EPA Set to Move on a Host of Environmental Regulations

Expect to hear more from the Environmental Protection Agency in the months ahead.

According to the Office of Budget Management, the EPA has more regulations pending than any other government agency, including scores of new greenhouse gas regulations, clean-air initiatives, and energy-usage rules. While several proposed rules make their way through the agency's complex approval process, new ones are on the way.

Last month, President Barack Obama introduced initiatives to reduce carbon pollution, including plans for the EPA to move forward with new greenhouse regulations for existing power plants, adding to the roughly 80 greenhouse gas-related rules the agency had already proposed since 2009.

The centerpiece of that new Climate Action Plan is the establishment of carbon pollution standards for new and existing power plants. The EPA proposed “source performance standards” for new power plants in the spring of 2012, with carbon dioxide emission standards that were initially very stringent, treating coal and natural gas plants he same, explains Cynthia Faur, an environmental lawyer with the law firm Quarles & Brady. It would require that new power plants emit less than 1,000 lbs of carbon dioxide per megawatt hour, a comparable rate to what natural gas plants already produce.“People were looking at this and saying they were not going to build a coal-fired power plant in that environment,” she says.

That rule will now be re-proposed, and the White House has confirmed it will pursue separate standards for coal and natural gas. There are still concerns the final regulation could have “a chilling effect” on the construction of new coal-fired plants, which generate roughly 40 percent of the nation's electricity. “It's a death knell for new coal-fired plants,” says Tom Mounteer, an environmental partner at Paul Hastings. The president's plan requires the EPA to finalize the rule by September of this year.

Although the EPA hasn't yet provided details on the standards, it is expected the coal standards may be relaxed, while the natural gas guidelines are tightened, says Cynthia Stroman, an environmental partner at the law firm King & Spalding. “Whether it is enough to make a difference, we don't know,” she says.

Similar demands for existing power plants are also on tap. The EPA plans to propose guidelines by 2015, which may be “extremely challenging,” Faur says. The process behind these rules is a bit different in that they involve state regulators. The EPA will propose guidelines, and states will then craft a regulatory plan the agency must ultimately approve.

These two sets of standards will affect more than just the energy sector. In particular, they could cause spikes in energy prices, Faur says. What effect having fewer plants might have on the reliability of the nation's power grid is another concern.

Making Everyone Unhappy

Adam Riedel of the law firm Manatt, Phelps & Phillips points to another air quality issue companies need to carefully monitor. In 2008, the EPA was sued by a coalition of states and environmental groups. In the resulting settlement agreement, the agency agreed to establish new source performance standards for refineries. The deadline of November 2012 came and went without the issuance of even a draft proposal.

“The plaintiffs may say the EPA has their hands full and because they are moving on climate change they are not going to push this,” he says.  “But there is nothing that bars those plaintiffs from going into court and suing to enforce the consent decree.”

Such litigation is common in the world of environmental regulation.

“Any significant environmental regulation goes through the judicial review process and has done so over time,” Stroman says. “I wouldn't expect that to change. A common saying at the EPA is that a good rule is one that makes everyone unhappy.”

“With the first round of source-specific and industry-specific climate rules we can expect that there will be challenges from all quarters,” says Adam Kushner, a partner in Hogan Lovell's environmental practice. “That will take some time. The process from proposal to final rule and affirmation by the D.C. Circuit typically takes three to four years or even longer.”

The long timeline for getting rules through may explain the Obama Administration's recent push for new regulations, Riedel says. “Either environmental groups will say it has been weakened too much, or industry will claim it is too strict. It could be challenged by both,” he says. “The clock is ticking. If they want to get this done by the end of Obama's term, they need to get all those legal challenges squared away now.”

“A common saying at the EPA is that a good rule is one that makes everyone unhappy.”

—Cynthia Stroman,

Environmental Partner,

King & Spalding

Some regulations are already moving through that judicial approval process. A central air quality regulation will go before the Supreme Court during its next session, for example. Last month, following the D.C. Circuit Court of Appeals' rejection of the EPA's Cross-State Air Pollution Rule, the Supreme Court announced it will hear the case at the request of the government. The contested regulation establishes limits for emissions from coal-fired power plants that drift from their source to states downwind.

The rule, first proposed in 2011, strengthens the Clean Air Interstate Rule. Revisions to CAIR were ordered by the Appeals Court three years after it was enacted in 2006. Since that time, CAIR has been in place temporarily, due to be replaced by the Cross-State Air Pollution Rule and its requirements to adopt new technology for emissions control. The crux of the ongoing legal challenge is whether the federal government can require some states to meet more rigid standards established by other states, where the emissions drift.

Political Hold-Ups

Just as legal challenges are par for the course when it comes to environmental regulations, so too are political skirmishes.

Proposed environmental regulation can elicit an emotional response on Capitol Hill, and the squabbling over rulemaking can be particularly heated.  House Energy and Commerce Committee Chairman Fred Upton (R-Mich.), for example, described the Obama Administration's carbon-reduction efforts as a “war on affordable energy” that “will threaten jobs, hobble our manufacturing resurgence, and cause electricity costs to go up.” U.S. Rep. Ed Whitfield, a Republican from Kentucky, alleges a scheme afoot to “bankrupt the coal industry” using cap-and-trade legislation “and a swarm of costly new EPA regulations.”

REGULATION INFORMATION

Below are two charts from the Office of Information and Regulatory Affairs regarding pending regulations.

Source: Office of Information and Regulatory Affairs.

Based on these concerns, House Republicans have proposed the Energy Consumers Relief Act. Before EPA finalizes any new energy-related rules estimated to cost more than $1 billion, it would be required to submit a report to Congress detailing the cost, and the potential effect on energy prices and on jobs. The bill could be debated in the House as early as this week.

The cost of compliance with environmental regulations also fuels debate. IHS Global Insight estimates that for every $1 billion spent on upgrade and compliance costs for the EPA's clean air standards for industrial boilers could endanger as many as 16,000 jobs and reduce U.S. gross domestic product by as much as $1.2 billion.

Greenhouse gas emission standards for automobiles, which take effect from 2017 through 2025, could cost the industry as much as $144 billion, according to the government's own estimates. Similar truck standards will cost an estimated $8.1 billion through 2018.

The Utility MACT (Maximum Achievable Control Technology) rule for reducing mercury and other airborne toxins from coal-fired power plants is scheduled to take effect in 2015 and could cost companies upwards of $11 billion annually.  A similar rule for commercial boilers and incinerators, finalized in December 2012, with a planned three-year phase-in, could cost manufacturers as much as $1.6 billion annually.

On July 18, a House committee on small business convened a hearing on the economic impact of the Climate Action Plan. Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business, testified that, the Utility MACT “may prove to be the most expensive direct rule in EPA history.” Third-party estimates of compliance costs “are considerably higher” than the EPA's $11 billion estimate, he said. An analysis by National Economic Research Associates, a business consultancy, estimated that compliance will actually cost power companies closer to $18 billion per year for the next twenty years.

“Some coal-fired plants will be so expensive to retrofit to comply with the standard that they will simply be shut down,” Weinstein says. New natural gas generators would be the most likely substitutes for these shuttered facilities. NERA estimates that gas price spikes could increase retail electricity prices by as much as 24 percent.

“EPA should not be developing long-term energy policy through environmental regulation,” Weinstein says.

Despite such fears of over-regulation, the United States still takes a far less stringent approach to air quality rules than the European Union.

Mounteer recalled his firm's recent work with a company based in Spain and demands to “quantify the carbon impact of our law practice,” he says. Among the calculations demanded were fuel usage for commuting and the landlord's electric bill, both evaluated for carbon emissions. “That is not unusual for EU companies,” he says. “But it was a nightmare.”