March 12, 2009
On Tuesday March 10th, EPA released its highly anticipated proposed rule for
mandatory reporting of greenhouse gases (GHG). The rule is considered to be a
critical first step towards providing a factual background for a comprehensive
federal climate change regulation program, which EPA Administrator Lisa Jackson
stated “must be guided by the best possible information.”
Scope of the Proposed Rule
The potential impact of this rule is both broad and near term. EPA estimates
the rule will draw data from approximately 13,000 facilities, estimated to cover
85-90% of total United States greenhouse gas emissions. Affected sources include
upstream fossil fuel suppliers, industrial gas suppliers, and vehicle and engine
manufacturers, as well as multiple categories of downstream manufacturing
facilities. Under the proposal, those 13,000 facilities would be required to
begin monitoring and recordkeeping starting January 1, 2010 with their first
annual report required on March 31, 2011 for calendar year 2010. Motor vehicle
and engine manufacturers would be required to begin reporting for model year
2011.
The rule specifies methods for calculating or measuring GHGs as well as
requirements for recordkeeping and annual reporting for over 40 industrial
sectors. It also applies to any other type of facility that operates combustion
sources emitting greater than 25,000 tpy of CO2 equivalent
(CO2e) annually.
The lengthy proposed rule establishes five potential applicability triggers
-- the first three of which are to be determined on a facility, rather
than corporate wide, basis.
First, twenty industries believed to be large GHG emitters are specifically
targeted for reporting, with some having capacity-based thresholds and others
having no reporting thresholds. These industries are required to report
emissions from any source that is included in any subcategory of the rule. Many
of these are specified types of chemical production facilities. Other large
sectors include coal mines, aluminum, lime and cement manufacturers, and
petroleum refineries. In addition, electrical generating facilities, landfills,
and manure management systems that emit over 25,000 tpy CO2e
are subject to this requirement.
Second, facilities that are not covered by the reporting requirements
applicable to the first 20 source categories must determine whether they emit
over 25,000 metric tons of CO2e per year from one or more
of 16 different categories of emission sources such as metals production,
electricity generation, wastewater treatment or industrial landfills.
The third group of affected facilities includes any type of facility that
emits 25,000 metric tons of CO2e per year from stationary
combustion sources (e.g. boilers or process heaters). These facilities are only
required to report emissions from their stationary fuel combustion devices.
According to the EPA literature, facilities that solely contain stationary fuel
combustion units would not be required to submit a report if their aggregate
maximum rated heat input capacity from all stationary fuel combustion units is
less than 30 mmBtu/hr. The EPA contends that approximately 30,000 facilities
would have to assess whether or not they had to report under this subsection and
that approximately 13,000 facilities would likely meet the threshold.
Fourth, upstream manufacturers and suppliers of fossil fuels must report the
volume of fuel placed into the economy and the emissions associated with
complete oxidation of the fuel. There is no threshold quantity for the
applicability of these sources.
Finally, all producers and importers or exporters of industrial GHGs that
emit greater than 25,000 metric tons per year with the complete release of
the product must comply with the new rule. These sources must report the
volume of product placed into the economy and emissions associated with the
complete release of the product.
Implications of the Proposed Rule
Intended primarily as a federal tool to gain comprehensive and accurate GHG
emissions data for future climate change policy, this rule is also likely to
have a number of other immediate and near term consequences -- including both
risks and opportunities for businesses.
This rule will be the first federal regulation to explicitly require the
reporting of GHGs and to create a uniform approach for quantifying those
emissions. Even the proposal of this rule is likely to trigger a flurry of
boardroom questions about the costs and requirements necessary to gear up to
meet these new compliance obligations in a relatively short time frame. Although
this rule does not regulate or limit GHG emissions, it can be expected to spur
corporate GHG reduction programs as smaller emitters strive to reduce emissions
to avoid the 25,000 tpy reporting threshold and larger emitters strive to avoid
the inevitable “carbon dirty dozen” lists that are certain to be published by
climate change activists following the release of this information.
Historically, there have been serious questions as to whether corporate
securities laws require the disclosure of GHGs and climate change-related risks
and liabilities. The SEC has not provided guidance on the issue, so the standard
in effect is one of materiality and requires an ability to make sufficient
determinations about future impacts and legislative or regulatory actions to
assess materiality. A
McGuireWoods LLP survey of 2008 SEC filings discovered that the vast
majority of major corporations have never disclosed in their SEC filings whether
they have calculated their GHG emissions levels or evaluated any risk associated
with those emissions. Similarly, while they may have reported with or without
quantification (or third-party verification) to various voluntary collectors of
data and risk assessments, such as climate registries or the Carbon Disclosure
Project, or provided similar information in sustainability reports they have
made publicly available to interested stakeholders via their websites or in hard
copy, recipients of this information have little ability to judge the
comparability of the information provided and in many cases it is not provided
in comparable form. With the advent of this rule, vast amounts of comparable GHG
data will be made easily accessibly public for the first time, allowing for
direct comparisons of different facilities and companies' GHG emission levels
and, to some extent, over time, comparisons of the effectiveness of corporate
sustainability programs.
In anticipation of carbon cap-and-trade legislation, the market is likely to
react to this new information and its cost implications for large carbon
emitting sectors. Lenders, investors, shareholders, and potential purchasers can
be expected to couple GHG data with the anticipated future price of carbon when
making financial decisions. As the rule prescribes methods for calculating and
reporting GHGs in each affected sector, this data should be deemed more reliable
than the data generated under existing voluntary programs -- and will hopefully
provide a “level playing field” for competing businesses.
On the opportunity side, the identification and analysis of GHG emissions can
be a catalyst for opportunities to commercialize new products and services;
generate additional income from emissions reduction programs; and, attract and
retain institutional money.
While the adoption of a uniform GHG methodology should normalize the ability
to evaluate and monetize carbon emissions, it may have the additional effect of
undercutting existing carbon exchanges. Some of these have been criticized for
failing to adopt a sufficiently rigorous method for evaluating GHG emissions,
and the value of their transactions has been diminished accordingly. This new
federal rule should provide for a more robust market. At the same time, the
quality of the data may not be uniform. EPA has proposed itself as the
verification agent for the self-reported data, yet that data will be so
voluminous that the EPA may lack the resources to do anything more than spot
check submissions. This may diminish EPA’s ability to enforce the “level playing
field” for GHG reporting.
EPA states that it intends the federal GHG Registry will supplement and
complement existing state and regional based programs. There are currently 17
states that have developed or are developing their own mandatory GHG reporting
program. In some states like California, a state rule is already in effect and
regulated entities are currently reporting GHG emissions. Whether more states
and regions will join the California bandwagon and create their own registries
is questionable. Given the breadth of EPA’s proposed rule, the value of
differing local GHG reporting regimes is small and differing requirements are
not only costly to the affected industries, but also confusing to the public.
Indeed, as the federal program becomes viable, individual states may choose to
repeal their programs entirely.
Next Steps
The proposed rule was published in response to the FY2008 Consolidated
Appropriations Act (H.R. 2764; Public Law 110--161), which also requires a final
rule to be published by June 26, 2009. To meet the June 26 deadline, the EPA has
set a 60 day comment period after the publication of the rule in the Federal
Register which may be as soon as March 13, 2009. Therefore, comments must be
submitted to the EPA no later than May 12. The EPA has scheduled two public
hearings at which the public can register to speak. The first hearing will be
held on April 6 and 7 in Washington, D.C. The second hearing will be held on
April 16 in Sacramento, CA.
McGuireWoods LLP Climate Change and Clean Air Act Teams
McGuireWoods LLP is a full service law firm with a specialty practices in
Climate Change and Clean Air Act matters. For further information on EPA's
Greenhouse Gas Registry rulemaking and its implications, please contact any
member of our
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