The much-anticipated Tailoring Rule, a critical cog in United States Environmental Protection Agency’s efforts to use the regulatory process to regulate Greenhouse Gas (GHG) emissions1, was finalized on May 13, 2010. US EPA and most commentators believe that without the Tailoring Rule, regulation of GHG emissions from stationary sources under the Clean Air Act (CAA) is a practical impossibility. Promulgation of this rule marks an important milestone in what has proven to be a contentious process.

Background

The trigger for the Tailoring Rule occurred on December 7, 2009, when US EPA responded to the United States Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007) by issuing the endangerment finding, stating that the emission of six GHGs from mobile sources constitute “air pollution” that “endanger” public health and welfare because these emissions cause climate change.2 The endangerment finding took effect on January 14, 2010, and, in and of itself, does not impose any requirements on the regulated community. Once GHGs become “regulated pollutants” for mobile sources, however, certain provisions of the CAA then automatically apply to all stationary sources (i.e., power plants, refineries, factories and landfills), absent congressional action to the contrary. Without the Tailoring Rule, regulation of stationary sources becomes a practical impossibility because of the sheer number of sources that would be regulated.3

The problem stems from the fact that the CAA was not designed to regulate emissions like GHGs. When it amended the CAA in 1990, Congress clearly intended that the Title V and Prevention of Significant Deterioration (PSD) programs would apply only to a relatively small set of facilities representing the largest emitters. Accordingly, the CAA explicitly establishes the applicability of Title V and PSD programs at the 100 and/or 250 tons per year thresholds.4 Applying these statutory thresholds to GHGs is problematic, however, because the primary GHG – carbon dioxide – is emitted in much greater quantities (by orders of magnitude) than traditional air pollutants given similar economic-activity levels. The application of these statutory limits would result in two consequences unintended by Congress: (1) a massive increase in the number of permits – an unmanageable, if not impossible, workload for regulators; and (2) the inclusion of sources that were never intended to become regulated under the CAA as major sources in the first place, such as office and apartment buildings, fast-food restaurants and retailers. Both are results that the regulating and regulated communities agree should be avoided. The Tailoring Rule was initially proposed to fix these unintended consequences by raising the applicability from 100/250 tons to 25,000 tons per year of CO2 equivalent.

The Tailoring Rule also is intended to fix the fundamental timing issue tackled by the now-famous Johnson Memorandum, which was US EPA’s first attempt to address the timing of when stationary sources would be regulated for GHG emissions should an Endangerment Finding occur. The Johnson Memorandum was issued outside of the notice and comment rulemaking process by the US EPA at the tail end of the Bush Administration and concluded that an air pollutant is a “regulated pollutant” at the point in time when a CAA regulation actually controls or limits GHG emissions. Based on this application, GHGs would become a “regulated pollutant” when a source must first comply with a regulation imposing control requirements, as opposed to simply when such regulation is issued. In other words, the rejected alternative approach advocated that the statutory trigger occurs when the first mobile source regulation is finalized, not when compliance with a control requirement first must be achieved.5 Surprising most commentators, the Tailoring Rule essentially codifies the central tenet of the Johnson Memorandum – that an air pollutant is “regulated” when compliance with a control requirement is actually required.

The Tailoring Rule also addresses the practical impossibility of regulating these sources by establishing a phased implementation cycle and increasing the explicit statutory threshold levels, through regulation, from 100/250 tons to 100,000 tons in 2011, with potentially lower applicability limits beginning on or after July 1, 2013. The Tailoring Rule is crafted in such way that it allows US EPA to proceed with the regulation of GHG emissions under the CAA while avoiding the practical impossibility of regulating in accordance with a strict reading of the CAA.

Tailoring Rule

The Tailoring Rule sets forth a three-phase approach for regulating GHG emissions from stationary sources, a departure from traditional permitting approaches. The most significant change from US EPA’s October 27, 2009, Tailoring Rule Proposal (74 FR 55292) concerns the actual applicability level – which was increased from 25,000 tpy (CO2- equivalent (CO2e) to 100,000 tpy (CO2e), decreasing to an unspecified figure (likely 50,000 tpy CO2e) in later years.

Without the Tailoring Rule, US EPA estimates that over 80,000 PSD permits and six million Title V permits would need to be issued by state, local and tribal permitting authorities – severely impairing the permitting authorities ability to properly manage their respective designated air quality programs. Based on US EPA’s analysis, the Tailoring Rule will initially target those facilities that are responsible for emitting 70 percent of the national GHG emissions from stationary sources – primarily power plants, refineries and cement production facilities. US EPA indicates that this Tailoring Rule drastically reduces the permits that will be issued – approximately 1,600 PSD permits and 15,500 Title V permits – while continuing to regulate the bulk of the GHG emissions. The final Tailoring Rule applies a three-step phased approach to regulating GHG emissions from stationary sources beginning in January 2011:

Step 1. January 2, 2011, to June 30, 2011

  • During this phase, no facilities would be subject to CAA permitting requirements solely because of GHG emissions.
  • Only facilities currently subject to the PSD permitting program (i.e., facilities that are newly constructed or modified in a way that significantly increases at least one non-GHG pollutant) would be subject to the permitting requirements for GHG emissions if the facility’s total GHG’s emissions increases by 75,000 tpy or more (on a C02e basis). These facilities would be subject to BACT requirements for their GHG emissions.
  • Facilities currently subject to the Title V operating permit program will be required to address their GHG emissions, regardless of their GHG emission level, when a permitting action is required. Possible permitting actions include permit renewal (generally for permits expiring in three years or less), permit revisions (generally for permits expiring in more than three years) or initial application (for sources newly subject to the Title V permitting program). The Title V permitting process will not, in and of itself, impose new substantive control requirements, but will typically include a combination of new testing, monitoring, recordkeeping and reporting requirements.

Step 2. July l, 2011 to June 30, 2013

  • Title V and PSD requirements will, for the first time, apply to certain facilities based on their GHG emissions regardless of the emissions of other pollutants.
  • In this second phase, facilities with a potential to emit of 100,000 tpy of GHG are defined as “major” sources. PSD permitting will be required for construction of new major GHG emitting facilities regardless of whether they exceed the PSD permitting thresholds for any other pollutant. The threshold for “significant” modifications at existing major facilities is lower – an increase in GHG emissions of 75,000 tpy or more will trigger PSD permitting requirements regardless of whether there will be a significant emission increase of any other pollutant.
  • All facilities that emit at least 100,000 tpy CO2e will be subject to Title V permitting requirements.

US EPA estimates that about 15,000 existing Title V facilities will have to amend their Title V permits and that an additional 550 sources will need to obtain first-time Title V permits due solely to their GHG emissions in 2011. The majority of the 550 new Title V permits will likely be municipal solid waste landfills and industrial manufacturers. Beginning in 2011, US EPA estimates that there will be approximately 900 additional PSD permitting actions each year triggered by increases in GHG emissions.

Step 3. July 1, 2013, to April 30, 2016

  • US EPA has set a GHG emission floor, 50,000 tpy (CO2e), below which facilities will not be subject to PSD or Title V permitting requirements before April 30, 2016.
  • Based on a supplemental rulemaking to be undertaken in 2011, US EPA may implement additional regulations to phase-in facilities with emissions above 50,000 tpy beginning in July 1, 2013.
  • US EPA will complete a study by April 2015 regarding whether (and how) facilities below 50,000 tpy should be regulated beginning no earlier May 1, 2016.

What’s Next?

Although the final Tailoring Rule tries to fix the unintended consequences of using the Clean Air Act to regulate GHGs, legal challenges to the Tailoring Rule are widely expected from companies with facilities above the rule’s thresholds. And while the proposed rule was not strongly opposed by environmental groups, it is unknown whether the final rule’s increased thresholds will cause any of the leading environmental groups to challenge the final rule. US EPA contends that it has adopted a common sense (and legal) approach in adopting its final rules; based on the over 400,000 comments it received in response to its October 2009 proposed regulations, many groups are likely to differ on this point. In fact, one of those groups, the United States Senate, is poised to act in a number of ways, including a scheduled June 10, 2010, vote on a resolution to disapprove the Endangerment Finding under the Congressional Review Act6, as well as the recent introduction of the Kerry-Lieberman American Power Act, a discussion draft climate change bill that would provide comprehensive regulation of GHGs outside of the current constraints of the CAA.

Absent political intervention, litigation on the Tailoring Rule is all but certain, so stay tuned...