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A Closer Look at EPA's Approach to CPP Rollback

On March 28, 2017, President Donald Trump signed an executive order directing the U.S. Environmental Protection Agency and other agencies to start the process of suspending, revising or rescinding regulations that “unduly burden” domestic energy development beyond what is necessary to protect the public interest or otherwise comply with the law.[1] Key among those regulations is the Clean Power Plan, the 2015 rule promulgated by the EPA under Section 111(d) of the Clean Air Act to reduce carbon dioxide emissions from existing fossil fuel-fired power plants.[2]

The rule established broad carbon dioxide emission performance targets for existing power plants and state-specific carbon dioxide goals reflecting those targets. Under the rule, states needed to achieve those targets through a combination of control measures, emissions trading and increased use of natural gas and renewable energy. The EPA estimated that the Clean Power Plan would reduce power plant carbon dioxide emissions 32 percent below 2005 levels by 2030. The rule would have allowed the United States to achieve a portion of its pledged greenhouse gas emission reductions under the Paris climate accord, although Trump has since announced that the United States will withdraw from the Paris climate accord as soon as possible.[3]

Regulating CO2 Emissions: Current Status of EPA Approach

While the EPA has taken steps towards withdrawing the Clean Power Plan, the question remains whether and how the EPA will regulate carbon dioxide emissions from power plants in place of the Clean Power Plan. Potential approaches include:

Repeal Only: A repeal of the Clean Power Plan, without a replacement, could subject the EPA to a legal challenge asserting that the EPA has a mandatory duty to regulate carbon dioxide emissions under Clean Air Act Section 111(d) (the section under which the EPA issued the Clean Power Plan), based on its 2009 GHG endangerment finding. While some have advocated for the EPA to also overturn the GHG endangerment finding, that would carry its own legal risks and would require the EPA to refute scientific findings regarding the effects of GHG emissions.

Inside the Fence: A more likely approach, and one advocated by some in the industry, is a narrow “inside-the-fence” replacement of the Clean Power Plan. Under this approach, the EPA could issue regulations that require efficiency upgrades, such as heat rate improvements, that apply only to individual power plants. “Outside-the-fence” measures, such as emissions trading and shifting away from coal to natural gas and renewable energy, would be off the table under this approach. Supporters of the Clean Power Plan argue that an inside-the-fence approach would result in only nominal carbon dioxide emission reductions.

Inside the Fence-Plus: Some supporters of the Clean Power Plan argue that if the EPA takes an inside-the-fence approach, it should consider carbon dioxide emission reduction measures beyond efficiency upgrades. Strategies include carbon capture and sequestration, natural gas co-firing of coal units, and coal unit retirements. This approach seems unlikely under the current administration.

Section 112 Exclusion: The EPA could further narrow a replacement for the Clean Power Plan by issuing inside-the-fence regulations that apply only to gas-fired, and not coal-fired, power plants. Under this approach, the EPA could argue that it is barred from regulating coal-fired plants under Clean Air Act Section 111(d), because it already regulates such plants under the Mercury and Air Toxics Standards (MATS) rule issued under Section 112. However, the EPA is also considering rolling back the MATS rule, which would take this approach off the table.

Recent reports suggest that the EPA is planning an inside-the-fence replacement strategy that would focus on heat rate improvements at individual power plants. The EPA has not commented publicly on this approach, however, and no other details have been released. The rulemaking process, pending and future litigation, and state actions, each of which are discussed further below, will likely shape any potential replacement.

The Rulemaking Process

In accordance with Trump’s executive order, the EPA announced on April 4, 2017, that it would undertake a review of the Clean Power Plan.[4] According to the EPA, if the review concludes that “suspension, revision or rescission” of the Clean Power Plan is appropriate, the EPA will engage “in a rulemaking process that will be transparent, follow proper administrative procedures, include appropriate engagement with the public, employ sound science, and be firmly grounded in the law.”

The EPA is currently moving forward with a proposal to withdraw the Clean Power Plan on grounds that the regulation exceeded the agency’s statutory authority under Section 111 of the Clean Air Act. On June 8, 2017, the EPA submitted its proposal to the White House’s Office of Management and Budget for review.[5] The OMB has classified the proposal as a “long-term action,” indicating that the next regulatory action — a proposed rule or even an advance notice of proposed rulemaking — could take 12 months or longer.[6]

In recent weeks, OMB officials have been meeting with EPA staff and industry stakeholders as part of the review process, which could suggest a more expedited timeline. Reports of these closed-door meetings suggest that industry stakeholders largely favor a narrow “inside-the-fence” approach to a Clean Power Plan replacement, which would provide certainty to the regulated industry and could prevent future administrations from promulgating more stringent “outside-the-fence” regulations. Other industry stakeholders are still advocating for the EPA to take a harder line on the Clean Power Plan repeal, either by taking the position that Section 112 of the Clean Air Act bars further regulation of coal-fired power plants, or by overturning the GHG endangerment finding. As noted above, the EPA has not commented publicly on its approach, and no other details have been released.

Pending and Future Litigation

Litigation challenging the Clean Power Plan has been fully briefed and argued in the D.C. Circuit; however, the case has been held in abeyance as of April 28, 2017, as the EPA takes steps towards reviewing and repealing the regulation. In its most recent status report filed on July 31, 2017, the EPA asked the court to continue holding the case in abeyance “pending the conclusion of the expected forthcoming rulemaking” to repeal the Clean Power Plan. On Aug. 3, 2017, environmental groups supporting the Clean Power Plan responded to the EPA’s status report, arguing that the EPA continued to provide little information on the substance of its rulemaking and suggesting that the process may take longer than the EPA was admitting. The response asks the court to move forward with a merits-based ruling on the validity of the Clean Power Plan.

On Aug. 8, 2017, the D.C. Circuit, in a per curiam order, extended the abeyance of the litigation by another 60 days. Notably, two judges issued a concurring statement highlighting that the abeyance, combined with the U.S. Supreme Court’s 2016 stay of the Clean Power Plan, had the effect of postponing application of the Clean Power Plan indefinitely. While that on its own might not be a problem, the judges note that in light of the EPA’s 2009 endangerment finding triggering an affirmative statutory duty to regulate GHG emissions, the abeyance and stay effectively “reliev[ed] EPA of its obligation to comply with that statutory duty for the indefinite future.”

Questions remain as to how any outcome in the pending D.C. Circuit litigation, including a remand of the Clean Power Plan back to the EPA, would affect the Supreme Court’s stay. Under any rulemaking scenario, future litigation challenging the EPA’s rules is likely by industry, environmental groups or both.

States Move Forward

Although the Clean Power Plan appears to be on its way out at the federal level, several states are moving forward with their own plans to reduce carbon dioxide emissions from power plants:

California: Although the U.S. Supreme Court has stayed the Clean Power Plan since 2016, California has moved forward with its own plan to demonstrate how California’s compliance with the Clean Power Plan can be achieved. On July 27, 2017, the California Air Resources Board approved a state implementation plan for the Clean Power Plan. The plan largely relies on a cap-and-trade system to reduce carbon dioxide emissions.

Virginia: In May 2017, Virginia Gov. Terry McAuliffe issued an executive directive to the Virginia Department of Environmental Quality to develop a plan to reduce carbon dioxide emissions from power plants through a multistate emissions trading program. A proposed rule is due to the Virginia State Air Pollution Control Board by the end of the year.

Multistate Effort: On July 14, 2017, environmental regulators of 12 states supporting the Clean Power Plan sent a letter to OMB expressing their deep concern with the EPA’s plan to repeal the Clean Power Plan and requesting a meeting with OMB officials. The letter expresses concern that “any effort to rescind the Clean Power Plan will substantially delay needed action to reduce greenhouse gases” and describes how “actions to reduce carbon emission also have economic benefits, and the Clean Power Plan reflects our collective experience.” It is signed by environmental regulators of California, Colorado, Connecticut, Delaware, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Virginia and Washington.

Potential Impacts on Stakeholders

Each of the approaches outlined above will have a significant impact on various stakeholders, including industry, public interest groups, and state and federal regulators.

Repeal-only or Section 112 exclusion could lead to continued uncertainty and individual state actions. Repealing the Clean Power Plan without replacing it with any regulation of carbon dioxide emissions from power plants will likely lead to additional litigation, which would only serve to create more uncertainty around GHG regulation. Further, the absence of regulation at the federal level would leave states to fill the gaps (as some have already begun to do), potentially creating an onerous patchwork of GHG regulations for industry. Utilizing the Section 112 exclusion could have similar effects because of the gap it would leave in regulation of coal-fired power plants.

The "inside-the-fence" approach may provide more certainty for industry. What appears much more likely at this stage is that the EPA takes the inside-the-fence approach that is favored by and more palatable to industry stakeholders. This approach would afford the industry a stable framework of regulation around which it could develop its operations. It would also have the added benefit for industry of taking certain disfavored “outside-the-fence” measures off the table. Note that this approach will also likely be challenged in litigation.

It is unclear at this time when the EPA will finalize its rulemaking and reveal its approach to repealing the Clean Power Plan. The fact that OMB officials have been meeting with the EPA staff and industry stakeholders as part of the review process suggests a more accelerated timeline. In the meantime, stakeholders can rely on the relative consistency of the status quo in light of the Supreme Court’s stay of the Clean Power Plan. Stakeholders should consider the following:

When the EPA conducts stakeholder outreach, working with the EPA to help craft a rule that promotes a favorable outcome;

Tracking and commenting on draft rules that the EPA makes available for public comment (including through trade and other groups); and

Engaging counsel and environmental consultants to consider the legal and technical/cost implications of potential regulations for ongoing and future operations or potential investments.

Paul D. Tanaka is a partner at Kirkland & Ellis LLP in the firm's environmental transactional practice in Houston and San Francisco. He leads the practice in both locations. He focuses his practice on managing environmental compliance and liability issues, primarily as they arise in the context of corporate and real estate transactions, both in the United States and around the world.

Devi Chandrasekaran and James Dolphin are associates at Kirkland in Houston, working in the environmental transactions practice.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.