Federal Climate Change Update: While Legislation Stalls in Congress, Federal Agencies Move Forward With Programs Affecting U.S. Businesses

January 8, 2010
Client Alert Newsletter Forecast 2010

As 2009 drew to a close, some thought that the United Nations Climate Change Conference in Copenhagen would result in an international agreement that might spur Congress to pass comprehensive climate change legislation. The conference participants, however, could only agree to "take note" of an eleventh hour agreement dubbed the "Copenhagen Accord" that failed to set binding greenhouse gas ("GHG") emission reduction targets, and the Copenhagen Conference was largely viewed as a failure. While there has been some recent news about support for a simple "cap and dividend" bill, the absence of a meaningful international agreement, the Obama administration's focus on healthcare, jobs and financial reform legislation, and the upcoming 2010 election make it increasingly unlikely that the 111th Congress will produce any comprehensive climate change legislation.

But despite the dim prospects of federal climate change legislation, for many companies it will become increasingly difficult to avoid addressing climate change legal issues as part of any strategic calls that will be made during 2010. In particular, several federal agencies, including the U.S. Environmental Protection Agency ("EPA"), the Securities and Exchange Commission ("SEC") and the Council on Environmental Quality ("CEQ") are moving forward with climate change regulations, guidance and programs that could affect operations at many U.S. businesses in 2010 and beyond.

First, towards the end of 2009, EPA finalized its mandatory GHG reporting rule that became effective as of January 1, 2010. The rule requires, among other things, that facilities with stationary sources that emit 25,000 metric tons of GHGs (measured as CO2 equivalents or "CO2e") per year monitor and report these GHG emissions and other operational information to EPA annually. The over 700 page rule includes detailed requirements, and in some cases options, as to how facilities must measure and report their annual GHG emissions. Recognizing that subject facilities may not have been able to put procedures and equipment in place by January 1, 2010, the rule allows for facilities to employ "best available monitoring methods" through March 31, 2010. Starting April 1, however, affected facilities must follow the monitoring requirements set forth in the rule, which include implementing a GHG monitoring plan, unless granted a waiver by EPA (which had to have been requested by January 28, 2010). Moreover, even facilities that believe they will be under the 25,000 metric ton threshold at the end of 2010 will need to consider what efforts in 2010 may be necessary to prove that annual reporting will not be required under the rule. The decisions made on issues associated with the GHG reporting rule carry added strategic significance because these initial annual GHG emission reports have the potential to "lock in" sources for purposes of a number of GHG programs going forward.

One of these potential GHG programs that may be finalized in 2010 is EPA's effort to regulate, at least initially, large emitters of GHGs through the Clean Air Act's Prevention of Significant Deterioration ("PSD") and Title V operating permit programs. EPA proposed this regulation in the fall of 2009 in anticipation of finalizing rules that limit emissions of GHGs from light duty motor vehicles by increasing fuel economy standards. Once the motor vehicle rules become final, GHGs would become a "regulated pollutant" under the Clean Air Act, triggering the applicability of the PSD and Title V programs to GHG emissions. The difficulty is that the PSD and Title V programs are applicable to "major" sources that (in most circumstances) emit 250 or 100 tons of a "regulated pollutant." Applying this major source threshold to CO2 emissions would subject a vast number of new sources to these complex programs, overwhelming already over-stretched state and federal permitting resources. In an effort to work around these threshold issues, EPA's proposed rule "tailors" the major source threshold to 25,000 tons per year for at least five years (thus this rule is often referred to as the "Tailoring Rule"). Both the motor vehicle rule and the Tailoring Rule are expected to be finalized in March 2010.

Finalizing the Tailoring Rule in its current form will not be the end of the discussion, however. In particular, it is unclear that EPA's work-around can withstand a legal challenge attempting to enforce the lower thresholds. Furthermore, even if the Tailoring Rule holds up, a number of significant issues remain, most importantly what constitutes "Best Achievable Control Technology" or "BACT" for GHG emissions, which is the standard that must be applied to all PSD permits. EPA convened a Climate Change Advisory Workgroup to study this BACT issue, and this group released an interim "Phase I" report of its findings at the beginning of February 2010. In addition, sources that emit less that 25,000 tons of GHGs annually are not untouched by the Tailoring Rule, as the rule provides for EPA to study streamlined permitting methods, including the use of general permits or presumptive BACT determinations, and thus allow the 250/100 ton thresholds to return after the initial five year period.

Another offshoot of EPA's efforts to regulate GHG emissions from mobile sources in 2010 is EPA's "endangerment finding" for GHGs under Section 202(a) of the Clean Air Act. Strictly speaking, EPA's endangerment finding is EPA's response to the Supreme Court’s 2007 decision in Massachusetts v. EPA, and is a necessary prerequisite to EPA finalizing the aforementioned motor vehicle rule. Under the "endangerment finding," which was proposed in April 2009 and finalized just before the Copenhagen conference, EPA determined that the well-mixed group of the six major GHGs are reasonably anticipated to threaten public health and welfare, by virtue of their effect on the earth's climate, and that motor vehicle sources cause or contribute to this threat. In addition to the direct effects of this finding with respect to the motor vehicle rule, many are concerned that EPA's endangerment finding will have broader ancillary effects, such as how GHGs are handled by other Clean Air Act regulatory programs with "endangerment" standards, including the National Ambient Air Quality Standards ("NAAQS") program, or by the courts where plaintiffs have had recent successes alleging that GHG emissions support public nuisance tort suits.

Against this backdrop, state permitting authorities delegated by EPA to carry out Clean Air Act permitting programs have come under increasing pressure to issue permits with GHG emission limits. At the end of 2009, a coal gasification power plant in Idaho accepted GHG emission limits, and in February 2010, California regulatory authorities issued a PSD permit with GHG emission limits to a natural gas fired power plant. 2010 will likely bring more instances of Clean Air Act permits that attempt to incorporate GHG emission limits, especially for power plants.

The EPA is not the only federal agency that has pressed forward with climate change programs that promise to affect U.S. businesses in 2010. For example, recently the SEC approved an "interpretive guidance" concerning existing disclosure requirements with respect to "business or legal developments related to climate change." While the SEC did not create new rules through this guidance, it did for the first time provide express direction to the regulated community on when existing disclosure requirements may obligate companies to disclose business or legal developments related to climate change. Notable issues touched on in the guidance include voluntary GHG reporting, reputational damage, how to address pending legislation or regulations, insurance, and potential new opportunities in a GHG regulated environment. Along the same lines, the Council on Environmental Quality recently issued draft guidance on how federal agencies should assess GHG emissions and climate change issues in conjunction with discharging their duties under the National Environmental Policy Act, which requires federal agencies to evaluate the environmental impact of various projects. The types of projects that could be affected are not limited to purely "public" projects, but could also include private projects that require federal approval or use public funding.

While there may not be much activity in Congress to advance economy-wide climate change legislation, early activity in 2010 indicates that Congress will not sit idly by while EPA and other federal agencies move forward with climate change programs. There is currently legislation pending in both houses that would force EPA to reverse its "endangerment finding" and strip EPA of its authority to regulate GHGs emissions. Along these lines, there will likely be debates in Congress over the Obama administration's 2011 budget increases intended to support EPA "regulatory initiatives to control [GHG] emissions under existing Clean Air Act authorities" and additional funds to aid states in "[GHG] permitting activities under the New Source Review and Title V operating permits programs." Similarly, certain members of Congress have officially voiced objections to the SEC's guidance on climate change disclosures. And some members of Congress have joined and/or support administrative and legal actions that have been initiated challenging the monitoring rule and EPA's endangerment finding.

In sum, despite the relatively low prospects for federal climate change legislation being passed in 2010, climate change regulatory programs will continue to be pushed in 2010. While the ultimate outcome of these regulatory programs may not be certain, many companies will need to track these developments closely and take a hard look at whether there are strategic needs or opportunities to adjust operations in 2010 in light of these potential new regulatory programs.