On June 2, 2014, in accordance with President Obama’s Climate Action Plan, the United States Environmental Protection Agency (EPA) issued a proposed rule (Existing Source Proposal) under Section 111(d) of the Clean Air Act (CAA) aimed at reducing carbon dioxide (CO2) emissions from existing coal- and natural gas-fired electric generating units (EGUs). The Existing Source Proposal does not impose limits on individual units, but rather establishes state-specific, rate-based CO2 emission standards that must be achieved by the state as a whole, taking into account the state’s various sources of power generation. The proposal also sets forth broad guidelines to help states develop plans to meet the emission standards, which may include emission reduction measures that extend “outside the fence” (or “beyond the unit”). Thus, EPA’s proposal, if implemented, would likely have significant impacts beyond the power sector.

Also on June 2, EPA issued proposed emission standards for modified and reconstructed EGUs under Section 111(b). Those standards are addressed in a separate alert.

EPA’s Authority to Regulate Existing Sources

EPA’s stated authority for the Existing Source Proposal is Section 111(d), a rarely used provision of the CAA that establishes a federal-state process for regulating existing sources of certain pollutants. More specifically, Section 111(d) directs EPA to develop a procedure under which each state submits to EPA a plan for establishing “standards of performance” for “affected sources,” and EPA determines whether the state plans are satisfactory. “Affected sources” are those for which new source performance standards have been established under CAA Section 111(b). The term “standard of performance” is defined as an emissions limit achievable by the “best system of emission reduction” (BSER) that EPA has determined is “adequately demonstrated” for the source type, taking cost and other factors into account. EPA’s procedure for development and review of state plans under Section 111(d) must be similar to that provided under Section 110 of the CAA for state implementation plans developed to meet national ambient air quality standards.

Emission Standards

As mentioned above, the Existing Source Proposal sets forth state-specific, rate-based CO2 emission standards (expressed as pounds of CO2 per megawatt-hour of electricity generation (lbs. CO2/MWh)) that must be achieved by the state as a whole. In establishing the standards, EPA first calculated a baseline CO2 emissions rate for each state utilizing 2012 emissions and electricity generation data for covered sources.

Next, EPA established interim and final emission rates for each state based on its capacity to achieve reductions using the four “building blocks” set forth below, which EPA has identified, in the aggregate, as the BSER for existing sources. The interim rates must be achieved on an average basis from 2020 to 2029, and the final emission rates must be achieved by 2030 and maintained going forward.

EPA’s building blocks can be summarized as follows:

  • Improving the efficiency of coal-fired plants
  • Substituting generation from coal-fired and oil/gas-fired plants with generation from existing natural gas combined-cycle (NGCC) units
  • Increasing generation from renewable and nuclear energy sources
  • Reducing electricity demand

Although EPA’s proposed interim and final emission standards would be mandatory, states are given considerable flexibility under the Existing Source Proposal to develop measures to achieve those standards. A compliance plan could include, for example, both “inside-the-fence” measures such as improving boiler efficiency and “outside-the-fence” measures such as promoting demand-side energy efficiency, increasing the deployment of renewables and improving transmission efficiency. The proposed rule would also allow preexisting state programs, as well as new programs implemented ahead of the compliance deadline, to be counted toward compliance with the state standard. In addition, EPA proposes to allow states to convert their rate-based emission standards into annual tonnage emissions budgets (also known as “mass-based” targets), which would allow multiple states to work together to achieve reductions through cap-and-trade programs. States that choose to participate in such multistate programs could submit a single unified multistate plan in lieu of individual state plans.

Next Steps

Comments on the Existing Source Proposal will be accepted through October 16, 2014. EPA plans to publish a final rule for existing sources by June 1, 2015. The Existing Source Proposal sets a June 30, 2016 deadline for states to submit their implementation plans, with opportunities for a one-year extension (individual plans) or a two-year extension (multistate plans), if certain requirements are met. If a state fails to timely submit an implementation plan or to receive EPA’s approval of its plan, EPA can impose a federal implementation plan.

The full text of the proposed rule can be found on EPA’s website or in the June 18, 2014 Federal Register at 79 Fed. Reg. 34830.