BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. The Transition toward a Carbon Constrained Economy: The EPA Approach Roger R. Martella, Jr. (202)

2 U.S. GHG Emissions

EPA Greenhouse Gas Regulatory Eras Existing Authority 2010Greenhouse Gas Reporting Renewable Fuel Standard Mobile Sources/Title II 2011Stationary Sources/Title I Carbon Sequestration 2012Market Based Controls? 3

Portfolio of EPA Rulemakings GHG Controls Endangerment finding (proposed April 17, 2009; comment period closed June 23, 2009; finalized December 7, 2009) Section 202 GHG regulation for cars and light duty trucks (proposed September 2009; finalized March 2010) PSD tailoring rule (proposed September 2009 and finalized May 2010) “Johnson Memo Rule” regarding stationary source permitting for new and modified units (Finalized March 2010) State implementation rules (proposed August 2010) Other Rules and Actions Greenhouse gas inventory rule proposal (proposed March 2009; comment period closed June 9, 2009; Final rule published November 2009; implementation January 1, 2010) Renewable fuels rule proposal (proposed May 5, 2009; goal of finalizing in fall 2009 and implementation January 1, 2010) California waiver decision (Obama Administration reconsidered Bush Administration denial of request for waiver to address GHGs; granted waiver on June 30, 2009) Carbon sequestration proposal (public comment period closed; possible final rule in early 2010) 4

Regulatory Path Forward Mobile Sources (2010) Final endangerment determination arguably will satisfy simultaneously endangerment determination for numerous other Clean Air Act provisions: –Mobile Sources Section 213 marine shipping vessels Section 231 aircraft and aircraft engines Section 213 nonroad vehicles EPA response to state and NGO petitions to regulate GHGs due within next 12 months Cars and light duty trucks: Final March 2010 Heavy Duty Trucks: Proposed summer 2010 Nonroad vehicles Aircraft and aircraft engines Marine vessels –Impact of ACESA Draft Legislation 1/1/2012 deadline for nonroad regulation (Section 821) Authorizes averaging, banking and trading among mobile sources “Sense of Congress” that ICAO process address aircraft emissions (Section 276) Renewable Fuel Standard implemented April

Regulatory Path Forward Stationary Sources (2011) New and Modified Sources: PSD Permits –EPA takes position final GHG rule for cars will trigger permitting requirements for estimated 1 million+ sources under Prevention of Significant Deterioration program –Four key questions: When will PSD be triggered? Can GHGs alone trigger PSD? What will be significance threshold for modified sources? What is Best Available Control Technology? Existing Sources: New Source Performance Standards –EPA would use NSPS to regulate energy efficiency for different source categories –EPA may propose first NSPS for GHGs in 2011 –EPA may utilize NSPS to address existing sources –Will present novel legal challenges to address existing sources Cap and Trade –EPA may consider implementing a cap and trade program under existing Clean Air Act; legal authority is untested 6

Final Tailoring Rule January 2, 2011 to June 30, 2011 –New sources: Only new sources that are already subject to the permitting programs because of their emissions of other pollutants—i.e. traditional CAA pollutants such as lead, and particulate matter—are subject to greenhouse gas emissions requirements under the PSD and Title V permitting programs. –Modified sources: Modifications of existing sources that lead to an increase in GHG emissions of more than 75,000 tons of carbon dioxide equivalent per year require a permit. July 1, 2011 to June 30, 2013 –New sources: GHG-only new sources are included for first time; the new source threshold for GHGs is set at 100,000 tons annually, instead of the 250-ton statutory threshold. –Modified sources: Modifications of existing sources that lead to an increase in GHG emissions of more than 75,000 tons of carbon dioxide equivalent per year require a permit. July 1, 2013 and following –EPA will phase in permitting requirements for GHG-only sources down to 50,000 tons per year of carbon dioxide equivalent. –EPA will not require permits for smaller sources until at least April 30,

What is BACT? From the ANPR stationary source TSD. GHG Control Measures –“There are numerous demonstrated efficiency improvements that exist, including boiler and steam system optimization, heat exchanger fouling mitigation and optimization, efficiency improvements in process heaters and motors, waste gas and power recovery, and process optimization and process technology improvements.” Thermal efficiency improvements –Process improvements to reduce steam and electricity usage –Biomass firing/co-firing –Waste gas recovery Approaches under 111 NSPS –Work practices, equipment standards, numerical efficiency standards. –Provide flexibility to make improvements and demonstrate they have received reductions through reporting. –“Significant” GHG reductions available from new and existing sources.

EPA Anticipated BACT Guidance EPA is developing GHG policy guidance for release in October. Likely a page guidance document with 30 pages of Appendices. It will include: –A walk through applicability based on the tonnages specified in the Tailoring Rule. –The top-down BACT process discussion will include: Defining (or redefining) the source Energy efficiency as BACT Fuel switching requirements Air quality analyses EPA is likely to define “source” more broadly for new sources as opposed to for modifications and are likely, for example, to include more of the process in addition to the emitting units for new sources. This policy guidance document will soon be in internal agency review. Upon release, there will be an outreach for comments, especially on items missed, but no formal notice and comment period. EPA expects to hold workshops for regions and states and may hold webinars for industry. 9 Privileged and confidential / attorney work product / attorney client privilege

10 Fuel Switching

11 Waxman Draft Section 116 Sets performance standard of 1,100 CO2/MWh as of 2015 and 800 CO2/MWh as of Effectively required fuel switching to natural gas. Requires facilities not permitted as of January 1, 2009, to adapt to carbon capture and sequestration. Preserves lawsuits against existing coal fired power plants, even after bill is passed. Preserves EPA’s authority to regulate existing plants.

Questions for a Clean Air Act Market Based System 2012 and beyond 1.Rationale 2.Legal Authority 3.Timing 4.Format 5.Distinctions with Legislation 12

Rationale “EPA believes that market-oriented regulatory approaches, when well suited to the environmental problem, offer important advantages over non-market oriented approaches.” ANPR at Distinction between carbon price vs. performance standards or prescription on behaviors/technology. Lower social cost Common emissions price for all emitters Encourages innovation Multi-pollutant strategy Geographic flexibility 13

Potential Legal Authority A door “slightly ajar” Acid Rain Program—specific authorization Title VI (ozone depleting substances) NAAQS (110) 110(a)(2)(D) (nitrogen oxide) SIP process (110(a)(1)). EPA could “require SIPs to provide for maintenance of air quality consistent with GHG standard... Implemented through a nationwide cap-and-trade program designed at the federal level and adopted by individual states in their SIPs.” ANPR at EPA cites to 110(a)(2)(A) authority to use “economic incentives such as fees, marketable permits, and auctioning allowances.” 110(a)(2)(D) requires SIPs to prohibit emissions that interfere with maintenance of the standard by other states. “Because GHGs are globally well-mixed, it may be that GHGs emitted from any state could be found to interfere with the maintenance of a GHG NAAQS in every other state.” ANPR at But see CAIR decision. NSPS (111) Expansive interpretation of “standards of performance” definition to establish market based system. “EPA has taken the position that this term authorizes a cap-and-trade program under certain circumstances.” ANPR at “We believe that the NSPS program could use emissions trading, including cap-and-trade programs and rate-based regulations that allow emissions trading, to achieve GHG emission reductions.” ANPR at EPA: A cap-and-trade system can constitute a “standard for emissions of air pollutants” because it is a system created by EPA for control of emissions. But see CAMR decision. Additional legislative authority. But authority to implement economy wide, nationwide trading program for all sectors uncertain. 14

Format “Alternative Designed for Market-Oriented Regulatory Mechanisms for Stationary Sources.” From ANPR at 44514: Cap and Trade Caps total emissions from covered sources, providing certainty regarding their future emissions, but not their costs. Rate-Based Emission Credit Program (tradable performance standard) Imposes an average mass-based emission rate across covered sources but does not cap total emissions, so emissions could rise with increased production. Establishes a regulatory standard based on emissions intensity. Emissions fee Sets a price for emissions but doesn’t limit total emissions from covered sources. Hybrid approach Combine attributes of a rate-based emissions trading system and some attributes of a tax. E.g. Cap and trade with price ceiling 15

Distinctions with Legislation Market based vs. sector based New vs. existing sources Treatment of offsets Distribution of allowances Dual regimes of market and command and control systems Market based system “would not stand alone; it would be accompanied by source-specific or sector-based requirements as a result of other CAA provisions.” ANPR at Resources/implementation International trade/leakage issues 16

Possible bumps on the path –EPA Some 31 states (including California) have asked EPA to defer triggering PSD ramifications in 2010 to provide time for states to enact state-based “Tailoring Rules” EPA has a number of legal options at its disposal to avoid triggering or deferring PSD while allowing mobile source regulations to move forward EPA is posting state response letters at –Congress Proposals that would: –Permit mobile source regulations to move forward but provide a stay of one or two years before PSD is triggered (Rockefeller); or –Use Congressional Review Act Authority to halt EPA regulations (Murkowski). –Preempt all Executive Branch authority over GHGs (Voinovich) –Litigation Almost all EPA rules are challenged in court; both environmental and industry groups have signaled potential for litigation of four GHG rules Three groups filed petitions for stay on September 15. NAM coalition, supported by 19 declarations, sought to stay effects of stationary source regulations only while preserving mobile source regulations. See