This year continues the confusing flow of administrative, judicial and legislative actions aimed at developing, changing or halting efforts to regulate air emissions, including the emission of greenhouse gases. We expect continued development and uncertainty with respect to regulations regarding operations of utility, industrial and area source boilers, control of cross-state air pollution, implementation of national air quality standards, development of renewable fuels programs and control of GHG emissions.

The following are air issues to follow in 2012:

Utility MACT

• On Dec. 21, 2011, EPA issued its final Maximum Achievable Control Standards (MACT) for coal- and oil-fired electric generating units. The new MACT standards, (often called Utility MACT), set emission standards for mercury, metals (as PM) and acid gases (as HCl) and other requirements for new and existing sources. The hotly debated rulemaking, one of the most expensive in EPA history, includes EPA guidance on how states can issue one-year extensions to the statutory three-year MACT compliance timeframe for units that need more than three years to install controls, or units that need to run in a fourth year due to reliability issues. EPA also issued an Enforcement Response Policy to address conditions for issuing administrative compliance orders to allow reliability-critical units to run in a fifth year. These provisions are EPA's attempt to address industry's contention that the three-year compliance time is insufficient to allow for the orderly retirement of a significant amount of coal-fired units determined to be uneconomic in light of the new MACT standards without causing significant reliability issues. While EPA has downplayed that risk, it has also set up a cumbersome and ill-refined process to address it. As well, industry is expected to challenge various aspects of the final rule, although no decision can be expected, absent grant of a stay request, until late next year.

CSAPR

• EPA issued its Cross-State Air Pollution Rule (CSAPR) on July 6, 2011, to replace the Clean Air Interstate Rule (CAIR) issued in 2005 and remanded by the U.S. Court of Appeals for the District of Columbia Circuit in 2008. EPA intended CSAPR to function similarly to CAIR in establishing a regional cap-and-trade program for the eastern half of the United States to reduce ozone and particulate matter emitted from large coal-burning power plants in upwind states and to assist downwind states in achieving or maintaining attainment with air standards. Like CAIR, CSAPR was immediately challenged by generating companies, utilities, industry groups and several states arguing that EPA did not have the authority to adopt the regulation and that the proposed rule would require closing a substantial number of facilities.
  
  The plaintiffs sought to stay the effective date of the rule pending judicial resolution. Surprisingly on Dec. 30, 2011, the D.C. Circuit did exactly that, forcing companies and environmental agencies to scramble to reestablish CAIR compliance methodology and credits. The court established an expedited briefing schedule and is expected to hear oral arguments in late spring.

GHG

• Federal Implementation
  
  GHG Performance Standards for New/Modified Power Plants. On or before Feb. 1, 2012, EPA will propose New Source Performance Standards (NSPS) for GHG emissions under Section 111(b) of the Clean Air Act for new and significantly modified fossil fuel power plants. The NSPS standards are anticipated to be rate-based and focus on efficiency improvements as likely control options (e.g., efficiency upgrades, waste heat recovery, CCS). There is a possibility that EPA will also later propose a second rule setting emission standards and guidelines for existing power plants later in the year, as well as a separate rule establishing GHG standards for oil refineries.

• California
• • Cap-and-Trade Program/Carbon Market. The California cap-and-trade and attendant carbon market, implemented as part of its Global Warming Solutions Act of 2006 (AB32), became effective Jan. 1, 2012, but compliance obligations do not commence until one year later, in 2013. The first carbon market auction is scheduled for August 2012.
  • • Additional regulatory actions and refinements to the program will be made by state regulators throughout the year, most notably potential expansion of eligible carbon offset types (e.g., pneumatic controls, international forestry) and implementation guidelines for the state's regional transmission organization for imported electricity.
    • CARB is likely to pursue further refinements to regulations on allocation of emission allowances and the regulation's prohibition against "resource shuffling", a term that refers to when a covered electric utility or marketer may seek to redirect or shift to other states existing power contracts importing carbon-intensive power in exchange for contracts that import lower-carbon electricity.
    • CARB is also expected to pursue a rulemaking aimed at linking California's cap-and-trade program with the Canadian province of Quebec as part of the Western Climate Initiative.
  • Low-Carbon Fuel Standard. On Dec. 29, 2011, a U.S. District Court for the Eastern District of California rejected California's Low-Carbon Fuel Standard (LCFS), which is the transportation portion of AB32 and was expected to commence Jan. 1, 2012. The LCFS accounted for roughly 15–20 percent of the state's targeted GHG emission reductions by 2020. The judge struck it down on the grounds that the LCFS discriminates against out-of-state ethanol producers, in violation of the commerce clause of the U.S. Constitution, by counting emissions associated with transporting fuels to California. A petition to stay the decision was rejected and the case is now on appeal before the Ninth Circuit, where the court will be asked to decide whether a state can regulate biofuels in interstate commerce based on lifecycle emissions impacts.
• International
• • Durban Platform for Enhanced Action. International climate change negotiations concluded in Durban, South Africa, in December — formally known as the 17th Conference of the Parties (COP17) to the United Nations Framework Convention on Climate Change (UNFCCC) and the 7th Meeting of the Parties (CMP7) to the Kyoto Protocol — are set for major reforms in 2012. Durban established a new platform to develop a new international climate regime by 2015 that could focus on bottom-up mitigation and adaptation efforts.
  • Extension of the Kyoto Protocol and CDM Reforms. The parties agreed to set up a second commitment period (CP2) under the existing Kyoto Protocol, which will commence Jan. 1, 2013, and is expected to be contentious. The CP2 will be set at next year's annual climate meetings as lasting from 2013–2017 or 2013–2020. There are a host of market design issues that will be addressed in 2012 for CP2, including reforms to the Clean Development Mechanism (CDM) and how it impacts international carbon market transactions. Notably, carbon capture and sequestration (CCS) projects were added to the list of eligible CDM projects.
  • Green Climate Fund (GCF). The parties agreed on a set of governing rules to launch the climate finance fund agreed upon in Cancun last year. The final details of the GCF, as it is called, will be concluded by the end of 2012. Notably, the GCF will allow private sector participation in the intended $100-billion-a-year funding mechanism.
  • REDD+. An international regime to protect international forest lands for carbon sequestration purposes, known as Reducing Emissions from Deforestation and Forest Degradation (REDD+), moves forward in 2012. Parties and other accredited organizations are invited to make submissions by March 5, 2012, to suggest possible market-based approaches for REDD+ financing. A number of South American governments will be moving forward in 2012 with national forestry and carbon market laws and regulations to account for climate finance investment rules.
  • China/Australia. At least seven Chinese provinces will launch pilot cap-and-trade programs by 2015. Australia's new hybrid carbon pricing scheme goes into effect July 1, 2012 (the starting price is not yet determined).
  • Europe. In 2012 the European Commission will finish developing new standards and preparations for "Phase III" of the EU's Emissions Trading Scheme (ETS). Effective Jan. 1, 2012, the EU-ETS began to cover GHG emissions from the aviation sector. This aviation sector coverage could result in trade disputes between the EU and the U.S. or China before the World Trade Organization.
• NAAQS Implementation
  
  In 2012 EPA is expected to make progress on revisions to two especially controversial NAAQS regulating ozone and particulate matter emissions.
• • According to a Jan. 17, 2012, filing in the U.S. Court of Appeals for the D.C. Circuit, EPA will propose a rule concerning revised particulate matter standards in June 2012. After review and comment, the rule would be finalized by June 2013. The proposed rule is partly in response to the D.C. Circuit's remand of the 2006 fine particulate matter standard (PM 2.5). In October 2011, EPA Administrator Lisa Jackson informed the U.S. Senate that EPA will propose retaining the current standard for coarse particulate matter (PM 10). The standard for PM 2.5 is likely to be proposed in the 11- to 12-micrograms-per-cubic-meter range.
  • As to the no-less-controversial ozone standard, on Jan. 17, 2012, EPA transmitted a plan to classify areas under the 2008 ozone NAAQS to the White House Office of Management and Budget. Although the 2008 ozone standard is the subject of two ongoing legal challenges, EPA has chosen to move forward with classifying areas under the 2008 standard to comply with a settlement agreement requiring final classifications of areas under the 2008 standard by May 31, 2012. In addition to classifying areas, the plan will set deadlines for areas to come into compliance with the 2008 standard. The plan will become a proposed rule when published in the Federal Register, which is expected shortly. Beyond implementation of the 2008 ozone standard, EPA expects to propose the next ozone standard sometime in 2014.

Boiler/Incinerator/Area Source MACT

• EPA's efforts to issue these three rules — a MACT for large industrial boilers (Boiler MACT), an NSPS for Commercial and Industrial Solid Waste Incinerators (CISWI Rules) and a MACT for smaller industrial boilers (Area Source MACT) resulted in one of the great regulatory snafus, which will continue to be the subject of litigation and legislative concern in the coming year.
• • Boiler MACT/CISWI Rule: EPA originally issued these two rules in 2005 in order to limit the emission of hazardous air pollutants from industrial boilers and solid waste incinerators. EPA consolidated its actions on the two rules in order to address and encourage the use of alternative fuels. In 2006 the D.C. Circuit rejected this effort, finding that EPA could not by fiat state that any fuels burned in industrial boilers for energy recovery were not the solid wastes that the Clean Air Act required to be burned in solid waste incinerators. Under increasing pressure from the courts, EPA finally released new rules in March 2011 but at the same time announced it would reconsider the rules it had just issued. The final rules were immediately challenged and EPA stayed the effective date of the rules pending the resolution of the reconsideration. On Jan. 9, 2012, the district court vacated that stay, rendering the rules immediately effective and sowing utter confusion as to what rules will apply and when. (See Client Alert June 13, 2012)
    
    Developments in this area will come from many quarters. First, EPA states that it intends to issue its proposed reconsidered rules in April and finalize those rules in the fall. Second, the D.C. Circuit has set an expedited briefing schedule on the many challenges to the rules and expects to hear oral argument by late spring. Finally, various representatives have proposed numerous bills to delay or even prevent EPA from issuing new rules or enforcing the current rules.
  • Area Source MACT: Consistent with their smaller scope and less stringent requirements, the Area Source MACT faces a far less troubled fate. Applicable to industrial boilers fueled by coal, oil or biomass with a heat input less than 10 million BTU/hr, the rules require tune-ups every two years for all boilers and an energy assessment for existing boilers. The Area Source MACT was not stayed by EPA and is not the subject of litigation.

Renewable Fuels

• Renewable Fuels Standard (RFS2). On Dec. 27, 2011, EPA finalized the 2012 percentage standards for fuel categories that are part of the RFS2 program. RFS2 contains a four-part mandate for lifecycle GHG emissions levels relative to a 2005 baseline of petroleum. The final 2012 overall volumes and standards are: biomass-based diesel (1.0 billion gallons; 0.91 percent); advanced biofuels (2.0 billion gallons; 1.21 percent); cellulosic biofuels (8.65 million gallons; 0.006 percent); and total renewable fuels (15.2 billion gallons; 9.23 percent). Based on the applicable percentage standards, each refiner and importer must comply with the determined minimum renewable volume obligations. Each obligated party must then own RINs representing the same percentage of each of the four types of renewable fuel.

This is the last in a series of Environment 2012 summaries. For previous installments, see Environment 2012: Water Issues and Environment 2012: Contamination and Waste Management-Related Issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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