Using section 111 of the Clean Air Act for cap-and-trade of greenhouse gas emissions: obstacles and solutions.

• Author: Enion, M. Rhead

ABSTRACT

The Environmental Protection Agency (EPA) is moving forward with regulation of greenhouse gases under section 111 of the Clean Air Act. The next step could be creating a cap and trade system for the electrical utility industry using "standard of performance" as the statutory foundation. Past litigation on EPA's proposed mercury cap-and-trade program provides insights about potential challenges to a carbon-trading program. This article describes those insights and discusses how EPA could set a national cap by defining a standard of performance for greenhouse gas emissions and then allow regulated facilities to use allowances to cover their greenhouse gas emissions. This article also looks to the specifics of the proposed California cap-and-trade program in order to demonstrate how EPA could allow states to use their participation in regional cap-and-trade programs to comply with section 111(d) requirements for existing sources.

1. INTRODUCTION II. BENEFITS OF USING SECTION 111 A. Regulating GHGs under Section 111 Has a Strong Legal Foundation in Comparison to Other Sections of the Clean Air Act B. EPA Has a Robust Regulatory System in Place under Section 111 C. Standard of Performance Does Not Depend on a "Technological System" D. No Significant Difference Exists Between New and Existing Sources for the Issue of Trading E. EPA Could Later Transition NSPS to a Section 110 Program III. NEW JERSEY V. EPA: ARGUMENTS OVER TRADING AS A STANDARD OF PERFORMANCE A. What is a "Standard"? B. Must Each Source Decrease Its Emissions to Meet the Standard, Thereby Precluding the Use of Allowances? 1. Must Every Source Achieve Actual Emissions Reductions? 2. What is "Continuous Emissions Reduction"? 3. Does Cap-and-Trade Violate ASARCO by Implementing a Bubble Concept? C. Does Cap-and-Trade "Reflect the Degree of Emission Limitation Achievable"? D. Does Cap-and-Trade Reflect the "Best system of Emission Reduction "? IV. TRADING UNDER SECTION 111 A. Outline of a Trading Program 1. Defining the Cap 2. Allocating Allowances 3. Use of a Minimum Emission Reduction Baseline B. Trading as a Standard of Performance 1. Standard of Performance as a Cap 2. Standard of Performance as a Minimum Emissions Reduction Baseline 3. Measuring Achievable Emission Limitation by Considering Cap-and-Trade the "Best System of Emission Reduction" V. HARMONIZING STATE CAP-AND-TRADE PROGRAMS WITH SECTION 111(D) OBLIGATIONS A. Standards of Performance B. Scope of Coverage C. Banking D. Borrowing and Multi-year Compliance E. Offsets and Out-of-State Trading F. Initial Allowance Distribution: Allowance Reserve and Auction Price Floor VI. CONCLUSION D. Borrowing and Multi-year Compliance E. Offsets and Out-of-State Trading F. Initial Allowance Distribution: Allowance Reserve and Auction Price Floor VI. CONCLUSION I. INTRODUCTION

   Starting in January 2011, Environmental Protection Agency (EPA) began regulating large stationary source emissions of greenhouse gases (GHGs). First, EPA is implementing regulations for power plants and industrial facilities under the Prevention of Significant Deterioration (PSD) and Title V permitting programs. (1) Second, EPA will regulate power plant and refinery emissions using new source performance standards (NSPS) set forth under section 111 of the Clean Air Act (CAA). (2) All of these regulations face numerous challenges in the courts. (3)

   On December 23, 2010, EPA announced a schedule to develop rules regulating GHG emissions from refineries and power plants under NSPS. (4) Electricity generation represents thirty-four percent of overall U.S. emissions; petroleum refineries make up another 7.3 percent. (5) Originally, EPA's draft standards for new and modified power plants were due by July 2011, with final standards to be issued by May 2012. (6) The refineries' standards lagged behind that timeline by about six months. (7) In June 2011, however, EPA stated that it would delay its proposed new rules for power plants until September 2011. (8) As of March 2012, the proposed rules are set to be published in April 2012. (9)

   Many have proposed a variety of cap-and-trade schemes that would provide flexibility to the energy sector in achieving required emission decreases, while still imposing a useful cap on total U.S. GHG emissions from the sector. (10) As McKinstry comments:

   Regulating emissions in the utility sector from petroleum refineries can be seen as a "no regrets" first step in making a transition to economywide regulation of GHGs that will eventually be necessary to prevent dangerous anthropogenic climate change. Regulating the utility industry will assist the industry in its transition to a modern energy economy, while addressing the serious problems of climate change. (11) Furthermore, state experiences suggest that measures to regulate GHG emissions from utilities can be cost-effective. (12)

   Using section 111 to implement a cap-and-trade program for the energy sector has the potential to drive cost-effective GHG emission reductions. Nor would it be the first time that EPA has used section 111 in this manner. EPA's Clean Air Mercury Rule (CAMR), which created a cap-and-trade system for mercury, was based in section 111. (13) EPA also runs a narrowly focused nitrogen oxide emissions-trading program for large municipal waste combustors using the NSPS program. (14)

   Section 111 requires EPA to set standards industry by industry. EPA describes the process by which it develops a standard of performance as follows:

   EPA typically conducts a technology review that identifies what emission reduction systems exist and how much they reduce air pollution in practice. This allows EPA to identify potential emission limits. Next, EPA evaluates each limit in conjunction with costs, secondary air benefits (or disbenefits) resulting from energy requirements, and non-air quality impacts such as solid waste generation. The resultant standard is commonly a numerical emissions limit, expressed as a performance level (i.e. a rate-based standard). While such standards are based on the effectiveness of one or more specific technological systems of emissions control, unless certain conditions are met, EPA may not prescribe a particular technological system that must be used to comply with a NSPS. Rather, sources remain free to elect whatever combination of measures will achieve equivalent or greater control of emissions. (15) For new and modified facilities, EPA develops this standard of performance directly. For existing sources, EPA must coordinate emission guidelines with states. (16) States then propose standards of performance for existing sources.

   The ability of EPA to consider costs in the development of performance standards helps to make section 111 a viable option for regulating GHG emissions. (17) John Walke, primary author of the Environmental Petitioners' brief in the CAMR litigation, believes "there is room for progress and success in covering GHGs under the CAA, and section 111 seems to be a pathway that has a lot of support." (18) The focus on sources in section 111 gives EPA flexibility in how it regulates different sectors of the economy. (19)

   Nevertheless, several obstacles impede regulation of GHG emissions under section 111. Setting emissions limits sector by sector may be cumbersome. Standards are limited to what is currently achievable and adequately demonstrated, inhibiting EPA's ability to ratchet down emissions over time. (20) Also, not many technological solutions exist to reduce carbon emission at the source of combustion. (21) If section 111 standards are developed with reference to technological improvements, the resulting standard may be ineffective in obtaining the necessary dramatic GHG reductions required to avert major climate change. The best approach for electric utilities in the near term, for example, may be consumer energy efficiency improvements that decrease peak electricity demand. (21) A standard based solely on technological reduction of emissions ignores the potential additional reductions that could be accomplished through other means, such as consumer energy efficiency improvements. A GHG trading program has the potential to impose stricter requirements while providing the necessary flexibility for utilities to achieve these additional reductions.

   This paper takes a detailed look at the potential for section 111 to serve as the foundation of a cap-and-trade program. Part II describes the potential benefits of focusing on section 111 for a GHG trading program. Part III looks to the lessons learned from the CAMR litigation. The briefs in that litigation present a challenge to a carbon trading program on two fronts: a factual challenge to the strictness of the program and a legal challenge to the idea that allowances can be used as a substitute for actual emission reductions in section 111. Part IV considers how EPA could, if it chooses, implement a GHG trading program through section 111 by defining the standard of performance to encompass the use of emissions allowances to enforce an emissions cap. Part V takes a closer look at section 111(d), which directs states to define standards of performance for existing sources. Using the proposed California cap-and-trade program as an example, Part V discusses how EPA could develop guidelines to allow states to use their regional trading programs as equivalents to section 111(d) plans for existing sources.

2. BENEFITS OF USING SECTION 111

   It is not surprising that EPA has indicated that it will regulate GHG emissions using section 111. Section 111 provides EPA with a strong legal foundation and a robust, established regulatory system. Furthermore, if ordered to regulate GHGs under National Ambient Air Quality Standards (NAAQS), EPA may be able to transition its section 111 regulations into, for example, state implementation plans under section 110. (23)

   Section 111 requires EPA to promulgate standards of performance for new and...