This ruling represents a key step toward regulation of greenhouse gas emissions from coal utilities, refineries, chemical plants and other large emissions sources across the United States.

On November 13, 2008, the U.S. Environmental Protection Agency (EPA) Environmental Appeals Board issued a key ruling that could move EPA a step closer to imposing CO2 emissions limits on power plants and other major sources of CO2 emissions. In In Re Deseret Power Electric Cooperative, the Board rejected EPA’s issuance of an air permit to Deseret Power Electric Cooperative’s 110 MW Bonanza coal plant near Vernal, Utah. The agency must now reexamine the permit conditions, solicit public comment and determine whether controls on CO2 should be imposed on the plant as part of its air permit. EPA’s decision will potentially affect numerous power plants and other sources presently undergoing review of their air permits.

The case represents the latest development in the debate over whether CO2 should be regulated under the Clean Air Act. In 2007, in Massachusetts v. EPA, the Supreme Court of the United States held that CO2 was an “air pollutant” under the Clean Air Act and ordered the Agency to ascertain whether it “may reasonably be anticipated to endanger health or welfare.” EPA is presently evaluating that issue. Earlier in 2008, a Georgia court held that EPA had to include limits on CO2 in its air permits. That case is presently on appeal to the Georgia Supreme Court. Additionally, on the regulatory front, EPA is presently accepting comments on its greenhouse gas proposals as to whether and how it should regulate CO2 under the Clean Air Act.

The Deseret holding builds on these opinions and activities by unequivocally stating that EPA has the authority to regulate CO2 in the context of an air permit regardless of whether EPA eventually makes an endangerment finding for CO2. Although the opinion stops short of requiring EPA to limit CO2 emissions, EPA must now evaluate such limits in this permit proceeding and decide whether it must impose a Best Available Control Technology (BACT) limit on such emissions. EPA’s decision will have broad implications on permits issued throughout the United States. Additionally, in all likelihood, issuance of new permits will slow dramatically while EPA makes this determination. Finally, the decision will undoubtedly increase the number of permit challenges filed by environmentalists and community groups.

The Holding

Under the Clean Air Act, EPA must issue prevention of significant deterioration (PSD) permits every time a new major source is constructed or significantly modified in certain parts of the United States. Such permits must consider a Best Available Control Technology emissions limit for every pollutant that is “subject to regulation” under the Act.

In 2004, Deseret applied for a PSD permit for a proposed waste-coal-fired generating unit at its Bonanza plant. The EPA issued a permit to Deseret and stated that the Massachusetts decision did not require it to impose limits on CO2 emissions and that EPA did not have authority to address climate change by imposing such limits in PSD permits. The Sierra Club filed a petition to review and was joined by a number of parties submitting briefs in support of the Sierra Club’s position. These parties included the Attorneys General of New York, California, Connecticut, Delaware, Maine, Massachusetts, Rhode Island and Vermont. EPA also submitted briefing defending its actions and received supporting briefs from several parties, including Deseret, ConocoPhillips and the Utility Air Resources Group.

The Sierra Club stated that EPA had violated two portions of the PSD regulations. The first argument was that EPA had not considered alternatives to the proposed facility. The Board rejected this argument. It noted that while EPA had evaluated alternatives in permit reviews at other facilities, in the case of Deseret, no such alternatives had been submitted for review in the comments.

The second argument, that EPA had not imposed BACT to limit CO2 from the plant, has greater implications. The Board held that although EPA was not necessarily required to impose CO2 limits, EPA had to at least consider such standards. EPA argued that CO2 was not subject to regulation under the Clean Air Act, because it was not a pollutant that was presently subject to a statutory or regulatory provision requiring actual control. The Board held that EPA’s definition was too narrow, rejecting EPA’s interpretation that the phrase “subject to regulation” meant “subject to a statutory or regulatory provision that requires actual control of emissions of that pollutant.” It also rejected EPA’s alternative argument that the provisions in the Clean Air Act relating to carbon dioxide or global warming were added later and were not to be considered the portion of the Clean Air Act to which the BACT standards refer.

Consequently, the Board remanded the permit for the EPA to reconsider whether or not to impose a BACT standard. It required the EPA to develop an adequate administrative record for why or why not it should impose such a standard, and required EPA to reopen the record for public comment on this decision.

The Impact

Countless coal plants, refineries, chemical plants and other large emissions sources across the United States are currently undergoing the PSD permitting process. This opinion is likely to slow the permitting process dramatically for the majority of these plants while EPA evaluates its position. Additionally, environmental groups may look for opportunities to challenge recently issued permits based on the same arguments.

Regulated entities should strongly consider providing comments to EPA with respect to the BACT issues when EPA opens a comment period. Additionally, they should consider modifying comments on the Greenhouse Gas Rule to reflect this decision. They should also evaluate their present pending permits to determine what type of CO2 limits they could achieve and whether a significant delay in permitting would affect their operations.