How Unlawful Is EPA’s Clean Power Plan?

EPA’s Clean Power Plan, the agency’s proposed rule to reduce carbon dioxide (CO2) emissions from existing power plants, is the centerpiece of President Obama’s climate policy agenda. On the day the Plan was published in the Federal Register (June 18, 2014), Murray Coal petitioned the D.C. Circuit Court of Appeals to bar EPA from further work on the rulemaking. Eight days later, nine states led by West Virginia filed an amicus brief in support of that petition.

Ever since Massachusetts v. EPA (April 2007), when the Supreme Court set the stage for EPA’s transformation into a Super Legislature dictating national policy on climate change, litigation to rein in the agency has generated more billable hours for lawyers than regulatory relief for their clients.

Consider Utility Air Regulatory Group v. EPA (June 2014), in which petitioners challenged EPA’s application of Clean Air Act (CAA) permitting requirements to stationary emitters of greenhouse gases. The absence of anything resembling congressional intent for EPA’s policy was breathtaking. Out of 692 bills containing the term “greenhouse gas” during 1990-2011, none specifically provided authority to apply CAA permitting requirements to greenhouse gas emitters. The only regulatory climate bill ever to pass a chamber of Congress — H.R. 2454, the Waxman-Markey cap-and-trade bill — explicitly exempted stationary sources from permitting requirements based on their greenhouse gas emissions.

EPA sought to regulate CO2 from facilities accounting for 86% of U.S. stationary-source greenhouse gas emissions. The Court in UARG trimmed back EPA’s reach to facilities accounting for 83% (slip op., p. 10). Seven of the nine Justices were either too deferential to agency expertise, too activist, or too reluctant to acknowledge errors in Mass. v. EPA to re-limit EPA in any serious way.

A bare majority in UARG did, however, vote to overturn EPA’s Tailoring Rule, the agency’s brazen attempt to rewrite unambigous (numerical) statutory requirements to avoid an administrative debacle of its own making. Moreover, the Scalia majority admonished EPA against adopting statutory interpretations that would “bring about an enormous and transformative expansion in EPA’s regulatory authority without clear congressional authorization.” The Court continued:

When an agency claims to discover in a long-extant statute an unheralded power to regulate “a significant portion of the American economy,” … we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast “economic and political significance” (slip op., p. 19).

Those words are a perfect rebuke to the regulatory coup EPA is trying to pull off via the Clean Power Plan. Will EPA get away with it? I don’t think so, especially after reading Here Be Dragons: Legal Threats to the ESPS Proposal by environmental attorney Eric Groten (Vinson & Elkins).

Background

The Clean Power Plan requires states, on average, to reduce their power-plant CO2 emissions 30% below 2005 levels by 2030. Each state (except Vermont) has an EPA-imposed emission performance standard, calibrated in lbs. CO2/MWh. The standards translate into statewide CO2 reduction targets. States must meet interim targets in 2020-2029 and final targets in 2030. For each state, compliance costs, electricity price impacts, and economic losses depend chiefly on how much the state relies on coal for electric generation and how much idle natural gas, nuclear, and renewable capacity is available to meet demand as coal generation is reduced or eliminated.

EPA’s alleged authority for the proposal is CAA §111(d). The provision requires states to establish EPA-approved existing source performance standards (ESPS) for categories of industrial facilities for which the agency has already adopted new source performance standards (NSPS). EPA proposed NSPS for CO2 from new fossil-fuel power plants in September 2013, and published those so-called carbon pollution standards in the Federal Register in January 2014.

CAA §111(a) defines “performance standard” as a standard that “reflects the best system of emission reduction” (BSER) that has been “adequately demonstrated.” Per §111(d), states are to adopt ESPS for “particular sources.” Per EPA’s 1974 and 1975 procedural regulations, ESPS apply to “designated pollutants” from “designated facilities.” EPA has promulgated only five 111(d) ESPS rules since Congress amended the CAA in 1970. In each case, following the Act’s plain language and the procedural regulations, EPA required states to adopt ESPS for “designated air pollutants” (e.g. acid mist) from “designated facilities” (e.g. sulfuric acid production plants).

From those elementary facts alone, we can discern the legal pickle in which EPA has put itself. There is no “adequately demonstrated” “best system of emission reduction” for CO2 emissions from existing power plants. EPA claims that carbon capture and storage (CCS) is the adequately demonstrated BSER for new coal power plants — a highly dubious proposition, since no utility-scale coal power plants with CCS are currently operating, and none is being built without generous subsidies. But EPA acknowledges that for existing coal power plants, retrofitting with CCS is too costly to pass muster as “adequately demonstrated.”

So the Clean Power Plan does not actually require states to set ESPS for coal power plants — the “particular sources” and “designated facilities” ostensibly targeted by the rule. Rather, the Plan weirdly treats each state as an existing source, and bizarrely defines BSER as a combination of policies for changing how electricity is produced, managed, and consumed in the state.

Specifically, the Plan defines BSER as four “building block” strategies for reducing CO2 emissions:

1. Improve heat rates (Btus/KWh) at coal-fired power plants.
2. Substitute natural gas combined cycle (NGCC) generation for coal generation to supply base load power.
3. Substitute renewables and nuclear power for both coal and NGCC.
4. Reduce industrial and consumer electricity demand.

Building block 1 is a technology-based, facility-specific compliance option, resembling previous §111(d) rules.* Why isn’t that the sum and substance of the Clean Power Plan? Because improved thermal efficiency alone — performance enhancements achieved “inside-the-fence-line” via equipment upgrades or best practices — would reduce emissions by only a few percentage points. And EPA wants BIG reductions.** To get big reductions, EPA must require states to regulate numerous entities and activities “beyond the fence line.”

To meet their EPA-imposed targets, some states without renewable energy mandates will have to adopt them; some with renewable energy quota or tax incentives will have to increase them. In many states, grid operators will have to replace traditional “economic dispatch” with “low-carbon dispatch,” giving priority to generating units with the lowest emissions profile rather than those with the lowest cost. In many states, policymakers will have to adopt new or more aggressive electricity demand-reduction programs. EPA helpfully notes (79 FR 34834) that cap-and-trade, especially if implemented through multi-state regional compacts, would facilitate compliance!

EPA insists the Clean Power Plan is “flexible,” allowing states to pick and choose whatever mix of building block strategies best suits their energy assets and economic conditions. However, the targets cannot be met without making most states’ energy policies more like those of California. Moreover, states that already have emission caps, renewable energy quota, or demand-reduction incentives may not be able to freeze, relax, or repeal those policies even if future electorates and legislatures want to.

Groten makes a compelling case that the Clean Power Plan is illegal. What follows is a summary of his key points.

Congress intended very limited use of §111(d).

Section 111(d) has “a long but tellingly undistinguished history,” having been used to regulate a total four pollutants from five source categories. The provision was intended as a backstop to catch whatever pollutants fall between the cracks of the §§107-110 national ambient air quality standards (NAAQS) program and the §112 hazardous air pollutants (HAPs) program. That is, §111(d) was designed to cover pollutants that were neither emitted by “numerous or diverse mobile or stationary sources” nor hazardous enough to require application of maximum achievable control technology (MACT).

Carbon dioxide is obviously not a HAP, but it more than any other substance regulated through the CAA is emitted by numerous and diverse mobile and stationary sources. So why doesn’t EPA instead propose to establish NAAQS for CO2? In December 2009, the Center for Biological Diversity and 350.Org petitioned EPA to establish NAAQS for CO2 and other greenhouse gases. For political reasons, Groten opines, neither EPA nor petitioners want to pursue the issue:

No doubt both sides of that transaction fear reaping the whirlwind, and perhaps even the overruling of Massachusetts v. EPA, 494 U.S. 497 (2007), as embarking on a GHG NAAQS no doubt would expose the error in Justice Stevens’ assumption that “EPA jurisdiction [over GHG] would lead to no such extreme measures” as had precipitated earlier Supreme Court rulings rejecting grand agency claims of authority absent clear Congressional delegation.

It is because EPA fears to follow the logic of Mass. v. EPA to its politically-explosive conclusion that it now attempts to misuse §111(d) to impose broad, NAAQS-like state implementation plans (SIPs) on state electric power sectors.

Carbon dioxide is the most pervasive byproduct of industrial civilization, making it a complete mismatch for 111(d) regulation. Indeed, EPA’s 1975 implementing rule states that 111(d) pollutants are “highly localized and thus an extensive procedure, such as the [NAAQS] SIPs require, is not justified” (40 Fed. Reg. 53,342). Section 111(d), Groten observes, was “intended to pick up isolated, industry-specific pollution issues (e.g., flourides from phosphate fertilizer plants, of which there are fewer than 35 scattered around the U.S.).” It was not intended to cover a “source category” as “broad and well-populated” as the complex, grid-linked network that comprises a state’s electric sector.

EPA guidelines under §111(d) have always been based on technologies applicable to “designated facilities.”

If the Clean Power Plan resembled previous 111(d) rules, it would establish “model emission limits for the variety of source types it purports to regulate (e.g., some variation of CO2/MWh limits established for electric generating units . . . customized to the capabilities of each source type).” What EPA proposes is dramatically different:

Instead, EPA has undertaken to review the present generation mix in each of the fifty states, and to establish for each state the CO2 intensity of generation that it believes to be achievable by effecting changes not only in the heat rate of existing designated facilities, but also in displacing existing generation with less GHG-intensive generation and reducing demand. In short, EPA proposes that the “best system of emission reduction” is to use fuel-burning generation less, or not at all.

The Clean Power Plan is unprecedented in four ways:

• “Never before has EPA used section 111(d) for a ubiquitous pollutant.”
• “Never before has EPA set performance standards for a state, as opposed to a source of emissions.”
• “Never before has EPA required so complex and multi-disciplinary an exercise, commanding the consideration and participation not only of each state’s air quality regulators, but its utilty regulators, its local governments, its appropriators, and even its individual citizens.”
• “Most notably, never before has EPA set any technology-based standard that relies on constraining or even prohibiting production from the entire industry as a ‘system of emission reduction.'”

When Congress wanted EPA to adopt “Nation-scale regulation of electric utility air emissions,” it added an entire title to the CAA — Title IV, which established the acid rain control cap-and-trade program. EPA now attempts to “wring” out of an “obscure subsection” an emission control system “far greater” in “intrusiveness and scope” than Title IV. The Clean Power Plan runs afoul of the Supreme Court’s admonition that “Congress does not hide elephants in mouse holes.”

Regulation of electric generating units (EGUs) under §112 preempts any regulation under §111(d).

This is the central thesis of the Murray Energy petition and the West Virginia amicus mentioned above. As it appears in the U.S. Code, CAA §111(d)(1)(A) puts two kinds of pollutants off limits to ESPS regulation: pollutants already regulated under the NAAQS program, and pollutants emitted by source categories already regulated under §112. Existing power plants have been subject to §112 regulation ever since EPA finalized its Mercury Air Toxics Standards (MATS) Rule in December 2011. Therefore, EPA may not promulgate a §111(d) rule for existing power plants.

In AEP v. Connecticut (2010), the Supreme Court affirmed that §112 regulation precludes §111(d) regulation of existing stationary sources:

EPA may not employ §111(d) if existing stationary sources of the pollutant in question are regulated under the national ambient air quality standard program, §§108–110, or the “hazardous air pollutants” program, §112. See §111(d)(1). (Slip op., p. 10, fn. 7)

That should be the end of the story. EPA, however, argues as follows. The §111(d) language appearing in the U.S. Code is from the House-passed version of the statute. It prohibits §111(d) regulation of source categories regulated under §112. However, the Senate-passed version prohibits §111(d) regulation of pollutants listed as HAPs under §112(b). The House and Senate versions are separate sections of the Statutes at Large. As such, EPA must, if possible, give effect to both versions.

All of that is correct. But EPA then claims the two versions conflict, creating an “ambiguity” that, under the Chevron doctrine, EPA gets to resolve based on its expert judgment. And in EPA’s judgment, the prohibition applies only to pollutants listed in §112(b), not source categories. Since CO2 is not a HAP, EPA is free to regulate CO2 under §111(d).

That reasoning is incorrect, because there is no inconsistency between the two versions. EPA must give effect to both prohibitions. The House and Senate versions together mean that, under §111(d), EPA may regulate neither air pollutants nor source categories already regulated under §112.

EPA must adopt a valid NSPS before it can adopt a valid ESPS.

Under CAA §111(d)(1)(A)(ii), EPA is to prescribe ESPS regulations only for a facility to which an NSPS would apply “if such existing source were a new source.” This clearly implies that NSPS regulations come first and indeed determine what can be considered sources for ESPS.

As mentioned, EPA’s new source rule defines CCS as the adequately demonstrated BSER for new coal power plants. That doesn’t pass the laugh test. To mention just one problem, CAA §111(a) requires EPA to consider cost when determining BSER for new sources. Courts have interpreted this to mean that an NSPS may not be “exorbitantly costly” (Essex Chemical Corp. v. Ruckelshaus 486 F. 2d 427 at 433 (D.C. Cir. 1973). CCS can increase the cost of a new coal plant by several hundred percent.

Groten comments: “If the NSPS fails, the necessary predicate for section 111(d) regulation of existing sources fails with it.”

EPA can’t require emission reductions “beyond the fence line.”

As explained above, EPA proposes to establish ESPS not for “designated facilities” but for the “generation mix of each state.” In effect, the Clean Power Plan assumes that “Congress, in enacting section 111(d), intended to deputize EPA as the Energy Policy Agency.” Sheer nonsense.

More importantly, Groten argues, EPA treats entire states or even regions as “existing sources.” That is impossible. In 111(d) rulemakings, states are the primary regulators; stationary sources are what they regulate. A source cannot regulate itself.

In addition, as noted earlier, EPA may promulgate ESPS only after promulgating NSPS. If states are existing sources, what are the corresponding new sources that EPA is already regulating?

In ASARCO Inc. v EPA 578 F.2d 319 (1978), the D.C. Circuit Court of Appeals struck down an NSPS rule in which EPA claimed flexibility to define a stationary source as “either an individual facility or combination of facilities” comprising an “entire plant.” Agreeing with Sierra Club, the court ruled that a source is a “single building, structure, facility, or installation,” and EPA “has no authority to rewrite the statute in this fashion.” Groten comments: “And so EPA may not even define the ‘stationary source’ for section 111 purposes as an entire plant, much less as an entire state.”

‘Don’t use it’ is not a best system of emission reduction.

Building block strategies 2-4 aim to reduce generation from coal. Historically, BSER “calls for emission reduction, not production reduction.” EPA identifies no precedent for defining “use it less” as BSER under 111(d). EPA often claims its regulations benefit the economy, but here the rule would deliberately suppress output. The proposal’s ‘logic’ leads to bizarre results.

Yet no matter the source category, it always has been and forever will be true that not running a source of air pollution will reduce its emissions. Wouldn’t running it less or not at all then be the BSER for a phosphate fertilizer plant? Or a Kraft pulp mill? Or any of the other categories for which EPA has developed ESPS? In fact, given that BSER is the objective of NSPS, as well, shouldn’t EPA explore “you don’t need to build that” as the BSER for all of these categories? Unless EPA is willing to claim that the CAA authorizes or perhaps even compels it—in the guise of BSER—to prepare Five-Year Plans for all U.S. industries, it cannot defend the notion that the statute authorizes it to do so here.

EPA’s legal memorandum on the Clean Power Plan argues that reducing generation from high-emission sources is justified by the “interconnected nature” of the nation’s electricity grid. The concept of a “system of emission reduction” must be as broad as the physical system to which it applies, according to EPA. But that would mean there is virtually no limit to what EPA may regulate — or compel states to regulate. Groten explains:

But all economic endeavors are in their ways as interconnected as electricity generation. Some are obvious, such as oil and gas production and petrochemicals, which are as interconnected by pipeline as power plants and their customers are by wire. Does this mean that EPA is authorized to determine how much natural gas or ethylene each state needs to produce? And it doesn’t take a pipe or wire to make “systems” out of any air emitting activity: Is EPA authorized to decide that maybe we could pave roads with asphalt so we don’t need so much concrete and cement, such that BSER for cement plants is “don’t produce so much.” Or maybe it prefers concrete to asphalt, and would direct the opposite? Is EPA authorized to direct crop rotation so that the Nation’s demand for phosphate fertilizer is reduced? Or, even more bold, to tell states they must do so, as it does for the power generation business in the ESPS?

The notion that Congress intended §111(d) to set statewide production quota (or caps) for interconnected industries or sectors is preposterous.

The ESPS cannot be more stringent than, or regulate a different source from, the corresponding NSPS.

The nationwide average emission performance goal for existing power plants in 2030 is 990 lbs. CO2/MWH (my calculation based on EPA state-by-state targets). That’s below EPA’s proposed NSPS for both new coal power plants (1,100 lbs. CO2/MWh) and new NGCC power plants (1,000 lbs. CO2/MWh). Groten observes that “fully half” the states’ existing-source CO2 performance targets are more stringent than the corresponding new source standards for either new coal or new NGCC.

An ESPS that is more stringent than the corresponding NSPS is unheard of in the history of the CAA. It defies the logic and intent of §111(d), which is to use the experience gained from NSPS regulation to develop ESPS that existing sources can afford.

The ESPS in the Clean Power Plan are more stringent than EPA’s proposed NSPS because the former require shifting base-load generation from coal to gas and from both to renewables and nuclear. The ESPS regulate not only power plants but also entities different from those regulated by the NSPS. There is no evidence Congress intended for §111(d) to operate in this way.

EPA must be able to do what it asks of states.

Section 111(d)(2)(A) requires EPA to impose a federal plan when a state fails to adopt its own EPA-approved plan to enforce the ESPS. The problem here is that, unlike previous 111(d) rules, BSER is defined not as a set of emission control technologies for “designated facilities” but as a mix of energy policies for entire states.

EPA unquestionably has authority to administer technology-based ESPS for particular sources when states won’t. But EPA has no authority to administer state energy policies. And if administering state energy policies is beyond EPA’s jurisdiction, then ordering states to revise their energy policies must be as well. Groten comments:

While EPA certainly could adopt and impose emission limitations on “existing sources,” it has no authority whatsoever to prescribe state-wide energy policy, as it is directing the states to do for themselves. EPA cannot identify in the CAA any provision that authorizes it to establish and enforce renewable portfolio standards (RPS), to make dispatch decisions, to provide rebates for programmable thermostats, or to undertake any of the other notions that it has for Blocks 2-4 of its “best system of emission reduction.” And so those blocks must be outside of the options delegated to EPA by Congress under section 111.

Other legal flaws afflict the Clean Power Plan, but the foregoing discussion should suffice to give the big picture. I’ll conclude by excerpting Groten’s conjecture about how it all plays out.

Based on the above challenges, and more still, EPA might have a difficult time defending its rule even with a favorable panel, and even if it still is wholeheartedly committed to their defense. If it loses at the D.C. Circuit, it is not certain that EPA would seek Supreme Court review. On the other hand, if the petitioners lose, there is enough at stake to ensure certiorari petitions, and the fact that these rules fairly clearly cross lines against which the UARG majority warned, the grant of certiorari seems certain. In any event, that means litigation will leave the ESPS uncertain at least until 2019. If, at the end, EPA has sailed past all the dragons, the states will have little time to do what the rules would require. The odds of safe passage, however, seem slight.

* Although even here the analogy is strained. Previous 111(d) rules based ESPS on particular control technologies (e.g., scrubbers for fluoride emissions from phosphate fertilizer plants), not on incremental efficiencies achieved through equipment upgrades and better management.

** “Big” in terms of energy-market impact, not climate impact. According to MAGICC, a climate model developed with EPA support, the Clean Power Plan would avert less than two-hundredths of a degree Celsius of warming by 2100 — an effect too small to be measured or verified.