In a development that will increase liquidity and transparency in the RIN market, two major providers are making RIN future contracts available to be traded. Both CME Group and the IntercontinentalExchange (ICE) will have RIN products available to be traded by mid May. CME Group and ICE will enable over the counter trading (OTC) of D4 RINs, D5 RINs, and D6 RINs. D6 RINs are the most common RINs, typically fulfilled by corn ethanol production. D5 RINs are the most flexible premium RINs, representing advanced biofuel that may consist of biogas, advanced drop in fuels, or other fuel types that meet the 50% GHG reduction standard. D4 RINs are biomass-based diesel RINs, fulfilled primarily by biodiesel and renewable diesel fuels. The development of a futures market could provide a substantial boost to the development of advanced biofuel facilities by enabling their financing. Many financial market participants have in the past regarded RIN revenue as too speculative to include in a plant's pro forma but are likely to be reassured by the presence of RINs in the OTC market. We speculated in our recent white paper that the EPA's rulemaking on Quality Assurance Programs (QAPs) could facilitate the establishment of a RIN futures market. See http://www.stoel.com/showarticle.aspx?Show=10180
Last Thursday, the Environmental Protection Agency released its proposed rule for the 2013 Renewable Fuel Standard (“RFS2”) volume obligations. Every year the EPA is required to determine and publish the annual volume requirements for each class of renewable fuel that obligated parties will have to comply with for the upcoming year under the RFS2 program. The volumes required under the proposed rule for 2013 are as follows (generally in ethanol equivalent volume): 14 million gallons of cellulosic biofuel, 1.28 billion gallons of biomass-based diesel (actual volume), 2.75 billion gallons of advanced biofuel, and 16.55 billion gallons of renewable fuel. As always the categories are nested and the advanced biofuel volume includes the volumes set for the cellulosic and biomass-based diesel categories. The renewable fuel category accounts for all renewable fuel including traditional corn starch ethanol.
Three of the four categories are consistent with the volumes set forth by statute. The volume for cellulosic biofuel, however, is set by this rule because it must be the lesser of the statutory volume and EPA’s projection of industry production for any given year. As with each ruling prior to this one under the program, EPA set a dramatically lower cellulosic biofuel volume than the statutory volume based on its assessment of the industry’s status. Rather than 1 billion gallons as would otherwise be required by statute, EPA is requiring obligated parties to account for 14 million gallons of cellulosic fuel. Despite the dramatic reduction from the statutory requirement, this is significant because it is an increase over the 2012 standard of 10.45 million gallons that has been the subject of considerable recent controversy.
Just a few days earlier, the D.C. Circuit Court ruled that EPA impermissibly set the 2012 standard with an eye toward promoting industry growth when, by statute, the agency should have simply made an accurate projection of what the industry could produce in the given year. While petitioners in that case asserted that the EPA volume for cellulosic ethanol should be equivalent to that which the Energy Information Administration (“EIA”) projects, the court instead determined that EPA’s projected volume should be simply based on the EIA projections.
In developing the 2013 requirement for cellulosic ethanol, the EPA relied on EIA estimates but also its analysis of more than 100 biofuel production facilities. The proposed rule includes a detailed analysis of all of the plants currently registered with EPA and able to produce cellulosic RINs. Of those 6 plants, it assumes two (INEOS Bio and KiOR) will be generating cellulosic biofuel RINs in 2013 in an amount equal to 14 million gallons of ethanol. The EIA estimate for 2013 is 13.1 million gallons of ethanol – which is also nearly exclusively based on production from those two plants.
Although the EPA also has authority to reduce the advanced biofuel category based on its decision to reduce the cellulosic biofuel category, the agency decided to keep the broader category at the statutory volume based on its projections of other domestic advanced renewable fuels as well as the ability to import sugarcane ethanol from Brazil. Comments on the proposed rule must be received no later than 45 days after the rule is published in the Federal Register.
The U.S Environmental Protection Agency (EPA) today announced it has denied requests from the Governors of Arkansas and North Carolina to waive Renewable Fuel Standard (RFS) volume requirements, based on the effects of the drought on feedstocks used to produce renewable fuel in 2012-2013. The petitions, filed in August, triggered a review process to determine if the implementation of the RFS requirements would severely harm the economy of those states.
After considering the nearly 30,000 comments received during the public comment period and empirical evidence, such as the prices of RINs and market commodities, the agency’s economic analyses did not produce sufficient evidence of severe economic harm that would warrant the granting of the waiver request. The EPA analyzed 500 scenarios and found no impact from the RFS program on corn, food or fuel prices in 89% of those scenarios. In the 11% of scenarios where RFS impacts were shown, the impact was less than a 1% change in corn prices. EPA acknowledged that “this year’s drought has created significant hardships in many sectors of the economy, particularly for livestock producers. However, the agency’s extensive analysis makes clear that Congressional requirements for a waiver have not been met and that waiving the RFS would have little, if any, impact on ethanol demand or energy prices over the time period analyzed.”
In its 83-page Notice of Decision (PDF file), EPA interpreted the waiver provision in a manner consistent with its prior response to the first RFS waiver request from Texas in 2008, which was also denied. In both cases, Section 211(o)(7)(A) of the Clean Air Act was interpreted as providing narrow authority. In order to grant a waiver, EPA would have had to determine with a high degree of confidence that implementation of the mandate would not only contribute to economic harm, but would itself severely harm the economy of the State or region requesting the waiver.
While the issue is politically charged, EPA’s decision making process in waiver requests focuses on the legal standard established by the Clean Air Act. The waiver is essentially a pressure relief valve for the program but is only available when the very high standard of severe harm is met. EPA utilized an updated version of an Iowa State University model to analyze 500 scenarios. In 89% of the scenarios, the model indicated that the implementation of the RFS program would have no impact on ethanol production and corn prices. This is consistent with the market reality that ethanol blending is driven primarily by factors other than the RFS, in particular blending economics and the value of ethanol as an oxygenate. A significant additional factor considered in the EPA analysis is the availability of rollover RINs from prior years that can be utilized by obligated parties. To the extent that rollover RINs are used this year, this factor would change significantly should similar drought conditions return next year.
While this waiver request has now been resolved, interested parties continue to follow EPA rulemaking activities relating to the RFS closely. It is anticipated that the agency will address the issue of RIN fraud in a pending rulemaking. Thanks to my colleague Sara Bergan for her assistance in reporting the EPA's RFS waiver decision today.
EPA Docket ID: EPA-HQ-OAR-2012-0632
The deadline for public comments on petitions seeking a waiver of the Renewable Fuel Standard (RFS) expired last night on October 11, 2012. The Governors of Arkansas and North Carolina had submitted separate requests, in letters dated August 13, 2012 and August 14, 2012, asking for a waiver of RFS volume requirements. Under Section 211(o)(7)(A) of the Clean Air Act, the Administrator of the EPA is permitted to waive national volume requirements of the RFS in whole or in part if implementation of those requirements would severely harm the economy or environment of a state, a region, or the United States, or if the Administrator determines there is an inadequate domestic supply of renewable fuel. Such a waiver may either be triggered through petition by one or more States, a party subject to RFS program requirements, or at the Administrator’s own motion. If a waiver is granted, it can last no longer than one year, but may be renewed by the Administrator after consultation with the Secretary of Agriculture and the Secretary of Energy.
Following receipt of the petitions, the EPA requested public comment, with a deadline of September 26, 2012, subsequently extended to October 11, 2012. In doing so, the EPA encouraged commentators to review the analytical approach it adopted in its 2008 denial of an RFS waiver request (PDF file) by the Governor of Texas. That analysis evaluated the impact of a waiver of the volume standard by comparing the circumstances with and without a waiver, to identify the impact associated with implementation of the RFS program in the relevant time period. Nearly 30,000 public comments were submitted, including by several Governors, industry groups and members of Congress.
According to Section 211(o) of the CAA, the EPA Administrator must approve or deny a petition for a waiver of RFS volume requirements within 90 days after the petition is received. We will report on the Administrator’s ruling and its significance as soon as it becomes available.
EPA Docket ID: EPA-HQ-OAR-2012-0632
In a decision released this morning, the DC Circuit rejected a challenge to the introduction of E15, a gasoline blended with 15 percent ethanol, under an EPA waiver grant. Currently, the national gasoline supply consists largely of E10, a 10 percent ethanol/gasoline blend. With fuel manufacturers confronting mandatory annual increases of renewable fuels under the Renewable Fuel Standard (RFS), Growth Energy, a trade association representing the ethanol industry, had sought an EPA waiver for a new 15 percent ethanol/gasoline blend. The EPA provided partial waivers (1 and 2), under the Clean Air Act for the E15 blend, restricting the fuel’s use to light duty motor vehicles and engines from model-year 2001 and newer. Three sets of industry groups representing engine manufacturers, food producers and petroleum suppliers then sued, challenging the EPA’s waivers.
In a 2-1 decision, the court declined to make a decision on the merits, finding that the petitioners lacked standing to bring the action. In a strongly worded dissent, Circuit Judge Brett Kavanaugh disagreed. Kavanaugh then addressed the merits of the case, finding they were “not close.” He concluded that in granting the E15 partial waiver the “EPA ran roughshod over the relevant statutory limits.”
Where We Go From Here
The decision preserves flexibility for implementing the RFS renewable fuels mandates – for now. However, the lack of a decision on the merits means the EPA waiver process remains vulnerable to judicial challenge. In the meantime, the debate over corn-based ethanol fuel mandates may be shifting to Congress, as predictions for historically low corn crop yields continue to accumulate.
Yesterday the EPA released the third major Notice of Violation ("NOV") against a biofuel producer in the past six months under the Renewable Fuel Standard ("RFS"). The NOV states that EPA has determined that Green Diesel, LLC of Houston, Texas, generated 60,034,033 invalid Renewable Identification Numbers (“RINs’) with a current market value of perhaps $85 million. Coming on the heels of 31 settlement agreements relating to the Clean Green Diesel and Absolute Fuels RINs, this NOV is likely to trigger immediate market reaction. The EPA has been enforcing invalid RIN cases first against the RIN generator then subsequently against the obligated party, i.e., the company that uses the RINs for compliance with RFS. Obligated parties under the RFS are petroleum refiners and importers in the U.S. About a month after the Clean Green Fuel filing, the EPA filed NOVs against the obligated parties. It remains to be seen whether EPA will do so again. The agency may instead rely upon its past actions and its recently released Interim Enforcement Response Policy to motivate corrections by obligated parties.
Some market participants have criticized the EPA for their managing of the RFS program and questioned the RFS program itself. In response, the biofuel industry and particularly the National Biodiesel Board have taken significant steps to address the validity issues. While there is significant time delay as many of the alleged activities date back to 2010, it appears that the EPA enforcement activities have motivated substantial due diligence activities that will serve the RFS program participants well in future years. The immediate challenge is in addressing the new Green Diesel NOV and the resulting contractual implications for market participants who transacted in these RINs. The rapid growth in the value of the RIN market has certainly presented substantial challenges. Nonetheless, private market responses to date suggest that the resourceful biofuel and petroleum industries can weather these storms and ultimately make the RFS program more effective toward its goals of reducing U.S. dependence on foreign oil imports and reducing GHG emissions.
On February 2, 2012, the Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") of the Renewable Fuel Standard ("RFS") to Absolute Fuels, a company located in Lubbock, Texas. The NOV alleges that between August 31, 2010, and October 11, 2011, Absolute Fuels generated over 48 million Renewable Identification Numbers ("RINs") and that all of these RINs were invalid. This EPA action is likely to have a substantial impact on the overall RIN market and could be followed by related NOVs to other market participants.
The Absolute Fuels NOV represents the second major enforcement action by the EPA under the RFS. The first action alleged invalid generation of over 32 million RINs by Clean Green Fuel. The Clean Green Fuel action proceeded with a criminal filing by the U.S. Attorney for the District of Maryland and was followed by the EPA's filing of 24 NOVs against the companies that utilized the Clean Green Fuel RINs for compliance with RFS obligations. EPA did not allege that the obligated parties that received the Clean Green Fuel RINs had any knowledge or reasonable basis to have knowledge regarding the RINs' invalidity. This alert provides an analysis of the regulatory basis for these EPA enforcement actions.
On November 3, 2011, the proposed Avenal Energy Project, a 600-megawatt natural gas-fired power plant proposed in the city of Avenal near Kettleman City in Kings County, California, encountered another legal challenge to providing electricity to the southern San Joaquin Valley. Sierra Club, Center for Biological Diversity, and Greenaction for Health and Environmental Justice challenged the Environmental Protection Agency’s issuance of a Prevention of Significant Deterioration (“PSD”) permit for the Avenal project via a Petition for Review filed with the Ninth Circuit Court of Appeals pursuant to section 307(b)(1) of the federal Clean Air Act (“CAA”). This is just the most recent turn of litigation activity involving the project. Avenal’s PSD permit has long been the subject of review and legal challenges. Among other claims raised to the Ninth Circuit, the Petitioners argue that the PSD permit impermissibly fails to address the recently adopted PSD requirements for greenhouse gas emissions.
The U.S. Environmental Protection Agency (“EPA”) has released a series of proposed rules relating to the Renewable Fuel Standard (“RFS”). Originally enacted by Congress in the Energy Policy Act of 2005 and expanded by the Energy Independence Act of 2007, the RFS represents the country’s most comprehensive and effective policy in the energy security and greenhouse gas (“GHG”) sectors. The current RFS, often referred to as RFS2, contains four categories of fuel made from renewable biomass. EPA has the authority to set the mandate levels for these renewable fuels. U.S. petroleum refiners and importers are obligated parties under the program and must prove compliance by purchasing a sufficient quantity of these fuels. The EPA proposed an overall standard for 2012 for renewable fuel of 9.21% or 15.2 billion gallons of fuel and also proposed significant regulatory changes to the program.
If you have any questions about the content of this alert, please contact:
On June 20, 2011, the U.S. Supreme Court issued an opinion on American Electric Power Co., Inc., et al. v. Connecticut, et al.
This case is significant because it dismissed a lawsuit in which several states and environmental groups sought court orders requiring large electrical utilities (alleged to be “the five largest emitters of carbon dioxide in the United States”) to reduce their greenhouse gas emissions because the emissions were alleged to be a public nuisance. Plaintiffs alleged that the emissions violated federal common law (nuisance) or state tort law. The plaintiffs were thereby requesting a court decree setting a cap for C02 emissions to be reduced annually.
The Supreme Court in a fairly short opinion touched upon a number of significant issues. The Court first dealt with the issue of jurisdiction and then with the issue of whether there is a federal common law cause of action of nuisance. The Court split on the issue of whether the plaintiffs had Article III standing, i.e., whether there was sufficient specific injury to the plaintiffs such that the Article III Claims and Controversies requirement would be met, allowing the plaintiffs to avail themselves of the jurisdiction of the federal court system. Half of the Court believes that there was no standing, the other believes (assuming the prior cases are an indication) that some of the plaintiffs (the states) had sufficient standing that the case could be brought. This issue was addressed in the Massachusetts v. EPA case in which the Court held that greenhouse gases were regulated under the Clean Air Act. In that case the state of Massachusetts was found to have had sufficient standing to allow the case to be heard.
The Court held that the federal common law nuisance which had been recognized in several interstate environmental cases was displaced by the statute even absent the setting of emission standards (EPA’s CO2 regulations are due in May 2012.) The Court also indicated that the agency should be allowed to act first, before the judiciary, as the expert agency is better equipped to do the job then the judiciary who typically lack the economic technological resources to cope with these issues. Plaintiffs’ proposal to have federal judges determine these emission limits in the first instance could not be reconciled with the statute.
Finally, the Court did not reach the issue of the viability of the state nuisance claims because they had been dropped by the lower courts when they held that the federal common law governed over state law. Because there was no briefing on the state law preemption issue, the issue was left for consideration on remand. The Court did indicate that the issue of whether there was preemption of the federal common law by federal legislation, as in this case, did not require “the same sort of evidence of a clear and manifest (congressional) purpose” required for preemption of state law. (Citing City Milwaukee II 451 U.S. at 304, 317 (1981)).
This decision, while sending the case back to the lower courts, raises several unresolved issues. Will the courts continue to allow plaintiffs, particularly non-states such as the industry groups in the Massachusetts case, and the environmental groups in this case, Article III standing where there is an argument that no specific injuries have been pled? Will the courts find that state common law claims are also pre-empted by the federal Clean Air Act? Will this theory of agency primacy be applied at other levels? What happens if the EPA or Congress decides not to issue greenhouse gas regulations? We’ll be continuing to monitor the case as it works its way back through the lower courts—stay tuned for updates.
On Friday, December 10, 2010, EPA published in the Federal Register its final rule governing the underground injection of carbon dioxide (CO2) for geologic sequestration (GS) under the Safe Drinking Water Act (SDWA). EPA released a pre-publication version of this rule back on November 22, 2010. Stoel Rives previewed the pre-publication version on our Renewable Energy + Law Blog. This alert highlights some key deadlines included in final rule, as published last Friday.
Background: Last Friday's rule focuses on protecting underground sources of drinking water (USDW) from endangerment due to CO2 GS activities. The rule was promulgated pursuant to EPA’s SDWA authority. The rule, which becomes effective on January 10, 2011, resulted from a proposed rule issued by EPA on July 25, 2008 (73 FR 43492) and a notice of data availability and request for comment by EPA on August 31, 2009 (74 FR 44802).
For more information about how last Friday’s rule could affect your CO2 injection plans, feel free to contact one of the following Stoel Rives’ attorneys.
Geoffrey Tichenor at (503) 294-9389 or firstname.lastname@example.org
Jerry Fish at (503) 294-9620 or email@example.com
Thomas Wood at (503) 294-9396 or firstname.lastname@example.org
Sara Bergan at (503) 294-9336 or email@example.com
Sarah Johnson Phillips at (612) 373-8843 or firstname.lastname@example.org
Eric Martin at (503) 294-9593 or email@example.com
The EPA has issued proposed RFS2 rules for 2011 that provide some indications that the agency is dedicated to jump starting the advanced biofuels industry. Most notably, the EPA held fast to an overall mandate of 13.95 billion gallons of renewable fuel. While the agency intends to deviate downward on cellululosic biofuels with a cut of 90% or more anticipated, the proposed rule maintains the overall Advanced biofuel mandate at 1.35 billion gallons and the Biomass-based diesel requirement at 800 million gallons. Thus the agency is paying significant attention to the existing capacity of the biodiesel industry despite the lack of approval for the blender's credit six months into the year. Biofuel supporters hope that this policy gap will be addressed shortly or that RIN values will continue to increase for Biomass based diesel.
The proposed rule contains two other notable components: tentative but retroactive RIN credit for canola, sorghum, pulpwood and palm oil biofuel producers; and a petition process for foreign countries to avoid the onerous feedstock obligations that now apply in favor of the aggregate approach available within the US. The referenced feedstocks have been under consideration by EPA for Life Cycle Analysis since prior to the original RFS2 Final Rule was released but the work has still not been completed. The severe challenge for this group of biofuel producers is that EPA has previously indicated that RIN generation would trigger only when the pathway was certified. EPA's proposed new flexibility is an improvement but still falls short of providing full RIN value for these producers due to the lag time and uncertainty associated with the approach. The proposed petition process for foreign countries is an apparent attempt to level the playing field for foreign producers who now must trace and certify feedstocks such as soy and corn in a manner not required within the US.
The rules will be published in the Federal Register shortly and the public comment period will likely run to approximately August 13th.
Here is a Q&A I did with William Brent, the head of Weber Shandwick’s cleantech practice and blogger at www.mrcleantech.com:
WB: I asked my friend Graham Noyes of law firm Stoel Rives who focuses his practice on bioenergy projects, federal energy incentives and carbon monetization for his thoughts on the Kerry Lieberman bill.
Q (WB): What was your main takeaway from the bill?
A (GN): Some context first. There’s a massive potential hammer out there on GHG emitters in terms of the risk of regulation under the Clean Air Act (CAA) by the EPA, which has already issued an endangerment finding that found GHGs to be a danger to public health and welfare, thereby making the EPA obligated to regulate GHG's under the CAA. So the wheels are turning forward at the EPA to regulate GHG. That’s what the EPA will do if nothing else happens. So it’s really surprising that Kerry Lieberman imposes what I think to be much stricter limitations on the EPA than the status quo.
In that sense the bill is very favorable to those industries that have the most to lose from GHG regulation, because it essentially weakens the regulatory landscape for GHG intensive industry when compared to what the EPA is likely to do. That’s why we have the strong industry support lined up for the bill. What’s odd is that we have universal Republication opposition (from a party known for its pro-business stance), and near universal Democratic support (from a party known to support more environmental protections). That is a fundamental disconnect.
The 800 lb gorilla in the room is the EPA's ability to utilize the CAA if the Kerry-Lieberman bill stalls. That’s a really interesting regulatory and political landscape for this thing to play out.
Q: Can you be more specific on how Kerry Lieberman is easier on emitters?
A: We don’t know what the EPA will do precisely in order to get its targets in the endangerment finding. Emissions levels, cost implications for regulated industries – we don’t know. But it’s easy to imagine a scenario in which the EPA ratchets down harder and harder on these emissions to get the problem under control, specifically the PPM concentration of CO2 in the atmosphere.. By contrast, Kerry Lieberman has a slow front-end phase-in (with only some industries included in the first years), price collars and very substantial offset programs to lower the economic impact, none of which the EPA would necessarily do. Most people expect the EPA would be more onerous than Kerry Lieberman.
Q: Is legislation or regulation better at the end of the day?
A: The Clean Air Act was not designed for GHGs, but for what we usually think of as pollutants- emissions that are directly unhealthy. CO2 is not something people worry about breathing, it’s the indirect risk of global warming caused by the escalating CO2 levels that triggerred the finding. CO2 is also more ubiquitous than other pollutants hence the tailoring rule actually reduces scope of CAA enforcement.
The EPA would regulate by mandate, not by consensus. If we can’t get legislation passed and the EPA begins enforcement, there will be a lot of criticism about over-reaching and strangling industry. EPA would take a lot of heat for this.
Q: Some argue that EPA will take much longer to regulate than legislation.
A: I don’t necessarily think so. This legislation requires extensive rule-making that will take a long time to happen, consider the RFS2 delay. And the EPA won’t build in phase-in limits like Kerry Lieberman. If EPA moves ahead on its present course, I think it would have a faster impact on emissions than the bill.
Ultimately, I think this landscape will spur a deal with a surprising alliance.
What are the top three ramifications on business from this bill?
The bill would establish a long-term value to CO2e reductions. This will benefit all renewable energy projects and support US offset projects in methane capture, agriculture and forestry that make good GHG sense.
New programs are in place to step up the use of renewable energy on farms through new grants and feasibility surveys:
1. USDA announced yesterday that it is soliciting applications for a total of four renewable energy programs.
a. Rural producers and small businesses installing renewable energy systems can apply for grants and loan guarantees under the Rural Energy for America Program (“REAP”), with applications due by June 30, 2010, to purchase energy-efficient equipment, add insulation, and improve heating and cooling systems.
b. The USDA is going to solicit applications for three other renewable energy programs: the Biorefinery Assistance Program, Repowering Assistance Program, and the Bioenergy Program for Advanced Biofuels. The solicitation for those programs will be published in the Federal Register by May 7. See the USDA press releases on the survey and the funding, the REAP solicitation as published on the REAP Web site;
2. The EPA and the USDA announced a new joint agreement on Monday to promote renewable energy generation and reduction of greenhouse gas emissions from livestock farming operations. This is an expansion of the AgStar program, a joint EPA-USDA endeavor to help livestock producers reduce methane emissions. The program will provide $3.9 million over the next five years to help the livestock farmers recover and use the biogas produced by decomposing manure.
3. On-Farm Energy Production Survey: the decomposition of manure is accelerated by feeding it into an anaerobic digester. The resulting biogas can be used to produce electricity, heat, or hot water. There are about 150 anaerobic digesters currently operating on farms across the US, and there are several thousand other farms that lend themselves to the installation of renewable biogas systems. To find out more, the USDA is now conducting the first national On-Farm Energy Production Survey, with results to be published in February 2011.
A quick follow up on my post last month regarding my colleague Graham Noyes’ white paper on the EPA’s sweeping revision of the federal Advanced Renewable Fuel Standard (RFS2). On April 20, Graham and his co-author Clayton McMartin will participate in a live Q&A webinar with Biofuels Journal publisher Myke Feinman on the new RFS2. Topics will include:
• The Four Categories of Fuel under RFS2
• Why All Producers Must Register Their Facilities
• What RINs will be Reinstated, Why, How, and When
• Lifecycle Analysis (GHG) and the Impact on Biofuel Markets
• Integration of RFS1 and RFS2
• Sweeping Changes in the RIN Program with RFS2
• Violations and Penalties
• The Seven Types of RINs
• The "Nesting" of Standards and the Potential Impact on Business
• EPA's New Role with the Moderated Transaction System (EMTS)
Registration and participation in the webinar is FREE. Click here to register for the advanced renewable fuel standard (RFS2) webinar with Biofuels Journal.
My colleague Graham Noyes and Clayton McMartin of Clean Fuels Clearinghouse recently published a white paper on the massive and staggeringly complex revision of the federal Advanced Fuel Standard (RFS) issued by the U.S. Environmental Protection Agency on February 3, 2010. Graham and Clayton describe how this second generation renewable fuel initiative (RFS2) will bring industry and government together in ways never before experienced by the fuels industry.
With a view to helping market participants develop comprehensive cost/benefit and compliance strategies, Graham and Clayton structure their discussion according to the following key topics:
- Legal background and new statutory requirements of RFS2;
- Compliance implications of updates to the Renewable Identification Numbers (“RINS”) process; and
- Issues important to particular market participants, including producer obligations, new fuel pathways, importer issues and RIN trading economics.
In response to a letter drafted by eight democratic senators and general industry adverse reactions, the EPA announced on February 22, 2010 that there would be delays to implementation of the regulation of green house gases as stationary source emissions under the Clean Air Act, and included additional conditions to the implementation. It is expected that the EPA will phase in permit requirements and regulation of GHG for large stationary sources beginning in calendar year 2011.
The additional conditions include only requiring facilities that are applying for air permits for non-greenhouse gas emissions to be permitted under the new GHG permitting system in the first half of 2011, and permitting at a level higher than the 25,000 ton level originally proposed, for the latter half of 2011 through 2013. The letter can be found here.
Stoel Rives partner Tom Wood reports:
Minutes ago EPA announced its long awaited “endangerment” and “cause or contribute” findings in relation to six key greenhouse gases – carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. While technically this announcement is of limited significance (applying only to motor vehicle emissions), the policy import of these determinations is tremendous.
In 2007, the U.S. Supreme Court held that greenhouse gases are air pollutants covered by the Clean Air Act in the Massachusetts v. EPA decision. This case arose in relation to EPA’s choice not to regulate carbon dioxide emissions from new motor vehicles. The Court held that EPA must determine whether or not emissions of greenhouse gases from new motor vehicles cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare, or whether the science is too uncertain to make a reasoned decision.
Earlier this year EPA proposed to issue the two part finding required to commence regulation of greenhouse gas emissions from new motor vehicles. This required first a finding that greenhouse gas emissions endanger public health and welfare and a second finding that emissions from new motor vehicle engines cause or contribute to greenhouse gas air pollution. The comment period for these proposed findings ended June 23, 2009 and EPA received over 380,000 public comments. Today, Lisa Jackson (EPA Administrator) signed final findings that greenhouse gases endanger both the public health and the public welfare of current and future generations and that the combined emissions of these greenhouse gases from new motor vehicles and new motor vehicle engines contribute to the greenhouse gas air pollution that endangers public health and welfare.
As a legal matter, today’s findings relate only to vehicle emissions. However, the precedent that they create will almost certainly result in substantial regulation for other source categories. It is no coincidence that this finding was announced on the first day of the Copenhagen talks on climate change. The Obama administration both wanted to show that some progress was being made in the U.S. and it wants to leverage this progress into further statutory or regulatory requirements.
Towards this goal, one of the more interesting things to come out of the determinations is the formal establishment of the new pollutant: “Well-Mixed Greenhouse Gases.” This term is now officially entered into EPA’s regulatory lexicon as a pollutant to be regulated. Well-Mixed Greenhouse Gases consists of the 6 Kyoto gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride) but introduces the grouping now as a regulatory unit. It is noteworthy that vehicles are not material sources of all of these greenhouse gases and so the use of this term should be seen as setting the stage for future regulation.
Also of interest is an EPA restatement in a footnote that at this time it does not consider greenhouse gases to be a regulated air pollutant. This is of tremendous significance to stationary sources of greenhouse gases as the moment that greenhouse gases become regulated, there is the potential argument that they are subject to Title V and major new source review permitting. At the risk of understating the issue, that would be a mess of biblical proportions.
For those wishing to read all 284 pages of the findings document, it can be found at: http://www.epa.gov/climatechange/endangerment/downloads/FinalFindings.pdf
The findings are not valid until 30 days after they are published in the Federal Register. Expect publication to occur later this month.
On the topic of Greenhouse Gas reporting, my partner Tom Wood recently circulated this "heads up" about EPA's final rule:
On September 22, 2009, EPA issued its final rule on greenhouse gas (GHG) reporting. Fossil fuel and industrial GHG suppliers, motor vehicle and engine manufacturers, and facilities that emit 25,000 metric tons or more of CO2 equivalent per year will be required to report GHG emissions data to EPA annually.
Recordkeeping obligations commence on January 1, 2010 with the first report due in 2011 (for 2010 emissions). Relaxed requirements will apply for reporting year 2010 as EPA recognizes that not all monitoring can be implemented in the weeks remaining in this year.
In a blow to the consulting industry, third party verification is not being required; sources will be able to self-certify their emissions. EPA says that its program does not preempt state reporting programs, but our hope is that with a final rule the state and regional efforts will conform to EPA’s lead.
Look for more details as Tom gives the rule a more thorough review.
My partner Tom Wood recently composed and circulated this email alert about the return of the "Global Warming" case against several electric utilities:
Five years ago eight states and New York City made headlines when they sued several electric utilities alleging that their carbon dioxide emissions constituted a federal common law nuisance. The plaintiffs wanted to force the companies to cap and reduce their carbon dioxide emissions. The federal trial court dismissed the case, holding that the issue was a political question that had to be addressed through the political branches of government and not through the courts. Earlier today the Second Circuit Court of Appeals reversed the trial court. This enables the plaintiffs to resume their nuisance lawsuit against the generating companies, but does not guarantee them victory as they will have significant evidentiary challenges to address. In reinstating the suit, the Second Circuit touted the judiciary’s ability to handle complex cases of this type and said that doing so would not interfere with the business of the other branches of government. However, the court noted in several places that the judiciary would be preempted in the future from addressing carbon dioxide through nuisance law if either Congress (i.e., the legislative branch) amends the Clean Air Act to regulate carbon dioxide or the executive branch, through EPA, moves to regulate carbon dioxide under existing authority.
Today’s decision will potentially have significant impacts on future climate change litigation. One of the areas heavily debated in the case was who has the ability to bring a federal nuisance claim such as that alleged here. The defendant companies recognized that states have the ability to bring federal common law nuisance claims, but argued that the potential contribution of carbon dioxide emissions to climate change was not the sort of issue for which a federal nuisance suit is available because, among other reasons, the impacts could not be traced to particular emission sources. The Second Circuit rejected this argument, setting the stage for the state suits to continue. The court also rejected arguments that private parties cannot bring federal nuisance suits related to climate change. The court recognized that the Supreme Court had never addressed this question, but concluded that private parties should be able to proceed with federal nuisance claims related to climate change when they invoke an overriding federal interest or federalism concerns. By holding that private parties can bring federal nuisance suits and by recognizing that climate change is of overriding federal interest, the court potentially cleared the way for federal lawsuits against all types of companies that emit material levels of greenhouse gases.
The decision will create significant new pressure on EPA and Congress to regulate greenhouse gas emissions. The court noted that it was reasonable to assume that EPA has the authority to regulate greenhouse gas emissions if it first determines that they “cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare” (referred to as an “endangerment finding”). However, as the court noted, EPA has only proposed to make such a finding and only in relation to mobile sources—not stationary sources such as factories and power plants. When/if EPA makes such findings, it must then develop a regulatory program. Until such time that a program is developed, the court held that the field is left open for federal common law nuisance suits. This holding will undoubtedly create increased support for taking the regulation of greenhouse gases out of the courts and back into the legislative or executive branches.
EPA is poised to issue several rules that will commence the regulation of greenhouse gases for mobile and stationary sources. These rules were not considered by the court as they had not been finalized. As these rules become finalized in the weeks and months ahead, the plaintiff’s victory may prove short-lived. However, there is no question that the decision is likely to have a tremendous impact on the debate regarding whether to proceed with greenhouse gas regulations.
Last week, the US EPA extended the rulemaking period on RFS 2 until September 25, 2009. This extends the period by 60 days. While this rulemaking is highly complicated and contentious, it is unclear that extending the comment period will improve this situation. In addition, the effective date of the regulations continues to be delayed. This could undermine Congress' intentions in passing the Energy Independence and Security Act that established RFS 2. Let's hope EPA is able to move quickly and efficiently in finalizing and implementing the regulations.
U.S. EPA is holding a public hearing in Sacramento, California today on the agency's proposed rule on mandatory greenhouse gas emissions reporting. EPA held public hearings on the new rule in the Washington D.C. area earlier this month.
Over 13,000 facilities nationwide, accounting for about 85% to 90% of GHGs emitted in the U.S., will be required to report their emissions under the rule. Reporting will largely be done on a facility-level, with the threshold for mandatory annual reporting based on facility capacity, rather than emissions. Where a capacity threshold is not feasible or appropriate, facilities that emit 25,000 metric tons or more of GHGs per year will be required to submit annual emissions reports. Data collection will begin January 2010, the first reports due in March 2011. EPA estimates that the cost to all industries to comply with the new reporting requirements would be $160 million in the first year, and $127 million annually in subsequent years.
The rule was published in the Federal Register on April 10, and comments on the rule are due to EPA no later than June 9, 2009.
The California Air Resources Board may soon get its wish. Back in 2005, ARB first requested a waiver from the U.S. Environmental Protection Agency, to allow California to regulate motor vehicle greenhouse gas emissions. EPA denied the waiver two years later, after California threatened to sue EPA to force the agency to take action on the request. The very day after President Obama's inauguration into office, ARB filed with EPA a request for reconsideration of its waiver request. Several days later, President Obama himself signed a Presidential Memorandum directing EPA to assess whether denial of the waiver was appropriate in light of the Clean Air Act. Last Friday, Lisa Jackson, head of the EPA, issued a Notice for Public Hearing and Comment on California's request for consideration of the previous waiver denial, which officially initiates reconsideration by EPA. Discussion at the public hearing on March 5, 2009 may get interesting, as the Notice's 'supplementary information' included a brief discussion on how the waiver denial had "significantly departed from EPA's longstanding interpretation of the Clean Air Act's waiver provisions and from the Agency's history, after appropriate review, of granting waivers to California for its new motor vehicle emission program." Stay tuned.
California ARB's request for a waiver is premised on the Clean Air Act provision that allows states to enact stricter motor vehicle emission standards than the federal government's, provided EPA has approved a waiver for the state to do so. Under the Clean Air Act, EPA must grant a waiver unless it finds that the state:
- was arbitrary and capricious in its finding that its proposed standards are in the aggregate at least as protective of public health and welfare as applicable federal standards,
- does not need such standards to meet compelling and extraordinary conditions, or
- has proposed standards not consistent with section 202(a) of the Clean Air Act.
In denying ARB's original waiver request, the EPA administrator at the time, Stephen Johnson, noted that President Bush had just signed an energy bill that would work to reduce emissions throughout the U.S. and that increased fuel economy standards. The energy bill increased fuel efficiency for new cars and light trucks by 40% by 202, to an average of 35 mpg. This is in fact the biggest increase by Congress in fuel economy standards since the program was created in 1975. As Johnson announced in December 2007, "The Bush administration is moving forward with a clear national solution, not a confusing patchwork of state rules." It's true that if the waiver is granted, California would enact a more stringent fuel economy standard than in any other state. But, 16 other states have pledged that if California can move forward with its higher standard, they would in turn adopt California's standard as their own.
In case there was any doubt after the recent watershed election, the times they are a-changin’. The U.S. Environmental Protection Agency (“EPA”) Environmental Appeals Board’s (“EAB”) recent ruling, In Re Deseret Power Electric Cooperative, could pave the way for EPA-imposed CO2 emissions limits on power plants and other significant sources of CO2 emissions. In response to a lawsuit filed by the Sierra Club over the EPA’s issuance of a permit authorizing the construction of a new coal generating unit near Bonanza, Utah, the EAB has ruled that the EPA must consider CO2 emissions when determining whether to issue permits for new power plants.
The Clean Air Act (“CAA”) requires EPA to issue a prevention of significant deterioration (“PSD”) permit whenever a new major source of air pollution is constructed or when major modifications are made to an existing source in certain areas in the U.S. Among other requirements, PSD permits must consider a best available control technology (“BACT”) emissions standard for every pollutant that is “subject to regulation” under the CAA. As the name suggests, BACT is an emissions limit based on the highest achievable degree of control.
In 2004, Deseret Power Electric Cooperative (“Deseret”) applied for a PSD permit to build a new waste-coal-fired generating unit at its existing Bonanza Power Plant. Prior to EPA’s issuance of the permit, the Sierra Club filed comments before the EPA suggesting that Massachusetts v. EPA, which was then pending before the U.S. Supreme Court, could ultimately require EPA to impose a BACT emissions limit on the Deseret plant’s CO2 emissions.
In its April 2007 decision in Massachusetts v. EPA, the Supreme Court held that CO2 is an “air pollutant” under the CAA. A few months later, EPA issued the PSD permit authorizing Deseret to build the waste-coal-fired generating unit and stating that Massachusetts v. EPA did not require it to cap CO2 emissions. Sierra Club filed a lawsuit arguing in part that EPA violated the CAA in issuing the permit because it did not require a BACT emissions limit for controlling CO2 emissions. EPA countered that based on a historical agency interpretation, it did not have to impose a CO2 BACT limit because CO2 was not subject to any rules or regulations requiring actual control over such emissions.
The EAB explicitly stated that it did not determine that the CAA requires EPA to impose a BACT limit on CO2 emissions. However, it rejected EPA’s reason for not imposing a CO2 BACT limit as not supported by the record. As a result, it remanded the permit to EPA for it to “reconsider whether or not to impose a CO2 BACT limit and to develop an adequate record for its decision.” Thus, the EAB’s decision compels EPA to consider CO2 emissions when evaluating permits for power plants—both new and modified. Although EPA may ultimately decide not to impose a BACT limit, it must at the very least incorporate the BACT analysis into its permit deliberations.
In the short term, the EAB decision will add uncertainty to the certification process for new coal plants, given the high concentrations of CO2 in coal. This uncertainty is likely to continue until a national policy is adopted addressing CO2 emissions. As the EAB noted, “[i]n remanding this permit to [EPA] for reconsideration of the CO2 BACT issue, we recognize that the issue of whether CO2 is ‘subject to regulation’ under [the Clean Air] Act’ is an issue of national scope and that all parties would be better served by addressing it in the context of an action of nationwide scope rather than in the context of a specific permit proceeding.”