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New EPA Final Rule Requires Reporting of Greenhouse Gas Emissions – Starting January 1, 2010

Environmental Law Alert Roger K. Ferland, Michael S. McCauley, Cynthia A. Faur

On October 30, 2009, the Environmental Protection Agency ("EPA") published in the Federal Register its final rule requiring a wide range of industries to report greenhouse gas ("GHG") emissions. Monitoring must begin January 1, 2010, with the first annual reports due in 2011. The stated purpose of the rule is to gather "comprehensive and accurate data about the production of greenhouse gases." The data will be used to support current research and reporting activities conducted by EPA and will inform the agency about the extent of GHG emissions resulting from different types of economic activity. Importantly, the rule does not impose emission limits; it only creates monitoring, reporting, and recordkeeping obligations.

 

In a December 2007 appropriations bill, Congress directed EPA to develop this new reporting rule under the Clean Air Act. The rule is to measure GHG emissions from "all sectors of the economy."  Because emissions from "all sectors" were to be measured, the rule applies very broadly and will likely impact many businesses that have never before been subject to a Clean Air Act reporting requirement. The universe of facilities subject to reporting requirements include: facilities operating in specific industries listed in the rule, other sources with carbon dioxide equivalent emissions ("CO2e") from stationary fuel combustion sources greater than 25,000 tons per year, and manufacturers and suppliers of products resulting in GHG emissions, such as vehicle and engine manufacturers and fossil fuel suppliers.

 

The rule also creates the first mechanism for enforcement by EPA relating to GHG emissions. Failure to file reports or otherwise comply with the rule could trigger penalties under the Clean Air Act, up to $32,500 per violation per day. For facilities with emissions close to the reporting threshold, the risks of underreporting and potential enforcement, especially in future years when economic conditions improve, may be a significant factor in determining whether to report. In addition, for better and for worse, the industry-specific reporting under the rule makes it more likely that the identified industries will be subject to a future cap. It also means that the burdens of regulation may not fall uniformly on all emitters.

 

Monitoring Requirement Includes Technology and Estimates

 

Under the rule, some sources can estimate emissions for the first part of 2010. From January 1 - March 31, 2010, facilities may use the best available data in lieu of the required monitoring methods for their type of facility. Facilities can request an extension of the period for use of estimates, but EPA has stated that it will not approve any extensions beyond 2010. Facilities must adopt and incorporate the required monitoring technology set out in the rule. The technology varies by type of facility. As a result, once a facility has determined that it is subject to the rule, careful evaluation of the monitoring options should occur to ensure compliance.

 

Different Methods of Determining if the Rule Applies

 

As noted above, the reporting rule employs several different methods to identify parties that must report GHG emissions. Two of these methods hinge on annual emissions of CO2e, which may vary from year to year. Any facility that meets the requirements of any one of the applicability methods must comply with the rule.

 

The primary methods consider the source's industry and also its emission levels. First, the rule contains a list of industry categories; sources in these categories must report emissions annually regardless of the amount of emissions. In addition, the rule contains another list of industry categories whose sources are required to report only if the source emits more than 25,000 metric tons of CO2e. Finally, all facilities that have stationary fuel combustion sources with an aggregate maximum heat input capacity of 30 mmBTU/hour or greater and emissions of at least 25,000 metric tons of CO2e that are not otherwise included in either of the first two groups must file reports. Facilities in the second and third categories with emissions close to the threshold will likely face difficult choices in documenting their emissions and in determining whether to report. The rule also establishes applicability criteria specific to engine manufactures for reporting emissions from the engines and criteria specifically for fossil fuel suppliers.

 

EPA has developed fact sheets for each source category covered by the reporting rule, and it has designed an interactive "Applicability Tool" to assist companies in assessing whether they are subject to reporting under the rule. That said, the rule does not provide an opportunity to request EPA approval of the company's applicability determination. Without advance EPA approval, non-reporting facilities have no safe harbor if they later determine that emissions were underestimated and should have been reported. The rule also does not address facilities with cyclical variations in emissions, such as seasonal operations or manufacturers that are currently at low production levels but may have higher emissions when production rebounds in future years.

 

Facilities that are not in a listed industry and do not currently meet the emission threshold face an additional problem. If the facility could have higher emissions in the future then they will likely need to monitor their emissions, because if the emissions exceed the threshold, the facility will then be required to report. Once a facility becomes subject to the rule, the facility must submit a report for every year thereafter unless (or until) the requirements to cease reporting are met.

 

Potential Enforcement Action for Noncompliance

 

Failing to comply with the rule could result in an enforcement action. It is inevitable that some sources required to report will fail to do so. In such a case, EPA would be entitled to bring an enforcement action for noncompliance. Other examples of noncompliance that would subject a company to an enforcement action include failure to monitor GHG emissions or otherwise gather the data necessary to make reports and failure to maintain records. The required records include annual emission reports themselves; a list of all of the sources of emissions included in the report; the underlying data and emission factors used to calculate emissions; a description of how the emissions data was collected; documentation of any changes to EPA's emissions measurement methods; and the names of the individuals who collected the data and prepared the report. EPA proposes to conduct its enforcement process for this rule under current Clean Air Act sections 113 and 203-205. Currently, the maximum penalty amount for violations of the Clean Air Act is $32,500, per violation, per day.

 

In addition to the broad reporting requirements for GHG emitters, the rule requires reporting of potential emissions by the manufacturers and suppliers of fuels and industrial gases. The rule essentially double-counts emissions because it requires reporting from both upstream suppliers and downstream end users.

 

The applicability approach adopted by the rule creates definite winners and losers in terms of regulation. The winners are sectors excluded from the rule such as agricultural sources of N2O and methane, as well as forestry sources of methane and CO2. These sources are not included in the enumerated categories of emitters and likely do not emit 25,000 tons of CO2 from fossil fuel combustion, even though their total CO2e emissions may exceed 25,000 tons. As a result, they are not subject to reporting under the rule. The rule also creates a presumption that facilities that fall outside of the enumerated industries will only produce significant emissions from combustion of fossil fuels for process and facility heating. In certain cases, for example, at facilities with large settling ponds or facilities with primarily small, area source emissions, this presumption may not be correct.

 

In addition, the approach to applicability also has another impact. By singling out specific industries and requiring reporting, regardless of annual emissions, EPA has implicitly established the presumption that all sources in that category deserve to be regulated regardless of emissions. As a result, these sources may eventually be subject to a cap, regardless of ability to pay or the cost-effectiveness, while other sources in other industries may not be subject to reporting or regulation. Although this type of disparate treatment for similar sources is familiar to anyone who has worked with the New Source Performance Standards under the Clean Air Act and Clean Water Act, it may come as something of a surprise to facilities not subject to those programs.

 

Conclusion

In short, EPA's GHG reporting rule appears to lay the groundwork for a new regulatory regime for GHG emitters. It will likely be followed by some form of climate change regulation, including emission limits. The rule creates uncertainty for industries and facilities with emissions near the reporting threshold. It also creates uncertainty and challenges for facilities attempting to determine whether the rule applies to them and what is required to achieve compliance. If you have questions or need additional information, contact Katea Ravega or Roger Ferland in Phoenix at 602-230-5541 / katea.ravega@quarles.com or 602-229-5607 / roger.ferland@quarles.com. In Milwaukee or Madison, contact Mike McCauley at 414-277-5525 / michael.mccauley@quarles.com. In Chicago, contact Cindy Faur at 312-715-5228 / cynthia.faur@quarles.com.