President Obama’s reelection promises to bring many new Clean Air Act (CAA) developments in 2013, including development of key EPA rulemakings governing greenhouse gas (GHG) emissions from new and, by separate rule, existing coal and gas power plants. While these key GHG rulemakings will address the power sector first, they will be important for industry to follow since they will begin to establish GHG approaches and precedents that could be applied to other industrial sectors as EPA moves forward with GHG regulation under Section 111.

Finalizing GHG NSPS for New Power Plants

Last March, EPA issued a proposed GHG standard of performance under Section 111(b) of the CAA for new coal and combined cycle gas units. It is expected that EPA will finalize this first-ever stationary source GHG emissions rulemaking sometime this year, and prior to issuing a proposal to govern GHG emissions from existing sources. EPA’s New Source Performance Standards proposal establishes (unusually, but not uniquely) a new covered source category that combines utility gas and coal units and applies a single standard to them (i.e., fossil fuel-fired utility boilers and natural gas combined cycle units), while excluding cycle gas combustion turbines. The proposed emissions standard is 1,000 pounds per megawatt hour (lbs CO2/MWh), which roughly equates to the emissions standard achieved by new combined cycle gas units. Consequently, new combined cycle gas units have to do nothing to comply other than ensure that combined cycles models with sufficient efficiency to meet the standard are chosen. Coal units, on the other hand, are provided with a 30-year averaging option, which allows such units (in theory) to meet an 1,800 lb CO2/MWh rate for the first 10 years (the rate a new supercritical coal unit might achieve), and then a rate of 600 lb CO2/MWh for the next 20 years. The lower rate would require installation of a carbon capture storage system within 10 years that could meet at least a 66 percent capture and storage rate to comply.

The EPA proposal is odd in many respects. First, EPA has set a single emissions rate for coal and gas without ever determining that there is a “best demonstrated” technology that can meet the standard for coal. (EPA specifically declines to conclude that CCS meets the “best demonstrated” standard.) Rather it determined only that a natural gas combined cycle unit is the “best” system of emission reduction, on grounds that it is cleaner and cheaper than coal. While EPA has occasionally set a fuel-neutral NSPS in the past, it has only done so where each fuel has had a “best demonstrated” technology available to it to comply. Second, the proposal costs literally nothing (EPA projects the rule will have “no notable compliance costs”) because new gas units can already comply, and, to the extent any new coal is built, EPA projects that all new coal would include CCS whether or not EPA issued the rule. This perspective is odd because if the rule does not cost anything, it largely follows that it does not accomplish anything either. Finally, EPA’s proposal makes little sense from a climate change policy perspective. The fundamental approach adopted by EPA in the proposal contradicts two key climate change themes from organizations like the International Energy Agency. First, natural gas can be a “bridge” to a lower carbon future, but it can become a dangerous “ditch” if gas crowds out development of more advanced technologies like CCS. Second, IEA has concluded that CCS is not a “pull me” technology such that simply mandating its application, as does the EPA proposal for coal, will not result in any development or application of CCS. It remains to be seen how EPA might address these and other criticisms in the final rule.

Section 111(d) GHG Emission Standards for Existing Utility Sources

Perhaps the most consequential rulemaking EPA will begin to undertake in 2013 is a GHG emissions performance standard for existing power plants. Once EPA has finalized its GHG performance standard for new utility units, perhaps as soon as this spring, it is expected to take up in earnest an emissions standard for existing sources under Section 111(d). What that standard will look like, or even could look like, is very much in doubt.

EPA has rarely used Section 111(d) for a variety of reasons, but has indicated that this provision will be the prime mechanism for the agency to reduce GHG emissions from existing stationary sources under the CAA. Importantly, the scope of the section and the meaning of its provisions, which contain little guidance as to what EPA can do, or what EPA can’t do, will take center stage in the power plant GHG rulemaking.

Unlike NSPS, Section 111(d) provides that EPA shall establish a procedure for states to issue performance standards for existing sources after EPA has developed regulations called “emissions guidelines.” These guidelines must reflect EPA’s determination of what emissions reductions are achievable through application of Best Demonstrated Technology, although economic considerations allow EPA to adopt less stringent standards or provide for longer compliance timeframes than standards for new sources. Typically, EPA has issued “model” emissions guidelines that can then be adopted by states, although states will have certain implementation flexibilities provided they adhere to the minimum requirements of the EPA guidelines.

EPA has also asserted the authority to establish an emissions trading program under Section 111(d) in a 2005 power plant rule to control mercury emissions, and in an even earlier municipal waste combustor rule with respect to NOx emissions (although ironically, environmental groups and some of the RGGI states objected that such an approach was illegal under the Act when EPA established a trading program for mercury emissions from power plants). In the power plant mercury rule, EPA argued that a cap-and-trade program meets the definition of a Section 111(d) “standard of performance.” As noted, that position was contested in briefing on the mercury rule with one of the more prominent arguments being that a standard of performance must result in every source generating emissions reductions (which precludes a cap-and-trade). The court never reached that issue, so it remains open.

If EPA can lawfully conclude that a Section 111(d) standard of performance allows for a cap-and-trade program then EPA will also have to be able to conclude that a cap-and-trade system constitutes the “best system of emissions reductions” that has been “adequately demonstrated.” Supporting that conclusion will be much more difficult for GHGs than for mercury owing to the different control options available. EPA was able to support this conclusion in the mercury rule based on assessment of “available” emissions control technologies (traditional add-on controls) that sources could install to reduce mercury. That is to say, the “best system of emissions reductions” was determined by EPA to be “a cap-and-trade system based on control technology available in the relevant timeframe.” Thus, the available control technologies must necessarily inform the stringency of the cap (i.e., EPA can’t just make up a number to set the cap). When it comes to GHGs, however, technologies available to emitting sources in the power sector are largely limited to plant efficiency improvements (relevant but modest reductions) and fuel switches (tough to justify economically and otherwise for broad cuts). Hence, if EPA is going to set a Section 111(d) standard with any real teeth, it is going to have to include different control methods such as energy efficiency, biomass and renewables as systems of emissions reduction that are available and can be used to justify a particular cap level. That jump may prove problematic from a legal perspective. All in all, there will be many legal issues that EPA will need to assess and overcome if it is going to develop an existing source GHG standard that provides for meaningful reductions.

CSAPR Replacement and New NAAQS Implementation

The D.C. Circuit vacated EPA’s Cross-State Air Pollution Rule (CSAPR) last year and recently denied a request to rehear that decision. As a consequence, although EPA could be expected to appeal that decision to the Supreme Court, EPA will also be expected to begin work on a new transport rule that creates emissions budgets in ways that are consistent with the court’s decision.

CSAPR established a multistate market-based NOx and SOx emissions reduction program for the power industry under the Clean Air Act’s “good neighbor” provision, and was intended to replace the similar NOx and SOx emissions reduction program under the Clean Air Interstate Rule (CAIR). The court’s decision struck down the methodology EPA used in CSAPR to set state emissions budgets (and consequent reduction obligations) for NOx and SOx. The court also provided its own detailed view of how EPA must set emissions budgets under the Act’s good neighbor provision. A new transport rule is important both because EPA is obligated to replace CAIR (which was temporarily left in place by the court pending a new rule), and because many states rely upon EPA multistate emissions reductions programs for the power sector such as CSAPR to meet their own National Ambient Air Quality Standards (NAAQS) for ozone and PM 2.5. Since EPA has just tightened its PM 2.5 NAAQS, and begun implementation of a tighter 2008 ozone standard that was not considered when issuing CSAPR, states will be looking for a new transport rule from EPA to assist them in meeting these NAAQS, and would expect it to include emission reduction requirements keyed to one or both of the two new tighter NAAQS. EPA has not indicated how it will approach the issue of replacing CSAPR, or whether a new transport rule will also cover the new PM 2.5 NAAQS or the 2008 ozone standard. It can be expected, however, that it will take considerable effort and time to revise the CSAPR emissions budgets to conform to the court decision, and more effort still to include either of the new NAAQS.

New Source Review Biomass Permitting

EPA temporarily exempted all biomass from GHG NSR permitting until July 2014. That exemption has been challenged in court, and a decision is expected this fall. EPA has also undertaken evaluations to refine what specific types of biomass should be considered biogenic or short cycle carbon and provided with an exemption on a permanent basis. It is expected that EPA will begin the process of resolving those issues, and making those determinations, this year, perhaps to include commencement of a rulemaking process to establish criteria and processes for a permanent biomass exemption.

Enforcement Trends

EPA is expected to continue to focus on New Source Review (NSR) enforcement and enforcement of MACT requirements from the largest emitters (power plants, cement kilns), as well as evaluate new sectors such as unconventional gas and oil for CAA enforcement efforts. Notably, however, some of the emphasis within these enforcement efforts can be expected to focus on GHG emissions. EPA has yet to bring an NSR case based on GHG emissions, in part because the GHG standards have not been applicable to sources for very long. It is expected that EPA will now begin to focus on recent facility modifications to assess whether there is, in EPA’s view, an NSR violation and a relevant GHG emissions increase.