EPA's Authority to Regulate GHG Emissions from Power Plants after UARG

The United States Supreme Court's recent decision inUARG v. EPA offers insight as to how future courts will evaluate the authority of the Environmental Protection Agency ("EPA") under the Clean Air Act ("CAA") to regulate greenhouse gas ("GHG") emissions from power plants and other stationary sources. InUARG, EPA had interpreted the CAA, through the Tailoring Rule, as requiring Prevention of Significant Deterioration ("PSD") and Title V permitting on the sole basis of a source's potential to emit GHGs.

The Supreme Court rejected this interpretation, holding that Congress must "speak clearly if it wishes to assign to an agency decisions of 'vast economic and political significance.'" Thus, the takeaway from UARG is that EPA rulemaking—especially rulemaking that would bring about an "enormous and transformative expansion in EPA's regulatory authority"—must be grounded in and judged against the statutory text of the CAA.

EPA's recent proposal to establish GHG emission guidelines for existing power plants under CAA § 111(d) is likely to test the standard set by the Supreme Court in UARG. Like the Tailoring Rule, the proposed guidelines will have significant economic and political impacts. Forty-nine states will need to achieve GHG emission reductions ranging from 11 to 72 percent by 2030 (see map below). Even by EPA's own estimates, the costs of compliance with the guidelines are expected to reach $7 billion to $8 billion annually by 2030.

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In addition, the guidelines represent an unprecedented expansion of EPA authority in several ways. While § 111(d) requires EPA to "establish a procedure" for states to submit plans with standards of performance for existing sources, it fails to specify how detailed the EPA procedure should be or suggest whether EPA can require states to achieve a particular standard of performance. In the proposed guidelines, EPA purports to require compliance with specific statewide GHG emission standards in pounds per megawatt-hour. EPA also utilizes § 111(d) more expansively than ever before by proposing measures that extend outside of individual sources in the regulated source category, such as setting statewide emission reduction targets, regulating state efforts to increase renewable energy capacity, and prescribing an increase in state demand-side energy efficiency efforts. This "beyond the fence" approach is not apparent from the statutory text of § 111(d) and, in practice, would extend the reach of the guidelines to many sources outside of the regulated category.

Though UARG does not touch on EPA's § 111(d) rulemaking authority, the decision emphasizes the need for EPA to base its rulemakings in explicit statutory authority. 

The question that EPA must address, and future courts will have to resolve, is whether 

§ 111(d) provides "clear congressional authorization" to support the proposed guidelines for existing power plants. In UARG, the Supreme Court noted that it is skeptical "[w]hen an agency claims to discover in a long-extant statute an unheralded power to regulate a significant portion of the American economy." Given the unusual scope and significance of the proposed guidelines, EPA will need to identify specific provisions of § 111(d) that justify its proposed approach.

— Charles T. Wehland (+1.312.269.4388, ctwehland@jonesday.com), Casey Fernung Bradford (+1.404.581.8119, cbradford@jonesday.com), and Simon P. Hansen (+1.404. 581.8988, shansen@jonesday.com)

Supreme Court Declines to Review California's Low Carbon Fuel Standard

On June 30, 2014, the U.S. Supreme Court denied a petition for certiorari in Rocky Mountain Farmers v. Corey, a case challenging the constitutionality of California's Low Carbon Fuel Standard ("LCFS"). The LCFS attempts to reduce greenhouse gas emissions by requiring producers or importers of California's transportation fuels to surrender credits for fuels that fail to meet a target "carbon intensity," or the greenhouse gas emissions generated over the lifecycle of a fuel, from production through consumption. Credits may be purchased, or earned through provision of low-carbon intensity fuels. Because the LCFS regulations assume a higher "carbon intensity" for certain fuel components, such as ethanol, produced outside California, petitioners challenged the regulations under the Dormant Commerce Clause. 

In a divided opinion, last year a three-judge panel of the Ninth Circuit held that the LCFS does not facially discriminate against interstate commerce and is not an unconstitutional extraterritorial regulation. Even though the LCFS categorizes fuels based on place of origin, the Ninth Circuit panel held that those regional characterizations are based on real differences in carbon intensities resulting from different methods of production and the transport of fuels into California. When the Ninth Circuit denied the petitioners' request for rehearing en banc, Judge Milan Smith, joined by five other Ninth Circuit judges indissent, described the panel decision as "squarely at odds with Supreme Court precedent." This did not persuade the Supreme Court to grant the petition for certiorari, however. 

The case will now head back to the District Court, which must decide if the LCFS discriminates in purpose and effect, or imposes an excessive burden on interstate commerce. The Supreme Court's decision may have consequences beyond California.Oregon and Washington have already taken steps toward implementing their own LCFS regulations. Eleven northeastern states previously explored adopting a regional Clean Fuels Standard. Although the program has been largely dormant for several years, that could change if those states interpret the Supreme Court's decision as an implied legal authorization for California's approach. 

— Thomas M. Donnelly (+1. 415.875.5880, tmdonnelly@jonesday.com) and Daniel L. Corbett (+1.415.875.5885, dcorbett@jonesday.com)

California Regulatory Developments

The California Air Resources Board ("CARB") approved the First Update to the Climate Change Scoping Plan at its public hearing on May 22, 2014. The next update will be due by May 2019. CARB amendments to its cap-and-trade regulations were approved by the California Office of Administrative Law and became effective on July 1, 2014. The update and amendments are discussed in the Spring 2014 Climate Report.

In accordance with the cap-and-trade regulations, CARB held its seventh auction of greenhouse gas allowances on May 16, 2014. CARB reported that all of the 2014 allowances available for sale at the auction (16,947,080 allowances) were sold at a settlement price of $11.50 (as compared to a reserve price of $11.34 per allowance). Approximately half of the 2017 allowances available for sale at the auction were sold at a settlement price of $11.34 per allowance. The eighth auction will be held on August 18, 2014.

California and Quebec have linked cap-and-trade programs, and the first joint auction of allowances is planned for November 2014. Notice of the date of a practice auction, which is expected to take place in early August 2014, will be posted on the CARB and Quebec websites on July 29, 2014.