United States: Greenhouse Gas Emissions from Power Plants: What’s in Store for New and Existing Plants?

Among the various Clean Air Act programs, it has been suggested that the New Source Performance Standards program provides the best vehicle for a manageable and effective reduction in greenhouse gas emissions. On June 25 President Barack Obama issued a memorandum directing the U.S. Environmental Protection Agency to issue final "standards, regulations or guidelines, as appropriate," under Sections 111(b) and 111(d) of the CAA (i.e., the NSPS) to regulate GHG emissions from new and existing power plants.¹ To implement this broad directive in the timeframe ordered by the president, the EPA has proposed performance standards for new sources and has begun the process of devising a regulatory plan for existing plants. This article discusses these forthcoming regulations and the kinks that will probably be ironed out through litigation.

The EPA's Current Regulation of Greenhouse Gases

Carbon dioxide is an air pollutant that can be regulated under the CAA. The Supreme Court settled this issue six years ago in Massachusetts v. EPA.² Since that decision, the EPA now has on the books a handful of regulations curtailing GHG emissions. The most significant of these regulations are those pertaining to motor vehicles (in a regulation referred to as its "tailpipe rule")³ monitoring requirements for GHG emissions from stationary sources⁴ and the GHG "tailoring rule" identifying stationary sources that will have to install best available control technology under the CAA's Prevention of Significant Deterioration program and obtain Title V operating permits according to their GHG emissions.⁵

The EPA continues to move forward with its regulation of GHGs from stationary sources according to the timelines in the president's directive. On Sept. 20 it announced its proposal to regulate CO2 emissions from new power plants.⁶ On the heels of the EPA's proposal, the U.S. Supreme Court issued a significant victory for the EPA via an order denying certiorari to challengers of the EPA's tailpipe rule and solidifying the EPA's endangerment finding for mobile-source GHG emissions.⁷ Thus, the question going forward should be how should the EPA regulate GHGs, not can it regulate them.

Statutory Background for Regulating Greenhouse Gases under CAA Section 111

New and existing emissions sources are subject to rules crafted under two distinct but related provisions of Section 111 of the CAA. Regulation of GHG emissions from new, modified or reconstructed sources is governed by Section 111(b), whereas Section 111(d) allows the EPA to set existing source performance standards, or ESPS for power plants but authorizes states to develop plans to implement those standards.⁸ The president's June 25 memorandum directed the EPA to prepare flexible standards, regulations or guidelines, as appropriate, for existing power plants, and the EPA is currently soliciting input from states as to the best approaches for ESPS.⁹ The ESPS cannot be finalized until a final standard is in place for new power plants.¹⁰

The contrast between Sections 111(b) and 111(d) is significant. Section 111(b) vests more authority in the EPA and allows it to set numerical performance standards regulating GHG emissions — a more straightforward approach than Section 111(d). In order to establish these specific emission caps, the EPA must identify emission-reduction technology that has been adequately demonstrated.¹¹ Similarly, the EPA must identify a "best system of emission reduction," or BSER, in preparing guidelines for state implementation of ESPSs, although the identified system may be different from that identified for the new source performance standards. Section 111(b) standards are implemented by the states, but states have little, if any, flexibility to alter the standards set by the EPA.

The EPA's NSPS Proposal Regarding Power Plants

In lockstep with the president's deadlines for EPA GHG regulation, on Sept. 20 the agency proposed an NSPS that limits CO2 emissions from new power plants.¹² Briefly, the proposal suggests adoption of separate limits for five subcategories of power plants, with more lenient standards for three subcategories: coal-fired, petroleum coke-fired and integrated gasification combined cycle, or IGCC, units, which will be subject to an emissions limit of 1,100 lb CO2/MWh, according to a 12-month rolling-average compliance period. The EPA is also proposing an alternative standard between 1,000 and 1,050 lb CO2/MWh according to an 84-month rolling-average compliance period. To meet either limitation, the EPA has identified carbon capture and sequestration, or CCS, as a BSER that will be necessary to achieve the standards. The remaining two subcategories apply to natural gas plants — these power- generating units will not need additional emissions controls to meet the CO2 limits of 1,000 lb CO2/MWh (1,100 lb CO2/MWh for small gas-fired turbines) proposed by the EPA.

The EPA's proposal relies in part on its projections that the price of natural gas is, and will continue to be, below the cost of producing electricity by burning coal. The proposal states that because of the current economies of natural gas, few if any new coal-fired electricity-generating units will be built in the near term. This may be true; however, if the price of natural gas increases, new coal-fired plants could return to the list of energy alternatives if CCS was not included as part of the cost equation. Industry is not likely to let the EPA's conclusions go unchecked, and thus challenges based upon the Section 111 requirement that the BSER be adequately demonstrated will probably follow the EPA's final rule.

The EPA can also expect its selection of CCS as the BSER to be tested. With limited evidence to support its success, the EPA's CCS proposal is essentially a technology-forcing rule. The agency has been successful in advancing this type of regulation in the past and has demonstrated in practice that it is authorized by the CAA to do so,¹³ but the difference this time around may be the lack of any current operating facilities (power plants or otherwise) that use CCS. The EPA's reliance on CCS to set the NSPS for new power plants is based on only two CCS systems that are still under construction or development — Southern Co.'s Kemper County Energy Facility (an IGCC facility that will implement partial CCS) and SaskPower's Boundary Dam CCS Project in Estevan, Saskatchewan. This, along with the fact that CCS is not available in all areas, will certainly be called into question during the rulemaking process and in subsequent litigation.

The Impact of the Power Plant CO₂ NSPS on the ESPS

The new power plant NSPS, although not hollow, will have a very limited effect in reducing GHG emissions in the near term, presuming the EPA's forecast for new coal-fired power plants is accurate. The more significant impact on GHG emissions is likely to come from the ESPS. But the new-source standards are not without import, since they could shape the guidelines for existing sources.

For one, in its new source proposal, the EPA suggests two options for codifying the substantive requirements of the CO2 NSPS. The agency first proposes to codify the CO2 NSPS for new power plants in already established source categories — 40 CFR 60 Subpart Da for coal-fired and IGCC utility units, and Subpart KKKK for stationary combustion turbines (natural gas units).

Alternatively, the EPA could create a new Subpart (TTTT) and include all standards of performance for each of the covered sources in that subpart. The new Subpart TTTT would contain a subcategory for utility boilers and IGCC units and a separate category for natural gas–fired stationary combustion turbines. The EPA seems to acknowledge that this approach is riskier because it could open the door to litigation on the premise that the EPA was required to issue an endangerment finding specific to the new source category — arguably something it does not need to do, and even so, has already done in its proposal.¹⁴

However, the categorical distinction could prove to be important for the EPA's next phase of regulation — performance standards for existing power plants. Under Section 111(d), the EPA will establish emissions guidelines that will be implemented through state programs. A workable and cost-effective regulatory framework will need to accommodate averaging, trading or other market-based options for compliance across the regulated source categories. Indeed, proposals put forth by several non-governmental organizations — the Natural Resources Defense Council, the World Resources Initiative and Resources for the Future, for example — acknowledge that anything other than a market-based approach will result in greater cost to affected sources.¹⁵

There is no express statutory bar to trading across Section 111 source categories; however, there is a lack of express authority. Whether a cross-category trading system meets federal requirements will therefore depend on whether (and how) the federal regulations allow for cross-category trading and whether such cross-sector trading is ultimately upheld as meeting the requirements of Section 111. To accommodate a structure using separate source categories to reduce CO2 emissions, the EPA will have to establish a reliable method for gauging compliance across two or more source categories.

Acknowledging the potential complexities posed by either approach, the EPA has solicited comments as to whether it should retain the existing source categories or combine the two, although it appears to be favoring what it believes to be the potentially less contentious route of maintaining existing source categories.¹⁶

ESPS Could Be Based on a Non-Technology-Based BSER

As with the NSPS, the ESPS will be based on a BSER identified by the EPA. The new power plant BSER is clearly technology-based, as traditionally a BSER is. If the EPA desires to give states the ability to implement market-based emissions-reduction policies to achieve the ESPS, the agency will have to claim that trading (and/or averaging and banking) itself is a BSER.¹⁷ The risks associated with this will be twofold. First, there is no precedent for emissions trading between source categories (if the EPA does not create the TTTT category to combine sources). Second, there is no precedent for allowing market-based approaches such as cap-and-trade programs under Section 111, period.¹⁸ Defining a BSER as emission trading might create an open wound for the litigious to poke, but a practical consequence of a successful challenge could be counterproductive. In other words, it could force the EPA to hand down less flexible and more costly guidelines for states to implement.

State Implementation Options and Flexibility for Power Plant ESPS Implementation

The EPA has been instructed to provide "flexible" ESPS guidelines and has indicated its intent to do so. But states probably will not have unfettered discretion in the tools they use to meet the emission reduction benchmark set by the EPA. Each state's implementation plan will be subject to approval by the EPA, and the state will have to demonstrate that its suite of compliance options will achieve the reduction in CO2 emissions required under the ESPS. In addition, the notion of "cooperative federalism" embodied by the CAA may inspire the EPA to draft more tailored guidelines.

Section 111(d) allows states to prepare a plan to implement the ESPS set by the EPA, but the EPA has authority under the CAA to disapprove state plans and impose its own. A state's implementation plan must be "adequate," but beyond this, there are no criteria by which the EPA is to judge a state's plan. A recent string of court rulings has upheld the EPA decisions that have overridden state regulation (or the failure of a state to regulate).¹⁹ However, the District of Columbia U.S. Circuit Court of Appeals recently struck down the EPA's Cross-State Air Pollution Rule, citing as a reason for its decision the EPA's violation of cooperative federalism.²⁰ Although there is ample judicial support giving credence to the EPA's authority to override a state plan, as a cautious measure, the EPA will have to balance its guidelines so as not to overstep state responsibilities under the CAA.

Some options that states might use to meet the ESPS include the ability to set performance standards equivalent to or more stringent than the reduction targets set in the EPA's ESPS, to implement a "hard" cap-and-trade program or to establish a flexible compliance standard according to which a source could comply with a rate-based standard directly or accrue credits to bank or trade.²¹ Other compliance measures that states might use are renewable portfolio requirements and energy efficiency and conservation programs, to name a few. The EPA is required to consider cost under Section 111, so given the large number of possible options that states may pursue with a flexible emission guideline, the EPA's presentation of a reasonable cost estimate will not be simple and creates some vulnerability for the agency.

The Takeaway

In sum, the question does not appear to be whether the EPA can regulate GHGs under the NSPS — that ship may have already sailed — particularly in the wake of recent Supreme Court orders denying certiorari by appellants requesting a review of the EPA's endangerment finding as to GHGs from mobile sources in the context of stationary sources. Without legislation, the regulated community will probably be stuck with regulation under Section 111 of the CAA. The real focus, then, should be on how the EPA can regulate GHGs. Thus, creating a flexible, cost-effective approach for reductions of GHG emissions at stationary sources should be the primary concern of stakeholders. To be sure, each of these variables will be tested in court, and the flexibility and cost of any EPA proposal, as well as its overall viability, will depend on whether the courts hold that the CAA allows the EPA to use the slate of tools available to it (e.g., banking and trading, averaging and cap-and-trade programs).

Footnotes

1. Presidential Memorandum — Power Sector Carbon Pollution Standards, available at http://www.whitehouse.gov/the-press-office/2013/06/25/presidential-memorandum-power-sector-carbon-pollution-standards.

2. 549 U.S. 497, 127 S. Ct. 1438 (2007).

3. 75 Fed. Reg. 25324 (May 7, 2010).

4. 74 Fed. Reg. 56260 (Oct. 30, 2009).

5. 75 Fed. Reg. 31514 (June 3, 2010).

6. The proposed rule was not published in the Federal Register as of the date this article was published; however, a copy of the proposal is available at http://www2.epa.gov/sites/production/files/2013-09/documents/20130920proposal.pdf.

7. Virginia v. EPA, 12-1152; Pac. Legal Found. v. EPA, No. 12-1153; and Coal. for Responsible Regulation v. EPA, No. 12-1253, cert. denied, 571 U.S. ____ (Oct. 11, 2013). In the same order, the Supreme Court granted certiorari to address the question of whether the EPA's GHG regulations for vehicles necessarily trigger the regulation of stationary sources. Although the outcome of that case could potentially scrap or alter the timing and tailoring PSD rules, it probably will have no conceivable effect on the forthcoming Section 111 standards. The court granted petitions for certiorari in Util. Air Regulatory Group v. EPA, 12-1146; Am. Chem. Council v. EPA, No. 12-1248; Energy-Intensive Mfr. v. EPA, No. 12-1254; Se. Legal Found. v. EPA, No. 12-1268; Texas v. EPA, No. 12- 1269; and Chamber of Commerce v. EPA, No. 12- 1272 cert. granted in part, 571 U.S. ____ (Oct. 11, 2013).

8. 42 U.S.C. § 7411.

9. See note 1, supra and http://www2.epa.gov/%20carbon-pollution-standards/public-listening-sessions, Carbon Pollution Standards: Public Listening Sessions (EPA stakeholder input notice).

10. 42 U.S.C. § 7411(d).

11. 42 U.S.C. § 7411.

12. 12 See note 6, supra.

13. See Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375 (D.C. Cir. 1973); Sierra Club v. Costle, 657 F.2d 298, 326 (D.C. Cir. 1981). The Supreme Court has also acknowledged that the CAA was intended to be technology forcing. Union Elec. Co. v. EPA, 427 U.S. 246, 247 (1976).

14. See note 6, supra at 120-130.

15. Greenhouse Gas Regulation under the Clean Air Act: Structure, Effects & Implications of a Knowable Pathway, Resources for the Future (April 2010); Can the U.S. Get There from Here? Using Exiting Federal Laws and State Action to Reduce Greenhouse Gas Emissions, World Resources Institute (2013); Closing the Power Plant Carbon Pollution Loophole: Smart Ways the Clean Air Act Can Clean Up America's Biggest Climate Polluters, Natural Resources Defense Council (March 2013).

16. See note 6, supra at 130.

17. See Closing the Power Plant, at n. 65.

18. The EPA has already briefed its ability to allow cap and trade under Section 111 in prior litigation before the D.C. Circuit over its Clean Air Mercury Rule, but the court did not acknowledge the issue in deciding the case. See New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008).

19. Texas v. EPA, 726 F.3d 180 (D.C. Cir. 2013) (upholding EPA rules overriding Texas' GHG permitting authority for stationary sources); Oklahoma v. EPA, 723 F.3d 1201 (10th Cir. 2013) (backing the EPA's rejection of Oklahoma's Best Available Retrofit Technology determination for haze and recognizing the agency's statutory authority do so); GenOn Rema LLC v. EPA, 722 F.3d 513 (upholding the EPA's approval of a "good neighbor" petition regulating a source in advance of state rule revisions).

20. EME Homer City v. EPA, 696 F.3d 7 (D.C. Cir. 2012) (EPA's Cross-State Air Pollution Rule overstepped the CAA's principles of cooperative federalism by regulating in the place of states).

21. GHG New Source Performance Standards for the Power Sector: Options for EPA and the States, Pew Center on Global Climate Change (Mar. 17, 2011).

This article was first published in the December 4, 2013 issue of Westlaw Journal Environmental (Volume 34, Issue 10). Reprinted here with permission of Andrews Publications, a Thomson Reuters business © 2013.

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