May 01, 2011

GHG regulation: The siren song of cap-and-trade

In 2009, the U.S. Environmental Protection Agency (EPA) published the Greenhouse Gas Endangerment Finding (GHG-EF) claiming that reductions in GHGs would reduce such wide-ranging maladies as neighborhood degradation to increased tick-borne diseases. Since that time, EPA’s only substantive regulation of stationary sources has been through the Prevention of Significant Deterioration (PSD) preconstruction permitting program. The Clean Air Act (CAA) provides at least two paths to regulating GHGs from stationary sources: (1) National Ambient Air Quality Standard (NAAQS) approach, or (2) New Source Performance Standard (NSPS) approach. Underlying either approach is the desire by some to adopt existing cap-and-trade programs that have already been developed in some states. This article provides a brief overview of these two disparate approaches to regulating GHGs and the potential for incorporation of a cap-and-trade system.

While the initial regulation of GHGs under the PSD program followed from the EPA’s regulation under Title II of the CAA, EPA did, through its 2010 Tailoring Rule and the invocation of several legal doctrines, limit the scope of the PSD program for this pollutant to a small fraction of sources that would have otherwise been required to be regulated under the CAA. Final Rule: Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, 75 Fed. Reg. 31,514 (June 3, 2010). At the time EPA promulgated the Tailoring Rule, there was a general expectation that Congress would legislate a cap-and-trade program for GHGs, and in so doing clarify the scope of EPA’s authority to regulate GHGs from stationary sources under the CAA. Congressional intervention never materialized, however, leaving EPA to divine its own path as constrained by the CAA.

NAAQS approach

EPA has equivocated on the threshold question of whether an endangerment finding triggers a requirement to define a NAAQS for GHG under the CAA or whether such action is discretionary. EPA faced a very similar question in the 1970s following their publication of an endangerment finding for lead. EPA argued then that even when an endangerment finding is made under CAA section 108(a), the administrator retains discretion whether to establish a NAAQS. In the face of a challenge by the Natural Resources Defense Council (NRDC), the Second Circuit summarily rejected EPA’s position, holding that “[t]he structure of the Clean Air Act as amended in 1970, its legislative history, and the judicial gloss placed upon the Act leave no room for an interpretation which makes the issuance of air quality standards for lead under §108 discretionary.” NRDC v. Train, 545 F.2d 320, 327 (2d Cir. 1976). The court went on to make clear that, once an endangerment finding under section 108 is made, a NAAQS and the State Implementation Plan (SIP) process under section 110 are automatically invoked. The Chevron doctrine of deference to administrative agency interpretations of ambiguous statutory provisions had not yet been recognized at that time. Thus, while the Second Circuit’s opinion did not appear to suggest any ambiguity in the statute, another court might be more supportive of an EPA determination that it need not issue a NAAQS even with an endangerment finding.

The impact of an NAAQS standard for GHGs could be significant. If EPA does establish a NAAQS for GHGs based on the science underpinning their GHG-EF, then widespread areas, if not the entire nation, may be designated as non-attainment. The CAA establishes specific deadlines for states to develop regulations that are sufficient to maintain the NAAQS, or in the case of nonattainment areas, regulations sufficient to return the area to attainment. For many years, EPA promoted the use of cap-and-trade type regulatory programs to assist states in addressing regional air quality problems like ozone.

More recently, though, the courts have severely restricted the use of cap-and-trade under the CAA’s SIP structure. The courts have found that these regional cap-and-trade approaches are difficult to reconcile with the federalist underpinnings of Title I of the CAA. In North Carolina v. EPA, the D.C. Circuit held EPA’s cap-and-trade approach to be unlawful because emission reductions were not required on a state-specific basis. 531 F.3d 896 (D.C. Cir. 2008). In the specific case of a non-attainment area, the D.C. Circuit also found the reliance of a state on a cap-and-trade program to meet source-specific Reasonable Available Control Technology requirements is inconsistent with the CAA as well. Natural Res. Def. Council v. EPA, 571 F.3d 1245 (D.C. Cir. 2009). For a more thorough discussion on the failure of cap-and-trade program in meeting the requirements under the CAA, see D. R. van der Vaart & John C. Evans, Location, Location, Location: Did North Carolina Go Far Enough?, 10 Vt. J. of Envtl. L. 267 (2009). As was the case of the false-start under EPA’s separate regulation, Clean Air Interstate Rule, states that rely on cap-and-trade on their own accord or follow an EPA model rule could find those efforts to be unlawful, resulting in additional delay of much needed GHG emissions reductions.

NSPS approach

Alternatively, EPA is authorized under CAA section 111(f) to promulgate NSPSs for new or modified stationary sources. Perhaps more importantly, given the need to address existing GHG levels, section 111(d) authorizes EPA to promulgate emission guidelines for existing sources for pollutants for which a NAAQS has not been promulgated. Promulgation of an “emission guideline” under section 111(d) would require states to adopt these guidelines into their SIP structure and if the state fails, EPA is authorized to enforce the guidelines as federal implementation standards. While states have some discretion in adopting the emission guidelines, that discretion is limited to “consideration, among other factors, the remaining useful life of the existing source to which such standard applies.” There has been considerable interest in the development of section 111(d) emission guidelines sufficiently broad to allow state agencies to implement cap-and-trade programs either within their state or to join a regional or nationwide cap-and-trade program. See J. Monast, T. Profeta, B. Pearson & J. Doyle, Regulating Greenhouse Gas Emissions From Existing Sources: Section 111(d) and State Equivalency, 42 Envtl. L. Rep. News & Analysis 10,206 (2012).

As was the case for the NAAQS approach above, this would not be the first time EPA has considered such a broad interpretation under section 111(d). Under the prior  administration, EPA was challenged by environmental groups and over fifteen states when the agency promulgated mercury rules that relied on a cap-and-trade approach under section 111(d). There were two arguments against cap-and-trade under section 111(d). The first argument was an environmental concern with mercury hotspots, a concern that is present, but to a lesser extent, with GHG emissions. In contrast, the second argument, and one that is perhaps fatal to this approach, was purely legal. The environmental Non-Governmental Organizations (NGOs), including Natural Resources Defense Council, Earthjustice, and the Clean Air Task Force, argued that the plain language of section 111(d) prohibits a cap-and-trade approach. As these groups pointed out in their brief to the D. C. Circuit, section 111 mandates that each state plan apply the emission reduction “to any existing source.” These groups observed that a cap-and-trade approach under section 111(d) would lead to a “topsy-turvey outcome” where reductions could mean increases in emissions from some sources. New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008).

EPA attempted a substantially more benign form of cap-and-trade in the early 1970s when it sought to allow sources subject to a standard under section 111 to achieve compliance via a plant-wide “bubble.” But, in Asarco Inc. v. EPA, 578 F.2d 319 (D.C. Cir. 1978), the Sierra Club successfully argued that the plain language of the CAA prohibited EPA from applying emission standards under NSPS to anything other than the individual emission unit. The D.C. Circuit noted that: “[t]he bubble concept in the challenged regulations would undercut section 111 by allowing operators to avoid installing the best pollution control technology on an altered facility as long as the emissions from the entire plant do not increase. For example, under the bubble concept an operator who alters one of its facilities so that its emission of some pollutant increases might avoid application of the NSPS by simultaneously equipping other plant facilities with additional, but inferior, pollution control technology or merely reducing their production. Applying the bubble concept thus postpones the time when the best technology must be employed and at best maintains the present level of emissions.” 578 F.2d at 328. The court held that “any” version of the bubble was contrary to the purpose of the CAA. Id.

Next steps

EPA’s efforts to achieve GHG reductions have been limited under the narrow scope of the PSD Tailoring Rule. More reductions are desired by the administration, as reflected by the EPA Administrator Lisa Jackson’s statement “Right now, our planet is facing a deteriorating atmosphere and a rapidly changing climate. Our country is entering a global race for clean energy, with fierce environmental and economic urgency. And our communities are awakening, having weathered years of federal inaction on air, water, and land.” Administrator Lisa P. Jackson, Remarks to the Commonwealth Club of San Francisco (2009).

Similarly, the lead U.S. negotiator at a recent UN climate change conference noted the urgency of emission reductions stating, “The United States administration believes that the urgency of the problem is real.” Dr. Jonathan Pershing, U.S. Department of State, Deputy Special Envoy for Climate Change Durban, South Africa, November 28, 2011 (Press Briefing: 17th Session of the Conference of the Parties to the UN Framework Convention on Climate Change).

Prior EPA regulatory efforts have led states down the primrose path by adopting first the mercury reduction rule and then long range transport rule, only to be forced to repeal their rulemakings or be told that rules cannot be relied upon for SIP submittals after successful legal challenges. Despite the seductive siren calling of cap-and-trade, attempts to implement such an approach through either the NAAQS or NSPS seem doomed by the rocky shoreline of legal precedent. Risky legal theories attempting to implement a cap-and-trade approach for GHG regulation, instead of simply promulgating standards that require more efficient operations, may further delay efforts mandated under the CAA to reduce GHG emissions.