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EPA Issues Final Rule Regulating Greenhouse Gases From New and Modified Sources

May 14, 2010

With a one-two punch, EPA on May 13, 2010 issued permitting requirements for larger stationary sources of greenhouse gases (“GHGs”), just one day after Senators Kerry and Lieberman released cap and trade legislation in the Senate [see related article in this Newsletter]. EPA’s so-called “tailoring rule” only applies to larger sources of GHGs, and only if they are required to obtain a construction permit under the Clean Air Act’s PSD program, or an operating permit under Title V of the Clean Air Act. In the first two years, EPA estimates that about 900 new and modified facilities a year will be required to obtain permits, mostly coal-fired plants, refineries, cement plants and solid waste landfills. Beginning in 2016, many more sources may be covered by the rule.

The EPA rules only impose limits on GHG emissions when a new source is built, or an existing source is modified, and the new construction or modification results in increased GHG emissions above the rule’s thresholds. Implementation is set to begin on January 2, 2011. Existing sources of GHGs are regulated only if and when they are modified - for example, when they are reconstructed or expanded.

For the first six months of 2011, EPA has limited GHG permitting to sources already required to obtain a PSD or operating permit due to their other air emissions. Those sources would only be required to address GHGs in their permits if their GHG emissions exceed 75,000 tons a year (for the PSD program, these would be new or increased GHG emissions). For two years after that, PSD and operating permits also would be required based only on a facility’s GHG emissions, even if not required due to emissions of other pollutants. EPA also committed in the rule to undertake another rulemaking, beginning in 2011, to consider whether to apply GHG permitting requirements to smaller sources.

Of course, if Congress enacts climate legislation this year which preempts EPA regulation under the Clean Air Act – as proposed in both the House and Kerry-Lieberman bills - then EPA’s regulations may be stillborn. But without action this year by the Congress or the courts, EPA has now set the rules, and the first PSD permits for GHG emissions will be required in January, 2011.

I. Effect of the Tailoring Rule

The tailoring rule modifies the GHG emissions thresholds that trigger the need for a PSD construction permit and a Title V operating permit, and phases in application of those two permitting programs to GHG sources. Absent the tailoring rule, a series of actions that EPA already has taken under the Clean Air Act (described in detail below) would force much smaller sources of GHG emissions to obtain both kinds of permits.

The PSD and operating permit programs apply to “major sources” of regulated pollutants, like sulfur dioxide and nitrogen oxides. The Clean Air Act defines a “major source” as one that emits 100 tons per year of a regulated pollutant, or if not from a listed source category, one that emits 250 tons per year. If these thresholds were applied to GHG sources, the permitting rules would apply to some 14,000 sources. See EPA Proposes Regulating Stationary Source Greenhouse Gas Emissions Under Federal Clean Air Act, Marten Law News (October 7, 2009).

The Tailoring Rule phases in GHG permitting requirements in two steps:

January 2, 2011 to June 30, 2011

For PSD construction permits, only sources that trigger PSD due to their non-GHG emissions would be required to address GHG emissions in their PSD permits, and then only if their GHG emissions (new emissions or an increase due to a modification) exceed 75,000 tons a year. Covered sources will be required to incorporate Best Available Control Technology (BACT) for their GHG emissions.

For operating permits, only sources already required to obtain an operating permit due to their non-GHG emissions would be required to incorporate GHG-related requirements into their operating permits. The only operating permit conditions related to GHGs for these sources are likely to relate to emission reporting under EPA’s new GHG reporting rules (40 CFR Part 98), unless the source also is required to obtain a PSD permit for GHG emissions.

July 1, 2011 to June 30, 2013

This second phase brings sources within both programs based on only their GHG emissions, in addition to sources that require permits under the first phase criteria. New construction projects emitting at least 100,000 tons per year of GHGs would trigger PSD construction permitting, even if they do not require a PSD permit for other regulated pollutants. Modifications to existing sources would trigger PSD if they would increase GHG emissions by more than 75,000 tons per year.

Similarly, under the operating permit program, facilities emitting at least 100,000 tons of GHGs a year would require an operating permit, even if not required to obtain one based on emissions of any other regulated pollutants. EPA estimates that about 550 sources – primarily landfills and industrial manufacturers – that do not currently require operating permits will need to obtain one as a result of this provision.

Later Expansion

EPA also plans to begin rulemaking in 2011 on a further phase, with the rule to be competed no later than July 1, 2012. During that third phase, EPA will consider whether to expand GHG permitting to sources emitting more than 50,000 tons per year. EPA also has indicated it does not plan to require permits from smaller sources in step three until at least April 30, 2016.

II. Background on the Tailoring Rule

A. Permitting For Stationary Sources Triggered By New Rules Limiting GHGs From Cars

EPA’s tailoring rule for stationary sources has its origin in the Supreme Court’s decision in Massachusetts v. EPA,[1] which involved a petition to regulate GHG emissions from cars. EPA initially denied the petition on grounds that GHGs are not “air pollutants” within the meaning of the Clean Air Act. The Supreme Court disagreed, and remanded the matter to EPA to consider the substantive issue presented by the petition: whether GHG emissions from cars endanger public health and welfare.

Last December, EPA issued its final determination that GHG emissions from new cars and trucks do cause or contribute to conditions that endanger public health and welfare.[2] This was EPA’s so-called “Endangerment Finding.” Having made that finding, EPA was effectively compelled to develop regulations limiting vehicle GHG emissions. Section 202(a) of the Clean Air Act requires EPA to limit vehicle emissions of pollutants the agency finds endanger health and welfare.[3] On April 1, 2010, EPA and the National Highway Traffic Safety Administration jointly released greenhouse gas emissions standards and revised fuel efficiency standards for cars and light duty trucks, which will apply to the 2012 vehicle model year.[4]

The Clean Air Act’s construction permitting program links these new vehicle standards to requirements for stationary sources. Section 165 of the Act requires that a “prevention of significant deterioration” (PSD) permit be obtained before constructing a major new stationary source or making a major modification to an existing source.[5] Among the requirements for a PSD permit is that the facility deploy BACT for each pollutant “subject to regulation” under the Act.[6]

B. Determining When Permitting Is Required For GHG Emissions From Stationary Sources

There has been substantial debate since the Supreme Court’s Massachusetts v. EPA decision was issued in 2007 as to when GHGs would become “subject to regulation,” triggering the BACT requirement. Environmentalists argued that the Court’s decision by itself made CO2 “subject to regulation” by declaring it a pollutant, or alternatively that an existing rule in the Act’s acid rain program made CO2 “subject to regulation” by requiring CO2 emissions monitoring and reporting. EPA, however, consistently maintained its historical position that a pollutant does not become “subject to regulation” until some rule or statutory provision requires actual control of emissions of that pollutant.

In November, 2008, the agency’s Environmental Appeals Board issued a ruling questioning the agency’s interpretation and directing it to reconsider whether to impose a CO2 BACT limit on a proposed coal-fired power plant.[7] Then-EPA Administrator Stephen Johnson quickly responded with a December, 2008 memo to the EPA Regional Administrators reaffirming that actual control requirements are needed to make a pollutant “subject to regulation.”[8]

Several environmental groups, seeking to force limits on CO2 emissions from new sources (particularly coal-fired power plants), petitioned EPA to reconsider the Johnson Memo. On February 17, 2009 the incoming Obama Administration announced that it would do so (but allowed it to remain in effect during the review).[9] In October 2009, EPA published a formal notice requesting comment on five possible interpretations of “subject to regulation,” including both the “actual control” approach previously taken by EPA and the “monitoring and reporting” approach advocated by the environmental groups.[10]

EPA issued its final decision on reconsideration of the Johnson Memo on March 29, 2010.[11] The agency reaffirmed the “actual control” interpretation of the phrase “subject to regulation.” Thus, under EPA’s interpretation, a PSD permit must require BACT for each pollutant that is subject to some form of control under a provision of the Clean Air Act or a regulation issued under authority of the Act, and this requirement expands each time a new pollutant becomes subject to “actual controls.”

In its reconsideration of the Johnson Memo, EPA applied its “actual control” test to the question of when GHGs would become “subject to regulation,” and so covered by the PSD program. The agency concluded that a pollutant becomes “subject to regulation” when controls on that pollutant take effect, meaning the date when the requirement to control the pollutant first applies to a source.[12] EPA expressly rejected suggestions that controls on a pollutant “take effect” on the date the regulation containing the controls is issued, or on the effective date of the regulation.[13] If it had adopted either of these approaches, PSD permits issued immediately after the vehicle standards were published, or 60 days later when the regulation took effect, would have been required to include BACT for GHG emissions.

Under EPA’s interpretation, the GHG emission standards for cars and trucks, which apply to 2012 model year vehicles, “take effect” on January 2, 2011, as that is the first date a manufacturer could legally sell a 2012 model year vehicle.[14] EPA rejected possible later dates for the vehicle standards to “take effect” for PSD purposes. NHTSA, which is in charge of setting vehicle fuel efficiency standards and issued new efficiency standards simultaneously with EPA’s vehicle GHG limits, historically has viewed the model year as starting on October 1 of the prior year. EPA said it was not bound by NHTSA’s interpretation, as EPA issued the vehicle GHG standards under a statutory provision that is different from the one implemented by NHTSA.[15] EPA rejected the suggestion that the limits take effect when model year 2012 cars are actually introduced into commerce, since a practical matter, manufacturers will not release 2012 models until later in the year. EPA also rejected the suggestion that the limits take effect when manufacturers must demonstrate compliance with average fuel efficiency standards, which occurs after a model year is over.[16]

EPA closed this portion of its reconsideration of the Johnson Memo with recognition that state permitting agencies and regulated sources will face significant difficulties implementing BACT analysis for GHGs, even with a delay until January 2, 2011. EPA noted that it intended to address the transition after January 2 in the Tailoring Rule.[17] As discussed above, EPA has set GHG thresholds high enough in the Tailoring Rule that only a limited number of sources are expected to require PSD or operating permits for their GHG emissions, at least during the first six months of 2011, and perhaps during the first two years of the program. However, an issue remains with the regulations individual states and permitting agencies already have on their books to implement these permitting programs, all of which contain the standard 100 ton and 250 ton thresholds for “major sources.”

EPA’s solution to this problem is to structure the Tailoring Rule’s thresholds as a definition of “subject to regulation,” a phrase not previously defined in EPA’s rules and unlikely to be defined in any state rules. EPA’s theory is that state permitting agencies can interpret the phrase “subject to regulation” in their rules consistent with this new federal definition, without having to first adopt changes to their regulations. It remains to be seen whether this theory will be tested when states begin implementing permitting for GHG sources.

III. Determining BACT for GHG Emissions

The only substantive limit that the PSD program will impose on GHG emissions, as the program takes effect, will be BACT emission limits. For conventional air pollutants, PSD requires an assessment of the impact of the proposed emissions on ambient air quality.[18] But ambient impact analysis is only relevant when an ambient air quality standard has been set for a pollutant, and there is no ambient standard for CO2 or the other GHGs. PSD permits also contain limits based on New Source Performance Standards and other industry- or source category-specific standards, but no such specific standards have been developed yet for GHGs. Unless and until more specific GHG-focused regulatory standards and emission limits are developed, the only basis for GHG emission limits in PSD permits will be the generally applicable BACT technology standard.

BACT is an emission limit, rather than a specific technology. However, the BACT limit for a pollutant is set based on the emission reduction that can be achieved through application of the best technology that it would be economically and technologically feasible for the particular plant to install. EPA’s regulations defined BACT as an emission limit based on “the maximum degree of reduction of each pollutant” that is achievable for a particular source “through application of production processes or available methods, systems, and techniques, including fuel cleaning or treatment or innovative fuel combustion techniques for control of such pollutant.”[19] In determining BACT, agencies must take into account “energy, environmental, and economic impacts and other costs.”[20]

BACT analysis for CO2, in particular, will be different than for most other air pollutants. Existing air pollution control practices employ a variety of end-of-stack control devices to reduce emissions of specific pollutants. Particles are captured in bag houses and electrostatic precipitators. Volatile compounds and some other pollutants are burned in flares or incinerators, or captured or chemically altered by catalysts. While there are experimental methods for removing CO2 from exhaust gases, none of these methods have been demonstrated at a large scale, nor shown to be economically feasible.

Some pollutants can be controlled by managing the way that fuels are burned. For example, it is fairly common for PSD permits to contain limits on nitrogen oxides that are based on the use of so-called “low NOx” burners. These burners are designed to reduce combustion temperatures, as more NOx is generated when fuel combustion occurs at higher temperatures. No similar methods have been demonstrated for reducing the amount of CO2 produced by combustion, although there has been experimental work with use of pure oxygen as combustion air (which first requires an expensive air separation unit).

Technologies also have been developed for the pre-combustion reduction of the carbon content of fossil fuels, such as coal gasification. While coal gasification is an established technology, its integration into electric power generation is still in its infancy. Similarly, the techniques for separating CO2 from the gasified coal are well understood, but the capture and geologic sequestration of CO2 has yet to be demonstrated on a commercial scale.[21] Thus, while the U.S. and other nations are putting significant effort into developing carbon capture and sequestration (“CCS”), and many believe widespread deployment of CCS will be one of the keys to significantly reducing CO2 emissions from electric power generation and some other industries, EPA has recognized that CCS is not yet a BACT technology.[22]

Given the lack of proven technologies for reducing the CO2 generated by combustion or removing CO2 from post-combustion exhaust, EPA has indicated that it expects GHG BACT analysis to focus on improving energy efficiency. In its reconsideration of the Johnson Memo, EPA noted that energy efficiency is a component of BACT, and that increasing energy efficiency can reduce pollutants other than GHGs as well.[23] The agency promised to issue guidance on the role of energy efficiency in BACT analysis before the end of the year.

IV. Conclusion

With the Tailoring Rule, EPA has completed a series of regulatory actions that bring GHG emissions within the Clean Air Act’s PSD and operating permit programs. These permitting requirements may still be preempted by legislative action or intervention by the courts. But absent such an occurrence, large new and modified sources, like power plants, cement kilns, refineries, and landfills, will be required to obtain permits for their GHG emissions beginning in 2011.

For more information regarding the Tailoring Rule or other climate change issues, contact any member of Marten Law’s Climate Change practice.

[1] Massachusetts v. EPA, 549 U.S. 497, 127 S. Ct. 1438 (2007).

[2] 74 Fed. Reg. 66496 (December 15, 2009).

[3] See 42 U.S.C. § 7521(a)(1).

[4] The vehicle standards were published in the Federal Register May 7, 2010: 75 Fed. Reg. 25324.

[5] 42 U.S.C. § 7475.

[6] 42 U.S.C. § 7475(a)(5).

[7] In re Deseret Power Electric Cooperative, PSD Appeal No. 07-03, 14 E.A.D. ___ (Nov. 13, 2008).

[8] 73 Fed. Reg. 80300 (Dec. 18, 2008) (providing public notice regarding the Johnson Memo).

[9] Letter from EPA Administrator Lisa Jackson to David Bookbinder, Chief Climate Counsel at Sierra Club (Feb. 17, 2009).

[10] 74 Fed. Reg. 51535( (Oct. 7, 2009).

[11] 75 Fed. Reg. 17004 (April 2, 2010).

[12] 75 Fed. Reg. at 17020.

[13] 75 Fed. Reg. at 17019.

[14] Id.

[15] 75 Fed. Reg. at 17020.

[16] Id.

[17] Id.

[18] 42 U.S.C. § 7475(a)(3).

[19] 40 C.F.R. § 52.21(b)(12).

[20] Id.

[21] Marten Law represents the developer of an integrated gasification combined cycle (“IGCC”) power plant that has been designed to capture 90 percent of its potential CO2 emissions. That project currently is undergoing permitting.

[22] Public comments by Gina McCarthy, EPA Assistant Administrator for Air & Radiation, at Johns Hopkins School of Advanced International Studies (April 13, 2010).

[23] 75 Fed. Reg. at 17021.

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