The previous post in this series discussed how the Supreme Court decision in Massachusetts v. EPA has led to permitting authorities considering whether CO₂ emissions must be considered in connection with new source review permits.  Predictably, initial confusion and inconsistent permitting decisions is giving way to the result ClimateIntel believes to be the most likely - that new or modified coal-fired power plants will be required to undergo NSR permitting for CO₂.  In this post, we highlight the major permitting developments of the past several months.

The arguments on the two sides are fairly straightforward.

• Entities seeking to require coal-fired power plants to control CO₂ emissions argue that CO₂ is “subject to regulation” under the CAA and, therefore, NSR is triggered for any project that results in any net increase of CO₂ emissions and that any NSR permit must include BACT-based CO₂ emission limit.

• Electric utilities and project developers argue that the Supreme Court did not require EPA to regulate CO₂ for NSR purposes and that EPA must still decide whether CO₂ is “subject to regulation” and, therefore, BACT for CO₂ is not mandated.

Deseret Power.  EPA Region 8 had issued a permit to Deseret Power to construct a waste-coal-fired generating unit at a Utah power plant.  Sierra Club challenged the permit.  EPA’s Environmental Appeals Board (EAB) flatly rejected Sierra Club’s argument that CO₂ must be considered “subject to regulation” under the CAA.  The Board remanded the permit to the region, however, ruling that the region erred in determining that its discretion was limited by EPA’s historical interpretation of the phrase “subject to regulation.”  The EAB held that “subject to regulation” was ambiguous, that Congress had not considered the precise issue and did not enact language to address it specifically, and that there was no evidence that the use of the term “regulation” in the 1990 Amendments was an attempt to constrain EPA’s interpretation of “subject to regulation.”

EPA Interpretive Rule on Pollutants Subject to PSD Review.  On December 18, 2008, EPA issued an interpretive memorandum providing its “definitive” interpretation of the regulatory definition of “regulated NSR pollutant” — which in turn implements the key statutory term, “subject to regulation under this Act.” EPA explained that it has never treated CO2 as “subject to regulation” under the CAA, and that it was now exercising its discretion formally to interpret its PSD rules as requiring enactment by Congress or regulatory promulgation of an emission standard or limitation for a pollutant before emissions of that pollutant become subject to PSD requirements. On December 31, 2008, EPA provided notice of this interpretation in the Federal Register and designated the interpretation as nationally significant under CAA section 307. 73 Fed. Reg. 80,300-01.

Desert Rock.  Sierra Club and a number of other environmental organizations challenged EPA Region 9’s issuance of a PSD permit to Desert Rock Energy Company for construction of a new 1,500 MW coal-fired plant located within the Navajo Reservation in New Mexico. Before the EAB could rule on the CO₂ BACT issue, EPA Region 9 withdrew the portion of its permit action regarding its decision not to impose limitations on emissions of CO2 to reconsider the issue “in light of the Board’s opinion in Deseret“ and the EPA Interpretive Rule.  EPA Region 9 then issued an Addendum, taking the position that EPA’s interpretive memorandum “reflects a properly adopted interpretive rule” and that the Region “is required to follow the Agency’s interpretation of the federal PSD regulations set forth in that memorandum.” Accordingly, Region 9 determined that CO₂ is not currently a “regulated NSR pollutant” and that it would not revise the permit to include limitations for CO₂.

Sierra Club filed a petition for reconsideration of the interpretive rule on December 31, 2008, and filed a petition to review the interpretive rule in the D.C. Circuit on January 15, 2009.  On February 17, 2009, new EPA Administrator Jackson granted the petition for reconsideration, but denied Sierra Club’s request to stay the effectiveness of the interpretive rule. 

For the time being, therefore, new and modified power plants need not consider potential NSR implications of CO₂, at least at the federal level.  But, since permits are not final until appeals to the EAB are completed, permit proceedings effectively ground to a halt until EPA rules on reconsideration.  ClimateIntel believes that the likely outcome is for EPA to require new or modified power plants to undertake new source review for CO₂, which leads to the issue of what is BACT for CO₂?

Longleaf Energy.  Sierra Club and other environmental organizations, in addition to challenging the Deseret and Desert Rock coal-fired projects for which EPA is the permitting authority, have challenged nearly every proposed coal-fired plant for which state permitting authorities have received NSR permit applications over the past several years.  With one exception, the states that have reached decisions regarding regulation of CO₂ under the NSR program have acted consistently with EPA policy.  However, in the Longleaf Energy case in Georgia, the state court overturned the state agency’s permit issuance, holding that “CO₂ is ‘otherwise subject to regulation under the Act’” and that an NSR permit “cannot issue without CO₂ emission limitations based on a BACT analysis.”

For further information about this topic, please contact Akin Gump.