United States: Trump Administration Continues To Overhaul Climate Change Regulations

On August 21, the Trump administration unveiled the Affordable Clean Energy (ACE) rule, a draft proposal that would establish guidelines for states to use in addressing greenhouse gas (GHG) emissions from the power sector. The ACE is explicitly intended to replace the Obama-era Clean Power Plan (CPP), and it differs from the CPP in several critical respects. Most importantly, whereas the CPP took a systemic approach to regulating GHG emissions, the ACE rule is limited to onsite efficiency improvements at existing coal-fired power plants.

The Environmental Protection Agency (EPA) is also proposing new implementing regulations for section 111(d) of the CAA, which are designed to bolster states' discretion in implementing any emissions guidelines promulgated under this subsection. In addition, the agency is also proposing changes that could allow operators of coal-fired plants to make efficiency upgrades consistent with these CO2 guidelines without triggering permitting requirements related to the CAA's New Source Review (NSR) program.

This advisory examines each of these three proposals in detail.

Best systems of emission reduction

The ACE departs from the "beyond the fence line" approach to CO2 emissions in the CPP, which established the best systems of emission reduction (BSER) on a system-wide, rather than a source-specific level. The CPP set BSER based on the following building blocks: (1) improving heat rate at affected coal plants; (2) shifting generation from coal-fired plants to combined-cycle natural gas power plants; and (3) increasing generation from zero-emitting renewable energy sources, such as solar and wind.  

In contrast, the ACE reiterates and expands upon EPA's draft CPP repeal rule that argued that the Clean Air Act only permits "emission reduction measures that can be applied to or at an individual stationary source." As such, the ACE defines BSER as merely heat-rate improvements that can be achieved at individual coal-fired power plants. The ACE lays out a number of "candidate technologies" that states could use in establishing standards of performance for affected sources.  These "candidate technologies" include neural network/intelligent sootblowers, boiler feed pumps, air heater and duct leakage control, variable frequency drives, blade path upgrade, redesign/replace economizer and improved operations and maintenance practices. EPA did not include other measures, such as the adoption of carbon capture or fuel co-firing, as part of BSER, though the agency indicated that states could consider these measures in establishing standards of performance.  

In the draft rule, EPA considered establishing efficiency upgrades for both existing simple-cycle natural gas turbines and combined-cycle natural gas turbines, but the agency concluded that such measures would either be too expensive or only result in minimal reductions in CO2 emissions.

State plan development

The centerpiece of the ACE rule is a provision giving states three years to develop emissions limits for GHGs, consistent with the definition of BSER summarized above under section 111(d). According to EPA, the draft rule's intention is to the clarify the respective roles of EPA and states. EPA would maintain authority in determining BSER and providing states with information on the degree of emission reductions that could be achieved if BSER is implemented. States would look to EPA's information on emission reductions but would maintain discretion in developing standards of performance for affected power plants. To put it another way, EPA would not set emission standards for power plants; instead, the agency would merely provide information on specific levels of emission reductions that could occur.

The draft rule would also offer states increased flexibility in promulgating section 111(d) standards of performance. Specifically, states would be allowed to consider a power plant's remaining useful life in setting a standard of performance. EPA is also soliciting comments on whether section 111(d) should permit states to allow for averaging and trading between existing sources to meet emission guidelines.

As to timing, the draft rule would require that states submit a implementation plan to EPA for approval within three years after the issuance of a section 111(d) emission guideline. EPA would then have 12 months to approve or deny a state implementation plan; if a state fails to submit a complete plan or if EPA rejects a state plan, the agency then would have 24 months to issue a federal implementation plan.

New Source Review program

The NSR program requires that a new major stationary source or major modifications to an existing source obtain a permit prior to commencing construction. Critics of the NSR program allege that the costs associated with the program deter power plants from making efficiency upgrades. In its draft rule, EPA notes that existing coal-fired power plants could trigger NSR review by undertaking efficiency upgrades pursuant to the ACE. In order to provide flexibility, EPA proposes changes to the NSR program that states could include in their ACE implementation plans.

Specifically, EPA proposes an hourly emissions increase test for modifications to coal-fired power plants to the current multi-step process for determining if NSR review applies. These steps would include the following: (1) whether a physical change or change in the method of operation occurs; (2) whether the change will result in an increase in the maximum achieved hourly emissions rate of the affected unit; (3) if there is an increase in the unit's hourly emissions rate, will the change result in a significant increase in annual emissions; and (4) if the project is projected to result in a significant increase in annual emissions, will there be a significant net increase in annual emissions. The proposed change would add step two to the analysis of whether NSR review applies. Notably, EPA, in 2007 under the George W. Bush administration, proposed adding the hourly emissions increase test to the NSR, but the agency never finalized the draft rule.

The use of the maximum achieved hourly emissions test could result in greater annual emissions from an affected source of other non-CO2 pollutants, such as ozone, and cause up to 1,400 more premature deaths annually by 2030, according to EPA's regulatory impact analysis.  

Impacts and outlook for ACE

The impact of the ACE on the electricity sector and climate change remains unclear. The ACE represents a victory for some in the electricity sector who lobbied the Trump administration not to merely repeal the CPP, but to instead issue narrower CO2 standards for power plants. Many of these stakeholders preferred weakened CO2 rules to a complete absence of federal regulation, reasoning that such a vacuum might allow states and environmental groups to secure more stringent emissions limits through litigation and state rulemaking. But litigation nonetheless remains the most likely outcome of the ACE rulemaking process. States and environmental organizations are almost certain to file legal challenges to any final ACE rule, potentially stalling full implementation of the rule until after the 2020 presidential election. This will interject additional uncertainty into the future of federal regulation of CO2 emissions, particularly if a Democrat retakes the White House and backtracks on the ACE.

According to EPA's regulatory impact analysis, coal production could increase by 7.4 percent to 9.5 percent by 2035 relative to the base case where the CPP is implemented. Conversely, natural gas production would decline 1.1 percent to 1.9 percent by 2035 against that same baseline. Yet, coal generation would continue to decline under every scenario over the coming decades as utilities transition to natural gas and renewables. Indeed, the US Energy Information Administration (EIA) projects that 13.5 gigawatts of coal generation are scheduled to shutter this year despite the policies of the Trump administration.

As to climate change, the draft rule notes that electricity sector CO2 emissions have been declining despite the fact that the US Supreme Court stayed implementation of the CPP in 2016. Moreover, the ACE cites the EIA's 2018 Annual Energy Outlook that projected that industry CO2 emissions will decrease in the near term due to the "cumulative effect of increased coal plant requirements, lower natural gas prices and lower electricity demand." States, cities and corporations are forging ahead with their own policies to reduce CO2 emissions, which are encouraging a shift to renewables. The power sector will continue to decarbonize even if the ACE rule is fully implemented.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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