Air Quality Law Alert: EPA Unveils Sweeping New CO2 Rules

Yesterday, EPA Administrator Gina McCarthy announced two new rules that will ultimately result in the application of carbon dioxide (CO₂) standards to existing power plants. The first rule was proposed under Section 111(d) of the Clean Air Act (CAA) and will impact existing power plants that do not undergo changes. This is the rule that garnered the press even though it will not directly impact any emitters for several years. The second proposed rule was proposed under CAA Section 111(b) and will impact existing power plants that undergo any changes starting immediately (note: 111(b) standards apply starting on the day of proposal).

Dubbed the “Clean Power Plan,” the rules taken together likely will have a significant impact on industrial and other consumers of electricity as well as developers of natural gas-fired and renewable (e.g., solar, biomass and wind) generation. EPA and other federal agencies promoted news of the 645 page draft rule with an intense and sustained public relations and social media blitz.

President Barack Obama has repeatedly stated his determination to regulate the roughly 40-percent of the nation’s GHG emissions that come from the energy sector. EPA proposed rules on January 8, 2014 regulating new power plants which many predict will make it impossible to build new coal-fired generating units. However, those rules left CO₂ from existing power plants unregulated. Yesterday’s rules changed that.

Section 111(d): A More Flexible Regulatory Approach?

Section 111(d) differs from EPA’s conventional rulemaking authority. For new and modified power plants EPA simply issues standards (under CAA Section 111(b)) that are directly applicable to all new and modified affected facilities. For example, EPA proposed CO₂ standards under CAA Section 111(b) for new power plants in January, 2014, and for modified power plants yesterday. EPA’s 111(d) authority is more circumspect. Rarely employed, Section 111(d) grants EPA the authority to issue emission guidelines that then must be used by the states to craft programs that are consistent with EPA’s stated objectives. These state programs must then be approved by EPA. However, the guidelines are just that--options for how to create a program--and not outright mandates as to what the state rules must entail.

One of the few existing Section 111(d) programs was the emission guidelines from May 1979 requiring states to regulate Total Reduced Sulfur from kraft pulp mills. That rulemaking proposal received 11 industry comments, no environmental group comments and the preamble to the final guidelines was two pages long (those were the days). EPA’s Regional Haze program, proposed in 1999, was also guideline-based, but resulted in years of litigation and court decisions holding that EPA had been too proscriptive and not respectful of states’ rights. EPA’s most recent use of the section 111(d) authority involved imposition of mercury guidelines where EPA attempted to establish a nationwide cap and trade program. That attempt ended with the D.C. Circuit striking down the rules without addressing the agency’s use of its 111(d) authority. As a result, the limits of EPA’s authority under a guideline-based approach are uncertain making its issuance of 111(d) standards for existing, unchanged power plants subject to inevitable challenge.

The new proposed 111(d) power plant rules establish state specific CO₂ emission limits and require that each state demonstrate by June 2016 how it will achieve that limit by the deadlines in 2020 and 2030. The CO₂ limits vary widely depending on the state. For example, the 2030 emission limit for Washington is 215 lb CO₂/MWh while Montana’s limit is 1,771 lb/MWh. States have the option of converting this rate-based limit to a mass-based limit (i.e., a specific number of tons of CO₂ emissions per year). Each state must develop a set of rules to reach these limits and submit the plan to EPA for approval. If a state fails to do so, EPA will impose its own rules.

Implementation of the New Rules

EPA specified four basic strategies to be used by the states in achieving the limits: improved power plant efficiency, increased use of lower emitting fossil fuel fired power plants (e.g., natural gas-fired combined cycle combustion turbines), increased use of non-emitting generation resources (e.g., solar, wind), and increased end-user (demand-side) efficiency. For example, states would be able to take credit for shifting generation from coal-fired power plants to natural gas-fired power plants. The proposed rules specify that a state can include existing programs in its plan, but can only take credit for action under those existing programs that occur after the date the proposed rule is published in the Federal Register.

EPA derived the state limits based on its projections of what each state can achieve from implementing the four strategies. In establishing the emission limits, EPA assumed that every coal-fired power plant would improve its generation efficiency by 6 percent, that combined cycle natural gas combustion turbines would, on average, provide 64 percent of a state’s generation, that renewable generating capacity would increase to meet or exceed all state goals, and that demand-side energy efficiency gains would reach 1.5 percent annually by 2020. A default option for states is to develop a plan that simply tracks the EPA assumptions.

The proposed rules allow states to join together to prepare regional plans. EPA’s rule preamble discusses extensively the benefits of implementing cap and trade programs such as that in place in California and the Northeast US. The proposal leaves open the possibility of states joining together into similar regional trading programs to demonstrate compliance with the 111(d) limits. This push may result in the revitalization of comparatively moribund programs like the Western Climate Initiative as a forum for the development of such schemes. This approach could shift the U.S. to a cap and trade system akin to what has existed in the European Union for years. In addition to or as an alternative to cap and trade, the proposed rule allows states to take credit for new wind and solar generation. States can also take credit for post-publication energy efficiency gains. This means that a state can meet its obligations under the 111(d) program through energy efficiency gains and Renewable Portfolio Standards so long as the gains were realized after the proposal is published in the Federal Register (likely about 2 weeks from now).

One very contentious aspect of the rulemaking is whether EPA can consider any of the reduction strategies other than the first (efficiency improvements at affected facilities). Several states have already indicated that they consider any “outside the fenceline” options to be outside the authority of EPA, virtually ensuring that the 111(d) guidelines will be in litigation for years to come. EPA responds in the preamble by stating that it welcomes comments on this issue. However, the agency also strongly suggests that not much credence will be given to such comments.

Impact on Industrial and Power Generation Sectors

How the rules will impact the industrial and power generation sectors remains to be seen. Two things are likely. First, if the final guidelines bear any resemblance to the proposed guidelines, they create one more significant impediment to the U.S. utilizing its coal resources. Second, many predict that the cost of electricity will increase as a result of this program (although EPA believes cost reductions from efficiency gains will more than offset any cost increases). If costs do increase, many predict that policymakers will be loath to have these costs fall too hard on residential and commercial consumers. That will end up with much of the cost being borne by the industrial users.

The rules may create benefits for several sectors. Developers of renewable energy sources are generally praising the proposal as it will, at the very least, provide support for Renewable Portfolio Standards and potentially boost sectors such as biomass and solar. Owners of existing natural gas combined-cycle combustion turbine generation should also be pleased with the proposal as EPA acknowledges that one likely result is a significant increase in utilization of these units. This will also benefit all of those involved in the extraction and transportation of natural gas. Nuclear should also be pleased.

Next Steps: Comment Period

EPA is allowing the public 120 days from the date of publication to comment on the proposed rules. Ultimate publication of the final rules is scheduled for June 2015 with states having to turn in their plans by June 2016 (unless they get an extension). It seems hard to believe that EPA will meet the 2015 final rule issuance deadline given this schedule (EPA received over 2.5 million comments on the 111(b) standards for new sources). Even if EPA meets the June 2015 deadline for signing the final rules, it seems unlikely that the states will move fast enough to meet the 2016 deadline and EPA has little ability to force timely compliance. Some states may drag out the submittal process to see who is next in the White House.

Stay tuned as this process unfolds in the next few years. The one certainty is that these rules will be vigorously litigated.

If you have any questions about the content of this alert, please contact a key contributor.