Counting Carbon: Scope and Implications of EPA Green House Gas Registry Rule

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 Climate Change and Clean Air Act teams.

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