Since the Supreme Court’s ruling in Massachusetts v. EPA, 549 U.S. 497 (2007), a row of regulatory dominoes have been poised to fall. On December 7, 2009, the finger of the EPA Administrator Lisa Jackson tipped the first when she issued the final GHG cause and endangerment findings. The endangerment finding states that the emission of six greenhouse gases (GHGs) constitute “air pollution” that “endangers” public health and welfare, based on the EPA’s determination that these emissions cause climate change, while the cause finding indicates that emissions from mobile sources contribute to the danger.1

The endangerment finding took effect on January 14, 2010, and only directly applies to mobile sources. Absent Congressional action to the contrary, however, the endangerment finding will also expand certain Clean Air Act (CAA) requirements to include emission of GHGs from stationary sources. Given the controversial nature of these potential impacts, the endangerment finding has already spurred several lawsuits and will likely drive some form of Congressional action.

The now-famous Massachusetts case held that the EPA was required to make a determination of whether GHGs emitted from mobile sources threaten the public health and welfare. In response, the EPA issued a proposed endangerment finding in April 2009, and received 380,000 comments in the 60-day period thereafter. The endangerment finding was finalized in substantially the same form as the proposed finding.

Trains, Planes & Automobiles – Mobile Source Rules

The endangerment finding allows the EPA to begin regulating GHG emissions from mobile sources such as planes, trains and automobiles. GHG emissions from these sources are directly proportional to fuel consumption, and there are no “add-on” or “tailpipe” control technologies commercially available to reduce GHG emissions. In September 2009, and in anticipation of the endangerment finding, the White House announced proposed regulations that would markedly increase fuel economy standards for passenger cars, light-duty trucks and medium-duty passenger vehicles.2

In order for these regulations to apply to 2012 model year vehicles, the EPA must finalize this regulation by March 31, 2010. The EPA has affirmed its initial statements that it intends to regulate the 2012 model vehicles and that it is likely to meet the target date. Regulations limiting GHG emissions from other mobile sources – such as airplanes, diesel locomotives and ocean-going ships – are likely to follow in coming years.

The Unintended Consequences – Stationary Source Rules

Although the endangerment finding applies only to mobile sources, certain provisions of the CAA apply to all “regulated pollutants” emitted by stationary sources such as power plants, refineries, factories and landfills. Once GHGs become “regulated pollutants” for mobile sources, the next domino falls on stationary sources – applicability of the Title V Operating Permit and the Prevention of Significant Deterioration (PSD) programs. There is no definitive answer as to the exact moment when stationary sources may be regulated. The Johnson Memorandum, issued by the EPA at the tail end of the Bush Administration, concluded that the trigger point occurs when a CAA regulation actually controls or limits GHG emissions. Although the Johnson Memorandum is currently under reconsideration, its effect has not been stayed, and the Obama Administration has indicated that this is its preferred interpretation.3 In other words, GHGs would become a “regulated pollutant” when a source must first comply with a regulation imposing control requirements (June 2011 based on certification deadlines for 2012 model automobiles), not when such a regulation is issued. Others, however, believe that the statutory trigger occurs when that first mobile source regulation is finalized (likely March 2010) and that the EPA’s interpretation is not correct. This uncertainty has substantial ramifications for companies whose GHG emissions will be subject to regulation under the CAA, especially in terms of litigation risk for stationary source air permit applications filed after the regulation is finalized but before it is enforceable.

Beyond timing, the regulation of GHGs raises two major practical concerns. The first is that Congress originally intended the Title V and PSD programs to apply to a relatively small set of facilities representing the largest emitters. The CAA explicitly establishes applicability of these programs at the 100 and/or 250 tons per year thresholds,4 levels that ensured that the majority of the stationary source emissions were regulated, while limiting the number of facilities subject to regulation under these resource-intensive programs. The principal GHG –carbon dioxide – is emitted in much greater amounts for comparable economic activities, however, and applying the statutory thresholds results in a potential 100-fold increase in the number of facilities regulated. In fact, the CAA would suddenly apply to sources never contemplated for regulation under these programs, such as office and apartment buildings, fast food restaurants and retailers.5 Neither the EPA nor state agencies are equipped to handle this increased workload.

The EPA has attempted to address this issue through its October 22, 2009 proposal of the “tailoring rule,”6 which would shield smaller GHG emitters from Title V and PSD requirements. This rule, if codified, would “tailor” the explicit text of the CAA requirement so that only facilities that emit more than 25,000 tons of carbon dioxide (or its equivalent) would be required to obtain Title V or PSD permits.7 At this level, the total national GHG emissions regulated from stationary sources would fall from 75 percent to 68 percent, but the number of facilities regulated would fall from over 1,000,000 to approximately 13,700. The EPA has justified ignoring the plain language of the CAA in the tailoring rule on the bases of “avoidance of absurd results” and “administrative necessity.” Both concepts receive very strict judicial scrutiny, however, and may not pass judicial muster.

The second practical problem is that the PSD process requires the installation of Best Available Control Technology (BACT). BACT is determined on a case-by-case basis and includes an analysis of both technical and economic feasibility. Unlike most air pollutants, there are no demonstrated control technologies for the reduction of GHG emissions. 8 The EPA is in the process of reconsidering the definition of BACT to include fuel and process–technology switching, which traditionally have not been part of the BACT analysis. Requiring BACT to include fundamental process changes will have significant and undoubtedly expensive ramifications for affected industries. The unavailability of any method for meaningfully reducing GHG emissions, combined with the potential for a new definition of BACT, creates additional uncertainty for those seeking to build new or expanded facilities, as well as for regulators tasked with processing those permit applications. 9

Legislative Action And Other Consequences

Given the challenges inherent in regulating GHG emissions under the CAA, the biggest domino may be federal legislation. The general unsuitability of the CAA to regulate GHGs emitted from stationary sources may provide the necessary impetus for Congress to pass a statute that provides the basis for a more suitable regulatory framework. Of course, we may see a completely different domino fall – such as enactment of a long-rumored bill that would “stay” the EPA’s authority to regulate GHGs for one year to allow for legislative action. At present, the House has passed a bill that would establish an economy-wide cap-and-trade system for regulation of GHGs, and the Senate Environment and Public Works committee has approved a similar bill. A compromise Senate bill to include a capand- trade system is reported as forthcoming. The timing of a compromise may depend on the outcome of the ongoing legislative struggle over health care reform, however.

The endangerment finding may topple litigation dominoes, affecting pending lawsuits and prompting new lawsuits. For example, the endangerment finding may reduce evidentiary concerns related to proving the impacts of climate change in the tort litigation context, but at the same time may bolster the “political question” defense. Until PSD permitting for GHG emissions is required for stationary sources, it is highly probable that the Sierra Club and others will continue their legal challenges to new air permits for coal-fired power plants based on a theory that GHG emissions are currently regulated air pollutants and that a BACT analysis must be performed. If PSD permitting is eventually required, we can expect litigation over the “correctness” of the BACT analyses.

While the endangerment finding does not directly impose any requirements on industry, it has triggered a series of actions that ultimately will result in the regulation of GHG emissions from stationary sources. Its unclear precisely what path these falling dominoes will take, but understanding what could happen is critical to planning business and growth strategies.