New Rules Governing Emissions Take Center Stage

Monday, January 31, 2011 - 01:00

Editor: The EPA's "Tailoring Rule" 1 breaks new ground in regulating stationary sources of GHG emissions. What is the impact of this rule and what companies are most likely to be affected?

Connolly: The rule currently requires certain larger emitters, such as utilities, refiners and some heavy manufacturers, to include greenhouse gasses (GHGs) in their Clean Air Act permits issued pursuant to the New Source Review Prevention of Significant Deterioration (PSD) and Title V programs. Under the PSD program, large emitters will need to implement what is known as Best Available Control Technology (BACT) to limit GHG emissions. BACT is determined on a case-by-case basis, and as yet there is no clear guidance as to what constitutes BACT for GHG emissions, so it will take time for standards to emerge from the permitting process. The overarching caveat is the assumption that Congress and the courts will allow EPA to continue on its current path of regulating GHG emissions from stationary sources.

Goslin: Under the current rule, a company will need to obtain a PSD permit that incorporates BACT for GHGs before constructing or significantly modifying a facility that will emit more than 75,000 tons of GHGs per year. Until July 1, the rule applies only to facilities that would have been required to obtain a PSD permit for another pollutant regulated by the Clean Air Act. On July 1, 2011, however, the rule will expand to cover any new or modified facility that emits more than 75,000 tons of GHGs annually. Restrictions imposed under the PSD program also will need to be incorporated into facilities' Title V permits if the facility emits more than 100,000 tons of GHGs annually. This will be the first time that stationary sources will be regulated under the Clean Air Act due exclusively to their GHG emissions, and EPA estimates that there will be 900 additional PSD permitting actions annually as a result of this new rule.

Editor: How are companies seeking to come into compliance with these new rules?

Connolly: Some entities have made proactive modifications, thereby avoiding the rule altogether. Others are proceeding more slowly and will observe the permitting process before assessing what the agencies are likely to require. We anticipate that the focus will be on energy efficiency versus new types of reactive pollution control equipment.

Goslin: Significantly, while the rule requires emitters to employ BACT, it does not actually define BACT. Compliance is determined on a case-by-case basis; thus, EPA requirements will remain undefined until there is a body of administrative decisions reflecting clear expectations. Another complicating factor is that PSD permits, and BACT determinations, are issued at the state level, resulting in variance among state-implemented programs, which creates even greater uncertainty and fuels the "wait and see" strategy.

Editor: Please provide a brief description of Connecticut v. AEP. What is the significance of the Supreme Court's granting certiorari, particularly since the case was originally dismissed as a "political question?"

Connolly: The litigation was brought by eight states, the city of New York and some private parties, against six utility companies alleging that the utilities' GHG emissions contributed to global warming, creating a public nuisance. The district court dismissed the case as a political question beyond the court's jurisdiction, but the Second Circuit reversed. In a similar public nuisance case, Comer v. Murphy Oil , the Fifth Circuit let stand a decision dismissing that action as a political question, which created a split in the circuits that may have led to Supreme Court review. One fascinating aspect of the AEP case is that Justice Sotomayor will not sit because she served on the Second Circuit during oral arguments. An eight-member court creates the possibility of a four-four decision, which effectively upholds the Second Circuit's decision and creates precedent for parties to seek court remedies with respect to GHG emissions.

Editor: In Coalition for Responsible Regulation, Inc., et al. v. EPA , the D.C. Circuit Court of Appeals rejected a petition to stay EPA GHG regulations. Is the Court communicating its intention to take a strict approach to new EPA regulations?

Connolly: It is unlikely that the D.C. Circuit is communicating a specific position. The real take-away is that these challenges are being raised and will have their day in court. In the meantime, the EPA continues to issue new regulations, establish guidelines and address GHG emissions in the context of the Clean Air Act.

Editor: Is a body of case law developing as a result of litigation in this area? What are the hot points of such litigation?

Connolly: Litigation occurs in three major areas. As we have discussed, there is litigation under the common law nuisance theory. On the regulatory side, EPA actions are being challenged in both directions. Environmental groups are challenging EPA for not going far enough to regulate GHGs, and industry has challenged EPA's authority to regulate GHGs under the Clean Air Act. There also is likely to be more litigation alleging that EPA did not follow proper administrative procedures in issuing aspects of the current rule or improving state implementation. On the permitting front, while GHGs traditionally have not been part of the process, communities and environmental groups are getting involved and making challenges that have resulted, in some cases, in voluntary agreements between litigants to include a GHG provision in permits scheduled for renewal.

Goslin: In the big picture, the body of case law remains fragmented and presents no clear direction for the future. This relatively new area of the law will continue to develop when the Supreme Court weighs in and as the lower courts deal with the various challenges to the new EPA rule. Permits incorporating GHG restriction will also be subject to challenge, and while every permit will not be challenged, many will be until a consensus emerges.

Editor: Are standards clearly set forth by the PSD? In practical terms, how does this change the rules for businesses that want to avoid regulatory compliance issues?

Goslin: Clearly, sources that emit over the threshold amount will fall into these programs, but the impact is far from clear. BACT standards remain undefined; matters are handled case by case and states make their own determinations. Many businesses are waiting for litigation, administrative decisions and permitting activities to develop a clear direction, though some have taken more proactive measures to comply with PSD.

Connolly: Organizations that have a vested interest in the permitting process are getting involved in challenges to the EPA's authority. Bigger entities - industries likely to be regulated - will appeal to the courts and the new Republican leadership in an attempt to avoid or delay compliance with current regulations. The important caveat to any federal developments is that certain states are focused on GHG emissions and, therefore, companies cannot avoid addressing this issue.

Editor: What measures are being enacted or considered by individual states in response to federal developments?

Connolly: Some states have already chosen to regulate GHGs. The Regional Greenhouse Gas Initiative (RGGI), made up of 10 Northeastern and Mid-Atlantic states, aims to reduce emissions from utilities through a cap-and-trade program. I was surprised, however, that California voters, facing all sorts of state financial troubles, essentially voted in November to implement a GHG cap-and-trade program that many argued would be detrimental to California businesses. This suggests that many Americans - at least those in California - want progress on this issue and are willing to pay the price. While it remains unclear whether state actions are in response to EPA activities, they certainly intend to address a void and stimulate regulation of GHG emissions.

Goslin: New Mexico also recently imposed a cap on GHG emissions from sources emitting more than 25,000 tons of CO2 in the air, which is a significantly more aggressive threshold than that contained in the new EPA rule. Such a low triggering threshold is a little surprising from New Mexico, which isn't considered a very liberal state, though the incoming governor is threatening to overturn these regulations. In any event, all of this demonstrates that states are acting as policy incubators, testing their own ideas while the federal government refines its regulations.

Editor: What is the significance and impact of the Chicago Climate Exchange (CCE) closure? Of what concern to U.S. business is the fact that the European Climate Exchange (ECE) remains operational and robust?

Goslin: Unlike its affiliated ECE, the CCE served demand from those who voluntary wanted to reduce GHG emissions. The ECE, on the other hand, primarily serves demand from those who must, by law, reduce GHG emissions, so that market should remain as long as the law does not change. The same is true for the exchanges that handle trading in RGGI credits and those that will be generated by the new California program. Though not perfect, the ECE remains operational and likely will serve as one model for California - both for what to do and what not to do - as it develops its own cap-and-trade program.

Connolly: The ECE is the leading exchange in EU, which remains committed to its cap-and-trade program, recently announcing new directives to improve their trading system and address concerns over manipulation within the system. Assuming that no federal cap-and-trade program emerges in the U.S. - which is a safe assumption at this point - it will be interesting to see whether any one dominant U.S. exchange will emerge to handle trading of the various credits generated by the state and regional programs.

Editor: Were you referring to the quality of carbon credits when you discussed whether the systems were enforceable?

Connolly: The quality of carbon credits is an issue, particularly those generated through offset projects, which often take place in third world nations. The key factor is verification, and everyone seeks to make the process more accountable. This is a major concern in the U.S., where there is a fear of market manipulation, especially after the housing and mortgage crisis.

Editor: Is there a code or agency that oversees the European system?

Goslin: One of the problems with Europe's system is that it is regulated by various entities, both at the national and international level, which has created a system with inherent conflicts of interest that might benefit from consolidation. There are also some transparency issues, particularly with respect to emissions reductions made under the Clean Development Mechanism of the Kyoto Protocol, which will persist for at least as long as the Protocol remains in effect.

Editor: How does the recent political shift to Republican domination of the House affect the federal plan's prospects?

Connolly: Republicans do not support federal legislation dealing with GHG cap-and-trade systems. The only successful bill came out of the House, which Democrats no longer control, and the Senate was not successful when the Democrats numbered 59+. There are a number of moderate Democratic senators, including Senator Rockefeller, who want to delay implementation of the EPA's regulations by two years, if not indefinitely. The real question is whether the President would choose to veto a bill delaying implementation of EPA's regulations that passes both chambers of Congress.

Editor: Do you have any final comments for our readers?

Connolly: Regardless of what happens with EPA regulation, the question is not whether GHGs will be regulated, but when and by whom. So we are advising our clients to keep these issues on the radar screen. In this dynamic federal, state and judicial environment, there are proactive measures that clients can implement, and proper planning puts them in a better position to manage all possible outcomes.1 On May 13, 2010, the EPA issued a final rule addressing greenhouse gas (GHG) emissions from stationary sources under the Clean Air Act (CAA) permitting programs. This final rule sets thresholds for GHG emissions that define when permits are required for industrial facilities and "tailors" the requirements of CAA permitting programs.

Please email the interviewees at annemargaret.connolly@weil.com or thomas.goslin@weil.com with questions about this interview.