Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

The twists and turns in the saga of regulation greenhouse gases (GHGs) continue.  After the State of the Union and release of the President's budget, there is speculation that President Obama has abandoned Cap & Trade legislation. 

Meanwhile, businesses face greater risk as a result of new and impending regulatory action.  The Securities and Exchange Commission (SEC) has issued guidance telling companies they must disclosure risks to investors related to the company's exposure to effects of climate change and potential regulations. Finally, EPA is moving ahead with its plans to regulate GHGs using existing authority under the Clean Air Act.

Is Cap & Trade Dead or Alive?

The President only made vague references in the State of the Union to a "comprehensive energy legislation" that will include measures to address climate change.  Speculation was that the Obama Administration had made the decision to drop its plans for Cap & Trade.  The speculation increased with the release of the proposed federal budget, which dropped $646 billion in anticipated revenue from Cap & Trade.  The President only included a "placeholder" for that revenue.

Carol Browner, the President's Climate Adviser, pushed back on the notion Cap & Trade is dead.  This from Politico:

The top White House climate adviser pushed back against reports that a climate bill would be scaled back — but shied away from giving an exact time frame for when the Senate should take up the legislation.

“I think predictions about when something is going to happen in the legislative process are very, very hard to make you have to just continue working at it,” Carol Browner told an audience assembled for a climate and energy forum. “We’re encouraged by what we are seeing, and we’re going to continue working at it.”

In hopes of keeping a bi-partisan compromise alive in the Senate, the President put more nuclear power on the table in State of the Union.  There is also discussion of a scaled back Cap & Trade proposal that would be limited only to utilities. 

Even with a scaled back proposal or other compromises, I see it very hard to get to 60 votes in the Senate.  Which makes the next update the critical issue.

EPA Rulemaking

While some businesses think the reduced prospects of a Cap & Trade bill means they have escaped potential climate change regulation, they may have a major wake up call this March.  EPA is planning on moving forward with a series of regulations that will have dramatic impacts on businesses that emit CO2 and other greenhouse gases.

EPA has finalized its "Endangerment Finding."  This paves the way for the Agency's release of the Light Duty Vehicle Rule which will establish GHG emission standards for vehicles.  As previously discussed in prior posts, finalization of mandatory emission limits for vehicles raises GHGs to "regulated pollutant" status under the Clean Air Act.  

Once GHGs are considered "regulated pollutants", other provisions of the Clean Air Act are automatically triggered, most notably Title V permitting and New Source Review (NSR).  EPA is proposing to finalize its "tailoring rule" simultaneously with the Light Duty Vehicle Rule in order to substantially raise the thresholds for triggering Title V permits or NSR.

The likelihood of regulations was further evidenced by the President's proposed budget, which includes significant increase funding to pay for new EPA regulatory initiatives on climate change. (Summary of EPA proposed budget)

• $47 million more the EPA in the 2011  budget to pay for greenhouse gas regulation
• $4 million would go to the EPA's mandatory greenhouse gas reporting rule.  Major emitters of greenhouse gases must start tracking their emissions this year under EPA's reporting rule.
• $25 million to States to aid in processing new permits that will be required as a result of greenhouse gases becoming a regulated pollutant under the Clean Air Act.
• $7 million is allocated to development of new performance standards including determining what constitutes Best Available Control Technology (BACT) for greenhouse gases.

SEC Interpretative Guidance

On January 27th, the SEC voted to issuance guidance requiring companies to disclose certain risks associated with climate change. The 3-2 vote was highly controversial. 

While some saw the SEC action as an political endorsement of climate change regulation, others believe its the job of the SEC to require disclosure of business risks.  The NY Times, in an editorial, supported increased information on corporate risk associated with climate change-"The S.E.C. action is simply one more incentive for investors and managers to better understand the risks — and the opportunities — out there for publicly traded businesses. "

 From the press release, here is a description of the requirements in the forthcoming guidance:

• Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

• Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

While the prospects for Cap &Trade legislation have dimmed dramatically over the last few months, this is by no means the end of the story.  Significant new mandatory regulations will be finalized as early as March. 

While there are issues with the House version of the Cap & Trade bill, it would at least create a market mechanism for reducing emissions.  Business opposing Cap & Trade may soon learn that the alternative- regulation under the Clean Air Act- is a far worse proposition.

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The past two days I have been in Houston at the Environmental Markets Association (EMA) fall conference.  If you are not familiar with the EMA, it is an organization that supports the use of market-based solutions to environmental issues.  The members are largely made up of consultants, traders of environmental credits and project developers. 

Many of the members were on the ground floor when the first cap and trade programs were implemented in the 90's regarding acid rain.  The also participated in the two cap and trade programs on utilities that followed acid rain- NOx SIP call and CAIR. 

Finally, there is also expertise in the burgeoning carbon markets.  Whether that involves the "voluntary markets" in the U.S., state mandatory programs like RGGI in the east, or the international cap and trade program in the European Union.

Bottom line, these folks have the expertise in trading various environmental credits under a wide range of programs.  They have seen what has worked (acid rain) and what hasn't worked (collapse of the CAIR program). 

The big topic of course is the Waxman-Markey and Kerry-Boxer bills pending in Congress.  There was a lot of discussion regarding the various elements of these bills.  From the various perspectives offered over the last few days I draw the following perspectives regarding the drive for a federal CO2 cap and trade program in the U.S.:

• Complexity- Many expressed concern that the Waxman-Markey Bill is overly complex.  That instead of focusing on setting up a core program- namely putting a price on carbon-the bill tries to dictate the minutia around the program.  The more complex the program the more difficult it is to operate.
• Offsets- Many concentrated on the debate over the domestic and international offset programs.  There appeared to be consensus that an offset program was absolutely key to bringing down the cost of compliance.  The concern expressed was that both Waxman-Markey and Boxer-Kerry put too many conditions on the offset program.  These include limiting how many offsets each company can use for compliance.  What types of offsets will qualify.  How quickly EPA can certify the verification procedures for creating offsets. 
• Stabenow-Baucus Offsets Bill- This bill is seen as a mechanism to clean up what is wrong with the offset programs established in the other bills.  A lot of hope was being placed on this being the vehicle to correct the problems.
• EPA Preclusion-  While not receiving a lot of attention, a huge difference between the House and Senate bills is whether EPA is precluded from regulating greenhouse gases under the Clean Air Act.  House says EPA is precluded, Senate does not.  As I have discussed on in prior posts, this is a huge issue.  In fact, one of the main reasons to set up a cap and trade program is to pre-empt EPA from establishing an unworkable command and control program under the Clean Air Act.
• Stability Reserve-  This is the concept of trying to address carbon prices getting to high after the program is established.  Rather than simply placing a cap on prices, both bills create the concept of a reserve of allowances that could be released if prices get to high.  This is not a cap, if the trigger is met it allows future allowances to be auctioned off.   EPA is supposed to take the proceeds from the auctions and purchase offsets to make the impact of releasing more allowance neutral.  The concern on the stability reserves were: 1) the triggers to tap into the reserve and whether it really can control prices from getting too high; and 2)  what happens if not enough offsets are available for EPA to purchase because all the limitations placed on which types of offset qualify.
• Verification Procedures for Offsets-  The Senate would require notice and comment on every offset project which was seen as overly cumbersome.  The House allows pre-compliance offset credits to qualify for only 2009-2012. Also, projects must meet either a state verification procedure or one deemed by EPA as stringent as a state verification procedure.  The short duration of pre-compliance offset projects was concerning because it may severely limit available offset credits after 2012.  The limitations on verification procedures could disqualify many projects that went through non-state certified verification procedures. 

Many more observations and comments were made.  I certainly learned a lot from the experts who work have been working in environmental markets since the 1990's.  Their expertise certainly should carry a lot of weight with Congress.  Otherwise, we risk have politicians set up a program that is doomed to failure from the start.

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U.S. EPA has initiated the process for determining what controls it will require should it finalize its proposal to regulate large industrial sources of greenhouse gases (GHGs).  As discussed in a prior post, the first phase of the program would cover sources emitting more than 25,000 tons of CO2 or equivalent emissions.  In subsequent phases of the program smaller sources would likely be covered.

Under EPA's proposal GHGs would become a pollutant covered under its New Source Review (NSR) program.  NSR requires new or modified sources that emit over established thresholds to install Best Available Control Technology (BACT).  The question is...what are the "best available" controls for reducing GHG emissions? 

I was interviewed for a story appearing in Climatewire that discussed the complexities involving in determining BACT for GHGs.  Unlike many mainstream media newspaper articles, the Climatewire article does an excellent job of providing an analysis of the issues related to implementation of this complex regulatory program. 

Two major issues:

1. What is BACT going to be for non-utility pollution sources? 
2. How on earth will EPA determine BACT for a wide variety of sources by its stated deadline of March 2010?

Efficiency improvements co-firing biomass are the two most likely candidates for utility sources.  But less analysis is known regarding potential methods to reduce GHGs emissions from other potentially covered sources like cement and steel production facilities. 

The preamble to U.S. EPA's proposed NSR GHG regulations makes clear the Agency believe the rules must be finalized by March 2010 because they must coincide with the rule regulating GHGs from light duty vehicles.  It seems like an impossible task to determine BACT for the range of sources that will be potentially covered in less than six (6) months.   Without established BACT standards, there is likely to be massive uncertainty and delays in permitting. 

[A complete re-printing of the Climatewire article is available in the extended entry with their permission]

photo: everystockphoto- cjohnson7

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On September 30th, U.S. EPA announced the release of its proposed rule regulating emissions of greenhouse gases (GHGs) from large industrial sources. The proposal represents a risky move by U.S. EPA in the event climate change legislative efforts fail and U.S. EPA is forced to move forward with the rules.  The risk is two fold: 1) U.S. EPA's action is grounded in questionable legal authority; and 2) the action starts a process that eventually leads to regulation of small sources and issuance of millions of federal air permits.

Under the proposal, at least initially, only large industrial facilities that emit at least 25,000 tons of GHGs a year will be required to obtain construction and operating permits covering their emissions.  The construction permits will come under U.S. EPA's New Source Review Program (NSR) and the operating permits will come under its Title V Program (Title V). 

What does triggering NSR mean for these sources?

Once a source triggers NSR, it must go through a lengthy and complicated permitting review process.  The review is designed to identify the best available control technology (BACT) which will reduce emission of the pollutant, in this case greenhouse gases (GHGs). 

Unlike the proposed cap and trade legislation, each and every source triggering NSR will be required to go through this case by case review process and install controls. Under cap and trade, sources can either install controls or cover their emission by purchasing pollution permits (allowances).  Therefore, cap and trades results in more cost effective reduction in emissions than a simple mandate on all sources.

What does coverage under Title V mean for these sources?

The Title V permit is meant to cover large sources that typically have multiple air permits or are subject to a variety of air pollution regulations.  The purpose of Title V is to consolidate all these requirements into a single permit.  Some Title V permits can be as large as 500 pages or more. Under the proposed rule, sources that emit more than 25,000 tons per year of CO2 or CO2 equivalent emissions (CO2e) will be required to obtain Title V permits. 

What doesn't make sense is that some sources may only be covered by Title V permits because of their GHG emissions.  This could result in the strange outcome of Title V permits that are virtually blank because those sources have very little other applicable air pollution regulations. The effectiveness of such an approach has to be questioned.

Key Issue: Established Thresholds Triggering NSR or Title V 

Why is the EPA's action risky?  The agency is proposing the "tailoring" thresholds applicable to GHG emissions that trigger regulation:

• 25,0000 tons of CO2e for new sources triggers NSR
• an emission increase of between 10,000 and 25,000 tons of CO2e from existing sources following a modification to the facility will trigger NSR
• Sources with 25,000 tons of CO2e will be required to obtain Title V permits after five years

Only problem is the Clean Air Act specifies the following thresholds:

• 100 tons from 28 specified industries trigger NSR for new sources
• 250 tons from all other types of sources trigger NSR for new sources
• 100 tons from any source triggers Title V

EPA notes that without modification of the thresholds 40,000 NSR permits would be triggered each year, where currently only 300 are triggered.  Also, 6,000,000 sources would fall under the Title V program whereas the program only currently covers 15,000 sources.

Its a pretty basic tenant of law that Agencies must follow statutory law and cannot re-write them using regulations.  Former Air Administrator Jeff Holmstead commented on this issue in the New York Times

"Normally, it takes an act of Congress to change the words of a statute enacted by Congress, and many of us are very curious to see EPA's legal justification for today's proposal,"

Major Risk #1-  EPA could lose its legal argument that it has authority to raise the thresholds

How does the EPA claim it has the legal authority to raise the thresholds?  Under the doctrines of "absurd results" and "administrative necessity."  Both legal doctrines are similar in that Courts have recognized the ability of agencies to depart from the plain meaning of a statute if application would result in "absurd results" or there is an "administrative necessity." 

EPA explains why these doctrines should apply in the preamble to the rule:

[T]o apply the statutory PSD (NSR) and title V applicability thresholds to sources of GHG emissions would bring tens of thousands of small sources and modifications into the PSD program each year, and millions of small sources into the title V program.  This extraordinary increase in the scope of the permitting programs, coupled with the resulting burdens on the small sources and on the permitting authorities, were not contemplated by Congress in enacting the PSD and title V programs.  Moreover, the administrative strains would lead to multi-year backlogs in the issuance of PSD and title V permits, which would undermine the purposes of those programs.  Sources of all types- whether they emit GHGs or no- would face long delays in receiving PSD permits, which Congress intended to allow construction or expansion.  Similarly, sources would face long delays in receiving Title V permits, which Congress intended to promote enforceability.  (preamble pg. 20)

EPA goes on to state in the preamble that courts are "reluctant" to invoke the "absurd results" doctrine "precisely because it entails departing from the literal application of statutory provisions."  However, EPA asserts this is "one of the rare cases" where it should apply. (preamble pg. 63)

If the Court disagrees with EPA's legal rationale, the rule would be rendered illegal and sent back to U.S. EPA.  However, even without the "tailoring rule" NSR and title V would apply to GHG emissions. 

EPA has stated its intent to move forward with other climate change regulations, such as the light-duty vehicle rule (which EPA says will be finalized no later than March 2010).  After these rules are finalized, GHGs are considered a "regulated pollutant."  If the attempt to raise the thresholds is thrown out, GHG status of a "regulated pollutant" would mandate application of the 100/250 ton NSR and 100 tons thresholds set forth in the Clean Air Act.

For this reason EPA's proposed rule represents a major gamble.  Perhaps that is the leverage they are looking for in the climate change legislative negotiations.  However, if things fall apart EPA may have crossed the point of no return.

Major Risk #2:  The thresholds are temporary in nature resulting in regulation of much smaller sources in the future. 

In U.S. EPA's Press Release Administrator Jackson states

“This is a common sense rule that is carefully tailored to apply to only the largest sources -- those from sectors responsible for nearly 70 percent of U.S. greenhouse gas emissions sources. This rule allows us to do what the Clean Air Act does best – reduce emissions for better health, drive technology innovation for a better economy, and protect the environment for a better future – all without placing an undue burden on the businesses that make up the better part of our economy.”

Jackson made the announcement regarding the proposed rule during a speech to the Governor's Global Climate Summit.  In her remarks she made the following statement:

Defenders of the status quo are going to oppose this with everything they have. Very soon, we will hear about doomsday scenarios – with EPA regulating everything from cows to the local Dunkin’ Donuts. But let’s be clear: that is not going to happen. We have carefully targeted our efforts to exempt the vast majority of small and medium-sized businesses. We know the corner coffee shop is no place to look for meaningful carbon reductions.

While I do not assert EPA is going to regulating the local Dunkin' Donuts, I do think the EPA's description that it will only apply to the largest sources is misleading.  EPA makes clear through out its preamble that the proposed 25,000 CO2e thresholds represents only a "first phase" of the rule.  This is because EPA believes the "absurd results" and "administrative necessity" doctrines, if applicable, only provide temporary relief from the Clean Air Act stated thresholds.  

EPA says that "if  variance from the statutory requirements nevertheless is necessary to allow administrability, the variance must be limited as much as possible." (preamble pg. 20). EPA describes the process in its preamble as follows:

The first phase, which would last 6 years, would establish a temporary level for the PSD and title V applicability thresholds at 25,000 tons per year (tpy), on "carbon dioxide equivalent" (CO2e) basis, and a temporary PSD significance level for GHG emissions of between 10,000 and 25,000 tpy CO2e.  EPA would also take other streamlining actions during this time.  Within 5 years of the final version of this rule, EPA would conduct a study to assess the administrability issues.  The, EPA would conduct another rulemaking, to be completed by the end of the sixth year, that would promulgate, as the second phase, revised applicability and significance level thresholds and other streamlining techniques, as appropriate. (preamble pg.2)

EPA contemplates taking "streamlining activities" vaguely referenced as changing potential to emit calculations as well as creation of general permits.  EPA also states "we expect permitting authorities to ramp up resources for permit issuance."  (preamble pg. 64).  Taking these actions will allow EPA to "bridge the gap between literal language and congressional intent", thereby making it possible to "include more of these sources" in the NSR and Title V program.  (preamble pg. 70).

As a result, EPA is clearly stating its intent that more and more sources fall under the NSR and title V programs by gradually reducing the thresholds over time down to the Clean Air Act statutorily established thresholds.  While EPA may state that their intent is to only gradually phase in smaller source over many years, the argument will be how quickly can "streamlining" techniques be implemented and more permit reviewers hired to bring more and more sources under the program. 

Therefore, EPA's proposed rule fails to set forth a policy statement that regulation of small sources of GHGs is illogical.  Rather, EPA states it needs more time and resources to bring these sources under the program.  By no means am I a defender of the status quo, but it is certainly fair to question whether this is the best approach to addressing climate change. 

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The first step to establishment of a comprehensive climate change regulatory program has been completed by U.S. EPA .  On September 22nd, the Agency finalized its rule on mandatory reporting of greenhouse gas emissions (GHGs).  The rule give the initial glimpses into what the potential overall control program will look.  The most important insight- which industries are likely to be required to control emissions.  

Who is required to report? 

To be covered by the rule, you must first fall within the source categories specified by U.S. EPA.  You must also emit more that a specified threshold.  EPA estimates 10,000 facilities will be covered representing 85% of all domestic GHG emissions.

COVERED INDUSTRIES- coal fired power plans, aluminum production, ammonia production, cement, electronics production, lime, petrochemical, petroleum refining, certain underground coal mines and municipal landfills.  Also covered are importers and exporters of coal, natural gas and petroleum products.

IMPORTANT "NON-COVERED" INDUSTRIES- reporting is not currently required for the following: electronics manufacturers, ethanol production, industrial landfills, wastewater treatment, suppliers of coal.

THRESHOLD- Only the largest facilities emitting GHGs- those that emit 25,000 metric tons or more of CO2 equivalent emissions per year- are required to report annually to U.S. EPA. 

If you are having trouble figuring out whether your facility may be covered, U.S. EPA has developed an "applicability tool" which walks you through the process of determining coverage.

What pollutants are considered GHGs?

There was some open debate as to some of the more "fringe" GHGs.  For now, U.S. EPA covers the following pollutants under the mandatory reporting rule:  carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), hydofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6) and other fluorinated compounds.

Non-CO2 pollutants must be converted to CO2 equivalent emission under the rule.  This is so emissions of various pollutants can be measured in a common currency.  The equivalency is based upon the global warming potential of the gas.  For example, one ton of methane is equal to 21 metric tons of CO2.

When does reporting start?

Recordkeeping obligation will begin January 1, 2010 for covered facilities.  The first mandatory report must be submitted to U.S. EPA by March 31, 2011 (reporting 2010 emissions). 

When do I have to install monitors?

U.S. EPA allowed some flexibility on use of required monitoring.  It allows the use of "best available monitoring methods" in the first quarter of 2010.  You can ask for an extension for up to December 31, 2010.  You can also use calculations specified by U.S. EPA in place of some monitoring.   However, if your facility already has a continuous emission monitor (CEM) you are expected to add GHG capability.

Do I have to hire a consultant to assess my emissions?

No, but...  U.S. EPA elected not to require third party verification of reported emissions.  However, companies must certify the accuracy of their records.  If you do not have staff on-hand who understand the protocols and methods for determining emissions, companies should strongly consider outsourcing this work.

Can I ever get out of the reporting obligation?

U.S. EPA decided to show limited flexibility on its "once in always in" policy.  You can exit the mandatory reporting program if you do either of the following:  a)  decrease emissions below 25,000 metric tons for five years in a row; or b) reduce below 15,000 tons per year for three years in a row.

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The Federal Court of Appeals (2nd Circuit) issued a major decision in the ever growing debate regarding action on climate change.  The court is allowing states to proceed with a suit against power companies that calls for a court order to reduce emissions of greenhouse gases which  contribute to global warming.

Eight states (California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont and Wisconsin), New York City and three land trust organization had filed a suit alleging major power plants caused a nuisance by emitting greenhouse gases that contribute to climate change.  The Appeal Court decision follows a lower court which dismissed the case on an interesting rule of law- the "political question doctrine."  In essence the lower court found the nuisance claim to raise a very complicated political question that was best left to the Executive and Legislative branches of government.  That questions was the balance between:

1) Reducing greenhouse gases to eliminate or mitigate societal impacts that flow from climate change

- versus-

2) The negative impact on the economy caused by the regulations and the societal impacts that would result

The Appeals Court ruled that the States did not need to wait for Congress to act by passing legislation.  The Court also ruled that EPA's authority to regulate greenhouse gases under the Clean Air Act does not displace nuisance claims.  The Court noted that the mere issuance of a proposed endangerment finding by EPA was not enough to displace judicial relief under federal common law nuisance theories.

Other significant findings in the Appeals Court decision include:

• The Court found the States are experiencing current "injury in fact" due to impacts from climate change, including melting California snow pack and erosion on the Massachusetts shoreline
• Emitters of greenhouse gases face potential nuisance liability by contributing to climate change.  The Court rejected the notion there must be a direct causation between the sources of emissions and global warming.

The decision will certainly increase pressure on those who have resisted passage of climate change legislation.  Those who stand in the way of legislation must face the prospect of either: a) EPA regulations under the Clean Air Act; or b) Court ordered caps on emissions through multiple nuisance claims.  Either result would be far worse that the legislative option.  Both would result in even more complex regulatory schemes, less certainty and more regulation of smaller sources.

Perhaps there will be a renewed sense of urgency to pass climate change legislation.  American Electric Power, one of the utilities sued, was quoted in the N.Y. Times asserting the need for climate change legislation: 

At American Electric Power, Pat D. Hemlepp, a spokesman, said the company’s lawyers had not decided whether to appeal. But he added: “We don’t feel that litigation is a proper avenue to address climate concerns. In our view, it’s a policy issue.”

“Legislation would be the best approach, and that’s happening now,” Mr. Hemlepp said, referring to a bill that has passed the House and that the Senate may take up this year. 

UPDATE 9/24/09:  Another wrinkle that I did not discuss regarding this decision is that it will open up the floodgates of climate change litgation.   As appropriately acknowledged on Stoel Rives LLP Renewable + Law Blog, private parties now have been recognized to have standing to bring federal nuisance claims:

The court recognized that the Supreme Court had never addressed this question, but concluded that private parties should be able to proceed with federal nuisance claims related to climate change when they invoke an overriding federal interest or federalism concerns. By holding that private parties can bring federal nuisance suits and by recognizing that climate change is of overriding federal interest, the court potentially cleared the way for federal lawsuits against all types of companies that emit material levels of greenhouse gases.

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Small businesses are deeply concerned with the economic impacts of the proposed cap-and-trade legislation currently pending in Congress.  Although small businesses will not be covered by the cap, if a price is placed on carbon, small businesses will feel the economic impact through energy price increases.  This is particularly true in the Midwest which is heavily reliant on carbon intensive coal power for its electricity generation.

With the hot national debate over cap-and-trade,  it is understandable that everyone is focused on the potential impacts of climate legislation on the economy.  However, I think this ignores the broader reality.  As discussed on this blog before there are other factors at work driving energy prices higher. (See, Cap and Trade: Job Killer or Call to Action for Coal States)  These include:

• A new program requiring control of mercury emissions from coal fired power plants
• Ever tightening federal ozone and fine particle pollution standards that will result in additional compliance costs for utilities
• A revamped cap-and-trade program for utilities in light of the Court decisions regarding the Clean Air Interstate Rule
• Potential tighter regulations on ash ponds and other utility wastes

If commodity prices rebound as a result of the economic recovery, price increases will be compounded.

For small businesses who are not prepared, high energy prices could force them out of business.

So, how can small businesses meet this threat through strategic action?  I would submit that any small business that is even moderately energy intensive should aggressively consider adopting energy efficient practices.

Today, the National Small Business Association released a report assessing the value of one practice, called "on-bill financing", that shows tremendous promise in reducing energy usage by small businesses.  According to the report, energy-efficiency programs such as on-bill financing can help the average small business save $4,932—and oftentimes more—every year on its energy bills.

On- Bill Financing- How it Works

Despite the benefits of energy efficiency projects, common barriers exist that prevent many businesses from implementing cost saving measures.  As detailed in the report, these include:

Cash flow: With tight margins and relatively small revenues, many small businesses find it challenging to undertake new capital investments, even if they will save money over time.  Fifty-two percent of small-business owners see cash flow as the primary barrier to investing in energy efficiency.

Up-front capital required: A typical energy-efficiency project might cost from $7,500 up to more than $20,000, with some projects costing a bit less and a few costing far more. 

Energy efficiency is only one priority among many: Small-business owners are heavily focused on the business at hand: managing inventory, maintaining payroll, providing health insurance, etc. They rarely have the time to focus on their energy bills, on energy-efficiency measures, or on their greenhouse gas emissions profile.

On-bill financing overcomes these barriers by: 1) identifying projects for the customer; and 2) providing up-front payment for the cost of the project and favorable repayment terms.

How are projects identified? Utilities identify businesses that may benefit from energy efficient project.  The utilities will use specialty trained contractors to perform an energy audit of the business to identify opportunities to reduce usage and save money.  The customers than elects whether to implement the project.  If the business implements the project it gets financed by the utility and repaid over time on the customers bill. 

The cost savings and the ability to reduce the impact of increasing energy prices are tremendously important to the vitality of small businesses.  There are also major environmental benefits as well. The report concludes that small business could collectively reduce greenhouse gas emissions by 259 million tons each year if they improved their energy efficiency by just 25 percent. 

A strong push for robust on-bill financing programs seems warranted. 

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More rumblings that EPA may move forward with regulation of greenhouse gases under its existing authority under the Clean Air Act.  It appears EPA has started to rattle its saber in an effort to re-energize the cap-and-trade proposal currently in the Senate.

The San Francisco Chronicle reported that Administrator Lisa Jackson said the "endangerment finding" would be issued in the next few  months.  Here are a few of her key comments:

"Legislation is so important, because it will combine the most efficient, most economy-wide, least costly (and) least disruptive way to deal with carbon dioxide pollution," Jackson said. "We get further faster without top-down regulation."

But Jackson insisted the EPA would continue on a path that began when the Supreme Court ruled in 2007 that greenhouse gases qualified as pollutants and could be regulated if the government determined they threatened the public.

"Two years is a long time for this country to wait for us to respond to the Supreme Court's ruling," Jackson said.

An "Endangerment Finding" is a prerequisite to regulation of greenhouse gases under the Clean Air Act.  In Massachusetts v. EPA, the Supreme Court held that the Administrator must determine whether or not emissions of greenhouse gases from new motor vehicles cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare, or whether the science is too uncertain to make a reasoned decision.

On April 17, 2009, the EPA issued its proposed positive "Endangerment Finding" and now the public comment period has closed.  This means the EPA could move forward with a final rulemaking at any time.

As Administrator Jackson's comments make clear, the Obama Administration's preferred course of action is passage of cap-and-trade legislation- the American Clean Energy and Security Act of 2009 (ACES).  However, it appears momentum behind the legislation has waned in the Senate. 

Some business groups and politicians may see EPA's comments as only bluffing.  That would be a grave mistake.  There is no doubt from the comments made by the Obama Administration the Agency will proceed with regulation under the Clean Air Act very soon if the prospects on legislation dim.  Key members of the Obama Administration not only believe action must be taken regarding climate change, they also believe the Supreme Court made it legally required. 

Furthermore, those who believe EPA regulations pertaining to climate change can simply be overturned, should read the Supreme Court's decision in Massachusetts v. EPA.  The highest court in the land has left little room for a legal determination that climate change is a hoax or not worthy of regulation.

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As reported in BNA and referenced in Foley & Hoag's blog, EPA is rumored to be moving forward with application of New Source Review requirements to large sources of greenhouse gas emissions.  BNA reported that EPA would likely set a trigger level of 25,000 tons of carbon dioxide or carbon dioxide equivalent emissions (other greenhouse gases converted into CO2 tons).  All sources emitting above this threshold would have to include Best Available Control Technology (BACT) to reduce greenhouse gas emissions.

Congress seems to face stronger head winds on passage of a cap & trade climate legislation.  Organizations like the National Association of Manufacturers (NAM) have started a national advertising campaign targeting vulnerable Senators- such as Sherrod Brown in coal dependent Ohio.  NAM is using their recent study regarding the impact on energy prices of the American Clean Energy and Security Act of 2009 (ACES) legislation to frame the debate as an energy tax increase. 

Missing in the strong opposition to cap & trade is the alternative- regulation of greenhouse gases under the existing authority of the Clean Air Act.  U.S. EPA has been in a holding pattern seemingly holding their collective breath that legislation will pass thereby avoiding a regulatory nightmare. However, with opposition growing perhaps EPA is starting see that it needs to raise the prospects of alternative regulatory schemes.  The timing of the proposal to included greenhouse gases under New Source Review would appear to support that view.

While the article states that EPA would apply NSR only to the largest sources of greenhouse gases (25,000 tons of CO2), EPA has questionable legal authority to limit application in this fashion.  The current statutory language in the Clean Air Act applies NSR to source emitting more than 250 tons of any pollutant.  EPA has said before it has no intention of setting the threshold that low.  However, that is what the Clean Air Act states is the applicable threshold.  Without legislation it certainly seems very questionable as whether EPA has the authority to alter statutory text through regulation.   

There appears no doubt that if cap & trade dies this fall that EPA will move forward with a positive endangerment finding and start to issue climate change regulations under its existing authority.  Yet the debate in Congress right now seems to be cap & trade versus no regulation.  EPA, businesses and environmental groups supporting ACES need to do a better job of framing the debate as- cap & trade versus command and control regulation under the Clean Air Act.   If more organizations engaged in the debate in a realistic manner, including NAM, the merits of cap & trade seem to be much greater.

As an indication we are still in the denial phase by some, the U.S. Chamber of Commerce wants to put climate change on trial.  As reported on Yale 360:

Facing the prospect that the federal government may soon begin regulating greenhouse gas emissions, the U.S. Chamber of Commerce is proposing a public hearing in which the chamber and allied scientists question whether human-caused global warming is real. William Kovacs, the chamber’s senior vice-president for environment, technology, and regulatory affairs, is asking the U.S. Environmental Protection Agency (EPA) to hold the rare public hearing, complete with witnesses, cross-examinations, and a judge who would rule whether man is indeed warming the planet.

This ignores the fact that we already had that trial in front of the U.S. Supreme Court in landmark case of Massachusetts v. EPA.  The Court found climate change to be real and recognized EPA's existing authority to regulated greenhouse gases.  This from the syllabus of the decision:

Based on respected scientific opinion that a well-documented rise in global temperatures and attendant climatological and environmental changes have resulted from a significant increase in the atmospheric concentration of “greenhouse gases,”

I wonder when the debate over cap & trade will start to honestly include a discussion of this legal reality?

(Photo: everystockphoto: cjohnson7)

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Ohio faces a two headed hydra when it comes to the impact of the proposed cap-and-trade bill in Congress- the American Clean Energy and Security Act of 2009 (ACES):

1. Ohio generates almost 90% of its energy from coal;
2. Manufacturing represents one the largest employment sectors in Ohio (ranking 3rd nationally with 1.1 million workers as of 2006)

These two factors combine to raise the stakes significantly if a price is placed on carbon as a result of the cap-and-trade ACES proposal.  Coal-fired power plants are the largest source of greenhouse gases (GHGs).  Any regulatory approach that puts a price on GHGs will result in higher energy prices. 

Most manufacturers are not even covered under ACES because only the largest industrial sources are capped (25,000 metric tons or more).  However, the secondary effect of ACES- rising energy prices-could mean significant job losses in the manufacturing sector which is heavy user of power 

Potential Job Loses from Cap-and-Trade

A report released last week by the National Association of Manufacturers (NAM) projected that Ohio could lose from 80,000 to 108,000 jobs by 2030 if ACES passes. The job losses are directly attributable to rising energy prices. The NAM cap-and-trade report projects the following increases in commodities or electricity:

• 26% increase in gasoline prices
• 60% increase in electricity prices
• 79% increase in natural gas prices

The 60% increase is actually conservative when compared to other studies.  Some have said total increases could be as high as 112% by 2030.  Such large price increases raise operating costs for many small and medium manufacturers.  Those cost increases will make many business unprofitable forcing them to close their doors, so the argument goes.

Is this really a complete analysis? Also, is opposition to ACES really the correct strategy?

A Call to Action- Diversity in Generation Key for Coal Dependent States

Based on my last two posts you may be expecting me argue that growth in green jobs attributable renewable energy development will significantly offset the manufacturing job loses.  For example, in 2008 there was a 70% increase in wind turbine related jobs nationally. 

While green jobs are important, a more fundamental issue presents itself- When it comes to preserving manufacturing jobs, reliance on coal power is unsustainable. 

The cost of energy produced from coal is going to dramatically increase regardless of whether climate change legislation passes.  A complex web of regulatory forces are at work driving coal energy prices higher over the next decade and into the future.  A honest assessment of these factors should serve as call to action- diversification.

An honest assessment of the forces at play demonstrates that coal reliant states are fighting a losing battle against energy price increases.  States must diversify their generation portfolios in order to become less sensitive to these forthcoming price shocks.  This means development of biomass, nuclear, wind, solar and other forms of electric generation.   

Analysis of Five Factors Driving Future Coal Power Energy Prices Higher

1. New Source Review Enforcement Cases
2. The fix for the Clean Air Interstate Rule or Multi-Pollutant Legislation 
3. Mercury controls
4. Ever tightening ozone and fine particle federal air standards (NAAQS)
5. Massachusetts v. U.S. = regulation of greenhouse gases in some fashion

New Source Review (NSR) Enforcement Cases

Manufacturers and other businesses in the Ohio and throughout the Midwest have yet to see the full impact of the NSR enforcement cases on the price of energy.  The settlement with American Electric Power impacts sixteen (16) coal plants and is estimated to cost $4.6 billion.  Ohio Edison, subsidiary of FirstEnergy Corp., settled its NSR case in 2005.   The settlement is projected to cost $1.1 billion to retrofit the Sammis Station.  The litigation has yet to fully conclude in the Duke Energy case and while the verdict was mixed, the case will still result in significant compliance costs. 

Also, a New Source Review regulatory fix seems unrealistic in the near term.  Therefore, future projects that could improve plant efficiency may be avoided out of fear of triggering NSR.

Bottom line:  Billions in new compliance costs for coal fired power plants over the next several years and an uncertain regulatory structure.

CAIR or Multi-Pollutant Legislation

The Clean Air Interstate Rule (CAIR) was a cap-and-trade regulation directed at coal-fired power plant emission of SO2 and NOx.  On July 11, 2008, a federal court found CAIR to be inconsistent with the Clean Air Act.  While the rule remains in place while U.S. EPA develops a fix, U.S. EPA has put a CAIR-fix on the fast track.   It is uncertain what the "new-CAIR" program will look like, but there is little doubt it will result in a more expensive regulation. 

As an alternative to CAIR,  members of Congress have proposed multi-pollutant cap-and-trade legislation for coal fired power plants.  Regardless of whether CAIR remains as regulatory based or converts to legislation the consensus among Democrats was the Bush Administration rule did not require steep enough cuts from coal-fired power plants. 

Bottom line:  Either the CAIR fix or multi-pollutant legislation will raise compliance costs for coal-fired utilities

Mercury Controls

Based upon cost concerns, the Bush Administration rejected facility specific regulation of mercury emissions from coal-fired power plants.  Instead, the Administration proposed a new cap-and-trade program called the Clean Air Mercury Rule (CAMR).  A federal court ruled that mercury as a pollutant could not be regulated through a cap-and-trade mechanism.  On February 6, 2009, the Department of Justice (on behalf of the Obama Administration) dismissed its appeal to the U.S. Supreme Court.  U.S. EPA is currently developing regulations under Section 112 of the Clean Air Act that will require every coal-fired power plant to control mercury emissions.  

Bottom line:  All facilities may be required to reduce mercury emissions through carbon absorption or implementation of other technologies.  Under CAMR, utilities were hoping to avoid controls on some of the older less efficient plants.  The rejection of CAMR will drive compliance costs higher.

Ozone and Fine Particle Air Quality Standards

Coal-fired power plant contribute roughly one-third (1/3) of ozone causing pollutants and particulate matter pollution.  As U.S. EPA tightens the ozone and fine particle National Ambient Air Quality Standards (NAAQS), coal-fired power plants will remain a major target of tighter regulation. 

Bottom line:  States pass new regulations to meet tighter federal air quality standards.  There is lag time between development of new federal standards and implementation of these new state regulations.  States will be forced to contemplate even stricter regulation of coal-fired power plants as a result of tighter federal standards.

Massachusetts v. EPA-  Greenhouse Regulation is Inevitable

In 2007, the U.S. Supreme Court declared CO2 and other greenhouse gases a "pollutant" under the Clean Air Act.  This landmark decision has set in motion a series of proposed actions by U.S. EPA to regulate greenhouse gases under the existing framework of the Clean Air Act. Regulation under the Act will be much more costly than the proposed cap-and-trade legislation. 

Bottom line:  The debate cannot be framed as pass cap-and-trade or have no climate change regulations.  Regulation is inevitable and most agree cap-and-trade is much more cost effective than regulation under the Clean Air Act.

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Today, a Georgia Appeals Court overturned a lower court's ruling that invalidated an air permit for a coal-fired power plant on the basis of climate change.  In June 20, 2008 Georgia's Fulton County Superior Court invalidated a permit for construction of a 1200-megawatt coal-fired power plant. The Court said the Georgia Environmental Protection Division should have considered CO2 a "regulated pollutant" under the Clean Air Act and required controls as part of the permit. 

When the lower Court decision was issued it marked the first time a State Court had invalidated a permit issued under the New Source Review (NSR) program for failing to consider CO2 a "regulated pollutant."  The decision sent major shock waves around the Country. 

Since the lower Court decision, a series of administrative appeal rulings and EPA proposals on climate change have been issued. The decisions have resulted in a complex regulatory web.  Lost was a clear indication whether CO2 should be considered a "regulated pollutant" under the Clean Air Act. 

The Georgia Appeals Court decision is well reasoned and navigates the various court and administrative rulings as well as EPA proposed rulemakings.  The Court's final conclusion...as it stands right now CO2 is not a regulated pollutant under the Clean Air Act.  Until U.S. EPA promulgates actual regulations requiring reduction of CO2 emissions or controls, permits issued under the NSR program need not consider a facility's CO2 emissions. 

Here is a key paragraph from the decision that succinctly sets forth the Court's reasoning:

This ruling (lower Court's invalidation of the permit)...would impose a regulatory burden on Georgia never imposed elsewhere.  It would compel [the State] to limit CO2 emissions in air quality permits, even though no CAA (Clean Air Act) provision or Georgia statute or regulation actually controls or limits CO2 emissions, and even though (to this Court's knowledge) no federal or state court has ever previously ordered controls or limits on CO2 emissions pursuant to the CAA.  It would preempt ongoing Congressional efforts to formulate a CO2 emissions policy for all the State...If accepted it would engulf a wide range of potential CO2 emitters in Georgia-and Georgia alone- in a flood of litigation over permits, and impose far-reaching economic hardship on the State.  We reverse this ruling.

Here are some the items I feel the Court got right in its ruling (keep in mind I'm not making pronouncements about climate change, I am just saying I think the legal analysis is well reasoned).

1. Analysis of Impact of Massachusetts v. EPA-  The landmark Supreme Court ruling only says that CO2 and other greenhouse gases are "pollutants" under the Clean Air Act.  Until EPA adopts affirmative regulations requiring controls or emissions limits on CO2, it will not be considered a "regulated pollutant" under the Clean Air Act.  Only "regulated pollutants" must be evaluated as part of the New Source Review Program.
2. Johnson Memo is Determinative for Now (prior post)-  In Deseret Power, the Environmental Appeals Board said U.S. EPA retained discretion to decide whether monitoring requirements applicable to CO2 which currently exist in the Clean Air Act are enough to raise CO2 to the status of "regulated pollutant" under the Act.  Former EPA Administrator Stephen Johnson, in one of his last acts, issued a memo setting for EPA's formal determination that monitoring was insufficient to raise CO2 to the status of "regulated pollutant."  New EPA Administrator Jackson granted a request to reconsider the Johnson memo, however she did not go as far as to stay the effectiveness of the Johnson memo during the review.  The Court finds that the current state of the law is that monitoring is not enough to raise CO2 to the status of regulated pollutant.
3. Formal EPA Rulemaking is Required to Trigger Regulation of CO2-  The Court concludes that until U.S. EPA completes a formal rulemaking that actually requires controls or emission limits on sources of CO2, permits can be issued without considering CO2 as a pollutant. 
4. Rejection of IGCC as Part of BACT Analysis-  The Court also follows prior Court decisions on the issue of requiring all coal plants to be IGCC plants.  It overturned the lower Court ruling that would have required analysis of IGCC as pollution control under the Best Available Control Technology (BACT) requirement.  In rejecting a required analysis of IGCC, the Court found that BACT analysis, as set forth in the New Source Review Program, does not require redesign of a facility from a pulverized coal to a syngas plant.

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The American Clean Energy and Security (ACES) Act of 2009 has cleared one hurdle through passage by the House Energy and Commerce Committee.  The bill now makes its way through at least two more House Committees before a floor vote will occur.  The House leadership has set an aggressive time frame for passage, Speaker Pelosi has said the remaining Committees must finish their work by June 19th.  This leads to the possibility of a  floor vote no later than the end of the month or early July. 

(World Resources Institute- Graph on anticipated reductions from ACES- click on chart to enlarge)

While the ACES legislation appears to be moving quickly, major issues remain with the structure of the legislation as well as its timing.  The Senate does not have a companion bill and many speculate the Senate will be unwilling to simply take of the Waxman-Markey Bill.  Therefore, a tremendous amount of uncertainty remains as to the approach the Senate will use to take up climate change legislation.

What are the possible issues that will be debated in House Committee hearings and in the Senate?  Some will include the following:

1. 5 year Phase Out of Allocations-  The mark up version of the ACES legislation saw a significant compromise  on the auction v. allocation debate.  Whereas, the President had proposed a 100% auction, ACES only calls for a 35% auction in the early years.  However, the bill still proposes an aggressive phase out of allocations for the energy sector. (See Pew Chart to Left that show dramatic shift downward in allocations during 2025-2030 - click on chart to enlarge) While it may seem like a long way off, in a five year period stretching from 2025-2030 the legislation phases out allocations moving to 90% auction of allowances.  Industry is concerned that this aggressive phase out period will lead to price spikes in utility costs.
2. 2020 Emission CAP- Emission reductions called for in the initial years was reduced.  The first major milestone of the cap is seen as 2020.  The original bill called for a 20% reduction below 2005 levels.  The mark up reduced that to a 17% reduction by 2020.  However, some forget that President Obama had called for a 14% reduction by 2020.  There are many industry representatives who believe the early reductions still need to be softened to make the bill workable.  There may be a renewed push to bring the 2020 cap down to the 14% reduction.
3. 2012 Start Date-  The Legislation calls for a modest 3% reduction in 2012.  However, some in industry believe 2012 is too early and does not give adequate lead time to prepare for the cap.  During an EMA presentation, Bruce Braine, Vice President of AEP, commented that the 2012 time frame may force switching to natural gas that will result in price spikes in the first year the cap is effective.
4. International Offsets-  In the face of widespread controversy regarding the European Trading Scheme (ETS) use of offsets, the bill includes many limitations on use of international offsets.  Beginning in 2018, there is an automatic 20% discount in the value of international offsets.  The bill limits use of international offsets to those categories of projects that have received approval by U.S. EPA.  In addition, there is a sector limitation on use.  Sectors in various countries will be identified where offsets are deemed appropriate (factors includes GDP and receiving equal treatment in project host country).  Finally, there must a an applicable bi-national or multi-national treaty in effect with the Country. Industry is concerned that these requirements will reduce the availability of international offsets thereby driving up the cost of compliance.
5. Environmentalist Perspective-  The consensus among the environmental community appears to be that the "watering down" of the ACES legislation was necessary to secure passage.  Therefore, even with the dramatic shift away from auction of allowances, most groups still support the Legislation.  The key issue from an environmentalist perspective is the proverbial "line in the sand" to prevent additional changes, including concessions to industry on the issues mentioned above in the Senate.
6. Ideology v. Realism-  Republicans who have uniformly opposed the carbon cap and trade legislation.  Even though industry support for the Legislation has grown, many Republicans have had success describing the Legislation as a large tax increase during a down economy.  This message plays well even with some Democrats from the Midwest and Southern States that face the greatest impacts from climate change legislation.  The "realism" aspect is that regulation of greenhouse gases appears inevitable.  A market based solution is clearly a better alternative to command and control regulation under the Clean Air Act.  However, are some members of Congress in denial that regulation is inevitable?

Obviously, ACES went through a dramatic transformation to gain passage from the House Energy and Commerce Committee.  The overwhelming majority of changes were to address industry concerns with the Legislation.  The most important changes were the shift away from auction of allowances and reduced reduction targets in the early years of the cap. 

Additional battles may be looming in the House over the issues identified above and others.  However, the most important battle ground remains the U.S. Senate where the future is less certain.

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Representatives Waxman and Markey released their much anticipated re-write of their proposed cap and trade climate legislation earlier this week. Much speculation has been offered in the media that the bill had no chance of passing as it was originally structured, if it had any chance at all. 

Well, there has apparently been a lot of horse trading going on to shore up Democratic support for the bill.  Most notably, President Obama's proposal to have 100% auction of allowances (pollution permits) has been completely tossed out.   The revised legislation allocates that majority of allowances to industry. 

The majority staff provided a summary of the American Clean Energy and Security Act of 2009 (ACES Act) to the Committee.  While the summary is helpful to get an overview of this complex bill, I thought one of the most interesting statements appears in the introduction to the summary appearing on the first page:

In the past two and half years, the Committee has held dozens of hearings on energy and climate change policy and has built a detailed factual record on the need for legislation in this area.  The nation's dependence on foreign oil has significantly increased over the last decade.  Consumers have faced increasing and volatile energy prices.  Other countries have overtaken us in the manufacture of wind and solar energy.  Energy company investments are paralyzed because of uncertainty about what policies the Congress will establish.  Meanwhile, global warming has increased unchecked.

Let's rank the staff's reasons for passing climate change legislation:

1. Reduce dependence on foreign oil
2. Volatile energy prices
3. Increase production of renewable energy
4. Regulatory certainty
5. Global warming

Isn't iit a little odd that global warming is not emphasized as the main reason for the legislation.  There is no discussion at all of the increased threat of climate change and the need to act.  Rather, its about foriegn oil and renewable power.  That seems strange to me, after all it is a multi-billion dollar cap and trade program to reduce greenhouse gases.

It is clear the choice in messaging is in reaction to the headway Republicans and conservative Democrats have made in raising concerns about the timing and cost of the legislation.  In a very difficult economy its hard to gain support for costly new programs, especially programs on the scale called for in this legislation. 

In reaction to this strong criticism we find a re-worked bill that provides the lion share of allowances to industry as well as other hedges against the potential cost of the program.  I am not criticizing the approach, rather I am commenting on the unrealistic nature of the President's 100% auction proposal.  This is a massive new environmental regulatory program, one that is greater in scope than any previous programs.  It makes sense to transition toward a carbon regulated economy.

Here are some of the more notable provisions in the legislation:

1. Reduction Targets- Reductions from covered sources to 97% of 2005 levels by 2012, 83% by 2020, 58% by 17% by 2050.  Here is one of the changes that is meant to ease into a carbon constrained world.  The reductions have been diminished in the early years to ease the transition.  While it helps out in the early years, at some point we face a major spike in needed reductions.  That may be a difficult issue to overcome.
2. Who is covered by the Cap?- By year the cap kicks in--- Group 2012: Electricity generators, liquid fuel refiners, and fluorinated gas manufacturers. Group 2014: Industrial sources that emit more than 25,000 tons of carbon dioxide equivalent per year. Group 2016: Natural gas local distribution companies.
3. Allowance allocation- Coal related: 30% to local electric distribution companies regulated by the states. 5% to merchant coal generators. Natural gas related: 9% of allowances to local distribution companies.  Home heating oil and propane: 1.5% to state programs for users of home heating oil or propane.
4. Auction- approximately 15% of allowances will be auctioned beginning 2011 and proceeds directed to low and moderate income families to address increases in energy prices. This is a far cry from the President's proposal of 100% auction.
5. Offsets- Covered entities are able to offset up to 2 billion tons of emissions by using EPA-approved domestic and international offset credits.  The ability to use the credits is divided according to the legislation's allocation formula.  By 2017, the price to use international offsets is increased.  Covered entities must use five tons of international offset credits for every four tons of emissions being offset.  Offsets are designed to reduce the cost of compliance.  Industries covered by the cap can purchase credits generated by projects outside of the cap.  Offset credits would be cheaper than allowances thereby reducing the cost of compliance.  It also creates a whole new business for companies that specialize in carbon offset credit projects.
6. Offset Integrity Advisory Board-  Board provides recommendations to EPA as to type of offset projects that should be listed by EPA as eligible; appropriate quantification methodologies, etc...  The bill contains multiple safeguards to try and improve the integrity of offsets.  These provisions have been included to address the criticism the European Trading Scheme has received regarding the lack of creditability of offsets used in Europe's Cap and Trade program.
7. National Renewable Portfolio Standard- Includes a requirement that retail electric suppliers provide 6% from renewable energy sources by 2010.  The standard rises to 20% by 2020.  Up to one quarter of the 20% requirement can be met through energy efficiency projects.
8. Clean Air Act Exemptions-  The bill would specifically exempt greenhouse gases from coverage under the Title V program, New Source Review Program, NAAQS, and HAPs. 

Number 8-  is a huge positive factor arguing in favor of the cap and trade approach. As detailed on this blog many times, regulation of greenhouse gases under the Clean Air Act would be a disaster. It would result in over regulation of small sources, inefficient permitting which would slow projects and significant amounts of litigation.

Dspite the recent media coverage, I don't see how EPA backs away from the cliff at this point.  Three are too many things set in motion for EPA to move away from regulation under the Clean Air Act unless legislation is passed. Cap and trade legislation, especially a bill that calls for a smooth transition to a carbon regulated world is just a far better alternative.

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As reported by the AP, "White House Memo Challenges Finding on Warming", an OMB document contains opinions that regulation of the greenhouse gases under the Clean Air Act could have dramatic impacts on the economy.  The release of the OMB memo seems to have put the Obama Administration on the defensive. 

Major news outlets including the N.Y Times, Wall Street Journal and Associated Press reported the uproar regarding the memo. Here is how the Associated Press described the controversy surrounding the memo:

An Environmental Protection Agency proposal that could lead to regulating the gases blamed for global warming will prove costly for factories, small businesses and other institutions, according to a White House document.

The nine-page memo is a compilation of opinions made by a dozen federal agencies and departments during an internal review before the EPA issued a finding in April that greenhouse gases pose dangers to public health and welfare.

That finding could set in motion for the first time the regulation of six heat-trapping gases from cars and trucks, factories and other sources under the Clean Air Act.

On Capital Hill, EPA Administrator Lisa Jackson faced questions from Senators regarding the memo (video of her testimony). The memo was described by some as the "smoking gun" that supported Republican and business claims that regulation of greenhouse gases under the Clean Air Act would have a devastating impact on the economy.

The memo also called into question EPA's claim that the scientific underpinnings for its proposed endangerment finding made an "overwhelming" case for regulation due to the threats presented by climate change. As reported in the Wall Street Journal, the memo criticized EPA's scientific support for the endangerment finding:

“The amount of acknowledged lack of understanding about the basic facts surrounding [greenhouse gases] seem to stretch the precautionary principle to providing regulation in the face of unprecedented uncertainty,” the memo reads.

After the release of the memo and the ensuing uproar, the Wall Street Journal suggested EPA may be wavering in its commitment to regulate greenhouse gases under the Clean Air Act. Such conclusions seem to be supported by statements made by  the Director,of OMB Peter Orszag, on his blog.  

Media reports today are suggesting that OMB has found fault with EPA’s proposed finding that emissions of greenhouse gases from motor vehicles contribute to air pollution that endangers public health and welfare. Any reports suggesting that OMB was opposed to the finding are unfounded...

Perhaps more importantly, OMB concluded review of the preliminary finding several weeks ago, which then allowed EPA to move forward with the proposed finding. As I wrote on this blog on April 17, the "proposed finding is carefully rooted in both law and science." I also noted: "By itself, the EPA’s proposed finding imposes no regulation. (Indeed, by itself, it requires nothing at all.) If and when the endangerment finding is made final, the EPA will turn to the question whether and how to regulate greenhouse gas emissions from new automobiles." 

Orszag seems to be going out of his way to minimize the significance of the endangerment finding.  Such statement belittle the fact that if the endangerment finding is finalized it will set in motion significant regulation of sources under the Clean Air Act.  

After reading the the coverage, I just don't understand all the fuss. Of course regulation under the Clean Air Act would have dramatic impacts on the economy. U.S. EPA's Advanced Notice of Public Rulemaking (ANPR) sets forth numerous examples of the difficulties and issues associated with regulation under the Act.   Even though the ANPR was written during the Bush years, the issues it identifies remain valid.   I have written numerous posts discussing how the structure of the Clean Air Act is ill-suited for regulating greenhouse gases. 

Lets face it, the Obama Administration understands these issues as well.  That is why it has been using the threat of regulation to leverage passage of cap and trade legislation.  EPA Administrator Jackson reiterated support for cap and trade legislation today. 

Thus far the Administration has taken very slow and deliberate steps toward regulation.  Many critical decisions related to climate change are under "EPA review " or in the draft stage. To date, environmental groups have been content to let the Administration move forward at its own pace.  They are convinced regulation is inevitable. 

How long can EPA realistically string out the decisions on whether to address climate change under the Clean Air Act? The longer the string out the decision, the less effective EPA's threats are in leveraging Congress.  At some point, Congress may just be convinced EPA is bluffing. 

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Democratic leaders of the US House Energy and Commerce Committee agreed to hold another hearing on climate change legislation on May 1.  As discussed by commentators with the Environmental Markets Association, some Washington Insiders believe this announcement is a clear indication the Waxman-Markey Climate Legislation won't make it.

Republican have hammered home the unknown costs of the proposal and seem to be getting traction during this tough economic time.  As reported in the Oil and Gas Journal, the minority party is still flexing its muscles:

"It is our intention to use the opportunity you are providing us this Friday to carefully examine the one element of the legislation that has so far escaped examination in 38 hearings stretching over 40 days, its cost," the two GOP committee members said.

Republicans have found a sympathetic group among Democrats from states that rely on coal and manufacturing to drive their economies.  As reported in Politico, while Rep. Dingell may have lost his leadership position he is still finding sympathetic fellow Democrats willing to support further concessions to protect industry in their states:

But dethroning Dingell didn’t change the membership of the committee, and there are plenty of Dingell Democrats left on the panel — Rust Belt, coal state and Southern Democrats who want to protect native industries as they negotiate the final terms of a sweeping climate change bill.  And that’s why Waxman has his hands full winning votes in the committee, and it’s one of the reasons he moved Monday to postpone a bill markup scheduled for this week.
 

Meanwhile the "fuse has been lit" by EPA on moving forward with regulation of greenhouse gases under the existing authority in the Clean Air Act.  Many commentators speculate that EPA and the Obama Administration are using this as a tactic to push the climate change legislation through Congress, even if they are correct that may be a tactic that back fires. 

If Congress does not act, I see no way EPA reverses course on its Endangerment Finding or California's Waiver request to set GHGs limits for vehicles.  Furthermore, EPA is reconsidering the Bush Administration decision to not require CO2 controls for coal plants. 

Even if EPA does not move forward with a full blow set of regulations to regulate GHGs, these actions will lay the ground work for Environmental groups to assert no new permits can be issued without CO2 controls. If there are concerns about the costs of climate legislation, everyone should be asking what the implications of these EPA actions will be on permitting and associated economic development. 

(Photo: Flickr Amy Manuel)

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I am a bit behind in writing a post about EPA's release of its endangerment finding.  Earth Day seems like the perfect day to catch up and take advantage of the last few days to look at the reaction and likely consequences of EPA's significant new action.

Background: In Massachusetts v. EPA decided in April of 2007, the Supreme Court held that greenhouse gases (GHGs) are pollutants that may be regulated under the Clean Air Act. But the Court did not go far enough to say EPA must regulate GHGs. At issue was Section 202 of the Clean Air Act which covers regulation of greenhouse gases from motor vehicles.

Under Section 202: The Administrator shall by regulation prescribe standards applicable to the emission of any air pollutant(s) from motor vehicles, “which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.”

The Court said EPA must conclude GHGs from motor vehicles endanger public health (i.e. "endangerment finding") before any regulation of emissions (tail pipe or fuel standards) from motor vehicles can occur. The Court remanded the Section 202 determination to EPA to make a legally defensible finding as to whether motor vehicle GHG emissions endanger public health. 

Key Legal Issues Discussed in EPA's Proposed Action:  On April 17th, Administrator Jackson issued a proposed finding that vehicle emissions of GHGs do endanger public health.  There is now a 60 day public comment period on the proposed action.

A key legal issue analyzed in the proposed action is whether Section 202 requires "actual harm" from a pollutant before it can be regulated.  EPA's proposed rule discusses the legislative history behind the language in Section 202 and concludes no finding of actual harm is necessary:

As the Committee further explained, the phrase “may reasonably be anticipated” points the Administrator in the direction of assessing current and future risks rather than waiting for proof of actual harm.

Also, EPA's proposed action rejects the notion a demonstration is needed that controlling GHG emissions from U.S. autos would actually make a difference in addressing climate change.  The EPA cited to language in the Supreme Court's Massachusetts v. EPA :

Moreover, as the Supreme Court recognized, “[a]gencies, like legislatures, do not generally resolve massive problems in one fell regulatory swoop.”

Science and Findings in EPA's Proposed Action:  There is no new science behind the endangerment finding.  Administrator Jackson relies on reports and conclusions from the U.S. Climate Change Science Program, the National Research Council, and the Intergovernmental Panel on Climate Change.  She found these reports to provide more than sufficient support that GHG pose a "risk" to public health that should be addressed. 

Here is how EPA has described its action on its web page and in supporting documentation:

The Administrator signed a proposal with two distinct findings regarding greenhouse gases under section 202(a) of the Clean Air Act:

1) The Administrator is proposing to find that the current and projected concentrations of the mix of six key greenhouse gases—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)—in the atmosphere threaten the public health and welfare of current and future generations. This is referred to as the endangerment finding.

2) The Administrator is further proposing to find that the combined emissions of CO2, CH4, N2O, and HFCs from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change. This is referred to as the cause or contribute finding.

This proposed action, as well as any final action in the future, would not itself impose any requirements on industry or other entities. An endangerment finding under one provision of the Clean Air Act would not by itself automatically trigger regulation under the entire Act

This last statement is very interesting. 

Does "Endangerment" = "Regulation":  Obviously the positive endangerment finding itself has major consequences.  There is no doubt it sets EPA on a path to regulate GHGs under the Clean Air Act unless Congress passes a cap and trade bill as substitute regulation.  While the path is set, the timing is in question.  Does this proposed action by itself mean all other sources that emit GHGs (beyond just motor vehicles) are subject to regulation under the Clean Air Act?

The status of GHGs under the Clean Air Act is uncertain as it stands.  EPA is currently taking comment on a separate action regarding regulation of GHGs under the Clean Air Act- Reconsideration of Former Administrator Johnson's memo declaring GHG unregulated without further action.

Deseret Power was an appeal of a coal permit in which Sierra Club argued the permit was invalid because it didn't include controls for GHGs.  The Environmental Board of Review said it was an open question as to whether GHG are considered "regulated pollutants" under the Clean Air Act. Sierra Club pointed to existing requirements to monitor CO2 emissions as evidence of regulation.  The EAB said EPA had discretion to decide whether monitoring was enough to amount to regulation.

In response to the EAB, Johnson, in one of his last acts before leaving office, tried to fill the void by issuing an interpretive memo determining CO2 was not a regulated pollutant due to the monitoring provisions.  Administrator Jackson is currently reviewing the Johnson memo following the Sierra Club petition.

THIS IS A HUGE ISSUE...If GHGs are regulated pollutants, then no additional legislation, rulemaking or action is necessary.  EPA could not issue permits to sources of GHGs without considering controls for those emissions.

Footnote 29 of the Endangerment Finding:  So does EPA's proposed endangerment finding amount to "regulation" of GHGs under the Clean Air Act?  Buried in footnote 29 on page 106 of the Proposed Rule is to me one of the most significant consequences flowing from a positive endangerment finding- does the finding amount to regulation.  Here is what footnote 29 says:

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.

EPA's footnote is confusing.  The issue in the reconsideration on the Johnson memo really should be limited to whether monitoring is sufficient to constitute "regulation" under the Act.  An endangerment finding would be a new action by EPA that will take place after Deseret Power was issued, after the Johnson Memo was written and after EPA granted the reconsideration of the Sierra Club petition. 

Perhaps the final action on the review of the Johnson memo will make this debate moot.  It certainly will if that action is to say GHG's are a regulated pollutant based upon monitoring requirements alone.  However, anything other than that outcome will allow the endangerment finding to be new grounds to argue GHGs are regulated under the Act.  In a prior post I discussed what a horrible outcome that would be as a regulatory approach. 

Final Comment:  Once again, to those questioning the merits of a Cap and Trade market mechanism for controlling GHGs- consider the alternative.  Like it or not EPA is on a path to regulate GHGs.  Due to the Supreme Court's holding in Massachusetts v EPA, there is no getting off that path or turning around.

 (see the extended entry for discussion of the reaction to EPA's action)

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On April 15, 2009 the Public Utilities Commission of Ohio finally adopted the long awaited rules that will govern Ohio's energy efficiency requirements and its Alternative Energy Portfolio Standard (AEPS).  Ohio was one of the last states to have adopted a Renewable Portfolio Standard (RPS)- more broadly defined as a AEPS in Ohio.  However, as one of the largest energy intensive states in the Country the finalization of the rules will surely spur growth of "green energy" related business in Ohio.

As a former regulator, a frequent mantra in describing the decision making process was- "if both sides are unhappy then you know you did your job well."   Well the Commission appears to have followed that mantra in responding to the vast amount of comments that were filed on the rules.  It sided with the Utilities on many issues and it sided with consumer and green groups on many issues.  It rejected many suggestions and complaints by Utilities and it rejected many suggestions and complaints by consumer and green groups.

The rules cover three major aspects of S.B. 221 passed by the Ohio Legislature in the summer of 2008:

1. Energy Efficiency and Demand Reduction Programs
2. Alternative and Renewable Energy Portfolio Standards
3. Greenhouse Gas Reporting and Carbon Dioxide Control Planning

Here is a brief recap of the changes made in response to comments.

Energy Efficiency and Demand Reduction Programs- The Commission completely restructured the rules governing energy efficiency and peak demand reductions.  The Commission revisions where designed to "reflect a focus on the program planning and review process."

• Cost Effectiveness- added new definitions of "cost effective" and "total resource cost test" that are applied to energy efficiency programs.
• Procedures for Review of Compliance Plans-  New hearing requirements were added on the planned portfolio of programs offered by an electric utility to meet energy efficiency benchmarks.  The hearing requirement was added in response to criticism that the benchmark review process be opened up and follow traditional Commission rate case procedures.
• Independent Auditors- Commission requires use of independent program evaluators (hired by the Utility but work at the direction of Commission Staff) to review and verify claimed energy savings and peak-demand reductions
• Calculating the Baseline for  Measuring Efficiency Improvements- the baseline will be measured by a "rolling average" of the last three years of kilowatt hours purchased instead of a fixed average of 2006 through 2008.  The Commission basically rejected claims by Utilities that using a rolling average keeps raising the bar because it incorporates the energy efficiency improvements each year.  As a result, the Utilities argued the energy saving requirement is closer to 39% than the 22.2% required in S.B. 221
• Banking "Overcompliance"- Commission will allow Utilities to "bank" over compliance with the energy efficiency benchmark and apply the overcompliance to future years
• Adjusting for Economic Growth- Baseline can be adjusted to account for either growth or reductions in economic growth.  The idea is to remove the influence of a changing economy on achieving energy efficiency improvements
• Mandated Efficiency Improvements- Utilities cannot count energy savings that result from customer installed appliances or equipment that are mandated by law including the Energy Independence and Security Act of 2007

Alternative Energy Portfolio Standard- S.B. 221 splits the 25% of electricity energy by 2025 standard into two separate benchmarks- one for "alternative energy" sources and another for "renewable energy sources."  The rules put a lot more teeth into the renewable energy benchmark, including specific interim benchmarks. 

Overall, the Commission did not address significant concern with some of the loose aspects of the Alternative Energy benchmarks.  These include the definition of what constitutes "Clean Coal" as well as what can be counted toward meeting the Alternative Energy Benchmark.  However, as detailed below, the Commission did put teeth into the "cost cap" provisions associated with compliance with either benchmark.

• RFP- Rejected a suggestion that renewable and alternative energy be procured through a Commission sponsored RFP process to ensure transparency
• Biomass- with regard to wood resources, the Commission allows use of wood and paper manufacturing waste, urban wood and tree residues, forestry residues, forest management or other land clearing.  However, forest resources must be from "sustainable forest management operations."
• Clean Coal- the Commission rejected criticism that the current rule would provide credit to technology that is "designed" to reduce CO2 irregardless of whether the reductions are actually achieved.
• Co-firing- will qualify as a renewable energy resource as determined by the proportion of energy input from the renewable energy resource.
• "Delivered into this State"- Commission will still require a power flow study and/or deliverability study to show power in the PJM or MISO transmission systems are deliverable into the state.
• Distributed Generation- renewable energy credits (RECs) generated from distributed energy sources belong to the owner of the equipment
• "Double Counting"- cannot use one project to meet both the energy efficiency benchmarks and the AEPS
• "Unbundling"-  Cannot unbundle other positive environmental attributes associated with creation of a REC and sell those attributes separately.  The classic example is you cannot sell the climate change CO2 reductions as well as RECs from one project.  You will have to choose with credits are more valuable
• Energy Storage- by itself cannot be considered a renewable energy resource
• Cost Cap- rejected utilities argument that the advanced energy and renewable energy cost caps be aggregated as one 3% cap. Also, rejected claim that the 3% increase is measured by isolating cost of generating the renewable or alternative energy.  Rather, the cost cap is triggered only if overall cost of supplying all forms of electricity rises more than 3% in order to meet the alternative energy or renewable energy benchmarks.  This ruling makes it far more difficult for Utilities to trigger the cost cap provisions.
• "Catch-up Provision- Commission effectively drops the requirement that future year benchmark compliance requirements be increased by the amount of undercompliance of the previous year due to the 3% cost cap

Greenhouse Gas Reporting Requirements

The Commission rejected concerns raised by Utilities regarding the mandate in the rules to become participating members in the Climate Registry.  The Commission noted that  S.B. 221 requires reporting and tracking of CO2 emissions must be performed.

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House Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) and Chairman of the Energy and Environment Subcommittee Edward J. Markey (D-Mass.) introduced the “The American Clean Energy and Security Act” as the opening salvo in a contentious and complex debate over a greenhouse cap and trade program.  The bill links two major and independently controversial proposals:  1) a nationwide cap on greenhouse gases (GHGs); and 2) a national renewable standard and energy efficiency. 

The bill would:

• Cut national greenhouse gas emissions 20 percent from 2005 levels by 2020-this is slightly more aggressive than similar measures pushed by the Obama Administration.  Overall the goal is to cut GHG emissions by 85% by 2050 when compared to 2005 levels
• Reduce electricity demand by 15% by 2020
• Nationwide renewable energy standard which requires 25 percent of the Country's energy generation be met through wind, solar and other renewables.

The bill forms a skeletal framework, but leaves major controversial components open to debate.  (See summary of the American Clean Energy and Security Act) For example, the bill does not address whether pollution allowances under the cap and trade program would be 100% auctioned or 100% allocated to industry or somewhere in between.  The fact the bill does not even make a proposal on this component suggest the drafters understand a deal will need to be struck to give a chance for the bill to pass. 

US Climate Action Partnership -- a coalition of businesses and environmental groups -- called the bill a good starting point.  The bill makes several key concessions to Industry:  a)  allowing domestic and international offsets; b)  provides C02 and other GHGs cannot be regulated as criteria pollutants or hazardous air pollutants under the Clean Air Act; c) creates a strategic reserve of allowance in the event allowance prices are too high; and d) allows unlimited banking of allowances.

However, the bill also includes proposals that will raise concerns with Industry beyond the major concern-should the U.S. have a cap and trade system to control GHGs?  While the bill essentially exempts GHGs from traditional regulation under the Clean Air Act (a major advantage of legislation), it directs EPA to set up a new regulatory program to curb GHG emission by sources that are not covered by the Cap.  The bill also does not create any kind of so called "safety valve" which is a limit on the price of allowances.  While the strategic reserve concept allows some cushion, it only provides for release of more allowances into the pool it does not set a ceiling on the price of an allowance.

As reported in the Boston Globe, the House Committee's goal is complete debate on the bill by Memorial Day.  Here is the tentative schedule:

• Week of April 20:  Energy and Environment Subcommittee Hearings
• Week of April 27:  Energy and Environment Subcommittee Markup Period Begins
• Week of May 11: Full Energy and Commerce Committee Markup Period Begins

This appears to be a highly ambitious schedule given the level of controversy and major components of the bill open to debate.  Passage will be still very questionable.  You will have virtually no support among Republicans. You will have Democrats in coal states worried about the cost impacts of cap and trade on utilities.  You will have Democrats and Republicans in Southern states very concerned about the national renewable energy standard. 

For the bill to pass, major components will likely have to be restructured.  I am certain there will be plenty to write about regarding the bill in the coming weeks and months. 

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A new complex web of standards for control of vehicle emissions of greenhouse gases (GHGs) is coming at a time of unprecedented challenges to the auto industry.  The timing raises questions as to whether the Bush Administration's denial of California's request to establish separate GHG standards is really worth re-visiting.

On January 26, 2009 President Obama signed a Presidential Memorandum directing U.S. EPA to assess whether denial of California's waiver request to allow it to implement emission standards for GHGs from vehicles was appropriate in light of the Clean Air Act.   The memo forces EPA to reconsider the previous Denial of a Greenhouse Gas Waiver of Preemption for the State of California that was published in the Federal Register on February 12, 2009.

The decision to revisit the denial of California's Waiver request comes at a time of unprecedented challenges for the Big Three Automakers.  Just over the weekend the Obama Administration rejected re-structuring plans and ousted General Motors CEO, Rick Wagoner. With the major auto companies in survival (or near bankruptcy) mode, why is the Obama Administration complicating the regulatory structure for manufacturers?   

There Was A Sound Basis to Deny the Waiver Request

Former Administrator Stephen Johnson denied California Air Resources Board’s (CARB’s) request for a waiver to regulate greenhouse gases deeming it unnecessary in order to "meet compelling and extraordinary conditions." Johnson found C02 to be different than other pollutants regulated by the Clean Air Act, concluding that:

“section 209(b) was intended to allow California to promulgate state standards applicable to emissions from new motor vehicles to address pollution problems that are local or regional. I do not believe section 209(b)(1)(B) was intended to allow California to promulgate state standards for emissions from new motor vehicles designed to address global climate change problems."

While California and the other states that adopted the CARB standards challenged the denial, no Court reached the decision that Administrator Johnson acted unlawfully. 

Many who support the CARB standards cite litigation in other contexts to argue the denial was unlawful.  Supporters cite to decisions that found the CARB standards are not preempted by the CAFE standards. In those cases, the Courts generally recognized there is overlap between CAFE and the California GHG standards, however they rejected the claim this meant the standards were preempted. Green Mountain Chrysler v. Vermont.  Supporters of the CARB standards also point to language in the Supreme Court's decision in Massachusetts v. EPA which rejected EPA's policy reluctance to regulate GHGs. 

Courts finding: a) the CARB standards are not preempted ;and b) GHG need to be regulated as a pollutant under the Clean Air Act- is a far cry from finding California's can establish its own GHG standards for motor vehicles. The Bush Administration properly determined the ability to set separate emission standards is limited to standards necessary to address local pollution problems like ozone or particulates. 

Regardless, it appears the writing is on the wall and EPA will reverse course and grant the waiver. Otherwise, why would the President have issued such a directive.  Also, the Presidential Memorandum notes that "For decades, the EPA has granted the State of California such waivers"- a nod that history should be repeated by granting the waiver.

A Complex Regulatory Structure During Unprecedented Challenges to the Automobile Industry

EPA's decision on the waiver denial comes at the same time it is poised to issue its "endangerment finding" under Section 202 of the Clean Air Act.  The finding will set in motion the development of national standards for controlling GHGs from motor vehicles.  It has been reported that a positive "endangerment finding" was sent to the White House for review. 

Granting the CARB waiver request opens the way for implementation of the state standards in California and thirteen other states which in total represent about 40% of the U.S. auto market. After promulgation of GHG standards under Section 202 ("endangerment finding"), there will be potentially three methods for regulating fuel economy from vehicles and two methods for reducing GHG emissions- CARB, Section 202 and CAFE standards.

Of the three regulatory approaches, the CARB standards are by far the most inconsistent and difficult to implement. Instead of two or three standards, the CARB waiver request will result in a patchwork of regulations across the country.

The National Automobile Dealers Association (NADA) performed an analysis of the effect of the CARB Standards being adopted by other thirteen other states-  “Patchwork Proven: Why a Single National Fuel Economy Standard is Better for America than a Patchwork of State Regulation.” As set forth in the NADA study, the CARB regulations base compliance on what an automaker “delivers for sale” in that state. Therefore, states which adopted the CARB standards will force auto manufacturers to develop and implement more than a dozen separate compliance plans. This unnecessarily complex regulation will raise costs for consumers and will ultimately delay the introduction of advanced technologies to market.

With EPA about to establish national GHG standards for motor vehicles under Section 202 of the Clean Air Act, why revisit the Bush Administration's denial of the California Waiver?  At this critical juncture for the auto industry, a complex regulatory scheme for controlling GHG emissions appears unwise.

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Here are some snapshots of some of the latest developments regarding the Congressional debate over cap and trade legislation.  For the first time serious consideration of legislation is underway.  As a result, groups are beginning to develop their public positions.  Meanwhile, businesses continue to feel increasing pressure to address the risks associated with climate change.

Congressional Battle Lines Are Forming-  In my last post I apparently underestimated the aggressiveness of the Conservative attack on the Cap and Trade Proposal.  The legislative battle is beginning to take shape. RNC Chairman Steele said the following on a call in talk show: 

We are cooling. We are not warming. The warming you see out there, the supposed warming, and I am using my finger quotation marks here, is part of the cooling process. Greenland, which is now covered in ice, it was once called Greenland for a reason, right? Iceland, which is now green.

Skepticism among "Blue Dog" Democrats:  As serious consideration of a cap and trade bill is now underway, conservative Democrats are questioning the timing and implementation of a cap and trade proposal.  In a Wall Street Journal interview with U.S. Climate Action Partnership member, Fred Krupp, he minimized the concern a divide is occurring within the Democratic Party:

Recently I met with 27 House Blue Dog Democrats, alongside other members of USCAP including [GE boss] Jeffrey Immelt, [Shell’s] Marvin Odum, and [Duke Energy’s] James Rogers. What I heard is that they want to be involved in getting a climate bill right, and making it fair for consumers; I didn’t see a lack of engagement. Until now, there’d been no prospect of legislation. Now, the sorts of concerns are raised that naturally get raised when things could actually happen. This is part of the legislative dance, and that just began in earnest when President Obama called on Congress to deliver a climate bill.

Size of the Climate Bill May 2 or 3 Times Projected in the President's Budget- Jason Furman, deputy director of the National Economic Council, told Senate staffers in late February that the plan could raise two to three times as much as the official budget figures, or between $1.3 trillion and $1.9 trillion, the WSJ reports.

[In order to get projections that high] That leaves carbon-emissions permits that are simply more expensive than the lowish prices that have been bandied about so far. To make the White House math work, the government would have to sell the same number of permits at prices ranging from $20 to more than $40 a ton [compared to $10 to $14 per ton originally projected.  For comparison the most recent RGGI auction, carbon was around $3 per ton]

Cap and Trade Means Jobs-  Understanding the link between a struggling economy and the viability of cap and trade legislation, the Environmental Defense Fund has launched a new web site showing regulating carbon can translate into green jobs.  The site contains maps of select states with push pins representing various companies that EDF argues would benefit from cap and trade legislation. It is no coincidence that EDF uses mainly coal states to highlight the potential for green job growth.  www. lesscarbonmorejobs.org

Insurers Must Disclose Climate Change Risks-  Another indication came last week that climate change is having real world impacts on the business community even before a vote occurs on cap and trade legislation.  The National Association of Insurance Commissioners (NAIC) voted last week to require the annual filing of Insurer Climate Risk Disclosure Surveys for insurance companies with annual premiums topping $500 million. The new rule, set to begin May 1, 2010, is the world's first climate risk disclosure requirement,

Market Solutions Versus Top Down Regulation-  The freight train that is greenhouse gas (GHG) regulation is on track and moving full steam ahead.  I cannot repeat enough to those debating climate change legislation, if you are focusing only on whether to enact cap and trade legislation you are missing the 800 lbs gorilla in the room.  GHG regulation is coming.  The Supreme Court set the train in motion with Massachusetts v. EPA.  No real debate should occur without examining the alternative of allowing Clean Air Act regulation of GHGs instead of a market based solution like cap and trade.

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In accordance with the FY2008 Consolidated Appropriations Act, the U.S. Environmental Protection Agency (EPA) has issued its proposed rule to require annual mandatory reporting of greenhouse gases from over 13,000 businesses.  Businesses covered by the rule must start tracking emissions by 2010 and report in 2011 on an annual basis. While specific sources are named, EPA has decided to use an emission threshold of 25,000 metric tons of CO2 equivalents (mtCO2e) to determine coverage for many businesses under the rule. 

The details of the EPA reporting rule may provide a glimpse into the structure of President Obama's Cap and Trade program.  For example, the 25,000 mtCO2e and specifically named source categories may be used to determine which businesses are covered by the cap.  It is also important to note, the coverage of the reporting rule contrasts with much lower threshold triggers used by other regulatory programs under the Clean Air Act.

Which gases are covered by the rule?

U.S. EPA will require reporting of anthropogenic GHG emissions covered under the United Nations Framework Convention on Climate Change (UNFCCC); carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), and sulfur hexafluoride (SF6), as well as other fluorinated gases (e.g., nitrogen trifluoride and hydrofluorinated ethers). These gases are often expressed in metric tons of carbon dioxide equivalent (mtCO2e). 

All the other GHGs have higher potential to cause global warming.  Therefore, as with other the European Union Trading System, a conversion ratio is applied to create carbon dioxide equivalents.  For example, 1 ton of methane is equal to 20 tons of CO2.  These conversion ratios are important to understand because they determine which businesses are covered by the reporting rule.

For example, a large agricultural operation will have significant emissions of methane.  The facility will need to convert its methane emissions to CO2 equivalents to determine if it is a facility covered. [Note: most agricultural operations are exempted from coverage under the rule]

How did EPA pick the 25,000 mtCO2e threshold?

EPA considered thresholds of 1,000, 10,000, 25,000, and 100,000 mtCO2e/year when developing the proposal. For each threshold, EPA assessed the number of facilities that would be covered as well as the total amount of emissions that would be covered. These analyses suggested that at a threshold of 25,000 metric tons of mtCO2e/year, 13,000 facilities and 85-90% of total GHG emissions would be covered. At a threshold of 10,000 mtCO2e/year approximately 20,000 facilities and 86-91% of GHG emissions would be covered.  EPA felt reducing the threshold increased costs for smaller businesses and would not result in a significantly larger inventory of emissions.

Are other facilities with lower than 25,000 mtCO2e required to report?

Yes.  EPA also named specific source categories that are covered by mandatory reporting regardless of whether they cross the 25,000 mtCO2e threshold.  These sources include, among others, the following: electric generating plants subject to the Acid Rain program, aluminum, ammonia, cement, electronics, lime, petrochemical, petroleum refining, certain underground coal mines, manufacturers of engines, and municipal landfills.

EPA also included "downstream" sources.  Those facilities that produce fuel that when burned result in GHGs emissions.  This producers include: coal, coal-based liquid fuels; petroleum products, natural gas and natural gas liquids; producers of industrial greenhouse gases as listed in the rule; and importers/exporters of 25,000 mtCO2e. 

How will this affect small and medium sized businesses?

Using this threshold,  EPA estimates this will capture 90% of GHG emissions and require 13,000 businesses to report. In rolling out its proposed rule, EPA tries to deflect criticism leveled by the U.S. Chamber and others that  EPA GHG regulations will have a negative impact on small and medium sized businesses.  EPA provides the following fact relative to the 25,000 threshold:

25,000 mtCO2e are equivalent to emissions from annual energy use of about 2,200 homes. It is also equivalent to just over 58,000 barrels of oil consumed or 131 railcars’ worth of coal.

This statistic does give you some perspective on the magnitude of the sources covered by the reporting rule.  However, just because these larger sources are covered by the reporting rule does not necessarily mean that regulation of GHGs under the Clean Air Act would not capture much smaller sources.  For example, the New Source Review permitting threshold for a major source is 100/250 tons of a pollutant.

What is the method for monitoring emissions?

EPA selected a combination of direct measurement and facility specific calculations as the general monitoring approach.  Direct measurement will require Continuous Emission Monitors (CEMs) on some sources.  Other sources will have to use emission calculations designed for that type of facility. EPA asserts that the emission calculations are similar to those used in other programs such as the Climate Registry or California's AB-32. 

Consistency is an important issues.  EPA estimates the cost to report will be around $13,000 per facility.  This is an average which means it will be much higher for some facilities.  Many companies have voluntarily begun measuring emissions under the Climate Registry or another approach.  Other companies are covered by mandatory state programs like RGGI. 

The ability to agree on a common method for measuring emissions is critical.  It will reduce compliance costs and prevent criticism that there are inconsistencies in the various programs.  For these reasons, the comments on this portion of the rule are critical. 

Has there been an early criticism of the rule?

Yes.  The largest amount of criticism has been focused on the reporting requirement being applied to both upstream and downstream sources of GHGs emission.  As an example, the coal mine and the power plant who later burns the coal are both required to report under the rule.  Some have criticized this approach as "double counting" or a waste of resources.  Others have pointed out that EPA needs to gather a range of data to keep policy options open for controlling GHGs. 

Additional Information:

For more information on the rule, see EPA's web page dedicated to the GHG reporting rule.  Also, EPA has prepared a four page fact sheet that does a good job summarizing the major components of the rule.

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Greenwire obtained a leaked copy of a U.S. EPA powerpoint presentation that discussed the likely elements of the "endangerment finding" and a timeline for action.  The presentation includes a slide showing a timeline for action.  According to the slide, the Agency will miss the April 2nd anniversary of the Massachusetts v. EPA Supreme Court decision, but is projected to sign the rule on April 16.   

In Massachusetts v. EPA decided in April of 2007, the Supreme Court held that greenhouse gases (GHGs) are pollutants that may be regulated under the Clean Air Act. But the Court did not go far enough to say EPA must regulate GHGs. At issue in this case was Section 202 of the Clean Air Act which covers regulation of greenhouse gases from motor vehicles. For a pollutant to be regulated under Section 202 it must be “reasonably be anticipated” to “endanger public health or welfare.” Therefore, EPA must conclude GHGs from motor vehicles endanger public health before regulation commences The Court remanded the Section 202 determination to EPA to make the necessary "endangerment finding."

As expected and detailed in the EPA powerpoint, the Agency is poised to make a positive endangerment finding.  The presentation also contains additional insights as to what to expect in the April 16the finding:

• EPA will expand the definition of "pollutants" to include the six GHGs traditionally regulated (CO2, CH4, N2O, HFCs, PFCs, SF6).  It will leave out other possible pollutants such as black carbon
• EPA will make a positive finding that GHGs impact both "public welfare" and "public health."  An earlier proposed finding did not make a finding that "public health" was impacted.  EPA will cite to rising temperatures, worse air quality and extreme storm events as impacts on public health
• EPA notes that the Administrator has discretion to determine some sources of GHGs are de minimis or insignificant.  I assume this is meant to address the concern expressed by the U.S. Chamber that everything down to churches and retail stores will be regulated as source of GHG emissions
• EPA will propose two options for listing GHGs as "air pollutants."  Option 1: group the six GHGs together as CO2e (C02 equivalents).  Option 2:  list each GHG individually.  EPA prefers the first option as CO2e have developed into the common currency in other regulatory and trading mechanisms
• EPA discusses the impact of the two options discussed above on different regulatory sections of the Clean Air Act.  Notably, PSD and NSPS are included on the list.  This seems to recognize that the endangerment finding could have an immediate effect of requiring permits for new sources of GHGs.

The "endangerment finding" is the first major domino to fall leading to comprehensive regulation of GHGs.  While President Obama's Cap and Trade proposal is drawing more scrutiny, it presents a much better option than regulation under the Clean Air Act.  Let's hope that legislation can pass before too many of the dominoes fall.

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No doubt the President's budget includes a very ambitious proposal cap and trade proposal to address Climate Change.  The President Budget provides an overview of the proposal in the EPA budget:

After enactment of the Budget, the Administration will work expeditiously
with key stakeholders and Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional Government regulations and mandates of the past.
Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in fiscal year 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.

The budget blueprint Obama sent to Congress yesterday foresees revenue of $645.7 billion by 2019 from the sale of permits to polluters from 2012. Obama proposes to use the money raised to pay for other priorities, such as tax breaks for the lower and middle class. Another $150 billion will be used to help spur development of renewable energy. 

Early reaction to Obama's plan has been mixed with most recognizing he will have an enormously tough road ahead to pass a Climate bill with the framework he is proposing.

100% Auction... how about 30%?- President Barack Obama may need to give away as much as 70 percent of greenhouse-gas emissions permits to win support for his cap-and-trade program, Merrill Lynch & Co said.

McCain Blasts Obama Proposal- “I don’t think cap and trade should be used for the purposes of generating revenue,” McCain

 Environmental groups were jubilant at Obama's proposals on climate change-"It's a hugely important policy direction and another sign that Obama gets it when it comes to building a clean energy economy," said Gene Karpinski, president of the League of Conservation Voters.

Obama team will be pragmatists on climate change-  "Todd Stern, the Obama administration’s new top climate-change negotiator, wants to tamp down on the expectations. He talks tough and is all for the shift to a low-carbon economy, but he’s not an ideologue. And he may well be reflecting the White House’s pragmatism in the face of numerous challenges."  Its hard to see the pragmatism in a 100% auction, very small offset proposal.

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On February 18th another permit, Northern Michigan University Ripley Heating Plant, for a new coal facility was remanded by U.S. EPA's Environmental Board of Review.  The Board remanded the permit because the State (the Michigan Department of Environmental Quality), in issuing the permit, failed to address whether CO2 was a regulated pollutant under the Clean Air Act.  The most interesting aspect of the decision is that the Board apparently gave absolutely no weight to former EPA Administrator Johnson's Memo which said CO2 was not a "regulated pollutant" and therefore new permits need not consider BACT controls for CO2.  Here is what the Board said on the issue:

For the reasons set forth in that decision (Deseret Power), we similarly remand the CO issue here, directing MDEQ, guided by our findings in Deseret, to undertake the same consideration whether the CAA’s “pollutant subject to regulation” language requires application of a BACT limit to CO emissions.

The Board does not elaborate or even address the Johnson memo.  Therefore, it is impossible to know whether new EPA Administrator Jackson's grant of the Sierra Club's petition for reconsideration rendered the Johnson Memo meaningless.  That seems like a difficult legal conclusion to reach given the fact Jackson's action specifically did not block the effectiveness of the Johnson memo while it was undergoing review.

The permit had authorized Northern Michigan University (NMU) to construct a new circulating fluidized bed (“CFB”) boiler at the Ripley Heating Plant on its campus in Marquette, Michigan. As permitted, the CFB boiler will function as a cogeneration unit that provides both electrical power and heat to NMU’s facilities through the burning of wood, coal, and natural gas

Another interesting aspect of the decision was the Board also remanded the BACT analysis for the SO2 limit.  The permit called for a mix of fuels- mainly wood and coal.  The Board found there was not enough information provided to justify the limited amount of wood which would lower SO2 emissions.  The Board also questioned the fuel choice relative to coal.  It said the MDEQ needed to provide more information as to why lower sulfur coal was not required to lower SO2 emissions.

The BACT requirements for fuel choice are interesting.  For instance, once (not if) CO2 is regulated would BACT require a coal and biomass mix which can lower emissions of CO2?  This could be very good news for biomass producers who blend biomass with coal to form briquettes or pellets. 

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May you live in interesting times....Yesterday EPA Administrator Jackson issued a letter granting the Sierra Club's petition for reconsideration of a Deseret Power memo issued by former EPA Administrator Johnson.  The Petition seeks reconsideration of the Johnson memo which interpreted EPA regulations defining the pollutants covered by federal permitting under the Clean Air Act.  The Johnson memo said that CO2 was not a regulated pollutant under the Clean Air Act (CAA) for purposes of permitting. 

The memo was issued following the decision by the EPA's Environmental Board of Review in the Deseret Power case concluding the CAA was ambiguous and that EPA had discretion to determine whether CO2 was a pollutant subject to regulation.  Johnson, in one of his last acts before leaving office, tried to fill the void by issuing an interpretive memo determining CO2 was not a regulated pollutant.

There was tremendous pressure on new EPA Administrator Jackson to revoke, stay or invalidate the memo.  Such action would have effectively put on hold about a 100 pending permits for coal fired power plants.  In a prior post, I predicted that despite the pressure Jackson would take a more deliberate approach.  She has done exactly that by not issuing a stay and announcing EPA will embark on a formal rulemaking process.  (even I get one right now and then)

While Jackson has chosen to address the issue slowly, she did include language in her letter that cast a great deal of uncertainty regarding pending permits:

In the meantime, the Agency emphasizes a point noted in the memorandum itself: the memorandum does not bind States issuing permits under their own State Implementation Plans.  In addition, given the Agency's decision to grant reconsideration of the memorandum, other PSD permitting authorities should not assume that the memorandum is the final word on the appropriate interpretation of Clean Air Act requirements.

While this statement casts some uncertainty, the Johnson memo is still legally effective.  Unlike others in the blogosphere predicting stoppage of all permitting for new coal plants,  I believe permits will still move forward in State's willing to issue them. 

Yesterday, EPA Administrator Jackson also issued a statement regarding her decision to grant reconsideration:

“I am granting this petition because we must learn more about how this memo affects all relevant stakeholders impacted by its provisions,” said EPA Administrator Lisa P. Jackson “This will be a fair, impartial and open process that will allow the American public and key stakeholders to review this memorandum and to comment on its potential effects on communities across the country. EPA’s fundamental mission is to protect human health and the environment and we intend to do just that.”

My take on the statement is: a) EPA intends to move through a slow rulemaking process; and b) once EPA completes the rulemaking process you can pretty much count on the fact CO2 emissions will be regulated. 

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In remarks titled "from peril to progress", the President set forth bold action yesterday that will inevitably lead to full regulation of CO2 and greenhouse gas emissions.  The President ordered a "vigorous review" of California's request to regulate greenhouse gas emissions which had been previously denied by the Bush Administration. [President Obama's memo ordering a review of the California Waiver]   While much of the media focus has been on the effect of the other aspects of the President's actions, such as raising mileage standards, in reality the California waiver request has far more reaching repercussions. 

California has been seeking EPA’s approval to waive federal preemption of state vehicle emission standards for several years.  California wants to enforce a state law that would require automakers to reduce carbon dioxide emissions from new vehicles by 30 percent by 2016. Under the Clean Air Act, U.S. EPA must concur that California has demonstrated a need reduce greenhouse gases in order  “to meet compelling and extraordinary conditions.” 42 U.S.C. § 7543(b)(1)(B). Former EPA Administrator Johnson denied California's "waiver" request last year.

The signs that President Obama would proceed in a radically different direction than the Bush Administration on controlling greenhouse gases have been building for some time. First, he mentioned climate change in his speech in Chicago the night he won the election.  Second, he appointed members to the cabinet and senior staff positions that are strong believers in aggressively tackling climate change.  Third, he made mention of climate change in his 20 minute inaugural speech clearly indicating it will be a major priority of his Administration. 

Yesterday, the President took bold action only a week into his Presidency with his issuance of an order to review the denial of the California waiver request.  After announcing his action, President Obama made a speech that contains a clear message- it the President's intention for the United States to lead on addressing climate change no matter how difficult the task may be.  His speech included some pretty bold statements.  Here is an excerpt from his speech: 

Third, the federal government must work with, not against, states to reduce greenhouse gas emissions. California has shown bold and bipartisan leadership through its effort to forge 21st century standards, and over a dozen states have followed its lead. But instead of serving as a partner, Washington stood in their way. This refusal to lead risks the creation of a confusing and patchwork set of standards that hurts the environment and the auto industry.

The days of Washington dragging its heels are over. My administration will not deny facts, we will be guided by them. We cannot afford to pass the buck or push the burden onto the states. And that's why I'm directing the Environmental Protection Agency to immediately review the denial of the California waiver request and determine the best way forward. This will help us create incentives to develop new energy that will make us less dependent on oil that endangers our security, our economy, and our planet....

Finally, we will make it clear to the world that America is ready to lead. To protect our climate and our collective security, we must call together a truly global coalition. I've made it clear that we will act, but so too must the world. That's how we will deny leverage to dictators and dollars to terrorists. And that's how we will ensure that nations like China and India are doing their part, just as we are now willing to do ours.

It's time for America to lead, because this moment of peril must be turned into one of progress. If we take action, we can create new industries and revive old ones; we can open new factories and power new farms; we can lower costs and revive our economy. We can do that, and we must do that. There's much work to be done. There is much further for us to go.

But I want to be clear from the beginning of this administration that we have made our choice. America will not be held hostage to dwindling resources, hostile regimes, and a warming planet. We will not be put off from action because action is hard. Now is the time to make the tough choices. Now is the time to meet the challenge at this crossroad of history by choosing a future that is safer for our country, prosperous for our planet, and sustainable.
 

California's waiver will almost certainly be granted.  Such action will tip the regulatory dominoes leading to full blow regulation of greenhouse gases from more than just tailpipes in California. As discussed on this blog before, the Supreme Court has already determined CO2 is a pollutant under the Clean Air Act.  Since the Court's decision the debate has centered on whether CO2 is a "regulated pollutant."  Once it is considered "regulated", then numerous provisions in the Act will be deemed to apply to control CO2 and other greenhouse gases.  

One way to make CO2 a regulated pollutant is for EPA to issue new regulations requiring control.  EPA started down that road slowly with the issuance of its Advanced Notice of Public Rulemaking for regulation of greenhouse gases this summer.  However, environmental groups argued new regulations were not needed.  They argued the act already "regulates" CO2.  Specifically, the Clean Act includes monitoring requirements for CO2 from coal plants.

In waning months of the Bush Administration, the Environmental Board of Review issued a major decision in Deseret Power, finding that EPA had discretion to decide whether monitoring was enough to constitute regulation.  In the final days of his tenure, former Administrator Johnson issued an interpretative memo responding to the Deseret Power decision declaring monitoring was not enough. 

Since issuance of the memo, environmental groups have legally challenged the Johnson memo and pressured the Obama Administration to retract it.  However, granting California's waiver request would likely render the memo meaningless.  A grant of the waiver would not by itself be considered regulation of CO2, thereby providing the trigger for regulation of CO2 under other provision of the Clean Air Act.   And with that the dominoes will begin to fall...

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With recent developments in climate change litigation, including the Deseret Power decision, it appears we are moving ever closer to requiring control of CO2 from coal fired power plants and other major sources of CO2.   Outgoing EPA Administrator Johnson may have delayed things temporarily by issuing his memo in response to Deseret Power. However, incoming EPA Administrator Jackson has pledged to quickly review the California waiver request that would allow the State to set CO2 emission standards for cars. If that happens, the dominoes will soon fall requiring controls for CO2 for all major sources under the Clean Air Act.

A positive "endangerment finding" in response to the California Waiver request will trigger a host of other regulations. Those would include requiring emission controls from new major sources of CO2 and other greenhouse gases under EPA's New Source Review permit program. 

If new or modified sources are required to control CO2, then as part of their permit they will be required to install Best Available Control Technology (BACT) to reduce CO2 emissions if located in an area that meets federal air quality standards.  More stringent limits (Lowest Achievable Emission Rate- LAER) apply in areas that don't meet air quality standards. 

The focus of all the recent litigation has been on whether to require CO2 controls as part of a BACT permit review.  But that begs a very interesting question....What would BACT be for CO2?

I was asked this very question during a recent interview I had with a reporter from Inside EPA.  That sent me to research the issue.   My review shows to things:  1) there is a wide divergence of opinion among experts as to what BACT would likely be;  and 2) EPA has a fair amount of discretion to determine the BACT standard for CO2.  Once it is decided that BACT must be required to control CO2 (and other greenhouse gases), Industry insiders expect EPA would take at a minimum 6 months to decide the issue.

Reading the tea leaves, I think we can begin to decipher an answer as to what BACT may constitute.  We certainly can eliminates some suggestion offered by pundits based upon how EPA has applied the BACT standard in the past.  Here is what we know....

1. There are no current EPA endorsed technologies for controlling CO2.  EPA's current RACT/BACT/LAER clearinghouse doesn't have anything on CO2.  The clearinghouse is used to identify various control technologies that would be deemed to meet the various standards on specific industries or technologies. 
2. BACT is a site-specific, case-by-case decision which means uncertainty.  In testimony  House Government Reform and Oversight Committee, attorneys Peter Glaser and John Cline stated the following: "Since BACT determinations for CO2 have no regulatory history at this time, and can vary by type of facility and from state-to-state, businesses wishing to construct new sources or modify existing ones would have no basis for planning what the regulatory requirements will be."
3. Case law and regulatory decisions of EPA establish parameters for the BACT analysis.  As detailed below, case law in the context of BACT for coal plants can be extrapolated to CO2.  The same general guidelines used to evaluate controls for other pollutants (SO2, CO, mercury, NOx) will be used for CO2. 

Now lets turn to a review of experts who have offered their opinion as to which technologies should be considered BACT for CO2.  Here is one guess from the blog Cleanergy.org:

BACT for CO2 is unlikely to mean carbon capture and storage (yet), since it's not readily available, but it will probably mean some combination of co-generation (making use of waste heat from electricity generation), efficiency improvements, and/or fuel switching/co-firing with biomass. Ultimately, President-elect Obama's EPA gets to decide how BACT is defined for CO2, a process which will take at least a year. 

Joseph Romm, author of the blog Climate Progress, offered his opinion of what BACT for CO2 may look like.

Certainly it is going to slow down the permitting of any new coal plant dramatically, until the EPA figures out the answer to the $64 billion question: What is BACT for CO2 for a coal plant? That will probably take the Obama EPA at least 12 months to decide in a rule-making process. But from my perspective it could/should/must include one or more of:

a) Co-firing with biomass — up to 25% cofiring has been demonstrated
b) Highest efficiency plants
c) Cogeneration (i.e. recycled energy)
d) (possibly even) Gasification with, yes, carbon capture and storage (CCS)

Here are some other opinions as to possible technologies that would qualify as BACT for coal-fired power plants:

1. Solar Thermal at a Coal Power Plant- mix the steam from solar thermal with steam from the boiler to reduce emissions. 
2. Highly Efficient Boilers-  Jeff Holmstead, former Chief Air Official for U.S. EPA, has said he  BACT would be for CO2 right now given costs and development of other control technology.

But let's look at the legal guidance associated with BACT.  In doing so, some of the technologies suggested seem "not ready for prime time" or would not be considered a control technology but rather a different type of generation. 

BACT is determined through a case-by-case evaluation of control technology alternatives and involves a complicated weighing of economic, environmental, energy and other factors. BACT can even be no control measure if that weighing process fails to identify a technically and economically feasible technology for controlling the pollutant in question.

A detailed discussion of the permitting process and legal aspects of a BACT analysis is provided below.  The single biggest consideration is that BACT takes the project as proposed and establishes the lowest achievable emission rate for the various pollutants.

This means BACT cannot fundamentally change the design of the proposed project.  This is why EPA has rejected establishing IGCC as BACT.  If the permit applicant is proposing a traditional pulverized coal boiler, then limits must be established based upon what is achievable for that type of boiler.

This eliminates many of the control technologies suggested by pundits:

1. IGCC- would force a redesign and would be rejected
2. Solar Thermal Combined with a Coal Boiler- would be rejected as forcing a redesign
3. Carbon Capture and Storage- This one is interesting.  Under BACT you must take the geographical location of the project into consideration.  If the geologic considerations would make CCS infeasible for the project it could not be required.  In addition, CCS is certainly not ready for prime time and could not be required as part of BACT for any site right now.

Some other technologies are more likely to be considered BACT:

1. High Efficiency Boilers- this would likely be required to reduce emissions
2. Co-firing with biomass-  depending on the project, this could be required.  Co-firing reduces CO2 emissions.  BACT does involve consideration of "clean fuels", however co-firing biomass would likely be rejected if it caused a major redesign of the facility.
3. Coal Drying- By removing moisture from the coal you can reduce CO2 emissions.  Similar to co-firing biomass this could be required if it doesn't force a major redesign of the project.

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On January 15, 2009 the Sierra Club filed a petition in the D.C. Circuit Court of Appeals challenging EPA Administrator Johnson's memo in response to Deseret Power.  The petition seeks the Court to throw out the Johnson memo.  The memo would allow current permits to proceed without considering controls for CO2 or other greenhouse gases.

If the memo is revoked or thrown out it would clear the way for the soon-to-be Administrator Jackson to issue her own interpretation.  But would she likely take such an action?  I doubt it.

The petition filed in the Court is procedural in nature and does not contain any insight into the Sierra Club's arguments.  However, you can review the petition the Sierra Club filed with EPA Administrator Johnson first which contains twenty pages of argument as to why the memo is illegal.  The group summarizes their attack on the memo in the following fashion:

As discussed below, this final agency action was impermissible as a matter of
law, because it was issued in violation of the procedural requirements of the
Administrative Procedures Act (“APA”), 5 U.S.C. § 101 et seq., and the Clean Air Act
(“CAA”), 42 U.S.C. § 7607, it directly conflicts with prior agency actions and
interpretations, and it purports to establish an interpretation of the Act that conflicts with  the plain language of the statute.

Many environmental groups are expecting that the future EPA Administrator will simply revoke the memo.  In the alternative, if their legal challenge is successful they expect future Administrator Jackson to issue her own interpretation which says CO2 is a regulated pollutant. 

I think they may be disappointed.  If such a memo were issued it would trigger an array of Clean Air Act regulations of CO2 emissions.  Many of these regulations are ill-suited for controlling CO2.  I would expect the future Administrator will get strong advice from her staff at EPA to proceed with caution in adopting new interpretations that could result in instantaneous regulation.  At a minimum, I believe they will advise that EPA construct a regulatory scheme in a deliberate fashion through a formal rulemaking process which could take at least a year. 

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(Image: CO2 Emissions in the U.S.)

Perhaps its obvious that the window of opportunity to obtain an air permit without CO2 controls is closing quickly.   Don't delude yourself that controls will wait for Congressional action on climate change.

The battle over requiring CO2 controls without additional rulemaking or legislation is being waged right now. The saga is being played out in the aftermath of the Deseret Power decision and the ensuing memo issued by EPA Administrator Johnson.  Here is a quick synopsis of what has transpired to date:

1. Deseret Power rejected EPA's basis for approving permits without CO2 controls.  However, the Environmental Review Board left the window open.  It said EPA could come out with a new position on the issue as to whether CO2 is a "regulated permit."
2. EPA Administrator Johnson quickly took advantage of the opening issuing a new interpretative memo saying the Clean Air Act's requirement to monitor CO2 was not tantamount to regulation of CO2.  Therefore, new permits did not need to include controls for CO2. 
3. In the latest round of the Deseret saga, the Sierra Club has filed a petition challenging the legality of the Johnson memo.  Citing Section 307(d) of the Clean Air Act, the group argues EPA's memo amounts to a new substantive rulemaking that must go through the notice and comment process.  If EPA denies the petition, the Sierra Club can appeal directly to the D.C. Circuit Court of Appeals.  The hope is that if the memo is declared illegal an Obama Administration would issue a much different memo- one saying controls for CO2 are required.

To me the saga over the Deseret Power decision is a simply good theater.  The fact is CO2 will be a regulated pollutant and soon.  In my mind, if you are seeking an air permit for a source with significant CO2 emissions you may have less than a year or so to get your permit before the whole playing field changes.   We should look to clues from President-elect Obama's pick to head the EPA as to what may happen in the near future.

President-elect Obama named Lisa Jackson to head U.S. EPA.  Ms. Jackson was the former Commissioner of the New Jersey Department of Environmental Protection.  According to some national news organization she brings a mixed record.  U.S. News and World Report stated the following:

She is credited with helping put New Jersey in a leadership role on the issue of climate change and with encouraging the state to adopt a moratorium on building new coal plants. Yet she also has made choices that have been applauded by industry, including an effort earlier this year to use private companies to clean up thousands of contaminated sites around the state.

In recent days, when Jackson's name emerged as Obama's likely pick, some of these issues resurfaced. A few New Jersey-based environmental groups have put out press releases criticizing Jackson's record, and their comments have gotten national attention. But many observers say the criticism is overblown and that Jackson, though having at times taken stands the groups didn't fully agree with, has largely been an ally.
 

Jackson's background shows EPA is likely to take some form of quick action on CO2 shortly after January 20th with Obama is sworn into office.  New Jersey participates in RGGI which is the cap and trade program for CO2 emissions from power plants in the Northeast.  Is no surprise Jackson and the rest of the Obama team strongly supports a national greenhouse gas cap and trade program.  However, such legislation is likely a year away at a minimum. 

What may happen in the interim?  There are several issues pending before U.S. EPA that could result in regulation of CO2 in the near term.  

1. The "endangerment finding" on CO2- EPA still needs to take action in response to the Supreme Court's decision in Massachusetts v. EPA.  This is the case regarding California's request for a waiver to set standards for CO2 from vehicles.  While the Court said CO2 is a pollutant, under Section 202(a)(1) of the Clean Air Act vehicle emission of greenhouse gases are not regulated until the EPA determines CO2 from cars would "endanger  public health and welfare."
2. Deseret Power interpretive memo-   An Obama Administration could also try and retract the memo issued by EPA Administrator Johnson in response to Deseret Power. 
3. Comprehensive Rulemaking on GHG Regulation-  EPA has issued its Advanced Notice of Public Rulemaking seeking comments as to whether to comprehensively regulate CO2 and other GHGs under the Clean Air Act.  An Obama Administration could accelerate action on this rulemaking effort. 

One of these three course of action will happen.  The question is just how soon.  New Jersey declared CO2 an air contaminant back in 2005.  In order to make such a declaration, New Jersey had to go through a formal rulemaking process declaring CO2 "injurious to human health and welfare."  Take a look at the conclusions in the NJ rulemaking, don't they appear to be exactly what would be need for an endangerment finding?

This interpretation (declaring CO2 an air contaminant)  is consistent with the statutory definition of air pollution at N.J.S.A. 26:2C-2 and the Department’s regulatory definition of “air pollution” at N.J.A.C. 7:27-5.1, which states that “’air pollution’ means the presence in the outdoor atmosphere of one or more air contaminants in such quantities and duration as are, or tend to be, injurious to human health or welfare, animal or plant life or property, or would unreasonably interfere with the enjoyment of life or property throughout the State ….”

The exclusion of CO2 as an air contaminant is no longer valid, given the intent of the Department’s definition of air contaminant throughout N.J.A.C. 7:27 and the definition of air pollution at N.J.A.C. 7:27-5.1, because scientific evidence has evolved to the point that adverse environmental and human health impacts due to increasing concentrations of CO2 in the atmosphere are now clear.

Also, New Jersey passed the New Jersey Global Warming Response Act which committed the state to returning global warming pollution to 1990 levels by 2020 and cutting global warming pollution levels by 80 percent by 2050.  New Jersey is only one of three states to make greenhouse gas reductions state law. 

The pressure on Jackson to take action to block new coal plants and regulate CO2 will be enormous.  She will have a hard time defending a slow and deliberate pace when her State has already taken significant action, including a State-like "endangerment finding."  This means some type of action to regulate CO2 will likely come in the first year of the Obama Administration.  As a result, the window of opportunity to avoid CO2 controls in a permit is closing quickly.   

The most likely course of action could be peeling the endangerment finding away from the ANPR and proceeding with a finding CO2 does endanger public health.  The other option that could have a quick and dramatic impact would be to retract the Johnson memo responding to Deseret Power.  A Jackson EPA could declare the memo was issued illegally and issue a new interpretive memo. 

(Image:  flickr Tom Raftery)

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Senator Barbara Boxer sent a letter to the Department of Justice demanding withdraw of what she calls a "blatantly illegal memo" issued by EPA Administrator Steve Johnson in response to the Deseret Power decision. The memo says that CO2 (and other greenhouse gases-GHGs) are not yet regulated pollutants under the Clean Air Act.  As a result, federal air permits will not require installation of Best Available Control Technology (BACT) to reduce GHG emissions.  Here letter states:

Administrator Johnson issued the document without legal authority under the Clean Air Act, and in spite of the clear opinion of the EPA’s Environmental Appeals Board in In re: Deseret Power Electric Cooperative, PSD Appeal No. 07-03 (EAB November 13, 2008). Johnson’s guidance also flies in the face of the U.S. Supreme Court in Massachusetts v. EPA (2007).

The Johnson document presents as arguments against including carbon dioxide emissions in a Clean Air Act permit the same kind of transparent excuses for inaction on global warming pollution that both the Supreme Court and the Environmental Appeals Board flatly rejected in their respective opinions. In addition, the EPA’s issuance of the Johnson document completely disregards the public’s right to participate in EPA decision making.

Senator Boxer goes too far in calling the memo "blatantly illegal."  In fact, the Environmental Appeals Board recommended that the EPA issue an interpretative memo to decide whether CO2 is considered a regulated pollutant. 

What I take away from the fact the letter was sent is how different things will begin to look come January 20th.  President-Elect Obama has already nominated members of the Cabinet that will have a 180 degree different view point of tackling Climate Change than the Bush Administration.  Most people know action will be taken, but I still don't think people fully grasp the magnitude of the change to move toward a low carbon economy.

My other observation is that many on the Internet who have been commenting on the events surrounding the Desert Power case don't fully grasp the implications of regulating CO2 under the current structure of the Clean Air Act.  (See Joe Romm's Post on his blog Climate Progress).  I have discussed this implications in prior posts.  There is a right way to do things and rushing to regulate CO2 without the proper regulatory framework would be a disaster.

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When the Environmental Review Board (EAB) issued its decision in Deseret Power, the Sierra Club and many others across the Internet declared victory claiming the decision would block permits for new coal fired power plants for the immediate future.  Looks like they may have been premature...  

The EPA issued a significant interpretive memorandum in response to the Deseret Power case which states CO2 is not a regulated pollutant under the Clean Air Act.   While more litigation will ensue, the permitting process can move forward on pending permits for new coal plants.

Background on Deseret Power

At issue in Deseret Power was whether controls were required (BACT) for CO2 for new coal-fired power plants.  Under the Clean Air Act, controls are required for CO2 if it is a "regulated pollutant." The Sierra Club pointed to provisions requiring monitoring of CO2, arguing those provisions were sufficient to be deemed "regulation."  EPA said monitoring requirements were insufficient and that past interpretations dictated a conclusion that monitoring was not enough to qualify as regulation.

As indicated in my post on the decision, the EAB in essence punted on the issue.  They rejected the Sierra Club's argument that the plain text of the Clean Air Act required regulation.  They also rejected the EPA analysis that past interpretations required it to conclude monitoring was not enough to trigger the need for controls.  However, the EAB said EPA has discretion to decide whether monitoring is enough to trigger the need to control through a new binding interpretation of what is sufficient to be considered a "regulated pollutant."

EPA Fills the Vacuum Left By the EAB

Here is Administrator Johnson's review of the EAB order, recognizing the discretion his agency retains:

The Board agreed with the Region and OAR that the statutory phrase "subject to regulation under this Act" is ambiguous. However, as discussed above, the Board also concluded that the Region's reason for not including a BACT limit for C02 in the permit - that it was bound by a historic interpretation of the phrase "subject to regulation" - was not supported by the administrative record for the permit. Id. Thus, the Board remanded the permit to the Region to "reconsider whether or not to impose a C02 BACT limit in light of the Agency's discretion to interpret, consistent with the CAA, what constitutes a 'pollutant subject to regulation under this Act."' The EAB also encouraged EPA offices to consider whether to undertake an action of nationwide scope to address the interpretation of the phrase "subject to regulation under the Act."

After citing to EPA's discretion, EPA concludes monitoring is insufficient to trigger controls for CO2:

EPA interprets the definition of "regulated NSR pollutant" in 40 C.F.R. 8
52.21(b)(50) to exclude pollutants for which EPA regulations only require monitoring or reporting but to include each pollutant subject to either a provision in the Clean Air Act or regulation promulgated by EPA under the Clean Air Act that requires actual control of emissions of that pollutant.  This interpretation is supported by the language and structure of the regulation and sound policy considerations.

EPA supports its interpretation by looking at the dictionary definitions of the words "subject to regulation."  However, this justification is pretty close to the one put forward to the EAB in the appeal which the EAB rejected.   EPA further supports this interpretation by arguing it amounts to sound public policy:

Furthermore, an interpretation that preserves the Agency's ability to gather information to inform the Administrator's judgment regarding the need to establish controls on emissions without automatically triggering such controls in no way limits the Agency's authority to require controls on emissions of a particular pollutant when the Administrator determines they are warranted. This
interpretation preserves the Administrator's authority to require control of individual pollutants through emissions limitations or other restrictions under various provisions of the Act, which would then trigger the requirements of the PSD program for any pollutant addressed in such an action.

EPA also attempts to create a better record in support of its interpretative ruling by citing to a series of previous permitting decisions that are consistent with this approach.  The permits arguably "demonstrate that EPA has not in practice issued PSD permits establishing emissions limitations for pollutants that are subject to only monitoring and reporting requirements."

Observations

1. More Litigation to Follow:  This interpretative memo will be challenged.  EPA certainly builds support for its interpretation, most notably by citing to a series of prior permit decisions that are in harmony with its interpretation. However, it is principally relying on a similar textual interpretation of the phrasing of the Clean Air Act that had, in part, been rejected by the EAB in Deseret.
2. EPA Rushed to Issue the Memo Before the Change in Administration:  The EAB recognized EPA had discretion to go either way in deciding to regulate CO2 under the Clean Air Act.  The Bush Administration did not want to allow this decision to be made by the next Administration, so it issued the memo without allowing for public comment which would have delayed finalization of the memo.  Administrator Johnson justifies cutting out public comment by citing to the need to keep the permitting process moving forward because a large number of permits put in limbo following Deseret. 
3. The Bush Administration's action ties the Obama Administration hand for the short term:  Administrator Johnson's memo cites to a series of cases that "recognized that an Agency has the flexibility to establish an initial interpretation of a regulation without engaging in a notice and comment process."  This memorandum is meant to be that "initial interpretation", which means the Obama Administration could not change it without going through a formal rulemaking process with a public comment period.  In the short term, this action keeps the permit processing moving forward for nearly 100 pending permits.

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A federal district court in Rhode Island has dismissed all the claims filed by the Auto companies seeking to strike down Rhode Island's greenhouse gas regulations for new cars. The decision did not reach the merits of regulating greenhouse gases from automobiles.  The Federal Court ruled that the Auto companies were prevented from challenging the adoption of  the CARB like standards based upon prior federal court decisions.

The importance of the decision is that other states can now move forward with regulations adopting standards to control greenhouse gases from cars.  Auto companies had been challenging state efforts to establish regulations on the basis both the Energy Policy Act and Clean Air Act pre-empt state efforts to establish regulations.  This implication of this decision is that the Auto Companies can no longer challenge such regulations on that basis.

If you are interested in the legal background, here is a link to the decision. 

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It didn't take long for the Deseret Power Decision to come back to Ohio.  The debate is over whether a permit for the proposed coal to liquid fuel plant proposed by Baard Energy and AMP Ohio's new coal power plant can move forward in light of the decision.  Here is a sampling of the debate over the Baard project as it appears in the local paper The Vindicator:

The statements came as the state EPA is on the brink of issuing an air permit for the proposed $5.5 billion Baard Energy plant that would turn coal into liquid fuel. Settles said a decision is expected to be made within the next two weeks.

The air permit would be the final permit needed to begin construction that would be a boost to the local economy. Permits regulating the plant’s effects on water and wetlands have already been approved.

In a statement, the Sierra Club said it went before the EPA Appeals Board in May of this year to request that the air permit for Deseret Power Electric Cooperative’s proposed waste coal-fired power plant in Utah be overturned because it failed to require any controls on carbon dioxide pollution.

The Sierra Club’s statement said the decision means that all new and proposed coal plants nationwide must go back and address their carbon dioxide emissions.
 

AMP Ohio's permit is facing an equal challenge.  In today'sDaily Sentinel, AMP Ohio was a bit cautious in its statements:

Carson (AMP Ohio) also pointed out, the decision was not in Ohio, which has a fully approved state permitting program, and that AMP-Ohio has worked for over a year in cooperation with Ohio EPA in meeting all requirements of Ohio law in regards to getting the plant online. Carson also pointed out the permit for the Utah plant was not denied but sent back to a regional office for reevaluation.

In a press release, the Sierra Club stated: “Two of the largest new coal proposals for Ohio, the AMP-Ohio power plant in Meigs County and the Baard liquid coal plant in Columbiana County, are likely to face setbacks from the ruling. Both companies had previously insisted that carbon dioxide should remain unregulated — an argument rejected in today’s ruling — and had resisted attempts to establish carbon limits in their air permits.”

Obviously there is a disagreement between the Sierra Club and Ohio EPA on how the decision will affect the permits at issue.  While Ohio EPA is correct that it is one federal court decision, the two cases that have had final decisions issued on whether C02 must be evaluated as part of federal New Source Review (NSR) have certainly been more in favor of requiring controls.  The Georgia State court held CO2 is a regulated pollutant and the pollution control analysis (BACT) for the new coal plant had to include controls for CO2.

The Sierra Club is a certainly overstating the decision in Deseret (see their Press Release) by claiming that all new coal plants must address CO2.  As discussed in my last post, the Environmental Appeals Board remanded the permit to U.S. EPA.  The Board said U.S. EPA has discretion to go either way- determine CO2 is a regulated pollutant or decide monitoring requirements are not enough to trigger requirements to control CO2. 

The Board did reject U.S.EPA's basis for saying historical precedent tied its hands from determining monitoring was enough to trigger regulation of CO2.  However, the Board did not say U.S. EPA couldn't develop a defensible position.

What is certain, is there is tremendous uncertainty.  From these comments we can anticipate Ohio EPA will issue the permit (known as "The Ohio River Clean Fuels LLC") without requiring analysis of CO2.  The Baard permit will be challenged and it is totally uncertain as to whether the permit will be invalidated by either a State or Federal Court in Ohio. The AMP Ohio Permit faces similar uncertainty.

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Talk about your pro-bowl quality punts...U.S. EPA's Environmental Appeals Board made a major one this week on the issue of climate change.  All eyes were fixated on the Board waiting for their decision on whether the Clean Air Act requires immediate regulation of greenhouse gases  (GHGs-which include CO2).  The Board's answer?  We would rather let the Obama Administration decide.

Others on the web point out this may hold up permits for coal plants while EPA deliberates on what to do next.  There is uncertainty after the decision, but other Courts don't have to follow the EAB ruling.

-See Coal Plant Stop Orders and Power Landscape Changes After Ruling

Background:  For those not keeping up to date on the latest litigation over regulation of GHGs, a major decision was issued yesterday- Deseret Power Electric Cooperative (Bonanza).  At issue in the case was whether the current language of the Clean Air Act requires immediate regulation of GHGs.

The Sierra Club appealed a federal permit that would have allowed construction of a new coal fired power plant.  The Sierra Club argued the permit was illegal because it did not require control of CO2 and the Clean Air Act (CAA) mandates regulation of the pollutant. 

Under the CAA,  EPA would have to require controls for CO2 if it is a pollutant "subject to regulation" under the Act.  The issue turned on the amount of regulation necessary to trigger this provision.  The Clean Air Act does require monitoring and reporting of CO2 for some sources.  But EPA argued monitoring is not enough, claiming that it has interpreted "subject to regulation" as meaning the Agency has set a standard requiring reductions, not just monitoring of emissions.

Implications:  A win for the Sierra Club would have had immediate and dramatic impacts on business across the country.  Hundreds of thousands of businesses, even commercial buildings may have needed a federal air permit to control CO2 emissions.  The EPA would have been overwhelmed with a tidal wave of new work. Why?

As discussed in a prior post, the permit thresholds in the CAA are extraordinarily low in the context of greenhouse gases.  Just how low?  The Act requires federal regulation for sources that emit 100 or 250 tons of a pollutant, depending on various factors.  That's fine for traditional pollutants like sulfur dioxide and soot, but ridiculous when viewed in the context of greenhouse gases.  As a comparison, California's Climate Change Program (AB-32) uses a threshold of 25,000 metric tons. 

On the other hand, if the Board sided with U.S. EPA then regulation of GHGs would be delayed until either U.S. EPA completed its lengthy rulemaking process or legislation is enacted by Congress.

Decision:  The Board definitely punted.  It did not agree with the Sierra Club that the plain text of the CAA requires CO2 to be regulated.  However, it rejected the EPA's position that an analysis of its historical interpretations forecloses the possibility that monitoring requirements are sufficient to trigger the need to regulate GHGs as a pollutant. 

The Board returned the permit to the Agency for further deliberation.  The Board said it is within EPA's discretion to begin regulating GHGs because the CAA includes monitoring requirements.  The Board concludes with the following paragraph:

Accordingly, we remand the Permit to for the Region (U.S. EPA) to consider whether or not to impose a CO2 BACT limit in light of the Agency's discretion to interpret, consistent with the CAA, what constitutes a "pollutant subject to regulation under this Act."  In remanding this Permit to the Region for reconsideration of its conclusions regarding application of BACT to limit CO2 emissions, we recognize that this is an issue of nation scope that has implications far beyond this individual permitting proceeding.  The Region should consider whether interested persons, as well as the Agency, would be better served by the Agency addressing the interpretation of the phrase "subject to regulation under this Act" in the context of an action of national scope, rather than through this specific permitting proceeding.  (emphasis added)

In otherwords, we want the Obama Administration to decide this through a regulatory interpretation that will apply universally and not by us requiring it in the context of a single appeal of a permit.

(Photo: Tostie14/everystockphoto.com)

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It is hard to believe but there are those who think regulating greenhouse gases under the current framework of the Clean Air Act (CAA) is the right thing to do. (see post "Politics Won't Decide Whether CO2 is Regulated Under the Clean Air Act").  Some of these same individuals assert that the Bush Administration was directly responsible for U.S. EPA's Administrator Steve Johnson's description of the Clean Air Act as "ill-suited" for regulating greenhouse gases (GHGs). 

However, an unbiased assessment of the structure of the Clean Air Act shows a regulatory mess would ensue if current CAA language was used to control GHGs.  In fact, I have heard senior staff at U.S. EPA express grave concern as what may follow if regulation of GHGs was required without amendment to the Clean Air Act. 

Take the most significant problem with using the CAA to regulate GHGs-permitting thresholds.  Under U.S. EPA's New Source Review (NSR) program a federal air pollution control permit is required anytime you have a source exceed "major thresholds."  40 CFR section 52.21(b)(1)(i).  The CAA sets the major threshold at any source that has the potential to emit 250 tons of a regulated pollutant.  The limit is 100 tons for specific types of sources or sources in nonattainment areas. U.S. EPA's Title V program requires a Title V air permit for source over 100 tons. 

The 250/100 ton thresholds work for pollutants like fine particles or ozone precursors because they capture large sources.   The thresholds trigger around 200-300 NSR permits per year.  The Title V threshold has led to issuance of around 18,000 Title V air permits in the country. 

However, greenhouse gas emissions, in particular CO2, are emitted in much higher quantities. Staff at EPA working on GHG regulation say they typically start paying attention to sources that emit 10,000 tons of CO2 per year.  For comparison, California's climate change law (AB32) establishes a mandatory reporting threshold of 25,000 metric tons.

If the 250/100 tons thresholds were applied to GHGs, U.S. EPA and state EPA's would be flooded with new permits.  U.S. EPA predicts there may be some 2,000-3,000 federal NSR permit per year and perhaps as many as 500,000 Title V sources in the Country.  Included in these numbers are small sources that have never been regulated by the Clean Air Act, such as large churches, retail stores and farms with as little as 25 cows. 

The numbers I cited above were provided by U.S. EPA as estimates.  The U.S. Chamber has put out a detailed report on the number of sources that would regulated based on GHG emissions thresholds in the CAA.  While some may say the U.S. Chamber's numbers are biased, I have not seen or heard anyone refute their analysis.  Also, the Chamber's numbers are generally consistent with EPA's own projections.  In U.S. EPA's Advanced Notice of Public Rulemaking on regulation of GHGs, EPA says "application of the existing PSD (NSR) permitting program to these new smaller sources would be a very inefficient way to address the challenges of climate change." (see page 488 of the ANPR)

Those who support use of the Clean Air Act argue that U.S. EPA could adjust the permitting thresholds to capture fewer sources- an option offered by EPA in its ANPR.  The problem with this argument is that the thresholds are in the text of the CAA.  Basic legal principles say the plain text of a statute is entitled to significant deference.  

EPA's ANPR sets forth two legal arguments to adjust the thresholds- absurd results and administrative necessity.  The "absurd results" argument is that literal application of the thresholds would lead to absurd results (i.e. regulating very small sources of CO2).  The administrative necessity argument is that the burden that would ensue from application of the 250/100 ton thresholds would "prevent the agency form carrying out the mission assigned to it by Congress." (see ANPR page 497).  In other words, EPA would be overwhelmed and couldn't do its job if the thresholds are kept in tact.

I certainly can see using some of the broad concepts contained in the Clean Air Act to regulate GHGs.  However, Congressional action is needed to amend those provisions and make them fit for dealing with climate change.  Congress should not wait to act.  It is very possible a court could decide the CAA applies to GHGs without further action, thereby triggering the "absurd" results noted by EPA.

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Recently, there has been quite a buzz around the issue of using the existing authority in the Clean Air Act to regulate greenhouse gas emissions.  In July, U.S. EPA issued its Advanced Notice of Proposed Rulemaking (ANPR) responding to the Supreme Court's decision in Massachusetts v. EPA and soliciting comment on use of the Clean Air Act to regulate greenhouse gases.

Notwithstanding EPA's solicitation of public comments, the buzz really kicked in following a recent statement by Jason Grumet in a Bloomberg interview that an Obama Administration would regulate greenhouse gases under existing authority in the Clean Air Act if Congress fails to act within 18 months.

The Wall Street Journal printed a scathing editorial of the notion an Obama Administration would move forward and regulate greenhouse gases without Congressional action:

In an interview last week with Bloomberg, Mr. Grumet said that come January the Environmental Protection Agency "would initiate those rulemakings" that classify carbon as a dangerous pollutant under current clean air laws. That move would impose new regulation and taxes across the entire economy, something that is usually the purview of Congress. Mr. Grumet warned that "in the absence of Congressional action" 18 months after Mr. Obama's inauguration, the EPA would move ahead with its own unilateral carbon crackdown anyway.
 

Left leaning blogs like Gristmill have come out in support of the idea:

I've talked to a few people behind the scenes who are big fans of this approach. One of its primary virtues is that it allows the EPA to build on all the great work that states have done, knitting together and rationalizing their various efforts. Another is that it can be done quickly, without a Congressional battle, enabling the U.S. to go into the 2009 Copenhagen climate talks with a good-faith effort in hand.
 

Others in academia and in the green movement have come out in support.  In an article appearing in Environmental Finance, Michael Northrop and David Sassoon argue the Clean Air Act can be an effective tool for combating climate change. citing various legal experts from around the Country.  They conclude their article by saying:

The Clean Air Act is already a mature, flexible and successful law designed to integrate the work of all economic sectors and all levels of government. Honed in three stages of effort – the original lawmaking, and two major rounds of amendments – it is a functioning national regulatory structure that spans decades of deliberation, compromise and practice.

By applying the Clean Air Act, the next president can stand on the shoulders of legal and regulatory precedent. He can adopt an executive branch strategy to complement the next round of legislative efforts, now also in preparation. He can lead climate policy development through existing authority, and ensure that the US has a strong position going in to the next round of international climate negotiations. Action in the first hundred days can set the stage for genuine US re-engagement in the international climate effort in
Copenhagen in 2009.

Meanwhile, the U.S. Chamber has already initiated a advocacy campaign urging against use of the Clean Air Act to regulate greenhouse gas emissions. 

The Chamber’s report concludes that over one million mid-sized to large commercial buildings in the industrial, commercial and agricultural sectors could potentially become subject to a costly and bureaucratic permitting process if EPA moves forward with its proposed rulemaking. These include:
o 260,000 office buildings;
o 150,000 warehouse and storage;
o 140,000 mercantile;
o 100,000 schools and other educational facilities;
o 92,000 health care facilities;
o 71,000 hotels, motels and other lodging facilities;
o 58,000 food service industry buildings;
o 37,000 houses of religious worship;
o 26,000 public assembly facilities; and
o 23,000 restaurants and food sales facilities.

The debate over the statements by Obama's adviser and the Chamber's effort to block an endangerment finding are overblown. If EPA does not act, the Court's will force them to.  In fact, the Deseret Power case, could very likely trigger such regulation without further action by EPA or before a new Administration takes the oath of office.

Massachusetts v. EPA ,which said greenhouse gases are a "pollutant" under the Clean Air Act, sets in motion inevitable regulation under the Clean Air Act.  U.S. EPA's position is that the Clean Air Act is not applicable to GHGs until it moves forward with actual regulatory standards for their control or reduction.  But that is only a matter of time.  Even if EPA continues to delay action, suits challenging that delay will be successful, probably way before the 18 month time frame established by Mr. Grumet. 

While other branches of the federal government (Transpiration, Energy, Agriculture and Commerce) have commented that regulation is not inevitable, such argument find little support in the findings of the Supreme Court.  In my mind, due to inevitable Court action, those who worry about regulation of greenhouse gases under the current structure of the Clean Air Act would be wise to pursue Legislation.

As discussed in my next post, there is reason to worry about using the current structure of the Clean Air Act to regulate greenhouse gases. 

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Lets get everyone up to speed with events on regulation of greenhouse gases (GHGs) including CO2:

1.  Supreme Court says CO2 is a pollutant under the Clean Air Act.  In Massachusetts v. EPA decided in April of 2007, the Supreme Court held that GHGs are pollutants that may be regulated under the Clean Air Act.  But the Court did not go far enough to say EPA must regulate GHGs. At issue in this case was Section 202 of the Clean Air Act which covers regulation of greenhouse gases from motor vehicles. For a pollutant to be regulated under Section 202 it must be “reasonably be anticipated” to “endanger public health or welfare.”   Therefore, EPA must conclude GHGs from motor vehicles endager public health before regulation commences The Court remanded the Section 202 determination to EPA to make the necessary "endangerment finding." 

2.  U.S. EPA says Clean Air Act is "ill suited" to regulated GHGs-  in July 2008, the EPA released its Advance Notice of Proposed Rulemaking on GHG regulation.  Along with its release, EPA Administrator Johnson made statements that the Clean Air Act is an ill-suited vehicle for regulation of GHGs. The ANPR represents EPA's response to both the Supreme Court's decision in Massachusetts v. EPA and a number of pending petitions to regulate greenhouse gas emissions from most mobile and stationary air pollution sources. The ANPR includes extensive analysis of the science related to climate change, technologies available for reducing greenhouse gas emissions, and the various statutory provisions that may be implicated by an endangerment finding under section 202 of the Clean Air Act. It solicits public comment on a variety of important issues.

3.  Environmental Groups Argue Regulation of GHGs is Not Discretionary by EPA-   Many environmental groups have argued that the finding that GHGs are a "pollutant" under the Clean Air Act is enough to trigger immediate regulation under permitting provisions of the Act.  They argue the endangerment finding necessary for regulation under Section 202 is not necessary to begin regulating GHGs under other provisions of the Act.

4.  Litigation Ensues Over Whether Regulation of GHGs is Discretionary-  As discussed in previous posts, a number of legal challenges have been filed to the issuance of permits for construction of new coal fired power plants.  Environmental and Citizen Groups have challenged the permits on the basis the failed to control CO2 as a pollutant.  U.S. EPA and State EPA's have argued that C02 and the other GHGs are not "regulated" pollutants under the Act.  They distinguish the Massachusetts decision by saying the Court only found GHGs to be a pollutant.  Therefore, U.S. EPA must complete its rulemaking process before GHGs are regulated.  At least one State Court has already disagreed with EPA's interpretation.  A Georgia Court has already ruled the GHG are a regulated pollutant that must be considered as part of EPA's New Source Review (NSR) permitting program.

And now the latest....

While U.S. EPA methodically proceeds down its rulemaking path, it is more than likely the Courts will not wait for EPA before deciding whether CO2 is a regulated pollutant.  In fact, I believe the landmark case to decide whether regulation of GHGs must occur immediately is about to be decided.  In the case, the Sierra Club is challenging EPA’s issuance of a permit for a waste-coal-fired generating unit at a power plant in Utah that did not establish Best Available Control Technology (BACT) emissions limits for CO2

On September 12, 2008, reply briefs were filed in the case of in the Deseret Power Electric Cooperative (Bonanza) case which is before U.S. EPA's Environmental Appeals Board.   A decision in the case could be expected in the next couple of months.  To give you an idea of the level of attention this case is attracting, the following business groups filed briefs in the litigation:  U.S. Chamber of Commerce, National Association of Manufacturers, American Petroleum Institute, American Chemistry Council, etc.   

Sierra Club argues that because the Supreme Court has already determined that CO2 is an “air pollutant” under the Clean Air Act (CAA), that finding triggers EPA's obligation to establish BACT for CO2 emissions in the permit.  EPA and the business groups counter that the Supreme Court only EPA found CO2 to be a “pollutant” under the CAA, it is not yet a pollutant “subject to regulation” for which BACT is required until EPA concludes is rulemaking process. 

The Sierra Club together with New York, California and other Northeast States have put forward a novel argument that may tip the scales in their favor based upon comments I have heard from EPA officials.  The Sierra Club cites to Section 821 of the Clean Air Act which establishes monitoring requirements for CO2.  The following excerpt is from a Sierra Club brief filed in the litigation:

In § 821 Congress ordered EPA “to promulgate regulations” requiring that hundreds of facilities covered by Title IV monitor and report their CO2 emissions, and in §165, Congress required a BACT limit for “any pollutant subject to regulation” under the Act. The only possible reading of these two statutory mandates is that Congress intended that EPA apply BACT limits to CO2 pursuant to §165.

The ultimate issue boils down to whether monitoring requirements rise to the level of "regulation" of CO2 or does EPA have to establish actual air quality standards or emission limits for CO2 and other GHGs.    

The decision in this case will have massive repercussions.  If EAB decides in EPA's favor, regulation of GHG will likely be delayed for at least a couple of years.  If the EAB agrees with the Sierra Club, EPA will need to immediately begin regulating GHG in permitting actions.  As I will discuss in an upcoming post, such a decision could overwhelm EPA and the States in new permits for hundreds of thousands of new sources. 

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The creativity of those opposed to new coal plants seems to have no bounds.  The most recent effort is to place a referendum on the ballot to allow citizens to vote whether a permit should be issued for a new coal plant in Utah. The referendum would amend the county's conditional-use permit ordinance to require voter approval prior to issuing permits for coal-fired power plants.

In a effort to block this type of referendum effort, the Utah Legislature passed H.B. 53 which says that the voters of any county, city or town may not initiate a land use ordinance or a change in a land use ordinance.  The Legislature also said that the people may not require a land use ordinance passed by the local legislative body (city council or county commission) to be submitted to the voters for approval before it can take effect (i.e. a referendum).

A lower court blocked the referendum, but the Supreme Court of Utah said it should be placed on the ballot.   Here is my favorite observation... a company representative said that getting a permit for a coal-fired power plant these days "is not for the faint of heart."

As I have commented in prior posts, a top priority of those concerned with climate change is to stop construction of new coal fired power plants, almost through any means necessary.  We have seen a call for citizen protests, various lawsuits filed, appeals of permits, legislation and now a proposal to let citizens vote on whether a permit should be issued. 

(Photo: Flickr Jeffreyd00)

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Al Gore, speaking at the annual meeting of the Clinton Global Initiative, called for young people to perform acts of civil disobedience to stop construction of new coal plants.  He also has called for State Attorney Generals to review whether utilities are committing stock fraud by discounting the threat of global warming. 

I put this post up after writing yesterday about the Arkansas proposal to pass legislation prohibiting construction of new coal plants.  Preventing construction of new coal plants that do not use carbon sequestration appears to be the number one strategy of green groups and those concerned with global warming. 

Ohio could soon be a major battle ground.  While the AMP Ohio facility has received its permit for construction of its new baseload coal power plant, it should be bracing itself for challenges on all fronts. During the public comment period on the new period concern was expressed that the facility would emit 7.3 million tons of CO2 per year.  Right now AMP Ohio appears to be the rare coal plant project that is still moving forward having received its authorization to construct from Ohio EPA.

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As reported in the Texarkana Gazette, the Arkansas State Commission on Global Warming is likely to recommend a ban on new coal fired power plants.  The Commission is also proposing construction of a new $1.5 billion dollar plant be delayed until carbon sequestration technology can be added to the plant. 

What is the Arkansas Governor's Commission on Global Warming?  Here is a description taken right from its web page:

With the signing of Act 696 of the Arkansas 86Th General Assembly (HB2460), Governor Mike Beebe established the Governor’s Commission on Global Warming. By design the Commission represents a wide diversity of views and perspectives with members coming from business, industry, environmental groups, and academia.

The Commission is charged with setting a “global warming pollution reduction goal” for Arkansas and a “comprehensive strategic plan for implementation of the global warming pollution reduction goal.” The Act sets several study and evaluation requirements and requires a final report be provided to the Governor by November 1, 2008.
 

The developments in Arkansas represent yet another in a series of legal, legislative and political attacks on new coal fired power plants.  The attacks have been successful, between 2007 and 2008 plans for at least 69 coal plants have been canceled.

In the article a utility representative comments that the decision would force continued use of older less efficient coal fired power plants.  His argument that the decision will be bad overall for the environment. 

While I sympathize with the argument we should not be adding to the problem, what alternatives are being suggested to replace old plants or meet ever increasing demands for electricity?  While renewables are a great solution, there is no denying they do not provide the baseload generation of either a coal or nuclear plant. 

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On August 20th, the Public Utilities Commission of Ohio proposed rules governing greenhouse gas reporting and carbon dioxide control planning.  Parties wishing to file comments have until September 6th to file comments.

The most interesting aspect of the rule is it proposes to mandate all electric generating facilities in Ohio become participating members in the Climate Registry.  It also mandates electric generating facilities to report report greenhouse gas emissions according to protocols approved by the Climate Registry.  While Senate Bill 221 provided discretion to the PUCO to establish the level of participation in the Climate Registry, the Commission has decided to mandate participation.

I'm sure the Commission will receive comments on their definition of "electric generating facility" covered by the mandatory reporting requirement.  The definition is as follows:

"Electric generating facility" means an electric generating plant and associated facilities capable of producing electricity.

There is no minimum size requirement specified in the proposed rule.  Therefore, it would appear an electric generating facility of virtually any size under PUCO's jurisdiction faces a mandatory reporting requirement.

I would also expect comments from the Utilities that the mandatory reporting requirements should wait until U.S. EPA proposes its mandatory greenhouse gas reporting rule in September.  U.S. EPA's reporting rule will specify required reporting as well as include limitations on the size of the generating unit covered by the mandatory reporting requirement. 

U.S. EPA propose rule will also shine light on the interplay between the Climate Registry and mandatory federal reporting requirements. Perhaps the Commission left themselves some wiggle room by inserting "or as otherwise directed by the Commission" right after the mandate to participate in the Climate Registry.

The rule also requires each owner and operator of a electric generating facility to file an annual report specifying its control plan for both criteria pollutants (NOx, SO2) and for carbon dioxide.  However, the rule lacks any specificity as to what elements must be included in the plan.  The proposed rule requires the environmental control plan include:

"...all relevant technical information on current conditions, goals, and potential actions based upon the current scientific and engineering design capability of any facility...to control emissions of criteria pollutants and carbon dioxide within the parameters of economically feasible best technology."

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Surprised? I was after hearing the old reports of China building a new coal plant once a week.  China has long been the favorite scapegoat for those arguing the United States shouldn't address climate change without their participation.  But it appears China may be changing direction. 

As reported in the Guardian, the Climate Group released a study that concludes China is the world's leading producer of energy from renewable sources. 

 Here are some of the fun (and surprising) facts reported in the Study:

1. China leads the world in installed renewable capacity at 152 gigawatts
2. Approximately 820 solar PV were produced in China in 2007, second only to Japan
3. It is the leading world exporter of wind turbines
4. China investments in renewable energy as a percentage of GDP are almost equal to Germany's, the world leader
5. China's energy efficiency standards for cars is 40% higher than in the United States
6. China is the third largest producer of ethanol

Clearly, the goal of the Climate Group was to produce a study to combat the arguments raised in the United States that support inaction on climate change without India or China.  However, one statistic highlighted in the Study deserves some additional discussion. 

In 2007, China emitted 5.1 tons of CO2 per capita compared to 19.4 tons for the United States.  While the United States per capita number justifies action, so does the potential for China to grow its emissions. 

China has 1.2 billion people compared to the United States 300 million.  China has already overtaken the US in total emissions with 1/3 of the emissions per capita because it has four times more people.  Without mandatory caps, what will China's emissions be once 1/2 their population drives cars, purchases more of latest electronics, and have more income to travel?

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For the first time a court has revoked a permit due to concerns over C02 emissions and climate change.  While there have been previous instances where states have denied permits due to concerns with C02 emissions, this is the first time a court has revoked a previously issued permit.  Notably, the Court did not base its decision on state law, rather it ruled the Clean Air Act (CAA) requires analysis and control of C02 emissions. 

Other courts are currently hearing similar challenges.  If this decision is a trend it will have major implications for any new facilities seeking an air permit.  In a future blog post I will discuss the implications of using the Clean Air Act, specifically the New Source Review provisions, to regulate CO2.  Much speculation has been made as to whether CO2 will be regulated even without action by Congress on comprehensive climate change legislation.

The CO2 decision was issued on June 20, 2008 in Georgia's Fulton County Superior Court.  The Georgia Environmental Protection Division had approved a permit for the construction of a proposed 1200-megawatt coal-fired power plant.   Environmental groups, including the Sierra Club, challenged the permit saying the plant's emission of 8-9 million tons of CO2 had to be considered. Siding with the Sierra Club, the Court overturned the State's issuance and sent the permit back to perform the analysis it said was required under the CAA. 

Note: According to Sourcewatch, between 2007 and 2008, plans for 69 coal plants have been canceled.

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Dave Douglas, Chief Sustainability Officer for Sun Microsystems, recently wrote an article in which he predicts the United State's hit peak carbon in 2007 (meaning emissions will now trend downward).  Here is a quote from his article:

  So, now my prediction: Peak Carbon occurred in the US in 2007.

 Yep, I’m predicting that annual GHG emissions in the US will now drop regularly going forward, with only minor setbacks every once in awhile. My rationale is that there are short-term, medium-term and long-term drivers in place which are capable of, together, sustaining reductions over decades:

His article generated a lot of responses and criticism from many who believe the U.S. will continue to trend higher in emissions until meaningful federal greenhouse legislation passes Congress.  I actually agree with his prediction. 

$4 dollar gas is not going away.  From recent car sale reports, the American consumer is switching from SUV and pickups to compact cars.  Even if people are not buying a new car they are driving less.   The transportation sector makes up roughly one-third of total greenhouse gas emissions in the United States.  Therefore, these consumer trends will translate into significant reductions.

Also, the switch toward renewable energy, the corporate sustainability movement, and greenhouse gas programs passed at the state level will all continue the trend downward.  Finally, federal legislation is inevitable, with many predicting a cap and trade program starting in 2012. 

In April, U.S. EPA released its greenhouse gas inventory report that analyzes emissions trends.  The main take away from the report...greenhouse gas emissions decreased by 1.1 from 2005 to 2006.  U.S. EPA concludes the decrease was attributable to the following:

• compared to 2005, 2006 had warmer winter conditions, which decreased consumption of heating fuels, as well as cooler summer conditions, which reduced demand for electricity;
• restraint on fuel consumption caused by rising fuel prices, primarily in the transportation sector; and
• increased use of natural gas and renewables in the electric power sector.

  We have a long way to go, but it does appear that peak carbon is not such an outlandish prediction.

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Everyday we are bombarded with stories of rising gas and energy prices.  The USA Today recently had a front page article on the increases in electricity rates due to the rise in fuel costs.  The article said utilities are raising rates up to 29% due to soaring fuel cots.   Its not just oil that has skyrocketing prices, natural gas and coal have experienced dramatic increases as well.  Since the beginning of the year coal prices have gone from around $60 per ton to well over $100 per ton (depending on the type of coal purchased). 

Ohio businesses have yet to experience the impacts from what is happening in the energy markets.  Until recent passage of Senate Bill 265, Ohio had frozen its electric rates so recent fuel cost spikes have not been taken into account in rates.  As reported by John Funk in the Cleveland Plain Dealer, the utilities have begun meeting with the State to discuss price increases. 

Ohio better brace itself for even a larger jolt in prices attributable to CO2 regulation.  Federal legislation such as S. 2191 (the Lieberman-Warner Bill), which would regulate carbon emissions, had a quick death a few weeks ago in the Senate.  However, it is inevitable that federal legislation that establishes a carbon cap and trade program will pass soon after we have a new President (both McCain and Obama support the cap and trade approach). 

With 87% of Ohio's power coming from coal, what impact would such a cap and trade program have on Ohio?  Most understand there will be an impact, but I'm not sure most understand the magnitude.  To illustrate the impact, I attached a chart from U.S. EPA's modeling of the impact of the Lieberman-Warner bill on electricity generation.  The two charts project the amount of electricity generation from various sources (blue = coal, yellow = nuclear, green = other sources).

The chart to the left (click to enlarge image) is the status quo- no greenhouse gas regulation.  It projects coal-fired power would continue to dominate generation in the US. The chart on the right shows what will happen if something close to Warner-Lieberman passes. 

Not only does the amount of coal power shrink relative to nuclear and other sources like renewables, the composition of generation from coal dramatically shifts. The change from blue to red in the chart project the conversion of coal to carbon capture and sequestration (CCS).  U.S. EPA projects that ALL coal plants will institute CCS by the year 2035.  Why?  Because the cost of emitting carbon will be so high that the economics will drive utilities to institute CCS. 

Even U.S. EPA notes in its analysis that this projection is "optimistic."  That certainly is an overstatement given the fact there are no successful CCS projects currently being implemented.  So what does it mean if CCS is unrealistic in that time frame?  It means huge cost increases for coal-fired utilities because the price of allowances under the cap and trade program will rise.  

With fewer reductions there is a corresponding increase in the value of the C02 reduction credits used to offset emissions.  Higher costs for C02 credits translates into larger compliance costs for coal-fired utilities. Those huge costs will be passed on to consumers in the form of electricity price increases. 

Seems to me Ohio business and officials better start seriously considering the implications of federal regulation of CO2.  I am not advocating against passage of greenhouse gas regulation.   Ohio better start planning for a carbon constrained world and how electricity prices tied to coal generation may affect Ohio's competitiveness.

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