In January 2014, the U.S. Environmental Protection Agency (EPA) reproposed standards of performance regulating carbon dioxide (CO2) emissions from new affected fossil-fuel-fired generating units pursuant to Section 111(b) of the Clean Air Act.1 Subsequently, in June 2014, EPA issued two new proposed regulations: (i) a standard of performance regulating CO2 emissions from modified and reconstructed fossil-fuel-fired electric generating units, also pursuant to Section 111(b), and (ii) emission guidelines for states to follow in developing CO2 emissions limits for existing fossil-fuel-fired electric generating units pursuant to Section 111(d) of the Clean Air Act.2 The latter proposal has been commonly referred to as EPA's "Clean Power Plan." EPA has received millions of comments on these proposed regulations, which it intends to issue in final form in 2015.

While all of these proposed rules have drawn considerable attention, it is the proposed regulation relating to existing sources that is most controversial. Because there are currently no cost-effective pollution controls that can be installed at existing power plants to reduce CO2 emissions, a proposed emission guideline that limited itself to the "best system of emission reduction" (BSER) on a source-by-source basis would result in minimal real world emission reductions, primarily from improvements in energy efficiency that could be achieved at such plants. EPA therefore has developed a much more ambitious and complex plan to require states to reduce CO2 emissions based on what can be achieved by each state's electrical generating sector.

Whatever one may think of the policy, EPA's ability to promulgate and defend these regulations will depend on whether the D.C. Circuit Court of Appeals and, ultimately, the Supreme Court, believe that EPA is exercising its authority consistent with the terms of a statute, last amended in 1990, that is widely acknowledged not to contemplate the problem of climate change caused by the emission of greenhouse gases (GHGs).

A. Background

In Massachusetts v. EPA, 549 U.S. 497 (2007), the Supreme Court held that the Clean Air Act's broad definition of the term "air pollutant" encompasses GHGs. Subsequently, EPA issued a finding that six GHGs in combination endanger the public health and welfare of current and future generations. 74 Fed. Reg. 66,496 (December 15, 2009) (the Endangerment Finding). This finding led to EPA's regulation of GHG emissions from light-duty vehicles (75 Fed. Reg. 25,324, May 7, 2010) (the Tailpipe Rule); which led to EPA's determination that GHGs were subject to the Clean Air Act's Prevention of Significant Deterioration (PSD) permitting program (75 Fed. Reg. 17,004, April 2, 2010); which in turn led to EPA's Greenhouse Gas Tailoring Rule (the Tailoring Rule). 75 Fed. Reg. 31,514 (June 3, 2010). In the Tailoring Rule, EPA modified the statutory major source emissions thresholds that triggered PSD permitting obligations to account for the vastly different scale of COemissions compared with the emission of conventional air pollutants such as sulfur dioxide.

In Coalition for Responsible Regulation, Inc. v. EPA, 684 F.3d 102 (D.C. Cir. 2012), the D.C. Circuit upheld the Endangerment Finding and the Tailpipe Rule and further held that the petitioners did not have standing to challenge EPA's substantial increase in the major source emissions thresholds in the Tailoring Rule. On appeal, the Supreme Court only addressed certain questions related to the Tailoring Rule itself, but let stand the D.C. Circuit's decision upholding the Endangerment Finding and the Tailpipe Rule. Utility Air Regulatory Group v. EPA, 573 U.S. ____, 134 S. Ct. 2427 (2014). The Court held: (i) the Clean Air Act did not compel EPA to require facilities to obtain PSD permits due to GHG emissions; and (ii) EPA did not have authority under the Clean Air Act to "tailor" the PSD program by departing from the major source emissions thresholds expressly set forth in the statute; but (iii) EPA's interpretation that it could subject sources that wouldotherwise be subject to PSD review to an emissions limit for GHGs based on "Best Available Control Technology" was permissible.

Leading up to EPA's effort to regulate CO2 from power plants, we have the following:

  • GHGs are "air pollutants" under the Clean Air Act;
  • EPA's determination that GHG emissions are a danger to the public health and welfare has been upheld by the courts;
  • EPA is regulating GHG emissions from motor vehicles and this regulation has survived legal challenge; but
  • EPA cannot modify the statutory major source emission thresholds for PSD permits in order to make the PSD permit program "work" with respect to the regulation of GHGs.

Utility Air Regulatory Group is a reminder that although EPA has authority to regulate GHG emissions pursuant to the Clean Air Act, there may be serious constraints to the substance of any such regulation if the statutory tools provided by the Clean Air Act are not designed to address the practical realities associated with the control of GHG emissions.

B. Proposed Regulation of CO2 From New, Modified and Reconstructed Power Plants

Section 111(b)(1) of the Clean Air Act directs the Administrator of EPA to establish (and from time to time revise) a list of categories of stationary sources and to include a source category if "in his judgment it causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare." 42 U.S.C. §7411(b)(1)(A). New, modified or reconstructed sources of emissions in a listed category are to be subject to a "standard of performance," which means "the degree of emission limitation achievable through the application of the best system of emission reduction, which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated." 42 U.S.C. §7411(b)(1)(B) (establishment of standards of performance); 42 U.S.C. §7411(a)(1) (definition of "standard of performance"). Fossil-fuel-fired electrical generating units have long been a source category subject to new source performance standards (NSPS). Such plants also are the largest stationary sources of CO2 emissions.

In 2012, EPA proposed a NSPS for CO2 emissions from new affected fossil-fuel-fired electrical generating units. As a result of the comments it received, EPA withdrew this proposal and published a new proposal in the Federal Register on January 8, 2014. 79 Fed. Reg. 1,430. The biggest change in EPA's revised NSPS is that it proposes separate standards for natural gas combustion turbines and coal-fired steam generating units — the original proposal combined these sources and set forth a standard based on what could be achieved by combined cycle combustion turbines. The new proposed standards are as follows:

  • Steam generating unit and integrated gasification combustion cycle (IGCC) facilities: 1,100 lbs CO2/MWh (gross energy output) on a 12-operating month rolling average basis;3
  • Stationary combustion turbines that have a baseload rating heat input to the turbine engine greater than 250 MW: 1,000 lbs CO2/MWh (gross energy output) on a 12-operating month rolling average basis; and
  • Stationary combustion turbines that have a design heat input to the turbine engine greater than 73 MW and equal or less than 250 MW: 1,100 lbs CO2/MWh.

The performance standard for stationary combustion turbines is derived from what can be achieved by modern, efficient natural gas combined cycle combustion turbines. The performance standard for steam generating units and IGCC facilities is based on partial implementation of carbon capture and sequestration (CCS) technology. Much of the preamble to the proposed regulation and related technical support document is devoted to supporting the conclusion that the implementation of partial CCS technology has been demonstrated as technically feasible for large commercial fossil-fuel-fired power plants4and can be achieved at an acceptable cost. With respect to the former, EPA cited a few CCS projects that it asserts are moving forward, including one project in Saskatchewan that was expected to be operational in 2014, and other studies that conclude that CCS is technically viable today. See, e.g., 79 Fed. Reg. at 1,434, 1,471. With respect to the latter, EPA asserts that the "levelized" cost of electricity (taking into account costs to be incurred over a plant's lifetime) generated by new steam-generating units implementing partial CCS would be comparable to the cost of non-natural gas-fired electricity (such as nuclear power, geothermal and biomass), and that this comparison is reasonable given the benefits of fuel diversity over solely relying on natural gas. Id. at 1,435-1,436.5

The proposed standards of performance applicable to existing electrical generating units that are modified or reconstructed are more modest. For example, for steam generating units and IGCC facilities, the proposed standard for units that are modified is based on best historical operating practices plus an additional 2 percent reduction in CO2 emissions, while the proposed standard for units that have been "reconstructed" (as that term is defined in applicable regulations) is based on supercritical pulverized or supercritical circulating fluid bed boiler technology, which EPA characterized as the most efficient generating technology available today for such units. 79 Fed. Reg. 34,960 at 34,964, 34,983 (June 18, 2014).

The focus for the legal challenge to the NSPS for new electrical generating units will be whether the record developed by EPA supports the conclusion that partial CCS is really an adequately demonstrated technology. Although EPA is usually afforded considerable deference on technical questions, this is at best a very close question.

The fate of the standard for new sources is not only important in and of itself6 but also because EPA's authority to issue emission guidelines for existing sources under Section 111(d) — the regulation that, if sustained by the courts, could actually result in a substantial reduction in CO2 emissions — only follows after an NSPS has been promulgated for new sources in the subject source category. 42 U.S.C. §7411(d)(1)(A)(ii).7

C. Proposed Emission Guidelines for CO2 Emissions From Existing Power Plants

1. Emissions Guidelines Under Section 111(d)

Under Section 111(d) of the Clean Air Act, EPA is authorized to issue regulations, known as "emissions guidelines," directing states to develop and submit to EPA plans establishing "standards of performance" for existing sources in a source category that is subject to an NSPS. The term "standard of performance" has the same meaning that it does for new sources (best system of emission reduction adequately demonstrated), although the states may take into consideration the differences between existing sources and new sources and the useful life of the sources to which a standard would apply. States have flexibility to develop their own plans so long as the plans will satisfy the performance standards established by EPA. Where a state fails to submit a plan or submits a plan that is not approved by EPA as satisfying the requirements of Section 111(d) and the emissions guideline for the source category, EPA has the authority to prescribe a plan for such state.

EPA has published only a few emission guidelines for existing sources pursuant to Section 111(d) of the Clean Air Act. This is because EPA cannot issue regulations under this section for pollutants for which "air quality criteria" have been issued or that are on a list of pollutants for which such criteria will be issued. These air pollutants are the primary conventional air pollutants regulated by the Clean Air Act — sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, lead and ozone (precursors of which are volatile organic compounds and nitrogen oxides). 42 U.S.C. §7411(d)(1)(A)(i).

In addition, there is a second prohibition on the promulgation of emission guidelines under Section 111(d) relating to hazardous air pollutants (HAPs). Id. There currently is a dispute about whether this limitation prohibits regulation of emissions of the specific HAPs that are regulated for a source category pursuant to Section 112 of the Clean Air Act, or whether Section 111(d) prohibits regulation of any air pollutant from a source category if the source category's HAPs emissions are regulated pursuant to Section 112, even if the pollutant at issue (in this case, carbon dioxide) is not regulated pursuant to Section 112.8Even though EPA has only issued a proposed regulation, appeals have already been filed in the D.C. Circuit by coal company Murray Energy Corp. and a number of states that seek a preemptive ruling that the Clean Air Act prohibits EPA from issuing regulations pursuant to Section 111(d) relating to electric generating units because such units are regulated pursuant to Section 112.9

2. EPA's Proposed ‘Best System of Emission Reductions’

Assuming that EPA has legal authority to issue guidelines regulating CO2 emissions from existing power plants, the problem facing EPA has been developing guidelines that would actually result in significant reductions. With respect to reductions that could be achieved at coal-fired electric generating units, EPA considered and rejected (i) retrofitting such units for CCS and (ii) substitution of natural gas for some or all of the coal-fired generation (although EPA solicited comment on whether natural gas co-firing or conversion should be considered part of the BSER). The only part of EPA's final proposal that directly relates to specific affected sources is the reduction of the carbon intensity of generation through heat-rate improvements at individual affected coal-fired steam generating units. However, EPA noted that without other incentives to reduce generation and CO2 emissions from coal-fired power plants, energy efficiency improvements would cause such units to become more competitive compared to other electrical generating units and lead to a smaller overall reduction in COemissions. 79 Fed. Reg. 34,830, 34,882 (June 18, 2014).

EPA's final proposal to reduce CO2 emissions from existing electrical generating units is based on the idea that the U.S. electricity system "is a highly interconnected, integrated system which large numbers of EGUs using diverse fuels and generating technologies are operated in a coordinated manner to produce fungible electricity services for customers."Id. at 34,880. EPA concluded that it could propose a standard of performance for existing electrical generating units based on what could be achieved by this broader system and not just what could be achieved at specific units, so long as the term "system" in the definition of "standard of performance" could be interpreted in this manner. EPA's position is that "system" is not defined in the Clean Air Act and that the dictionary definition of "system" refers to an "interconnected set of things working together." Id. at 34,886. As a result, EPA asserts that it can include all of the "interconnected" elements as part of the "system," so long as these elements result in a system that is the "best" at reducing emissions and is adequately demonstrated, taking into account costs and other non-air quality impacts. EPA further argues that it is entitled to deference with respect to the interpretation of "standard of performance" pursuant to Chevron. Id.

Relying on this broad construction of the term "system," EPA identified the following "building blocks" as BSER with respect to existing electrical generating units:

  • Building Block 1: Heat rate improvements at affected sources. EPA based its proposal on improving the average heat rate of coal-fired steam electrical generating units by 6 percent;
  • Building Block 2: Displacing coal-fired steam and oil/gas fired steam generation in each state by increasing generation from existing natural gas-fired combined cycle combustion turbines towards a 70 percent utilization rate;
  • Building Block 3: Including the projected amounts of generation achievable by completing all nuclear units under construction, avoiding retirement of about 6 percent of existing nuclear capacity, and increasing renewable electric generating capacity over time through the use of state-level renewable generation targets consistent with renewable generation portfolio standards that have been established by states in the same region; and
  • Building Block 4: Increasing state demand-side energy efficiency efforts to reach 1.5 percent annual efficiency savings in the 2020-2029 period.

Based on these elements, EPA proposed state rate-based CO2 emission performance goals (in terms of lbs CO2/net MWh) as an average for each state. EPA proposed "interim" goals for the states to meet beginning in 2020, based on what it believed the states would be able to achieve in that time frame, and final performance goals by 2030.10 The proposed emission performance goals for each state are not identical, as EPA took into account the generation mix in each state, the performance of affected electrical generating units, and the opportunities for achieving emission reductions in each state using the various building blocks. EPA claims that the Clean Power Plan will result in a 30 percent reduction in CO2 emissions from the electrical power sector compared to 2005 emissions.

3. State Plans and Timing

States have flexibility to develop plans to achieve compliance with the proposed emission performance goals. In particular, the proposal allows states to develop intra- or interstate market-based trading programs, such as the Regional Greenhouse Gas Initiative that has been in effect since 2009 in nine northeastern states or the emissions trading program adopted by California pursuant to the Global Warming Solutions Act of 2006 [link to CA environmental article].

In order to implement such approaches, the states would have to convert the rate-based emission performance goals to mass-based emission caps.

On January 7, 2015, Acting Assistant Administrator Janet McCabe announced that EPA plans to finalize the Clean Power Plan for existing power plants and the performance standards for new, modified and reconstructed power plants by midsummer 2015. States would have until June 30, 2016 to submit their own plans for approval by EPA, unless the delay in issuing the final rule causes EPA to extend the deadline for submission of state implementation plans. The proposed rule allows for more time if states indicate their interest in developing regional approaches to achieve compliance with the guidelines. If states do not submit satisfactory plans, EPA would then issue federal implementation plans that would apply directly in any such states. In the January 7, 2015 announcement, Ms. McCabe stated that EPA is developing a model rule for existing power plants that could serve as the basis for federal implementation plans if necessary.

D. Regulatory, Legal and Political Uncertainties

There are considerable uncertainties associated with EPA's approach to regulating CO2emissions from power plants. Assuming that EPA finalizes these regulations in a form that is substantially similar to what has been proposed and these regulations are upheld, an extremely complicated process will be initiated on a state, regional and federal level to develop the specifics of regulatory programs that will have profound impacts on how electricity is generated in the United States.

There are fundamental questions as to whether EPA will be able to defend its proposed emissions standards for new sources and emissions guidelines for existing sources. For new sources, the critical question is whether EPA can support its controversial conclusion that partial CCS has been "adequately demonstrated" and the extent to which such demonstration relies on projects funded by Department of Energy research; these projects cannot be the basis for a "BSER" demonstration pursuant to the Energy Policy Act of 2005. A judicial rejection of EPA's new source performance standard could imperil the proposal to regulate existing sources.

For existing sources, EPA faces a threshold question as to whether it can issue regulations at all given that it regulates HAPs emissions from electrical generating units pursuant to Section 112 of the Clean Air Act.11 Assuming that this hurdle is met, EPA will have to defend its creative and controversial position that the term "best system of emission reduction" should include emissions reductions or benefits that can be achieved beyond the fence line of any particular electrical generating unit or plant, including the incorporation of such indirect measures as end-user efficiency or the required expansion of renewable power generation. As many have noted, what EPA has proposed under the guise of a pollution control regulation is a program that has EPA directing the states in the regulation of the electricity generation marketplace. EPA (and commentators that support EPA) rely on the fact that the term "system" in Section 111 of the Clean Air Act is not defined and, under Chevron, regulatory agencies are given deference to interpret their governing statutes when such statutes are capable of multiple interpretations. Nonetheless, EPA and the Department of Justice will have their work cut out to persuade the courts and in particular the conservative Supreme Court that Section 111 of the Clean Air Act can be interpreted to allow EPA to broadly regulate the electricity marketplace. Beyond the strictly legal questions, EPA and DOJ also will have to defend the many data-based decisions that are the basis for the specific emission goals that the Clean Power Plan imposes on each of the states.

Everyone expects that Congress, with the Republican party in control of both the House of Representatives and the Senate, will endeavor to pass legislation or use its authority over budgeting and appropriations to attempt to block EPA's efforts to regulate GHG emissions. Although such efforts are not likely to be successful, the presidential election of 2016 looms. Even as legal battles are fought over the EPA's electric utility CO2 emissions standards, the results of that election will have a significant role in shaping what EPA will be allowed to do to regulate GHGs pursuant to the Clean Air Act.