Scattered and dissonant: the Clean Air Act, greenhouse gases, and implications for the oil and gas industry.

• Author: Ritchie, Alex
• Position: I. Introduction through II. Regulation of GHG Under the Prevention of Significant Deterioration Program B. Implications of PSD GHG Regulation for the Oil and Gas Industry 3. Administration Burdens, p. 461-489

1. INTRODUCTION II. REGULATION OF GHG UNDER THE PREVENTION OF SIGNIFICANT DETERIORATION PROGRAM A. GHG as Air Pollutant and the Path of GHG Regulation under PSD 1. Massachusetts v. EPA 2. The Endangerment Finding, the Tailpipe Rule, the Timing Rule, and the PSD Trigger 3. The Tailoring Rule: A voiding the Administrative Train Wreck 4. Coalition of Responsible Citizens v. EPA B. Implications of PSD GHG Regulation for the Oil and Gas Industry 1. Source Categories Brought Into PSD Review Because of GHG Emissions 2. Lowering of GHG Emissions Thresholds--Adding Sources 3. Administration Burdens a. Permitting and Review b. Permit Avoidance c. Best Available Control Technology i. General Guidance ii. Specific Guidance d. Potential Streamlining Approaches 4. GHG as NAAQS Criteria Pollutant? 5. Regulation of Other Pollutants under Varying Thresholds III. NEW SOURCE PERFORMANCE STANDARD REGULATION OF GHG A. The Path of New Source Performance Standard (NSPS) Regulation 1. The NSPS Settlement Agreement 2. Power Plant GHG New Source Performance Standards B. Implications of NSPS GHG Regulation for the Oil and Gas Industry 1. Implications of New and Existing Power Plant NSPS and the Promise of Cheap Natural Gas 2. Refinery New Source Performance Standards 3. Future Regulation of Midstream and Upstream Oil and Gas and Operations under NSPS 4. Regulation of Existing Sources under NSPS? IV. FEDERAL MARKET-BASED REGULATION OF GHG A. The Path of [No] Cap and Trade in the US 1. Climate Change Legislation 2. The Mandatory Greenhouse Gas Reporting Rule B. Implications for the Oil and Gas Industry 1. Administration of the Reporting Rule 2. Lessons of the Reporting Rule V. STATE MARKET BASED REGULATION OF GHG A. California Cap and Trade B. Implications for the Oil and Gas Industry VI. CONCLUSION I. INTRODUCTION

   If the predictions of the International Energy Agency (IEA) come to pass, "the U.S. will become the world's top producer of oil by 2020, a net exporter of oil around 2030, and nearly self-sufficient in energy by 2035," all spurred by U.S. domestic off and gas production, with much of the gains attributable to horizontal drilling and hydraulic fracturing technologies. (1) The advancement of these technologies to extract natural gas from unconventional shale rock will see production growth from approximately 650 billion cubic meters in 2011 to 800 billion cubic meters in 2035 "putting the United States ahead of Russia as the largest gas producer in the world between 2015 and the end of the 2020s." (2)

   In the midst of this overwhelming revolution in domestic oil and gas production, industry operators face an ever more complex web of regulations to control greenhouse gas (GHG) emissions (3) that have been promulgated or proposed under the auspices of the Clean Air Act (CAA). (4) Based on the holding in Massachusetts v. EPA (5) that greenhouse gases are an "air pollutant," (6) the Environmental Protection Agency (EPA) has morphed a statute to control GHGs emitted from motor vehicles into a tailored program to control emissions from new or modified stationary sources that emit or have the potential to emit over thresholds arbitrarily set by EPA. This GHG Prevention of Significant Deterioration (PSD) program now covers refineries and certain natural gas processing and treatment plants and is sure to be expanded to other industry segments.

   In Coalition for Responsible Regulation, Inc. v. EPA, (7) industry and various states challenged EPA's Prevention of Significant Deterioration program in the D.C. Circuit Court of Appeals to no avail. (8) Notwithstanding that the special solicitude of the states was in part the basis for standing in Massachusetts, (9) no such solicitude was provided the state petitioners in Coalition. Unless the Supreme Court grants certiorari and reverses the D.C. Circuit, the arbitrary thresholds established by EPA to regulate GHG emissions for major sources may never receive a substantive review from the federal courts.

   President Obama, spurred by environmental groups, is currently focused on the coal-fired power plant industry as EPA moves to promulgate New Source Performance Standards for new--and then--existing electric utility generating units. (10) Eventually, however, the focus of environmental groups will turn toward an off and gas industry that such groups describe as "dirty, dangerous and run amok." (11)

   Actions by EPA to control GHG emissions through the CAA are not without critics unconnected to industry. Many commentators believe that, because carbon dioxide is not a toxic pollutant and does not cause direct damage to human health, the CAA is a poor fit for the regulation of GHGs. (12) Although opposed by most in the oil and gas industry, a federal incentive-based program such as cap-and-trade or a carbon tax could create a much more flexible, cost-effective solution to climate change than ill-fitting provisions of the CAA. (13) Independent oil and gas producers especially may be unable to afford costly regulatory controls, but may have the ability to better manage costs through a market-based system by sharing the GHG burden with large integrated companies. (14)

   While a number of comprehensive climate change bills have been proposed since President Barack Obama took office, they have all suffered at the hand of political gridlock. (15) Congressional legislators that support action on climate change have simply come to view the exercise by EPA of authority under the CAA to regulate C[O.sub.2] as an expedient means to avoid the political ramifications of climate change legislation. (16)

   In the meantime, California has begun implementation of its cap-and-trade program, providing a convenient testing ground for potential future federal climate change legislation. (17) The California program will begin slowly at first, but time will tell whether California will remain a competitive marketplace for oil and gas refiners, processors, and producers.

   This Article explores the practical and theoretical implications for the oil and gas industry of EPA's GHG regulatory regime and its inevitable expansion. The decision in Coalition opens the door for EPA to lower thresholds for permitting and control technology to apply to smaller independent producers; to adopt GHG performance standards for refineries; and to eventually expand GHG performance standards to well-site oil and natural gas drilling and completion operations. While new GHG regulations increase the cost of natural gas production, proposed GHG power plant rules may ironically intensify the demand for natural gas at the same time that the U.S. begins its transformation into a liquefied natural gas exporter. These pressures on demand may increase the price of natural gas, a fuel currently viewed as a cheap alternative to coal. Further, should Congress actually adopt a market-based system, the existing GHG reporting program indicates that oil refiners might be made to account for both facility emissions and the emissions of motor vehicles that combust their refined products, forcing refiners to pass such costs to consumers in the price of gasoline at the pump.

   Part II of this paper begins with a discussion of the origin of the PSD program as applied to GHGs and its implications for the oil and gas industry, including source categories subject to the rule, administrative burdens, and implications for future regulation. Part III addresses New Source Performance Standards proposed for electric utility generating units, how those standards may affect the oil and gas industry, and how those standards likely will lead to similar regulation of oil and gas operations. Part IV explains federal legislative efforts to regulate climate change, the extensive federal reporting and verification system already in place, and the lessons of this reporting system for the oil and gas industry. Part V focuses on the new California cap-and-trade system and its application to the oil and gas industry.

2. REGULATION OF GHG UNDER THE PREVENTION OF SIGNIFICANT DETERIORATION PROGRAM

   1. GHG as Air Pollutant and the Path of GHG Regulation under PSD

      1. Massachusetts v. EPA

         The path of GHG regulation under the CAA began in 1999, when a group of private organizations filed a rulemaking petition asking EPA to regulate GHG emissions from new motor vehicles. (18) The petitioners marched into battle armed with CAA section 202(a)(1), which provides that the EPA Administrator "shall" regulate emissions of any air pollutant from new motor vehicles, "which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare." (19)

         EPA denied the rulemaking petition in 2003, (20) relying on an unrebutted report by the National Research Council opining that while evidence points to a warming of global surface air temperatures, uncertainties in understanding natural variability in temperatures meant that an unequivocal link between the buildup of GHGs in the atmosphere and observed climate changes could not be established. (21) EPA concluded in denying the petition that 1) the CAA did not authorize EPA to issue mandatory regulations to address global climate change, (22) and 2) even if EPA had such authority, it would be unwise to do so at that time. (23)

         Undeterred, the petitioners sought review of EPA's petition denial by the D.C. Circuit Court of Appeals, joined by Massachusetts and other state and local governments. (24) In a 2-1 decision, the Court denied the petition, holding that EPA's decision to forego rulemaking of GHG emissions was not unreasonable until more was understood about the causes, extent, and significance of climate change. (25) One year later, the Supreme Court in the seminal case of Massachusetts v. EPA (26) reversed the D.C. Circuit, holding in a 5-4 decision that EPA failed to offer a reasoned explanation for its refusal to decide whether GHGs caused or contributed to climate change. (27)

         Writing for the...