Of late, there have been few meaningful exchanges in the war over the S. Environmental Protection Agency's (EPA) climate change regulations. On the legal front, the final briefs challenging critical agency rulemakings were filed months ago. On the permitting front, the EPA has issued guidance and offered comments regarding Best Available Control Technology analyses for greenhouse gases (GHGs), but has not objected to a state's issuance of a GHG permit.[1]

However, there have now been two newsworthy developments in a little more than a week. On February 24^th, the EPA announced a proposal to maintain the current major source applicability limits established in the agency's Tailoring Rule, which phases in Prevention of Significant Deterioration (PSD) and Title V permitting requirements for GHG emissions. EPA also proposed two permitting options that may streamline the permitting of GHG emissions by allowing some sources to avoid permitting under the rule. 

Then, on February 28^th and 29^th, the United States Court of Appeals for the District of Columbia (the D.C. Circuit) held oral arguments for four consolidated cases challenging EPA's power to regulate GHGs. The cases challenge: (1) the Endangerment Finding; (2) GHG emissions standards for light-duty vehicles; (3) the Timing Rule establishing when pollutants become "subject to regulation"; and (4) the Tailoring Rule itself. These developments are further discussed below. 

EPA's Tailoring Rule Proposals

Current Applicability Thresholds to be Maintained

When the EPA finalized the Tailoring Rule in May of 2010[2], the agency established a three-step schedule for the phase-in of federal Clean Air Act (CAA) PSD and Title V permitting requirements for stationary sources of GHGs, but only established permitting thresholds for Steps 1 and 2. The Step 3 thresholds, EPA explained, would be established through a separate rulemaking in 2011. The belated start of this process came with the proposal on February 24^th. 

The EPA has proposed to simply maintain the current Step 2 thresholds[3], making Step 3 nothing more than an extension of Step 2. The agency's primary justification for the proposal is that permitting authorities have not received many applications for GHG PSD permits[4] and, therefore, have not yet developed the expertise needed to handle the number of applications expected at lower thresholds. Also, the increased coverage of national GHG emissions that would result from lowering the thresholds is, EPA contends, significantly outweighed by the increased burdens on permitting agencies.

If the EPA finalizes the proposal, PSD permitting for GHGs will continue to be required only for any source with a potential to emit (PTE) of 100,000 tons per year (tpy) or more of CO₂ equivalents (CO₂e) or any project that would increase GHG emissions at an existing source by at least 75,000 tpy of CO₂e. Likewise, Title V will only apply to any stationary source with a PTE of at least 100,000 tpy of CO₂e.

Streamlining Proposals: PALs and Synthetic Minor Permits

Although the EPA's proposal not to lower permitting thresholds is noteworthy, it would be a stay-the-course decision. In contrast, the agency's two "streamlining" proposals for GHG permitting are new developments and may prove more helpful to regulated sources. The agency has announced its intent to: (1)  modify the existing Plantwide Applicability Limit (PAL) rules to encourage the use of GHG PALs; and (2) create federal synthetic minor permit authority for GHG emissions.

A PAL is a voluntary permit establishing a source-wide, tons-per-year emissions cap. The cap then allows the permitted source to make changes without triggering major New Source Review (NSR) permitting requirements, so long as overall emissions remain below the cap. Many in Texas would be tempted to call it a "flexible permit."[5]

The EPA's PAL proposal would address two issues. First, it would allow existing sources of GHGs which are not already major for another pollutant to obtain a PAL. Currently, the EPA interprets its rules such that only major sources can receive a PAL.  Because existing sources of GHGs do not become "major" until they increase GHG emissions by at least 75,000 tpy of CO₂e, they cannot apply for and receive a PAL unless they are major for a non-GHG pollutant. Second, the PAL proposal would allow a source to have its tpy cap expressed in CO₂e, instead of the actual mass of the GHG emissions.[6]

If finalized, the PAL proposal could add flexibility to the permitting process. Specifically, a PAL would allow a source to avoid PSD review for future projects that increase GHG emissions, provided total emissions remain below the GHG cap. Because the cap could be set at 75,000 tpy of CO₂e above baseline emissions, a source could significantly increase emissions without triggering PSD requirements and could implement even larger projects if it were able to offset increases with decreases from existing source equipment. 

The EPA's second streamlining proposal, concerning synthetic minor source permitting, is more of a gap-filling measure.  Currently, except in areas designated by EPA as Indian Country, there is no federal authority for the agency to issue minor New Source Review (NSR) permits. Accordingly, the EPA generally cannot issue permits with enforceable conditions limiting emissions to less than major source thresholds (thereby making the source a "synthetic minor"). 

If finalized, the EPA's proposed synthetic minor permitting provisions would allow the agency to issue synthetic minor GHG permits for sources located in areas where the EPA is the GHG permitting authority. It would also allow issuance of synthetic minor permits by states implementing the federal PSD program pursuant to a delegation agreement with EPA.

Legal Challenges and Oral Arguments

The EPA's Tailoring Rule proposals will become moot if the agency's various rulemakings supporting its authority to regulate GHGs are overturned by the D.C. Circuit. On February 28^th and 29^th, a three-judge panel of the court heard oral arguments on the four pivotal GHG cases pending before the court.[7] This litigation involves dozens of parties and thousands of pages of briefs.  What follows is an overview of the four major issues in these cases.

The Endangerment Finding

In December 2009, the EPA issued findings that GHG emissions constitute air pollution that threatens the public health and welfare (the endangerment finding) and that GHGs from new motor vehicles and new motor vehicle engines contribute to this condition of air pollution (the cause and contribute finding).[8] These findings are required before the EPA may regulate mobile sources under the CAA.

The petitioners attack the EPA on both procedural and factual grounds. Among other arguments, they contend that the climate science is insufficient to support the EPA's conclusion that global warming is very likely due to human causes and will result in severe harm, that the agency improperly delegated its authority to unreliable outside entities, such as the Intergovernmental Panel on Climate Change, and that the agency should have granted reconsideration of its findings after certain allegations of scientific misconduct were made. 

At oral argument, the court panel appeared skeptical of the petitioners, asking questions regarding the preclusive effect of the Supreme Court's 2007 decision in Massachusetts v. EPA and noting that the petitioners would have to meet the heavy burden of demonstrating that the EPA's findings were arbitrary and capricious. For its part, the EPA argued that it did not rubber-stamp third-party findings, instead conducting a thorough review of thousands of peer-reviewed studies and arriving at its own rational findings.  Further, the EPA contends that the errors alleged by the challengers were marginal and within the range of uncertainties previously evaluated.

Light-Duty Vehicles (The Tailpipe Rule)

In May 2010, the EPA issued standards, developed with the National Highway Traffic Safety Administration, under Title II of the CAA limiting GHG emissions for light-duty vehicles for model years 2012-2016. The so-called "Tailpipe Rule" is important to the  regulation of GHGs from stationary sources because, EPA contends, GHGs automatically became "subject to regulation" under the CAA when the Tailpipe Rule took effect on January 2, 2011.

Petitioners in the consolidated challenge to the Tailpipe Rule argued that the standards would not meaningfully address the harms described by the agency in the Endangerment Finding and that the EPA should have considered the costs of regulatory impacts on stationary sources in its evaluation of the costs and benefits of the rule. The EPA argued that, once it finalized the Endangerment Finding, it had a non-discretionary duty to promulgate emissions standards for motor vehicles.

During oral argument, the court panel pointed out in its questioning that the plain language of the CAA states that the EPA "shall" issue motor vehicle emissions standards for any pollutant concerning which the agency has made endangerment and cause and contribute findings. The U.S. automakers argued to the court that they are the industry actually subject to the standards, but the automakers support the Tailpipe Rule. The Supreme Court's interpretation of this CAA language in Massachusetts v. EPA may present an uphill battle for petitioners in their effort to overturn the Tailpipe Rule.

The Timing Rule (Subject to Regulation)

In this rule, issued in April 2010, the EPA formally reaffirmed a December 2008 interpretation that air pollutants are "subject to regulation" and, therefore, a "regulated New Source Review pollutant" if a regulation adopted under the CAA requires actual control of emissions of that pollutant. The EPA also "refined" its interpretation to establish that PSD permitting requirements do not apply until the triggering regulation actually takes effect. Based on this interpretation, the agency explained that permitting requirements under Title I (PSD) and Title V of the CAA would automatically trigger for GHGs not when the Tailpipe Rule was promulgated, but when the Tailpipe Rule took effect on January 2, 2011.

Petitioners argue that certain sections of the CAA limit the application of PSD requirements to pollutants for which the EPA has established a National Ambient Air Quality Standard (NAAQS). As the EPA has not established a NAAQS for GHGs, PSD cannot apply for these pollutants. The EPA, however, maintains that once PSD applies in an area for any pollutant, it can apply for any other pollutant. The agency also argues that the CAA provisions are best interpreted as merely precluding the application of PSD to pollutants for which an area is in nonattainment, with the "subject to regulation" language in the CAA providing the trigger for PSD requirements.  

The panel pushed both sides at oral arguments, asking petitioners why their legal arguments regarding the scope and applicability of the PSD program are timely, given that they could have and maybe should have been raised long ago, and quizzing the EPA regarding the level of deference that should apply under Chevron v. NRDC. Essentially, it appears that the panel may consider petitioners' statutory construction arguments reasonable, but was concerned that they might no longer be timely. Even if the petitioners pass the standing hurdle, they could still lose based on a finding that the CAA is sufficiently ambiguous to require deference to the EPA's position, due to Chevron. 

The Tailoring Rule

As discussed above, the Tailoring Rule is the EPA's plan for phasing in PSD and Title V permitting requirements for GHG emissions.  A core issue is that the rule does not use the explicit applicability thresholds in the CAA. Specifically, for PSD the CAA defines a major stationary source of a regulated air pollutant as one with a PTE of 100 tpy for certain specified sources and 250 tpy for all other sources. The statutory Title V threshold is 100 tpy. 

In contrast, the Tailoring Rule established thresholds of 100,000 and 75,000 tpy of CO₂e. In its rulemaking, the EPA justified its departure from the statutory limits based on "absurd results," "administrative necessity," and the premise that the agency can proceed toward full compliance "one step at a time."

The Tailoring Rule may be the hardest for the EPA to defend, because the rule does not accord with the express language in the CAA. Accordingly, the agency will not be afforded deference under Chevron. Further, petitioners have seized on the EPA's "absurd results" basis for the rule to argue that the easiest and best way to avoid absurd results would be to find that PSD and Title V permitting does not apply to GHGs. Petitioners also argue that the EPA's "absurd results," "administrative necessity," and "one step at a time" arguments are illegitimate and, if affirmed by the court, would provide the agency with too much discretion to rewrite existing law.

Even if the petitioners have strong legal arguments regarding the legitimacy of the Tailoring Rule, petitioners could have difficulty demonstrating that they have been harmed by the rule and have standing, because the rule ostensibly establishes less stringent applicability thresholds. Petitioners may also have a difficult time convincing the court to hold that vacating the Tailoring Rule necessarily makes PSD and Title V permitting inapplicable to GHG emissions. 

For example, during oral arguments, the panel asked about what seemed to be a missing connection between vacating the rule and the relief requested, given that the Tailoring Rule does not itself purport to bring GHGs into the PSD program. On the flip side, the panel described the absurd results doctrine as "pretty dramatic" and seemed concerned with the amount of discretion it would give the EPA.

Concluding Thoughts

For now, the majority of climate change regulatory issues will focus on commenting on the two proposed permitting options to streamline the GHG permitting process and case-by-case controversies arising from the efforts of regulated entities and permitting authorities dealing with the actual implementation of permit reviews for stationary sources. BACT will be a prominent focus of these reviews, with numerous  challenges to the sufficiency of the information and analysis used to exclude control methods, such as carbon capture and sequestration, from selection as BACT.

On the legal front, parties will largely be waiting for the D.C. Circuit's decisions on the EPA's four central rulemakings, with some attention paid to associated issues such as the challenge by Texas to the EPA's State Implementation Plan call and Federal Implementation Plan rulemakings. As for expected outcomes, the conventional wisdom is that the D.C. Circuit will uphold the Endangerment Finding and Tailpipe Rules, but could be persuaded on the Timing Rule and the Tailoring Rule.  However, the odds may be against petitioners on these rules as well.

Although the NAAQS prerequisite argument against the Timing Rule is persuasive, to reach it the court may have to find that the petitioners have standing to challenge historical regulations, some of which are decades old. Because the court would be cautious about doing so, the Timing Rule could survive. If it does, the court would then face the no-win prospect of upholding a rule that is contrary to statutory language or vacating the rule and subjecting an untold number of sources to regulation. More likely, the court would take a third path, remanding the rule without vacating it. This would preserve the status quo, but without upholding the EPA's use of the "absurd results" and related doctrines. Regardless, it is virtually certain that these issues will then be appealed to the Supreme Court.

This article was prepared by Patricia Finn Braddock and Bob Greenslade (rgreenslade@fulbright.com or 512 536 5241) of the firm's Environmental Law Practice Group, Climate Change Practice Group and Energy Practice Group. For further information, please contact one of the above authors, Edward C. Lewis (elewis@fulbright.com or 713 651 3760), co-head of the Climate Change Practice Group or Jeffrey B. Margulies (jmargulies@fulbright.com or 213 892 9286), head of California's Environmental Law and Climate Change Practice groups.