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By Deborah E. Jennings, Andrew B. Schatz and Catherine B. Campbell
The Environmental Protection Agency has announced long-awaited regulations to reduce carbon-dioxide (CO2) emissions from existing power plants pursuant to the Clean Air Act. EPA's Clean Power Plan would for the first time establish national limits on carbon emissions from existing power plants, reducing CO2 emissions intensity by 30 percent below 2005 levels by 2030.
States would also be required to meet an interim average emissions-intensity goal over the ten-year period from 2020-2029. The proposed rule will allow each state flexibility to develop its own plan to meet applicable CO2 emissions limits.
If the rule stands as proposed, the Clean Power Plan would be the single most significant step ever taken by the United States to curb emissions responsible for causing climate change.
The proposed regulations would cover fossil-fuel based electricity generators (approximately 1,000 fossil-fuel fired power plants), with the greatest impacts to be felt by coal burning utilities. As a whole, the electricity sector is responsible for 40 percent of national greenhouse gas (GHG) emissions, the largest single source of emissions in the United States. Given that coal represents approximately 37 percent of national electric power generation, but 74 percent of GHG emissions from the electricity sector, utilities dependent on coal will bear a disproportionate share of the costs of implementing the rule. By contrast, because natural gas represents closer to 30 percent of electric power generation, but only 24 percent of electricity sector GHG emissions, there may be a significant increase in the demand for natural gas. In its current form, the proposed regulation could potentially lead to a fundamental reshaping of the electricity sector once finalized. CO2 emissions “intensity goal” on a state-by-state basis
EPA’s approach marks a departure from the current regulation of most air pollutants under the Clean Air Act. Under the proposed rule, EPA would set a statewide limit on the carbon-intensity of a state’s electric power sector. Each state would have to meet a “rate-based goal” according to the following formula: CO2 emissions from fossil fuel-fired power plants in pounds divided by state electricity generation from fossil-fuel fired power plants and certain low- or zero-emitting power sources in megawatt hours (MWh). All states would be required to reduce their emissions intensity by 30 percent below 2005 levels, regardless of their electricity mix.
In setting each state’s emissions intensity goal, EPA created a consistent national formula taking into consideration four sets of practices – or “building blocks” – currently used by states and utilities that EPA deemed collectively make up the “best system for reducing carbon pollution.”
These building blocks are:
(1) Improving energy efficiency at fossil fuel power plants (increasing heat rates by 6 percent at coal-fired power plants)
(2) Operating existing low GHG emitting sources more frequently (encouraging dispatch of natural gas combined cycle plants so that they would operate with as much as a 70 percent capacity factor)
(3) Increasing electricity generation from zero and low emitting sources (encouraging dispatch to nuclear and renewable sources of power) and
(4) Reducing electricity demand (to achieve 1.5 percent annual electricity savings from 2020-2029).
EPA then applied each of these building blocks to a state’s electric generation fleet to arrive at each state’s emissions intensity goal.
The use of carbon intensity standard is particularly noteworthy, because it could still allow a state to increase overall GHG emissions (i.e., by building a natural gas-fired power plant), even though average statewide CO2/MWh might decline. EPA is also giving states the option to use an aggregate limit on total CO2 emissions (i.e., a “mass-based goal”), which would allow states to set a harder cap on their CO2 emissions and set up a trading program if they desire. In either case, states would be required to ensure that fossil fuel-fired power plants maintain CO2 emissions below the carbon intensity or aggregate target by adhering to the state’s compliance plan.
Flexibility of compliance with the Clean Power Plan
Under the terms of the proposed rule, both states and companies could have significant flexibility in meeting any future emissions limits – depending on how a state structures its own compliance plan. A state or individual facility could use one of the four building blocks to reduce its CO2 emissions, or it could adopt any other measure, such as renewable energy portfolio standards or demand-side energy efficiency measures. Likewise, power companies could potentially reduce emissions at an individual facility or invest in efforts to reduce emissions off-site.
States may also create or join existing cap-and-trade programs, such as the Northeast’s Regional Greenhouse Gas Initiative (RGGI) or California’s Cap and Trade program. Under such programs, all facilities are subject to a cumulative limit on GHG emissions, and are either granted or must purchase allowances (i.e., credits) to emit GHGs. Companies more efficient at reducing their emissions will either have less need to purchase credits or can sell any excess credits for a profit. Depending on the state or regional program, companies may also have the option to purchase offsets generated by renewable energy projects or emission reduction projects in other sectors, such as the forestry, agricultural, or industrial sectors, or even from other US or foreign jurisdictions.
Timeline for emissions reductions
EPA is proposing a two-step process for states to comply with the Clean Power Plan. EPA will set emission reduction goals on a state-by-state basis, taking into account pre-existing GHG reductions for each state. States will first be required to meet an interim average emissions-intensity goal over the ten-year period from 2020-2029. Secondly, states must achieve a final emissions-intensity goal by 2030 and thereafter.
EPA is proposing two options for required CO2 reductions under the rule. Under its preferred option, states would reduce CO2 emissions by 26-27 percent below 2005 levels by 2020, and 30 percent below 2005 levels by 2030. Its second option would reduce emissions by 23 percent in 2020 and 23-24 percent in 2025, compared to 2005 levels.
Submitting state compliance plans
States will generally have until June 2016 to submit their compliance plans to EPA. Once a state submits a complete plan, EPA will review the plan and make a determination, within 12 months, to approve or disapprove the plan through a notice-and-comment rulemaking process.
If a state is unable to submit its complete plan by June 2016, it may instead submit an initial plan at that time, and subsequently send a complete plan by June 2017. If a state decides to join with other states to submit a multi-state plan, it is eligible for a two-year extension. These states must submit a progress report by June 2017 and a complete multi-state plan by June 2018. The proposed deadlines are summarized as follows:
June 30, 2016 – Initial plan or complete plan due
June 30, 2017 – Complete individual plan due if state is eligible for a one‐year extension
June 30, 2018 – Complete multi‐state plan due if state is eligible for two year extension (with progress report due June 30, 2017)
States with existing energy efficiency programs will be able to build on these programs during the compliance period to help meet their goals.
Foundation for the Clean Power Plan: Clean Air Act Section § 111(d)
In promulgating this rule, EPA is asserting its authority under Section 111(d) of the Clean Air Act. Section 111 (Standards of Performance for New Stationary Sources) generally requires EPA to develop regulations for each new source within a category which cause or significantly contribute to air pollution which may endanger public health or welfare.
Section 111(d) requires states to develop plans establishing “standards of performance” for existing sources of non-criteria pollutants (i.e., a pollutant for which there is no national ambient air quality standard) whenever EPA promulgates a standard for a new source. Because EPA is currently finalizing its regulation of CO2 from new fossil-fuel power plants, it has now moved forward with the process of promulgating regulations for existing sources of CO2 in the electric utility sector under 111(d). This provision requires states to submit for EPA review and approval “standards of performance” for existing sources. In support of its expansive interpretation of the statute to include cap-and-trade and other flexibility mechanisms, EPA relies on the definition of “standards of performance,” which means:
a standard for the emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated.
42 U.S.C. 7411(a)(1)(emphasis added). EPA thus contends that a combination of existing measures to reduce CO2 emissions – including, but not limited to the four “building blocks”– represents the “best system of emission reduction” which has been adequately demonstrated. See EPA Fact Sheet: Clean Power Plan, National Framework For States - Setting State Goals To Cut Carbon Pollution (June 2, 2014), available here.
Potential challenges to the Clean Power Plan
Once finalized, EPA’s rule will likely face numerous legal challenges. For example, some commentators have suggested that EPA may not use a “mass-based approach” establishing a standard based on emissions reductions occurring beyond the confines of an individual facility. These commentators have argued that EPA may only regulate facilities on a unit by unit basis, instead of using off-site programs and projects to implement the provisions of the Clean Air Act, such as efforts to reduce consumer demand for electricity.
Another possible legal challenge would be that offsets are not permissible because the concept is incompatible with the source category design of Section 111.
Finally, environmental groups have already expressed disappointment that EPA selected 2005 as the baseline, as opposed to a later date, because many states have already reduced their carbon-intensity since 2005 due to a shift towards more natural gas usage.
Existing EPA measures to curb GHGs
In any event, EPA’s Clean Power Plan represents the most significant of many policies put forward by the Obama Administration to reduce national greenhouse gas emissions.
After the Supreme Court in Massachusetts v. EPA ruled EPA had the authority to regulate GHGs under the Clean Air Act, the Obama Administration issued its endangerment finding on December 7, 2009, concluding GHGs threatened public health and welfare. EPA subsequently set joint GHG / Corporate Average Fuel Economy (CAFE) Standards for motor vehicles, raising average industry fleetwide GHG standards to 163 grams/mile of CO2 in model year 2025, which is equivalent to 54.5 miles per gallon (mpg). EPA later issued its GHG Tailoring Rule, effective in 2011, regulating GHGs from modified or new stationary sources with GHG emissions greater than 75,000 or 100,000 tons/year CO2-equivalent, respectively. This rule is currently under consideration by the Supreme Court in Utility Air Regulatory Group v. EPA.
As noted earlier, EPA is currently finalizing its proposed rule establishing separate New Source Performance Standards for coal and natural gas-fired electric generating facilities. New natural gas-fired stationary combustion units would be required to meet a 1,000 lb CO2/MWh gross limit for larger units (> 850 mmBtu/hr) and 1,100 lb CO2/MWh gross limit for smaller units (≤ 850 mmBtu/hr). Meanwhile, new fossil fuel-fired utility boilers and integrated gasification combined cycle (IGCC) units would have to meet one of the following standards (with some carbon capture and storage), depending on the compliance period chosen: 1,100 lb CO2/MWh gross over a 12-operating month period; or 1,000-1,050 lb CO2/MWh gross over an 84-operating month (seven-year) period.
How to participate in the rulemaking?
EPA will accept comments on the proposed rule for 120 days after publication in the Federal Register (potentially until mid-October 2014) and will hold four public hearings on the proposed Clean Power Plan during the week of July 28 in Denver, Atlanta, Washington, DC, and Pittsburgh. President Obama has directed that the rule be finalized by June 2015. It is important to submit your comments on the rule to EPA on a timely basis for consideration as EPA works to finalize its rule, and to preserve standing to file a petition for review of the rule.
DLA Piper represents a wide range of clients in the coal, natural gas, nuclear and renewable energy sectors and in electricity markets. Please reach out to DLA Piper for any advice or assistance in providing your comments on the proposed rule or interpreting any of EPA’s new climate change regulations.
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