Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. 35 ELR 10316 ELR 5-2005 NEWS&ANALYSIS Is the U.S. Environmental Protection Agency’s Revised New Source Review Rule Moving in the Right Direction?: A Deepened New Source Bias, and the Need for Pursuing Sustainable Energy Development in Air Pollution Control Law by Inho Choi Table of Contents Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 10316 I. Discussion of the NSR Program . . . . . . . . . . 10319 A. In General . . . . . . . . . . . . . . . . . . . . . . . . 10319 B. New and Modified Major Stationary Sources. . . . . . . . . . . . . . . . . . . . . . . . . . . 10320 C. NSR Applicability . . . . . . . . . . . . . . . . . . . 10320 1. Physical or Operational Change: The Routine Maintenance Exception . . . . . . . . . . . . . 10320 2. A Significant Net Increase in Emissions . . 10321 a. An Emissions Increase: The Actualto-Future-Actual Test. . . . . . . . . . . . . 10321 b. The WEPCO Rule: The Actual-toProjected-Future-Actual Test and Its Extended Application . . . . . . . . . . . . 10322 c. A Significant Net Increase: Netting . . . . . . . . . . . . . . . . . . . . . . . 10323 II. NSR Failures and the Movement to Reform the Current NSR Program. . . . . . . . . . . . . . 10324 A. Grandfathering Under the CAA . . . . . . . . . 10324 B. Federal and State Efforts to Repeal Grandfathering . . . . . . . . . . . . . . . . . . . . . 10325 1. Congressional Efforts. . . . . . . . . . . . . . . 10325 2. State Action . . . . . . . . . . . . . . . . . . . . . 10325 C. EPA’s Enforcement Initiative . . . . . . . . . . . 10326 D. The Overhaul of EPA’s Enforcement Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . 10327 1. The National Energy Policy Group’s Report to the President . . . . . . . . . . . . . . . . . . . 10327 2. The DOJ’s NSR Report . . . . . . . . . . . . . 10327 3. EPA’s 90-Day NSR . . . . . . . . . . . . . . . . 10327 Inho Choi is an S.J.D. candidate and received his LL.M. in 2002 from George Washington University Law School. He received an LL.M. in 1998, and an LL.B. in 1993 from the Chungnam National University College of Law in South Korea. He can be contacted via e-mail at [email protected]. The author would like to express his greatest gratitude to Prof. Arnold W. Reitze Jr., who is his mentor at George Washington University Law School and one of the nation’s leading environmental law experts, for his helpful comments on the earlier drafts of this Article and his strong encouragement throughout its preparation. All the remaining errors and misunderstandings are the author’s responsibility. E. A Multi-Pollutant Trading Approach at the Federal Level . . . . . . . . . . . . . . . . . . . . . . 10328 1. Four-Pollutant Bills . . . . . . . . . . . . . . . . 10328 2. Three-Pollutant Bills: The Bush Administration’s Clear Skies Initiative . . 10329 III. The 2002 New NSR Rule . . . . . . . . . . . . . . 10329 A. A 10-Year Look-Back Period and the Actual-to-Projected-Future-Actual Test . . . . 10330 B. PALs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10330 C. The Clean Unit Exclusion . . . . . . . . . . . . . 10332 D. PCPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10332 IV. Another Round of Heated Debate Over the New NSR Rules . . . . . . . . . . . . . . . . . . . . . . 10333 A. Criticisms of the New NSR Rule: Environmental Groups’ Arguments . . . . . . . . . . . . . . . . . . 10334 B. Concerns About the Revised Routine Maintenance Exception Rule . . . . . . . . . . . . . . . . . . . . . 10335 C. The U.S. Government Accountability Office (GAO) Studies on Stakeholders’ Views on the New NSR Rules . . . . . . . . . . . . . . . . . . . . . 10336 D. The Stay of the Routine Maintenance Exception Rule and the Uncertain Future for NSR Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . 10336 E. The Legality of the New NSR Rule . . . . . . . 10336 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10337 T his Article analyzes the revised new source review (NSR) rule and argues that it violates the Clean Air Act’s (CAA’s or the Act’s)1 clean air mandate by changing the preexisting definition of the statutory term “change” and by extending the demand growth exclusion to all sources and creating several NSR-exempt project-based construction activities that are applicable to existing sources, without providing meaningful procedural safeguards. This is because the new rule conflicts directly with the following requirements under the CAA’s NSR program: (1) a proposed physical or operational change that would increase emissions or result in collateral emissions must go through NSR preconstruction review; (2) emissions increases and de1. 42 U.S.C. §§7401-7671q, ELR Stat. CAA §§101-618. 5-2005 NEWS & ANALYSIS 35 ELR 10317 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. creases to be considered in NSR applicability determinations must be contemporaneous; and (3) once NSR is triggered, the stringent technology requirement, the best available control technology (BACT) or the lowest achievable emissions rate (LAER), must be applied to the sources. The Article argues that the revised NSR rule is moving in the wrong direction in that it strengthens a bias against new sources and enlarges preexisting loopholes in favor of old, dirtier sources, which have traditionally enjoyed significant cost advantages over cleaner, more energy-efficient sources under the grandfathering scheme. It observes that the U.S. Environmental Protection Agency’s (EPA’s) reliance on the new rule’s allegedly minimal impacts on air quality and the nation’s decade-long transition to a multi-pollutant trading approach in air pollution control in justifying the rule changes is untenable in view of congressional intent leading to the enactment of NSR and the literal meaning of the term “change.” The Article concludes with the argument that the overriding goal in NSR reform is to create a level playing field for all sources, whether new or old, by building sustainability concerns into existing environmental and energy law, for example, through repealing grandfathering, the adoption of output-based emissions standards and, possibly, the enactment of climate change policy aimed at reducing fossil fuel usage. Introduction The permitting sections of Parts C and D of CAA Subchapter I are known as the NSR program,2 whose main goal is to protect, maintain, and improve air quality while providing for continued economic development and meeting energy needs.3 The CAA covers six criteria air pollutants: particulates (including particulate matter (PM) with a diameter of 10 microns or less (PM10) and PM with a diameter of 2.5 microns or less (PM2.5)), sulfur dioxide (SO2), nitrogen oxide (NOx), carbon dioxide (CO2), ozone (O3), and lead (Pb). It also regulates toxic air pollutants and volatile organic compounds (VOCs). Under the Act’s clean air mandate, EPA is to promulgate primary and secondary national ambient air quality standards (NAAQS) for each of the six criteria pollutants.4 Each state must then within three years prepare and submit to EPA for approval its implementation plan, called a state implementation plan (SIP), for meeting NAAQS.5 In their SIPs, the states, including tribal lands and territories, must demonstrate the timely attainment of NAAQS or “reasonable further progress” toward the attainment of NAAQS in all areas under their jurisdiction, using available monitoring data and modeling analyses.6 The EPA Administrator must promulgate a federal implementation plan (FIP) if a state fails to submit a SIP by the statutory deadline or if it submits an inadequate SIP, or fails to revise it 2. See id. §§7470-7492, 7501-7515. The NSR regulations are found in 40 C.F.R. §§51.165, 51.166, 52.21, 52.24, and pt. 51, app. S. 3. See, e.g., H.R. Rep. No. 95-294, at 13 (1977), reprinted in 1977 U.S.C.C.A.N. 1077, 1091 (noting that “[t]his section is proposed as a means of assuring realization of the dual goals of attaining air quality standards and providing for new economic growth”). 4. See 42 U.S.C. §7409. 5. See id. §7410. 6. Id. §7503(c)(2)(B). CAA §§110(a)(2)(A)-(M) provide for the basic requirements for the SIP, which are to be used by EPA as criteria for the approval of individual SIPs. Id. §7410(a)(2)(A)-(M); see 40 C.F.R. §51. after EPA’s notice of disapproval.7 The EPA Administrator can disapprove the entire SIP or part of it.8 Harsh sanctions may be imposed on states that fail to meet the statutory deadlines for SIP submittal or NAAQS attainment.9 On the other hand, states have the wide discretion to choose measures to comply with NAAQS as long as they can demonstrate timely attainment to EPA and make reasonable further progress. Each state, by adopting a SIP, is empowered to determine which sources to regulate and which pollution control measures to employ to meet NAAQS.10 In short, the CAA’s basic scheme for accomplishing its goals is “cooperative federalism” with distinct roles for the states and the federal government. However, state authority to shape air management strategies and plans has its limits. Congressional dissatisfaction with the 1970 CAA’s performance led to the enactment of the prevention of significant deterioration (PSD) and nonattainment programs in 1977. The main thrust of the PSD program is to protect and enhance the high air quality of areas with clean air. Under the nonattainment program, states are required to implement more stringent SIP requirements in return for more time for attainment in areas within their jurisdiction that have failed to meet the applicable NAAQS. States must impose emissions reduction requirements based on reasonably available control technology (RACT) on existing major sources covered by EPA guidelines.11 New and significantly modified major stationary sources that want to locate in PSD or nonattainment areas must obtain preconstruction permits from state permitting agencies. For new sources in PSD areas, this usually means that they must go through air impact analyses and air quality modeling at the preconstruction stage, and meet post-con7. 42 U.S.C. §7410(c)(1). 8. Id. §7410(c)(1)(B). 9. States may be subject to highway sanctions prohibiting approval and funding by the Secretary of Transportation of highway projects, and to stringent offset requirements under the nonattainment NSR program of at least 2 to 1. Id. §7509. 10. Id. §7407(a), declaring that [e]ach State shall have the primary responsibility for assuring air quality within the entire geographic area comprising such State by submitting an implementation plan for such State which will specify the manner in which national primary and secondary ambient air quality standards will be achieved and maintained within each air quality control region in such State. See also, e.g., Train v. Natural Resources Defense Council, 421 U.S. 60, 79, 5 ELR 20264 (1975) (concluding that “so long as the ultimate effect of a State’s choice of emission limitations is compliance with the national standards for ambient air, the State is at liberty to adopt whatever mix of emission limitations it deems best suited to its particular situation”); Union Elec. Co. v. EPA, 427 U.S. 246, 269, 6 ELR 20570 (1976) (stating that the states have “the power to determine which sources would be burdened by the regulations and to what extent” in implementing their SIPs approved by EPA); EPA v. Brown, 431 U.S. 99, 103, 7 ELR 20375 (1977) (per curiam). Therefore, a state can demonstrate timely attainment to EPA in its SIP by relying more on control measures that target area sources, such as dry cleaners and gas stations, and mobile sources than other states. 11. EPA has interpreted RACT to mean “the lowest emission limitation that a particular source is capable of meeting by the application of control technology that is reasonably available considering technological and economic feasibility.” The 1990 CAA Amendments incorporated this RACT requirement, as interpreted by EPA guidelines. Arnold W. Reitze Jr., Air Pollution Control Law: Compliance and Enforcement 79 n.18 (2001). 35 ELR 10318 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. struction air quality monitoring requirements.12 New sources in nonattainment areas must obtain an offset from other sources in surrounding areas that is equal to or greater than the proposed increase in emissions at their facility.13 Once it is found by the permitting agency that NSR requirements apply, new or significantly modified sources must install BACT or LAER in PSD and nonattainment areas, respectively.14 This technology requirement is quite onerous 12. See 42 U.S.C. §7475(e)(3)(B) (stating that PSD regulations “shall require an analysis of the ambient air quality, climate and meteorology, terrain, soils and vegetation, and visibility” at the proposed construction site and in nearby areas); 40 C.F.R. §52.21(m)(1)(iv), 52.21(m)(2), (m)(3). 13. 42 U.S.C. §7503(c)(1). The applicable offset ratio is different depending on the location’s nonattainment classification. CAA §182 sets out offset ratios for O3 nonattainment areas. An applicable minimum ratio is from VOCs of 1.1 in marginal areas down to 1.5 in extreme areas (1.15 for moderate areas, 1.2 for serious areas, and 1.3 for severe areas). See id. §§7511a(a)(4), 7511a(b)(5), 7511a(c)(10), 7511a(d)(2), and 7511a(e)(1). In principle, the required emissions reductions must come from a source in the same area. Id. §7503(c)(1). However, an exception applies when the offset is provided by a source in another attainment area with an equal or higher nonattainment classification (2) whose emissions from this area contribute to nonattainment in the area where the new source is sited. Id. This exception may apply in the context of transboundary pollution in which the transport of a pollutant emitted from sources located in upwind areas contribute to nonattainment in downwind areas. Offsets are often called emissions reduction credits (ERCs). Prior to the 1990 CAA Amendments, ERCs were still used in offsets in nonattainment areas, bubbles and netting, and banking. See generally U.S. EPA, Emissions Trading Policy Statement; General Principles for Creation, Banking, and Use of Emission Reduction Credits, 51 Fed. Reg. 43814 (Dec. 4, 1986). 14. 42 U.S.C. §§7502, 7503. Note that an area can be in attainment for one criteria pollutant and in attainment for another pollutant. As a result, both technology standards could apply to the same source and the source applicant must prepare for both PSD and nonattainment NSR, simultaneously. The nonattainment NSR requirements are more stringent than the PSD NSR requirements. The applicant should identify all technologies, including those listed in RACT/BACT/LAER Clearinghouse (RBLC), in which EPA has maintained a list of technologies on its website that have been demonstrated to be effective on similar sources. The applicant should also consider a control technology that has successfully been applied at other source categories. U.S. EPA, Draft New Source Review Workshop Manual: Prevention of Significant Deterioration and Nonattainment Area Permitting B.11 (1990), available at http://www.epa.gov/region07/programs/artd/ air/nsr/nsrmemos/1990wman.pdf (last visited Mar. 1, 2005) [hereinafter Draft NSR Workshop Manual]. Pollution control technologies that are being successfully applied to similar sources in foreign countries are also potential candidates for BACT or LAER. Id. at B.5. While BACT is determined “on a case-by-case basis, [after] taking into account energy, environmental, and economic impacts, and other costs,” LAER is a much more demanding one, without mentioning costs and other related considerations in the relevant provision. Compare 42 U.S.C. §7479(3); 40 C.F.R. §51.166(b)(12) (BACT), with 42 U.S.C. §7501(3) (LAER). This is mainly because nonattainment areas must make reasonable further progress toward attainment, which is intended to ensure that air quality in nonattainment areas must be improved continuously, while allowing for economic growth. BACT is an emission limitation standard, which is set at the most stringent level that can be achieved by a similar source in industry unless it is proved by the applicant as technologically or economically infeasible. Reitze, supra note 11, at 195. It usually requires the use of best available pollution control methods and technologies. If emissions standards prove to be infeasible, design, equipment, work practices, operational standards, or any combination thereof can be used. 40 C.F.R. §51.166(g)(12). LAER may also lack numerical emissions limitations because of “the technological or economic limitations on the application of measurement methodology to a particular class of sources.” Id. §51, app. S. IV-A n.4. (“Hereafter, the term emission limitation shall also include such design, operational, or equipment standards.”) (emphasis in original). EPA has allowed states instead to prescribe a design, operational, or equipment standard in the permits for these sources that in that sources are required to pursue the right mix of control options to minimize air quality impacts to the maximum extent possible.15 It also is comprehensive because the applicant for an NSR permit must consider all possible environmental impacts on the environment a particular technology would have, in the technology selection process.16 Thus, NSR is quite similar to an environmental impact analysis under the National Environmental Policy Act (NEPA) but, because of its substantive bite, NSR can be described as “NEPA with teeth.”17 Moreover, EPA has significant leverage over state decisions to choose NSR technology.18 As with the O3 nonattaiment program, NSR is the product of congressional policy judgment favoring the Act’s clean air goal at the expense of state sovereignty and industry’s operational flexibility. It constitutes an integral part of the Act’s PSD and nonattainment programs and is one of the most important tools in moving the nation toward attaining the goal of clean air for all Americans. Attempting to balance the two competing interests of environmental protection and accommodating economic and must contain enforceable conditions on design characteristics or equipment. The owner or operator of a major emitting facility is required to perform BACT analysis independently of its analyses of its source impacts on ambient air quality. The CAA requires EPA to issue guidance documents on BACT/LAER technology and to revise these documents at least every two years. 42 U.S.C. §7508. Additionally, EPA may consider incidental effects of emissions of toxic pollutants, which are not regulated under the PSD program, in making BACT determinations. See id. §7412(b)(6) (“The provisions of [the PSD program] shall not apply to [hazardous pollutants] under [§112].”); see, e.g., In re North County Resource Recovery Assocs., 2 E.A.D. 229, 1986 EPA App. LEXIS 14 (Adm’r 1986) (stating that “the net environmental impact of such emissions is eligible for consideration in making the BACT determination”) (emphasis added); see Draft NSR Workshop Manual, supra, at B.50-.53 (stating that “the generation or reduction of toxic and hazardous emissions, including compounds not regulated under the Clean Air Act, are considered as part of the environmental impacts analysis[,]” citing In re North County Resource Recovery Assocs., 2 E.A.D. at 229); see In re Steel Dynamics, Inc., 9 E.A.D. 165, 189 n.29, 2000 WL 833062 (EAB Apr. 23, 2000) (stating that state permitting agencies have “considerable discretion to evaluate HAPs emissions and potential health impacts as part of its consideration of environmental impacts in general[,]” citing Draft NSR Workshop Manual, supra and In re North County Resource Recovery Assocs., 2 E.A.D. at 229). 15. In practice, EPA has employed a “top-down” approach. Under this approach, all technologically feasible and available technology options are identified and ranked on the basis of its stringency or effectiveness, and the permit applicant has the burden to reverse the presumption in favor of the most stringent technology available, by showing why this will not be appropriate for it. See Draft NSR Workshop Manual, supra note 14. The NSR technology selection process have traditionally focused primarily on end-of-pipe, postcombustion, controls. It, however, does not necessarily mean that the chosen technology is limited to a particular pollution control technology. It may include the use of a cleaner fuel or innovative production processes, and, even, a combination of all available control methods that can achieve the maximum degree of emissions reductions of the pollutant subject to NSR. See 42 U.S.C. §7479(3) (requiring that an applicable emission limitation be “based on the maximum degree of reduction of the [covered] pollutant . . . through application of production processes and available methods, systems, and techniques, including fuel cleaning, clean fuels, or treatment or innovative fuel combustion techniques for control of each such pollutant”) (emphasis added). 16. Draft NSR Workshop Manual, supra note 14, at B.26. 17. Gregory B. Foote, Considering Alternatives: The Case for Limiting CO2 Emissions From New Power Plants Through New Source Review, 33 ELR 10642, 10651 (July 2004). 18. See Alaska Dep’t of Envtl. Conservation v. EPA, 540 U.S. 461, 34 ELR 20012 (2004) (holding that a state permitting agency must present a reasonable justification for its BACT determination to EPA’s satisfaction in order to meet the Act’s NSR requirements). 5-2005 NEWS & ANALYSIS 35 ELR 10319 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. energy needs19 has led to a highly complicated regulatory system, which is often criticized by the regulated community as burdensome, complex, time-consuming and costly, inflexible, and even frustrating good-faith efforts to improve environmental performance in pollution control technology.20 Given its technology-forcing nature and onerous requirements, it is not surprising that industry has every incentive to avoid NSR by taking advantage of the weaknesses and loopholes in the NSR program. A spectrum of stakeholders, including industry representatives, environmental nongovernmental organizations (NGOs), and state and federal regulators, reached a broad consensus on the need for NSR reform around the early 1990s. EPA then embarked upon a process for NSR reform by authorizing the formation of a subcommittee to the Clean Air Act Advisory Committee in 1993.21 Since then, especially EPA’s new NSR enforcement initiative in the late 1990s, the NSR program has been at the center of debate over how to reform this system. The stated objectives of the NSR reform seemed promising.22 In reality, however, EPA is caught in the middle of a tug of war between industries and environmentalists that want to shape the agenda to their own interests and values. The new NSR rule, which was promulgated in 2003, is no exception. It creates a new controversy on its legality under the CAA, provoking another round of heated debate. The new rule is moving in the wrong direction because it strengthens a new source bias and enlarges preexisting loopholes in favor of old, dirtier sources, which have traditionally enjoyed significant cost advantages over cleaner, more energy-efficient sources under the grandfathering scheme. Allegedly minimal impacts on air quality and the nation’s decade-long transition to a multi-pollutant approach in air pollution control should not be used as an excuse for relaxing preexisting rules. NSR has been the center of the U.S. 19. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 851, 14 ELR 20507 (1984) (observing that in the NSR program “Congress sought to accommodate the conflict between the economic interest in permitting capital improvements to continue and the environmental interest improving air quality”). 20. A relevant EPA report reads as follows: For more than 10 years now, the Environmental Protection Agency (EPA) has been engaged in an effort to improve the New Source Review (NSR) Program in response to widespread concerns from stakeholders who are concerned that it is too complex and burdensome, it introduces uncertainty in planning, it inhibits industry’s ability to quickly make needed changes, and it is not working as effectively as it could be to protect air quality. U.S. EPA, New Source Review Improvements: Supplemental Analysis of the Environmental Impact of the 2002 Final NSR Improvement Rules 1 (2002), available at http://www.epa.gov/nsr/documents/nsr-analysis.pdf (last visited Mar. 1, 2005) [hereinafter Supplemental Analysis of 2002 Final NSR’s Impact]. 21. U.S. EPA, Notice of Public Meeting, 58 Fed. Reg. 36407 (July 7, 1993). 22. See, e.g., U.S. EPA, Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR): Baseline Emissions Determination, Actual-to-Future-Actual Methodology, Plantwide Applicability Limitations, Clean Units, Pollution Control Projects, 67 Fed. Reg. 80186, 80189 (proposed Dec. 31, 2002) (to be codified at 40 C.F.R. §§51, 52) (stating that the aim of NSR reform is to “reduce burden, maximize operating flexibility, improve environmental quality, provide additional certainty, and promote administrative efficiency”). legal system’s failure to attain the goal of sustainable energy development. The correct direction to be taken in reforming NSR should be to incorporate sustainability concerns into legal decisionmaking processes under the CAA, e.g., through the adoption of output-based emission standards, repealing grandfathering, and/or the integration of sustainable energy development goals into NSR permitting processes. This Article aims to discuss the problems with NSR and analyze the new NSR rule in detail. It argues that, while its impact will be minimal on electric utilities, the new NSR rule arguably violates the CAA’s “clean air” mandate because: (1) a proposed physical or operational change that would increase emissions or result in collateral emissions must go through NSR preconstruction review; (2) emissions increases and decreases to be considered in NSR applicability determinations must be contemporaneous; and (3) once NSR is triggered, the stringent technology requirement, BACT or LAER, must be applied to the sources. Part I describes the elements of the CAA’s NSR program with much focus on baseline determinations and NSR applicability. It partially compares the preexisting rule with the new NSR rule. Part II explains why NSR has not worked as well as expected at the time of its enactment in 1977, and discusses NSR reform moves by the U.S. Congress, some states, and the previous and current Administrations. Part III examines the new NSR rule and discusses what changes in EPA’s prior position took place and the rationales for the changes given by the Agency. Part IV discusses grave concerns expressed by environmentalists and state agencies about the potential adverse impacts of the new rule on existing air quality. It then critically analyzes EPA’s current legal position and arrives at the presumptive conclusion that the new NSR rule is violative of the CAA’s clean air mandate in view of congressional intent leading to the enactment of NSR and the literal meaning of the statutory term “change.” The Article concludes with the argument that the overriding goal in NSR reform is to create a level playing field for sources, whether new or old, by building sustainability concerns into existing environmental and energy law. I. Discussion of the NSR Program A. In General The essence of the PSD and nonattainment NSR programs is the requirement for preconstruction review. The owner or operator planning to construct a new major stationary source or to make a major modification to an existing major stationary source must undergo a preconstruction permitting process. Preconstruction review is designed to select proven modern pollution control technology as applied to each regulated pollutant emitted from the facility, including new emissions of a collateral pollutant. In order to obtain a preconstruction permit, the facility must prove to the permitting agency that it would not result in a violation of NAAQS or any applicable PSD regulations in local or downwind areas currently in compliance with NAAQS.23 Because NSR involves a lengthy and complex process, much attention is paid to its applicability. 23. For permit requirements, see generally 42 U.S.C. §7475(a); id. §7503(a) (nonattainment). 35 ELR 10320 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. B. New and Modified Major Stationary Sources Under the CAA, stationary source means “any source of an air pollutant except those emissions [from mobile sources].”24 CAA §111(a)(3) further defines the term stationary source as “any building, structure, facility, or installation which emits or may emit any air pollutant.”25 The threshold emission levels for qualification as a major stationary source in nonattainment areas are set at a potential to emit (PTE) of more than 100 tons per year (tpy)26 of any pollutant subject to regulation under the CAA down to smaller amounts depending on the area’s nonattainment classification.27 In the case of PSD areas, the threshold is 100 or 250 tpy of any regulated pollutant under the CAA, depending on the source type.28 Under the NSR program, the amount of emissions is calculated based on aggregating sources located on contiguous or adjacent properties that are under common control, having the same two-digit Standard Industrial Classification code.29 Note that states have implemented minor source programs. Thus, even if new or modified sources do not qualify as major and, hence, are not subject to NSR, they can still be subject to minor source requirements imposed by states. A source’s emissions can include fugitive emissions.30 24. Id. §7602(j). Actually, the term “major emitting facility” is used under CAA Subchapter I, Part C, Subpart 1. See id. §7479(1). Its definition is similarly worded as that of a major stationary source. 25. Id. §7411(a)(3). Roughly speaking, a stationary source is a discrete point from which one of any regulated air pollutants under the CAA is released, such as smokestacks. But note that fugitive emissions may be included for the purposes of calculating emissions from stationary sources within the certain industrial categories covered by EPA regulations. 26. Id. §7602(z). 27. See id. §§7511a(c)-(e), 7511c(b)(2) (O3); id. §7512a(c)(1) (CO); id. §7513a(b)(3) (PM). This can be as low as 10 tpy of VOCs in an extreme O3 nonattainment area. 28. 42 U.S.C. §7479(1); 40 C.F.R. §52.21(b)(1). Usually the threshold is 250 tpy, but the 100-tpy threshold applies to a list of 28 source categories (industrial groupings such as petroleum refineries, fossil fuel-fired steam-generated electric power plants, pulp mills, and iron and steel mill plants). See 40 C.F.R. §52.21(b)(1)(a). See also U.S. EPA, NSR 90-Day Review Background Paper 3 (2001), available at http://www.epa.gov/air/nsr/documents/nsr-review.pdf (last visited Mar. 1, 2005) [hereinafter NSR Background Paper]. 29. 40 C.F.R. §§51.166(h)(6), 52.21(b)(6). 30. CAA §302(j) reads: New source is defined as any stationary source that begins construction or modification after the promulgation of proposed regulations for a source category.31 “‘[M]odification’ means any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.”32 These provisions are contained in the Act’s new source performance standard (NSPS) program, but the NSPS program has a purpose and scope that are wholly different from the NSR program. BACT or LAER are mass-based standards applicable only to major stationary sources, depending on the area’s air quality, is determined on a case-by-case basis, and is usually much more stringent than NSPS. On the other hand, generally speaking, NSPS is a national, uniform performance standard for approximately 69 categories, which does not mandate the use of particular technologies. C. NSR Applicability 1. Physical or Operational Change: The Routine Maintenance Exception The NSR program has been applicable only to major modifications that would “result in a significant net emissions increase,”33 and the NSR regulations establish significant emissions levels, which vary by pollutant.34 Therefore, determining whether a major modification has occurred is a two-prong test. First, there must be a physical or operational change at the facility. Neither Congress nor EPA has protion of State Implementation Plans, 45 Fed. Reg. 52676, 52690 (Aug. 7, 1980). There are 27 source categories covered by this regulation. See id. at 52692. EPA agreed to withdraw its position as part of a settlement with industry petitioners in Chemical Mfrs. Ass’n v. EPA after a series of legal challenges to the rules, but the Agency thereafter returned to the interpretation it initially adopted under the 1980 regulations, a move encouraged by the judicial opinion of the D.C. Circuit in Duquesne Light Co. v. EPA. See No. 79-1112 (D.C. Cir. filed Jan. 26, 1979); 698 F.2d 456, 13 ELR 20251 (D.C. Cir. 1983). Therefore, the Agency’s current position is that it will balance all possible socioeconomic costs and benefits in determining whether fugitive emissions should be included in the calculation of emissions in the context of PSD NSR. In light of the court ruling in the Alabama Power case, it can be said that EPA has the discretion to determine whether to require a source category to consider fugitive emissions in the definition of a major source for the purposes of PSD and nonattainment NSR preconstruction review. For example, in Ogden Projects, Inc. v. New Morgan Landfill Co., the U.S. District Court for the Eastern District of Pennsylvania concluded that “fugitive emissions may not be counted unless EPA has first conducted a rulemaking” for listing a source category, as required by §302(j). 911 F. Supp. 863, 878, 26 ELR 20843 (E.D. Pa. 1996). See also 40 C.F.R. §51.165(a)(1)(C) (nonattainment NSR). In addition, on November 27, 2001, EPA promulgated a rule, under which a source within a category subject to the NSPS or the hazardous air pollutants (HAPs) rule issued after August 7, 1980, is not required to include fugitive emissions of all regulated pollutants under PSD or nonattainment NSR for the purpose of determining whether it has a major source status. See U.S. EPA, Change to Definition of Major Source, 66 Fed. Reg. 59161, 59162 (Nov. 27, 2001) (codified at 40 C.F.R. §70). However, sources are still required to include fugitive emissions of all HAPs in determining whether they are major sources under §112. Id. Except as otherwise expressly provided, the terms “major stationary source” and “major emitting facility” mean any stationary facility or source of air pollutants which directly emits, or has the potential to emit, one hundred tons per year or more of any air pollutant (including any major emitting facility or source of fugitive emissions of any such pollutant, as determined by rule by the Administrator). 42 U.S.C. §7602(j) (emphasis added). However, there has been continued controversy as to whether and how fugitive emissions will be handled under the NSR program. In Alabama Power Co. v. Costle, the U.S. District Court for the District of Columbia (D.C.) Circuit held that fugitive emissions must be included in determining whether a source constitutes a major emitting facility under CAA §302(j). 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979). The court observed that the wording of §302(j) was controlling in the definition of a major emitting facility in §169(1), even though whether to include fugitive emissions in calculating threshold emission levels for major stationary sources should be determined by EPA. See id. at 369-70. EPA then issued rules that listed the source categories covered by PSD and NSPS rules that were required to consider fugitive emissions. U.S. EPA, Requirement for Preparation, Adoption, and Submittal of State Implementation Plans; Approval and Promulga- 31. 32. 33. 34. 42 U.S.C. §7411(a)(2). Id. §7411(a)(4); 40 C.F.R. §60.2. See 45 Fed. Reg. at 52676; 40 C.F.R. §52.21(b)(2)(i). 40 C.F.R. §52.21(b)(23). 5-2005 NEWS & ANALYSIS 35 ELR 10321 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. vided a clear definition of these terms. But EPA’s NSR regulations recognize that certain types of projects are exempt from NSR and, among other things, allow for the exception for routine maintenance, repair, and replacement.35 While creating certain categories of NSR-exempt activities clearly makes sense, the obscurity surrounding the question of what types of projects should be considered routine maintenance has been highly controversial between regulators and industry. Most of the past and current EPA- or state-initiated NSR enforcement actions have targeted industry’s strategic behavior aimed at maximizing the use of this exemption. The routine maintenance exception has created a loophole that, if abused, could inflict significant damage on the integrity of the entire NSR program. This is especially so because a facility is not required to ask the permitting agency to determine whether the planned activity is within the scope of the routine maintenance exemption, although EPA will decide the applicability of the exemption on a case-by-case basis when asked to do so. The court’s ruling in Wisconsin Electric Power Co. (WEPCO) v. Reilly36 provides useful guidance in this regard. Responding to the utility petitioner’s argument that its planned replacement project was within the scope of the routine maintenance exception, the U.S. Court of Appeals for the Seventh Circuit ruled in favor of EPA that it was beyond the exception and therefore was covered by NSPS and NSR, finding as a reasonable application of the relevant regulations EPA-used factors, such as the nature, extent, purpose, frequency and cost of work, for determining the applicability of the exception.37 The court did not agree with WEPCO that the cost, magnitude, and nature of its project were irrelevant for purposes of the routine maintenance exception to NSPS and PSD. Among others, the court regarded the following facts as decisive: (1) the project was a “life-extension” project; (2) WEPCO admitted that a project of such magnitude “would normally occur only once or twice during a unit’s expected life cycle,” and it never occurred before; and (3) it would cost at least $70.5 million.38 Therefore, a strong presumption can be established from a reading of the WEPCO decision that maintenance projects intended to increase the life expectancy of an electric-generating unit (or other industrial units) are considered a modification (not routine), thereby triggering NSR. In 2000, EPA’s Environmental Appeals Board (EAB) heard a case involving life-extension projects at nine electric-generating units owned by the Tennessee Valley Authority (TVA) in Kentucky, Tennessee, and Alabama.39 This case also involved TVA as one of the nine electric utilities against which EPA took enforcement actions in 1999. Unlike other companies, for jurisdictional concerns, EPA issued an administrative order under §§113 and 167 of the CAA against TVA whose failure to comply with the order could independently lead to severe penalties. The EPA Ad35. Id. §§52.21(b)(2)(iii) (PSD), 52.24(f)(5) (nonattainment). This exemption was added after a similar provision under the 1975 NSPS regulations. 36. 893 F.2d 901, 20 ELR 20414 (7th Cir. 1990). 37. See id. 910-13. 38. Id. at 911-12. 39. See In re Tennessee Valley Auth., No. CAA-2000-04-008, 9 E.A.D. 357, 2000 WL 1358648, 32 ELR 41231 (EAB Sept. 15, 2000) (final order on reconsideration). ministrator directed the EAB to reconsider the administrative order and to issue a final order. The EAB applied a four-part test to determined whether the routine maintenance exception was applicable to the company’s projects at issue: (1) the nature and extent of the change; (2) the purpose of the change; (3) the frequency of the change; and (4) the cost of the change. It ruled that none of the TVA’s 14 life-extension projects qualified for the routine maintenance exception, thereby violating the NSPS and NSR requirements.40 On July 26, 2002, the U.S. District Court for the Southern District of Indiana issued an important ruling on preliminary motions in an ongoing lawsuit involving the Southern Indiana Gas & Electric Company (SIGECO).41 The court held that EPA’s enforcement was not barred by the Indiana Department of Environmental Management’s (IDEM’s) previous determination that SIGECO’s plant upgrades constituted routine maintenance. SIGECO’s main argument was that the IDEM’s ruling was binding on EPA as a result of its delegation of enforcement power to the state agency.42 The court rejected that argument, however, finding that EPA is not precluded from bringing an enforcement action, given the broad language of §113 of the Act, which provides that EPA is authorized to enforce “any requirement or prohibition” of “an applicable implementation plan or permit,” and §111(c)(2) that authorizes EPA to enforce “any applicable standard of performance.”43 It held that the doctrine of equitable estoppel does not apply unless EPA “knew the facts” relating to a state agency’s ruling and had engaged in “affirmative misconduct.”44 This ruling was another victory for EPA which has been engaging in legal battles with large electric utility companies since 1999. However, note that the definition of the term “significant” has been changed with respect to three newly created mechanisms designed to promote the use of clean energy technologies: plantwide applicability limits (PALs), the Clean Unit exclusion, and pollution control projects (PCPs). For sources choosing to use PALs or the Clean Unit exclusion, allowable emissions, instead of actual emissions, become the basis for determining whether a significant emissions increase would result. A qualifying PCP is deemed not to result in an increase in collateral emissions if its net air quality benefits are judged as positive. 2. A Significant Net Increase in Emissions a. An Emissions Increase: The Actual-to-Future-Actual Test Once it is determined that a physical or operational change to a major stationary source would occur, the next step is to 40. See id. pt. III.C.3. and app. A. But in 2003, the U.S. Court of Appeals for the Eleventh Circuit struck down the administrative order on procedural grounds. See Tennessee Valley Auth. v. Whitman, 336 F.3d 1236 (11th Cir. 2003), reh’g en banc denied, 82 Fed. Appx. 220, 2003 U.S. App. LEXIS 27278, 33 ELR 20231 (11th Cir. 2003), cert. denied sub nom. Leavitt v. Tennessee Valley Auth., 124 S. Ct. 2096 (2004). As a consequence, the EAB’s decision lost much of its precedential value. 41. United States v. Southern Ind. Gas & Elec. Co., 2002 U.S. Dist. LEXIS 14039 (S.D. Ind. July 26, 2002). 42. Id. at **9-11, 14. 43. Id. at **13, 15. 44. Id. at **16-17. 35 ELR 10322 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. identify whether that change would produce a significant net increase in emissions in order for the source to be subject to NSR. The initial step for the permitting agency to take is to determine the baseline for the actual emissions before the change, which is compared to the projected post-change emissions to determine if there will be an increase in emissions before and after the modification.45 Under the old rule, the pre-change actual emissions were to be calculated based on the average rate in tpy, actually emitted during the previous two years, if those emissions were representative of normal operations at the unit during this time.46 Therefore, the baseline emissions meant a source’s actual emissions shortly before the proposed modification begins. The permitting agency was allowed to use a different time period if the source shows that it is more representative of normal operations.47 If that is the case, the calculation of actual emissions must be based on “the unit’s actual operating hours, production rates, and types of materials processed, stored, or combusted during the selected time period.”48 The new NSR rule replaced the 2-year time period with a 10-year look-back period except for electric-generation units.49 Once the baseline is determined, the following step is to calculate projected postmodification emissions. Under the old rule, which still applies to new sources, post-change projected emissions must be equal to the PTE, which was defined as “the maximum capacity of a stationary source to emit a pollutant under its physical and operational design.”50 While it was relatively easy to determine a new source’s PTE, much of the controversy over NSR applicability had centered around this issue, which was the trickiest part of NSR implementation. The PTE, as applied by EPA, was based on the presumption that the unit will run at full capacity (namely, 24 hours a day year-round). This was the so-called actual-to-potential test. EPA had applied this test to modifications to existing sources since it is presumed that they have not begun normal operations. This test was quite onerous for most existing sources because they usually do not operate at their maximum capacity. Even after the WEPCO decision, the actual-to-potential test had been applied to all sources with the exception of fossil fuel-fired electric utilities51 until the new NSR rule was promulgated in 2003. As will be discussed below, the actual-to-future-actual test is in place for all sources.52 45. See Letter from Francis X. Lyons, Regional Administrator, to Henry Nickel, Counsel for Detroit Edison Company, Detroit Edison Applicability Determination: Detailed Analysis 18 (May 23, 2000), available at http://yosemite.epa.gov/r5/ardcorre.nsf/36ae8bf3212bb6b 28625650c0079f5da/dde17f64f29e6a36862568ef0067cb13/$FILE/ de_enclosure.pdf (last visited Mar. 1, 2005) [hereinafter Letter from Francis Lyons]. 46. 40 C.F.R. §§52.21(b)(21)(ii), 51.165(a)(1)(xii), 51.166(b)(21) (pre-2002 NSR rule). 47. Id. §52.21(b)(21)(ii) (pre-2002 NSR rule). This provision was heavily influenced by the WEPCO decision. 48. Id. 49. Id. §§52.21(b)(48), 51.165(a)(1)(xxxv), 51.166(b)(47) (2003). 50. Id. §52.21(b)(4) (pre-2002 NSR rule). 51. See 893 F.2d at 901. EPA’s continued use of the actual-to-potential test was upheld by federal courts. See, e.g., Puerto Rican Cement Co. v. EPA, 889 F.2d 292, 20 ELR 20259 (1st Cir. 1989). 52. 40 C.F.R. §§52.21(b)(41), 51.165(a)(1)(xxviii), 51.166(b)(40) (2003). b. The WEPCO Rule: The Actual-to-ProjectedFuture-Actual Test and Its Extended Application As mentioned above, under the preexisting rule, there was an important exception that electric-generation units, called electric utility steam-generating units (EUSGUs), were subject to a different standard other than the PTE: the actual-to-projected-actual test that had been adopted in the 1992 regulation, known as the WEPCO rule,53 as a result of the 1990 WEPCO ruling. In this case, the Seventh Circuit faulted EPA for wholly disregarding past operating conditions at the facility for which an emission history could be established, so that “a more realistic assessment of its impact on ambient air quality levels is possible, and thus is directed.”54 The court required EPA to utilize a different calculation method for an electric steam-generating unit’s like-kind replacements of equipment if it is an established operation. After the decision, EPA’s WEPCO rule adopted an “actual-to-future-actual methodology” for changes at electric utility plants except the construction of a new unit or reconstruction of an existing emissions unit.55 Under this formula, the premodification actual emissions are compared to the projected postmodification actual emissions, and the baseline emissions are calculated based on the highest hourly emissions rate achievable in any two-year period within a five-year period preceding the proposed change.56 For verification purposes, a utility must monitor actual emissions after the modification and report data and information to the permitting agency for the first five years.57 In some cases, EPA or the state agency may extend a monitoring period up to 10 years if the 10-year period is determined to be more appropriate.58 Also, the new regulations exempted emissions increases due to demand growth. Increases in emissions caused by high market demand for electricity may not be included in the calculation of projected-future-actual emissions.59 Understandably, however, it is a very difficult task to distinguish between increased emissions due to demand growth and those emissions increases from the physical or operational change. EPA conceded this problem and proposed to eliminate the demand growth exclusion in its 1998 Notice of Availability.60 How53. See U.S. EPA, Requirements for Preparation, Adoption, and Submittal of Implementation Plans; Approval and Promulgation of Implementation Plans; Standards of Performance for New Stationary Sources, 57 Fed. Reg. 32314 (July 21, 1992) (codified at 40 C.F.R. §§51, 52, and 60). 54. 893 F.2d at 917 (quoting Alabama Power Co. v. Costle, 636 F.2d 323, 379, 10 ELR 20001 (D.C. Cir. 1979) (emphasis in original). 55. 57 Fed. Reg. at 32326. See Memorandum from John Seitze, Director of Air Quality Planning and Standards, U.S. EPA, to Air Directors Regions I-X, at 2 (July 1, 1994). 56. 57 Fed. Reg. at 32324. See also 40 C.F.R. §52.21(b)(3)(i)(b) (pre-2002 NSR rule); Supplemental Analysis of 2002 Final NSR’s Impact, supra note 20, at F-1. 57. 57 Fed. Reg. at 32325. 58. Id. See 40 C.F.R. §§52.21(b)(21)(v), 51.165(a)(1)(xii)(E), 51.166(b)(21)(v) (pre-2002 NSR rule). 59. 57 Fed. Reg. at 32326; 40 C.F.R. §52.21(b)(41)(ii)(c) (pre-2002 NSR rule). See 893 F.2d at 918 n.13 (observing that market fluctuations in the electricity marketplace make it difficult for utilities to use synthetic minor permits (quoting Puerto Rican Cement Co. v. EPA, 889 F.2d 292, 298, 20 ELR 20259 (1st Cir. 1989))). 60. EPA said: [A]ttempting to discern whether increased utilization and emissions should be attributed to physical or operational 5-2005 NEWS & ANALYSIS 35 ELR 10323 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. ever, the 2003 new NSR rule extends the WEPCO rule and the demand growth exclusion to all other industries.61 The only difference between EUSGUs and other sources is that a 10-year look-back period applies to the latter in calculating baseline emissions. The owner or operator of an existing source is now allowed to project future-actual emissions based on historical data on its operations during any one of the 5 or 10 years immediately preceding the proposed change. c. A Significant Net Increase: Netting The final element in determining NSR applicability is that an increase in emissions must be a net increase. Therefore, the reviewing authority must determine if there will be a net increase in emissions. Net emissions are determined after considering “[a]ny other increases and decreases in actual emissions at the major stationary source that are contemporaneous with the [proposed] change,” in addition to the projected increase in emissions from the change.62 Under the changes versus purely independent demand-satisfying increased capacity utilization will be much more difficult in the future, as restructuring in the electric power industry allows electric-generating companies to compete for retail customers. As a result, the marketplace will drive electric generators to function as any other consumer-driven industry, that is, to ensure their ability to supply the market and collaterally to increase their revenues. In addition, as utilities respond to a competitive market for the generation of electric power they can no longer be expected to accurately predict their level of operations and post-change emissions. Each physical or operational change that makes it possible for a source to efficiently increase its level of utilization, then, will likely be pursued and turned into electricity for sale. U.S. EPA, Notice of Availability; Alternatives for New Source Review (NSR) Applicability for Major Modifications; Solicitation of Comment, 63 Fed. Reg. 39857, 39860 (July 24, 1998). 61. 40 C.F.R. §§52.21(b)(41)(ii)(c), 51.165(a)(1)(xxviii)(B)(3), 51.166(b)(40)(ii)(c) (2003) (demand growth exclusion). 62. Id. §52.21(b)(3) (emphasis added). The current regulations for netting was heavily influenced by the D.C. Circuit’s 1979 decision in Alabama Power Co. v. Costle, 636 F.2d 323, 402, 10 ELR 20001 (D.C. Cir. 1979). The court stated: “The Agency retains substantial discretion in applying the bubble concept. First, any offset changes claimed by industry must be substantially contemporaneous. The Agency has discretion, within reason, to define which changes are substantially contemporaneous. Second, the offsetting changes must be within the same source, as defined by EPA.” (emphasis added). The use of netting was finally upheld by the Court in the famous Chevron case. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 14 ELR 20507 (1984). The Court observed that the PSD and nonattainment NSR permit program “represented a balance between the economic interests in permitting capital improvements to continue and the environmental interest in improving air quality.” Id. at 851. It finally concluded that EPA’s policy decision to adopt flexible mechanisms such as netting “represent[ed] a reasonable accommodation of manifestly competing interests and [was] entitled to deference” in the absence of contrary clear congressional intent. Id. at 865. EPA has developed and implemented a policy to promote emissions trading, including netting. See 51 Fed. Reg. 43814. Netting is an internal trading mechanism in which increased emissions in one point are used to offset decreased emissions in other points as long as it is expected that there is no net increases in emissions within the entire plant. Bubble is a very similar mechanism because all individual emission sources under the control of the same person are regarded as a single source for regulatory purposes, as if the total emissions combined were coming from a single imaginary outlet in the bubble. The bubble is what makes netting legal in the first place. But it is different in that it is used by existing sources to pursue flexibility in complying with pollution control requirements, and that the use of bubbles is limited by the regulatory definition of a source. See Arnold W. Reitze Jr., A Century of Air Pollution Control preexisting rule, any increase or decrease is deemed to be contemporaneous if it happened within the five-year period immediately before the change actually occurs.63 Thus a major emitting facility can net out of NSR by subtracting any “creditable” decreases it caused to happen in the two years of the previous five-year period.64 Sources cannot claim a change in emissions as offsets that it is otherwise obligated to comply with under their permit conditions or other applicable laws.65 Any increase in emissions is creditable “only to the extent that the new level of actual emissions exceeds the old level.”66 To be creditable, any emission decrease must: (1) reflect emission reductions from the old level of actual emissions or the old level of applicable allowable emissions, whichever is lower; (2) be “enforceable as a practical matter” before the proposed modification actually occurs; (3) have “approximately the same qualitative significance for public health and welfare as that attributed to the increase from [the proposed modification]”; and (4) not result from the use of the “add-on control technology or application of pollution prevention practices” relied on by the source in qualifying for the Clean Unit exemption.67 These requirements are designed to prevent “paper credits” from being used and to ensure that offset trading must represent real progress toward attainment of NAAQS. In 1979, EPA proposed a premodification notification requirement with regard to netting, but it was never adopted due to objection from industry.68 As a result, currently the owner or operator planning a change to his facility that has the potential to significantly increase net emissions may forego NSR completely using a netting mechanism, and is not required to notify EPA or the state permitting agency of it. This lack of control over netting practices has been the target of criticism by environmentalists for creating another significant loophole, along with the routine maintenance exclusion, that has allegedly been taken advantaged of by industry, especially grandfathered coal-fired electric utilities. There is little data available concerning how frequently 63. 64. 65. 66. 67. 68. Law: What’s Worked; What’s Failed; What Might Work, 21 Envtl. L. 1549, 1622-25 (1991). 40 C.F.R. §52.21(b)(3)(ii). See also id. §§51.165(a)(vi), 51.166(b)(3). Net emissions after the change are equal to the projected emissions increases from the baseline plus plantwide creditable increases minus plantwide creditable decreases. Note that states may use a different time period in calculating a net emissions change. In California, however, netting is not allowed, and NSR thresholds can be as low as one pound per day. See Report by a Panel of the National Academy of Public Administration (NAPA) for the U.S. Congress and the U.S. EPA, A Breath of Fresh Air: Reviving the New Source Review Program 31 (2003), available at http://209.183.198.6/NAPA/NAPAPubs.nsf/9172a14f 9dd0c36685256967006510cd/ae53e82c36ab2f1985256d1800494 4b5/$FILE/Fresh+Air+Full+Report.pdf (last visited Mar. 1, 2005) (citing interview with California air officials) [hereinafter NAPA NSR Report]. See 40 C.F.R. §52.21(b)(3)(iii)(a)-(b). Id. §52.21(b)(3)(v). Id. §52.21(b)(3)(vi)(a)-(d). U.S. EPA, Requirement for Preparation, Adoption, and Submittal of State Implementation Plans; Approval and Promulgation of State Implementation Plans, 45 Fed. Reg. 51923 (Sept. 5, 1979). However, EPA stressed that “owners and operators are hereby put on notice that they should maintain sufficient records regarding contemporaneous emission increases and decreases so as to verify no permit was required.” See 45 Fed. Reg. at 52676. EPA added a similar requirement to the 1975 NSPS regulations, but it was subsequently removed. 35 ELR 10324 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. netting actually is used. According to one study, approximately 800 netting transactions took place in between 1974 and 1989.69 An estimated cost savings were somewhere between $25 million and $300 million, which mostly came from avoiding costs associated with permitting processes and installing modern pollution control.70 It is important to note, however, that the new NSR rule has changed the preexisting netting policy in a significant way by adopting the new definition of baseline emissions (in other words, changing the prior definition of the statutory term “change”). Thus, the baseline year is not the year when the proposed construction actually takes place, but any year in a 10-year look-back period during which the highest emissions were ever recorded. II. NSR Failures and the Movement to Reform the Current NSR Program A. Grandfathering Under the CAA The perceived failures of NSR are attributable to grandfathering under the CAA. Old sources were exempted because it was thought to be more economically efficient to mandate the installation of new pollution controls at the time existing facilities would be upgraded, rather than requiring those facilities to be retrofitted immediately.71 Congress expected many of the existing plants would soon be retired and replaced with new ones, and that future technological breakthroughs would make the costs of state-of-the-art pollution control technologies significantly lower.72 Unlike Congress’ expectations, however, the dichotomy between new and existing sources has allowed grandfathered major sources to stay operational beyond their expected life cycle without being subject to NSPS and NSR requirements. Notably, electric utilities have kept their old coal-fired electric units operating beyond life expectancy.73 Few new coalburning electric power plants have been constructed since 1980, and preconstruction permits for major modifications have rarely been issued to grandfathered coal-fired power 69. Robert W. Hahn & Gordon L. Hester, Where Did All the Markets Go? An Analysis of EPA’s Emissions Trading Program, 6 Yale J. on Reg. 109, 133 (1989). In this article, the authors observed: From available data it appears that netting is the most commonly used emissions trading activity by a wide margin. In 1984, the only year for which detailed data are available, an estimated 900 sources used netting. This is about fifteen times as often as offsets were used during the same year, and it is far more often than bubbles have ever been used. Id. (citation omitted). 70. Id. at 136. 71. See H.R. Rep. No. 95-294, at 185-86 (1977), reprinted in 1977 U.S.C.C.A.N. 1077, 1264-65. 72. See id. 73. Although EPA’s NSPS regulations were revised several times, old electric power plants are still running, thereby even avoiding NSPS requirements. See Arnold W. Reitze Jr., State and Federal Command-and-Control Regulation of Emissions From Fossil Fuel Electric Power Generation Plants, 32 Envtl. L. 369, 380-83 (2002). Grandfathering is not limited to NSPS and NSR. Prior to the enactment of the 1990 CAA Amendments, grandfathered power plants were allowed to disperse their emissions using tall smokestacks. They were subject to less restrictions when compared to new units. With the acid rain program being implemented, however, they may not use that option, since it must reduce their SO2 and NOx emissions to the levels set by the Act or the regulations. plants.74 Most of the new power plants have been gas-fired plants.75 Grandfathering facilitated gaming of the NSR program by the electric power industry which took advantage of the routine maintenance exception and netting to forego NSR altogether. This has given huge cost advantages to old, dirty coal-burning power plants over oil- and gas-fired power plants, and renewable energy facilities. It creates an uneven playing field in the energy sector and thus frustrates efforts to promote efficient use of energy and renewable energy development.76 It apparently contravenes the “polluter-pays” principle enunciated in various international environmental agreements, and is the most significant hurdle for the United States to moving toward achieving the future energy policy goal of sustainability. Electric utilities are by far the nation’s largest polluters. Old and energy-inefficient coal-fired power plants release into the atmosphere significant amounts of SO2, NOx and PM, as well as CO2, disproportionately compared to other stationary sources, even over 30 years after the passage of the 1970 CAA. In 1998, electric utilities were responsible for 25% of national NOx emissions, 67% of SO2 emissions, and 8% of PM10 emissions, respectively.77 Electricity generation was responsible for approximately 40% of national CO2 emissions in 2001, which are believed to be associated 74. In 2000, more than 50% of electricity was generated “by coal-fired power plants, most of which were built between 1950 and 1980.” Byron Swift, Grandfathering, the New Source Review, and Nitrogen Oxide—Making Sense of a Flawed System, 15 Env’t Rep. (BNA) 1538, 1538 (2000). According to EPA, of 274 PSD permits issued since 1995, over 250 have been issued to gas turbine electric power plants, with only 10 going to coal-fired power plants. NSR Background Paper, supra note 28, at 9. 75. In addition to burdensome NSR requirements, the main reason is that new gas-fired turbines can produce electricity more cheaply than new coal-fired power plants. Natural gas power plants are less expensive and take less time to build, since they requires much lower construction costs and are relatively small and modular, thereby minimizing capital expenditures and maintenance and other related costs. See Environmental Law Institute, Cleaner Power: The Benefits and Costs of Moving From Coal Generation to Modern Power Technologies 21 n.17 (2001). In 2000, the Energy Information Administration projected that 92% of new power plants were expected to be fired by natural gas during the next 20-year period. U.S. Energy Information Administration (EIA), Annual Energy Outlook 2001 With Projections to 2020, at 73 (2000) (DOE/EIA-0383). However, construction of new coal-fired power plants has recently been proposed in increasing numbers. See Foote, supra note 17, at 10643. In recent years, natural gas prices have gone up, as gas supply has become constrained due to increased demand and limited stocks of natural gas in North America. This volatility in gas prices have negatively impacted some of the combined-cycle gas turbines, whose competitiveness and thus attraction for investment money rest heavily on relatively low and stable gas prices. See Tom Woods, What Are the Prospects for Coal?; Unless Gas Prices Stabilize, Coal Prices Will Continue Rising, Pub. Utils. Fortnightly, May 9, 2004, at 13. 76. Other factors are the low price of coal and the fact that the assets of old power plants were fully amortized during their life span. The cost of producing electricity in grandfathered electric power plants ranges between 1.5 and 3 cents per kilowatt hour (kwh). See Bruce Biewald, David While & Tim Woolf, Grandfathering and Environmental Comparability: An Economic Analysis of Air Emission Regulations and Electricity Market Distortions 28, tbl. 5.1. (Prepared for the National Association of Regulatory Utility Commissioners by Synapse Energy Economics. Inc., Cambridge, Mass. 1998), available at http://www.synapse-energy.com/ publications.htm (last visited Mar. 1, 2005). 77. U.S. EPA, National Air Pollutant Emission Trends: 1900-1998, at 2-2, 2-3 (2000) (EPA 454-R-00-002), available at http://www.epa.gov/ttn/chief/trends/trends98/trends98.pdf (last visited Mar. 1, 2005) [hereinafter 1998 National Air Pollutant Emission Trends]. 5-2005 NEWS & ANALYSIS 35 ELR 10325 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. with global climate change.78 The heavy use of coal for electric generation significantly contributes to acid deposition and precipitation, ground-level O3 formation, reduced visibility in pristine areas, and global climate change.79 Moreover, in today’s deregulatory environment in the electricity markets, there also is concern among the environmental community that coal-fired power plants with cost advantages will be more fully utilized. This implies that the nation’s air will be dirtier and greenhouse gas (GHG) emissions will increase. Given the fact that air pollution problems root in the massive use of fossil fuels for electricity production, regulation of CO 2 and NSR reform could produce synergistic effects.80 Inducing the retirement of grandfathered coal-fired power plants and promoting energy efficiency and use of renewable energy sources should be a top priority goal. It should be pursued through legal reforms that aim to align energy production with environmental goals. B. Federal and State Efforts to Repeal Grandfathering 1. Congressional Efforts Several bills were proposed in Congress that would have removed the grandfathering of old coal-fired power plants. On October 9, 1990, one U.S. Senate bill, sponsored by Sen. Joseph Lieberman (D-Conn.), would have required some fossil fuel-fired electric-generating units constructed after August 17, 1971, to be subjected to the same emissions standards those applied to new or modified units.81 Affected units would be fossil fuel-fired steam-generating units with the capacity of 25 megawatt hours (Mwhs) and interconnected to the interstate electrical transmission grid for the wholesale sales of electricity.82 The bill would have allowed 78. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1900-2001, at ES-15 (2003) (EPA 430-R-03-004), available at http://yosemite.epa.gov/OAR/globalwarming.nsf/Unique KeyLookup/LHOD5MJQ6G/$File/2003final-inventory.pdf (last visited Nov. 22, 2004) [hereinafter 2003 U.S. GHG Emissions and Sinks]. 79. In the United States, 90% of coal is consumed in the electricity sector. Id. at 2-13. More than 90% of electric utility NOx and SO2 emissions came from coal-fired power plants, two-thirds of whose emissions took place during bituminous coal combustion. 1998 National Air Emission Trends, supra note 77, at 2-2. Coal combustion represented approximately 85% of CO2 emissions from fossil fuel-fired electric generation. See 2003 U.S. GHG Emissions and Sinks, supra note 78, at 2-4, tbl. 2-3. This is so because the carbon content of coal per unit of energy produced is much higher than that of petroleum or natural gas. Petroleum and natural gas contain 25% and 45% less carbon than coal, respectively. Id. at ES-14. Coal contains carbon content of 95 teragrams CO2 equivalent per quadrillion British thermal unit (Tg CO2 Eq./QBtu), while natural gas’ carbon intensity is about 53 Tg CO2 Eq./QBtu. Id. at 2-14. Note that Tg CO2 Eq./QBtu is a weighted value of each fuel type’s global warming potential (GWP). 80. Regulation of CO2 requires the reduced usage of fossil fuels. This in turn would bring “ancillary benefits” to society in the form of reduced emissions of other persistent air pollutants. See Dallas Burtraw et al., Ancillary Benefits of Reduced Air Pollution in the United States From Moderate Greenhouse Gas Mitigation Policies in the Electricity Sector (Resources for the Future, Discussion Paper No. 01-61, 2001), available at http://www.rff.org/rff/Documents/ RFF-DP-01-61.pdf (last visited Mar. 1, 2005). Strong and effective NSR enforcement would lead to upgrading grandfathered old facilities, making them more energy efficient and thus saving energy. Good for the environment. Good for the U.S. economy. 81. S. 2610, 105th Cong. (1998). 82. Id. five years for those affected units to comply with its mandate, and directed EPA to develop an emissions trading mechanism to help affected units meet its deadline.83 On November 7, 1997, a similar bill was introduced in the U.S. House of Representatives by Rep. Frank Pallone (D-N.J.).84 This House bill provided for a nationwide cap-and-trade program for NOx and PM2.5.85 2. State Action Some states have moved to eliminate the grandfathered status of old electric power plants, and/or to adopt a multi-pollutant trading strategy which may include CO2 emissions control. On May 17, 2000, the governor of the state of Connecticut signed an Executive Order directing the Connecticut Department of Environmental Protection to develop regulations no later than May 1, 2003, to reduce annual SO2 and NOx emissions from 61 major sources, including all fossil fuel-fired power plants, by 30-50% and by 20-30%, respectively.86 The final regulations, which were promulgated on December 28, 2000, require covered facilities to take NOx control measures throughout the year.87 The regulations extend the coverage of the SO2 acid rain program to 61 from 28 units. They also require the 28 units to retire some of their SO2 allowances, which were initially allocated under Title IV.88 Emissions trading may be used to comply with the NOx and SO2 reduction requirements.89 In 2001, Texas enacted legislation to phase out grandfathering of one-third of the state’s industrial facilities, under which those in East Texas must go through permitting by 2007, and other facilities by 2008.90 The same year, Massachusetts promulgated a regulation requiring fossil fuel-fired boilers, including indirect heat exchangers with a nameplate capacity of 100 Mwhs or more, to meet output-based emission rate standards that would cut NOx emissions by 50% and SO2 emissions by 74%. This regulation covers mercury, CO2, and fine particle emissions from power plants and employs a credit trading mechanism.91 83. Id. 84. H.R. 2909, 105th Cong. (1998). 85. Id. The introductory part of the bill expressed concerns about the anticipated harmful effects on the nation’s air quality of electricity deregulation pushed by the Federal Energy Regulatory Commission in recent years after the passage of the 1992 Energy Policy Act, especially in nonattainment areas suffering from transboundary pollution. It said that the nation and the general public would not benefit much from competition in the electricity marketplace “if some competitors enjoy an advantage resulting from externalization of environmental or other costs, permitting them to charge prices for electricity that do not reflect the full economic and environmental cost of production.” Id. 86. Exec. Order No. 19 (May 19, 2000). Connecticut chose to target these sources to comply with the 1998 NOx SIP call. 87. Regulations of Connecticut State Agencies (RCSA) §22a–174-22. 88. Id. §22a–174-19a. 89. The SO2 program is to be implemented in two phases. In Phase I, averaging is only allowed. For basic information about the final regulations, see Bureau of Air Management, Connecticut Department of Environmental Protection, The Implementation of Executive Order No. 19: RCSA Sections 22a–174-19a & 22 (2001), available at http://www.dep.state.ct.us/air2/siprac/2001/ sec19.pdf (last visited Mar. 1, 2005). 90. S.B. 493, H.B. 356 (2001). 91. See Emissions Standards for Power Plants, 310 C.M.R. §7.29, at http://www.mass.gov/dep/bwp/daqc/files/regs/729final.doc (last visited Mar. 1, 2005). 35 ELR 10326 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. New Hampshire’s Clean Power Strategy placed caps on emissions of four covered air pollutants from three coalfired power plants owned by Public Service Company of New Hampshire.92 It expects to cut 75% of SO2 and mercury emissions and 70% of NOx emissions from baseline levels. This strategy also required a 7% reduction of CO2 emissions by 2010, which is the same as the reduction target for the United States under the Kyoto Protocol.93 The state of New Hampshire employs a cap-and-trade approach, in which the company is allowed to comply with these requirements using credits earned by purchasing from outside sources or banking its future emissions, and offers several other incentives designed to lower compliance costs and encourage the timely attainment by the company of the reduction goals.94 The state of Illinois directed the Illinois EPA to issue findings about the need for controlling emissions from power plants by September 30, 2004, and, if needed, to propose rules containing options to reduce those emissions to be finalized by the Illinois Pollution Control Board.95 On June 20, 2002, North Carolina enacted its Clean Smokestacks bill requiring 14 coal-fired power plants to reduce NOx emissions 77% by 2009, and SO2 emissions 73% by 2013, from 1998 baseline levels.96 C. EPA’s Enforcement Initiative As a response to perceived failures of the NSR program discussed above, EPA mounted enforcement actions against coal-fired power plants owned by seven large electric utilities in midwestern and southeastern regions during the Clinton Administration.97 This enforcement initiative tar92. New Hampshire Clean Power Act, H.B. 284 (2002). See Environmental Services Department, the State of New Hampshire, Clean Power Strategy: An Integrated Strategy to Reduce Emissions of Multiple Pollutants From New Hampshire’s Electric Power Plants 69-71 (2001), available at http://www. des.state.nh.us/ard/pdf/NHCPS.pdf (last visited Mar. 1, 2005). 93. Id. at 71, tbl. 11-2. 94. Id. at 71-80. 95. Michael Bologna, Governor Signs Law Seeking to Limit Pollution From “Grandfathered” Power Plants, 32 Env’t Rep. (BNA) 1602, 1602 (Aug. 10, 2001). 96. Air Quality/Electric Utilities Bill, S.B. 1078 (2002). This bill provides for a two-phase reduction of SO2 emissions from the power plants, which must reduce 49% of their SO2 emissions by 2009. Key facts of the bill are available in the official website of the Division of Air Quality, North Carolina Department of Environment & Natural Resources, at http://daq.state.nc.us/news/leg/stackfacts.shtml (last visited Mar. 1, 2005). 97. Reitze, supra note 73, at 389-90; see Office of Legal Policy, U.S. Department of Justice (DOJ), New Source Review: An Analysis of the Consistency of Enforcement Actions With the Clean Air Act and Implementing Regulations 13-14 (2002), available at http://www.usdoj.gov/olp/nsrreport.pdf (last visited Mar. 1, 2005) [hereinafter DOJ NSR Report]. The initial list included: (1) American Electric Power Company; (2) Ohio Edison and First Energy; (3) Cinergy Corporation; (4) Southern Indiana Gas & Electric Company; (5) Illinois Power Company; (6) Southern Company affiliates (including Alabama Power Company and Georgia Power Company); and (7) Tampa Electric Company. Id. at 14. The same day, EPA Region IV issued an administrative compliance order under CAA §§113 and 167 against nine coal-fired power plants owned by the TVA. See id. 16. In September 2000, the EAB ruled that none of the TVA’s 14 rehabilitation projects did not qualify for the routine maintenance exception under the NSR and NSPS regulations. TVA then filed a lawsuit challenging the administrative compliance order in the Eleventh Circuit. After several jurisdictional issues had been resolved, the three-judge panel in the Eleventh Circuit finally held that it lacked jurisdiction to review the order since geted the industry’s decade-old practice in which electric utilities made component replacements incrementally for the purpose of maintaining reliability, efficiency, and safety of electric-generating plants. It also included enforcement actions against the refinery, wood products, and other industries.98 EPA’s changed position was based on its 1998 NSR guidance, which adopted a more stringent definition of modifications.99 According to the NSR guidance, there were two scenarios in which NSR requirements could be invoked: (1) when a stationary source exceeded an applicable major source threshold level without obtaining a preconstruction permit; and (2) when a stationary source with a synthetic minor permit exceeded an applicable major source threshold level in violation of the permit limitation.100 In both situations, violating sources would be required to undergo the NSR process. EPA’s theory of liability was threefold: (1) utility life-extension projects replacing major components of the unit are not considered routine; (2) the reduced hours of operation during interim shutdowns or curtailments are excluded when the physical construction is involved; and (3) component repair or replacement projects that caused forced outages or deratings can always be projected to increase the utilization of the unit after the project.101 EPA intended to narrow or close a loophole in the NSR program that it believed was being taken advantage of by regulated industries to forego NSR using the routine maintenance exception. While many electric utilities alleged that EPA’s new interpretation constituted a rulemaking without fair notice as required by the Administrative the order was “legally inconsequential” and thereby did not constitute final agency action within the meaning of the Administrative Procedure Act (APA). The panel reasoned that, notwithstanding explicit congressional intent, the statutory scheme was unconstitutionally drafted that authorizes EPA to impose penalties for failure to comply with an administrative order without any provision for affording challengers due process rights. It concluded that, since a mere failure to comply with an administrative order cannot be allowed to deprive any person of his property or liberty, the order at issue was not final agency action subject to judicial review. See supra Part I.C.1. and text accompanying note 40. On December 22, 2000, EPA sued Duke Energy in the U.S. District Court for the Middle District of North Carolina. DOJ NSR Report, supra, at 15. 98. See id. at 17-19 and 43, app. II; Christopher W. Armstrong, EPA’s New Source Review Enforcement Initiative, Nat. Resources & Env’t, Winter 2000, at 203, 203-04. EPA’s NSR enforcement began in the late 1980s. The early enforcement actions were filed against the wood products industry. The WEPCO decision was an ignition point for enforcement actions against large electric utilities. Beginning in the mid-1990s, EPA’s Petroleum Refinery Initiative addressed possible NSR violations in the refinery industry. See DOJ NSR Report, supra note 97 at 11-19. 99. Memorandum from Eric V. Schaeffer, Director, Office of Regulatory Enforcement, Guidance on the Appropriate Injunctive Relief for Violations of Major New Source Review Requirements (Nov. 17, 1998), available at http://www.epa.gov/Region7/programs/artd/ air/nsr/nsrmemos/nsrguida.pdf (last visited Mar. 1, 2005). 100. See id. at 3-6. EPA said that “as part of an EPA settlement, the Consent Decree should require a minimum level of control which the Agency believe[d] ensures BACT/LAER-equivalent emission reductions.” Id. at 3. To avoid the NSR requirements, a new source or an existing source opting in to the old actual-to-potential test can voluntarily choose to become a “synthetic minor source” by agreeing to a permit condition setting a federally enforceable emission limit on the changed unit, which imposes restrictions on its operations, such as hours of operation less than full capacity, the use of pollution controls, and changes in production. See NSR Background Paper, supra note 28, at 6-7; Letter from Francis Lyons, supra note 45, at 18. 101. Makram B. Jaber, Utility Settlements in New Source Review Lawsuits, Nat. Resources & Env’t, Winter 2004, at 22, 23. 5-2005 NEWS & ANALYSIS 35 ELR 10327 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. Procedure Act (APA),102 some of the offending power plants facing EPA enforcement actions agreed to the installation of control equipment or implementation of process changes that were equivalent to NSR requirements through settlement with EPA.103 tor of the Office of Regulatory Enforcement, resigned in a protest to the new Administration.107 In his resignation letter, he strongly criticized the Bush Administration for its hostility to the Agency’s NSR enforcement campaign.108 2. The DOJ’s NSR Report D. The Overhaul of EPA’s Enforcement Initiative 1. The National Energy Policy Group’s Report to the President EPA’s enforcement campaign was subject to a possible change when the current Bush Administration took office. In late January 2001, the Bush Administration convened a National Energy Policy Development Group (NEPD) to be headed by Vice President Dick Cheney. The NEPD submitted its 170-page report to the president on May 16, 2001.104 The NEPD recommended in its report that the president direct federal agencies to review the NSR program.105 Accordingly, President George W. Bush ordered EPA to conduct a 90-day review of the NSR regulations and asked the U.S. Department of Justice (DOJ) to independently determine whether EPA’s enforcement campaign was consistent with the CAA or its implementing regulations, or whether it constituted administrative rulemaking within the meaning of the APA.106 Shortly thereafter, Eric Schaeffer, EPA Direc102. 5 U.S.C. §§551 et seq., available in ELR Stat. Admin. Proc. 103. As of the end of 2003, the DOJ settled litigation with the following companies: Tampa Electric Company, PSEG Fossil Limited Liability Company, Virginia Electric Power Company, Wisconsin Electric, Southern Indiana Gas & Electric Company, and Alcoa, Inc. (electric utilities); Chevron, U.S.A., Inc., Conoco, Premcor, Navajo Refining Company, Montana Refinery, Murphy Oil, Cenex, Ergon, Coastal Eagle Point, Koch Petroleum Corporation, BP Exploration & Oil Company, Motiva/Equilon/Shell, and Marathon Ashland Petroleum Limited Liability Company (refineries); Willamette Industries, Inc. and Boise Cascade Corporation (wood products companies). On October 6, 2004, EPA announced that it had reached settlement with Citgo Petroleum Corporation, one of the nation’s largest refineries. Under the settlement, Citgo agreed to spend an estimated $320 million to install state-of-the-art emissions control technologies, to pay a $3.6 million civil penalty, and to invest in $5 million worth of a supplemental environmental project at one of its six refining facilities. EPA estimated that the settlement would reduce NOx and SO2 emissions by more than 7,184 and 23,250 tpy, respectively. U.S. EPA, Press Release, U.S. Announces Clean Air Agreement With CITGO Petroleum Corp.; Petroleum Refiner to Reduce Air Emissions at Refineries in Five States (Oct. 6, 2004), available at http://yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562 e7004dc686/db2aa8edb865a54485256f2500534222!OpenDocument (last visited Mar. 1, 2005); see also Juliet Eilperin, Citgo Reaches $323 Million Emissions Settlement, Wash. Post, Oct. 7, 2004, at A12. 104. Report of the National Energy Policy Development Group, National Energy Policy: Reliable, Affordable, and Environmentally Sound Energy for America’s Future (2001), available at http://www.whitehouse.gov/energy (last visited Mar. 1, 2005). 105. It recommended to the president that EPA, in consultation with the Secretary of Energy and other federal agencies, “review New Source Review regulations, including administrative interpretations and implementation, and report to the president within 90 days on the impact of the regulations on investment in new utility and refinery generation capacity, energy efficiency, and environmental protection.” It also recommended that the DOJ “review existing enforcement actions regarding New Source Review to ensure that the enforcement actions are consistent with the Clean Air Act and its regulations.” Id. at 7-14. 106. David G. Mandelbaum, Thoughts on the Bush Clean Air “Strategy” So Far and a Suggestion for What Might Work, 21 Temp. Envtl. L. & Tech. J. 1, 6 (2002). On January 15, 2002, the DOJ published its NSR report. The DOJ’s NSR report almost exclusively focused on the routine maintenance exception. It asked: (1) whether the enforcement actions constitute “a substantive change in EPA’s interpretation of the CAA and its regulations that would require APA-compliant notice-and-comment rulemaking”; and (2) whether, despite a lack of administrative rulemaking, EPA’s interpretation of the routine maintenance exception is “reasonable” in light of the Act and its implementing regulations, and prior guidance documents.109 Based on a reading of the applicable case law, the DOJ found administrative rulemaking procedures unnecessary because it believed that EPA’s legal position in the enforcement actions against large electric utilities could be categorized as being interpretive and “did not constitute a departure from a prior authoritative interpretation of ‘routine maintenance.’”110 Moreover, the report emphasized that EPA was entitled to Chevron deference111 in its interpretation of the CAA, and that it deserved utmost deference as announced in Bowles v. Seminole Rock & Sand Co.112 in the interpretation of its own implementing regulations.113 It finally concluded that it would continue to pursue the enforcement actions pending in federal courts.114 In this regard, on October 24, 2002, the Southern District of Indiana held that EPA’s interpretation did not constitute a rulemaking in violation of the APA.115 Therefore, there exists an authoritative judgment that EPA’s enforcement actions are not unlawful. However, the reason why the pace of the litigation has been slow thus far is that EPA has to prove facts which often spanned more than two decades. Most of the reviewing courts did not enter summary judgment for EPA.116 3. EPA’s 90-Day NSR For its part, EPA finalized its 90-day review of the NSR pro107. See Steve Cook, Departing EPA Official Issues Broadside at Bush Administration’s Clean Air Programs, 33 Env’t Rep. (BNA) 462 (Mar. 1, 2002). 108. See Letter of Resignation, Eric V. Schaeffer, Director Office of Regulatory Enforcement (Feb. 28, 2002), available at http://www. Mindfully.org/Reform/2002/Resignation-SchaefferEPA28feb02. htm (last visited May 25, 2004). 109. See DOJ NSR Report, supra note 97, at 24. 110. Id. at 25-33. 111. See 467 U.S. 837, 842-43, 14 ELR 20507 (1984). 112. See 325 U.S. 410 (1945). 113. See DOJ NSR Report, supra note 97, at 35-36. It argued that the Christensen case decided by the Supreme Court in 2000 reaffirmed the Seminole Rock’s holding. DOJ NSR Report, supra note 97, at 36; see Christensen v. Harris Country, 529 U.S. 576, 588 (2000). 114. DOJ NSR Report, supra note 97, at 39-40. 115. United States v. Southern Ind. Gas & Elec. Co., 2002 WL 31427523 (S.D. Ind. Oct. 24, 2002); see also United States v. Ohio Edison Co., 276 F. Supp. 2d 829, 33 ELR 20253 (S.D. Ohio 2003). 116. See, e.g., United States v. SIGECO, 2003 WL 21024595 (S.D. Ind. Apr. 17, 2003). 35 ELR 10328 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. gram in June 2002.117 EPA’s final report borrowed largely from the findings of its pervious study of NSR118 and comments from various stakeholders, including members of the general public. It addressed the impacts of the NSR program on capital investment in the energy sector, especially for electric utilities and refineries. This issue had important implications for the adequacy and reliability of the nation’s energy supplies. EPA’s findings were twofold. For new power plants and refineries, EPA found that the NSR program has not significantly impeded investment in new power plants or refineries. For the utility industry, this is evidenced by significant recent and future planned investment in new power plants. Lack of construction of new greenfield refineries is generally attributed to economic reasons and environmental restrictions unrelated to NSR.119 For existing power plants and refineries, EPA concluded that the NSR program has impeded or resulted in the cancellation of projects which would maintain and improve reliability, efficiency and safety of existing energy capacity. Such discouragement results in lost capacity, as well as lost opportunities to improve energy efficiency and reduce air pollution.120 EPA’s findings appeared to favor more to industry’s dominant view that the NSR program “discourage[s] investment in both preserving and maintaining utility and refinery generating capacity as well as in improving energy efficiency and expanding capacity.”121 Furthermore, whereas it said there is no question that the NSR program has made a significant contribution to improving the nation’s air quality,122 EPA stated that [it] also believes, however, that for particular industry sectors the benefits currently attributed to NSR could be achieved much more efficiently and at much lower cost through the implementation of a multipollutant national cap and trade program. In particular, the President’s Clear Skies initiative is a much more certain and effective way of achieving emissions reductions from the power generation sector.123 There may be some truth in these findings in view of the time delays and costs associated with the NSR process itself. Perhaps, NSR may have “failed to accommodate adequately industries with short product cycles and large-scale batch production, affecting them in ways that may reduce their competitiveness.”124 But the findings and industry comments seemed to reaffirm the common understanding that the NSR program has not worked as intended at the time of its enactment. They also implied that the CAA’s NSR scheme may have been gamed by some industries. The low number of NSR permits issued to old, dirtier electric power units and cost disparities between grandfathered and new power plants dictate this conclusion. Therefore, it is one thing to say that NSR reform is needed, and it is another to argue that NSR itself is to blame for its alleged failures to induce clean energy development. The challenge is how to redesign the regulatory structure in a way that distinguishes good- and bad-faith players and rewards the former. There also is a need to level the playing field for alternative energy resources, which, thus far, have been disadvantaged under the current regime. E. A Multi-Pollutant Trading Approach at the Federal Level 1. Four-Pollutant Bills 117. U.S. EPA, New Source Review: Report to the President (2002), available at http://www.epa.gov/nsr/documents/nsr_report_ to_president.pdf (last visited Mar. 1, 2005) [hereinafter EPA 90Day NSR]. 118. See NSR Background Paper, supra note 28. An interagency group composed of several federal agencies and a private consulting firm, ICF Consulting Inc., participated in the preparation of this preliminary report. See EPA 90-Day NSR, supra note 117, at 2-3. 119. Id. at 1. 120. Id. 121. See id. at 8-21. However, it did not make any definitive findings supported by fresh data and rigorous analysis. EPA based its findings more on general perceptions among industry than on hard evidence. Its NSR Background Paper did find that “capital expenditures for air pollution control as a percentage of total capital expenditures on new plant construction are significantly lower than those expenditures on existing plants.” NSR Background Paper, supra note 28, at 18. It noted that it could not answer the question of “whether or not NSR had affected the economic behavior of new plant owners or developers.” Id. at 21. It then illustrated a number of factors that may contribute to cost increases, such as the costs of pollution costs, and time delays, complexity and regulatory uncertainty, commonly associated with NSR. Id. at 21-23. It did state, however, that these costs were difficult to quantity, and referred to comments and studies that argued economic factors, not environmental regulations, are decisive in making siting and expansion decisions. Id. at 24. As for the refinery industry, it found that pollution control costs constituted a small portion of capital investment. Id. at 41-42. Then EPA rather summarily concluded that NSR has impeded or resulted in the cancellation of projects that would maintain or improve reliability, efficiency or safety of existing power plants and refineries. 122. It conceded the difficulty of quantifying the benefits in the report, but its NSR Background Paper did estimate that as a result of NSR 4.1 million tons of all regulated air pollutants per year were avoided There have been legislative efforts to introduce multi-pollutant bills primarily targeting the electric utility industry. This move is inspired largely by the relatively successful performance of the acid rain program under the 1990 CAA.125 On the other hand, it derives in part from the widespread recognition that it is much more economical to concentrate regulatory energy and efforts on the electric utility industry often characterized by inefficiencies. The so-called four-pollutant bill, called the Clean Power Act, was introduced in the Senate to mandate reductions in SO2, NOx, mercury, and CO2 emissions from electric power generators using a cap-and-trade approach on a pollutant-by-pollutant basis.126 This Senate bill would require the electric-generation industry to cut 75% of its SO2 and NOx emissions, 90% of its neurotoxin mercury emissions, and 20% of its CO2 emissions, respectively, and calls for implementation of policies such as strengthened efficiency standards for buildings and appliances, and incentives for development of renewable energy sources.127 But it is now being stalled in the 123. 124. 125. 126. 127. or 1.4 million tons of criteria pollutants per year. It noted that 90% of those reductions were thought to be from electric utilities. EPA 90Day NSR, supra note 117, at 9. Id. at 2 (emphasis added). NAPA NSR Report, supra note 64, at 100-03. See 42 U.S.C. §§7651-7651o. S. 556, 107th Cong. (2001). Id. 5-2005 NEWS & ANALYSIS 35 ELR 10329 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. face of opposition to the inclusion of CO2 as one of the covered pollutants.128 2. Three-Pollutant Bills: The Bush Administration’s Clear Skies Initiative President Bush has pushed the Clear Skies Initiative (threepollutant bill),129 and, on February 27, 2003, S. 485 and H.R. 999, known as the Clear Skies Act of 2003, were introduced in both houses of Congress, which would create a cap-andtrade program for SO2, NOx, and mercury for electric utilities, with a possibility of future downward cap adjustments, and deadlines of 2008, 2010, and 2018.130 This bill would exempt all changes at existing sources, called “affected units,” from NSR requirements, and would require that new sources meet NSPS rather than BACT or LAER. A stationary source qualifies as an affected unit if it satisfies the requirement that its operational changes not “increase the maximum hourly emissions of any air pollutant achievable at the unit during the last five years.”131 Therefore, the proposed bill tried to amend the current law concerning NSR preconstruction review. EPA’s recent NSR reform efforts have been based on this bill’s basic scheme.132 On the other hand, the Clear Skies Initiative is designed to reduce carbon intensity by encouraging electric power plants to develop clean coal technologies with regard to CO2 emissions and by supporting other programs to enhance energy efficiency and to develop renewable energy resources and clean fuels.133 Carbon intensity is “the ratio of [GHG] emissions to economic output,” and President Bush’s plan aims to reduce carbon intensity by 18% in the next 10 years.134 This effort could be promising, given the fact that energy-related CO2 emissions contribute over 80% of national GHG emissions.135 But it appears that the plan will not greatly help the nation to achieve the Kyoto Protocol target, or even the stabilization goal of the Climate Change Convention, because it does not impose any legal obligations on industry to reduce CO2 emissions, and because the U.S. economy is ex128. This bill was reintroduced in 2003. S. 366 and H.R. 2042, 108th Cong. (2003). This bill had a “birthday” provision that would require existing power plants to meet NSR and NSPS requirements 30 years from either the date of the plant began operation or 10 years after passage of the bill, whichever is later. For updated information about congressional activity, see Pew Center on Global Climate Change, 108th Congress Proposals, at http://www.pewclimate.org/what_s_ being_done/in_the_congress/108th.cfm#Clean_Coal (last visited Mar. 1, 2005). 129. See Steve Cook, Bush’s Clear Skies Plan Moving Slowly in Both Houses; Senate Markup Planned, 34 Env’t Rep. (BNA) 2009 (2003). 130. S. 485 and H.R. 999, 108th Cong. (2003). 131. See U.S. EPA, Summary of the Clear Skies Act of 2003, at 4-5 (2003), available at http://www.epa.gov/air/clearskies/CSA2003 shortsummary2_27_03_final.pdf. 132. See, e.g., Hearings Before the Clean Air Subcomm. of the Comm. on Environment and Public Works (Apr. 8, 2003) (testimony of Christine Todd Whitman, Administrator, EPA), available at http://www. epa.gov/air/clearskies/testimony.html (last visited Mar. 1, 2005). 133. See News Release, White House, Global Climate Change Policy Book (Feb. 2002), available at http://www.whitehouse.gov/news/ releases/2002/02/climatechange.html (last visited Mar. 1, 2004). 134. Id. 135. U.S. EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2000, at 2-1 (2003) (EPA 236-R-02-003), available at http://yosemite.epa.gov/oar/globalwarming.nsf/UniqueKey Lookup/SHSU5BMQAR/$File/2002-inventory.pdf (last visited Nov. 22, 2004). pected to continue to grow. In its 2002 report to the United Nations, the U.S. Department of State projected that GHG emissions would increase by 42.7% until 2020.136 It is expected that political support would increase for addressing global warming through regulation of CO2 as an air pollutant, but, as of now, the lack of political enthusiasm remains a significant obstacle to establishing a nationwide global warming strategy. After a series of energy bills had been defeated in Congress, EPA announced that it would pursue a regulatory approach until a White House-sponsored three-pollutant bill is passed.137 On March 15, 2005, it promulgated regulations, which would adopt an emission trading mechanism for utility SO2, NOx, and mercury emissions.138 Under the finalized rules, the current SO2 cap emissions would be further tightened and NOx control would become more stringent.139 However, the exclusion of CO2 may increase the longterm costs of CO2 control by postponing the issue of regulation of CO2 to a future day, and could have chilling effects on voluntary efforts by the private sector and some states to reduce CO2 and other GHG emissions. III. The 2002 New NSR Rule On December 31, 2002, EPA promulgated new NSR rule, which took effect on March 3, 2003.140 The same day, it published a proposed rule for changing a regulatory definition for the “routine maintenance, repair, replacement exemp136. U.S. Department of State, Climate Action Report 2002, at 73 (2002), available at http://yosemite.epa.gov/oar/globalwarming. Nsf/content/ResourceCenterPublicationsUSClimateActionReport. html (last visited Mar. 1, 2005). 137. Press Release, U.S. EPA, New Power Plant Rule to Achieve Largest Emission Reductions in a Decade (Dec. 4, 2003), available at http:// yosemite.epa.gov/opa/admpress.nsf/b1ab9f485b098972852562 e7004dc686/17302e197330932585256df200686549?Open Document (last visited Mar. 1, 2004). 138. U.S. EPA, Rule to Reduce Interstate Transport of Fine Particulate Matter and Ozone (Interstate Air Quality Rule); Revisions to Acid Rain Program; Revisions to the NOx SIP Call, 70 Fed. Reg. __ (Mar. 15, 2005) (codified at 40 C.F.R. §§51, 72, 73, 74, 77, 78, and 96); U.S. EPA, Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam-Generating Units, 70 Fed. Reg. __ (Mar. 15, 2005) (codified at 40 C.F.R. §§60, 63, 72, and 75). 139. Eric Pianin, EPA Aims to Change Pollution Rules: Utilities Could Buy Credits From Cleaner-Operating Power Plants, Wash. Post, Dec. 5, 2003, at A2. The final rules are based on proposed rules dated January 30, 2004. Under the proposed interstate air quality rules, a cap on SO2 emissions would be further tightened in the eastern half of the United States beyond the current level required under the Act’s acid rain program. 69 Fed. Reg. at 4617. This was possible by applying a new PM2.5 standard in view of the fact that SO2 emissions are main precursors to fine particle pollution and regional haze. And, more areas and sources would have to comply with more stringent NOx control requirements under the new eight-hour O3 standard. EPA proposed to find that NOx emissions from sources in 25 states and the District of Columbia significantly contribute to the nonattainment of the new eight-hour O3 NAAQS in downwind areas. Id. at 4570. Since NOx emissions are also precursors to the formation of fine PM, NOx reduction requirements would be imposed throughout the year in areas found to significantly contribute NOx emissions to PM2.5 NAAQS nonattainment downwind. See id. at 4633. In the final rules, EPA made relatively minor changes to the proposed rules by reducing the number of covered states subject to new fine particle-related SO2 and Nox reduction requirements based on new modeling results, by adding such new features as opt-in requirements, and by deciding to apply new NOx reduction requirements one year earlier. For a concise summary of the final rules, see U.S. EPA, Basic Information (2005), available at http://www. epa.gov/cair/basic.html. 140. 67 Fed. Reg. at 80186. 35 ELR 10330 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. tion” to NSR.141 After reviewing the comments received on proposed changes to the routine maintenance exemption, EPA issued a final rule in October 2003.142 A. A 10-Year Look-Back Period and the Actual-toProjected-Future-Actual Test Generally speaking, the December 31, 2002, rule was based on the 1996 NSR reform proposal.143 Its key provisions can be summarized as follows. The actual-to-projected-futureactual test is extended to all source categories. The new rule did not adopt the potential-to-potential test proposed by some members of the electric utility industry.144 Sources have the option to choose between the preexisting actualto-potential test and the new actual-to-future-actual test.145 Sources choosing the former are not subject to recordkeeping requirements that otherwise apply to sources using the actual-to-future-actual test.146 The actual-to-future-actual test allows source owners to project future actual emissions based on projected capacity and usage, historic trends and emissions from the unit before the modification, and other emissions factors, during any one of the 5-10 years immediately preceding the proposed change.147 Different time periods for determining the baseline emissions apply: a 10-year look-back period for all industries, except for EUSGUs that is still subject to the WEPCO rule’s five-year period. Sources, except EUSGUs, may use any consecutive 24-month period in the past 10 years.148 They may consider “the utilization rate of the equipment, fuels and raw materials used in the operation of the equipment, and applicable emission factors.”149 However, past emissions that are not allowed under “the most current legally enforceable limits” applicable to the changed unit must not 141. Id. at 80290. 142. U.S. EPA, Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR): Equipment Replacement Provision of the Routine Maintenance, Repair, and Replacement Exclusion, 68 Fed. Reg. 61248 (Oct. 27, 2003). The purpose of this new rule is to maintain and improve safety, reliability, and efficiency. Id. at 61252. It contains two key features, which all aim to simplify the applicability of the routine maintenance exception, thereby offering regulatory certainty. First, it established the cost threshold at 20% of the cost to replace the entire process unit. To qualify, replacement equipment must be “functionally equivalent,” which means it serve the same function and basic design parameters as the old one, such as heat input and fuel consumption. Id. Second, activities whose cost are below an annual maintenance allowance to be set by EPA on an industry-by-industry basis would be exempt from NSR. Id. Because of a lot of controversy about this second option, EPA did not finalize it in issuing the final rule. Id. (“We have decided, for now, not to take final action on the proposed annual maintenance, repair and replacement allowance approach.”). As a result of this final rule, many of the changes to existing sources that would otherwise trigger NSR under the CAA will be out of NSR altogether. EPA’s position on the routine maintenance exception is well reflected in its pronouncement of NSR recommendations, which had been published immediately before the 2002 new NSR rule was proposed. See U.S. EPA, New Source Review, New Source Review Recommendations 4-6 (2002). 143. U.S. EPA, Prevention of Significant Deterioration and Nonattainment New Source Review; Proposed Rules, 61 Fed. Reg. 38249 (proposed July 23, 1996) (to be codified at 40 C.F.R. §§51 and 52). 144. 67 Fed. Reg. at 80189. 145. Id. 146. Id. 147. Id. 148. Id. at 80196. 149. Id. at 80195. be included.150 For EUSGUs, the baseline emissions are the average emission rate, in tpy, of any regulated pollutant during any two years within the five-year period shortly before the proposed construction begins.151 The new rule not only retained the demand growth exclusion, which had been applied to electric utilities as part of the WEPCO rule, but also extended the exclusion to all sources. Therefore, sources “could exclude emissions resulting from increased utilization due to demand growth that the unit could have accommodated before the change” in calculating projected future emissions or establishing PALs.152 This was in stark contrast to EPA’s position in its 1998 Supplemental Notice.153 Furthermore, the source owner is not subject to rigorous reporting requirements. B. PALs PALs can only be established through a public comment process.154 A PAL is one option that sources can use to avoid NSR. It establishes a plantwide emissions cap for any regulated pollutant, which is similar to a bubble concept.155 As long as a PAL is not exceeded, a source can increase its emissions without triggering NSR, thereby affording maximum flexibility.156 If PALs are set in an environmentally friendly manner and can actually be successful in giving incentives for source owners to install state-of-the-art pollution control equipment or processes, they could make a significant contribution to achieving the dual goals of NSR reform: environmental protection and economic growth. EPA used the term “baseline actual emissions” instead of “actual emissions” that it had used in its 1996 NSR reform proposal.157 While in its 1998 notice it had said that it considered requiring facilities to consider contemporaneous emission decreases and increases, EPA stated that “there is no need [ ] to quantify contemporaneous emissions increases and decreases for individual emissions units.”158 150. 151. 152. 153. 154. 155. 156. 157. 158. Id. Id. at 80189. Id. at 80192. See 63 Fed. Reg. at 39860-61 (stating that the exclusion “ignore[d] the realities of a deregulated electric power sector,” and that its “self-implementing and self-policing” mechanism created enforcement problems). 67 Fed. Reg. at 80206. The applicant must go through all applicable procedural requirements, under the state’s minor NSR permit program or the Title V operating program. “Where the PAL is established in a major NSR permit, major NSR public participation procedures apply.” Id. at 80208. As a practical matter, PALs can be established for more than one pollutant. See id. Id. at 80206. See id. n.26. Id. at 80206-07; see also 63 Fed. Reg. at 39863 (pointing out that PALs could function as another loophole for avoiding NSR if the contemporaneity requirement as dictated by the Alabama Power court is not applied). EPA noted: We believe that the concept of contemporaneity, as articulated in Alabama Power and as set forth in the regulations governing the major NSR program, does not apply to PALs. The PAL program differs in certain important respects from our current regulations and from the 1978 regulations at issue in Alabama Power. The Alabama Power court was not presented with the PAL approach for determining whether there was an increase in emissions and did not consider whether the principles it set forth in its opinion would apply to such an approach. 67 Fed. Reg. at 80215. 5-2005 NEWS & ANALYSIS 35 ELR 10331 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. A PAL is the sum of the baseline actual emissions plus an amount equal to the applicable significant level for the covered pollutant.159 The formula for establishing a PAL is complicated. The calculation of the baseline emissions distinguishes between existing units with more than a two-year operating history and new units with less than a two-year operating history.160 The first step is to calculate the baseline actual emissions based on the average emission rates, in tpy, of existing units for the covered pollutant that existed during any consecutive 24-month period chosen by the applicant within the 10-year period immediately preceding the change.161 The second step is to add emissions equal to PTEs of existing and new units that were constructed since the 24-month period and then to subtract the emissions of any units that was “permanently shut down” or dismantled since that time period.162 Baseline emissions must reflect currently available technology requirements.163 A PAL’s facilitywide emissions cap should consider fugitive emissions to the extent it is quantifiable.164 The permitting agency must include a PAL in a federally enforceable permit.165 It must specify in the permit that a reduced PAL level would be imposed at the time any applicable federal or state requirements that it is aware of prior to issuing the permit.166 A PAL will be valid for 10 years.167 It would be renewed for another 10 years if there is a timely request for renewal and the reviewing authority approves it.168 At renewal time, the PAL must be revised in consideration of newly applicable requirements.169 Where a source’s PTE has declined below the PAL, the new PAL must be readjusted at a level that does not exceed its PTE.170 Besides these requirements, in general, the reviewing authority has great discretion to choose the new PAL. It can approve the application without any adjustments to the original PAL if the sum of the baseline actual emissions plus an amount equal to the applicable significant level for the covered pollutant is equal to or greater than 80% of the PAL level.171 If it is less than 80%, 159. 67 Fed. Reg. at 80208. The 1996 NSR reform proposal used the language “a reasonable operating margin less than the applicable significant emissions rate.” 61 Fed. Reg. at 38265. The final rule has instead chosen “the applicable significant amount” as specified in the NSR regulations or the CAA. For explanation on the part of EPA, see 67 Fed. Reg. at 80218-19. 160. 67 Fed. Reg. at 80218-19. 161. Id. EPA said that “you will have broad discretion to select any consecutive 24-month period in the last 10 years to determine the baseline actual emissions.” Id. 162. Id. at 80208-09. For EUSUGs, however, a different formula is applied. Whether nor not a shutdown is considered permanent is decided on a case-by-case basis considering all relevant facts and circumstances. The foremost consideration is the intention of the owner or operator of the unit at issue. There is a rebuttable presumption that “[s]hutdowns of more than 2 years, or that have resulted in the removal of the source from the State’s emissions inventory,” are permanent. Id. at 80209 n.30. 163. Id. at 80209. 164. Id. at 80208. 165. Id. 166. Id. at 80209. 167. Id. 168. See id. at 80209-10. At least 6 months prior to, but not earlier than 18 months from, the expiration date of the PAL, the facility owner or operator must submit a complete application. Id. at 80209. 169. Id. 170. Id. 171. Id. the authority may create a new PAL level that is more representative of the source’s actual emissions, or taking into account other relevant factors.172 Despite emissions increases exceeding the plantwide emissions cap, the PAL may be adjusted upward without triggering NSR requirements if it is demonstrated that the owner is unable to reduce emissions levels below the PAL even with BACT-equivalent technology being applied to units that have a PTE greater than the applicable significant level.173 Otherwise, all exceedances above the PAL must go through NSR.174 Readjustment decisions during the 10-year term are largely at the discretion of the reviewing authority with some exceptions.175 Any monitoring system must be “based on sound science and must conform to generally acceptable scientific procedures for data quality and manipulation.”176 Any monitoring system contained in the permit must satisfy the minimum requirements as required by the rule.177 Monitoring systems must be able to precisely quantify the emissions from each unit on a 12-month rolling basis.178 But this does not mean that the use of a continuous emissions monitoring system (CEMS) or other rigorous monitoring requirements is mandated. The source may employ emission factors to monitor actual emissions at each unit.179 Sources must use “current emissions or other current direct measurement data.”180 The reevaluation of the data must occur “at least once every 5 years” for the PAL term, using “a performance evaluation test or other scientifically valid means [ ] approved by the reviewing authority.”181 Then the final rule provided for minimum recordkeeping requirements.182 The facility owner must submit a semiannual emissions report to the authority, 172. 173. 174. 175. Id. Id. at 80210. Id. Id. The final rules explained the reasons for mandatory adjustments: (1) To correct typographical/calculation errors made in setting the PAL or to reflect a more accurate determination of emissions used to establish the PAL; (2) to reduce the PAL if the owner or operator of the major stationary source creates creditable emissions reductions for use as offsets; or (3) to revise a PAL to reflect an increase in the PAL. 176. 177. 178. 179. Id. Id. at 80211. See id. at 80212-13. See also 40 C.F.R. §60, app. B. 67 Fed. Reg. at 80211. Compliance with the PAL is determined based on a consecutive 12-month period, rolled monthly. Id. at 80214. The monitoring system must be one of the following methods or any combination thereof: (1) Mass balance for processes, work practices, or emissions sources using coatings or solvents; (2) Continuous Emissions Monitoring System (CEMS); (3) Continuous Parameter Monitoring System (CPMS) or Predictive Emissions Monitoring System (PEMS) with Continuous Emissions Rate Monitoring System (CERMS) or automated data acquisition and handling system (ADHS), as needed; or (4) emission factors. Id. at 80211. 180. Id. 181. Id. 182. Id. at 80213. Emissions data during periods of startup, shutdown, maintenance, and malfunction must be collected even though they may not be considered part of the emissions in determining compliance with the PAL. The reviewing authority has the discretion to approve different monitoring for various operating conditions for each unit. However, the facility owner is still subject to the same minimum monitoring requirements. Id. 35 ELR 10332 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. and must record “all periods of deviation, including the date and time that a deviation started and stopped and whether the deviation occurred during a period of startup, shutdown, or malfunction.”183 C. The Clean Unit Exclusion The Clean Unit exclusion applies to units that installed BACT or LAER through recent NSR.184 A unit can still qualify as a clean unit if it is demonstrated that its emissions control level is comparable to BACT or LAER.185 The new NSR rule adopted a new applicability test. The Clean Unit status gives its owner operational flexibility to make any change to the designated clean unit without triggering NSR if a change to the unit does not alter the emissions limitations or work practice requirements imposed in the permit in conjunction with BACT or LAER, or physical or operational characteristics that formed the basis of the BACT or LAER determination, or if it does not result in a significant net emissions increase in violation of the CAA.186 The comparability requirement is satisfied when the candidate pollution control technology is BACT or LAER chosen for other similar sources in the RACT/BACT/LAER Clearinghouse (RBLC), or when it is demonstrated on a case-by-case basis that it is “substantially as effective” as BACT or LAER.187 The Clean Unit status will be valid up to 10 years.188 The new applicability test was a departure from the 1996 NSR reform proposal, which stated that the new rule would base the Clean Unit status on the unit’s pre-change hourly potential emissions rate.189 In 1996, EPA proposed that there would be three routes to be used for the Clean Unit designation. The first and second would be through major or minor NSR, which took place within the last 10 years.190 As for the third, to be comparable BACT or LAER, the pollution control technology’s performance level must be: “(1) the average of the BACT or LAER for equivalent sources over a recent period of time (such as 3 years); or (2) [ ] within some percentage (such as 5 or 10) of the most recent, or average of the most recent, BACT or LAER levels for equivalent or similar sources.”191 For the units within the third category, the 1996 proposed rule provided that the Clean Unit status would last for five years.192 As a result of these changes, stringency required for qualifying technologies is greatly reduced, and thus it would be much easier for major sources to use the clean unit option. Furthermore, its longer term (10 years other than 5 years) would have potential to offset much of the beneficial effects that the Clean Unit exclusion might otherwise have. Units that have gone through major NSR automatically qualify.193 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. Id. Id. Id. Id. Id. Id. Id. Id. Id. Id. Id. at at at at at at at at at 80213-14. 80189. 80190. 80189-90. 80222. 80190. 80222. 80222-23. 80223. Other units must go through a SIP-approved permitting process.194 A unit may requalify for the Clean Unit status after the 10-year period, subject to the above-mentioned applicability test. In other words, it must go through major NSR or a SIP-approved permitting process once again and meet technology requirements for pollution control to be adopted at the unit, reflecting advances in technology and changes to the existing unit during the effective period.195 Where the unit’s location has been reclassified as a nonattainment area during the term, it must install LAER or LAER-comparable pollution control at the time of expiration to requalify.196 The required emissions reductions under the Clean Unit exclusion are not allowed to be used for netting purposes or as offsets.197 But those reductions below the emissions limitation that qualifies the unit as a clean unit can be used in a netting analysis or as offset credits if the general requirements applicable to netting or offsetting are met.198 In principle, the Clean Unit exclusion is pollutant-specific with the exception that “simultaneous Clean Unit status [may be granted] for other pollutants at those emissions units that are sufficiently controlled to independently qualify as ‘clean’ for each pollutant.”199 The Clean Facility exclusion, which was proposed in the 1996 proposed rule, was omitted.200 D. PCPs The new NSR rule extended the utility-specific PCP exclusion to all types of sources.201 Listed PCPs are automatically exempted from NSR if there is no violation of a NAAQS or any of the PSD requirements, such as PSD increments and visibility.202 PCPs that are not listed must pass the “environmentally beneficial” test on a case-by-case basis.203 The PCP exclusion offers flexibility while giving incentives for sources to install modern pollution control. Therefore, its success depends in large part on the effectiveness of the technology selected. 194. Id. 195. Id. This means that they are subjected to the control technology determination, air quality review, public participation and other requirements under state-administered permit programs, which are designed to ensure that no violation of a NAAQS or any of the PSD requirements (increments or visibility) would not occur. 196. Id. at 80226. Note that the new rule stated: However, we will not necessarily require you to meet an additional investment test to re-qualify for Clean Unit status for the same controls. That is, unless the controls used to establish Clean Unit status are no longer BACT/LAER or comparable, there will be no requirement for an investment to requalify for Clean Unit status. Id. Id. at 80227. Id. at 80228. Id. If adopted, the clean facility exclusion would have exempted from NSR requirements major stationary sources that have undergone NSR for the entire source within the last 10 years. 61 Fed. Reg. at 38258. 201. 67 Fed. Reg. at 80233. 202. Id. at 80190. There is a rebuttable strong presumption that listed PCPs and technologies, and other standards are environmentally beneficial. See id. at 80233-34. 203. Id. at 80190. For non-listed PCPs and technologies, the reviewing authority must consider the case-specific factors and employ a public notice-and-comment process. Id. at 80234. 197. 198. 199. 200. 5-2005 NEWS & ANALYSIS 35 ELR 10333 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. One of the concerns about the PCP exclusion is that PCPs may result in emissions increases of any collateral pollutant, which triggers NSR under the CAA. The 1996 proposal embodied the “primary purpose” test, which said that the primary function of a PCP is to reduce pollution.204 It also stated that the listed add-on technologies and switch to less polluting fuels may qualify as a PCP that would be presumed to be environmentally beneficial.205 Other PCPs not listed must be environmentally beneficial, and new add-on technologies must be demonstrated in practice.206 The new rule eliminated the primary purpose test and expanded the scope of listed PCPs and add-on technologies.207 It included as potential PCPs energy efficiency projects, the replacement, reconstruction, and modification of existing pollution control equipment, and work practice standards.208 Upgraded or rebuilt control equipment must achieve a more stringent level of emissions reductions than the original one in terms of input- or output-based emissions rate or must have the same level of performance, provided that it is more energy-efficient.209 It clarified that non-air pollution impacts would not be considered in the environmentally beneficial determination.210 It limited the applicability of the PCP exclusion to existing sources.211 One of the most significant changes to the 1996 NSR proposal was that the environmentally beneficial test is conducted based on the determination as to whether a PCP would have net environmental benefits.212 Net environmen204. 205. 206. 207. 208. 209. 210. Id. at 80232; see 61 Fed. Reg. at 38261. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38260. 67 Fed. Reg. at 80232; see 61 Fed. Reg. at 38261. 67 Fed. Reg. at 80233. Id. Id. at 80234. Id. EPA explained: [C]ross-media tradeoffs are difficult to compare, so it is difficult to weigh their importance in appraising the overall environmental benefit of a PCP. We solicited comments in the proposal on how to compare cross-media pollution, but we received no suggestions on how to design such a system. As a result, we have determined that it is inappropriate to consider non-air impacts when considering whether projects, activities, or work practices qualify for the PCP Exclusion. Id. at 80236. 211. Id. at 80235. EPA reasoned: Installing or implementing a project on an existing source is more likely to improve the environment than is the construction of a new source, since one can reasonably expect a PCP to reduce overall emissions, barring a considerable utilization increase. New sources, however, introduce new emissions to the air without reducing existing emissions, and consequently should be as clean as possible. Furthermore, new emissions units are among the major capital investments in industrial equipment, which are the very types of projects that Congress intended to address in the NSR provisions when such projects result in an overall emissions increase from the major stationary source. Thus, when emissions from a new source exceed the significant level, they are subject to NSR, and all emissions that are generated from the new project should be addressed in the major NSR permit evaluation for the major stationary source. Id. 212. 61 Fed. Reg. at 38262 (soliciting comment on whether applicants for the PCP exclusion should be required to consider cross-media impacts on any of the applicable CAA requirements; stating that only “de minimis” increases in the emissions of a collateral pollutant tal benefits result when the emissions reductions of the primary pollutant(s) are anticipated to outweigh any potential increases in collateral pollutants.213 The new actual-to-future-actual test is applied to the calculation of any collateral emissions increase.214 PCPs are available both in PSD and nonattainment areas.215 Only where any collateral pollutant contributing to nonattainment increases by a significant amount as a result of the PCP can the offset requirement apply.216 Another significant change was that the applicant for the PCP exclusion is not required to conduct air quality modeling if he determines no air quality-related values (AQRVs) exists in a nearby Class I area that could be impacted by expected collateral emissions increases.217 The applicant can make this determination after checking information, which is publicly available on the Internet about whether any AQRVs such as visibility have been identified for that area by the federal land manager.218 Even if an AQRV exists that have been identified by the federal land manager, the applicant also is not required to conduct a modeling analysis if there is no likely correlation between the AQRV and the pollutants emitted as a result of the PCP, including the case where collateral emissions will not increase by a significant amount.219 Then the applicant is merely required to submit such determination to the reviewing agency.220 In general, the reviewing authority has the discretion to request more specific information about adverse impacts on AQRVs in nearby Class I areas and, if it determines it as necessary, to require the applicant to conduct air quality modeling.221 These changes aim to streamline the PCP process for providing major sources with incentives to undertake environmentally beneficial projects.222 IV. Another Round of Heated Debate Over the New NSR Rules The new NSR rules provoked uproar among many stakeholders. Nine northeastern states brought suit in the U.S. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. could be exempted from the application of the environmentally beneficial test). 67 Fed. Reg. at 80232. Id. Id. 80237. Id. EPA said, however, that “a less than significant emissions increase may be subject to a State’s minor NSR requirements.” Id. Id. Id. Id. Id. Id. In this regard, EPA said: The new, broader PCP Exclusion will ensure equitable treatment of all source categories and remove any disincentive for companies that wish to install pollution control and pollution prevention projects, to the extent allowed by the CAA . . . . Despite today’s rule revisions addressing a broader array of pollution control and pollution prevention projects at a larger variety of sources, we feel that the rule’s procedures are less complex than and are clearer than the WEPCO PCP Exclusion and the July 1, 1994 policy guidance. We are satisfied that the final PCP Exclusion best achieves the goals of minimizing regulatory burden and reducing procedural delays for projects that ensure net overall environmental protection. Id. at 80233. 35 ELR 10334 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. Court of Appeals for the District of Columbia (D.C.) Circuit seeking an order staying the new proposed rule on December 31, 2002, the day it was promulgated.223 They contended that “the changes to the preexisting NSR regulations deviated from CAA requirements and also that EPA’s rulemaking process was procedurally flawed.”224 On March 6, 2003, however, the D.C. Circuit refused to grant the motion for the stay.225 A. Criticisms of the New NSR Rule: Environmental Groups’ Arguments A coalition of environmental groups also filed a petition for reconsideration with EPA. Environmental groups argued that EPA must begin a new rulemaking process for three reasons: (1) EPA had relied on “materials and recommendations that were developed after the 1996 and 1998 comment periods,” thereby precluding informed public comment; (2) changed circumstances after 1998 justified new rulemaking, such as electricity deregulation and a better understanding of the public health and environmental effects of power plant emissions; and (3) the December, 31, 2002, NSR rule violated the substantive provisions of the CAA, and EPA failed to adequately explain why the deviations in the new rule from the 1996 and 1998 proposals were warranted.226 Environmental groups challenged almost every aspect of the final rule, alleging that it creates too many loopholes and, hence, would seriously compromise the environmental protection goal of the CAA’s NSR program. First, they argued that EPA’s business cycle rationale for the 10-year look-back period is unfounded in light of the study it relied on,227 and that basing the calculation of the baseline actual emissions on a source’s highest emissions rate in any year within a 10-year period would nullify the simple mandate of the CAA, which requires NSR whenever a proposed change is expected to result in an emissions increase, and violates the contemporaneity requirement as articulated by the D.C. Circuit in the 1979 Alabama Power Co. v. Costel228 case. According to environmental groups, allowing netting transactions in addition to a 10-year baseline period and the use of a different time period for each regulated pollutant confirmed the conclusion that EPA’s methodology violates the CAA’s requirement that NSR be based on contemporaneous emissions increases and decreases as part of the proposed change.229 Also, they warned that allowing inclusion of fugitive emissions in baseline emissions calculation would inflate baseline emissions, on the one hand, and overestimate projected emissions, on the other hand, making it easy for existing sources to escape NSR.230 Environmental groups contended that the new NSR rule lacks meaningful limitations on the discretion of 223. David Mastroyannis-Zaft, EPA’s Revised New Source Review Regulations Take Effect, 30 Ecology L.Q. 805, 805 (2003). 224. Id. at 805-06. 225. New York v. EPA, No. 02-1387, 2003 U.S. App. LEXIS 19029 (D.C. Cir. Mar. 6, 2003). 226. Earthjustice, Petition for Reconsideration 1-8 (2003), available at http://www.earthjustice.org/backgrounder/documents/NSR petition.pdf (last visited Mar. 1, 2005). 227. Id. at 16. 228. 636 F.2d 323, 10 ELR 20001 (D.C. Cir. 1979). 229. Earthjustice, supra note 226, at 21-25. 230. Id. at 9. a permitting authority to approve the source’s quantification of fugitive emissions.231 This concern may be addressed by applying conservative assumptions about quantifiable fugitive emissions. But verification systems will vary in terms of stringency from state to state. Given the fact that fugitive emissions are extremely difficult to quantify, inclusion of fugitive emissions will likely create enormous enforcement problems or big loopholes, depending on the will or the financial resources of a state or local air quality management agency. A recent report, published by the Environmental Integrity Project (EIP), shows that large quantities of fugitive emissions in “upset” conditions are being released from regulated stationary sources.232 This report analyzed upset reports submitted by 57 facilities in 5 states, which include California, Louisiana, Ohio, Pennsylvania, and Texas. These facilities include oil refineries, chemical plants, natural gas-fired power plants, and one carbon black plant.233 Of these facilities, relatively accurate information about fugitive emissions was available only with regard to 37 facilities from Texas and Louisiana.234 The EIP found that these facilities, in 2003, emitted fugitive emissions in an amount that is many times greater their reported 2002 annual emissions. Of six natural gas plants, four released significant amounts of VOCs and SO2.235 Ten of the 18 refineries included in the study had annual emissions of at least one pollutant, SO2, CO, or VOCs, that were more than one-quarter of reported emissions.236 Chemical plants and the one carbon black plant emitted significant quantities of VOCs and CO during upsets. Benzene and butadiene, toxic air pollutants subject to regulation under CAA §112, were released in massive amounts from some of the chemical plants.237 VOC and CO emissions from the carbon black plant were 85 and 8 times greater the reported emissions, respectively.238 In overall, these 37 facilities released 63,411,603 pounds of air pollutants in 2003, which included 167,133 pounds of benzene and 142,754 pounds of butadiene.239 More than one-half of these emissions were CO emissions, and the other one-half were split almost equally by VOCs and SO2 emissions.240 This report demonstrates two things. First, many stationary sources may have gamed upset provisions under the CAA and facility-specific permit variances under state SIPs.241 Second, most states have not yet developed a highly developed fugitive emissions reporting system. Even in case a relatively reliable reporting system is in place, such as one in Texas, regulated sources underreported their fugitive emissions. Therefore, environmental groups’ argument 231. Id. at 8-9. 232. EIP, Gaming the System: How Off-the-Books Industrial Upset Emissions Cheat the Public Out of Clean Air (2004) available at http://www.environmentalintegrity.org/pubs/EIP_upsets_ report_FULL.pdf (last visited Mar. 1, 2005). 233. Id. at 5. 234. Id. at 5, 20-21. 235. Id. at 7-8; see also id. at 8, fig. 2. 236. Id. at 8-9; see also id. at 8, tbl. 2. 237. Id. at 9. 238. Id. 239. Id. at 5, 9; see also id. at 6-7, tbl. 1. 240. Id. at 5, fig. 1. 241. See id. at 13-17. 5-2005 NEWS & ANALYSIS 35 ELR 10335 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. raising serious concerns about inclusion of fugitive emissions in the calculations of baseline emissions and future projected actual emissions should be paid attention to by EPA and state and local air officials. Second, environmental groups contended that EPA failed to reasonably explain why it had decided to retain the demand growth exclusion and even to extend it to other industries, because it did not come up with a new rationale for justifying the significant departure from its prior position.242 Specifically, the lack of procedural safeguards “would place an unduly large burden on [state] permitting authorities,” deny the public access to emissions data, and transform NSR into post-construction review.243 Also, state-by-state variations in NSR enforcement would weaken the effectiveness of the NSR program.244 Third, they argued that EPA’s decision not to subject PALs to the contemporaneity requirement violated the CAA and were arbitrary and capricious because of the Agency’s failure to explain the reason for the change to prior proposals.245 Under the final rule, the term of a PAL is 10 years. And, despite the bubble concept underlying PALs, a source owner is allowed to raise the PAL level without undergoing NSR, provided that the existing major emissions units currently subject to a BACT or LAER requirement that was imposed within the last 10 years are not contributing to the emissions increase.246 Automatic renewal is granted to the source whose average emissions in any 2 years within the preceding 10 years are at least 80% of the PAL. Environmental groups argued that, combined with a 10-year lookback period used for setting a PAL, this would allow for netting during an extended period of time, deprive the public of a meaningful opportunity to participate in establishing PALs, and does not create any incentive to install modern pollution control.247 They also alleged that the final rule permits the use of alternate monitoring without providing any meaningful check on the discretion of a state permitting authority and includes emissions factors with inherent inaccuracies as one of the four monitoring approaches, despite the fact that “a PAL necessitates superior monitoring” to be effective.248 Fourth, environmental groups criticized EPA for choosing the net emissions benefits test to be used for determining a qualifying PCP in violation of the statutory requirement that NSR be triggered whenever a proposed physical or operational change would “result[ ] in the emission of any air pollutant not previously emitted.”249 More specifically, they argued that EPA had not provided an opportunity for public comment on the inclusion of the replacement or reconstruction of an emissions unit as a PCP, or offered any new justification for the departure from its prior position that, however beneficial, “major capital investments in industrial equipment are the very types of projects that Congress intended to address in the new source modification provisions.”250 242. 243. 244. 245. 246. 247. 248. 249. 250. Earthjustice, supra note 226, at 27-31. Id. at 31-42. Id. at 33-34. Id. at 46-55. Id. at 55-58. Id. at 58-67. Id. at 70-85. Id. at 112-21. Id. at 121-35. Finally, environmental groups contended that, unlike the prior proposals, the final rule sets the effective term of the Clean Unit exemption at 10 years and allows the exemption to be renewed for another 10 years without the unit being subject to new technology requirements.251 They basically argued that EPA’s chosen method for the Clean Unit designation “flatly contravenes the statutory requirement[s] [ ] that a modification be determined based on changes that increase emissions,”252 and that the chosen technology should be BACT or LAER, the most stringent one of its kind.253 B. Concerns About the Revised Routine Maintenance Exception Rule Many stakeholders expressed concerns about EPA’s proposed rule for the routine maintenance exception, because it would allow sources to avoid NSR indefinitely by making changes to their facilities in an incremental manner, thereby resulting in increased pollution. They argued that EPA’s categorical approach failed to consider “the large diversity of industries and situations,” because even sources with the same industry have different maintenance needs “based on such factors as age, prior maintenance history, intensity of use, raw materials used in production processes, climate, and local labor costs.”254 They also alleged that the cost threshold and the minimum annual budget allowance to be established by EPA violated the statutory requirement that NSR be conducted whenever emissions increases would result from a proposed change.255 According to them, states, especially downwind states, would face more difficulty ensuring compliance with NAAQS, since “the proposed per se exemptions deprive states of one of the strongest tools they have in controlling emissions: federally uniform restrictions on modifications to existing sources.”256 This is because cost-based exclusions may “allow sources to operate indefinitely without implementing state-of-the-art control technology.”257 Furthermore, the cost-based approach would not eliminate uncertainty altogether, in that even an activity which falls within the annual budget but is in essence not a routine maintenance is considered a major modification.258 Establishing annual maintenance allowances “invites manipulation of expenditure.” Sources would likely engage in creative, but bad, accounting practices in an attempt to spread costs in a multiyear period.259 This in turn will lead to conflict and litigation over the cost calculation, and thereby create another administrative complexity and resulting costs and time, which might otherwise be spent on other more important legal issues.260 In June 2002, EPA promised to reconsider the rules. On October 27, 2003, however, it promulgated the final regula251. 252. 253. 254. 255. 256. 257. 258. 259. 260. Id. at 94-96. Id. at 94. Id. at 96-104. Victor B. Flatt et al., Let the People Speak: Notice-and-Comment Rulemaking (Lessons From the Controversial New Source Review Proposal of the Clean Air Act), 34 ELR 10115, 10119, 10122 (Feb. 2004). See id. at 10119-20, 10124, 10126-27. See id. at 10129-30. Id. at 10123. See id. at 10119. See id. at 10122. See id. at 10125. 35 ELR 10336 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. tion for the routine maintenance exception without much of a change.261 The only exception was that EPA decided not to finalize the annual budget allowance proposal.262 EPA also decided to implement the NSR rule as finalized on December 31, 2002. C. The U.S. Government Accountability Office (GAO) Studies on Stakeholders’ Views on the New NSR Rules In response to objections to the new rules, Congress commissioned the GAO to conduct surveys of key stakeholders’ views on the revisions. In a October 2003 report, the GAO found that federal and state enforcement officials and other stakeholders were concerned that some of the revisions, especially the proposed changes to the routine maintenance rule, would negatively impact ongoing federal and state enforcement actions and settlement negotiations with industry.263 It also found that certain provisions in the December 2002 final rule would limit the public’s access to emission data, because “[u]nder the rule, fewer facility changes may trigger NSR and thus the need for permits and related requirements to notify the public about changes and to solicit comments—unless state and local air quality agencies have their own permit and public outreach rules.”264 Furthermore, the GAO pointed out that the lack of clarity about the definition of “reasonable possibility” and its “self-policing” nature in NSR determinations with regard to the demand growth exclusion “could potentially hinder enforcement and monitoring activities.”265 The October 2003 GAO report prompted some congressional members to ask EPA’s Inspector General to investigate the Administration’s claims that the new regulations would not affect the ongoing NSR enforcement actions.266 A study conducted by a Rockefeller Family Fund project and Council of State Governments found that changes to the preexisting NSR rules could lead to an almost combined 1.4 million tons more of persistent air pollutants in 12 northeastern states.267 In another report published in February 2004, the GAO gave a survey result, which showed that a majority of the state officials expected the new rules to increase air emissions.268 According to the report, some state officials were concerned that the revisions would rather complicate their jobs and thereby increase their workloads, since weakened NSR enforcement would give fewer options for states to comply with NAAQS.269 D. The Stay of the Routine Maintenance Exception Rule and the Uncertain Future for NSR Reform On December 24, 2003, the D.C. Circuit ordered the stay of the routine maintenance rule.270 However, the court once again denied the motions for the stay of the December 2002 NSR rule on the grounds that “[p]etitioners [had] not demonstrated sufficient changed circumstances to justify revisiting the [May 6] order.”271 On July 1, 2004, EPA formally issued an administrative stay,272 and announced that it planned to reconsider three issues concerning the routine maintenance rule: (1) whether the rule as originally finalized is allowable under the CAA; (2) the legal basis for selecting the 20% cost threshold; and (3) a simplified procedure for incorporating a FIP into SIPs to accommodate changes to the NSR rules.273 Many observers expected the result of the presidential election to decide the fate of the NSR rules, and several observers have predicted that the U.S. Supreme Court will ultimately hear the NSR debate given splits in the various circuits.274 Because President Bush was reelected last November, it is expected that EPA will continue to push its NSR initiative, and that the Court will ultimately resolve the ongoing controversy surrounding the new NSR rule in coming years. E. The Legality of the New NSR Rule The new NSR rule will not have much national impact until states with an approved NSR program complete the SIP revisions and implement their revised NSR regulations upon EPA’s approval. Currently, the new NSR rule has been implemented in 11 states that do not have an approved NSR program and other some states with a delegated NSR program.275 Hence, it is somewhat too early to tell how the new NSR rule will change the behavior of regulated industry in any significant manner. When reading its brief submitted recently to the D.C. Circuit, EPA’s legal position hinged primarily on two grounds. First, relevant CAA provisions are ambiguous such that EPA is entitled to Chevron deference for the new definition of the statutory term “change.”276 Second, the environmental impacts of the new rule would be positive or zero, since it would give regulated sources the incentive to engage in en270. New York v. EPA, 2003 U.S. App. LEXIS 26520 (D.C. Cir. Dec. 24, 2003). 271. Id. 261. 68 Fed. Reg. at 61248. 262. Id. at 61252 (“We have decided, for now, not to take final action on the proposed annual maintenance, repair and replacement allowance approach.”). 263. U.S. GAO, New Source Review Revisions Could Affect Utility Enforcement Cases and Public Access to Emissions Data 15-21 (2003) (GAO-04-58), available at http://www.gao.gov/new.items/d0458. pdf (last visited Mar. 1, 2005). 264. Id. at 21-25. 265. Id. at 25-26. 266. 2 Studies Contradict EPA on New Rules; Changes to Boost Pollution, They Say, Associated Press, Oct. 23, 2003, at A2. 267. See id. 268. U.S. GAO, Key Stakeholders’ Views on Revisions to the New Source Review Program 13-23 (2004) (GAO-04-274), available at http://www.gao.gov/new.items/d04274.pdf (last visited Mar. 1, 2005). 269. Id. at 23-24. 272. U.S. EPA, Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR): Equipment Replacement Provision of the Routine Maintenance, Repair, and Replacement Exclusion; Stay, 69 Fed. Reg. 40274 (July 1, 2004) (codified at 40 C.F.R. §§51 and 52). 273. Id. at 40278. 274. Darren Samuelsohn, Clean Air: Court Schedule Indicates NSR Rules’ Fate Rests on Next Presidential Administration, Greenwire, Feb. 26, 2004, Air, Water & Climate, Vol. 10, No. 9, available at LEXIS, Nexis Library, Greenwire File. 275. Mastroyannis-Zaft, supra note 223, at 809. 276. See Brief for the United States and EPA at 69-72, New York v. EPA, No 02-1387 (D.C. Cir. Dec. 31, 2002), available at http://www.epa. gov/nsr/documents/respondentbrief.pdf (last visited Mar. 1, 2005). EPA relied heavily on the Chevron and Alabama Power cases. With respect to PALs, EPA argued that the Alabama Power case gives it the authority to set a plantwide emissions cap. According to EPA, deciding on the length of the contemporaneous period is also a “matter [ ] left to its discretion.” See id. at 93-95. 5-2005 NEWS & ANALYSIS 35 ELR 10337 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. vironmentally beneficial projects without the fear of being subject to NSR.277 Adverse environmental impacts on existing air quality that could otherwise result from rule changes would be reduced to a minimum by implementation of a number of safeguards provided under the new rule.278 Throughout the brief, EPA stressed the fact that it has the duty to balance the CAA’s clean air goal and economic growth needs in implementing the Act’s NSR program.279 Put differently, the reason for revising the prior rule was motivated by the Agency’s belief that it deprived existing sources of operational flexibility to meet increased market demand or failed to give them incentives to invest in pollution control technologies or energy efficiency projects, which would otherwise have produced air quality improvements. EPA made it clear that the primary goal of the new NSR rule is not to unduly inhibit economic growth, by stating that “the purpose of the NSR provisions is not to compel emissions reductions from existing sources, but to limit emissions increases resulting from physical or operational changes.”280 In other words, in EPA’s view, the new NSR rule aims to return the previous state of affairs tilting toward environmental considerations to the right balance between air quality protection and economic development needs. I would like to respond to EPA’s position by making two points. First, even if it is conceded that EPA has the authority to interpret the NSR provisions in order to balance the NSR’s two equally important goals, the overriding goal of the CAA is to improve air quality on a continual basis for the benefit of the general public. The NSR program has functioned as one of the valuable tools for accomplishing that noble goal. Throughout the Act’s history, Congress has continued to increase the Act’s stringency by adding new pro277. See id. at 65-66, 76-82. For example, in justifying its argument that the Clean Unit exclusion would produce air quality benefits, EPA cited the result of its review of a flexible permit pilot program, which shows that five of the six participating facilities reduced their emissions beyond emissions limits contained in their permits. Id. at 109 and n.61. 278. EPA argued that only a small percentage of sources, 3% of total emissions, might be able to take advantage of a higher baseline using the new methodology used for calculating baseline emissions. See id. at 78-79. EPA reiterated its statements in the preamble of the 2002 NSR rule. First, the demand growth exclusion is implementable, and state minor NSR and Title V operating permit programs will be successful in incorporating into permits monitoring requirements adequate to prevent its abuse. See id. at 95-101. Second, in order to use the Clean Unit exclusion, sources that have not gone through NSR must comply with all the requirements of the NSR program. Furthermore, renewal is not an automatic one, and to requalify, an existing clean unit must meet all the criteria as if it applied for the Clean Unit exclusion for the first time. The public has a right to participate in the process for designating a clean unit under the state minor NSR or the Title V operating permit program, except for units that have recently gone through NSR. At renewal time, an existing unit can requalify only if it complies with the requirements applicable in the area reclassified as nonattainment or more severe nonattainment. See id. at 112-16. Third, to qualify for the PCP exclusion, a source may install one of the listed pollution control technologies presumed to be environmentally beneficial, and in its application must provide detailed information showing the environmental benefits of a control technology it plans to use. If the proposed project does not belong to one of the presumptively beneficial PCPs, it must be approved by the reviewing authority in a state minor NSR or a Title V operating permitting process that provides for public notice-and-comment before the applying source begins construction. A qualifying source has an ongoing legal duty to operate its PCP in a manner that continues to produce net environmental benefits, while minimizing emissions of collateral pollutants. See id. at 122-26. 279. Id. at 28, 75, 76, 95, 112. 280. Id. at 73-74, 75, 94-95 (emphasis in original). gram requirements or by tightening preexisting standards and requirements that it deemed necessary to move the nation toward meeting clean air goals. There is no doubt that congressional intent in enacting the NSR program in 1977, was to bring more and more sources into its coverage over time. Congress did not anticipate that NSR would become an end run game played by grandfathered sources, in particular those in the energy industry. As a result, contribution to air quality improvements from industry has come mainly from new sources or existing sources’ compliance with requirements under other programs under the CAA. Moreover, EPA’s new definition of the term “change” is against its common sense understanding. The primary purpose of NSR should be to improve existing air quality. Any imaginative interpretation of the term “change” cannot go too far so as to violate this simple mandate. It is therefore clear that the enactment of the NSR program was the nation’s choice to emphasize clean air goals rather than economic growth. To paraphrase, the purpose of the NSR program is to compel emission reductions from existing sources whenever they propose a change that will increase their actual emissions in a way that adversely impacts existing air quality. Thus, the first prong of EPA’s legal position is untenable. Second, EPA’s argument that the new NSR rule would lead to air quality improvements because, in its view, more existing sources are expected to have incentives to invest in clean energy technologies cannot withstand analysis. Experience with implementation of a variety of environmental statutes tells us that industry responds to the economics rather than act on its environmental awareness. More often than not, it is clear market signals, usually in the form of unambiguous statutory or regulatory mandates, that have succeeded to motivate regulated sources to become cleaner or more energy efficient. Under the new rule, existing sources can avoid NSR more easily than in the past. It is hard to believe that they will have incentives to install state-of-the-art pollution control technologies or inherently cleaner energy technologies that they had little incentive to use under the previous rule. The opposite will be more true. Given this, PALs, the Clean Unit exclusion, and PCPs will likely be underutilized. Otherwise, their frequent use will lead to more and more existing sources escaping NSR for an extended period of time. If it is assumed that their use will be subject to adequate public scrutiny, as EPA argues, industry will find it cumbersome and hence not worthy of pursuit to opt in to such mechanisms. Furthermore, EPA seems to neglect the fact that new sources, which have been the driving force for technological innovation, will experience more of an economic disadvantage under the new NSR rule. The notion of a level playing field or environmental comparability hardly found its way into the new rule. Conclusion To summarize, the new NSR rule is another example of EPA’s failure to reconcile two conflicting goals: environmental protection and economic development. While allegedly providing increased simplicity and flexibility to industry, the rules aggravate the problems with the preexisting rules such as a bias against new sources and, most importantly, compromise the clean air goals of the NSR program. It appears that the issuance of the new NSR rules is outside the scope of EPA’s delegated authority under the CAA. 35 ELR 10338 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. The Act contains three simple but clear requirements in its NSR program: (1) a proposed physical or operational change that would increase emissions or result in collateral emissions must go through NSR preconstruction review; (2) emissions increases and decreases to be considered in NSR applicability determinations must be contemporaneous; and (3) once NSR is triggered, the most stringent technology requirement, BACT or LAER, must be applied to the source. In issuing the new NSR rules, EPA seemed to be so preoccupied with one of the two NSR goals, i.e., easing the regulatory burdens on industry, that it forgot the clear mandates of the CAA. Although it has becomes less important in controlling emissions of large coal-fired power plants, which has incrementally been brought under the multi-pollutant trading approach, NSR is still a valuable tool that can be used as a backstop to impose more stringent requirements on grandfathered plants. Moreover, NSR enforcement represents one of the most significant options available for states to utilize in compelling other source categories, such as refineries, smelters, wood products industries, to update existing pollution control. EPA should reconsider the December 2002 NSR rule. NSR reform should not result in a rollback of preexisting rules. Rather, it should be aimed at improvements in the nation’s air quality and laying the foundation for creating the clean energy path. In pursuing these goals, it is advisable for the nation to listen to the following recommendations of the National Academy of Public Administration in its EPA-commissioned report, which, among others, include: (1) repealing grandfathering; (2) retaining NSR for new sources; (3) the continuation of vigorous NSR enforcement; (4) the replacement of NSR for existing source with a compulsory three-tier system (cap-and-trade for industrial sources with reliable monitoring records, cap-and-net, or unit-cap for other sources); and (5) requiring all new and existing sources to regularly report their emissions data to regulatory agencies and the public in order to enhance accountability.281 To add to these recommendations, netting also should not be allowed. In the alternative, reporting requirements should be imposed on those sources seeking credits for contemporaneous net emissions decreases at their facility. Another alternative approach to NSR is to adopt output-based emissions standards and to put more of an emphasis on energy efficiency and conservation goals in NSR permitting processes, in order to facilitate sustainable energy development.282 EPA has justified changing the preexisting NSR rule on the basis of the findings of its 90-day NSR report to the president, which said that the old NSR rule impeded the energy development and environmentally beneficial projects of existing power plants and refineries, while its adverse impacts 281. See NAPA NSR Report, supra note 64, at 133-37. 282. See Foote, supra note 17. In this article, the author, who is currently EPA’s Assistant General Counsel in the Air and Radiation Division, argued that the NSR program can be implemented to promote clean energy technologies and energy conservation using a hierarchical approach, under which permitting agencies apply: (1) conservation; (2) renewable energy; (3) energy efficiency; and (4) add-on control technologies in descending order, with some help from states’ integrated resource planning (IRP) and demand-side management (DSM) policy. See id. at 10648, 10657-62. Notably, he argued that CO2 emissions, which EPA has concluded is not an air pollutant, should be considered in NSR permitting decisions. See id. at 10662-69. on new sources were minimal. Even if it is assumed that the findings were correct, EPA seems to overlook the fact that its new NSR rule would have the effect of skewing the preexisting unlevel playing field toward old, grandfathered sources more than in the past, however insignificant it might be. In other words, EPA stands on the wrong foundation. Because the status quo has been changed in a way that would aggravate intersource and regional disparities in emission reduction requirements, the new NSR rule may not deliver its goal of economic efficiency unless it provides for additional mechanisms that would zero out all the advantages it may give to existing sources, in order to maintain the preexisting status quo. The fundamental solution for resolving the inequities in NSR implementation should be to repeal grandfathering and to adopt uniform output-based emission standards that are equally applicable to new and existing sources. When implementing environmental and energy law, sustainable development takes the form of environmental comparability. Environmental comparability generally refers to a general policy approach that is designed to fully internalize the negative externalities of energy production and consumption.283 Its central strategy is to incorporate sustainability concerns into the current law under which all sources can compete on an equal footing with one another solely on the basis of environmental performance, regardless of their age.284 Available policy tools to this end include, among other things, the phaseout of grandfathering, the adoption of output-based emissions standards, and providing subsidies for accelerating the commercial deployment of cleaner, more energy-efficient sources such as renewable energy.285 They essentially symbolize sticking to the principle of sustainable development in the energy law field. Environmental regulation discriminates against new and cleaner energy sources. In most instances, it imposes on new sources more stringent emission reduction requirements on a percentage, input basis, even though these sources oftentimes are much cleaner than old, grandfathered sources because of the inherent nature of fuels or combustion technologies actually used.286 “In 1996, coal plants had average 283. See generally David R. Wooley, Environmental Comparability, 12 Nat. Resources & Env’t 276 (1998). 284. Id. at 279. 285. For a discussion of various policy tools, see Bruce Biewald et al., supra note 76, at 46-55. 286. Technology-based standards take the form of “emission rate” standards, which are typically expressed in terms of the amount of emissions of a regulated pollutant based on heat input, such as pounds per million Btu (lbs./mm Btu). More demanding emission rates are required of clean fuel-burning sources under the name of BACT. Establishing emission reduction requirements on a percentage, input basis penalizes new clean fuel-burning sources in two respects. First, clean fuel-burning sources usually employ highly energy-efficient fuel combustion technologies. For example, the maximum thermal efficiency of state-of-the-art combined-cycle, natural gas-fired plants is nearly 60%, whereas the most energy-efficient coal-burning technology currently in dominant use has a thermal efficiency of 33% at best. See Steven Ferrey, The New Rules: A Guide to Electric Market Regulation 4 (2000). Thus, input-based emission standards disregard energy efficiency aspects, producing the practical effect of rewarding old, energy-inefficient energy sources, which are primarily grandfathered coal-fired power plants. Second, clean fuel-burning sources embodying energy-efficient technologies are subject to percentage reduction requirements. Though being less polluting, more energy efficient, these sources must install expensive modern post-combustion control equipment whose efficiency gains are questionable in terms of effectiveness in pollution control compared to incurred investment monies. See Swift, supra 5-2005 NEWS & ANALYSIS 35 ELR 10339 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. emission rates that were [thirty] or [fifty] times higher than new gas units with low-NOx combustion and SCR controls.”287 Midwest electric utilities’ average NOx emissions may be 10 times higher than those in the Northeast region even on a per Mwh basis.288 Although implementation of both the CAA’s NOx acid rain program289 and EPA’s NOx 1998 SIP call290 have had the effect of addressing these disparities in emissions reduction requirements to some extent, they fall short of achieving the environmental comparability goal. The SIP call’s emissions limit of 0.15 pounds per million British thermal units291 is “still roughly [ten] to [twenty] times less stringent than typical NOx emission rates required of new natural gas combined-cycle units in nonattainment areas.”292 Moreover, both CAA’s SO2 allowance trading and the EPA’s NOx Budget Trading (NBP) program293 designed to implement its 1998 NOx SIP call each allocate SO2 and NOx allowances based on historical operating data such as fuel input.294 This allocation method penalizes new and cleaner 287. 288. 289. 290. 291. 292. 293. 294. note 74, at 1539 (observing that new gas-fired plants subject to rigorous NSR control requirements would have to incur the cost of $2,500 to $10,000 per ton of NOx removed, while grandfathered, coalfired plants could reduce NOx emissions “at prices as low as $300 per ton”). Tim Woolf & Bruce Biewald, Electricity Market Distortions Associated With Inconsistent Air Quality Regulations, Elec. J., Apr. 2000, at 44. Ellen Roy, The Uniform Generation Performance Standard: Connecting Electric Industry Restructuring and Air Quality Improvement, Elec. J., Jan./Feb. 1998, at 59. 42 U.S.C. §7651f. Section 407 subjects affected coal-fired units with SO2 reduction requirements under other provisions of the acid rain program to the emissions rate standards for NOx. These units must achieve new emission rates set by the EPA Administrator, which were to be implemented at the same pace as the SO2 emission limitations under Subchapter IV. See id. Relying on its authority under CAA §110(k) to force states to amend their SIPs upon a finding of “significant contribution” to another state’s NAAQS attainment or maintenance, called a SIP call, EPA in 1998 made a NOx SIP call against 22 eastern states and the District of Columbia. See id. §7410(k)(5); U.S. EPA, Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone; Final Rule, 63 Fed. Reg. 57356 (Oct. 27, 1998) (codified at 40 C.F.R. §§51, 72, 75, and 96). In its 1998 NOx SIP call, EPA made a finding that “highly cost-effective” controls on large electric-generating units included both combustion and post-combustion control techniques that could be used to achieve an emission rate of 0.15 lbs./mm Btu based on the unit’s 1995-1996 average utilization rate. Id. at 57378. In fact, the chosen emission rate standard is the NSPS for NOx emissions applicable to coal-fired units that has existed since 1979. See 40 C.F.R. §60.44a. Woolf & Biewald, supra note 287, at 47. The NOx SIP call gave the states the flexibility to choose which sources to target and mix of control measures needed to achieve the required NOx emissions reductions. Its most significant feature, however, was its requirement that the states allocate a budget for fossil fuel-fired electric steam-generating units, with the option to participate in an EPA-administered regional cap-and-trade program. EPA’s NBP was launched on May 1, 2003, in eight northeastern states and the District of Columbia acting under the Ozone Transport Commission (OTC), thereby replacing the OTC’s NOx trading program with respect to these states. Beginning on May 31, 2004, 11 other states subject to the NOx SIP call joined the program. See U.S. EPA, NOx Budget Trading Program: 2003 Progress and Compliance Report (2004) (EPA 430-R-04-010), available at http://www.epa.gov/airmarkets/cmprpt/nox03/noxreport03.pdf (last visited Mar. 1, 2005). Under CAA Subchapter IV, SO2 allowances were allocated using historic fuel input and other operating data from 1985 through 1987. See 42 U.S.C. §§7651c(a)(2). On the other hand, new facilities be- sources in two ways. First, grandfathering of allowances constitutes “scarcity rents” for large existing sources, because new sources have to purchase allowances in the trading market to begin operation. Second, input-based allowance allocation is another form of discrimination against new and cleaner, more energy-efficient sources, because these sources need more allowances under an input-based allocation formula than under an output-based one. Nine northeastern states and the District of Columbia under the Ozone Transport Commission (OTC) NOx cap-andtrade program295 or other states opting-in to EPA’s NBP have not set aside allowances for new sources, or even if they did, the number of set-aside allowances were “not large enough to cover all the new power plants seeking to enter the market.”296 These inequities can be addressed adequately by establishing a cap-and-trade program, which incorporate the following three features: (1) the adoption of an output-based allowance allocation method; (2) periodical updating of allowance allocations; and (3) the application of the same emission rate to new and existing sources.297 The way in which the method for making allowance allocations on an output basis, called the Uniform Generation Performance Standard, can be implemented as follows. First, the relevant authority calculates the amount of total allowable emissions. Second, it establishes the same emission rate, which is applicable to all new and existing sources on a per kilowatt hour or Mwh basis, “by dividing the cap by the expected generation for that region over a set period of time.”298 Additionally, an output-based cap-and-trade program can be designed to allow renewable energy sources to directly participate in trading. In this way, more efficient sources, regardless of their age and the chosen energy technology, can gain a competitive advantage. This in turn provides strong incentives for generation sources to become cleaner, more energy-efficient. ginning operation after December 31, 1995, must purchase allowances in EPA-administered auctions or from existing sources who have allowances to sell in the secondary market. Id. §7651d(g)(3)(4). Under EPA’s NBP, a state’s baseline inventory for large electric-generating units is based on “the higher of the 1995 or 1996 ozone season heat input values.” 63 Fed. Reg. at 57407. Covered large nonelectric-generating units, which are defined as nonutility industrial boilers and turbines units with a capacity greater than 250 mm Btu per hour or with NOx emissions greater than one ton per day, are required to achieve a 60% reduction of their preexisting NOx emissions. Id. at 57378, 57415. But note that participating states have the discretion to apportion allowances between covered units. 295. Under CAA §§176A and 184, northeastern states comprising the OTC, except Virginia, agreed to implement a regional NOx capand-trade program in 1994 and finalized a model rule for NOx allowance trading in 1996, which would be implemented by participating states beginning in 1999. See 42 U.S.C. §§7506a, 7511c; Memorandum of Understanding Among the States of the Ozone Transport Commission on the Development of a Regional Strategy Concerning the Control of Stationary Source Nitrogen Oxide Emissions (Sept. 27, 1994); Laurel J. Carlson, Northeast States for Coordinated Air Use Management/Mid-Atlantic Regional Air Management Ass’n NOx Budget Model Rule (1996), available at http://www.epa.gov/airmarkets/otc/otcrule.zip (last visited Mar. 1, 2005); OTC, NOx Budget Program: 1999-2002 Progress Report 5 (2003) (EPA 430-R-03-900), available at http://www.epa.gov/airmarkets/otc/otcreport.pdf (last visited Mar. 1, 2005). 296. Woolf & Biewald, supra note 287, at 45-46. 297. Id. at 47. 298. Roy, supra note 288, at 57. 35 ELR 10340 ENVIRONMENTAL LAW REPORTER 5-2005 Copyright © 2005 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. It is important to note, however, that implementation of output-based allowance allocation or NSPS proves difficult in practice. At one time, EPA pursued output-based NSPS for NOx control applied to electric utility boilers built, modified, or reconstructed after July 9, 1997, but it withdrew the proposal after the D.C. Circuit’s vacatur.299 Massachusetts, one of the OTC states that had agreed to implement the OTC NOx cap-and-trade program in 1994, adopted an outputbased allocation formula in November 1997. But it still set different emission rate standards for four different categories of affected sources, and new sources were allocated allowances based on their permit limits.300 Worse, new 299. U.S. EPA, Revision of Standards of Performance for Nitrogen Oxide Emissions From New Fossil Fuel-Fired Steam-Generating Units; Revisions to Reporting Requirements for Standards of Performance for New Fossil Fuel-Fired Steam-Generating Units, 63 Fed. Reg. 49442 (Sept. 16, 1998); Lignite Energy Council v. EPA, No. 98-1525, 1999 U.S. App. LEXIS 26263, *2, 30 ELR 20279 (D.C. Cir. 1999). 300. Roy, supra note 288, at 62. sources had to surrender up to 50% of their allowances if they left over unused allowances.301 Climate change policy may be the most effective way of promoting clean energy development, given that there are currently no commercially available carbon capture and sequestration technologies. Thus, it has the effect of restricting fossil fuel usage. Because old, dirtier sources usually use more carbon-intensive fuels, it rewards cleaner, more efficient energy sources, without relying on output-based standards. Put differently, well-designed climate change policy has the potential to send price signals to energy producers and consumers that adequately reflect environmental externalities of energy-related products and activities. Most of these and other reform proposals require action on the part of Congress. It will take time to gain political currency. The United States badly needs the leadership of both chambers of Congress to clear the way for achieving the goal of sustainable development. 301. Id.
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