January 01, 2014

D.C. Circuit vacates GHG Tailoring Rule deferral for biogenic sources

Roger R. Martella Jr. and Joel F. Visser

Four years after the U.S. Environmental Protection Agency (EPA) finalized its first-ever suite of greenhouse gas (GHG) regulations under the Clean Air Act, one of the most controversial yet unanticipated issues remains unresolved: Whether and how to account for the carbon dioxide (CO2) emissions from the combustion of renewable biomass (“biogenic emissions”).

This issue, which has quickly evolved from barely a glancing mention into a prominent national debate, is one of the most significant questions that remain undecided from EPA’s original GHG regulations. Initially buried deep in the text of EPA’s Tailoring Rule, “biomass combustion” has become a separate and distinct issue, simultaneously dividing and uniting forest owners, certain states, environmental NGOs, renewable fuel proponents, and agricultural interests throughout administrative petitions, three federal court cases, and a D.C. Circuit decision.

And now there is the distinct possibility that the U.S. Supreme Court could weigh in too.

This debate over whether and how to address biogenic emissions is as much a scientific, technical, and political issue as it is a legal once. Unlike GHG emissions from fossil fuels, biogenic emissions—as a result of the natural carbon cycle—theoretically have no net adverse effect on atmospheric CO2 emissions. CO2 is sequestered by trees and other types of biomass as they grow and is emitted when biomass decays or is combusted. These processes occur simultaneously across the landscape and form an ongoing cycle where emitted carbon is sequestered and vice versa.

As long as biomass carbon stocks remain stable or increase—as they have for at least the past 60 years—the CO2 that is released during combustion is replaced by an equivalent amount of CO2 through regeneration and thus does not increase the concentration of CO2 in the atmosphere. The extent to which emissions and regeneration balance is highly dependent upon the spatial and temporal scales used for analysis, and studies may report different conclusions depending on the time scales and areas studied. When longer time scales or broader geographic areas are considered, biogenic emissions do not increase atmospheric CO2 concentrations. These competing conclusions regarding the carbon neutrality of biomass have created uncertainty that EPA now seeks to resolve.

EPA’s regulation of GHG emissions from stationary sources

The current dispute over EPA’s treatment of biogenic emissions began when EPA first regulated stationary source GHG emissions in the Tailoring Rule. In the proposed Tailoring Rule (74 Fed. Reg. 55,292, Oct. 27, 2009), EPA did not explicitly address biogenic emissions, but directed sources to calculate a source’s GHG emission by cross-referencing EPA’s GHG Inventory (2009), which excludes biogenic CO2 from Energy Sector emissions. In the final Tailoring Rule (75 Fed. Reg. 31,514, June 3, 2010), however, EPA removed all references to the GHG Inventory and announced that biogenic emissions would be counted as GHG emissions under the Prevention of Significant Deterioration (PSD) and Title V permitting programs. In response, the National Alliance of Forest Owners (NAFO) submitted a petition for reconsideration challenging EPA’s inclusion of biogenic emissions.

In January 2011, EPA granted NAFO’s petition and announced that it would propose to defer regulation of biogenic emissions for three years while it completed a scientific assessment of biogenic emissions. On July 20, 2011, EPA issued the Deferral Rule (76 Fed. Reg. 43,490, July 20, 2011), which temporarily excluded biogenic emissions from the PSD and Title V permitting programs for a period of three years. EPA justified the Deferral Rule by relying on the same administrative law doctrines that it used in the Tailoring Rule. Several environmental organizations petitioned for review of the Deferral Rule. A number of trade associations intervened on behalf of EPA.

D.C. Circuit decision

On July 12, 2013, the D.C. Circuit vacated the Deferral Rule in a split decision that produced three separate opinions. Center for Biological Diversity v. EPA, 722 F.3d 401 (D.C. Cir. 2013). In the majority opinion, Judge Tatel held that the Deferral Rule was ripe for judicial review despite the interim nature of the rule and that EPA’s reliance on various administrative law doctrines was not sufficiently supported in the administrative record. Regarding prudential ripeness, intervenors relied on recent D.C. Circuit case law to argue that the court should decline to review the Deferral Rule during the pendency of EPA’s decision on a final approach to regulating biogenic emissions. Judge Tatel found that the case presented purely legal questions that were fit for judicial review and that petitioners would suffer hardship in the absence of review because at least one biomass energy facility had already been constructed in reliance on the Deferral Rule.

Turning to the merits, Judge Tatel found that EPA failed to create an adequate record to justify its reliance on three administrative law doctrines. With respect to the one-step-at-a-time doctrine, Judge Tatel faulted EPA for failing to explain in the record the legal theory it may rely on in a future rulemaking to treat biogenic emissions differently from other emissions. Turning next to the doctrine of administrative necessity, Judge Tatel held that EPA failed to justify in the record its rejection of a “middle-ground option” that would have required biomass facilities to obtain PSD permits in some limited circumstances. Finally, with respect to the absurd results doctrine, Judge Tatel found that EPA could not incorporate its rationale from the Tailoring Rule because the rules were aimed at different absurd results. He explained that the Tailoring Rule was intended to address the administrative burden of processing PSD and Title V permits, while the Deferral Rule was intended to address the regulation of sources with a “negligible impact on the net carbon cycle.” Id. at 412.

In a concurring opinion, Judge Kavanaugh agreed with EPA that there may be valid policy reasons for excluding biogenic emissions but asserted that this option was foreclosed by recent D.C. Circuit precedent. Citing Coalition for Responsible Regulation, Inc. v. EPA, 684 F.3d 102 (D.C. Cir. 2012) (CRR), he asserted that “there is zero basis in the text of the Clean Air Act to distinguish biogenic carbon dioxide that EPA is required (under our precedent) to regulate for purposes of the PSD and Title V permitting programs.” Id. at 412 (Kavanaugh, J. concurring). At the same time, however, Judge Kavanaugh reiterated his belief that CRR was wrongly decided and suggested that EPA’s inability to exclude biogenic emissions now can be attributed to the “broad interpretation” of the Clean Air Act that EPA advocated in prior cases.

Judge Henderson indicated in her dissent that she would have affirmed the Deferral Rule based on the one-step-at-a-time doctrine, finding that EPA reasonably balanced its duty to regulate GHG emissions with the uncertainty related to the net atmospheric impact of biogenic emissions. She concluded that “EPA’s decision to stop and think before regulating in a complex—and changing—area is eminently reasonable.” Id. at 420 (Henderson, J. dissenting). Alternatively, Judge Henderson would have found judicial review to be prudentially unripe because EPA’s ongoing review of biogenic emissions would “crystallize the issues” related to biogenic emissions and because the few sources that may be built in reliance on the Deferral Rule would have a minimal impact on petitioners.

While the court’s decision poses short-term challenges for EPA and for facilities that emit biogenic CO2, it expressly does not limit EPA’s ability to permanently exclude biogenic emissions. Judge Tatel’s opinion focused on the content of the administrative record, and the defects he identifies can be corrected in a future rulemaking. In fact, his opinion “leaves for another day the question whether the agency has authority under the Clean Air Act to permanently exempt biogenic carbon dioxide sources from the PSD permitting program.” Id. at 412. Even Judge Kavanaugh noted that EPA could exempt biogenic CO2 by “tinker[ing] with the Endangerment Finding” for GHGs. Id. at 413 n.1 (Kavanaugh, J., concurring).

Next steps

The D.C. Circuit’s decision has created near-term uncertainty for stationary sources that have (or intended to) rely on the Deferral Rule’s temporary exclusion for biogenic emissions. Sources that have already commenced construction face uncertainty as to whether the vacatur will be applied retroactively, which might require them to complete a best available control technology (BACT) analysis for GHGs and other regulated pollutants. Companies considering construction of new biomass sources and existing facilities considering modification also face significant uncertainty, as biogenic emissions that would be subject to regulation under the D.C. Circuit’s decision may eventually be excluded from regulation in EPA’s final policy. By commencing construction now, these facilities could be required to complete a costly BACT analysis and potentially install pollution control equipment that would ultimately be deemed unnecessary under EPA’s permanent policy.

The impact on sources of biogenic emissions is further complicated by ongoing litigation regarding EPA’s regulation of GHG emissions from stationary sources. First, on October 15, 2013, the Supreme Court granted several petitions for certiorari challenging EPA’s legal interpretation that regulation of GHG emissions under the PSD permitting program was automatically triggered by EPA’s regulation of GHG emissions from mobile sources. These petitions directly challenge EPA’s authority to regulate GHG emissions under the PSD program, and the Supreme Court’s decision could render the D.C. Circuit’s decision moot by limiting EPA’s legal authority to regulate GHG emissions under the PSD permitting program. Second, in response to the Supreme Court’s grant of certiorari, the Court granted Intervenors’ motion to extend the deadline for future filings in that case pending the Supreme Court’s decision. Petitioners’ motion for immediate issuance of the D.C. Circuit’s mandate was denied. After the Supreme Court issues its decision, EPA or Intervenors will still have an opportunity to seek rehearing or rehearing en banc. Third, forestry and forest products trade associations filed separate petitions for review of EPA’s regulation of biogenic emissions from light-duty vehicles and from stationary sources. Those cases were severed from broader challenges to EPA’s GHG regulations and held in abeyance pending EPA’s ongoing reconsideration of biogenic emissions. Those cases could be reactivated and litigated.

These sources of uncertainty are unlikely to be resolved in the immediate future, given the multiple rounds of litigation that are currently possible under existing regulations. However, by issuing new regulations that definitively and finally establish EPA’s policy regarding the appropriate accounting for biogenic emissions, EPA could potentially moot a significant portion of the existing biomass-specific litigation and provide a measure of certainty to biomass facilities. EPA has already made significant progress in this endeavor since the Deferral Rule was issued, and neither the D.C. Circuit’s decision nor the Supreme Court’s broader review of EPA GHG regulations provides a basis for delaying completion of this important regulatory policy.

Roger R. Martella Jr. and Joel F. Visser

Roger R. Martella, Jr. is a partner in Sidley Austin’s Washington D.C. office and is the former general counsel of EPA. Joel F. Visser is an associate in Sidley Austin’s Washington D.C. office.