 2008

When he takes office in January, Barack Obama will have at least two clear paths to regulating carbon dioxide emissions to address climate change. The first is through new legislation, such as the cap-and-trade proposals floated in the 110th Congress. The other, quicker, path – but one fraught with its own set of problems – is to use existing laws, notably the Clean Air Act (CAA). Seizing on existing law, the Sierra Club (Petitioner) recently blocked a permit to construct a coal-fired power plant by arguing successfully to the Environmental Protection Agency’s Environmental Appeals Board (the Board) that a CAA permit needed to operate the plant could not be issued without a showing that the plant would use “Best Available Control Technology” (BACT) to reduce carbon dioxide emissions.

Fossil-fuel fired power plants, petroleum refineries, and other major stationary sources are required to include BACT for air pollutants that are “subject to regulation” under the CAA. EPA granted the permit at issue in In re Deseret Power Cooperative after concluding that carbon dioxide was not “subject to regulation” under the CAA, and that BACT review was therefore unwarranted. Petitioner appealed that decision to the Board, which hears challenges to EPA permits. The Board did not conclusively rule that carbon dioxide was indeed “subject to regulation” under the CAA. But the Board did rule that EPA’s rationale for not including BACT was unsupported by the administrative record and remanded the matter back to the agency for further deliberation.

It is virtually certain that a determination as to whether carbon dioxide is “subject to regulation” under the CAA will not occur during the Bush Administration’s waning days. The Board’s decision in In re Deseret, however,ensures that the incoming Obama EPA will be required to address the issue early on. EPA has three principal options on remand. First, EPA could bolster its administrative record to further support the conclusion that carbon dioxide emissions do not trigger BACT requirements. Given President-elect Obama’s pledge to address greenhouse gas emissions early in his administration, it would appear unlikely that EPA would make such a determination. Second, EPA can conclude that carbon dioxide is indeed “subject to regulation.” Such a conclusion would have far reaching ramifications. Not only would it require BACT to control carbon dioxide emissions at major industrial facilities, but it would also potentially impose BACT requirements on a broad range of smaller facilities that generate over 250 tons of carbon dioxide per year, but that have previously been unregulated under the CAA, including hospitals, schools, and apartment buildings.

Finally, as the Board points out, EPA could engage in a nationwide rulemaking. As the Board noted, the issue of whether to regulate carbon dioxide under the CAA “is an issue of national scope that has implications far beyond this individual permitting proceeding.” The Board went on to suggest “that [EPA should] consider whether interested persons, as well as [EPA], would be better served by … addressing the interpretation of the phrase ‘subject to regulation under this Act’ in the context of an action of nationwide scope, rather than through this specific permitting proceeding.”

Statutory Framework

The CAA establishes a cooperative framework under which states are primarily responsible, pursuant to EPA-approved plans, for implementing and enforcing various programs which regulate air emissions from stationary sources. The programs over which states have regulatory responsibility include the New Source Review (NSR) program. The NSR program has a number of preconstruction review provisions, including Prevention of Significant Deterioration (PSD) permits which are required for “major emitting facilities” in areas meeting EPA’s air quality standards. Prior to constructing or modifying a “major emitting facility” subject to PSD permitting requirements, the permittee must demonstrate that the facility will not cause or contribute to air quality violations, and that it is deploying “the best available control technology for each pollutant subject to regulation … [that is] emitted from … [the] facility.” BACT requires facilities to implement controls to achieve “the maximum degree of reduction of each pollutant subject to regulation.” BACT determinations are facility- and pollutant-specific, and take into consideration energy, environmental, and economic impacts.

A broad range of industrial sources qualify as “major emitting facilities” and are subject to regulation under the PSD program, including fossil-fuel fired power plants, Portland Cement plants, municipal incinerators, phosphate rock processing plants, and copper smelters. In addition to the specific facility types enumerated in the statute, “major emitting facilities” also include “any other source with the potential to emit two hundred and fifty tons per year or more of any air pollutant.” Historically, these thresholds have limited BACT requirements to a relatively small number of large industrial sources. EPA estimates that it annually issues 200-300 PSD permits.

The Deseret Bonanza Facility

In November 2004, Deseret submitted a PSD permit application to construct a new waste-coal-fired electric generation unit at its existing Bonanza power plant, located near Vernal, Utah. The facility is located within the boundaries of the Uintah and Ouray Indian Reservation. Because the Reservation does not have a federally-approved tribal CAA permitting program, EPA Region 8 retained primary authority for implementing the PSD program and approving Deseret’s permit.

During the public review period, Petitioner submitted comments indicating that the Supreme Court’s decision in Massachusetts v. EPA compelled EPA to impose BACT requirements on the new facility. That case involved challenges to EPA’s denial of a petition requesting rulemaking to address greenhouse gas emissions from mobile sources under the CAA. EPA’s denial was predicated on its determination that it did not have authority to regulate carbon dioxide and other greenhouse gases under the CAA. The Court, however, disagreed, holding that “greenhouse gases fit well within the Clean Air Act’s capacious definition of ‘air pollutant.’” The Court remanded the petition back to EPA to determine whether greenhouse gases “endanger public health or welfare.” EPA has yet to make that determination.

In response to Petitioner’s comments on the pending Deseret permit, EPA stated that Massachusetts v. EPA “does not require [EPA] to set CO2 emission limits” and that “EPA does not currently have authority to address the challenge of global climate change by imposing limitations on emissions of CO2 and other greenhouse gases in PSD permits.” EPA also stated that its historical interpretation of the phrase “subject to regulation” required actual control of emissions, as opposed to monitoring or reporting. EPA issued Deseret a PSD permit authorizing construction of the new waste-coal-fired facility in October 2007. While the permit imposed BACT requirements for some pollutants, it did not include BACT for carbon dioxide.

Analysis

In October 2007, Petitioner sought review of EPA’s permit before the Board. The principal issue before the Board was whether carbon dioxide was a pollutant “subject to regulation” under the CAA. Citing to Massachusetts v. EPA and EPA regulations which require certain facilities to monitor and report carbon dioxide emissions, Petitioner contended that carbon dioxide was indeed “subject to regulation” under the CAA. As a result, according to Petitioner, EPA was required to include BACT controls for carbon dioxide in the PSD permit. EPA countered with a variety of textual and historical interpretation arguments.

The Board first ruled that the phrase “subject to regulation” “is broad enough to embrace different meanings, or shades of meaning.” Petitioner argued that the monitoring and reporting requirements constituted “regulation,” while intervenor Deseret argued that “regulation” requires affirmative emission controls. The Board sided with EPA, ruling that the term “subject to regulation under this Act” “is not so clear and unequivocal as to preclude the Agency from exercising discretion in interpreting the statutory phrase.”

Although the Board ruled that the statute’s plain language did not compel a particular interpretation, it rejected EPA’s contention that its historic interpretation of the phrase “subject to regulation” prohibited it from imposing BACT limitations on carbon dioxide. In its response to Petitioner’s public comments, EPA indicated that it was bound by a historic interpretation of the phrase “subject to regulation” as meaning “subject to a statutory or regulatory provision that requires actual control of emissions.” EPA relied on a variety of sources to support its historical interpretation argument, including certain regulatory preambles, a definition of “regulated NSR pollutant” developed in a 2002 rulemaking, and two EPA memorandums. The Board rejected those arguments on grounds that they “provided little, if any, support for the contention that the phrase applies only to provisions that require actual control of emissions.” As a result, the Board concluded that EPA’s determination that its discretion was limited by historic statutory interpretation was not supported by the administrative record and clearly erroneous.

Because EPA’s determination that carbon dioxide was not “subject to regulation” was unsupported by the administrative record, the Board remanded the matter to EPA for further consideration.

Implications

The implications of the Board’s decision in In re Deseret are predictably contested. Petitioner and other environmental groups heralded the decision as a major victory and step towards the direct regulation of carbon dioxide under the CAA. Industry representatives, however, have pointed out that the Board’s decision, like the Supreme Court’s decision in Massachusetts v. EPA, is procedural and does not compel a certain substantive outcome. The Board’s decision nonetheless casts a pall of uncertainty over as many as 100 coal-fired power plant projects whose permits will not be finalized prior to the end of the Bush administration.

The CAA’s cooperative federal/state framework may potentially constrain the impact of the Board’s decision. In most instances, states are the primary CAA permitting authority pursuant to EPA-approved implementation plans. State-level permitting decisions in states with delegated CAA authority are not subject to review by the Board. As a result, the precedential value of the Board’s decision may be limited to the narrow situations, like those presented in In re Deseret, in which EPA is the primary permitting authority. In other words, the Board’s decision (as well as EPA’s subsequent decision on remand) may not prevent states from making their own determination as to whether carbon dioxide is “subject to regulation.” Indeed, that issue is currently subject to litigation at the state-level. In Georgia, for example, the state appellate court recently accepted review of a June 2008 state trial-court order ruling that a permit for a new coal-fired power plant was required to include BACT controls for carbon dioxide.

The decision nonetheless pushes EPA down a path it has (so far) been reluctant to travel – direct regulation of carbon dioxide under the CAA. In response to the Supreme Court’s remand in Massachusetts v. EPA, EPA issued an Advanced Notice of Public Rulemaking (ANPR) in July 2008 which provided a roadmap of various options for regulating greenhouse gases under the CAA. The CAA’s emission thresholds (100 tons per year for enumerated facility types and 250 tons per year for all other facilities) have limited preconstruction review and BACT requirements to a relatively small number of stationary sources. Unless EPA took measures to limit the scope of the PSD program, a finding that carbon dioxide is “subject to regulation” would exponentially expand the reach of that program.

The U.S. Chamber of Commerce estimates that over one million previously unregulated sources emit (or have the potential to emit) enough carbon dioxide to trigger BACT requirements, including office buildings, schools, restaurants, and hospitals. In the ANPR, EPA noted that BACT review is complex and costly, and that federal, state, and tribal permitting authorities, not to mention permittees, would be faced with significant new costs and administrative burdens if the program was expanded to include carbon dioxide and other greenhouse gases. While EPA proposed a number of options for streamlining PSD review in its ANPR, its theories are untested and would be exposed to potential legal challenge if enacted. As with Massachusetts v. EPA, the ramifications of the Board’s decision in In re Deseret have the potential to extend far beyond the smokestack, and the decision tees up a series of vexing issues for the incoming administration.

For more information on this case and on developments in climate change policy generally, please contact any member of Marten Law Group’s Climate Change and Sustainability practice group.

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