Federal Regulation of GHG Emissions Continues to Grow

By Anna Wildeman and David Crass
Biomass market drivers-such as renewable portfolio standards and the potential to generate carbon credits for greenhouse gas (GHG) emission reductions-are not getting much federal attention, but rather are ramping up on state and regional levels. In contrast, regulation of GHG emissions is getting attention at the federal level. Recently, federal agencies such as the Securities and Exchange Commission and the Council on Environmental Quality, have issued guidance that may require private corporations and the federal government to evaluate and report on potential impacts from climate change and GHG emissions. The most important federal action, however, is the U.S. EPA's impending GHG regulation.

In the first quarter of 2009, EPA issued a determination, known as the endangerment finding, that GHGs may reasonably be anticipated to endanger public health and welfare. EPA's endangerment finding provides the foundation for EPA to regulate GHGs pursuant to its Clean Air Act authority. Although the endangerment finding has been challenged by industry groups and several states in U.S. Circuit Courts of Appeals and by Sen. Lisa Murkowski, R-Alaska, in Congress, it appears EPA will continue to develop a comprehensive GHG regulatory scheme until Congress acts to prevent such regulation.

Since issuing its endangerment finding, EPA finalized the mandatory GHG monitoring and reporting rule, which required certain GHG sources to begin emissions monitoring on Jan. 1 and requires subject sources to submit annual reports starting in March 2011. EPA has also proposed two rules that would regulate-within the existing CAA regulatory framework-GHGs from mobile sources and stationary sources. It is these two proposed rules that are generating the most concern.

In February, EPA Administrator Lisa Jackson issued a letter responding to economic concerns of several U.S. senators and outlining the agency's timeline for finalizing rules to regulate GHG emissions within the CAA framework. As indicated in its September 2009 proposed rule and reiterated in Jackson's letter, EPA, in coordination with the federal Department of Transportation, intends to finalize the mobile source rule in late March. The EPA mobile source rule will set GHG emission standards for light-duty motor vehicles and the DOT standard will raise the nationwide fuel-economy standards for vehicles starting with model year 2012.

According to EPA interpretation, finalizing the mobile source rule will trigger a requirement to also regulate GHG emissions from stationary sources under the CAA. EPA intends to finalize what is known as a "tailoring rule," at the same time it finalizes the mobile source rule, to limit the number of stationary sources immediately subject to CAA regulation. If GHG emissions from stationary sources are made subject to the CAA without the tailoring rule, EPA estimates the number of facilities required to obtain CAA permits would increase by tens of thousands, paralyzing federal and state regulatory agencies charged with processing permit applications.

EPA has indicated that the final tailoring rule will not require any stationary sources to comply with CAA regulations until 2011, and then only sources that are currently subject to CAA permits will be required to account for GHG emissions. Between the end of 2011 and 2013, EPA expects to phase-in CAA permit coverage to "other large sources" of GHG emissions. It is unclear at this point what will be considered a large source, but Jackson indicated that, between 2011 and 2013, the GHG emission threshold to trigger CAA requirements will be "substantially higher than the 25,000 ton limit that EPA originally proposed." The smallest sources of GHG emissions are not expected to be subject to CAA requirements until at least 2016.

In President Obama's proposed federal budget, EPA is slated to receive $47 million to implement GHG regulations; of that, $4 million will be allocated to implement the GHG monitoring and reporting rule; and $43 million will be allocated to implement the GHG regulations described above. So, unless Congress acts to prevent it, EPA regulations should be in full swing by 2011.

Anna Wildeman is a member of Michael Best & Friedrich's land and resources practice group. Reach her at ajwildeman@michaelbest.com or (608) 283-0109.

David Crass is a leader in the firm's renewable energy practice. Reach him at dacrass@michaelbest.com or (608) 283-2267.