Lawyers Advising Clients to Prepare for Economy-Wide GHG Regulation

Ballard Spahr Andrews & Ingersoll, LLP, which traces its origins to the 19th century, is today one of the largest law firms in the United States, with 550 practicing attorneys working out of 12 offices around the country. Earlier this week, two lawyers in its Climate Change Group, Robert B. McKinstry, Jr and Caleb Holmes, sent a detailed memo to the firm’s clients.

Titled: “EPA Regulatory Proposals Represent the First Steps of an Economy-Wide Program for Regulation of Greenhouse Gas Emissions,” the memo suggested “Those who are facing regulation would be well-advised to begin preparing.”

Below is the memo, reprinted in full with permission of the authors and the firm.

On April 17, 2009, U.S. Environmental Protection Agency Administrator Lisa Jackson signed a proposed finding under section 202(a) of the Clean Air Act that emissions of six greenhouse gases cause or contribute to “pollution” that can “reasonably be anticipated to endanger” both health and welfare. See Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act; Proposed  Rule, 74 Fed. Reg. 18886 (April 24, 2009). This proposal, taken in response to the U.S. Supreme Court’s April 4, 2007, decision in Massachusetts v. EPA, is the first step in what will likely become an economy-wide effort to regulate and reduce emissions of greenhouse gases under the Clean Air Act.

The endangerment proposal followed on the heels of the April 10 publication in the Federal Register of a proposed rule that will require economy-wide reporting of greenhouse gas emissions by significant sources of those emissions, certain greenhouse gas manufacturers, and the producers of fossil fuels whose combustion results in greenhouse gas emissions. See Mandatory Reporting of Greenhouse Gas Emissions, Proposed Rule, 74 Fed. Reg. 16448 (April 10, 2009).

This reporting proposal represents perhaps the most complex regulatory enactment since the 1980 regulations creating the definition of hazardous waste. 

The two EPA actions took place shortly after the release by Congressmen Henry A. Waxman and Ed Markey of a “discussion draft” bill to create an economy-wide cap and trade program for greenhouse gas regulation and Congressional approval of a budget that presupposes an auction sale of greenhouse gas emissions allowances. These actions provide us with an indication of the nature of the future federal regulatory program for control of greenhouse gas emissions under the Clean Air Act. That program ultimately will likely have even further reaching implications than the federal programs for regulating and remediating waste, implicating all sectors of the economy and likely reaching many sources not affected by other federal environmental regulatory programs.

Proposed Endangerment Finding

The proposed endangerment finding represents what many believed would most likely result from the Supreme Court’s April 4, 2007, decision in Massachusetts v. EPA, 549 U.S. 497 (2007).  There, the Supreme Court reversed EPA’s denial of a petition to regulate greenhouse gas emissions from cars, trucks, and other “mobile sources” under section 202(a) of the Clean Air Act, 42 U.S.C. § 7521(a). The court remanded the decision to EPA to make the narrow determination “whether an air pollutant ‘causes, or contributes to, air pollution which may reasonably be anticipated to endanger public health or welfare.’” Id. at 32-33, quoted at 74 Fed. Reg. 18889. EPA would be required to make the finding unless it could show some specific reason grounded in the statute or “‘the scientific uncertainty is so profound that it precludes EPA from making a reasonable judgment as to whether greenhouse gases contribute to global warming,’ in which case EPA must so find.”  Id., citing Massachusetts v. EPA, supra at 534.

Because the endangerment finding would likely trigger regulatory actions across the economy under multiple sections of the Clean Air Act, EPA, under the prior administration, issued a lengthy Advance Notice of Proposed Rule Making on Regulating Greenhouse Gas Emissions Under the Clean Air Act, 73 Fed. Reg.44354 (July 30, 2008) (ANPR).  See Preparing for Economy-wide Federal and State Regulation of Greenhouse Gas Emissions Under the Next Administration: July 2008 Developments Presage a Different Future. The ANPR described the state of the science regarding endangerment, various legal and policy issues under the Clean Air Act, and various alternatives for regulating greenhouse gas emissions from mobile sources and other sources. However, it did not propose to make the endangerment finding or propose any specific rule.

EPA has now proposed making the endangerment finding. Although only four categories of greenhouse gases (carbon dioxide, methane, nitrous oxide, and hydrofluorcarbons) are emitted from mobile sources, EPA has proposed making the endangerment finding for “pollution” consisting of all six greenhouse gases (the other four, plus sulfur hexafluoride and perfluorocarbons). The proposed finding repeats and updates much of the ANPR’s discussion of that issue and relies on an updated version of the Technical Support Document that had accompanied the ANPR. EPA also responds to public comments on most of the legal and factual issues raised by the proposal.

Specifically, Administrator Lisa Jackson proposes to find that greenhouse gas pollution endangers both health and welfare and that it does so both in the United States and internationally. She has determined that she can make this finding both on the basis of a small likelihood of a catastrophic impact and a higher probability of less significant impacts. In unusually strong language for a rule proposal, she finds that “the case for finding that greenhouse gases in the atmosphere is compelling and, indeed, overwhelming.” Id. at 18904. She concludes

This is not a close case in which the magnitude of the harm is small and the probability great, or the magnitude large and the probability small. In both magnitude and probability, climate change is an enormous problem. The greenhouse gases that are responsible for it endanger public health and welfare within the meaning of the Clean Air Act. id.

The Administrator also finds that emissions from mobile sources cause or contribute to this pollution. She makes this finding based on the gases individually or collectively. She also makes the finding based on total emissions in the United States, total international emissions, and sectoral emissions both in the United States and internationally, again both by individual gas and the gases collectively.

The proposal also gives important indications of likely future regulatory directions. Although the Administrator finds that she can make a finding without simultaneously proposing regulations, she notes that she is “moving forward with this proposed endangerment finding and a cause or contribute determination while developing proposed standards under section 202(a).”  Id. at 18888-18889. Thus, a proposed rule for mobile source emissions can be expected shortly.  This is likely also true of other sources discussed at length in the ANPR, such as marine vessels, locomotives, airplanes, and some stationary sources.

The Administrator also notes EPA’s policy that the endangerment finding alone will not necessarily mean that the requirements of the New Source Review program will be triggered for greenhouse gases:

At this time, a final positive endangerment finding would not make the air pollutant found to cause or contribute to air pollution that endangers a regulated pollutant under the CAA’s Prevention of Significant Deterioration (PSD) program. See memorandum entitled ‘‘EPA’s Interpretation of Regulations that Determine Pollutants Covered By Federal Prevention of Significant Deterioration (PSD) Permit Program’’ (Dec. 18, 2008). EPA is reconsidering this memorandum and will be seeking public comment on the issues raised in it.  That proceeding, not this rulemaking, would be the appropriate venue for submitting comments on the issue of whether a final, positive endangerment finding under section 202(a) of the act should trigger the PSD program and the implications of the definition of air pollutant in that endangerment finding on the PSD program.

Id. at 18905, n. 2. However, even under the interpretation set forth in the memorandum under consideration, if EPA develops regulations limiting greenhouse gas emissions, NSR requirements will be triggered.

Reporting Rule

On April 10, 2009, EPA proposed a rule for mandatory annual reporting of greenhouse gas emissions. Mandatory Reporting of Greenhouse Gas Emissions, Proposed Rule, 74 Fed. Reg. 16448 (April 10, 2009). Congress required EPA to develop a greenhouse gas reporting rule pursuant to its existing authority under §§ 114(a)(1) and 208 of the Clean Air Act in the Consolidated Appropriations Act of 2008, Public Law 110-161, 121 Stat. 1844, 2128 (2008).  EPA states that the mandatory GHG reporting program will be used to assist in the development of climate policy.

The proposed rule requires annual reporting of GHGs by regulated facilities. These reports must include both the total GHG emissions for all source categories and mass emissions for each source category and supply category by gas. 74 Fed Reg 16462. GHGs whose emissions must be reported include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), and sulfur hexafluoride (SF6). § 98.6, 74 Fed. Reg. 16221, reported in carbon dioxide equivalents (CO2e).

Regulated facilities subject to reporting requirements include the following four categories: (1) facilities containing certain source categories, regardless of emission levels, § 98.2(a)(1); (2) facilities that emit 25,000 metric tons CO2e per year in combined emissions from those sources, § 98.2(a)(2); (3) stationary fuel combustion sources not otherwise listed with a maximum heat input capacity of 30 mmBtu/hr or greater and emitting 25,000 metric tons CO2e per year, § 98.2(a)(3); and (4)  suppliers of fossil fuels and industrial greenhouse gases, § 98.2(a)(4).  EPA estimates that 30,000 facilities will have to determine whether they have to report under § 98.2(a)(3). Of those, it predicts approximately 13,000 facilities will meet the threshold and have to report. 74 Fed. Reg. 16604.  For each source and supply category listed, the regulations define the category, set forth what GHGs must be reported, and explain how GHG emissions are calculated.

Section 98.2(b) sets forth the method for calculating whether a facility exceeds the 25,000-ton threshold: First, estimate the greenhouse gas emissions of each of the following sources using the methodologies in the applicable subpart: stationary fuel combustion units, miscellaneous uses of carbonate, and any applicable source category listed in § 98.2(a)(1).  § 98.2(b)(1).  Second, calculate the annual CO2 emissions, § 98.33(a); the annual CH4 and N2O emissions; convert those to carbon dioxide equivalents, § 98.33(c); and exclude carbon dioxide emissions from the combustion of biogenic fuels. Third, calculate the annual CO2 emissions of miscellaneous uses of carbonate, subpart U. (With regard to biomass fuels, although they do not count in determining whether emissions meet the threshold, they are subject to reporting requirements, if the facility meets the threshold.) The emissions from these calculations are then summed using an equation. § 98.2(g).

Once a facility has met the requirements in one year, that facility must continue to report GHG emissions in future years, even if the applicability requirements are not met in future years.  Companies must reevaluate each facility’s emissions whenever there is a process change or other change that may increase the facility’s emissions.

A facility that is subject to the reporting requirements must collect emissions data, calculate GHG emissions, and follow quality assurance, missing data, and recordkeeping reporting requirements. GHG emissions reports must be submitted electronically by March 31 of each year for emissions in the previous calendar year. §§ 98.3(b), 98.5. Under section 98.8, facilities that fail to satisfy the reporting requirements are subject to enforcement under the Clean Air Act.  Violations include “failure to report GHG emissions, failure to collect data needed to calculate GHG emissions, failure to continuously monitor and test as required, failure to retain records needed to verify the amount of GHG emissions, and failure to calculate GHG emissions following the methodologies specified in this part.”

EPA does not propose delegating authority for the reporting program to the states under section 114(b) of the Clean Air Act. However, it foresees a role for the states in educating facilities and ensuring compliance. In addition, EPA hopes to work with states to harmonize data management among the federal requirements and existing state or regional requirements. EPA invites comments on delegating authority to collect data and more general comments regarding the role of states in implementing the rule and interacting with EPA.

For a more detailed description of the reporting requirements, click here.

Future Directions

Both the endangerment finding and the reporting rule are proposals. This means that there is still an opportunity for comment and the possibility that both or either could be significantly modified or not adopted. Although EPA’s review of comments will likely result in small but significant modifications of the reporting rule, it is unlikely that EPA will not adopt either rule or make significant modifications in their broad outlines. Both the science and the statutory mandates are sufficiently clear that the regulated community can expect that EPA will adopt both regulations in roughly the form that they have been proposed.

This does not mean that the regulated community should not review the reporting rule carefully and comment, where appropriate. Measurement techniques, greenhouse gases released from particular processes, and the processes under consideration in the reporting rule involve technical issues where review and comment by the regulated sector could correct technical errors by the agency. Early review and preparation can also help those who will be regulated avoid missed deadlines and even identify opportunities for emissions reductions that can produce cost savings.  Many companies have found that programs to reduce greenhouse gas emissions reductions have helped them identify ways to reduce fuel use and reduce operating costs.

These proposals also provide sufficient details about some future regulatory directions that the regulated community can begin preparing now. We now know the following:

* There will most probably be an economy-wide program to regulate greenhouse gases under the Clean Air Act, unless Congress enacts legislation directing otherwise. There will therefore be additional regulatory costs associated with use of fossil fuels.

* It is unlikely that any legislation will significantly reduce the scope of regulation or eliminate costs. Although Congressmen Waxman and Markey have released a “discussion draft” of legislation that would limit regulation under some sections of the Clean Air Act, that legislation would also create a broad cap and trade system that will require industries emitting large amounts of greenhouse gases to buy, at auction, allowances for every ton of carbon dioxide or its equivalent emitted. The budget proposed by President Obama and passed by Congress also counts on emission-allowances auction revenues. Because the existing Clean Air Act authorizes creation of a cap and trade program even without legislation, it now appears inevitable that there will be a nationwide cap and trade system in the not-too-distant future.

* All six greenhouse gases will be regulated, and the regulation will weight them to carbon dioxide equivalents based on the ratios used internationally.

* Reporting will require additional efforts and costs on virtually all industrial and many public and commercial sectors. Environmental managers will need to pay close attention to those requirements.

* Categorical emissions standards for cars, trucks, and other mobile sources will soon be proposed. These will require capital expenditures from the manufacturers but, based on past experience, will likely reduce overall, lifetime costs for the users of those vehicles.

* Without legislation, requirements for new source review, emissions standards for stationary sources, and requirements for national ambient air quality standards and state implementation plans will follow. The exact mix of features that will ultimately emerge is more difficult to predict, but cap and trade will likely be part of the mix, with or without legislation.

These proposals will provide additional ammunition for those who have been relying on climate change issues to challenge permits for major industrial facilities. Organizations that will require air permits for major facilities might consider undertaking a Best Available Control Technology (BACT) assessment for greenhouse gas emissions in permit applications to make themselves less vulnerable to attack in potential permit appeals.

These requirements also have implications for reporting requirements for publicly traded companies, which should carefully review their reporting in light of both these new requirements and the reported emissions levels. See Developments Increase Pressure for Climate Change Disclosure Under SEC Regulations.

Those who are facing regulation would be well advised to begin preparing. Managers should review the proposed reporting rule to determine (1) what facilities, if any, will be required to report; (2) whether the organization should prepare comments to seek to change the requirements; and (3) what will need to be done to ensure compliance with the reporting rule. In so doing, the organization should consider reviewing its operations to determine whether there are “low-hanging fruit” in the form of opportunities to achieve cost savings through greenhouse gas reductions. Those cost savings might be achieved through increased energy efficiency or the capture of products that might otherwise be lost. Affected organizations should ensure that any early reductions are reported in one or more of the registries that have already been established. Although the applicability of new source review requirements remains unclear, organizations that are already regulated should consider including a greenhouse gas BACT assessment in permit applications for new or modified sources in order to make themselves less vulnerable to attack in potential permit appeals. Companies should also carefully review  any permitting requirements associated with these actions. Finally, publicly traded companies should assess the implications of all of these actions on their reporting requirements under securities laws.

Copyright 2009 by Ballard Spahr Andrews & Ingersoll, LLP. This periodic e-publication of Ballard Spahr aims to notify recipients about legal developments. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The content is intended for general information purposes only. You are advised to consult your Ballard or other lawyer regarding your specific legal situation. This publication is available online at www.ballardspahr.com.