On June 2, 2014, the U.S. Environmental Protection Agency (“EPA”) released a landmark proposed rule entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units.” The proposed rule would establish requirements for states to issue standards of performance for carbon dioxide (“CO2”) emissions from existing electric generating units (“EGUs”) under Section 111(d) of the Clean Air Act (“CAA”). The proposed rule follows EPA’s September 2013 proposal to regulate CO2 emissions from new fossil fuel-fired EGUs under Section 111(b) of the new source performance standards (“NSPS”) program. The key components of the proposed rule are the first ever state-specific CO2mandatory emissions targets for existing EGUs, along with guidelines for the states to incorporate CO2 emissions reductions into state plans that achieve EPA’s target reductions. Unlike the rule for new sources, the existing source rule must be implemented by states with EPA approval. The proposal is part of the President’s Climate Action Plan, which, among other things, seeks to reduce domestic greenhouse gas (“GHG”) emissions by 17% between 2005 and 2020. Below are five key highlights from EPA’s proposal.
- EPA is Mandating State-Specific Rate-Based CO2 Emission Reduction Targets to Meet Overall Goals. On the whole, EPA proposes to realize 30% CO2reductions from fossil fuel utilities by 2030 based on a 2005 baseline. Importantly, to realize those reductions, the proposed rule includes interim and final emission reduction targets for each individual state. Interim standards would apply from 2020 to 2029, with final standards taking effect in 2030.
The targets are expressed as rate-based standards for each individual state. In setting the standards, EPA considers not only CO2 emissions from fossil fuel-fired EGUs, but also electricity generation from a broader set of EGUs that could serve as substitutes for fossil fuel-fired capacity, including nuclear and renewable energy sources. While emissions reductions vary by state, EPA’s emissions reduction targets are based on a Best System of Emissions Reduction (“BSER”) that, at an aggregate level, incorporates four “building blocks” to calculate emission reduction targets: (1) improvement of heat rate efficiency at coal facilities; (2) the substitution of coal-fired EGU capacity with natural gas combined cycle (“NGCC”) units that are existing or currently under construction; (3) substitution of coal-fired EGU capacity with nuclear or renewable energy; and (4) reduction in overall electricity generation through demand side energy efficiency improvements. At the same time, EPA expressly excludes a number of emission reduction strategies from its BSER analysis, including carbon capture and sequestration (“CCS”), fuel switching at individual EGUs, and heat-rate efficiency improvements at NGCC units.
- EPA Looks “Outside the Fence Line” to Calculate Emissions Reductions.EPA’s proposed state-specific emissions reductions goals are based on a BSER analysis that takes into account emissions reductions that occur outside the fence line of the fossil fuel-fired EGUs that are subject to the proposed regulation. As shown in the graphic below, EPA uses the four building blocks in an iterative process to determine the state-specific emissions reductions that it believes are possible. EPA’s reliance on these “outside the fence line” options dramatically expands the scope of BSER beyond the fossil fuel-fired EGUs subject to regulation and raises questions about the scope of EPA’s authority under Section 111(d). This approach is also at odds with EPA’s proposed rule for new sources under Section 111(b), which proposed standards specific to coal and natural gas facilities respectively.
- EPA Provides States with Flexibility to Achieve Emissions Reduction Targets. While each state’s rate-based emissions reduction goal represents a mandatory standard that the state must achieve, EPA offers the states considerable flexibility in achieving those goals. At the outset, EPA endorses states’ abilities to implement “portfolio” approaches that would “require EGUs and other entities to be legally responsible for actions required under the plan that will, in aggregate, achieve the emission performance level” (emphasis added). To achieve the targets, EPA notes that states may choose from market-based trading programs, GHG performance standards, renewable portfolio standards (“RPS”), energy efficiency resource standards (“EERS”), and other demand-side energy efficiency programs. EPA also recognizes that many states have already implemented programs to reduce CO2 emissions from fossil fuel-fired EGUs and specifically highlights the Regional Greenhouse Gas Initiative (“RGGI”), California’s Global Warming Solutions Act (AB32), and Colorado’s Clean Air, Clean Jobs Act. Finally, under the proposal, states are permitted to partner with each other and submit multi-state plans to reduce CO2 emissions from the energy sector.
- EPA Has Elected to Proceed through Notice and Comment Rulemaking. In a memorandum accompanying the Climate Action Plan, the President directed EPA to issue “standards, regulations, or guidelines” to address CO2 emissions from existing fossil fuel-fired EGUs. Although EPA refers to the proposal consistently as providing “guidelines,” it appears clear that the proposal is actually a rulemaking. This means that the proposed targets, once finalized, will be binding on each individual state. Further, the decision to proceed with a rulemaking will have important implications for the timing and content of judicial review upon finalization of the rule in 2015.
- Congress Will Increase Engagement on the GHG Proposal. Following up on a number of markers laid last month, Congress is expected to increase focus on the Administration’s proposal. Senate Minority Leader Mitch McConnell (R-KY) is expected to introduce legislation this week addressing the carbon reduction proposal aimed at precluding EPA from finalizing regulations until various government agencies can provide certainty that jobs, gross domestic product and energy prices, etc., will not suffer as a result. On the House side, the Energy and Power Subcommittee of the Energy and Commerce Committee will hold a hearing on the proposal on June 18, 2014 with Acting Office of Air and Radiation Administrator Janet McCabe testifying. Washington insiders anticipate a summer full of questions and actions from Congress on the proposal. Open questions remain regarding what action, if any, various vulnerable in-cycle Democrats will take in order to strengthen their political positions at home.
EPA will accept public comments on the proposal for 120 days after the proposed rule is published in the Federal Register. EPA also intends to hold public hearings in late July in Atlanta, Denver, Pittsburgh and Washington, D.C. Pursuant to the Presidential Memorandum that accompanied the Climate Action Plan, EPA must issue a final rule by June 1, 2015, and the states must submit plans implementing the rule by June 30, 2016 (although EPA provides for some extension opportunities for the states).