This issue contains the following articles: U.S. EPA Issues Proposed Greenhouse Gas Endangerment Finding; EPA’s Greenhouse Gas Reporting Rule: What It Portends For Greenhouse Gas Emissions Regulation; U.S. Supreme Court To Address Superfund Cleanup Liability
Environmental Law Update 04/23/09 Cynthia A. Faur, Lauren G. Harpke
On Friday, April 17, U.S. EPA Administrator Lisa Jackson signed the Agency's proposed finding that greenhouse gas emissions endanger the public health and welfare. The action has been expected since the change of Administration and was made in response to the U.S. Supreme Court's decision in Massachusetts v. EPA, which concluded that carbon dioxide constitutes an "air pollutant" as that term is defined in the Clean Air Act. Issuance of an endangerment finding is required before EPA can promulgate regulations limiting the emission of greenhouse gases.
For procedural reasons related to the context of the Massachusetts decision, the proposed finding was issued under Section 202 of the Clean Air Act, which authorizes EPA to regulate emissions from motor vehicles. Although motor vehicle greenhouse gas emissions constitute less than a quarter of U.S. emissions, and even though total U.S. greenhouse gas emissions constitute less than 18% of the global total, EPA determined that such emissions may be reasonably anticipated to cause or contribute to a risk to public health and welfare. In reaching that conclusion, EPA cumulatively defined the six primary greenhouse gases - CO2, CH4, N20, HFCs, PFCs and SF6 - as a single "air pollutant," rather the defining them separately. The Administrator applied this approach based on current practice in the field of climate change science and policy, where emissions of different greenhouse gases are converted to a CO2 equivalent (CO2e) for purposes of reporting. It is this mix of the six key greenhouse gases that the Administrator determined endanger the public health and welfare.
Unlike the risk posed by criteria and hazardous air pollutants, the danger posed by those six gases does not arise from direct adverse health effects such as respiratory or toxic effects. Rather, according to the proposed finding, the risks to public health and welfare arise from the collective effects of climate change, including increased heat waves and periods of high temperatures, increases in levels of regional ozone production (ozone production is temperature-dependent), increases in the spread of pathogens and allergens, changes in temperature and precipitation patterns (including hurricanes and drought) and rising sea levels.
EPA issued the endangerment finding even though the Obama Administration has stated that it would prefer a legislative approach rather than the use of existing Clean Air Act authority. Although the finding arises in the context of motor vehicle emissions, the logic of the finding applies equally to greenhouse gas emissions from stationary sources such as factories and power-generating facilities. The endangerment finding notes that EPA is reconsidering a prior determination, that issuance of an endangerment finding for mobile source emissions will not immediately trigger regulation of carbon emissions from stationary sources under the Prevention of Significant Deterioration ("PSD") program. If the PSD and Title V programs are used to regulate CO2 emissions from stationary sources, it could increase the number of air permits that federal, state and local permitting agencies issue by a factor of 10 and could result in 550,000 sources subject to operating permits, as compared to approximately 15,000 at present.
EPA will accept public comment for 60 days from the date the Proposed Endangerment Finding is published in the Federal Register. It will hold public hearings on May 18 in Arlington, Virginia and on May 21 in Seattle, Washington. These hearings are separate from the administrative hearings being held on the proposed greenhouse gas reporting rule, which was published in the Federal Register on April 10.
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In response to a bill signed by President Bush in 2007, on March 10, 2009, U.S. EPA proposed a rule for mandatory reporting of greenhouse gas (GHG) emissions. Although the stated purpose of the rule is to gather "comprehensive and accurate data about the production of greenhouse gases," the rule foreshadows the scope and perhaps content of future GHG emission regulations. The proposed rule is estimated to cover 85%-90% of total U.S. GHG emissions, comprising approximately 13,000 facilities, including vehicle and engine manufacturers and fossil fuel suppliers.
The proposed reporting rule appears to provide some insight into what EPA would recommend for GHG regulation. The scope of the rule and the way that EPA has approached certain industries indicate EPA thinks there are certain industries more likely to cause GHG emissions than others. Other features of the proposed rule that may portend characteristics of a forthcoming GHG emissions management system include (1) the gases subject to reporting, (2) the industries required to report under the rule and (3) the level of reporting and emissions measurement methodology. Facilities that believe their emissions are beneath the reporting threshold may also think their GHG emissions will be unregulated in the future; that would be a mistake. While the proposed rule offers some insight into what certain aspects of the final GHG regulatory scheme might look like, it is by no means the final word. Through this data-gathering exercise, EPA may learn lower thresholds of CO2e are appropriate and possible, or certain industries were inadvertently overlooked in this initial foray into the field. Regardless, the proposed rule sets the stage for GHG emissions limits.
The gases subject to the reporting requirement may be included in subsequent emissions regulations. The proposed rule seeks to track emissions of the following greenhouse gases: the six GHGs regulated under the Kyoto Protocol - carbon dioxide (CO2); methane (CH4); sulfur hexafluoride (SF6); nitrous oxide (N2O); perfluorocarbons (PFC); hydrofluorocarbons (HFC) - as well as certain other fluorinated gases. The rule would require reporting and related monitoring and recordkeeping, but it does not establish emission limits. Penalties for noncompliance will be assessed under Clean Air Act sections 113 and 203-205, which currently carry a maximum penalty of $32,500 per violation per day.
Who must report GHG emissions?
It is a mistake to assume a facility will never be subject to the reporting requirement if the proposed rule doesn't apply to a facility right now. While the reporting rule employs three different methods to identify parties that must report GHG emissions, two of these methods hinge on emissions of CO2 equivalent emissions (CO2e), which may vary from year to year. Any facility meeting the requirements of any one of the three methods is subject to the rule.
The three methods consider both emissions levels and industry of the source. First, the rule contains a list of industry categories; sources in these categories must report emissions annually, regardless of the amount of emissions. Second, the rule contains another list of sources that are required to report if the source emits more than 25,000 metric tons of CO2e. Third, all facilities emitting greater than 25,000 metric tons of CO2e that are not otherwise included in either of the first two groups must file reports. However, facilities in the third category may be subject to different calculation methods and reporting requirements. For example, facilities in the third category are only required to report emissions from stationary fuel combustion sources such as process heaters, stationary engines or combustion turbines. To facilitate general understanding of how the rule will apply to various industries, EPA created a series of industry-specific information sheets, which are available on its Web site.
Unless the facility operates within one of the listed source categories, the company is on its own for determining whether the reporting requirement applies or not. Additionally, if an industry is listed in the proposed reporting rule, that industry may be more likely to be subject to a later GHG emissions regulation scheme. Although the rule establishes detailed methodology to determine applicability and specifically lists other sources subject to the rule (such as suppliers of coal and industrial GHGs), the proposed rule does not provide an opportunity to request EPA approval of the company's applicability determination. This could be important in the event that a facility is on the cusp of the emissions limit and decides not to report; EPA's approval of the company's determination that it is not required to report could be useful to the company if it is later discovered the company's calculations were incorrect.
In addition, once a facility experiences a year with emissions at or above the reporting threshold, that facility must submit a report for every year thereafter. This is required even if the facility's emissions later dip below the reporting threshold and remain there. Similarly, facilities that may not be emitting CO2e above the threshold when the rule goes into effect will likely need to monitor their emissions anyway because if the emissions exceed the threshold, the facility will then be required to report. As discussed below, failure to monitor is one of the actions that could result in an enforcement action.
With this wide applicability, the rule requires reporting of potential emissions by certain fuel suppliers as well as emissions from stationary sources. Therefore, the rule essentially double counts emissions from these sources. By requiring double reporting, EPA is leaving open the door to a carbon tax or hybrid cab-and-trade and carbon tax approach to GHG regulation. While the data gathered through the double counting can also be used to justify whichever system is ultimately selected, it may also indicate that EPA is still considering a carbon tax approach or that the agency is seeking another way to regulate the upstream providers. The same is true for industrial GHGs, which may be reported by both suppliers and end users. This double counting indicates that future regulations may apply to both suppliers of fossil fuels and industrial GHGs as well as end users.
How will stationary sources calculate their reportable emissions?
The rule establishes a series of industry-specific reporting methodologies and provides EPA with an opportunity to determine which measurement methods are effective in each regulated industry setting. It's possible the measurement methods used in the proposed rule will be modified after experience with the reporting rule and then ultimately incorporated into the final GHG emission regulations.
The proposed measurement methodologies are industry-specific. Electric-generating facilities that already report their CO2 emissions under 40 C.F.R. Part 75 will continue to utilize that procedure and will conduct an additional calculation that is in proposed 40 C.F.R. § 98.40. However, EPA established a four-tiered approach to calculating emissions from stationary combustion sources that are not already reporting under the Acid Rain Program; these calculations are in proposed 40 C.F.R. § 98.33. In addition, a table summarizing the sources subject to each tier is at Table C-1 in the preamble to the proposed rule. The calculation methods vary, depending on the type of fuel used at the source, size of the combustion equipment and additional requirements. As a result, facilities will have to evaluate each fossil fuel combustion source on a case-by-case basis. If the EPA prescribed a calculation method for sources in a specific industry, then all facilities with sources in that industry sector must apply the prescribed calculation methods. The proposed calculations for each industry category are in the proposed 40 C.F.R. Part 98. The rule also specifies methods for suppliers of fossil fuels and industrial GHGs to convert the amount of product supplied into potential end-use emissions.
The calculations determined to apply to sources in unlisted industries but regulated under the third category - those with CO2e in excess of 25,000 metric tons - may be used in the eventual GHG emissions regulations in the event those sources are subject to emission limits under a cap-and-trade or other system. Under the reporting rule, these sources (1) will be allowed to file an abbreviated report for the first reporting year and (2) estimate emissions based on fuel-specific CO2 emission factors for the first reporting year because there is no industry-specific calculation available. EPA proposed this because many sources regulated under this third category may never have had to previously report or monitor any type of emissions and will likely require additional time to fully implement the new rule. Subsequent reports will be based on actual GHG emissions.
Regardless of industry category, all reporting facilities would be required to calculate emissions for each source-type at their facility for which EPA prescribes a specific calculation method. In addition, facilities with any kind of combustion equipment may be required to report emissions from that combustion source under the proposed Subpart C General Stationary Combustion category, using the tiered system described above. The point is a single facility may have many different source types, and the emissions reported for each source type must be determined using the calculations specified for that individual type of source.
What is the reporting level?
Most reporting will be done on a facility or lower level. The calculations specify whether the reporting for sources covered by that calculation should be reported on a facility, process, unit or other basis. EPA may be considering imposing process or unit-specific GHG emission-related requirements on facilities. The data gathered will assist the agency in evaluating that possibility and may contribute to the formation of a lower-level approach to emissions regulation for GHGs.
Reports must contain the emissions data resulting from the calculations discussed above. For facility-wide reports, emissions would be reported at the overall facility level and would also be broken out by source category. For example, a facility would identify its emissions from manufacturing processes, wastewater treatment and any other source categories that are located onsite. If specified within the regulations for the applicable source categories, the report may be required to include further breakdown of emissions amounts by process or unit. The additional data required to support the report varies by calculation and industry and is listed in the proposed rule. In the report, facilities will also self-certify their annual emissions reports, similar to the current practice with Title V compliance reporting. Third-party verification (the norm in Europe) is not required.
What records must be retained?
Facilities and suppliers subject to this rule will be required to maintain records of their emissions, as well as records of how those emissions were calculated, for a period of five years. This includes the 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 were 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.
What are the penalties for non-compliance?
It is inevitable that some sources required to report will fail to do so. In such an event, EPA would be entitled to bring an enforcement action for non-compliance. Non-compliance that could result in an enforcement action includes falsification of reports, failure to monitor for GHG emissions or otherwise gather the data necessary to make reports, failure to maintain records or failure to 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.
What are the next steps in the rulemaking?
EPA will hold public hearings on the proposed rule on April 6 and 7, 2009 in Washington, D.C., and on April 16, 2009 in Sacramento, California. The proposed rule, preamble and several papers on various aspects of the rule are available online at the EPA Web site.
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On February 24, 2009, the United States Supreme Court heard oral arguments in Shell Oil v. United States and Burlington Northern-Santa Fe Railway v. United States, in which petitioners asked the Court to reconsider the decision of the Ninth Circuit, addressing several fundamental aspects of Superfund cleanup liability, including longstanding principles of arranger liability and joint and several liability. A reversal of the Ninth Circuit decision could considerably alter the established Superfund liability scheme.
The case arose from a relatively straightforward contamination matter. Brown & Bryant ("B&B"), now insolvent, operated an agriculture chemical business on both property it owned and a neighboring parcel leased from Burlington Northern and another railway. In its operations, B&B purchased fumigant from Shell Oil. However, during transfer and storage the fumigant was spilled, resulting in groundwater and soil contamination on both parcels.
The United States and California initiated a cleanup action and brought a CERCLA suit to recover costs against B&B and the railways, as owners of the property, and against Shell, as an "arranger." The district court apportioned liability among the parties, with the railways and Shell each liable for relatively small percentages. However, the Ninth Circuit overturned the apportionment on grounds that insufficient evidence was presented to make such a determination - as a result, the default of joint and several liability was imposed.
The parties have asked the Supreme Court to reverse the Ninth Circuit's holding that all companies are jointly and severally liable for cleanup costs incurred at the site. Additionally, Shell Oil has requested reversal of the decision holding it liable as an "arranger" and to clarify the circuit split on the definition.
The Ninth Circuit's decision establishing joint and several liability is consistent with general principles of Superfund law. If the Supreme Court makes apportionment more easily attainable, it is likely that many more potentially responsible parties ("PRPs") at Superfund sites will resist imposition of joint and several liability, to lessen their exposure. Under current standards, a PRP with a small basis for apportionment may choose to forego that fight after determining that costs are too high and that the odds of a successful outcome are too low. However, in a world of more easily achievable apportionment, that same PRP may decide the fight for allocated liability is worthwhile.
Under the current default approach to joint and several liability, "orphan shares" of liability, attributable to insolvent parties or unknown sources, are assigned to PRPs with the ability to pay. However, if liability is allocated, then those orphan shares remain unassigned. As a result, government agencies initiating cleanup will be left covering a much larger percentage of cleanup costs. Faced with this potential cost increase, government agencies may be more hesitant to commence cleanups in the future.
The Ninth Circuit held that Shell "arranged for the sale and transfer of chemicals under circumstances in which a known, inherent part of that transfer was the leakage, and so the disposal, of those chemicals." The panel held this was sufficient for "arranger liability" even though Shell no longer owned the chemicals or controlled the leakage and despite the fact the fumigant was a useful product and not "waste."
In its amicus brief on behalf of industry groups, the Product Liability Advisory Council calls for a bright line rule that arranger liability requires a finding that either (1) there was intent to dispose of hazardous substances and control those substances or (2) the transaction was entered into for sole purpose of disposing hazardous substances. However, the United States argues, in opposition, that arranger liability does not require intent since CERCLA defines "disposal" as including "leaking and spilling."
An affirmance of the Ninth Circuit's holding that Shell was liable as an "arranger" would result in a considerably broader interpretation of arranger liability, with a greater number of businesses potentially on the hook. For instance, a manufacturer or seller of a product containing trace amounts of hazardous materials could potentially be liable for ultimate disposal or leakage of that product, despite lack of control or knowledge of the manner in which the product is discarded.
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For more information, contact Lauren Grahovac Harpke at 414-277-5183 / [email protected] or your Quarles & Brady attorney.