Article Law360

The EPA's Next Regulatory Frontier: Large Ship Emissions

The U.S. Environmental Protection Agency's enforcement office is signaling a new area of interest: air pollution from large ships and ocean-going vessels. Statements made by EPA personnel indicate the agency is poised to enforce sulfur oxide and nitrogen oxide requirements of Annex VI to the International Convention for the Prevention of Pollution from Ships ("MARPOL").

Annex VI is implemented in the U.S. through the Act to Prevent Pollution from Ships ("APPS"). Annex VI, APPS and implementing regulations promulgated by the EPA under the Clean Air Act, impose engine-based and fuel-based standards that apply to U.S. flagged ships wherever located, and to non-U.S. flagged ships operating in U.S. waters. The EPA will enforce these requirements pursuant to its authority under APPS, the Clean Air Act and a Memorandum of Understanding between the EPA and U.S. Coast Guard.

The engine and fuel standards affect a large swath of the maritime sector, including companies that manufacture, sell or import marine diesel engines, companies that make vessels that use such engines, the owners and operators of large vessels, such as cruise ships, tankers, container ships and bulk carriers, and marine diesel fuel suppliers.

The regulations apply to vessels operating in U.S. waters, as well as ships operating within the 200 nautical mile border around the U.S., including the North American Emission Control Area ("ECA") and the U.S. Caribbean ECA, which encompasses waters around Puerto Rico and the U.S. Virgin Islands. In the upcoming months, we expect to see more administrative subpoenas, inspections and investigations culminating in federal enforcement actions.

What Requirements Will the EPA Begin Enforcing?

More stringent emission limitations for marine diesel fuel and engines come into effect beginning Jan. 1, 2015, and Jan. 1, 2016, respectively, in both the North American ECA and the U.S. Caribbean ECA.

In April 2010, pursuant to its authority under APPS and the Clean Air Act, the EPA promulgated a rule that revised the domestic diesel fuel program to allow for the production and sale of diesel fuel with up to 1,000 ppm sulfur for use in Category 3 marine diesel engines by 2015. Category 3 engines are the main propulsion engines used in most large ships, such as container ships, tankers, bulk carriers, cruise ships and lakers. The rule generally prohibits marine diesel fuel oil above 1,000 ppm sulfur, unless the vessel employs alternative devices, procedures or compliance methods that achieve equivalent emission reductions. For instance, ship operators may elect to equip their vessels with exhaust gas cleaning devices, known as “scrubbers,” to remove SOx from higher sulfur fuels.

The 2010 rule added two new tiers of NOx standards for Category 3 marine diesel engines installed on vessels flagged or registered in the U.S. While the Tier 1 standards went into effect in 2011, the Tier 3 standards take effect on Jan. 1, 2016, and will require the use of high-efficiency emission control technology, such as selective catalytic reduction, to meet the aggressive NOx limits, which range from 2.0 to 3.4 g/kW-h, depending upon engine speed, and require an 80 percent reduction in NOx emissions below current levels.

A New Frontier for the EPA’s Enforcement Program

On March 20, 2014, Janet McCabe, the EPA’s acting assistant administrator for the Office of Air and Radiation ("OAR"), commented at an American Bar Association conference that reducing air pollution from marine vessels was a prominent emerging issue for the agency. Earlier that same month, on March 4, OAR’s Director of the Office of Transportation Air Quality, Christopher Grundler, testified before the House of Representatives Subcommittee on Coast Guard and Maritime Transportation about the EPA’s marine vessels program. Grundler stated that the program is “one of the most important and cost-effective air quality programs the U.S. government has put into place in the past decade.”

As the programmatic side of the EPA has been touting the air-related benefits of the marine vessels program, the enforcement side of the agency is gearing up to enforce the more stringent SOx and NOx requirements. At a presentation to the Ship Operations Cooperative Program ("SOCP") in November 2013, an attorney with the EPA’s Air Enforcement Division ("AED"), in the Office of Enforcement and Compliance Assurance ("OECA"), told attendees that there would be more activity from the enforcement office over the next several months.

She explained that this is an important area for the EPA because “ocean-going vessels are the last uncontrolled source of air emissions in the [U.S.]” The AED attorney also said that the assistant administrator for OECA, Cynthia Giles, is paying attention to the marine vessels program, and wants the enforcement program to ensure that the emissions benefits expected from the EPA’s rule are realized.

What can Companies Expect From the EPA’s Enforcement Office?

The EPA has pursued enforcement initiatives under the Clean Air Act for a variety of sectors since the 1990s, including refineries, coal-fired power plants, glass manufacturers, acid production plants and cement plants. We expect the EPA will adopt a similar initiative-type approach for its enforcement of the marine vessels air emission requirements. It is possible for the EPA to also adopt this program as a formal “enforcement initiative” for the upcoming 2016-2018 cycle.

In the near-term, companies should expect increased scrutiny by the federal government, from both the EPA and Coast Guard, who shares responsibility with the EPA in enforcing marine vessel requirements. The EPA will leverage all of its authorities under the Clean Air Act, as well as the authorities granted to it and the Coast Guard under APPS. To leverage as much bang for its enforcement buck, the EPA will pursue multiple, concurrent investigations employing various investigative authorities with the goal of announcing a collection of enforcement actions related to the marine vessels program to promote general deterrence in the regulated community.

This coordinated enforcement effort will include document requests, onsite inspections of engines and log books and fuel sampling. The EPA will issue subpoenas and information requests pursuant to its authority under APPS and the Clean Air Act, regarding compliance with the marine diesel engine and fuel limits. The EPA and Coast Guard are currently engaging in flyovers of regulated vessels to obtain emission samples from vessel plumes. With this technique, the EPA claims it can assess compliance with fuel sulfur limits because the amount of SOx can be estimated based on the CO2 concentration in the plume. This is yet another way the EPA and Coast Guard will investigate compliance with the fuel sulfur limits. The AED representative speaking at the SOCP conference also commented that of late, the EPA has been joining the Coast Guard in marine vessel inspection-related activities.

The EPA will pay particular attention to the fuel oil nonavailability reports it receives. Owners and operators of vessels who cannot obtain compliant fuel oil can assert a fuel oil nonavailability claim to the EPA through an online system. The EPA has published guidance regarding such claims. It is important to note that the filing of a fuel oil nonavailability report does not mean that the vessel will be deemed in compliance with Annex VI requirements.

The EPA will use its information request and subpoena authorities under APPS and the Clean Air Act to investigate the veracity of fuel oil nonavailability reports that it receives. The agency will take into account the information provided in the report, together with any other information it obtains in response to its administrative subpoena, in determining whether to pursue a violation of the fuel oil limit. Companies should be aware of this, especially with the decreasing SOx limit beginning in January 2015.

After conducting its investigation, but before the EPA initiates a civil enforcement action, the agency may issue a notice of violation to the company under investigation. The EPA is not legally required to issue a notice as a precondition to enforcing the SOx and NOx standards. However, it is has become common practice for EPA to use NOVs for many air enforcement actions where it is not legally required to do so. And, the Coast Guard will likely issue NOVs for alleged violations of the requirements it enforces pursuant to its procedures codified at 33 C.F.R. Section 1.07-11.

Thus, given the EPA’s foray into this new area of the law and because it shares enforcement responsibilities with the Coast Guard, the EPA may apply its practice of issuing NOVs to alleged violators in the marine vessels context.

The issuance of an NOV provides the recipient an opportunity to meet with the EPA, referred to as a NOV conference, and to present arguments as to why the agency is incorrect as to any alleged violations, or to explain the circumstances giving rise to an alleged violation. It is important to note, however, that a NOV conference is not a settlement conference, and any communications with the EPA during an NOV conference are generally not a protected settlement communication, unless there is an agreement and understanding with the EPA prior to the meeting.

Following an NOV conference, the EPA may determine that a violation does not exist and withdraw the NOV, may engage in settlement negotiations or may pursue an enforcement action for civil penalties.

Federal Enforcement: A Shared Responsibility Between the EPA and Coast Guard

The EPA and Coast Guard entered into a memorandum of understanding regarding the enforcement of Annex VI requirements. The memo provides that the EPA and Coast Guard will jointly and cooperatively enforce the provisions of Annex VI.

These efforts include inspections, investigations and enforcement actions if a violation is detected through oversight of marine-fueling facilities, on-board compliance inspections and record reviews. The Coast Guard has issued a guidance regarding the methods and procedures it will use to verify compliance with Annex VI requirements. In general, the Coast Guard is responsible for verifying compliance with Annex VI requirements and the EPA is responsible for enforcing violations pertaining to certain Annex VI requirements, including Regulation 13, which established NOx emission standards, and Regulations 14 and 18, which established sulfur limits for fuels.

The Coast Guard inspects U.S. and foreign-flagged ships for compliance with Annex VI requirements during comprehensive domestic inspections and Port State Control examinations. If a violation is discovered, the Coast Guard can issue a no-sail order to the vessel operator of a U.S.-flagged ship or a detention order to the operator of a foreign-flagged ship.

Both the EPA and Coast Guard can commence enforcement actions for violations of Annex VI, and the regulatory SOx and NOx standards. Violators of Annex VI, APPS or an implementing regulation may result in criminal and/or civil liability. For civil violations, companies may be liable for a penalty of up to $25,000 for each violation. Under APPS, each day of a continuing violation constitutes a separate violation.

Looking Ahead: Opportunities for Addressing Potential Compliance Issues Prospectively With the EPA

Companies diligently pursuing strategies to meet the SOx and NOx requirements, but are concerned they will not timely achieve the standards, may approach the EPA’s enforcement office prior to the occurrence of any violations. The EPA’s enforcement office has the discretion to work with companies to fashion prospective compliance schedules, given appropriate circumstances. However, companies entering into such settlement agreements with the EPA will be asked to pay civil penalties to resolve the anticipated violations of the law, and may need to devise a compliance program that achieves an overall net environmental benefit.

REPRINTED WITH PERMISSION FROM THE APRIL 21, 2014 EDITION OF LAW360 © 2014 PORTFOLIO MEDIA INC. ALL RIGHTS RESERVED. FURTHER DUPLICATION WITHOUT PERMISSION IS PROHIBITED