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The Carbon Tax Checklist

Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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EPA’s New Refinery Rule—Next Generation Compliance in Action

The U.S. Environmental Protection Agency (EPA) signed a new air pollution rule in September that illustrates how EPA is implementing its next generation compliance ideas.  The rule governs hazardous air emissions from petroleum refineries, but features several “next gen” tools that are relevant to other types of facilities, especially chemical plants and oil and gas storage facilities.

Next Gen Tools Found in the New Refinery Rule

EPA’s next generation compliance initiative seeks to modernize the agency’s regulations and enforcement efforts.  The initiative encourages the use of new technologies for detecting air emissions, aims to incentivize compliance and emissions reductions, rather than relying primarily on the threat of enforcement, and also encourages greater public disclosure of environmental data.  Many of these ideas are on display in the new refinery rule.

First, the rule requires “fenceline monitoring” of benzene concentrations and corrective action if benzene levels are detected above a baseline level.  This is the first time EPA has required fenceline monitoring and related corrective action measures on such a large scale.

Second, the rule requires electronic reporting of the fenceline monitoring data.  That is important not simply because it will enhance EPA’s ability to bring timely enforcement actions, but also because it is a prelude to public disclosure of the monitoring data.  EPA has explained that it intends to develop a publically accessible database of the fenceline monitoring results.

Third, the rule illustrates EPA’s evolving approach toward so-called “upset” or “malfunction” events.  Historically, many EPA air regulations excused compliance during periods of equipment malfunction.  EPA has begun rolling back those malfunction exceptions and, in the new refinery rule, the agency adopts an approach to malfunction events that it will likely seek to apply to other industrial facilities going forward, especially those that use flares and pressure relief devices (PRDs).  The new rule aims to minimize the use of flares and PRDs, in part because of recent studies suggesting that flares and PRDs can themselves be large sources of air pollution.  The rule limits the number of flaring and PRD events that are permitted, requires refinery operators to develop flare management plans (to reduce flare use) and requires certain corrective actions to be taken after each flaring or PRD event.

Fenceline Monitoring Issues

The rule’s fenceline monitoring and corrective action requirements deserve special attention.  Those features of the rule are intended to improve the control of so-called “fugitive” emissions, emissions that, generally speaking, leak out of industrial equipment rather than being expelled out an exhaust stack where they can be more easily subjected to pollution control devices.  Many other types of facilities experience fugitive emissions, including chemical plants, distilleries, oil and gas storage terminals, and wastewater treatment plants.  Thus, the new refinery rule provides a glimpse of a possible regulatory future for many other industrial activities.

A critical issue in this context is how the fenceline monitoring data will be used.  Do high levels of a hazardous air pollutant, standing alone, establish a violation, or is something more required?  In the [...]

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An Update on EPA’s Approach to Methane Emissions from the Oil & Gas Sector – Including a Summary of the Agency’s Proposed New Reporting Rule

The U.S. Environmental Protection Agency (EPA) is expected to announce between now and December 31, 2014 its plan for pursuing methane reductions from the oil and gas sector – including whether it will propose new emission reduction regulations.  Additionally, the agency recently modified its greenhouse gas (GHG) reporting rules for oil and gas systems and also proposed expanding those rules so that they would cover many additional oil- and gas-related sources.  This blog post briefly summarizes these recent developments.

Where is EPA Headed with Respect to New Emission Reduction Requirements?

In his March 2014 Methane Reduction Strategy, President Obama directed EPA to study opportunities for reducing methane emissions from the oil and gas sector and to make a determination by this fall as to how best to pursue further reductions.  EPA has yet to announce its “determination” but it is widely anticipated that EPA will not propose new methane capture or leak detection and repair (LDAR) regulations; instead, EPA is generally expected to continue promoting voluntary emission reduction efforts.  But the agency remains under pressure from environmental organizations to actually require emission reduction measures, such as new mandatory LDAR requirements.  For example a recent report by a coalition of environmental organizations asserts that new LDAR regulations focused on methane, coupled with other mandatory methane reduction measures, could “reduce the sector’s methane pollution in half in just a few years.”

New GHG Reporting Requirements Take Effect January 1, 2015, and EPA has also Proposed a Significant Expansion of the Reporting Rules

Although EPA may not propose new methane emission reduction regulations, it is clearly interested in improving the range and quality of methane emission data that it receives – and that it makes available to the public.  Thus, on November 13, 2014, EPA signed a final rule (published in the Federal Register on November 25, 2014) modifying the existing GHG reporting requirements for the oil and gas sector to clarify the exact equipment covered by the regulations and the precise methods that can be used to calculate emissions from that equipment.  The modifications take effect on January 1, 2015 and apply to emissions occurring in 2015.

EPA also just signed a proposed rule that would expand the oil and gas sector GHG reporting requirements to several additional categories of equipment and activities.  The proposed rule has not yet been published in the Federal Register, but it would expand the reporting requirements to include, among other sources, gathering and boosting facilities, completions of fractured oil wells (currently, the rules cover fractured gas wells) and natural gas transmission pipeline blowdowns.  The proposed rule also discusses emission calculation methodologies and the confidentiality of data reported to EPA.  Indeed, the proposed rule lists several categories of emission and equipment-related data and proposes to designate much of that information as not confidential.  That feature of the proposal reflects the agency’s ongoing emphasis on “next generation compliance,” one element of which is greater public [...]

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The Supreme Court’s Greenhouse Gas Permitting Decision – What Does It Mean?

The U.S. Supreme Court today partly upheld and partly rejected the U.S. Environmental Protection Agency’s federal Clean Air Act permitting regulations governing greenhouse gas (GHG) emissions from stationary sources.  The decision is mostly a victory for EPA, and its narrow scope means that it will almost certainly not disrupt, let alone invalidate, EPA’s ongoing Section 111(d) rulemaking to set GHG emission limits for existing power plants.  At the same time, the decision does not necessarily mean that EPA’s 111(d) proposal is free from legal challenge.  That is because the decision does not address 111(d).

Today’s decision concerns the Clean Air Act’s two stationary source permitting programs – the prevention of significant deterioration (PSD) program and the Title V program.  In 2010, EPA announced that it was including GHG emissions within the scope of both programs.  Various states and industry groups challenged that announcement, and today, the Supreme Court partly agreed and partly disagreed with the challengers.

First, five justices (Scalia, Roberts, Kennedy, Alito and Thomas) held that a source’s GHG emissions, standing alone, cannot trigger the obligation to undergo PSD and Title V permitting.  That part of the decision is a loss for EPA.  But the second part of the decision is a victory for the agency.  Seven justices (Scalia, Roberts, Kennedy, Ginsburg, Beyer, Sotomayor and Kagan) held that EPA can require sources that are subject to PSD “anyway,” because they emit other types of pollutants in significantly large quantities, to control their GHG emissions.  In sum, GHG emissions cannot trigger the obligation to undergo PSD permitting, but EPA can use the PSD permitting process to impose source-specific GHG emission limits on facilities that trigger the process for other reasons.

The decision does not address EPA’s authority to impose substantive limits on GHG emissions using other statutory provisions such as Clean Air Act Section 111(d).  Readers interested in the ongoing debate over EPA’s Section 111(d) authority may wish to log into a complimentary webinar that McDermott is offering on Thursday, June 26.  The webinar will discuss EPA’s recent 111(d) proposal for existing power plants and will cover various topics that affected parties may want to address during the public comment period on that proposal.  Click here to register.




EPA Publishes its Proposed Regulations for Existing Power Plants – Starting the Public Comment Period

Today, the U.S. Environmental Protection Agency (EPA) published in the Federal Register its June 2, 2014, proposal to regulate greenhouse gas emissions from existing fossil fuel-fired power plants.  The act of publication triggers the start of the 120-day public comment period, meaning that interested parties must submit comments to the agency by no later than October 16, 2014.

On Thursday, June 26, McDermott will be hosting a complimentary webinar on critical issues to address during the comment period.  Click here to register.




The Third Piece of EPA’s Clean Power Plan: GHG Emission Limits for Modified and Reconstructed Power Plants

The U.S. Environmental Protection Agency’s proposed greenhouse gas (GHG) regulations for “new” and “existing” power plants have received substantial media attention, but regulated parties should also be aware of the third piece of EPA’s self-styled “Clean Power Plan”:  Proposed carbon dioxide (CO2) emission limits for “modified” and “reconstructed” electricity generating units (EGUs).

EPA proposed CO2 limits for “modified” and “reconstructed” EGUs on June 2, 2014, the same day it issued its proposed regulations for existing power plants, but it did not release its proposed regulatory text for those limits until several days later.  The proposed regulatory text is now available on EPA’s website, and power plant owners and operators should scrutinize it carefully – it amends the proposed regulatory text that EPA released in January 2014 in connection with its proposed limits for “new” power plants.

As defined in EPA’s regulations, “modified” units are existing units that undergo a physical or operational change that results in an increase in their hourly rate of air emissions, while “reconstructed” units are existing units where components have been replaced to such an extent that the fixed capital cost of the new components exceeds 50 percent of the fixed capital cost that would be required to construct a comparable entirely new facility, and it is technologically and economically feasible to meet the emission standards set by EPA.

Under EPA’s June 2 proposal, neither modified nor reconstructed steam units would have to install carbon capture and storage technology or meet the more stringent CO2 emission standards that EPA has proposed for newly constructed units.  Instead, those units would be required to meet an emission standard based on a combination of best operating practices and equipment upgrades (to improve the unit’s efficiency).  Modified gas turbines would be required to meet the corresponding emission limits for new gas turbines.

More specifically, the proposal would set different standards of performance for different types of units, as follows:

  • Modified fossil fuel-fired EGUs (i.e., utility boilers and integrated gasification combined cycle (IGCC) units):  the source must meet a EGU-specific emission limit (a) determined by the EGU’s best historical annual CO2 emission rate from 2002 to the date of modification, plus an additional 2 percent emission reduction, or (b) determined depending on whether the modification occurs before or after the EGU becoming subject to a Clean Air Act Section 111(d) state plan.  For option (a), the limit must be at least 1,900 pounds of CO2 per net megawatt-hour (lb/MWh-net) for sources with a heat input exceeding 2,000 million British thermal units per hour (MMBtu/h), or 2,100 lb/MWh-net for sources with a heat input of 2,000 MMBtu/h or less.
  • Reconstructed fossil fuel-fired EGUs:  sources with a heat input exceeding 2,000 MMBtu/h must meet a limit of 1,900 lb/MWh-net, and sources with a heat input of 2,000 MMBtu/h or less must meet a limit of 2,100 lb/MWh-net.
  • Modified or reconstructed natural gas-fired stationary combustion turbines:  sources with a heat input exceeding 850 MMBtu/h must meet a limit of 1,000 pounds of [...]

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EPA’s Proposed Power Plant Regulations – Simpler Than You Think

The U.S. Environmental Protection Agency (EPA) released its long-anticipated proposal for regulating greenhouse gas emissions from existing power plants on June 2, 2014, to much fanfare.  The proposal is simpler than it looks.  Here are the key points.

1.  The Proposed Rule is Only 38 Pages Long.  It’s the “Justification” That Takes up Space.  Many observers have been overwhelmed by the sheer volume of material associated with the EPA’s proposal – a 607-page preamble, a “legal memorandum” defending the proposal, a “regulatory impact analysis” discussing the proposal’s impacts and several “technical support documents.”  All of that material is important, but if you want to understand the heart of what EPA is proposing, focus on the draft regulatory text – the actual proposed rule.  Read the other material if you want to understand EPA’s justification for the rule.

2.  The Gist of the Proposed Rule: Target Rates and State Compliance Plans.  The rule applies to state governments, not to power plant owners and operators.  The rule requires each state to submit a plan to EPA showing how that state will reach a target CO2 emission rate for its existing power plants (coal, oil and gas) by 2030, as well as how the state will reach an interim target rate for the years between 2020 and 2029.   Thus, the rule has two parts: the “target rate,” and the requirement that each state submit a plan for reaching the target rate.  The target rate is going to be the most controversial aspect of the rule.  EPA set a different target rate for each state, and the manner in which it did so is what the fight is going to be about.  As for how to achieve the target rate, that is a bit less controversial because EPA has given the states a lot of flexibility.  In essence, the states can get to their targets however they want – by mandating heat rate improvements, by implementing a cap-and-trade system, by reducing demand for electricity – as long as they demonstrate that their plan will in fact get them there.

3.  The Easiest Way to Comply:  Follow RGGI.  The easiest way for states to comply with this proposed rule is to develop and participate in a program like the Regional Greenhouse Gas Initiative (RGGI).  Participating in a RGGI-type cap-and-trade program may not get every state all the way to its target rate, but it will help many states get a long way toward that goal.  Equally important, RGGI is a relatively simple cap-and-trade system.  That means that implementing a RGGI-like program faces fewer bureaucratic and legal obstacles than some of the other compliance mechanisms available to the states.

4.  The Proposal Raises at Least Three Overarching Legal Questions. 

First, does EPA have authority to issue the rule in the first place?  This question turns on the language of Clean Air Act (CAA) Section 111(d).  Some lawyers contend that rather than authorizing EPA to regulate power plant greenhouse gas emissions, Section 111(d) actually prohibits such [...]

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EPA’s Next Generation Compliance Initiative – The Agency’s Latest Proposed Rule for Refineries Shows the Initiative in Action and Provides a Glimpse of the Future for Other Industries

The U.S. Environmental Protection Agency (EPA) recently released a proposed rule that illustrates several of the agency’s Next Generation Compliance ideas in action.  The proposed rule concerns hazardous air pollutant (HAP) emissions from refineries, but should be studied by anyone who wants to gain a better understanding of what “Next Generation Compliance” means as a practical matter.  Most importantly, the proposed rule shows the direction in which the agency is likely headed with respect to “fugitive” air emissions at other types of facilities – chemical plants, paper mills, distilleries, etc.

EPA uses the term “Next Generation Compliance” to cover several ideas:  (i) the use of new, advanced technologies to identify and measure emissions, (ii) electronic reporting of environmental data rather than paper reporting, (iii) greater disclosure of environmental data to the public, and (iv) regulations that contain fewer exceptions and more built-in incentives for compliance.

Many of those ideas are on display in EPA’s May 15 proposed rule for refineries, but two features of that rule stand out as being especially relevant to other industries, and as good examples of what Next Generation Compliance means in practice:

First, the proposed rule would impose emission limits that apply at all times; there are no exceptions for startups, shutdowns and malfunctions.  Under this approach, which, because of recent court decisions, will likely be standard for all HAP rules going forward, regulated parties will no longer be automatically shielded from penalties in the event they exceed emission limits because of an equipment malfunction.  But those parties may still be able to convince the agency, on a case-by-case basis, that they should not be penalized, based on the event-specific facts.

Second, the proposed rule would require refinery owners and operators to monitor ambient air quality at the fenceline of their facilities, and it encourages the use of new technologies to conduct that monitoring.  The agency explains, in the draft rule’s preamble, that this approach is intended to provide a flexible means of locating and controlling fugitive emissions – emissions that cannot easily be captured to pass through a stack or vent and that are usually estimated based on engineering judgments rather than measured directly.

Fenceline monitoring is a controversial topic.  Regulated parties sometimes fear that data from fenceline monitoring will be used to impose penalties for emissions that are not in fact unlawful, or that such monitoring will be used to support state law tort claims against the owners and operators of industrial facilities.  But in some situations, fenceline monitoring might provide a defense to state law nuisance and trespass claims, or otherwise exonerate a regulated party from blame for local air pollution problems.  In all events, a critical question is how the fenceline monitoring data will be used.  Does the data establish violations?  Does it trigger corrective action duties?  Does it trigger reporting duties?

The refinery proposal addresses each of those questions, but with mixed results.  Most importantly, there are places where the draft regulatory text and EPA’s explanation [...]

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EPA Unveils Final Cooling Water Intake Structures Rule

On May 19, the U.S. Environmental Protection Agency (EPA) finalized its long-awaited rule under Section 316(b) of the Clean Water Act (CWA) imposing requirements for cooling water intake structures (CWIS) at power plants and manufacturing facilities in order to protect aquatic life.  The rule, on which EPA received input from the U.S. Fish and Wildlife Service and National Marine Fisheries Service, will become effective 60 days after its publication in the Federal Register.

EPA has stated that the withdrawal of large volumes of water from nearby water bodies by power plants and manufacturing facilities results in the removal of billions of aquatic organisms from these water bodies each year.  The main threats CWIS pose to these organisms are impingement (the entrapment of organisms against the outer part of a CWIS) and entrainment (drawing of the organisms into the cooling water system).

The final rule establishes requirements for the location, design, construction and capacity of CWIS at “existing” power generating facilities and manufacturing facilities that withdraw at least two million gallons of water per day from nearby water bodies and use at least 25 percent of that water exclusively for cooling.  The rule defines an “existing facility” as a facility “that commenced construction as described in 40 CFR 122.29(b)(4) on or before January 17, 2002 (or July 17, 2006 for an offshore oil and gas extraction facility) and any modification of, or any addition of a unit at such a facility.”  Section 122.29(b)(4) states that construction commences when the facility’s owner or operator has (1) begun to place, assemble or install facilities or equipment or has begun to conduct “[s]ite preparation work” (e.g., clearing or excavation activities), or (2) entered into a binding contract (other than option contracts, contracts that may be terminated or modified without substantial loss, and contracts for feasibility engineering or design studies) to purchase facilities or equipment it intends to use for its operations within a reasonable time period.  EPA estimates that the rule covers approximately 1,065 facilities – 544 power plants and 521 factories.

The final rule’s requirements will be implemented through National Pollutant Discharge Elimination System (NPDES) permits, and EPA stated that the requirements are based on the best technology available (BTA) for minimizing environmental impacts.  The rule establishes a baseline for protecting aquatic life from CWIS, but also allows for state permitting authorities to build in additional facility-specific safeguards.  The rule contains three major components:

  • Covered facilities must reduce impingement of aquatic life through one of seven options for meeting BTA requirements, including operation of a closed-cycle recirculating system, installation of an offshore velocity cap, or potentially using a modified traveling screen;
  • Facilities withdrawing at least 125 million gallons of water per day must conduct studies to assist permitting authorities, through a process involving public input, in determining any site-specific entrainment mortality controls that may be necessary; and
  • New units built at an existing facility to increase the facility’s generating capacity must reduce entrainment and impingement by either reducing actual intake [...]

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The President’s Methane Reduction Strategy – Here’s What Energy Companies Need to Know

President Obama recently released a Strategy to Reduce Methane Emissions (Strategy) that sets forth a multi-pronged plan for reducing methane emissions both domestically and globally.  Domestically, the plan is to focus on four sources of methane—the oil and gas sector, coal mines, agriculture and landfills—and to pursue a mix of regulatory actions with respect to those sources.  Energy companies now have the opportunity to help influence exactly what those actions will be.

For the oil and gas sector, the Strategy indicates that the federal government will focus primarily on encouraging voluntary efforts to reduce methane emissions—such as bolstering the existing Natural Gas STAR Program and promoting new technologies.  But the Strategy also identifies two areas of potential mandatory requirements.  First, later this year, the Bureau of Land Management (BLM) will issue a draft rule on minimizing venting and flaring on public lands.  Regulated parties will have the opportunity to submit comments after the proposed rule is released.  Second, the Strategy confirms that the Environmental Protection Agency (EPA) will decide this fall whether to propose any mandatory methane control requirements on oil and gas production companies.  Consistent with that announcement, on April 15, 2014, EPA released five technical whitepapers discussing methane emissions from the oil and gas production process.  The agency is soliciting comments on those whitepapers—they are due by June 16, 2014.

For coal mines, the Strategy indicates that BLM will soon be seeking public input on developing a program to capture and sell methane from coal mines on public lands.  The Strategy further indicates that EPA will continue promoting voluntary methane capture efforts.

For landfills, the Strategy calls for public input on whether EPA should update its regulations for existing solid waste landfills, indicates that EPA will be proposing new regulations for future landfills, and indicates that EPA will continue to support the development of voluntary landfill gas-to-energy projects.

For agriculture, the Strategy does not suggest any new regulatory requirements.  Instead, it indicates that EPA and the Department of Energy will work to promote voluntary methane control efforts and that those agencies will place special emphasis on promoting biogas—starting with the release of a “Biogas Roadmap” in June 2014.

In addition to these sector-specific approaches, the Strategy emphasizes the need for improved methane measurement and modeling techniques, both domestically and globally.  All of the topics covered by the Strategy are ones about which regulated parties may want to submit comments—to EPA, BLM and/or the Office of Management and Budget.




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