TAKING THE CLEAN AIR ACT INTO THE 21st CENTURY AND BEYOND: A PROPOSAL TO STREAMLINE REGULATION TO IMPROVE U.S. ECONOMIC COMPE

TAKING THE CLEAN AIR ACT INTO THE 21st CENTURY AND BEYOND:

A PROPOSAL TO STREAMLINE REGULATION TO IMPROVE U.S. ECONOMIC COMPETIVENESS

 

C. William Smalling; The Law Office of C. William Smalling, PC; Published at the 23rd Annual Symposium; Ethics in Environmental & Energy Law; South Texas Law Review; February 24, 2017.

Abstract/Summary:

 

EPA regulation, in including CAA GHG regulations, as well as potential cap-and-trade legislation, will negatively affect U.S. industry over time. Included in this article is an example CAA impact analysis on the U.S. refining industry. Additionally, over-regulation is hurting efficiency and will hurt U.S. competitiveness overseas.

One way to remove excess regulation that is gaining attention from some politicians is to abolish the EPA entirely. Abolishing the EPA would create many new challenges that would likely take many years of legislative maneuvering and litigation to sort out.

This paper proposes a practical, alternate solution: the simplification and modernization of the CAA. By streamlining and simplifying facets of the CAA, the modernized CAA would look more like a framework, easily adaptable to our world’s ever-changing technological and environmental landscape.

I. The costs of EPA regulation on the U.S. refining industry

The Environmental Protection Agency (EPA) regulation of greenhouse gas (GHG) emissions through the Clean Air Act (CAA) is gradually impacting the U.S. refining industry; cap and trade legislation would have an even larger impact.

            CAA Regulation of GHG    

Environmental regulations related to the petroleum refining industry fall in to two main categories. First, there are requirements mandating specific product qualities for reducing the environmental impacts associated with the downstream use of the product. Second, there are requirements directed at reducing the environmental impacts of the refineries themselves.

PSD

Following EPA’s 2010 GHG standards for automobiles, EPA announced that the automobile standards trigger CAA regulation of all new major stationary sources or major modifications to existing stationary sources that produce GHG emissions. The impact of this action is to require Prevention of Significant Deterioration (“PSD”) permits for such sources. EPA has promulgated the “Tailoring Rule” so that PSD permits would only apply to modified sources with the potential to emit (“PTE”) 75,000 tons per year (“tpy”).[1]

On June 23, 2014, the United States Supreme Court handed down a decision in Utility Air Regulatory Group v. EPA.[2] The Court held that EPA had overstepped the bounds of its legal authority in issuing the “Tailoring Rule.”[3] While the Court reserved for EPA some authority to control GHGs when a plant is otherwise required to obtain a PSD permit, no additional PSD permits are required beyond those that were required before EPA decided to regulate vehicle GHG emissions.[4] 

NSPS

As of 2010, EPA is required to propose regulating GHGs under New Source Performance Standards (“NSPS”).[5]  NSPS requires emissions performance standards for new or “modified” existing refineries.[6] EPA is required to consider cost when developing an NSPS.[7] However, the refining industry frequently has significant disagreements with EPA over the Agency’s interpretation of what is cost-effective. Industry is concerned that a GHG NSPS may create just as much uncertainty as BACT, threatening jobs and investment.[8]  Under section 111(d) of the CAA, subject to certain exceptions, the EPA has authority to regulate existing sources of listed source categories.[9]  Rather than authorizing the EPA to directly set national standards, this provision authorizes the EPA to issue “emission guidelines” that states must meet when they regulate emissions of existing sources in a source category.[10]  In 2012, EPA announced that it has indefinitely deferred the release of proposed GHG emission standards for new and existing petroleum refineries.[11] Although EPA did not specify a new deadline for issuing the standards, it is expected that these standards will not be issued until after EPA completes proposed GHG performance standards for the power sector, which have also been deferred indefinitely.

Cost Estimates Summary

From the cost estimates, the estimated CAA cost compared to total U.S. refinery sales is just over one percent.

Table 1. Cost Estimation Summary

Regulatory Category Name

Total Estimated Annual Cost of Regulation to Refineries

(Million $/Year) [Available Upon Request]

Total Nonattainment Costs

3485.4

Emission Standards for Mobile Sources (Fuels) Costs

967.7

40 C.F.R. PART 61 – NESHAPs Costs

3.05

40 C.F.R. PART 63 - MACT Costs

652.02

40 C.F.R. PART 60 – NSPS Costs

194.45

Total Permits and Enforcement Costs

1000

Total GHG Costs

920

Summary

 

Total Refinery CAA Costs

7224.62

Total Annual Refinery Sales

521,463[12]

Total Refinery CAA Cost Percent of Total Annual Refinery Sales

1.39%

 

Potential Cap and Trade Legislation                     

Cap and trade legislation would mandate pollution control by providing economic incentives for achieving reductions in the emissions of pollutants. Assuming a Cap-and-trade bill like Waxman-Markey[13] is passed where allowance costs are $30 per ton and there is a 90% pass-through of product emission costs, the current CAA GHG regulation cost plus the Cap-and-trade costs are 0.94% of refining sales. Assuming a Cap-and-trade bill like Waxman-Markey is passed where allowance costs are $30 per ton and there is no pass-through of product emission costs, the current CAA GHG regulation cost plus the Cap-and-trade costs are 8.73% of refining sales. A stringent cap-and-trade system will reduce oil demand over the long term, but it may be detrimental to U.S. oil security in the intermediate term. A $27 per CO2-equivalent ton emission price would cause heating oil prices to rise around 21% and gasoline prices to rise around 14%.

If a Cap-and-trade bill like Waxman-Markey is passed in the U.S., the current CAA GHG regulation cost plus the Cap-and-trade costs will, in the writer’s estimation, reduce the U.S. refining industry to one-half its current size.

Table 2. Emission Allowances for U.S. Refineries under Waxman-Markey for Selected Years (Millions of Metric Tons of CO2 Per Annum)[14]

YEAR

TOTAL CO2 EMISSIONS PERMITTED

FOR US ECONOMY

U.S.

REFINERS’ EMISSIONS (STATIONARY SOURCE)

U.S.

REFINERS’ EMISSIONS (PRODUCT COMBUSTION)

REFINERS’ TOTAL EMISSION COMPLIANCE OBLIGATION

EMISSION ALLOWANCES PROVIDED AT NO COST

NET EMISSION ALLOWANCE PURCHASE REQUIREMENT

+ 5 Years

5,003

 

256

2,029

2,285

100

2,185

+ 10 Years

5,056

250

1,980

2,230

101

2,129

+ 15 Years

4,294

248

1,964

2,212

86

2,126

+ 20 Years

3,533

249

1,973

2,222

0

2,222

 

In a scenario where pass-through of Fuel Use Allowance Costs is 90% and at $30/ton Allowance Cost, the following are the U.S. Refiners Direct Costs plus U.S. Refiners Pass-Through Costs to U.S. Customers (million $) are calculated by the writer to be:[15]

Table 3. U.S. Refiners Direct Costs plus U.S. Refiners Pass Through Costs to U.S. Customers

YEAR

NET EMISSION ALLOWANCE PURCHASE REQUIREMENT (MILLION TONS)

U.S. REFINERS DIRECT COSTS (MILLION $)

U.S. REFINERS PASS THROUGH COSTS TO U.S. CUSTOMERS (MILLION $)

U.S. REFINERS DIRECT COSTS PLUS U.S. REFINERS PASS THROUGH COSTS TO U.S. CUSTOMERS (MILLION $)

+ 5 Years

2,185

6,555

58,995

65,550

+ 10 Years

2,129

6,387

57,483

63,870

+ 15 Years

2,126

6,378

57,402

63,780

+ 20 Years

2,222

6,666

59,994

66,660

 

In a scenario where allowance costs reach $30 per ton and 90% pass-through of product emission costs, total capacity losses could be between 3.4 million barrels per day and 8.0 million barrels per day. Employment job losses could be between 180,000 and 400,000. EPRI summarized these as below.[16]

Table 4. Pass-through, Capacity Closures, and Employment Losses from Product and Stationary Allowance Costs - $30 per ton of CO2

 

LOW FOREIGN SUPPLY

MEDIUM FOREIGN
SUPPLY

HIGH FOREIGN SUPPLY

CAPACITY AT RISK OF CLOSURE (MILLION BARRELS PER DAY [MB/D])

CAPACITY AT RISK OF CLOSURE ((MILLION BARRELS PER DAY [MB/D])

CAPACITY AT RISK OF
CLOSURE (MILLION BARRELS PER DAY [MB/D])

Product Emission
Costs - 90% Pass-
through

1.3 mb/d

2.3 mb/d

3.0 mb/d

Stationary Emission
Costs

2.1 mb/d

4.2 mb/d

5.0 mb/d

Total Capacity Losses

3.4 mb/d

6.5 mb/d

8.0 mb/d

Total Job Losses

180,000

275,000

350,000-400,000

 

Gasoline, and all other petroleum based transportation fuels, could rise by over $1 per gallon under some CO2 allowance cost forecasts by the U.S. Energy Information Administration (“EIA.”)[17]

Ethical dilemmas:

EPA regulation has led to ethical costs and dilemmas for attorneys. The prudent attorney must balance “vigorous representation” of the client with public interest in a safe, healthy environment.[18] Additionally, because of the myriad of rules and regulations, a company-client may want to cut corners to save costs. If “cutting corners” results in a lawyer knowingly submitting inaccurate information to the EPA on behalf of the client, that attorney could be exposed to penal sanctions.[19] Furthermore, during litigation, issues of attorney-client confidentiality will conflict with an attorney’s duty to fully disclose in court.[20] The CAA poses many ethical dilemmas to attorney working the industry which could be simplified by cutting-back on CAA regulation. 

II. Abolishing EPA

The EPA oversees and directly implements most federal environmental statutes and invites states to participate in implementation, permitting, and enforcement. The elimination of the EPA has been a talking point for many conservative law-makers and political candidates over the past few years. Proponents cite over-regulation and wasteful spending as main reasons to cut or greatly scale back EPA. Arguing over-regulation is “killing small business and manufacturing,” recent political candidates have made abolishing the EPA a rally-cry during campaign season.[21] But would eliminating the EPA be practical or beneficial to the refining industry in the long run?

Benefits

The most touted benefit of eliminating EPA is the deregulation of environmental industries. This would necessarily result in the refining industry having more control over emissions standards, pricing, and more. Without EPA, it would be up to the states to regulate GHG and ethanol and to set pricing— or not. It is argued that handing control of environmental issues to states would allow each state to tailor programs to fit that state’s environmental landscape.

Challenges

Eliminating an agency as large and complex as EPA has never been done before, so the idea raises many questions. A president seeking to abolish EPA would need votes from a majority of the House and 60 votes in the Senate.[22] This action would also face strong opposition from the environmental and public health community.[23] Since EPA is charged with enforcing important environmental statutes, including CAA, a main challenge would be how these statutory provisions would be enforced. Congress would either have to eliminate these statutes or assign their enforcement to another agency.[24] Questions about what to do with EPA funding, would citizens could sue to rescind an environmental program, and who would conduct the bulk of environmental research the EPA authorizes are other questions that would need considerations.[25]

In recent years, assertions have increasingly been made that EPA, instead of cooperating with the States as equal and valued partners, is diminishing the role of the States. Yet, instead of abolishing the EPA altogether, there are other avenues to ensure continued cooperation with the states while retaining the cooperative model of federalism intended by the creation of EPA.

III. Proposal: CAA Modernization

A. Why Modernize

As the federal regulatory systems becomes more huge and complex, the modernization of the CAA becomes increasingly important.[26] Spending to manage the complex regulations are going up, likely costing the U.S. economy trillions of dollars per year. Similarly, the work required to comply with regulations is increasing. NSR and PSD permitting delays hurt U.S. global economic competitiveness. Furthermore, new emissions measurement technologies are antiquating the current measurement system that was adopted to fit the current CAA.[27]

Through the CAA, a State Implementation Plan (SIP) requires citizens and businesses to offset foreign pollution impacts in addition to reducing their own pollution impacts. The SIP system relies ultimately on States to achieve attainment—yet the authority and ability of States to achieve attainment is minimal      

B. Recommended Changes

There are certain changes that could be made to the CAA that would address the current issues. First, realign SIP responsibility and authority under the Act to increase the influence and effectiveness of State and Local control efforts.[28] Second, create a multi-pollutant approach to addressing air quality and climate change concerns, much like what is required for NAAQS attainment.

In general, streamlining, modernizing, and simplify the Act will make it easier to understand, and implement. For example, simplifying NSR and PSD permitting and the SIP process will make it easier for companies to comply, thus leaving more resources for conducting actual business.

Another proposed change is to avoid referring to current technologies in the CAA, such as emissions measurement technologies. These technologies will soon become obsolete and cost ineffective. Unfortunately, they are embedded in the CAA and cannot be removed until the CAA is amended.



[1] Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, 75 Fed. Reg. 31513, 31516 (June 3, 2010).

[2] 134 S.Ct. 2427 (2014).

[3] Id. at 2445.

[4] Id. at 2449.

[5] Settlement Agreement between the following groups of Petitioners: (1) the States of New York, California, Connecticut, Delaware, Maine, New Hampshire, New Mexico, Oregon, Rhode Island, Vermont, and Washington, the Commonwealth of Massachusetts, the District of Columbia, and the City of New York (collectively "State Petitioners"); (2) Natural Resources Defense Council (NRDC), Sierra Club, and Environmental Integrity Project (EIP) (collectively "Environmental Petitioners"); and (3) Respondent, the EPA (collectively "the Parties") regarding NSPS for GHG emissions from petroleum refineries. In connection with the Final Rule, EPA declined to establish NSPS for GHGs, (2010).

 

[6] Standards of Performance for New Stationary Sources, 40 C.F.R. pt. 60 (2011).

[7] Id.

[8] Letter from Charles T. Drevna, President of National Petrochemical & Refiners Association, to Gina McCarthy , EPA Assistant Administrator for Air and Radiation (2011).

[9] Envtl. Regulation Comm., Energy Bar Ass’n, Report of the Environmental Regulation Committee, 32 Energy L.J. 637, 648­-49 (2011); 42 U.S.C. § 7411(d) (2015).

[10] Envtl. Regulation Comm., supra note 9.

[11] Columbia University, Petroleum Refineries, Columbia Law School: Sabin Center for Climate Change Law, http://columbiaclimatelaw.com/resources/us-climate-regulation/petroleum-refineries/ (last visited Feb. 12, 2017).

[12] U.S. ENERGY INFO. ADMIN., PERFORMANCE PROFILES OF MAJOR ENERGY PRODUCERS 2009, 31 (2010).

[13] American Clean Energy and Security Act, H.R. Res. 2454, 111th Cong. (2009). 

[14] H.R. Res. 2454, EPA Data, EIA W-M Basic Case Projected Refinery Crude Throughputs, and EPRINC Calculations.

[15] H.R. Res. 2454, EPA Data, EIA W-M Basic Case Projected Refinery Crude Throughputs, and EPRINC Calculations.

[16] H.R. Res. 2454, EPA Data, EIA W-M Basic Case Projected Refinery Crude Throughputs, and EPRINC Calculations.

 

[17] H.R. Res. 2454, EPA Data, EIA W-M Basic Case Projected Refinery Crude Throughputs, and EPRINC Calculations.

[18] Daniel Riesel & Victoria Shiah Treanor, Ethical Consideration for the Clean Air Act Attorney, The Practical Real Estate Attorney, Sept. 2014, at 5.

[19] Id. at 6.

[20] Model Rules of Prof’l Conduct 1.6 (2016).

[21] Anthony Adragna, No, Republicans Won't Succeed in Abolishing EPA: Legal Scholars, Bloomberg BNA: Daily Environment Report (Mar. 8, 2016) https://www.bna.com/no-republicans-wont-n57982068222/.

[22] Id.

[23] Id.

[24] Mark A. Ryan, Abolishing the EPA?, Nat. Resources & Env’t, Summer 2016, at 50.

[25] Id. at 50­–52.

[26] Devin Henry, House Panel to Consider ‘Modernizing’ Clean Air Act, Environmental Laws, The Hill (Feb. 9, 2017) http://thehill.com/policy/energy-environment/318815-house-panel-to-consider-modernizing-clean-air-act-environment-laws.

[27] See generally Gregg Easterbrook, Opinion, Let’s Modernize our Environmental Laws, N.Y. Times, Oct. 8, 2015, at A31.

[28] David B. Rivkin et al., Does EPA's Clean Power Plan Proposal Violate the States' Sovereign Rights?, 16 Engage: J. Federalist Soc'y Prac. Groups 26, (2015).



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