On May 13, 2010, the US Environmental Protection Agency (EPA) announced its final “tailoring” rules for determining which sources must obtain air permits for greenhouse gas (GHG) emissions. EPA’s approach is to limit the applicability of, or “tailor,” existing requirements by phasing in GHG permitting obligations over time, with the initial focus on the largest emitters such as fossil-fueled power plants, steel mills, petroleum refineries, and large landfills. Smaller sources—farms, office buildings, residential structures, and even some industrial facilities—would be excluded from GHG air permitting for now. 

Under the Clean Air Act (CAA), the emissions threshold used in determining whether a source needs to obtain a Prevention of Significant Deterioration (PSD) construction permit is either 100 or 250 tons per year (depending on the type of source). For federal operating permits, referred to as “Title V permits,” the CAA sets the threshold at 100 tons per year or less. Relying on the doctrines of “absurd results,” “administrative necessity,” and “one-step-at-a-time,” however, EPA has concluded that it need not use those thresholds for GHGs since they would burden emitters and overwhelm permitting agencies.

Instead, EPA has decided to phase in CAA permitting for GHGs in at least two steps. In Step 1, lasting from January 2, 2011 to June 30, 2011, the PSD program will include GHGs only if a source is otherwise subject to PSD requirements and its potential GHG emissions will increase by at least 75,000 short tons per year (tpy) on a carbon dioxide equivalent basis (CO2e). Similarly, sources that are subject to Title V anyway would include their GHG emissions in Step 1. Thus, in the first phase no source would need to obtain an air permit based solely on GHG emissions.

In Step 2, lasting from July 1, 2011 to June 30, 2013, sources that have the potential to emit at least 100,000 tpy CO2e, or to increase GHG emissions by at least 75,000 tpy, would be subject to the PSD program. Sources emitting 100,000 tpy CO2e would need to obtain Title V permits, even if they would not be subject to such requirements based on other emissions. 

Rejecting an approach favored by several commenters on the proposed rule, EPA established no industry-specific threshold. Thus, it exempted neither biomass plants, which are argued to be carbon neutral, nor any energy-intensive sector. Nor will there be a transition period for applications that are pending when Step 1 begins.

The states will need to tell EPA whether they will follow the federal interpretation. If a state does not, it will need to explain what authority it will use, and if it does not similarly tailor the permitting triggers, it will need to show it could administer a lower threshold. As necessary, EPA may take regulatory action to correct any related deficiencies in State Implementation Plans. States also may need to alter their Title V fee structure to fund the permitting of GHG sources.

In the longer term, EPA is committing to take a third step, which would include a rulemaking by July 1, 2012 to consider lowering the thresholds and streamlining the permitting process. Even so, EPA is committing not to lower the threshold below 50,000 tpy CO2e. In addition, it will study permitting burdens for smaller sources and will complete, by April 30, 2016, another rulemaking addressing their permitting status, possibly exempting them permanently.

The Tailoring Rule builds on several prior EPA administrative initiatives. In December 2009, EPA found that (i) the six key well-mixed GHGs—carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride—threaten public health and welfare, and (ii) new motor vehicles contribute to that GHG pollution. Based on those findings, EPA finalized GHG tailpipe levels on April 1, 2010 for model year 2012 through 2016 cars and light trucks. The earliest date that a vehicle meeting those requirements may be sold in the United States is January 2, 2011. In an interpretation of its regulations, EPA concluded this is when the first final nationwide GHG control takes effect such that GHGs are “subject to regulation” under the CAA and thus within the PSD and Title V permitting programs for stationary sources. Hence, Step 1 of the tailoring rule starts on that date.

Judicial challenges to this path are pending, and at least one group already is signaling its intention to file a petition for review of the tailoring rule. Chief among the rule’s controversial features is whether EPA can ignore express statutory language in setting the new CAA permitting thresholds. Further, EPA is continuing to treat the mix of GHGs as the air pollutant to be controlled, rather than individual constituents. This is particularly important for PSD permits, which must include case-by-case emissions limitations based on the best available control technology or BACT. 

The tailoring rule provides no guidance on BACT for GHGs; EPA is planning to roll out additional guidance on that issue over 2010. Critical BACT issues still to be resolved include netting of emission increases and decreases, fuel substitutions, the role of efficiency, how to utilize a project’s fundamental business purpose in defining a source (and thus the scope of the BACT analysis), and cost-effectiveness thresholds.

For more information about the tailoring rules, or any other matter raised in this Legal Update, please contact Roger W. Patrick at +1 202 263 3343, or your usual Mayer Brown lawyer.

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