Connecting the Dots

Federal GHG cap-and-trade regulation is on the horizon

Even if you don't believe global warming is “real" or support U.S. efforts to regulate greenhouse gases (GHGs), the cold hard fact is, this country is headed for GHG regulation … and fast. You should expect some form of GHG regulation to be effective by 2012 -- a blink of an eye from a corporate planning perspective.

Here are the recent events, or dots. Connecting them will show the inevitability of federal GHG regulation:

FACT: Released on Feb. 25, President Obama's Fiscal Year 2010 budget says, “The Administration will work expeditiously …to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system … starting in FY 2012..."

FACT: On March 10, the U.S. Environmental Protection Agency announced a proposed rule in response to the FY2008 Consolidated Appropriations Act, which requires mandatory reporting of GHG emissions from large sources. In general, EPA proposes that suppliers of fossil fuels or industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHG emissions submit annual reports. The gases covered by the proposed rule are the six listed under the Kyoto Protocol and other fluorinated gases, including nitrogen trifluoride and hydrofluorinated ethers.

FACT: On March 23, major news sources started reporting that EPA would soon propose a finding that GHGs pose a danger to human health and welfare. The proposed finding is scheduled for publication in the Federal Register on April 30. There is likely to be substantial public comment on the proposed finding, but none that will prevent the endangerment finding from being finalized.

Is EPA indicating, through its proposed endangerment finding, that it might regulate GHGs under the Clean Air Act (CAA)? From what we have seen so far, you bet. The proposed endangerment finding proposes to address all six Kyoto Protocol GHGs as a group (rather than individually) and not just the four gases related to transportation.

Furthermore, the proposed scope of the endangerment finding is that GHGs pose a threat both to public health and welfare. This enables EPA to institute primary and secondary National Ambient Air Quality Standards for GHGs and to fully and stringently regulate GHGs under the CAA.

How would GHGs be regulated under the CAA? One likely scenario is that EPA would treat GHGs as other pollutants that have interstate transport issues. The agency could regulate such interstate transport of GHG emissions as a Federal Implementation Plan (FIP), with EPA learning from its mistakes under the Clean Air Interstate Rule. The FIP could then set forth a national plan for GHGs that included cap and trade, which would accomplish the administration's budgetary goal of a cap-and-trade plan without the approval of Congress.

With all signs pointing to action on federal GHG regulation this year, with new rules taking effect by 2012, at least some aspect of that regulation will involve a federal cap-and-trade program. When it comes to regulation of climate change, the business community overwhelmingly favors a cap-and-trade system over other alternatives, such as a carbon tax.

Do not expect this federal regulation to be delayed due to the economic crisis. In fact, there are those in Washington who see climate change regulation as the “trifecta" of saving the environment, rebuilding the economy, and eliminating the political Achilles' heel of the Middle East.

What is uncertain at this point is whether the cap-and-trade program will come from Congress or from EPA. Should you care? Absolutely.

Industry leaders with a strong lobby likely will prefer federal cap-and-trade legislation in hopes of having the most influence on the outcome of the new rules. For others, it may be more beneficial to wait for an EPA generated cap-and-trade system. EPA is likely to dictate, with fairness, what is best for both the environment and economy, and not whose lobby spoke the loudest.

On the one hand, if your facility prefers a short time-frame for GHG regulation -- for example, an industry with large capital expenditures in the near future that are cost-dependent on GHG regulation -- you may want to prod your congressional representative because -- although action from either arena is likely to be complex and controversial, and fraught with litigation -- it is more likely that EPA's regulatory route will take longer. And for that reason, industries that would benefit from the regulation being finalized slowly should focus on EPA.

There are certainly several other issues beyond the scope of this article, including: what sectors would be covered under cap and trade in either system, how allowances would be distributed, availability of offsets, the effect of cap and trade on bridge fuels like natural gas, etc.

The bottom line is: make no mistake, a federal cap-and-trade program is coming.

There are pros and cons as to whether EPA or Congress designs the new cap-and-trade system. Each GHG emitter should analyze the situation with its legal counsel to determine where its interests are best served. However, if such analysis indicates that congressional action is in your favor, you had better act fast. EPA isn't bluffing and is sure to move forward on its own in the face of continued congressional inaction.

About the Author

Jennifer Smokelin is an attorney in the Pittsburgh office of Reed Smith LLP, who counsels in a broad range of environmental issues, including civil enforcement and litigation matters, as well as regulatory and transactional issues. For the past several years, Smokelin has focused her practice on emerging climate change issues, on which she has lectured and counseled on extensively.