Climate Change Legislation and Regulatory Activity (RegTech White Paper No. 6)

In the United States, the pace of regulatory and congressional activity related to climate change legislation and rulemaking has increased exponentially.  While previous climate change regulatory activity focused primarily on the emissions associated with the regional generation of electricity, U.S. EPA is now moving forward with proposed and final rulemakings that will require facilities across the entire national economy to report, obtain permits for, and potentially reduce emissions of greenhouse gases (GHGs).  The first and most significant of these rulemakings to date is the Final Mandatory GHG Reporting Rule issued by U.S. EPA on October 30, 2009 (74 FR 56260).  At the same time, the U.S. Congress is advancing national climate change legislation that is intended to reduce global warming pollution.  The fundamental changes in the way that GHGs are viewed from a regulatory perspective may be costly for companies and will drive changes to the way that they do business.  This White Paper presents an overview of the key components of the current climate change legislative and regulatory initiatives that will impact a wide range of businesses, and describes in more detail the requirements of the Final Mandatory GHG Reporting Rule that places new requirements on certain industrial, commercial, and institutional facilities across the nation.

Overview of Legislative Initiatives

The key components of the current climate change legislative initiatives in the U.S. are two (2) congressional bills:

• U.S. House of Representatives – The American Clean Energy and Security Act of 2009 (Waxman/Markey)
• U.S. Senate – The Clean Energy Jobs and American Power Act (Boxer/Kerry)

The American Clean Energy and Security Act of 2009, H.R. 2454, better known as the Waxman-Markey Energy Bill, was introduced on May 15, 2009 and passed the House of Representatives on June 26, 2009 by a small margin of 219-212.  The Waxman-Markey Energy Bill proposed significant regulations that would mandate energy reduction, energy efficiency, and the reduction of GHG emissions across the entire economy.  The Waxman-Markey Energy Bill contains provisions that would amend the Clean Air Act (CAA) to establish a cap-and-trade system designed to reduce GHGs from certain sources to 83% below 2005 levels by the year 2050.  The Bill also contains provisions related to promoting clean energy and energy efficiency, and for transitioning the U.S. to a clean energy economy.

On September 30, 2009, Senators John Kerry and Barbara Boxer released the Clean Energy Jobs and American Power Act, which is the Senate’s version of climate change legislation.  The proposal builds off the Waxman-Markey Energy Bill, with a cap-and-trade program still considered the leading regulatory mechanism for GHG emissions reductions, and with a key difference that allows regulated industries that cannot reduce GHG emissions to purchase offset credits.  However, the Senate proposal would require more of the offsets to have their origin in domestic projects, allowing for international offsets to account for only a quarter of the projects annually, rather than the half allowed for in the House Bill.  The Senate Bill also proposed greater initial GHG reduction goals than the Waxman-Markey Energy Bill, with an initial reduction of 20% below 2005 levels by the year 2020 and reductions to 83% below 2005 levels by the year 2050.  The Senate Bill also contains provisions related to promoting clean energy and energy efficiency.

The remainder of this White Paper provides a review of the requirements of U.S. EPA’s recently published Mandatory GHG Reporting Rule and compliance considerations for facilities that are affected, as well as an overview of U.S. EPA’s proposed Greenhouse Gas Tailoring Rule.

Mandatory Greenhouse Gas Reporting Rule

On September 22, 2009, U.S. EPA finalized the Mandatory GHG Reporting Rule (“GHG Reporting Rule” or “Rule”).  The proposed rule was published in the Federal Register on April 10, 2009 and public hearings were held during the 60-day public review and comment period.  Prior to issuing the final rule, U.S. EPA responded to comments from interested parties and the resulting final rule contains revisions to address some of those comments. The GHG Reporting Rule was published in the Federal Register on October 30, 2009 and will be codified at 40 CFR Part 98.  The Mandatory GHG Reporting Rule requires “listed sources” and sources that emit greater that 25,000 MTCO2e per year to report CO2 equivalent (CO2e) GHG emissions annually with the first reports for calendar year 2010 emissions due March 31, 2011.  This rule is expected to cover 85% of the nation’s GHG emissions and apply to approximately 10,000 facilities.

U.S. EPA has identified six (6) GHGs for reporting: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons, and perfluorocarbons.  GHG emissions are measured and reported on a CO2e basis, where each GHG has a global warming potential factor relative to CO2.  Emissions from non-CO2 GHG emissions will need to be calculated and converted to CO2e before determining a facility’s GHG reporting obligations.    Read on as we discuss:

• Who must report?
• What are the Reporting Requirements?
• What are the Best Available Monitoring Methods?
• What is the Abbreviated Emissions Report for Facilities Containing Only General Stationary Fuel Combustion Sources?
• What are the Recordkeeping Requirements?
• What about Calibration Requirements?
• What are the Calculation Requirements?
• What about Report Certification and Verification Requirements?

Who must report?

The GHG Reporting Rule establishes mandatory GHG reporting, monitoring, and recordkeeping requirements for owners and operators of certain facilities that directly emit GHG; certain fossil fuel suppliers; and certain industrial GHG suppliers that are located in the U.S. and that meet the requirements of 40 CFR §98.2.  The GHG Reporting Rule establishes four (4) categories of facilities that must keep records of and report their GHG emissions beginning in calendar year 2010:

1.  Facilities listed in source categories as defined in the following subparts of 40 CFR Part 98:

Subpart D – Electricity Generation
Subpart E – Adipic Acid Production
Subpart F – Aluminum Production
Subpart G – Ammonia Manufacturing
Subpart H – Cement Production
Subpart O – HCFC-22 Production & HFC-23 Destruction
Subpart S – Lime Manufacturing
Subpart V – Nitric Acid Production
Subpart X – Petrochemical Production
Subpart Y – Petroleum Refineries
Subpart Z – Phosphoric Acid Production
Subpart BB – Silicon Carbide Production
Subpart CC – Soda Ash Manufacturing
Subpart EE – Titanium Dioxide Production
Subpart HH – Municipal Solid Waste Landfills
Subpart JJ – Manure Management Systems

2.  Facilities listed in the following source categories and emit more than 25,000 MTCO2e per year of combined emissions from processes, stationary fuel combustion units, and other miscellaneous uses of carbonate:

Subpart K – Ferroalloy Production
Subpart N – Glass Production
Subpart H – Hydrogen Production
Subpart Q – Iron & Steel Production
Subpart R – Lead Production
Subpart AA – Pulp & Paper Manufacturing
Subpart GG – Zinc Production

3.  Facilities that do not otherwise meet the requirements of (1) or (2) above, but have an aggregate maximum rated heat input capacity for all stationary combustion units at the facility greater than 30 MMBtu/hr and emit more than 25,000 MTCO2e per year from all stationary combustion units combined, are covered by Subpart C – General Stationary Fuel Combustion Sources.

4.  Entities that produce, import, or export fossil fuel or industrial GHGs, such as:

Subpart LL – Suppliers of Coal-Based Liquid Fuels
Subpart MM – Suppliers of Petroleum Products
Subpart NN – Suppliers of Natural Gas and Natural Gas Liquids
Subpart OO – Suppliers of Industrial Greenhouse Gases
Subpart PP – Suppliers of Carbon Dioxide

What are the Reporting Requirements?

Once a facility has performed an initial applicability assessment and determined whether or not it is subject to 40 CFR Part 98, the facility should either (1) retain records on-site as documentation that it is not subject to the GHG Reporting Rule at this time or (2) begin to prepare for the recordkeeping and reporting schedule which will commence January 1, 2010.

Although it is imperative for all facilities subject to the Rule to review the specific requirements included in each subpart relevant to their business category, U.S. EPA has provided generalized calculation, monitoring, quality assurance, missing data, recordkeeping, and reporting requirements in Subpart A (General Provisions).   Facilities should note that if any provisions of Subpart A are in conflict with specific Subparts B through PP, precedence shall be given to the provisions included in Subparts B through PP.

Pursuant to 40 CFR §98.3(b), the first annual GHG report for existing facilities subject to the Rule must include all GHG emissions generated during calendar year 2010 and must be submitted no later than March 31, 2011.  For any facility that performs a physical or operational change after January 1, 2010 that would cause the facility to become subject to this rule, emissions would need to be reported for the first calendar year in which the change occurs, beginning with the first month in which the change occurred and ending on December 31 of that year.  Each subsequent annual report would need to cover emissions for the full calendar year, beginning on January 1 and ending on December 31.

Each annual GHG report will be required to include the following:

• Basic facility information.
• Year and months covered by the report.
• Date of report submittal.
• Emissions of individual GHGs (i.e., actual CO2, N2O, CH4, and individual fluorinated GHGs, as well as total CO2e) per applicable emission unit and references noting the specific equations employed in each calculation.
• Unit-specific process and activity data as specified in the “Data Reporting Requirements” of Subparts B through PP.
• A signed and dated certification statement provided by the designated representative or alternate designated representative.

Certain GHG reports will need to include additional information, as applicable, regarding the following:

• Changes to emission calculation methodologies within the reporting period.
• Use of missing data estimation procedures, in accordance with Subparts B through PP.
• Use of Best Available Monitoring Methods (described below).

What are the Best Available Monitoring Methods?

For the first reporting year, U.S. EPA has provided owners and operators with the option to use Best Available Monitoring Methods (BAMM) until March 31, 2010 for any parameter that canno reasonably be measured according to the monitoring and Quality Assurance/Quality Control (QA/QC) requirements of a relevant subpart.  Examples of BAMM include, but are not limited to, the following:

• Monitoring methods currently used.
• Supplier data.
• Engineering calculations.
• Other company data.

It is possible for facilities to request an extension beyond the March 31, 2010 BAMM deadline. However, any requests for extension must be submitted by January 28, 2010.  U.S. EPA will not allow extensions beyond calendar year 2010, and extensions past the March 31, 2010 deadline are expected to be difficult to obtain as U.S. EPA will only be granting extensions for well-documented and justifiable circumstances, as outlined below.

A request for an extension to use BAMM beyond March 31, 2010 must:

• List specific instrumentation and location of installation.
• Identify specific applicable rule requirements.
• Include a detailed explanation of why instruments cannot be obtained and installed by April 1, 2010.
• Include a description of future actions to be taken to ensure the actual monitoring method is obtained and installed as soon as possible.
• Indicate the expected date of installation and operation.
• Provide supporting documentation, if installation of monitoring equipment was not possible, including:
  • Date ordered.
  • Alternative suppliers and their delivery dates.
  • Backorder or delay notifications and actions to expedite delivery.
  • Current expected delivery date.
• Provide supporting documentation, if process shutdown is required, including:
  • Demonstration that isolation is not possible.
  • Frequency of process shutdown.
  • Dates of most recent and next planned shutdown.
  • Explanation as to why the equipment installation was not completed if there was a shutdown between promulgation and April 1, 2010.

What is the Abbreviated Emissions Report for Facilities Containing Only General Stationary Fuel Combustion Sources?

The GHG Reporting Rule includes an additional provision, available only for the 2010 reporting year, which allows for the abbreviated reporting of emissions for facilities only reporting GHG emissions due to stationary fuel combustion.  The abbreviated reporting provision at 40 CFR §98.3(d)(3) offers such facilities the option to aggregate GHG emissions generated by all on-site stationary fuel combustion units (as defined in §98.30) during the year 2010.  The abbreviated facility report must include the following information:

• Facility name and physical street address including the city, state, and zip code.
• The year and months covered by the report.
• Date of submittal.
• Total facility GHG emissions aggregated for all stationary fuel combustion units calculated according to any method specified in 40 CFR §98.33(a) and expressed in metric tons of CO2, CH4, N2O, and CO2e.

The abbreviated report is still due on March 31, 2011 and will not be an acceptable format in subsequent reporting years.

What are the Recordkeeping Requirements?

Any owner or operator that is required to report GHGs will need to keep the records specified in 40 CFR Part 98 on-site in either electronic or hard-copy format for a minimum of three (3) years.  In addition to retaining all background data used to calculate the facility’s GHG emissions (specifically listed at §98.3(g)), it will also be necessary for the facility to retain the results of all required certifications and quality assurance tests; maintain records of all continuous monitoring systems, flow meters, and other instrumentation; and develop and maintain a written GHG monitoring plan.

A GHG monitoring plan must, at a minimum, identify the following:

• Personnel responsible for collecting GHG emissions data.
• Data collection methods.
• Quality assurance, maintenance, and repair methods for all continuous monitoring systems (CMS), flow meters, and other instrumentation employed to collect applicable data.

In preparing GHG monitoring plans, facilities may rely on references to existing corporate documents (e.g., standard operating procedures, quality assurance programs under Appendix F to 40 CFR Part 60 or Appendix B to 40 CFR Part 75, and other documents) provided that the elements required in a GHG monitoring  plan are easily identifiable.  Initial GHG monitoring plans must be developed by April 1, 2010 and updated whenever necessary to reflect changes in relevant production processes, monitoring instrumentation, and quality assurance procedures – or to improve procedures for the maintenance and repair of monitoring systems to reduce the frequency of monitoring equipment downtime.

What about Calibration Requirements?

Reporting facilities are required to calibrate instrumentation used to measure GHG data using the procedures specified in Subparts B through PP by April 1, 2010.  Certain exceptions apply, such as for certain fuel billing meters, instrumentation calibrated previously in accordance with Part 98, and units and processes that operate continuously with infrequent outages.  Facilities should review the specific provisions of §98.3(i)(4) through (6) in order to determine if the April 1, 2010 calibration deadline applies.

What are the Calculation Requirements?

The calculation methodologies that must be used are defined in the GHG Reporting Rule based on unit-specific criteria.  Facilities will generally use the same calculation methodology throughout a reporting period. However, if a calculation methodology is changed part way through the year, a written explanation of why the change in methodology was needed must be provided in the annual report.  Once calculations have been performed according to the relevant subpart(s), the facility’s designated representative (or alternate designated representative) shall certify, sign, and electronically submit the annual report in accordance with the requirements of §98.4 in a format yet to be specified by the U.S. EPA Administrator.

What about Report Certification and Verification Requirements?

In addition to the required certification by a responsible facility official, the U.S. EPA Administrator will also verify the completeness and accuracy of the submittal.  The Administrator mfay use any additional information, including auditing, to verify the completeness and accuracy of a report.  Should the report contain any errors, the facility will need to submit a revised report within 45 days of discovery or after being notified by U.S. EPA of the errors.  The revised report must correct all identified errors.  Records documenting revisions performed to any annual GHG report must be retained on-site at the facility for three (3) years.

Proposed Greenhouse Gas Tailoring Rule

A second U.S. EPA action related to GHG regulation is the recently proposed Prevention of Significant Deterioration (PSD) and Title V GHG Tailoring Rule introduced September 30, 2009.  This action is the result of the Massachusetts v. U.S. EPA Supreme Court finding on April 2, 2007 that determined GHGs to be air pollutants that could be regulated by the CAA.  This court ruling in turn led to U.S. EPA’s proposed endangerment finding that concluded that GHGs contribute to air pollution that may endanger public health or welfare.  At the present time, GHGs are not regulated pollutants and therefore are not subject to Federal New Source Review (NSR) permitting.  However, in anticipation of the promulgation of regulations related to GHG emissions from motor vehicles, U.S. EPA is moving forward with proposed regulation of GHG emissions from stationary sources under the PSD and Title V Operating Permit programs. It is anticipated that U.S. EPA will finalize the automotive GHG rule in March 2010 and consequently, GHGs will become regulated pollutants under the CAA.

In advance of GHGs becoming regulated pollutants, U.S. EPA has proposed “tailoring” to reduce the permitting burden that would be caused in its absence.  The intent of the Tailoring Rule is to minimize the potential consequences to millions of relatively small sources of GHG emissions that would otherwise occur.  Under the PSD construction permit program and the Title V operating permit program, if the present thresholds that apply to pollutants (typically 100 or 250 tons per year) are applied to CO2e emissions, U.S. EPA has estimated that there would be tens of thousands of additional PSD permits issued each year and millions of additional Title V permits issued.  In Phase One of the U.S. EPA Tailoring Rule proposal, the threshold for new sources under the PSD program would be set at 25,000 tons per year (tpy) CO2e, and the “significance level” for modifications would be set between 10,000 and 25,000 tpy CO2e.  U.S. EPA is presently seeking comment on the appropriate emission level.  The proposed Title V threshold would also be set at 25,000 tpy CO2e. Note the difference between short tons used in the Tailoring Rule  compared with metric tons used in the other legislative and regulatory initiatives.

Under the proposed 25,000 tpy CO2e emissions thresholds, U.S. EPA estimates that 400 new sources or modifications to existing sources would be subject to PSD review each year for GHG emission increases. Less than 100 of these would be newly subject to PSD.  U.S. EPA also estimates that 14,000 sources would need to obtain Title V operating permits for GHG emissions.  About 3,000 of these sources would be newly subject to Title V operating permit requirements as a result of this action.

U.S. EPA has stated in its proposal that “if a state wants to implement PSD and Title V at a threshold lower than 25,000 tpy CO2e, or implement a significance level lower than the proposed 10,000 to 25,000 tpy CO2e, for GHG emitters” it would be free to do so.

There are also some indications that U.S. EPA will require that GHG emissions be considered when assessing control technologies for NSR permits.  On August 18, 2009, the U.S. EPA Region 4 office provided negative comments to the State of Georgia while reviewing a proposed PSD permit.  U.S. EPA commented: “As is noted in the application, RTOs emit higher levels of CO2 than other CO and VOC control methods. However no quantification of CO2 emissions is provided. At a minimum, CO2 emissions should be quantified as a possible additional environmental impact.”  While this permit has not been issued to date, unresolved negative comments by U.S. EPA can lead to a formal objection of the permit.  Some states are advising companies to include an assessment of GHG emission impacts in permit applications in order to minimize the potential for appeal by third parties.

The Title V permitting impacts associated with the tailoring rule are due primarily to the additional burden on companies and on the state regulatory agencies to issue the additional permits. The PSD permitting impacts are largely unknown at this point but will likely be significant.  Best Available Control Technology (BACT) for GHGs under PSD permitting has never been established.  Also, the comments provided by U.S. EPA during the Georgia PSD review raise a potential conflict – how will regulatory agencies weigh the GHG consequences of BACT or Lowest Achievable Emission Rate (LAER) for currently regulated NSR pollutants? The addition of GHG pollutants to the NSR and Title V permitting programs will have significant negative impacts on the regulated community.

Conclusion

The climate change legislation being considered along with the recent regulatory activity around GHG emissions represents a watershed moment in domestic environmental policy that will affect the regulated community into the foreseeable future.