Last week, the Environmental Protection Agency announced the “Affordable Clean Energy (ACE) Rule,” which is the proposed replacement to the so-called “Clean Power Plan” (CPP). After 8 long years of the prior administration’s misuse of environmental regulations to promote an anti-fossil fuel ideology and to illegally shift power from the states to the federal government, this proposal is another example of the current administration efforts to return our nation’s largest environmental agency back to is statutory role – protecting the environment, not directing energy policy.
This role is governed by the Federal Clean Air Act (FCAA) in conjunction with similar state laws across the country, many of which pre-dated the federal law, and is kept in-check by fundamental constitutional protections such as the rule of law, separation of powers (Article 3), and states’ rights (10th Amendment). For decades, this state-federal balance, also referred to as “cooperative federalism,” was a model for the world as it reduced pollution and maintained economic growth, leading the United States to enjoy the cleanest environment while remaining globally competitive. The CPP undermined this balance as it was one in a series of rules promulgated by the prior administration seeking to impose energy policies they failed to implement legally through Congress. While the CPP’s abuses were shrouded in complexity and an unprecedented public relations blitz by the prior administration, it was easily the high-water mark of federal government overreach in the energy policy arena.
A RETURN TO REGULATION, NOT MARKET MANIPULATION
Before addressing the legal and policy reasons why the ACE Rule is an important step in the right direction, let me first address the fallacy being promoted by the past Administration, extreme environmental groups, and renewable energy advocates. In the wake of the ACE Rule announcement, these interests make the argument that the CPP was merely going to do by rule what the market was already doing as it relates to coal-fired power plants. This over-generalization is now being parroted in headlines about how the ACE rule is somehow running counter to the market and “can’t save coal.” Addressing all the flaws in such spin would take an entire book, but suffice it to say that, if those who believe that markets were going to do anyway what the CPP was trying to do, why would they work so hard to develop, pass, and promote a legally-tortured rule you say is not necessary for renewable energy to succeed? When has the federal government ever been a central player in any successful business plan?
American electricity markets have become so distorted with direct and indirect energy subsidies that nobody can expect those markets to tell us anything about what is or is not competitive. Current efforts to balance the erosive impact of subsidies on resilient nuclear and coal plants are another chapter in a familiar, cautionary tale that government cannot fix markets, even those that it has broken, unless it eradicates subsidies and improves transparency so ratepayers know the true and total cost of what they are buying when they pay their electricity bills. With that reality-check in mind, let’s turn to why the ACE Rule is another in a series of regulatory reforms that show this administration’s dedication to reducing the size of the administrative state.
A RETURN TO THE RULE OF LAW
While it is difficult to rank which legal failing of the CPP was the most egregious, it is widely agreed that the most obvious legal flaw of the rule was its unprecedented grab of energy policymaking authority through the re-definition of one phrase in the Clean Air Act – “Best System of Emission Reduction (BSER).” Breaking from explicit statutory text and 45 years of regulatory and judicial precedent, the Obama EPA redefined the word “system” to mean the entire electricity grid such that it could derive a mandatory emission standard based, not on what was achievable inside the fence of a facility, but instead on its own assumptions of what could be built elsewhere in the bulk power system to offset a facility’s emissions. This “outside the fence” approach, while acceptable under the FCAA as a method of flexible compliance with an emission standard, has never been accepted as a means to derive a mandatory compliance standard. Because the Obama EPA made its own assumptions about the power grid in deriving the emission standard, they were able to impose their policy preferences about what type of electric generation could and should be built in the grid (primarily renewables) and made it impossible for traditional fossil fuel-fired plants (coal and simple-cycle natural gas) to meet the standard they derived without a massive transfer of wealth from fossil energy owners to renewable developers.
Part of the creative PR campaign behind the rule was to convince people that natural gas would also be a “winner” under the rule, but there were two poison pills in the CPP rule that most failed to catch: (1) the preamble to the final CPP made it clear that the trading regimes likely to result from the CPP would not be allowed to encourage new natural gas plants because they were “inconsistent with the long-term need to continue reducing CO2 emissions” and (2), as discussed further below, the newly expansive definition of BSER would pave the way for aggressive methane emission regulations in the oil and gas industry because the oil and gas pipeline system is no less a “system” than the electric grid.
The ACE Rule, by contrast, returns EPA’s regulation under Section 111 of the FCAA back to the statutory text and long-standing precedent by establishing a process of deriving compliance standards based on technologies that can be deployed “inside-the-fence” of facilities. This return to the rule of law also returns EPA back to the approach that made American environmental regulation great to begin with – technology, not ideology. It is through the development and deployment of technology, once commercially demonstrated, that the United States has achieved the cleanest air in the world and remained globally competitive. The prior administration tried to preach that the CPP followed that model, but the stark truth is that it destroyed it by illegally expanding EPA’s authority so it could impose its policy preferences and pick winners and losers.
A RETURN TO COOPERATIVE FEDERALISM
As if the “outside the fence” energy policy edicts of the CPP were not enough, perhaps the greatest legal failing of the the CPP is the manner in which it shifted power from the states to the federal government, in direct conflict with the cooperative federalism compromise that is built into the FCAA and most federal environmental statutes. Even more impressive than this attempted power grab was the prior administration’s PR campaign claiming that the CPP was a “model of cooperative federalism” because states’ had “flexibility” to fashion how they went about meeting the federally-mandated emission budgets. The flaw in this claim, of course, was that state budgets were set at unreasonably low levels such that states were functionally forced to implement the assumptions EPA made when they derived the budgets to begin with. For many states, EPA assumed things that were completely unrealistic, including the construction of unprecedented levels of renewable energy.
This approach – to mandate budgets based on unrealistic assumptions and then claiming that states can “flexibly” comply, was inappropriately coined “coercive federalism” by many observers. As one state enviromental agency appropriately pointed out, EPA was treating states more like “pawns” than “partners.” Nobody put it better than Harvard Law Professor Lawrence Tribe when he observed about the CPP (and I paraphrase) ‘When a Robber says: ‘your money or your life, it is neither legal nor “flexible” just because he says ‘you can pay with cash, credit, or Bitcoin.’
A RETURN TO SANITY ON NEW SOURCE REVIEW
One of the most important reforms proposed in the ACE rule relates to one of the most absurd legal constructs of the FCAA – the New Source Review (NSR) Program. NSR is the program which, if triggered, exposes existing facilities to a regulatory process that most often results in the imposition of expensive emission control/retrofit requirements that, in many cases, would be so infeasible that closure of the facility is the most likely outcome. The idea behind NSR is that facilities that are undergoing significant changes warrant the imposition of state-of-the-art emission control requirements. The problem is that ambiguous statutory language has given rise to historic agency practice and judicial opinions that significantly restrict efficiency-related changes to a facility – resulting in the current, absurd situation where many efficiency-improvement projects are not implemented at existing facilities to avoid the risk of triggering NSR. Given that efficiency is critical to both market competitiveness and environmental protection, NSR effectively handicaps power plants across the country, especially coal-fired units, and hinders the ability of each power plant to reduce its emissions through higher efficiency.
With the ACE proposal, EPA clarifies that efficiency-related projects will not necessarily trigger NSR even if they result in greater dispatch of the facility and, thus, greater total annual emissions, so long as hourly emission rates do not increase because those day-to-day emission rates are the best reflection of their efficiency and environmental performance. A bill pending in Congress would effect this same reform which could prove essential if a reviewing court views this reform as needing a statutory, rather than regulatory, fix. This reform is essential to the ACE Rule because, as already stated, the proposal returns the regulation of carbon dioxide from power plants back inside the fence of facilities and the only economically viable inside-the-fence controls are efficiency improvements that enable plants to produce less carbon dioxide per each unit of energy they produce.
MORE TO DO
So this return to the rule of law and cooperative federalism is a step in the right direction, but there are important parallel proceedings that need to be pursued to be confident that EPA has fully returned to its proper role as environmental regulator, as opposed to energy policy maker. Much has been written and speculated about whether the agency will revisit the “Endangerment Finding” issued in the context of the 2009 Motor Vehicle “Tailpipe Rule.” While the ever-evolving data and scientific evidence warrants such a review, the more immediate review that EPA should commence is the specific query of whether carbon dioxide from power plants significantly contributes to influence global climate sufficiently to satisfy Section 111(b) of the FCAA.
Section 111(b)(1)(A) establishes an explicit test for whether a specific pollutant can be regulated within a specific source category. For reference, that section states:
The Administrator shall, within 90 days after December 31, 1970, publish (and from time to time thereafter shall revise) a list of categories of stationary sources. He shall include a category of sources in such list if in his judgment it causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare. (Emphasis added)
It should be noted that the 2009 Tailpipe Rule Endangerment Finding was governed by a less stringent standard under Section 202 of the FCAA, which is in large part identical to Section 111(b)(1)(A) except the notable absence of the word “significantly” from the Section 202 Standard. This difference in statutory text is important given how much harder it is to meet the test when a source category is required to “significantly” contribute rather than just “cause or contribute” to endangerment. Because this provision guides what must be done by EPA when promulgating standards for new or modified sources under Section 111(b), the most appropriate docket for this assessment will be the EPA’s announced rulemaking to repeal and replace the 111(b) Rule governing new/modified sources (a.k.a. The “Carbon Pollution Standard (CPS)”). Because a valid 111(b) rule is a statutory prerequisite for a 111(d) rule to stand, the soon-to-be released 111(b) proposal is a critical part of the current administration’s plans to repeal and replace the CPP.
Nothing EPA proposes in the ACE Rule precludes them from pursuing, in the next rulemaking, the 111(b)(1)(A) assessment of whether the amount of pollutant (carbon dioxide) from this source category (power plants) can be reasonably considered to “significantly contribute” to endangerment. The preamble to the ACE Rule recites the views of prior administrations who have concluded that they did not need to conduct a new, pollutant-specific finding for any source category so long as a general finding for other pollutants was issued for the source category when it was originally listed for regulation under Section 111. Applied to carbon dioxide from power plants, this historic statutory interpretation would conclude that, because power plants were previously listed under Section 111, no additional endangerment finding is necessary. Of course, that argument effectively grants vast authority to EPA to regulate new pollutants from an already-listed source category, even if those pollutants, like carbon dioxide, were not even contemplated in the original endangerment finding.
This inferred expansion of regulatory authority has not yet been tested in court and few commenters have focused on it during the CPP debate. However, the second-largest environmental protection agency in the world, the Texas Commission on Environmental Quality (TCEQ) has commented about it throughout the 111(b) and (d) rule making over the past several years and it was the subject of a recent letter submitted to EPA by the Texas Governor, Lt. Governor, and Attorney General. The letter sets out a persuasive analyses of the statutory text and articulates how and why the FCAA demands that EPA conduct this pollutant- and source category-specific assessment before it finally decides to move forward with regulation of carbon dioxide at new, modified, or existing power plants.
The Texas officials point out that, since emissions standards under the FCAA are set on a pollutant-by-pollutant basis within source categories, it follows that the endangerment consideration must also be on a pollutant-specific basis before it can be regulated within a source-category. The TCEQ has long argued that GHGs are well mixed in the global atmosphere and the effect of GHG emissions on the climate cannot be traced back to specific geographic emission points. EPA has never provided convincing evidence that U.S. power plant emissions significantly contribute to global GHG concentrations or temperature change, even if IPCC-assumed climate linkages are assumed to be scientifically valid.
Despite the misconception of many that a “non-significant contribution” finding would constitute “climate change denial,” the Texas officials have pointed out that this finding can be made without having to tackle the climate change debate. They explain how, using the same calculation methodology deployed by the Obama EPA in the 2009 Endangerment finding, it can be demonstrated that eliminating U.S. power plant carbon emissions would effect less than a 0.4% reduction in global CO2 concentration (2.06 PPM of the 500 PPM projected 2050 global concentration of CO2). This corresponds to a reduction in global temperature of 0.021 degree Fahrenheit which would mitigate sea level rise by less than 1/50th of an inch. This disparity is a function of how much more the developing world will be contributing to to global carbon concentrations by 2050 relative to an ever-more-efficient U.S. power plant fleet.
It is important to remember that this debate about statutory text is not just relevant to power plants. The Obama EPA was in the process of pursuing GHG regulations governing oil and gas facilities (e.g., the Methane Rule) and had committed itself to pursuing a refinery rule under Section 111 as well. With this looming risk outstanding for other source categories, the manner in which the current administration navigates carbon dioxide rules for power plants is directly relevant to other important sectors of the U.S economy. Those sectors stand to gain significant protection from a “non-significant contribution” finding for power plants, if it were to be issued.
First, because the power sector is the largest domestic emitter of greenhouse gases, if it is found that the power sector does not meet the “significantly contribute” standard found in section 111(b)(1)(A), it is almost certain that no other source category’s emissions will meet that threshold. Second, other source categories may not be nearly as sanguine about the prospects of being regulated under 111(d) as the power sector simply because the CPP replacement rule stays “inside the fence.” That is to say that power plants may be better positioned to fend off an overly burdensome rule so long as EPA holds true to the longstanding precedent of requiring reductions that can only be reasonably achievable inside the fence of their facilities whereas other source categories might still endure significant burdens from such a regulatory approach.
To name a few, there could be costly controls imposed at oil and gas fracturing operations, optical imaging at gas gathering/boosting stations, electric engine mandates at gas processing plants, forced retrofitting of storage facilities, as well as a host of other oil and gas controls, including Vapor Recovery Units (VRUs), vapor combustors, and flares; and/or leak detection and repair requirements. Similarly, refineries could find an inside the fence rule will cause significantly more cost than would be expected at a power plant because the complexity and sheer number of potentially targeted sources at those facilities vastly exceeds what you find at a power plant.
What this all means is that non-EGU source categories could gain significant protection and regulatory certainty from a CPP replacement strategy that includes a limitation of EPA’s regulation of GHGs based on the materiality of a source category’s emissions to the global pool under the section 111 significant contribution standard. In the end, all the regulatory certainty the ACE Rule might bring will be for naught if EPA does not follow-through on this important review to ensure that the full text of the FCAA is followed and common-sense materiality assessment of domestic stationary source GHG emissions is fully scrutinized.
Purity has its place. However, in the difficult struggle to fend off extreme environmental interests seeking to expand centralized governmental control of the energy sector, every step in the opposite direction should be applauded. Stated another way, when it comes to energy policy, we should avoid defeating the good in search of the perfect. The ACE Rule goes a long way toward returning the EPA to its proper regulatory role. We recommend that the EPA follow through with parallel proceedings to solidify its ability to factor-in materiality and common sense when assessing GHG regulations under the FCAA moving forward.