On March 10, 2009, Environmental Protection Agency (“EPA”) Administrator Lisa Jackson signed a proposed rule that would impose a mandatory national system for monitoring and reporting emissions of greenhouse gases (“GHGs”), including carbon dioxide (“CO2”), methane (“CH4”), nitrous oxide (“N2O”), hydrofluorocarbons (“HFC”), perfluorocarbons (“PFC”), sulfur hexafluoride (“SF6”), and other fluorinated gases (e.g., nitrogen trifluoride and hydrofluorinated ethers). The proposed rule is intended to allow EPA to collect comprehensive, economy-wide GHG emissions data that can be analyzed on both geographic and facility-specific levels. The proposed rule is widely considered to be a precursor to eventual regulation of GHG emissions in an effort to mitigate the effects of global climate change.

Background of the Proposed Rule

In 2007, Congress passed the Consolidated Appropriations Act, 2008, which included a provision directing EPA to develop a rule that would require certain sources to report their GHG emissions. The EPA’s proposed rule would fulfill this requirement, under the authority of Section 114(a)(1) of the federal Clean Air Act (“CAA”), which authorizes EPA to require certain persons to keep records, make reports, conduct monitoring, measure emissions, and provide such other information as EPA may reasonably require. It is important to note that the proposed rule only mandates monitoring and reporting for certain GHG sources; it does not cap or otherwise curb emissions. EPA intends to use the GHG emissions information that would be collected under the proposed rule in evaluating and developing future climate change policies, including whether and how to regulate GHG emissions under the CAA. However, the information will also be useful if, as expected, Congress enacts a new cap and trade program to control GHG emissions outside of the existing structure of the CAA. Reliable and comprehensive emissions inventories are an indispensable precursor to the design and implementation of any effective cap and trade program.

Reporting Requirements and Timing

The proposed rule requires covered facilities and sources to record and report their GHG emissions to EPA on an annual basis. As currently proposed, regulated facilities and sources would be required to begin collecting data on January 1, 2010, and the first annual GHG emissions reports, covering all of 2010, would be due on March 31, 2011. The required reports would include the facility’s total annual GHG emissions from all source categories present at the facility, annual GHG emissions for each source category and supply category at the facility by type of GHG and by individual unit or process line, and certain activity information used by the facility to generate the emissions data (such as fuel use or feedstock inputs). The proposed rule calls for emissions to be reported in metric tons of CO2 equivalent (“MTCO2e”). Each GHG has a different potency, or global warming potential (“GWP”) – a measure of both the heat–trapping potential of the gas and its persistence in the atmosphere – with CO2 (actually the least potent of the six major GHGs) being assigned a value of 1.0. Quantities of the other GHGs are multiplied by their respective GWP to derive their volume in CO2 equivalence for reporting purposes. As a frame of reference, 25,000 MTCO2e represents the emissions potential from approximately 58,000 barrels of oil or 131 railcars of coal. The average U.S. household emits approximately 11.3 MTCO2e per year.

The proposed rule calls for covered facilities/sources to submit their annual GHG emission reports to EPA electronically. Regulated entities would be required to retain and make available to EPA for a period of five years certain records that support the information contained in their annual GHG emission reports.

The proposed rule stipulates that once a facility/source becomes subject to the rule it will be required to continue reporting in future years even if its total GHG emissions fall below the applicable reporting threshold. EPA’s rationale for this “oncein/ always-in” requirement is that EPA wants to track a consistent universe of reporting facilities over a period of years to permit the identification of trends and other patterns in the national, industry, and facility- specific GHG emissions data.

Covered Facilities and Sources

EPA has organized the proposed rule around seven categories of sources, each classified either as an “upstream” or “downstream” source of emissions. The categories of upstream GHG emissions sources include fuel suppliers and industrial GHG suppliers. The downstream source categories include fossil fuel combustion: stationary, fossil fuel combustion: mobile, industrial processes, fossil fuel fugitive emissions, and biological processes. Within these broad categories, a great number of subcategories encompassing a broad range of facility types would be subject to reporting. Individual facilities may contain multiple source categories. In cases where the reporting obligation is subject to minimum emissions thresholds, total GHG emissions from all source categories at a facility would be added to determine whether the threshold is met. The proposed rule would require reporting on the facility level, with the exception of certain suppliers of fossil fuels and industrial gases and manufacturers of vehicles and engines, who would be required to report at the corporate level.

The following is a breakdown of facilities and sources covered by the proposed rule, and the relevant applicability criteria:

  • Facilities that contain certain listed source categories in any calendar year beginning in 2010 or later would be required to report their GHG emissions for all sources in any source category, with no minimum threshold. The listed source categories for which no reporting threshold applies to the facility (except as may be specified in the definition of the source category itself) include, among others:
    • Electricity generating facilities subject to the Acid Rain Program, or which contain electric generating units that collectively emit 25,000 MTCO2e/yr
    • Aluminum production
    • Cement production
    • Petrochemical production
    • Petroleum refineries
    • Phosphoric acid production
    • Underground coal mines subject to quarterly or more frequent sampling under the MSHA of ventilation systems
    • Municipal landfills that generate methane in amounts of 25,000 MTCO2e/yr or more
    • Manure management systems that emit methane and nitrous oxide in amounts of 25,000 MTCO2e/yr or more
  • Facilities that emit 25,000 MTCO2e or more per year in combined emissions from stationary fuel combustion units, miscellaneous use of carbonates or certain additional listed sources beginning in 2010 or later would be required to report their GHG emissions for all sources present at the facility. The additional listed sources include, among others:
    • Electricity generation
    • Photovoltaic manufacturing
    • Ethanol production
    • Food processing
    • Iron and steel production
    • Oil and natural gas systems
    • Pulp and paper manufacturing
    • Industrial landfills
    • Wastewater
  • Facilities that meet all three of the following conditions in any calendar year beginning in 2010 would be required to submit a GHG emissions report covering only emissions from stationary fuel combustion sources at the facility:
    • The facility does not contain any source designated under the two reporting conditions summarized above;
    • The aggregate maximum rated heat input capacity of the stationary fuel combustion sources at the facility is equal to or greater than 30 mmBtu/hr; and
    • The facility emits 25,000 MTCO2e/yr or more.
  • Finally, any supplier of the following products in any calendar year beginning in 2010 would be required to submit a GHG emissions report covering all applicable products:
    • Coal
    • Coal-based liquid fuels
    • Petroleum products
    • Natural gas and Natural gas liquids
    • Industrial GHGs
    • CO2
  • In addition to these stationary source categories, the proposed rule also would apply to mobile sources. Rather than requiring reporting by individual mobile source or fleets, however, EPA would require the manufacturers of mobile sources and engines to report emissions from the vehicles and engines they produce. Because manufacturers cannot know the hours that the engines they produce will be operated, the proposed rule would require them to report in terms of an emission rate from their products for emissions of CO2, CH4, N2O, and, where appropriate, HFCs. The proposed rule would apply to the manufacturers of the following vehicle and engine types:
    • Passenger cars, light trucks, and medium-duty passenger vehicles
    • Highway heavy-duty engines and complete vehicles
    • Nonroad diesel engines and nonroad large spark-ignition engines
    • Nonroad small spark-ignition engines, marine spark-ignition engines, personal watercraft, highway motorcycles, and recreational engines and vehicles
    • Locomotive and marine diesel engines
    • Jet and turboprop aircraft engines

Summary

EPA’s proposed GHG emissions reporting rule, which is more than 1,400 pages in length, is far-reaching in its scope and applicability. It would apply to virtually all significant sources of GHG emissions economywide, with the notable exception of agricultural operations and most commercial buildings – although much of the GHG emissions attributable to those industries would be captured on the upstream end. In fact, EPA estimates that the proposed rule would apply to the sources of 85-90 percent of GHG emissions in the U.S. Because the proposed rule is intended to establish the first-ever, national, facility-level inventory of U.S. GHG emissions that EPA may use to inform future policy decisions, it does not provide any mechanism to account for GHG emissions control devices, sinks, or offset programs. Covered facilities and sources would be required to report their total, actual GHG emissions.

Public Comment Opportunity

EPA signed and made the proposed rule available on March 10, 2009, and it soon will be formally published in the Federal Register. Once published, the public will have just 60 days in which to comment on the proposed rule. EPA has announced plans to hold two public hearings during the comment period, though the date and locations of those hearings has not yet been announced. EPA has specifically requested comment on the following aspects of the proposed rule: the reporting thresholds; the interrelationship of the proposed rule and existing state or voluntary GHG reporting programs; methodologies for each source category; frequency and year of reporting; verification options; and duration of the reporting program. However, comments may be submitted on any aspect of the proposed rule. Given its extraordinary breadth and significance, corporations, organizations, and other entities that may be subjected to emissions reporting for the first time, or that would be required to greatly expand the type of emissions reporting they conduct, may well wish to submit comments on the proposed rule, either individually, in combination with similarly situated entities, or through industry groups and trade associations. Locke Lord’s Climate Change Practice Team, which includes seasoned environmental and regulatory lawyers as well as members of the Locke Lord Strategies LP public affairs practice, are available to advise clients on their potential reporting obligations under the proposed rule as well as to assist clients in preparing formal comments to the proposed rule.

Outlook and Steps to Prepare for Regulation

Although the proposed rule is likely to undergo minor revisions in response to public comment, given the importance that the Obama administration has attached to the issue of climate change and the momentum in both the administration and Congress for some form of GHG emissions regulation, there is a strong likelihood that a final rule eventually will be adopted that is similar in scope and applicability to the proposed rule. Indications are that there is a strong desire for the rule to go into effect in time to make 2010 the first reporting year, which would allow GHG regulation based on the new, facility-level, national inventory to commence as early as 2012.

By the time the proposed rule is finalized, there may be only several months or less for regulated entities to prepare to track their GHG emissions in 2010. Those companies that start preparing now will be in the best position both to ensure compliance with the new reporting requirements and to take advantage of the opportunities that an EPA-approved GHG emissions inventory will afford. For example, allowances or credits for early emissions reductions are most likely to be granted to facilities that have established, reliable emissions inventories and can provide the most certainty regarding the value of their emissions reductions. Facilities that are preparing for capital improvements and other upgrades to their equipment or processes can maximize their opportunity to receive emissions reduction credits by coordinating those projects with their emissions inventory to enable documentation of the project’s benefits. In contrast, companies that do not begin soon to prepare to comply with the proposed rule may find themselves behind the eight-ball as 2010 approaches and they lack the systems necessary to accurately inventory and report their emissions.