United States: Congress, EPA And Courts Moving U.S. Closer To Greenhouse Gas Emission Limits

The Senate, the Environmental Protection Agency (EPA) and the courts are all pushing the U.S. closer to controls on greenhouse gas (GHG) emissions at power plants and large industrial sources. On Sept. 30, 2009, Sens. Barbara Boxer (D-CA) and John Kerry (D-MA) introduced the Clean Energy Jobs and American Power Act. That same day, the EPA took a step closer to regulating GHG emissions from stationary sources by issuing a proposal to establish the threshold for requiring controls on new stationary sources of GHG emissions and existing sources that make major modifications. And even if neither Congress nor EPA acts, GHG emission controls may be imposed by courts under the nuisance doctrine after a Sept. 21, 2009, decision by the Second Circuit Court of Appeals in State of Connecticut, et al. v. American Electric Power Company Inc., et al.

Senate Climate Change Bill

The proposed Senate legislation comes after the U.S. House of Representatives earlier this year passed H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), by a vote of 219-212. Sponsored by Rep. Henry Waxman (D-CA), Chairman of the House Energy and Commerce Committee, and Rep. Ed Markey (D- MA), the over 1,500-page bill had undergone several revisions prior to its June 26, 2009, House passage, including a 309-page manager's amendment that was unveiled at 3 a.m. on the same day the bill was considered on the floor of the House. It is clear that the Senate bill, too, will undergo significant revision before it can pass the full Senate.

For example, while the Senate bill (in new sec. 771 of the Clean Air Act (CAA)) does identify what entities will receive free allocations of emissions allowances under Senator Kerry's and Boxer's cap and trade proposal (which they have renamed "pollution reduction and investment"), the amount of those allowances is not specified. This means that there will be overwhelming industry lobbying and significant political horse-trading before this bill reaches the Senate floor. This also means that it is virtually impossible for the Congressional Budget Office or anyone else to estimate the cost of the legislation.

The Senate bill also does not include the "border adjustment" provision sought by energy intensive/trade vulnerable industries to ensure that the price of goods imported from countries that do not adopt GHG emission controls do not undercut the price of goods manufactured in the U.S. Instead, the bill includes, in new section 765 of the CAA, placeholder language stating: ''It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.'' Ten senators sent a letter to President Obama in August indicating that border adjustment language is essential for their support. So this issue, too, must be negotiated.

Avoiding another controversial issue, the Senate bill does not establish which agency, EPA or the Department of Agriculture, will be in charge of determining the availability of agricultural offsets. Instead, new CAA sections 731-744 give that authority to the President, leaving it to him to delegate. The provision placing that authority in the Department of Agriculture was negotiated in the House bill with the chairman of the House Agriculture Committee, Rep. Collin Peterson (D-Minn.). Sen. Blanche Lambert Lincoln (D-Ark), chairman of the Senate Agriculture Committee, is likely to require a similar provision in the Senate bill. Sen. Lincoln has already announced that her committee is likely to mark-up the Senate legislation.

Finally, the Senate bill makes a number of changes sought by environmental advocates. However, it is likely that many of these changes were included to give Senator Kerry and Senator Boxer negotiating room as he and Sen. Boxer try to find 60 votes in the Senate for their legislation. For example, the Senate bill (in new sec. 702 of the CAA) would require earlier emission reductions by requiring a 20 percent reduction in emissions from a 2005 baseline by 2020, instead of the 17 percent reduction provided in the House bill. The House bill, too, initially began with a 20 percent reduction by 2020. That was reduced to 17 percent during negotiations with members representing the Midwest. The Senate bill (new CAA sec. 722) also is more restrictive on international offsets, allowing only 25 percent of offsets to come from international sources, up to 37.5 percent if there are insufficient domestic offsets. In contrast, the House bill allows half of the credits to come from international sources, up to75 percent if sufficient domestic offsets are not available. While environmental advocates distrust international offsets, every estimate of the cost of the House bill has demonstrated that the availability of international offsets is critical to keeping compliance costs down. The Senate bill (new CAA sec. 727) also fails to block CAA regulation of GHG emissions that are subject to the emissions cap. Regulation of GHGs under the existing CAA is generally understood to be unworkable and that provision, while sought heavily by environmental advocates, is likely to be negotiated away.

The Senate bill also does not achieve any breakthroughs on some of the issues left unanswered by the House bill. For example, the availability of carbon sequestration sites is no more certain in the Senate bill than in the House bill because the issue of liability remains open. Instead, the Senate bill calls for a multi-stakeholder task force to study the legal framework for geologic sequestration (sec. 123). The availability of new nuclear capacity also is uncertain since the only incentives provided in the Senate are worker training and research on waste management (sec. 132 and sec. 133).

The Senate bill (sec. 154) does include a program to create analyses and methodologies to optimize GHG emission reductions through recycling and to provide funds to States to encourage reductions in GHG emissions through recycling programs. This provision could help recycling programs generate tradable credits.

The Senate bill (new CAA sec. 726) also includes a version of the price collar sought by the electric utility industry. The bill sets aside a reserve of allowances that will be auctioned at $28 a ton in 2012 (with annual increases) if the market price exceeds that amount. This provision is intended to avoid price speculation and keep allowance prices down.

The Senate bill (new CAA sec. 772(b)) retains the formula in the House bill that allocates allowances to local distribution companies based 50 percent on emissions and 50 percent on sales, although some Midwestern utilities believe this formula adversely affects them because they rely heavily on coal for power generation and thus have higher emissions.

The Senate bill does not include a nationwide renewable electricity standard. That issue falls under the jurisdiction of the Senate Committee on Energy and Natural Resources, which already has approved an energy bill (S. 1462) that includes a renewable electricity standard that starts at 3 percent in 2011 and grows to 15 percent by 2021, one quarter of which may be met through efficiency reductions. These provisions, which are less stringent than the House bill, are likely to be added to the Senate bill when it is considered on the Senate floor.

With five Senate committees with jurisdiction over the Senate bill, and many issues that remain either open or highly controversial, it is difficult to see how the bill will reach the Senate floor this calendar year.

EPA Regulations

The biggest driver for Senate action remains EPA's preparations to regulate GHG emissions from stationary sources.

On Sept. 22, 2009, EPA finalized its rule imposing mandatory reporting obligations on stationary sources that emit over 25,000 tons per year of GHGs. For most covered sources, reporting must begin in March 2011 for calendar year 2010. However, EPA did delay reporting requirements for a few source categories, where EPA lacked sufficient data to mandate emissions reporting. Reporting also applies to producers, importers, and exporters of fossil fuels.

On Sept. 30, 2009, EPA proposed a rule to establish when a stationary source must include GHG emissions limits in their permits under the CAA. Once the endangerment finding is issued, GHGs will become regulated pollutants under the CAA. Once GHGs are regulated under any part of the CAA (such as the limits proposed for light duty vehicles), then GHG limits based on best available control technology must be placed in permits for new and expanding stationary sources of GHG emissions. Under the statute, the new source review and prevention of significant deterioration provisions of the CAA apply to sources that emit as little as 100 tons per year of a pollutant. For GHGs, that would subject very small sources to regulation. In its proposal, EPA points out this would overwhelm the permitting system and proposes to establish a 25,000 ton per year threshold for CAA regulation of GHGs. However, given that applicability thresholds are in the statute, EPA's "absurd results" and "administrative necessity" arguments may not be upheld, if challenged. It will be interesting to see if environmental advocates challenge EPA's statutory authority to set this threshold. EPA will accept comments on the proposal for 30 days following publication in the Federal Register.

Seeking GHG Emissions Controls Through Litigation

There are literally dozens of lawsuits around the country, seeking to require EPA to establish GHG limits in existing permits. For example, in Aug. 2007, EPA issued a permit for the Desert Rock coal fired power plant on Navaho land without GHG emission limits. This permit was appealed by the State of New Mexico. On Sept. 24, 2009, the EPA Environmental Appeals Board granted EPA's request to withdraw the permit, to reconsider whether to include limits on GHGs.

Many lawsuits also have been filed under tort law, including a claim brought by the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, and Wisconsin, and the city of New York, against American Electric Power Company, Southern Company, Tennessee Valley Authority, Xcel Energy, and Cinergy Corporation seeking to limit GHG emissions from power plants owned by these entities, under a nuisance doctrine. The district court for the Southern District of New York dismissed the case, holding that the question of whether to require GHG emission controls is a political decision, applying the "political question doctrine." However, on Sept. 21, 2009, the Second Circuit Court of Appeals overturned the district court and held in State of Connecticut, et al. v. American Electric Power Company Inc., et al. that the nuisance claim could proceed. This may open the door to a significant increase in tort claims against emitters of GHGs.

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