EPA Issues: Evolving GHG Regulations And The Resurgence Of Renewables

Friday, October 21, 2011 - 13:43

Editor: Are there current and pending environmental laws and regulations that could be detrimental to economic growth and job creation?

Connolly: Some people appear predisposed to argue that anything EPA proposes is “detrimental” if it has a price tag attached to it. Some in industry argue that spending money means they have less money to expand or create new jobs. There are several proposals that are garnering attention from those who are concerned that environmental legislation or regulation is likely to chill job growth.  

Morton: One pending environmental regulation is named the Utility MACT, which is scheduled to be finalized no later than November 16 and requires coal- and oil-fired power plants to reduce their emissions of mercury and other metallic toxins, acid gases and organic air toxins. Some plants already have controls that will comply with these limits. Others will need to install or upgrade pollution controls in order to comply. EPA projects that corporations will retire approximately one percent of national electric generation capacity rather than install the required pollution controls.   

Another pending EPA regulation is the Cross-State Air Pollution Rule, which was finalized in July 2011 and covers emissions in 27 states. This rule is intended to prevent one state’s pollution from making it harder for another state to meet federal air quality standards by setting strict limits on nitrogen oxides and sulfur dioxide that cause soot and smog. The Utility MACT and Cross-State Air Pollution Rule are the subject of numerous lawsuits filed in the D.C. Circuit Court of Appeals attempting to block or otherwise delay the implementation of these rules.

Connolly: Obviously, if a plant shuts down, jobs will be lost. On the other hand, there could be a positive effect. If regulations force companies to shut down facilities or buy new pollution control equipment and products, new facilities will need to be constructed, and manufacturers need to make the new equipment, thus creating new jobs. There may be a net job gain. 

Editor: What is the effect of the interest in renewable energy on job growth? 

Connolly: Green technology may not be a happy buzzword at the moment given all of the focus on Solyndra’s bankruptcy. However, significant money is still going into the renewable energy industry, whether from private equity, venture capital or traditional corporate entities such as GE. This certainly contributes to job growth. Admittedly, the loss of loan guarantee programs and some of the tax incentives geared towards spurring development of renewable energy sources and technology may adversely affect investment in the near term, but that remains unclear. 

Many states, especially California, are still promoting renewable energy. These states are telling their utility companies that an increasing percentage of the energy they generate must come from renewable energy. As a result we’re seeing money going into wind farms and solar as well as into biomass and other alternative energy sources. 

General surveys indicate that in the third quarter of this year solar companies were able to obtain more than $3.3 billion in financing. Some of that is from loan guarantee programs, but substantial amounts came from traditional sources of financing. Venture capitalists, for example, have put more than $1.3 billion into U.S. solar companies already this year.

Solyndra notwithstanding, there are many credit-worthy companies out there, and a great deal of money is going into them. The third quarter saw 20 or more M&A transactions just involving solar companies – some of them here and others, of course, in China, where the government is putting great emphasis on solar. 

Wind is getting a lot of attention, too. There have been 60-plus M&A transactions of note this year with a valuation totaling well over $5 billion. Last month Goldman Sachs invested $200 million in a wind farm operator in India. It is important to note that renewable energy has a global dimension, so while our federal government may be stuck in a political morass, in other countries the demand for renewable energy continues to grow. 

Editor: Do you advise your clients to calculate their GHG emissions?

Connolly: Our general position is whether you’re regulated today or not, it is important to understand your GHG footprint for a number of reasons. You could be caught in the EPA’s or its state counterparts’ regulatory process by regulators collecting information from a wide variety of businesses. You may also experience pressure from your shareholders (if you are publicly held) or investors (if you are privately held) to understand, or even reduce, your carbon footprint. And, customers in certain industries may express an interest in understanding their supplier’s carbon footprint and any efforts taken to minimize greenhouse gas emissions

Our position generally is that you should get a handle on the nature of your greenhouse gas footprint and regulatory trends that may give rise to any legal or practical obligations. If you are one of the entities required to comply with EPA’s reporting requirements, you already should be working with those technical folks and figuring out the best way to respond to EPA and any state requirements. 

Editor: Please tell us about the EPA’s rulemaking on GHG emissions.

Connolly: The EPA’s entire rulemaking on greenhouse gas is subject to numerous types of lawsuits covering various aspects of the regulations and potential congressional intervention. The U.S. Supreme Court has said that if greenhouse gases endanger the environment, EPA must regulate them. If Congress enacts legislation saying that greenhouse gases are no longer pollutants under the Clean Air Act, this would take some of the pressure off EPA at a time when appropriations and budgets are being reviewed by Congress. You don’t need to be practicing in the environmental realm to realize that Congress is having a difficult time reaching consensus on how to finance particular agencies.

Earlier this year, the EPA announced that it was going to delay proposing the greenhouse gas standards for power plants and refineries. Some see this as a political decision by the administration; others believe that EPA is going to focus on the Utility MACT, which could enhance EPA’s ability to shut down large greenhouse gas sources like certain coal-fired plants. 

Meanwhile, the EPA’s Tailoring Rule, which went into effect this past January, requires a company to obtain a permit under the Clean Air Act’s Prevention of Significant Deterioration (PSD) Program if it plans to either construct a new facility or substantially modify a facility that emits more than 75,000 tons of greenhouse gas annually; emitters must also implement what is known as Best Available Control Technology (BACT). 

BACT is determined on a case-by-case basis, usually by the state or local permitting agencies. We’ve yet to see many decisions or permittings where BACT technology is approved or implemented in a GHG emitter context. At this time, your best course is to work with your technical advisor and watch any precedents as they become available. 

Meanwhile, GHG emissions must now also be incorporated into a company’s Title V permits if it emits over 100,000 tons of GHG. These requirements are the subject of many lawsuits whose outcomes remain uncertain.

Morton: There is speculation that the Obama administration is moderating its stance on regulating air emissions in advance of the 2012 election. Case in point is the White House’s recent decision to delay a decision on stricter ozone limits until 2013. EPA Administrator Lisa Jackson is on record with Congress as favoring a stricter standard, but the Bush-era standard will be enforced in the meantime. Some view this decision as politically motivated in advance of the election because the ozone standard applies across the economy and impacts state and local governments. In May, EPA also indefinitely stayed the effective dates for the new boiler MACT emissions standards for boilers, which many in the business community viewed as extremely burdensome. It is unclear how EPA will proceed from here or whether EPA will act prior to the 2012 elections if the courts do not force EPA to take action sooner.

Editor: How have some environmental groups been able to invoke the Endangered Species Act?

Connolly: Using the Endangered Species Act is not new. It is just one of the tools that environmental groups use to challenge what they perceive in any particular case as being an adverse action with respect to environmental protection. 

There is always tension between environmental groups and industry when it comes to moving things forward. Recently a nonprofit organization was able to prevent the spraying of herbicides and pesticides in one of our national forests because the environmental impact statement didn’t take into consideration the impact of low-flying helicopters spraying the chemicals and how that would affect the grizzly bears, which are protected under the Endangered Species Act. 

On the other side you have members of Congress attempting to prevent a single species from being able to derail certain projects, particularly when it comes to oil drilling. The polar bear is an oft-cited example.

Editor: Several regions of the U.S. have adopted their own versions of cap-and-trade through their regional organizations or RGGIs (Regional Greenhouse Gas Initiative). Governor Christie announced that New Jersey would be withdrawing from its RGGI. Do you think this portends a trend away from more active regional control of greenhouse gases?

Morton: While Christie announced his intention to withdraw from that multi-state compact, his Energy Master Plan still contains a greenhouse gas reduction and renewable energy component. For example, it continues the state’s commitment to developing off-shore wind and seeks to reduce New Jersey’s future dependence on coal-fired power plants. So reducing greenhouse gas emissions is not an issue the state is completely ignoring. New Jersey’s action could reflect its judgment that RGGI might not be the correct vehicle for regulation. In fact, RGGI emissions allowance prices have so far been too low to change behavior. 

There is evidence that certain states nonetheless are forging ahead. With respect to RGGI, several states remain members and have publicly condemned New Jersey’s decision to exit the initiative. In New Hampshire, the governor vetoed a bill mandating withdrawal from RGGI. This veto has since been upheld by the New Hampshire legislature. California is proceeding with its cap-and-trade program; the state is also part of a regional compact called the Western Climate Initiative. New Mexico also has enacted a cap-and-trade program.

Editor: Some members of the House of Representatives are attempting to prevent additional regulation of the largest sources of GHGs – namely fossil-fueled plants and refineries, which are regulated under EPA’s GHG Tailoring Rule. Do you expect any further regulation of emissions to take place during the present Congress?

Connolly: Honestly, no. Congress has an awful lot on its plate. Given the degree of partisanship and the presidential election campaign, we do not anticipate any significant action by Congress with respect to reducing greenhouse gas emissions.

Editor: What future do you see for nuclear power plants in the U.S. following the Japanese earthquake and Germany’s subsequent closing down of nuclear facilities?

Connolly: I don’t see significant expansion in the nuclear industry in the United States for a variety of reasons. What happened in Japan resonates with the U.S. citizenry in terms of the potential catastrophe that could happen in the event of an uncontrollable circumstance like a natural disaster. This, combined with the political problem of developing a final repository for our nuclear waste and the protracted permitting process, means I don’t see a significant increase in nuclear generation capacity in this country happening any time in the near future. I recognize that the Southern Company has a federal loan guarantee and is moving forward with developing a new nuclear reactor in Georgia; however, it will probably be years before that comes online. 

Editor: You mentioned solar and wind. I gather there have been major efforts off Cape Cod to shut down wind turbines even though they are far offshore.

Connolly: Wind has many factors that influence its potential development, and numerous project-specific questions need to be answered before a project is potentially allowed to move forward. Do moving turbines attract birds and bats? Do windmills interfere with migratory bird paths, which are extremely important in terms of the life cycle for all local plants and animals? There also can be objections from the public on aesthetic grounds. Windmills make noise, and some people consider them unsightly. 

Editor: Do you see any major regulatory efforts to close them down?

Connolly: No, I believe that wind will continue to be reviewed case by case and project by project as to what makes sense and where. Obviously, Cape Wind attracted a lot of attention. Other wind projects have been completed with significantly less public attention, and we expect that will be the case in the future. 

Please email the interviewees at annemargaret.connolly@weil.com or matthew.morton@weil.com with questions about this interview.