The shifting sands of GHG regulation

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Courtesy of Trinity Consultants

So far this year, there have been significant developments on U.S. climate change policy, including movement toward mandatory reporting and regulation of greenhouse gas (GHG) emissions at the federal level via either a cap-and-trade program or possibly existing Clean Air Act mechanisms. While the specifics are still uncertain regarding how these regulatory developments and legislative actions will unfold, companies who were monitoring GHG developments from afar will need to more aggressively address the issue. Companies will benefit greatly from better quantification of emissions,engagement in rulemaking processes, and delineation of GHG developments that should be of highest priority to corporate environmental managers including:

  • EPA's proposed mandatory GHG reporting rule
  • EPA's proposed GHG endangerment finding
  • Emerging cap-and-trade legislation (e.g., 2009 American Clean Energy & Security Act, or the 'Waxman-Markey' legislation).

EPA Mandatory GHG Reporting
On April 10, 2009, the U.S. EPA proposed federal greenhouse gas (GHG) reporting and related monitoring, recordkeeping, and verification requirements. The proposed Title 40 of the Code of Federal Regulations (40 CFR) Part 98 would cover stationary sources. The public comment period for the rule closed on June 9, 2009. EPA is under a requirement by Congress to finalize the rule by June 26, 2009; however, EPA stated that it is unlikely to meet the deadline. Recent reports have noted a potential issuance date of October or November 2009.

Unlike most voluntary GHG reporting registries which rely on corporate-level reporting, EPA has proposed facility-level reporting with some exceptions. Generally, the reporting threshold will either be 25,000 metric tons of carbon dioxide equivalent (CO2e) in any calendar year, (starting in 2010) or capacity-based thresholds. Facilities may be subject to the rule if they contain one or more of the identified source categories (subparts B - PP). Tables identifying the source categories subject to the rule are provided in Table 1.

The proposed methodologies for calculating GHG emissions include direct measurement for facilities that already collect GHG emissions data via monitoring under 40 CFR Part 75 or Part 60 and facility-specific calculations for other source categories. For small facilities with only stationary combustion sources, EPA eased the burden of determining rule applicability by automatically excluding any facility that has an aggregate maximum rated heat input capacity of all stationary fuel combustion units of less than 30 MMBtu/hr and no other GHG emission sources on-site.

Calculation and monitoring methods are prescribed in the rule. The requirements for emissions calculation and monitoring are dependent on source category processes and fuels. In some cases, facilities must use a particular emission calculation methodology due to process type, unit size, and fuel burned. The rule may require facilities to review and update monitoring equipment and record-keeping practices to comply with the rule. It is important to note that these changes may be associated with high capital costs and increased labor burdens for some sectors. As proposed, reporting would be required annually, with the first reports due March 31, 2011 for calendar year 2010 emissions, except that facilities already reporting quarterly for existing mandatory reporting programs such as the Acid Rain program will continue to report quarterly. For many facilities, data collection and monitoring will begin January 1, 2010, as currently proposed.

The proposed rule would require reporting of annual emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and other fluorinated greenhouse gases. Currently, third-party verification is not required, unlike some other voluntary and state-level GHG reporting programs. Like most EPA regulatory programs, reporters will self-certify emissions and related activity data and potentially face enforcement action for non-compliance. Facilities must keep detailed monitoring, reporting, and recordkeeping information and must keep detailed documentation on how company records are used to estimate emissions.

The proposed mandatory reporting program was developed to provide comprehensive and accurate data that would inform future climate change policies. Therefore, we can assume that the reporting rule is an initial step toward mandatory GHG reduction regulation, including potential cap-and-trade regulation. For some facilities subject to the rule, this can mean potentially a significant financial liability related to the cost of carbon allowances and implementation of reduction projects, as well as financial opportunities associated with carbon offsets. As EPA moves toward promulgation of the mandatory GHG reporting rule, Trinity recommends the following steps for potentially affected facilities:

  • Monitor developments with EPAâ•˙s proposed mandatory GHG reporting rule. Organizations should understand the rule and how it affects their operations.
  • If a facility has not yet prepared a GHG emissions inventory, this is certainly the time to start the inventory process. Develop or refine your GHG emissions inventory using methodologies provided in the proposed rule to the extent practicable. Conducting an inventory will allow you to evaluate your organization's potential exposure if carbon has a future cost (through a cap-and-trade scheme) in addition to the cost of potential reductions.
  • Conduct a gap analysis of current monitoring and recordkeeping procedures for comparison with those required in the proposed rule. Many of the subparts in the proposed rule include monitoring requirements that exceed current procedures. Estimate what internal and external resources will be required for rule compliance and incorporate these resource requirements into future budgets. Start developing your internal systems for recordkeeping, monitoring, calibration, and reporting procedures. Keep in mind that you may have to maintain multiple inventories, depending on your voluntary, state, and regional GHG requirements. Consider how to protect existing or early reductions through a voluntary reduction registry process such as the California Climate Action Registry. Understand that there may be confidentiality provisions within the rule; however, your facility's GHG emissions will be public information.

EPA's Proposed GHG Endangerment Finding
In 1999, EPA first received a petition from several environmental groups to regulate GHGs from new motor vehicles under the Clean Air Act (CAA). The Clinton administration did not act on this petition, and in 2003, the Bush administration denied the petition. The denial was based on the opinion that the CAA did not authorize EPA to regulate GHGs. Environmental groups and several states, led by the state of Massachusetts, challenged EPA's denial of the petition in federal court. Initially in 2005, the D.C. Circuit Court of Appeals supported the Bush administration's denial in a 2-1 decision, holding that Congress did not intend the CAA to control GHGs.

D.C. Circuit Court's decision in a closely split 5-4 decision on April 2, 2007. Key findings in that ruling (Massachusetts v. EPA) included the following:

  • The plaintiffs have standing to sue EPA
  • EPA has the authority to regulate GHGs under the CAA
  • GHGs fit within the definition of air pollutant under the CAA

However, the U.S. Supreme Court ultimately overturned the The legislation proposes awarding a percentage of free allowances to certain sectors and according to the schedules indicated in the table below.

With this decision, EPA was instructed to make an endangerment finding for GHGs under Section 202(a) of the CAA or provide reasonable explanation why it cannot make such a finding. Once an air pollutant is found to pose a danger to public health or welfare, rulemaking generally follows. EPA issued two key findings for GHGs from mobile sources in the proposed endangerment finding published in the Federal Register on April 24, 2009:

  1. Endangerment Finding: Atmospheric concentrations of six categories of GHGs (CO2, CH4, N2O, SF6, HFCs, PFCs, and SF6) endanger public health and welfare within the meaning of Section 202(a) of the CAA.
  2. Cause or Contribute Finding: Combined emissions of carbon dioxide, methane, nitrous oxide, and hydrofluorocarbons from new motor vehicles and new motor vehicle engines contribute to this mix of GHGs in the atmosphere.

It is important to note that the proposed endangerment finding itself does not impose any specific requirements on industry or other entities at this point. However, this rulemaking has laid the groundwork for new GHG emissions standards for motor vehicles as well as potential stationary source rulemaking, depending on the path of cap-and-trade legislation.

While this endangerment finding pertains to mobile source regulation pursuant to Section 202 of the CAA, other sections of the CAA, including those affecting stationary emission sources, have similar endangerment language. Interestingly, EPA chose to make an endangerment finding for six categories of GHGs even though the cause or contribute finding for mobile sources only encompasses four of these categories. Thus, this endangerment finding for GHGs for mobile sources could easily lead to similar findings for sections of the CAA affecting stationary sources such as power plants, manufacturing facilities, etc., either directly by EPA or through further litigation and additional rulemaking.

Despite this significant action, the Obama administration and EPA Administrator Lisa Jackson have stated their preference for Congress to pass comprehensive GHG legislation using a market-based approach. Such legislation could preempt EPA from pursuing GHG regulation under the CAA. For example, the draft American Clean Energy Security Act of 2009 legislation includes language to preempt GHG regulation under some provisions of the CAA. Nonetheless, EPA could continue on a simultaneous path of CAA regulation if Congressional action on GHG regulation stalls or a court decision forces action sooner.

A timetable for issuing GHG regulations as a result of the endangerment finding is unclear, as evidenced by EPA Administrator Jackson’s commitment that EPA would not engage in “rash decision making.” Moreover, it is unclear as to what type of GHG regulation industrial sources might face as a result of an endangerment finding under the stationary source sections of the CAA. EPA’s July 23, 2008 advance notice of proposed rulemaking (ANPR) for regulation of GHGs , identified three CAA pathways for regulating stationary sources: (1) national ambient air quality standards (NAAQS)/new source review permitting; (2) new source performance standards (NSPS); or (3) maximum achievable control technology (MACT) standards. Clearly, EPA has not decided at this point which pathway to pursue. Some have argued that the rigidity of the CAA would cause an enormous amount of previously unregulated, smaller stationary sources to be regulated under a CAA regulatory scenario. However, recent Senate testimony from Administrator Jackson suggests that the agency would use discretion in regulating sources, as it has under other CAA-derived regulations. Regardless, the path of the endangerment finding must be watched closely by industry over the coming months, as it potentially gives EPA broad discretion and power to regulate stationary source and mobile source GHGs.

Developing Carbon Cap-and-Trade Legislation
While there is a potential pathway for GHG regulation for stationary sources through the previously discussed endangerment finding, a market-based cap has been noted by the Obama administration as the preferred method for GHG regulation. The American Clean Energy and Security Act (ACES) of 2009, containing draft cap-and-trade legislation, passed in the House Energy and Commerce Committee by a vote of 33-25. (As of publication date, the bill has passed the House with a 219-212 vote, adopting over 300 additional pages of changes through a “Manager’s Amendment.”)

The draft legislation has the potential to impact a wide number of sectors, including many of the sectors impacted by EPA’s proposed mandatory GHG reporting rule. The cap-and-trade program will also require the following reductions from capped sources according to the recently passed draft legislation:

  • 3% below 2005 levels by 2012
  • 17% below 2005 levels by 2020
  • 42% below 2005 levels by 2030
  • 83% below 2005 levels by 2050

The largest cause for concern with the ACES proposal is the awarding of emissions allowances – by free allocation, auction, or a combination of free allocation and auction. On balance, the legislation currently allows for free allocation of approximately 85% of the allowances early in the program, moving to auctioning over time. The cost differential is significant, as some industry sectors will have a portion of their allowances awarded at no cost, while many industry sectors would go to auction for allowances and pay the market price in $/ton for GHGs emitted.

The legislation proposes awarding a percentage of free allowances to certain sectors and according to the schedules indicated in the table below.

Among the most interesting items included in the draft legislation are the provisions regarding New Source Review (NSR) and Title V. The legislation states that NSR provisions will not apply to a major emitting facility that is initially permitted or modified after January 1, 2009 based on GHG emissions. In addition, stationary sources will not be required to apply for new Title V permits solely because of GHG emissions.
For coal-fired power plants, there are additional performance standards proposed under ACES. Affected units are coal-fired power plants that derive at least 30% of annual heat input from coal, pet coke, or any combination of those fuels. For a unit that is initially permitted on or after January 1, 2020, the unit is required to achieve a 65% reduction in emissions of CO2, as measured on an annual basis. For units initially permitted after January 1, 2009 and before January 1, 2020, the unit must achieve a 50% reduction in emissions of CO2 measured on an annual basis.1 Compliance with this requirement is based on the earliest of either:

  1. four years after EPA has published a report that there is generating unit equipment with carbon capture and sequestration technology that (i) have a total of at least 4 GW of nameplate generating capacity of which at least 3 GW must be electric generating units and up to 1 GW may be industrial applications, (ii) include at least 2 electric generating units each with a nameplate generating capacity 250 MW or greater that capture, inject, and sequester CO2 into geologic formations other than oil and gas fields, and (iii) are capturing and sequestering at least 12 million tons of CO2 per year, on an aggregate annualized basis; or
  2. January 1, 2025

Furthermore, new electric generating units that are subject to the above performance standards are not subject to any NSR requirements with respect to GHG emissions.

With regard to offsets, the draft legislation no longer contains a discount criterion for
international offsets as compared to domestic offsets, at least for the first five years of the cap-and-trade scheme. The discount mechanism (five international offsets for four U.S. allowances) would then be reinstituted. Most interestingly, there are requirements in the draft legislation that would allow crediting of early offset projects that are registered under government recognized programs (e.g., Regional Greenhouse Gas Initiative, Western Climate Initiative) if they were started after January 1, 2001 and for which a credit was issued under a regulatory or voluntary offset program that EPA determines (1) was established under state or tribal law or regulation prior to January 1, 2009, (2) has developed offset project standards, protocols, and methodologies through public
consultation or peer review, (3) has made available to the public standards, methodologies and protocols that require that the reductions are permanent, additional, verifiable, and enforceable, (4) requires third party verification, (5) are registered in a publicly accessible registry, and (6) ensures credits are not issued for which the entity administering the program has served as the fund administrator for the reduction project.

Conclusion
Due to potential breadth and complexity of the requirements, organizations should continue to closely monitor GHG regulatory and legislative developments to gain a greater understanding of their liabilities. Whether ACES passes or wanes, the current administra-tion is committed to regulating GHGs either through a market-based cap or potentially through existing CAA mechanisms.

Understanding the impacts of these new requirements is crucial as organizations plan for the future. Developing a comprehensive carbon management strategy is essential to ensuring that the organization is effectively and accurately assessing and mitigating carbon risk.

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