Paul Hastings LLP
Kevin Poloncarz & Ben Carrier

August 7, 2015

On August 3, 2015, the Environmental Protection Agency (hereinafter, “EPA”) released its final “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units” (the “Clean Power Plan” or “Final Rule”), a much-anticipated regulation to reduce carbon dioxide (“CO2”) emissions from existing power plants. Compared to the June 18, 2014 proposed Clean Power Plan (“Proposed Rule”, see 79 Fed. Reg. 34830 (June 18, 2014)), the Final Rule establishes more ambitious CO2 emission reduction goals while providing additional flexibility to affected electric generating units (“EGUs”) and states in meeting the Clean Power Plan’s goals. Along with the Final Rule, the EPA concurrently proposed a federal plan to implement the requirements of the Clean Power Plan in states that do not submit an approvable plan. The proposed Federal Plan also provides proposed model rules that states can adopt to facilitate interstate trading to achieve either their respective rate- or mass-based goals.

The Clean Power Plan is one of the boldest and most ambitious environmental regulations of our time and, for those reasons alone, is likely to be one of the most contested as well. Several states and coal producers already challenged the Proposed Rule in court, even before it was final, and are poised to challenge the Final Rule again, once it appears in the Federal Register. Sixteen states have already sought an administrative stay of the Final Rule pending resolution of litigation.

The final Clean Power Plan represents a strong, legally defensible approach to achieving meaningful reductions in carbon emissions in light of Congressional inaction and is on more solid legal footing than the Proposed Rule in several key respects.

• By establishing nationally uniform emission rates for each of coal-fired power plants and natural gas-fired combined cycle (“NGCC”) power plants, the Final Rule more closely adheres to the EPA’s historic approach for developing standards under Section 111 of the Clean Air Act (“CAA”).
• By calculating these emission rates using a regional, rather than state-specific approach, the resulting rates better reflect the interconnected nature of the electricity grid and create a leveler playing field among states.
• By calculating these rates based upon what can be achieved by shifting generation to existing NGCC and new renewable power plants, the Final Rule’s emission rates and resulting state goals are based solely on how efficiently electricity is generated and not how much of it is consumed.
• By imposing the emissions standards directly on the affected EGUs and authorizing trading to achieve the required reductions, the Final Rule follows an approach that has long been applied to reduce emissions from the power sector under the CAA.

The Final Rule responds to the 4.3 million comments received by the EPA by providing an unprecedented degree of flexibility for states to design their plans and achieve their goals. It also provides several years for states to comply, with the interim and final goals not going into effect until 2022 and 2030, respectively. States also have until 2018 to submit their compliance plans. Given these long lead times, states and other petitioners are unlikely to demonstrate the irreparable injury that would justify staying the Final Rule while anticipated litigation proceeds.

Notably, the Final Rule vastly increases the opportunities for states to design plans that allow for interstate trading, without requiring states to combine their respective targets or submit multi-state plans. While the form of the Proposed Rule and state-specific goals posed obstacles to regional coordination, the Final Rule creates the very realistic possibility that a nationwide carbon trading program will emerge, administered by the EPA and trading one or two products.

In fact, electric utilities familiar with existing emissions trading programs (such as the Acid Rain Program and Cross-State Air Pollution Rule under the CAA or the greenhouse gas cap-and-trade programs implemented by California and the Regional Greenhouse Gas Initiative (“RGGI”)) will see many familiar features in the Final Rule and proposed Federal Plan, such as multi-year compliance periods, banking (but no borrowing) of allowances, and incentives to achieve early reductions. In these respects, the Final Rule can hardly be said to shy away from criticism that President Obama and the EPA are seeking to impose by regulation a carbon trading program of the sort that Congress has failed to enact. Rather, it reflects the President’s efforts to establish his legacy on climate change and a framework that will achieve meaningful reductions in U.S. emissions, in advance of the next UNFCCC Conference of the Parties (“COP”) 21 in Paris this December.

Contours of the Final Clean Power Plan

The final Clean Power Plan builds upon the ambition of the Proposed Rule’s overall CO2 emission reduction goals, while providing additional flexibility to states to achieve those goals. The Final Rule will decrease CO2 emissions from the power sector by 32% below 2005 levels by 2030, compared to the Proposed Rule’s goal of reducing power sector emissions by 30% by 2030.

The Best System of Emission Reduction

The Final Rule identifies the “best system of emission reduction” (“BSER”) for existing power plants as the emissions reductions achievable from three building blocks, which roughly track the first three building blocks of the BSER in the Proposed Rule:

1. Use of heat rate improvement rates ranging from 2.1 to 4.3% as the average heat rate improvement achievable by steam generating units (rather than the uniform 6% in the Proposed Rule);
2. Re-dispatch from higher-emitting affected steam generating units to lower-emitting NGCC units with an NGCC utilization rate of 75% of summer capacity (rather than the 70% of nameplate capacity in the Proposed Rule); and,
3. Replacing electricity generated by fossil fuel-fired EGUs through new renewable energy (“RE”) capacity alone (i.e., existing RE generation is not part of BSER), using National Renewable Energy Laboratory data on RE costs and potential.[1]

Unlike the Proposed Rule, the Final Rule does not include demand-side energy efficiency (“EE”) measures in calculating the BSER. As the preamble to the Final Rule states “our traditional interpretation and implementation of CAA section 111 has allowed regulated entities to produce as much of a particular good as they desire, provided that they do so through an appropriately clean (or low-emitting) process. While building blocks 1, 2, and 3 fall squarely within this paradigm, the proposed building block does not.”[2] Although each of the building blocks function independently and are severable (in the event of a court’s finding them unlawful), this significantly strengthens the Final Rule.

EPA reiterates in the preamble to the Final Rule (as it did in the Proposed Rule) that the BSER determination does not necessitate that any state actually use the three building blocks, and other measures may be employed to reduce CO2 emissions from affected EGUs. For instance, the Final Rule authorizes the creation of emission rate credits (“ERCs”), which may be used to achieve affected EGUs’ rate-based goals, through EE measures that avoid generation from the affected EGUs. In short, states can utilize any measures to achieve the required emission reductions.

Final Emission Performance Rates and State Emission Performance Goals

The Clean Power Plan establishes nationally uniform CO2 emission performance rates for each of two subcategories of fossil fuel-fired EGUs—fossil fuel-fired electric steam generating units and stationary combustion turbines—that express BSER for CO2 from the power sector.

• For fossil fuel-fired steam generating units, the final emission performance rate is 1,305 pounds of CO2 per megawatt-hour (net) (“lb CO2/MWh”).
• For stationary combustion turbines, the emission performance rate is 771 lb CO2/MWh.

These emissions rates are based on “a consistent regionalized approach to quantification of emission reductions achievable through all the building blocks.”[3] EPA chose the least stringent rate resulting from its regionalized application of the building blocks to derive a single, national goal for each subcategory. In turn, the Clean Power Plan establishes state-specific rate-based and mass-based goals that reflect the subcategory-specific CO2 emission performance rates and each state’s mix of affected EGUs. As EPA states, “[e]ach state goal therefore reflects uniform stringency of emission reduction requirements with respect to affected units in each source subcategory, but also reflects the EGU fleet composition and historical generation specific to that particular state.”[4]

The state rate-based goals reflect a weighted average of the uniform emission rates, as applied to each state’s mix of affected EGUs. Thus, a state’s rate-based goals can be no less stringent than the emission performance rate for a steam generating unit and no more stringent than the emission performance rates for a combustion turbine. For instance, North Dakota’s rate-based goals are equivalent to the emission performance rates for a steam generating unit (reflecting the fact that North Dakota only has affected steam generating units) and Rhode Island’s rate-based goals are equivalent to the emission performance rates for a combustion turbine (reflecting the fact that Rhode Island only has stationary combustion turbine affected EGUs).

In response to comments from many stakeholders who suggested that the EPA should promulgate mass-based targets for each state, the Final Rule includes mass-based goals, which reflect application of the BSER to the state’s existing fleet and incorporate a growth adjustment. The Final Rule also includes a set of mass-based goals for states that want to include both existing affected EGUs and new sources within their plan, adding a “new source complement” to each state’s budget to account for emissions growth. A state’s use of the final mass-based goal with the new source complement is a presumptively approvable means to address the risk of “leakage” from existing NGCCs to new fossil units.[5] According to the EPA, the incentive for increased operation of new NGCC, which are not affected EGUs under Section 111(d), vis-à-vis existing NGCC, which are subject to emissions standards under a state plan, could “negate the implementation of the BSER and would result in increased emissions undermining the emission reduction goals of the BSER and emission performance rates.”[6] Accordingly, in the Final Rule, state plans to achieve mass-based goals must address such leakage.[7]

Adjustments to Interim Goals and Rates

Although it is designed to achieve greater emissions reductions than the Proposed Rule, the Final Rule extends from 2020 to 2022 the first year that states must begin complying with state emission performance rates or goals. Additionally, rather than the Proposed Rule’s proposal for one interim emission performance goal for the entire ten-year period of 2020 to 2029, the Final Rule’s eight-year interim period from 2022 through 2029 is separated into three steps: 2022-2024, 2025-2027, and 2028-2029. States must achieve the interim CO2 emissions performance rates over the period of 2022 to 2029 and the final CO2 emission performance goals by 2030, as judged in 2032 for the period 2030-31. Additionally, these interim rates were significantly adjusted so that they provide a less abrupt initial reduction expectation for states. This was accomplished primarily by phasing in the reductions achievable under building block 2 from redispatch to NGCC over a longer time period.

Discretion for States in Choosing Form of Emission Standards

The emission standards in a state plan may incorporate the subcategory-specific CO2 emission performance rates established by the Final Rule or, in the alternative, may be set at levels that ensure that the state’s affected EGUs, “individually, in aggregate, or in combination with other measures undertaken by the state achieve the equivalent of the interim and final CO2 emission performance rates between 2022 and 2029 and by 2030, respectively.”[8] The EPA states that the translated state goals are an “alternative yet equivalent expression of the BSER that the state may choose to use to establish emission standards for its affected EGUs.”[9] As the EPA emphasizes, the Final Rule’s rate- and mass-based goals for each state are merely accounting devices to assist the states in designing plans that will assure their affected EGUs achieve their respective performance rates. Accordingly, “each state…will need to choose whether its plan will be designed to achieve the CO2 emission performance rates, statewide rate-based goals, or statewide mass-based goals by the affected EGUs.”[10]

The Final Rule establishes two main formats for state plans:

• The “emission standards approach” consists of a state establishing emission standards for its affected EGUs sufficient to meet the requisite performance rates or state goal, thus placing all of the requirements directly on its affected EGUs.
• The “state measures approach” would result in the affected EGUs meeting the statewide mass-based goal by relying upon state-enforceable measures that apply to entities other than affected EGUs (e.g., renewable portfolio standards that apply to load-serving entities), in conjunction with any federally enforceable emission standards applicable to the affected EGUs. If a state elects such a state measures approach, it must adopt a mass-based limit and include a “backstop” of federally enforceable measures for the affected EGUs, which would only be triggered in the event that the state fails to achieve its mass-based goal and would also require the state to make up for any shortfall.

The state measures approach provides a pathway for state plans to rely upon existing market-based trading programs, such as RGGI or California’s Cap-and-Trade Program implemented pursuant to Assembly Bill (“AB”) 32, which have broader coverage than affected EGUs and/or incorporate additional flexibility and cost-containment mechanisms.

The Final Rule and accompanying proposed Federal Plan are remarkable for the degree to which they encourage the development of nationwide carbon markets by allowing states to develop “ready-for-interstate-trading” plans[11] and otherwise link trading plans together. The proposed Federal Plan sets forth two distinct trading programs, either a mass-based trading program or a rate-based program. While the EPA currently intends to finalize only one approach as the federal plan for states that do not adopt their own approvable plan, the proposal also provides model rules, which states can utilize to develop presumptively approvable state plans that can be linked with other similar state plans and any federal plan for trading purposes, without needing to develop either a merged goal or a multi-state plan. States still have the option of participating in multi-state plans; however, this clearer path towards interstate trading—along with the uniform emission performance rates and clear mass-based goals—dramatically increases the likelihood that a broad emissions market will develop as part of Clean Power Plan implementation.

2020-21 Compliance Replaced By Incentive Program

Although the initial interim compliance period does not commence until 2022, to encourage early investments in RE and demand-side EE, the EPA is establishing the Clean Energy Incentive Program (“CEIP”). Through the CEIP, states will have the opportunity to award allowances and ERCs to qualified providers that generate MWh (RE) or reduce end-use energy demand (EE) during 2020 and/or 2021. The states that take advantage of this option will be eligible to receive from the EPA matching allowances or ERCs, up to a total for all states that represents the equivalent of 300 million short tons of CO2 emissions.

Final Rule Addresses Reliability Concerns

A significant stakeholder concern with the Proposed Rule was its potential effect on electric reliability. The Final Rule addresses this concern by extending the initial interim compliance period from 2020 to 2022 and adjusting the interim emissions goals. Also, each state must demonstrate in its final state plan submittal that it has considered reliability issues in developing its plan. Furthermore, the Final Rule clarifies that states have the ability to propose amendments to approved state plans in the event that unanticipated and significant electric system reliability challenges arise and compel affected EGUs to generate at levels that conflict with their compliance obligations under those plans. Finally, the Clean Power Plan provides for a reliability safety valve for individual sources where there is a conflict between the requirements the state plan imposes on a specific affected EGU and the maintenance of electric system reliability “in the face of an extraordinary and unanticipated event that presents substantial reliability concerns.”[12]

More Time For States To Submit State Plans

The Final Rule requires each state to submit a final plan by September 6, 2016, but allows an optional two-phased submittal process. If a state needs additional time to submit a final plan, then the state may request an extension by submitting an initial submittal by September 6, 2016. If the initial submittal explains why additional time is needed and fulfills other requirements, then a state may have until September 6, 2018 to submit a state plan.

Anticipated Litigation

Before the Clean Power Plan was even finalized, industry and state petitioners had challenged the Proposed Rule, claiming that it violated the plain meaning of the Clean Air Act and seeking an extraordinary writ from the Court. Petitioners’ central claim was that EPA should be barred from regulating carbon pollution from existing power plants because EPA only has one statutory mechanism for promulgating the Proposed Rule (i.e., section 111(d) of the CAA) and this statutory mechanism is unavailable due to the interplay of sections 111(d) and 112 of the Act. On June 9, 2015, A three-judge panel consisting of Judge Thomas Griffith, Judge Brett Kavanaugh, and Judge Karen Henderson rejected as premature the challenges seeking to block the Proposed Rule, finding in a per curiam judgment that the court lacked jurisdiction to review the proposal.[13]

State and industry petitioners have since petitioned for panel rehearing and rehearing en banc. Significantly, such petitions request that, if the Court does not grant rehearing, it should instead stay issuance of the mandate until the Final Rule is published in the Federal Register; at that time, the Court could then vacate its ruling as purely academic; the states would file their Petition to Review the Final Rule and would seek to consolidate that petition with the existing Murray Energy cases. Petitioners’ strategy for seeking this is to retain a panel of judges which they believe was receptive to their underlying claims in oral argument.

Many legal experts expect the next phase of Clean Power Plan litigation to focus on whether the D.C. Circuit should stay implementation of the Final Rule as it reviews petitioners’ arguments on the merits.[14] On August 5, 2015, a coalition of sixteen states, led by West Virginia, asked the EPA Administrator to stay the Final Rule pending completion of “the impending litigation regarding the [Final] Rule’s legality.”[15] The states only gave the EPA until 4:00 pm on August 7, 2015 to respond, “so that Petitioners can know whether they must seek emergency relief in court”, and said they will consider the EPA’s failure to act by that time as “a constructive denial of the request.”[16] The Federal Rules of Appellate Procedure require that petitioners seeking a stay of agency action first request such a stay from the agency.[17] Thus, it appears that several states that had previously filed premature challenges to the Proposed Rule are now preparing to file motions to stay implementation of the Final Rule, notwithstanding that such a filing would still be premature, until the Final Rule is published in the Federal Register.

A petition for a stay must demonstrate, among other things, whether the movant will be irreparably harmed if a stay is not granted. In this case, this factor would militate strongly against petitioners’ claim for a stay because the final Clean Power Plan provides states (1) up to three years for the submission of state plans and (2) seven years before the first CO2 emissions reductions must be achieved. Additionally, states have the option of not developing their own plans and allowing EPA to issue a federal plan on their behalf; EPA also clarified in the Final Rule that no sanctions would be imposed upon states that decide not to submit their own plan.[18] Further, unlike the Proposed Rule, the Final Rule imposes the emission reduction obligations directly upon the affected EGUs. Given the long lead-time between promulgation of the Final Rule and the Clean Power Plan’s implementation, states and industry will face significant hurdles demonstrating that they would be irreparably harmed by having to wait for litigation on the merits of the Final Rule.

Besides the one particular argument at issue in the Murray Energy cases, petitioners are likely to challenge the EPA’s authority to set numeric emissions performance goals for affected EGUs in the first place and to consider emissions reductions achievable by other plants operating within the interconnected electricity grid in setting those goals. In these respects, the Final Rule is strongly positioned to rebuff such claims by establishing nationally uniform emission performance rates for each of two subcategories of fossil fuel-fired EGUs, by only considering reductions in the carbon intensity achievable by shifting dispatch to lower-emitting sources in setting those rates, and by imposing federally enforceable emissions standards directly on the affected EGUs. Additionally, by premising the BSER on reductions achievable through emissions trading, the Final Rule grounds itself in the approach that has long been used to reduce emissions from power plants operating within the interconnected electricity grid under the CAA.

Conclusion

The final Clean Power Plan represents a cornerstone of President Obama’s environmental legacy. In his remarks announcing the Clean Power Plan on August 3rd, the President called it “the single most important step America has ever taken in the fight against global climate change.”[19] He also provided a forceful response to likely critics, who will pronounce the Final Rule a “war on coal” or raise the same “stale arguments” previously raised against earlier efforts to reduce emissions under the CAA, describing the price of continued inaction and the  “moral obligation” to address climate change (referencing Pope Francis’ recent encyclical, Laudato si’, for moral authority beyond the CAA). Certainly the Clean Power Plan will face challenges both in court and Congress, but the President’s steely resolve and ecclesiastical tone indicate that he and the EPA are ready for the fight.

To view the footnotes, please view the original here.

This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Poloncarz and Mr. Carrier and may not reflect the opinions of Synergy Environmental, Inc., Paul Hastings, LLP or either of those firms’ clients.