On June 25, 2013, President Obama announced a broad initiative to address aggressively the causes and consequences of climate change. Among other things, he issued a memorandum directing the Environmental Protection Agency (EPA) to take various actions before the end of the Administration in 2016. Because congressional action to revise the Clean Air Act and other statutory authorities appears exceedingly unlikely, the proposed actions consist of rulemakings, grant programs, and other executive actions that the Administration intends to undertake under existing legal authorities and without any congressional action.

Performance Standards for Power Plant Greenhouse Gas Emissions

New Power Plants

The principal element of the initiative will be an effort by EPA over the next two years to fashion regulations governing CO2 emissions from fossil fuel-fired power plants pursuant to section 111 of the Clean Air Act1. The first part of that section – section 111(b)2 – requires EPA to issue new source performance standards (“NSPS”) for newly-constructed or reconstructed sources in identified source categories of regulated pollutants, including power plants. In April 2012, EPA proposed NSPS for greenhouse gas emissions from new fossil fuel-fired power plants; if finalized, these standards would require power plants over 25 MWe to achieve an emission rate of 1000 lbs. of CO2 per megawatt-hour, averaged over 30 years. In practice, this is the emission rate achieved by natural gas combined-cycle technology. New coal-fired plants are expected to meet the proposed standard primarily through the installation of carbon capture and sequestration technology within 11 years, by which time EPA has predicted the technology will be technically and economically feasible for commercial use.

EPA previously announced its intention to finalize the standards for newly-constructed or reconstructed sources by April 2013, but that target date passed with no final rule. The president’s June 25th memorandum confirms what has long been suspected by many stakeholders: that EPA, after reviewing public comments on the proposal, has determined not to finalize the proposed standards in their current form. Instead, EPA intends to re-propose the standards in a different form, likely with unique standards applying separately to coal-fired and gas-fired plants.3 The president has directed EPA to publish any new proposal by September 20, 2013. This re-proposal will trigger a new public comment period. A final rule will likely follow within a year.

One important point for regulated entities considering the construction of new power plants: unlike most environmental regulations, which are applicable only to activities that occur after finalization of a rule, by the plain terms of the statute, NSPS apply to any source in the category that begins construction after a NSPS is proposed.4 This can put sources commencing construction during the period between proposal and finalization of a NSPS in a difficult situation: they must either comply with a performance standard that has not been and may never be finalized (like the 2012 proposal) or risk the possibility of enforcement action if they do not comply. Early engagement with EPA on the re-proposal is thus critical even for near-term new power projects.

Existing Power Plants

Section 111(d) of the Clean Air Act5 requires EPA, in cooperation with the States, to develop performance standards for existing sources after new source performance standards have been issued for a pollutant. Thus, issuance of the NSPS for new and reconstructed power plants will require the development of performance standards applicable to existing power plants. Because existing sources generally face compliance difficulties – both technical and economic – that may not apply to new sources, the factors governing development of performance standards for existing sources are more liberal than those applicable to new sources, with more deference provided to States in determining the regulatory approach. Indeed, the process for developing existing source performance standards is similar to the process States use for adopting the state implementation plans (“SIPs”) for federal air quality standards. Under this approach, each State will adopt its own performance standards for power plant greenhouse gas emissions; EPA will then review and approve those standards it finds meet the Act’s requirements.6

In setting existing source greenhouse gas standards, each State will still be required to adopt the best system of emission reduction (“BSER”) that has been adequately demonstrated, and each will be permitted to take into account, among other things, the cost of achieving the emission reductions and any non-air quality health, environmental, and energy requirements associated with that system. Significantly, the State may also take into account the remaining useful life of the existing sources.

Flexible Approaches to Standard-Setting Encouraged

The president’s Action Plan is not detailed, but it instructs the States and EPA to focus on rules that are flexible and incorporate an all-available-fuels and all-available-technologies approach. Specific mention is made of encouraging the further development of clean coal technologies. This suggests, at least as a starting point, that the standards are likely to take into account each State’s particular mix of fuels and generation facilities; the possibility of employing averaging, banking, and trading of CO2 emission reduction credits; as well as credits for end-user demand reductions that can be associated with the actions of a particular facility or facilities. Because the Clean Air Act serves as a floor for state-imposed air standards, rather than a cap on their stringency, it is conceivable that some States might choose to impose a carbon tax as one means of reducing end-user demand, even if EPA might not have such authority under the Act.

Timeline for Action

Section 111(d) contemplates EPA will issue emissions guidelines for the States’ subsequent actions before the States develop their site-specific performance standards for existing sources. These guidelines are likely to include criteria under which EPA will judge the adequacy of state standards; rules to govern averaging, banking, and trading of emission reduction credits; and rules for assessing the circumstances under which reductions in end-use demand can be credited to a facility or State for purposes of complying with an existing source performance standard.

The president’s memorandum to EPA sets an ambitious schedule designed to ensure the rules are in place and judicially-tested before the 2016 presidential elections:

  • June 1, 2014: deadline for EPA to issue proposed rules to govern the process of establishing existing source performance standards. 
  • June 1, 2015: deadline for EPA to issue final rules governing the process of establishing existing source performance standards. 
  • June 30, 2016: deadline for States to submit the required state-specific performance standards for existing sources.

This schedule could easily be delayed by resource issues such as the sequester and competing agency resource demands; by litigation in which EPA’s rules might be stayed or invalidated by the D.C. Circuit; or by political pressures in the lead-up to the 2014 midterm and 2016 presidential elections. That said, this appears to be the Administration’s principal environmental initiative for the next three years, and EPA is expected to devote considerable attention to carrying it out in as timely a manner as possible. Again, early engagement at the federal level with EPA, the President’s Council on Environmental Quality, and the Office of Information and Regulatory Affairs7, and at the state level with the regulators who will formulate the state-specific standards, will be critical in helping to shape sensible emissions guidelines and standards.

Renewable Energy and Cleantech Investment Incentives and Other Plan Elements

The Action Plan also calls for, among other things, federal agencies to take action to:

  • Encourage investment in renewable energy (including wind, solar, and geothermal energy) and clean energy technologies (including advanced biofuels, nuclear energy, clean coal, and advanced fossil energy projects) through loan guarantees and other federal programs; 
  • Accelerate clean energy permitting, and permitting and review for upgrades to the Nation’s electric grid; 
  • Further increase fuel economy standards for heavy-duty vehicles beyond the reductions already specified for Model Years 2014-2018; 
  • Encourage the development of advanced batteries and fuel cell technologies; 
  • Obtain at least 3 billion metric tons of CO2 emissions by 2030 through energy efficiency standards set by the Department of Energy; and 
  • Reduce methane emissions through both regulations and incentive-based opportunities applicable to mining, landfills, agriculture, oil and gas development, and other sectors.

The Plan further calls upon federal agencies to provide support for, and remove regulatory barriers impeding, climate-resilient investments such as upgraded stormwater and sanitary sewer systems, hospitals, buildings, seawalls, natural flood control projects, and roads. These initiatives could provide significant opportunities for businesses wishing to upgrade facilities to make them climate-resilient or wishing to enter or expand their footprint in the market for climate-resilient technologies.

Links to the President’s Climate Change Action Plan and Memorandum to EPA:

1  42 U.S.C. § 7411.
2  42 U.S.C. § 7411(b).
3  Section 111(b)(2) specifically allows EPA to “distinguish among classes, types, and sizes within categories of new sources for the purpose of establishing such standards.”
4  See 42 U.S.C. § 7411(b)(6) (“Any new or modified fossil fuel fired stationary source which commences construction prior to the date of publication of the proposed revised standards shall not be required to comply with such revised standards.”).
5  42 U.S.C. § 7411(d).
6  State-promulgated standards become enforceable under state law upon their issuance by the State. They become enforceable under federal law once approved by EPA.
7  The Office of Information and Regulatory Affairs is a component of the White House Office of Management and Budget. It is charged with reviewing all significant federal regulations to ensure that they make economic sense and with overseeing interagency review of all proposed and final federal regulations.