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Energy Users Must Plan Now for the Future as Carbon Dioxide Regulation Risk Explodes with Recent Developments

April 28, 2009

Until recently, carbon dioxide has not been considered a regulated pollutant under the Federal Clean Air Act. For this reason, carbon dioxide emissions from coal and natural gas fired boilers and electrical generation facilities have not been subject to expensive pollution control technology or time-consuming air permitting requirements. For the same reason, many heating sources for commercial buildings that have a carbon dioxide emission component (e.g. natural gas fired heating units), have avoided the expensive and time-consuming air permitting thresholds (100 or 250 tons per year) applicable to major emitting sources under the Prevention of Significant Deterioration of Air Quality Program (the "PSD Program"). In the event CO2 were deemed to be a regulated pollutant under the Federal Clean Air Act, many thousands of such commercial buildings located in the State of Wisconsin would "trip" the PSD threshold under the Act and be subject, for the first time, to expensive pollution control and "major source" permitting requirements.

Recent Developments on CO2
A recent development by the United States Environmental Protection Agency ("EPA") proposes a significant change to the current status for regulations for carbon dioxide and other greenhouse gas emissions. On April 17, 2009 the EPA published in the Federal Register a proposed finding that greenhouse gas emissions constitute an endangerment to human health or welfare. This proposed finding is an outgrowth of a recent United States Supreme Court decision in 2007 entitled Massachusetts vs. EPA, 549 U.S. 497 (2007). In this case, the Supreme Court ruled that the EPA must regulate such emissions unless it can meet the burden to establish that such emissions do not have a reasonable likelihood to create an endangerment to human health or welfare. In the April 17, 2009 proposal, the EPA has indicated an intent to adopt a contrary finding which, if finalized, will result in mandatory regulation of such greenhouse gas emissions under the Federal Clean Air Act. The EPA's notice includes an opportunity to submit written comments and attend public hearings on the subject of the proposed findings on May 18, 2009 in Arlington, VA and in Seattle, WA.

In the event this proposed finding is finalized by EPA, it will mean that numerous fixed and mobile sources of greenhouse gas emissions could be subject to regulation under the Clean Air Act. In particular, it will put significant pressure on Congress to determine whether federal legislation should be adopted to preempt such EPA regulation of greenhouse gas emissions by providing a separate legislative structure (outside of the current structure of the Federal Clean Air Act) for regulating sources of greenhouse gas emissions. In the absence of such a separate legislative structure, it is estimated that the current threshold requirement for major sources of greenhouse gas emissions under the current provisions of the Federal Clean Air Act will cause a five fold increase in the number of businesses and commercial structures that will be subject to permitting and pollution control requirements under the Act.

Given the absence of Federal action under the Federal Clean Air Act during the last 30 years, States are taking the lead in regulating greenhouse gas emissions. Prime examples include the State of California and, more recently, the State of Washington. In particular, the State of Washington's House recently passed a restructured climate change bill following a heated debate. The State of Washington measure would require that State's Department of Ecology to give the State's major polluting industries a trajectory for reaching the State's greenhouse gas emissions targets by 2020 and require transportation planners in urban areas to develop strategies for reducing vehicle emissions.

Wisconsin is not immune to legislative proposals to regulate greenhouse gas emissions. In particular, representatives of the Governor's Task Force on Climate Change are currently drafting legislation which will almost certainly include proposed limits on greenhouse gas emissions including, but not limited to, carbon dioxide. In Wisconsin approximately 60% of the base-load electrical generation is supplied by coal; a fuel that is one of the highest source of CO2 among all available fuel sources for electrical generation. Therefore, in Wisconsin, the stakes are high in the debate on control of carbon dioxide for users of electricity who are served by these existing, carbon-rich, generation systems.

Renewable Energy Portfolio Standards
On a related topic, there are many state and federal proposals that would increase the percentage of base load electrical generation provided by renewable energy sources in the future. These standards for renewable energy are called Renewable Portfolio Standards, or "RPS" requirements. Under current RPS requirements in Wisconsin, for example, 10% of electricity used must be derived from renewable generation resources by the year 2015. The Wisconsin Task Force on Climate Change recommends that the renewable energy portfolio standards in Wisconsin be increased to 25% by the year 2025.

This week, Congressman Waxman, the Chair of the House Energy and Commerce Committee, is holding important hearings on a federal proposal that would cap CO2 emissions and create a national RPS requirement of 25% by 2025. The recent EPA announcement on April 17, 2009 has increased the stakes in the national debate on federal legislation. In particular, this regulatory proposal has made it more likely that there will be a federal program to regulate greenhouse gas emissions. A federal legislative enactment would be a more cost-effective and rational alternative to the current structure of regulation if greenhouse gas emissions are allowed to be regulated under the Federal Clean Air Act under the 4/17/09 proposed EPA "endangerment" finding.

Energy User Strategies
These recent regulatory and legislative developments require all parties, including significant energy users, to carefully monitor these initiatives that would apply to greenhouse gas emissions. As mentioned previously, approximately 60% of the generation of electricity in Wisconsin is coal based and associated with significant carbon dioxide emissions. The future regulation of carbon emissions from these generation sources will be associated with enormous increases in costs for these regulated, high carbon emitting facilities; costs that, in all likelihood, will be passed on to the customers of the regulated utilities.

Therefore, G&K is recommending that users of carbon based energy not only actively seek methods to become more energy efficient, but also consider strategies to analyze the opportunities for using carbon-free renewable energy sources to meet their present and future energy needs. New tax provisions as well as significant sources of grants for qualified renewable energy systems contained in the February 16, 2009 Federal Stimulus Package provide strong incentives for developing these strategies. See last month's G&K Environmental/Energy Update titled "Key Renewable Energy and Energy Efficiency Provisions in the American Recovery and Reinvestment Act of 2009".

G&K is assisting many clients in their current effort to take maximum advantage of these stimulus provisions in designing energy efficiency and renewable energy strategies. EPA's recent proposed "endangerment" finding on April 17, 2009 and the other federal and state legislative proposals mentioned in this newsletter will only serve to further motivate businesses and governmental entities to double their efforts to develop and implement these strategies. Members of the G&K Environmental/Energy and Economic Recovery Teams are uniquely qualified to assist clients in the development of these strategies to meet the demands of the future energy markets.


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