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March 13, 2009 |
Schiff Hardin Environmental Update New National Mandatory Greenhouse Gas Reporting Rule Proposed by U.S. EPA: The U.S. Environmental Protection Agency (EPA) is taking a substantial step closer to regulating greenhouse gas emissions (GHG) to mitigate risks from climate change. On March 10, 2009, the EPA released1 a draft regulation for a national mandatory greenhouse gas reporting program2. The establishment of a national uniform GHG reporting program is the necessary first step toward implementing a federal GHG cap-and-trade program or to identify other options by which to achieve GHG emission reductions. EPA set forth its rationale for the proposed rule in an 800-page preamble to the 600-page proposed rule. In its justification, EPA notes that it seeks to avoid the initial failures of the European carbon-trading program. Analyses of the initial failures indicate that the European Union's initial cap was too high to achieve any real reductions, largely because the baseline had not been accurately measured. European companies had to make few changes to reach their targets. By getting a much more accurate picture of the U.S. sources of GHG emissions and the quantity emitted by source type, EPA believes that policy will better match reduction goals. The preamble discusses the existing state and regional GHG programs and why the data available from them is not adequate for federal rulemaking. Notably, EPA's proposal is the first national mandatory reporting and emission inventory program. It applies to all sectors of the economy, including fossil-fuel suppliers such as natural gas transmission and coal companies; direct greenhouse gas emitters such as power plants, refineries and cement factories and large manufacturers; manufacturers in the transportation sector; and even to furnaces and boilers in large commercial or residential buildings. The proposed rule covers the accepted international suite of GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), perfluorochemicals (PFCs), and other fluorinated gases. These gases are often expressed in metric tons of carbon dioxide equivalent (CO2e). Annual emission reporting is proposed to begin on March 31, 2011 for data collected during the 2010 calendar year. Reporting is generally required at the facility level, not the corporate level. GHG emissions are measured either directly or via source-specific calculation methods. At this time, EPA is not requiring facilities to report their electricity purchases or indirect emissions from electricity consumption. All sectors of the economy will need to determine whether the rule could apply to them. The first step will be to determine whether the rule will apply by undertaking a baseline calculation. EPA estimates that 30,000 facilities will have to gather data to undertake the initial screening calculations, but that only 13,000 will meet the threshold and be required to participate in the reporting process. EPA estimates the cost at over $160 million in private sector compliance costs in the first year alone. EPA intends that the reporting process will capture more facilities than any final rule to control GHGs. This is necessary, EPA indicates, to develop a regulation that would achieve actual GHG reductions in the U.S. economy. The proposed rule applies to all sources in certain business categories and to all large CO2e-emitting facilities regardless of business category:
As anticipated, electricity generating facilities that already report CO2 emissions under the Clean Air Act's Acid Rain Program are exempted from duplicative CO2 emission reporting under the proposed rule. Facilities would be required to report the cumulative CO2 mass emissions collected to comply with the Acid Rain Program for each generating unit. Such facilities would still be required, however, to annually report GHG emissions of N2O and CH4 for each generating unit and may be required to report all GHG emissions for other emission sources located at the generating station. Natural gas processors, transporters, storage operators, liquefied natural gas terminals, and distributors can expect to be substantially impacted by the proposed rule. Natural gas transmission and distribution facilities will likely be affected by the emissions of their gas-burning compressor stations. For example, the year-round operation of a 13,000-horsepower compressor will likely generate enough CO2e to require reporting. Gas processors, storage operators and liquefied natural gas terminals are required to report their CO2 and CH4 fugitive emissions (leaks) if the combined emissions equal or exceed 25,000 metric tons CO2e per year. In addition, local distribution companies may be required to report the CO2 emissions from the annual volume of natural gas delivered to their residential, commercial, industrial and electricity generation customers, as well as to downstream gas transmission pipelines or other local distribution companies. Non-energy intensive companies including manufacturing, small business owners, and owners of commercial and residential buildings are not immune from annual reporting obligations - although the actual scope of affected facilities is uncertain at this time. Companies that contain boilers, stationary engines, process heaters, combustion turbines and other fuel combustion equipment that exceed the 30 mmBtu/hr and 25,000 metric tons CO2e trigger will be required to report. EPA suggests that the majority of commercial and residential buildings will not be subject to the proposed rule. However, commercial and other large buildings that are not currently regulated by EPA must evaluate whether they emit the threshold of 25,000 metric tons of CO2e. EPA requires that a combustion source that processes 30 mmBtu/hr of natural gas must be evaluated to determine whether it meets the threshold emissions on an annual basis. As a guide and not by way of limitation, Schiff Hardin notes that buildings of about 1.5 million square feet quite possibly meet this target, although location, use of heating, efficiency, air exchange and many other factors will affect whether the threshold for reporting is met. Each potentially affected facility must follow the procedures set forth in the proposed rule to determine whether to report. Unlike other GHG reporting requirements, EPA is not proposing that a third-party verifier be employed by the reporter to certify the accuracy of the emissions inventory. Instead, verification will be done by a combination of self-certification and EPA audit. EPA notes that the proposed rule may conflict with other existing voluntary and mandatory reporting programs, and that integrating the voluntary programs with this proposed rule may be difficult. EPA further indicates in the preamble to the proposed rule that it attempted to keep the monitoring and calculation methodologies, known in the GHG accounting world as "protocols," the same for many source categories as the methodologies contained in the state reporting programs. Comments concerning integration with existing programs such as RGGI and the California reporting program are solicited. The Climate Registry or TCR (a voluntary reporting program), recently released two additional protocols (the Electric Sector Protocol and the Local Government Operations Protocol) for public comment. TCR is a voluntary reporting program that many states, Canadian provinces and Mexico are relying upon to create their carbon inventories. The processes used by TCR and its stakeholders groups are influential in the overall federal discussion of carbon emissions inventories. The Electric Sector Protocol contains detailed instructions for counting emissions and allocating emissions across generation and transmission service territories. The Local Government Operations Protocol contains detailed instructions for counting emissions related to such things as public lighting, public vehicle fleets and municipal landfills and utilities. Comments are due on these protocols by March 20, 2009. EPA's proposed GHG reporting rule is open for public comment for 60 days from the date of its Federal Register publication. Two public hearings are scheduled for April 6-7, 2009, in Arlington, Virginia, and April 16, 2009, in Sacramento, California. Schiff Hardin LLP can assist in reviewing the proposed rule and its impact on your business and can assist in providing comments to the EPA on this proposed rule. Schiff Hardin can also provide general background on climate change, GHG emissions and reduction strategies, energy efficiency projects, renewable energy assistance, and regulatory developments as your business responds to changes in statutory and regulatory requirements. Please contact Jane E. Montgomery, Joshua R. More, or David M. Loring. RECENT ENVIRONMENTAL PUBLICATIONS "EPA Proposes to Regulate Additional Stationary Internal Combustion Engines," Environmental Update (March 6, 2009) ABOUT SCHIFF HARDIN LLP Schiff Hardin's diverse environmental practice advises clients engaged in a wide variety of industries and commercial endeavors such as electric generation, natural gas distribution and production, chemical manufacturing, auto and auto parts manufacturing, consumer goods manufacturing, real estate development and investments by financial institutions and equity investors. For more information, contact us. 1 The EPA released a pre-Federal Register publication on its website. The official Federal Register publication date is expected before the end of March and will be the date from which the 60-day public comment period begins. 2 http://www.epa.gov/climatechange/emissions/ghgrulemaking.html. The Web site contains the text of the preamble and the proposed rule as well as many helpful source-specific fact sheets. 3 Applicability requirements vary in some of these source categories. For example, some source categories do not require achieving an emission threshold to trigger reporting requirements. |