It has been almost one month since the EPA published its proposed rule on controlling carbon pollution (CO2) from power plants and other large emitters. The proposed rule was formally published in the Federal Register on June 18th, and it is in the 120-day comment period for stakeholders. Meanwhile, the Supreme Court handed down a decision in Utility Air Regulatory Group v. EPA, which lets regulation of CO2 emitted by power plants stand, more or less, but with the parameters defined differently than the EPA defined them. Here’s a summary of the basics and a few issues.

The Proposed Carbon Rule

Earlier this year, the EPA tackled carbon emission standards for newly constructed stationary sources–power plants and other major emitters–and it has also recently submitted a proposed rule for modified and reconstructed sources. The largest media storm has been over the EPA’s proposed rule for existing sources (electric generating units). Clean Air Act Section 111(d) covers existing sources and authorizes the EPA to make rules regulating them if they would be regulated if new, or if there is an air pollutant which has not been “categorized” yet. The new “pollutant” at issue is the greenhouse gas CO2. Title V of the Clean Air Act is the general permitting program established in 1990 wherein major sources submit to repermitting every 5 years, and this CO2 rule would be added to the list of documentation required. An insightful series of articles summarizing the proposal and asking legal questions is available at U.C. Berkeley’s Legal Planet. For discussion of the plan’s options and other more technical details, this post by large DC firm Akin Gump is excellent.

The carbon rule proposed by EPA for existing electric generating units sets target rates for reductions of emission of CO2 from power plants by 2030. EPA requires states to begin meeting individual interim targets in 2020. By the EPA’s calculations, this will reduce emissions of carbon from 2005 levels by approximately 30% in 2030. The target goals are originally measured in a rate-based manner, that is, amount of CO2 (in pounds) produced per megawatthour (MWh) of energy, rather than a mass-based target, normally measured in tons per hour. However, it gives states the option to convert to a mass-based target.

The deadline for the rule to be finalized by the EPA is June 2015. State plans are expected to be in place by June 30, 2016, adding an additional year or two if the state is able to send in an interim plan describing how it is on track to create a final plan. One complication that could make states’ plans late would be a state’s decision to join a regional coalition to cap and trade CO2. Comments on the rule are due before mid-October this year.

The rule can’t stop climate change if the rest of the world doesn’t do anything, but it’s a significant statement by the Obama administration. It’s also a significant adjustment for some states, and sure to be legally challenged.

States are supposed to work with the EPA to come up with their plan for reductions in CO2 emissions, similar to the way a state creates a SIP (state implementation plan) under the New Source Performance Standards, or NSPS, of the 70s. In EPA’s proposed carbon rule, the state public utilities commissions are supposed to work with the EGUs (electric generating units) to create their plan to cut down on emissions. However, unlike in the NSPS, the EPA uses “building blocks” that are outside the fenceline–not just focusing on the generating unit itself and its sphere–in the equation to reduce overall projected state emissions. This creates questions of just who will be responsible if enforcement is necessary, and how far into the states the federal government will be regulating.

The Clean Air Act tasks the EPA with coming up with “the best system of emission reduction,” or BSER, for plants, which they must then apply. In the proposed rule, the EPA takes four “building blocks” and asks states to use them all to achieve a weighted emission reduction number. The EPA argues that the four building blocks used together are the best system of emission reduction.

All building blocks listed by the EPA in its proposed rule, are: 1) efficiency at the source itself (the EPA calls this “heat rate improvements”), 2) use of lower-emitting assets at greater capacity (read: natural gas combined cycle) 3) increased use of zero or low-generation assets, and 4) demand-side energy efficiency programs. Only the first of these has to do with the source itself. The second building block has to do with substituting sources and may affect the way power is bought and sold on regional ISOs. The third, low or zero-carbon generation, includes nuclear but not hydro. This is one of the controversial features of the proposal. The fourth, demand-side, namely, consumer, energy efficiency, is something that has risen into the public consciousness more and more after the turn of this century.

Some questions people have been asking are:

Does the EPA have the power to ask for beyond-the-fenceline measures to be taken and integrated into this equation, so as to count for reductions in emissions? Is the EPA beginning to regulate state-only material? For example, renewable portfolio standards are set by states and require power generators to get a percentage of their power from renewables. If a state has them, these are factored into the emissions number and will lower emissions as calculated by the EPA.

What about nuclear? The EPA estimates almost 6% of low- or no-emission power will come from a combination of new nuclear plants being built, and the retention of nuclear assets that are currently set to close. Many people do not believe nuclear is safe, given storage issues. The Fukushimi Daiichi plant stored used reactor cores in water inside holding tanks onsite, and the cooling of that water was stopped by a natural disaster. Even recently, the leaking of contaminated water has not been fully controlled. Without a consensus on a central nuclear storage facility like Yucca Mountain, American spent fuel is stored onsite, with varying degrees of security, some in open-air tanks. And then, how will plants financially bound to close stay open? The rule argues that the new market share created by the increase in the use of this power technology will be enough encouragement, but that is not entirely clear.

The states have varying degrees of what might be called carbon shock when it comes to the reduction requirements. Kentucky has one natural gas plant and otherwise all coal, so even though its requirement for 2020 looks generous (1,844 pounds per MWh), it will be hard to achieve using these building blocks. Massachusetts, on the other hand, could increase use of its natural gas plants only slightly and not need any coal, so its required reduction is a smaller number of carbon tons (655 pounds per MWh), but it is easier to achieve as a practical matter.

The EPA has also proposed a second option with lower targets and a shorter timeframe, and has asked for comments on whether a combination of building blocks 1 and 2 should be the best system of emission reduction.

This proposed rule really represents a ton of effort by the EPA, to be flexible with states, to calculate steps and factors in emission reduction, to catalog the history of the Clean Air Act itself. Can I be blamed for being happy that something has been produced, and that it weaves new pieces into this complex statute, the Clean Air Act, fairly well? Nevertheless, the ultimate rule may not look at all like this form, given the comments and the litigation to come.

The UARG v. EPA Decision

The UARG decision dates back to Massachusetts v. EPA, a 2007 case where the Supreme Court decided that the EPA did have the power to regulate CO2 as a pollutant.  Note: this sounds the same, but the regulation under review in UARG is in a different section of the Clean Air Act than the proposed rule on the EGUs discussed above. Going back to our NSPS, section 110 regulates major sources, defined as sources emitting 250 tons/day or more of a given pollutant. This was originally in respect to SO2, NOx, particulate matter and ozone precursors. Yet when EPA did decide to make rules with regards to CO2, it defined a major source in a new Tailoring Rule as emitting 100,000 tons or more of CO2, because a power plant simply emits so much carbon dioxide it would be impossible to regulate all the sources emitting over 250 tons per day.

The Supreme Court in UARG decided that it was arbitrary and capricious to change the standard emission rate when it came to carbon and struck down the tailoring rule. That

created a new conundrum. The lower standard–250 tons of CO2, would capture small businesses within the regulation. To get around this, the Supreme Court said that EPA could regulate carbon pollution from sources already regulated for other pollutants. Sources already regulated include approximately 80% of the sources that would have been regulated under the 100,000 ton version of this rule. So EPA won – or did it?

I tend to be fearful of the language, pointed out by Dan Farber at Legal Planet, in the Scalia majority decision stating, “our decision should not be taken as an endorsement of all aspects of EPA’s current approach, nor as a free rein for any future regulatory application…”. Did you or your children ever buy those little sponge animals hiding inside a dissolvable capsule? This language may bloat in the bathwater of interpretation just like that little sponge animal, eventually end up blocking administrative discretion.