Regulation of Greenhouse Gases: The Management of Uncertainty
Public awareness and perception of global warming accelerated by man-made carbon emissions is increasingly compelling action by lawmakers and regulators around the world. Under the Bush administration, regulatory control within the United States has lagged behind Europe and much of the rest of the world, even though it is by far the leading generator of greenhouse gases (GHG).
The presidential campaign made it clear that President-elect Obama sees things differently, and a recent Supreme Court decision gives an Obama led EPA ample authority to regulate GHG. The United States will see increasing regulatory and tax policy directed at GHG. The new administration will need to develop its regulatory priorities for GHG in the context of desired, but by no means certain, new GHG legislation, and the precarious balance of environmental protection and economic development. And it must do this in the context of what appears to be the largest post war recession and many foreign policy challenges.
Uncertainty will prevail for some time. This paper briefly reviews the political, legal, and regulatory developments relating to GHG, and identifies some of the challenges that businesses face with managing the risk inherent with this uncertainty.
EPA’s Power, and Obama’s Stated Willingness to Use It
The EPA’s position on whether GHG are pollutants subject to regulation has evolved under both political and legal pressures. Under the Clinton administration, the EPA determined that it had authority to regulate GHG, but did very little. Under the Bush administration, EPA initially reversed, declaring that GHG are not pollutants subject to regulatory control.
Not surprisingly, the courts became involved, and in 2007 the United States Supreme Court made clear that EPA had authority, under present legislation, to control GHG. Massachusetts v. E.P.A,. 549 U.S. 497, 127 S.Ct. 1438 (2007).
In Massachusetts, the Supreme Court held that the EPA had authority under the Clean Air Act to regulate GHG. Moreover, the Court declared that EPA’s past reasons for not regulating GHG were inadequate, and that EPA needed to articulate better reasons, or regulate GHG.
Over a year after the Massachusetts ruling, EPA issued an Advanced Notice of Proposed Rulemaking (ANPR), requesting public comment regarding the extent, if at all, that EPA should regulate GHG. The preface to the ANPR included a statement by EPA Administrator Stephen Johnson that he did not believe that current federal law provided an appropriate basis for GHG regulation. He indicated that any GHG program under existing law would likely be “complicated, time-consuming” and “relatively ineffective.” The ANPR also took the unusual step of incorporating comments from other federal agencies that generally agreed with the statements in the preface. The ANPR set a comment period of 120 days, thus ensuring that EPA would not actually promulgate any GHG regulations until the start of the new administration.
In contrast to the Bush administration, President-elect Obama has made clear that he intends to use EPA’s power to regulate GHG, to the extent Congress is unwilling or unable to pass legislation to address GHG issues.
Some observers suspect that President-elect Obama may use the threat of sweeping EPA regulation under existing law, based on the authority identified by the Supreme Court in Massachusetts, to coerce Congress into specific legislation on GHG and on climate change, in general. While the reelection of Senator Chambliss in Georgia keeps the Democratic majority from being so large as to be able to pass legislation based on a strict party vote (60 votes are needed in the Senate to end debate and allow passage of almost all bills), several prominent Republicans have expressed an interest in GHG legislation. The Obama administration will no doubt reach out to moderate Republicans, and more conservative Democrats, on GHG issues, but those members will also be under the threat, implicit or express, of sweeping EPA regulations on GHG, and the continued development of several different states GHG schemes. Some businesses may prefer a federal GHG program that is worse than most of the state regulatory programs, and more onerous than current federal regulations, but at least uniform across the country, once passed as federal legislation. These businesses may also prefer fairly onerous federal legislation to regulations developed under existing law by an EPA headed by Obama administration political appointees.
State Regulatory Efforts
Several states have attempted to pursue initiatives, either alone or with other states, regarding GHG. The Bush administration has not always viewed these efforts favorably. For example, in April 2008, the National Highway Traffic Safety Administration announced proposed rules that would preempt ongoing attempts by states to regulate GHG from vehicles. In contrast, the Obama campaign has generally supported these state efforts.
California has taken a particularly aggressive approach to GHG regulation, spawning several court suits, including Central Valley Chrysler-Jeep v. Witherspoon, 456 F.Supp.2d 1160 (E.D. Calif. 2006), a case challenging California’s ability to impose its own fuel efficiency standards. Also, California has sued EPA in the United States Court of Appeals for the Ninth Circuit, over EPA’s refusal to grant a waiver to California and other states to regulate GHG from vehicles. On the issues in these and similar cases, an Obama administration may take a different posture from the current Bush administration stance, as the Obama campaign indicated strong support for state development of GHG regulations.
Several Northeast and Mid-Atlantic states have formed the Regional Greenhouse Gas Initiative (“RGGI”). RGGI is a cooperative effort to design a regional cap-and-trade program covering carbon dioxide emissions from power plants in the respective states. The states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont are signatory states to the RGGI agreement. These ten states will cap CO2 emissions from the power sector, and then require a 10 percent reduction in these emissions by 2018. The RGGI states have negotiated a regional CO2 budget of approximately 188 million tons, and have apportioned it among themselves. RGGI held its first auction in September 2008, and its independent auction monitor characterized the bidding as “robust” and generally “in line with competitive expectations.” For more information, see www.rggi.org.
Until the federal government, either through new legislation, new EPA regulations, or both, adopts a comprehensive GHG program, businesses can expect ongoing attempts at GHG regulation at the state level, and support for these efforts by the Obama administration. The uncertainty created by multiple state GHG programs will add to the current political demand for a comprehensive federal program, and uncertainty will increase until then.
Management of Uncertainty
Litigation spurred by concerns over GHG, and political developments, contribute to an environment of business uncertainty. For example, a recent EPA Appeals Board ruling rejected EPA’s position that EPA had no authority to require best available control technology (BACT) for GHG (carbon dioxide) emissions from a coal fired power plant. In re: Deseret Power Cooperative, PSD Permit No. PSD-OU-0002-4.00, PSD Appeal No. 07-03. That decision remanded the permit application to the agency to determine if BACT should apply to GHG emissions, and for the agency to develop an adequate record for its decision. This ruling, from an appeal in the administrative permitting process brought by the Sierra Club, could indicate a significant change in numerous air quality permits, in which EPA, or a state agency under delegation of the permitting authority, must either require a certain control technology (such as BACT or maximum available control technology, “MACT”) for GHG, or develop a record to explain why the permit need not contain such a requirement.
The political, legislative and regulatory climate, at the federal level and in many states, is so uncertain regarding GHG as to make even relatively short term planning a challenge. High energy prices encouraged conservation, but recent drops in those prices, no doubt due to the recession, make those plans uncertain, as well.
Renewable energy sources, such as wind, are yet another potential partial solution receiving considerable attention. Wind farms, however, present their own controversy largely as a result of the “not in my backyard” attitude prevalent in the country. Opponents argue that wind farms destroy the natural beauty of the landscape, negatively affect adjacent real estate values, and threaten wildlife. Residents of various states, including Massachusetts and Texas, have raised these arguments in opposing wind farm developments through litigation. Thus far, courts have generally permitted projects to continue, but much more aggressive state and federal support is necessary before wind contributes significantly to the energy mix.
Uncertainty creates risk. Capital investment and enterprise follows promised return and growth. In the prevailing environment, however, it is increasingly difficult to assess where, how or how much capital to invest in businesses generating GHG or dependent upon such industries.
These developments and trends illustrate that affected industries must aggressively manage their businesses to hedge the risk of developing regulation while simultaneously positioning their business to be competitive. It is no longer sufficient just to know your business and the market, or the existing regulatory landscape where your business operates. Instead, it is becoming increasingly important to read the tea leaves and foretell what the litigation and political future will bring. In order to do that, industries will need to increase their awareness of public attitudes and the trends in legislation, regulation, and litigation, and become even more proactive in bringing good business and engineering sense to the issue of GHG.
