Anticipated Regulatory Initiatives and Developments for 2011 - Climate Change

January 7, 2011
Client Alert Newsletter Forecast 2011

The mid-term election results have all but assured that Congress will not pass any comprehensive climate change legislation during the next Congress. In the face of this political reality, the climate change activity in 2011 promises to originate from a wide variety of sources, including the U.S. Environmental Protection Agency ("EPA") regulatory programs, Congressional efforts to restrict EPA authority, court decisions concerning common law remedies and EPA authority, and state and local initiatives.

On the federal regulatory front, January 2, 2011 marked the start date of EPA's phased "Tailoring Rule," which generally requires large new or modified facilities with significant increases in greenhouse gas emissions to obtain Prevention of Significant Deterioration ("PSD") permits that, among other things, require affected sources to apply Best Available Control Technology ("BACT") to control greenhouse gas ("GHG") emissions. In November 2010, EPA issued guidance intended to assist states in making these BACT determinations, which placed much emphasis on energy efficiency measures. In our experience, the PSD process can significantly complicate and delay planned construction projects, and adding GHG considerations to this mix can only serve to exacerbate these issues, especially given the absence of any experience at the state level in making BACT determinations for GHG emissions.

In addition, as part of two settlements with states and environmental groups reached at the end of 2010, EPA announced that it will propose GHG limits for fossil fuel fired power plants and refineries by revising applicable New Source Performance Standards. The new standards would affect new, modified and existing sources in these industries. The power plant standards will be proposed by July 26, 2011, and the refinery standards will be proposed by December 15, 2011.

In the face of this regulatory activity, certain members of Congress have already introduced a number of bills that would severely restrict EPA's ability to regulate GHG emissions. These efforts include the introduction of bills that would delay EPA's authority to implement these regulatory programs for one or two years, appropriation bills that would preclude funding for any EPA GHG regulatory initiatives, and promises to reverse any future EPA regulatory action through the Congressional Review Act. While such initiatives would likely pass the House, whether they would get through the Senate and/or survive a Presidential veto is uncertain.

Separate from EPA's efforts to control GHG emissions through the Clean Air Act, 2011 marks the first year that certain large sources (i.e., sources that emit 25,000 tons per year of GHGs measured as CO2 equivalents) are required to report their annual GHG emissions under EPA's GHG Reporting Rule. While the final rule has been in place since the end of 2009, EPA continues to modify a number of aspects of the rule. For example, in the middle of 2010, EPA proposed a rule that would govern what reported data could be considered confidential business information. Based upon comments that the proposed rule was not sufficiently protective, at the end of 2010, EPA published an interim final rule that waived the requirements to submit certain data and proposed a rule that would postpone requirements to submit such data until 2014.

Additionally, in a move that would significantly affect the rapidly expanding natural gas industry in Pennsylvania and across the Marcellus region, at the end of 2010, EPA issued its final GHG reporting rule for petroleum and natural gas systems. According to this rule, due to the unique characteristics of the industry, the definition of "facility" that will be required to report GHG emissions was expanded to include a wider range of operations that may be separated physically by large distances. In the case of natural gas production, the definition will require well pad operators to total all GHG emissions from all their well pads within a given hydrocarbon basin, a potentially significant endeavor.

Courts are also likely to weigh in on a number of climate change issues in 2011. First, the District of Columbia Circuit is poised to hear the dozens of actions that attempt to roll back EPA's GHG regulatory initiatives in 2010. In addition, the Supreme Court will hear argument in American Electric Power v. Connecticut ("AEP"), a case in which the Second Circuit Court of Appeals permitted several states and private entities to assert common law nuisance claims against large electric power producers based on their alleged contribution to global warming. Interestingly, any successful efforts in Congress to restrict EPA's GHG regulatory authority may preclude any arguments in the AEP case that EPA regulation has preempted the plaintiffs' claims.

States and other local governments will also likely see climate change activity in 2011. The Regional Greenhouse Gas Initiative continues to operate its regional cap and trade program for power plants in the Northeast, albeit with declining allowance prices. Both Pennsylvania and New Jersey have their own climate change statutes that resulted in the issuance of climate change action plans by their respective environmental agencies. With the political shift in both states, however, the fate of such plans is uncertain.

Against this uncertainty surrounding the regulation of GHG emissions, environmental groups and others will likely increase efforts to regulate and restrict high GHG emitters through stricter controls on other pollutants, such as sulfur dioxide. Accordingly, despite the absence of GHG regulation, the shift towards lower emitting fuels such as natural gas will likely continue in 2011 and thereby support the expanding natural gas industry in the Marcellus and other shale plays.