A Risky Approach for the CO2 New Source Performance Standard

Issue 11 and Volume 116.

Adam Kushner   By Adam Kushner, Partner, and Phillip Assmus, Associate, Hogan Lovells US LLP
Adam Kushner

The Environmental Protection Agency’s (EPA) aggressive approach to regulating carbon dioxide (CO2) emissions is exemplified by its April New Source Performance Standard (NSPS) proposal to regulate CO2 from almost all new fossil fuelled electric generating units (EGUs). Though it could have offered CO2 emissions limits that differentiated between the various fossil fuels, EPA instead chose a one-size fits all standard for EGUs based on a single low-emitting fuel – natural gas. By doing so, the agency has chosen a path with significant policy and legal risks.

The proposed NSPS would establish a CO2 emissions limit of 1,000 pounds per megawatt-hour for any new fossil fuel-fired EGU producing more than 25 megawatts. Simple cycle combustion turbines are excluded from coverage. The proposed emission standard is based on the performance of natural gas combined cycle units even though EPA expressly acknowledges that natural gas-fired EGUs have CO2 emissions inherently lower than other EGU types – particularly, coal-fired EGUs that are designed without the ability to capture and sequester CO2 (CCS).

The stringency of the natural gas-based standard and its application across multiple fuel types raises fundamental policy questions about EPA’s decision to forego a more modest approach. By mixing coal-fired boilers and natural gas turbines together as a single source category, the agency has staked out risky legal position by imposing a standard that may be largely unachievable by EGUs fired by any fuel other than natural gas. Though the proposed NSPS offers significant CO2 reductions in the abstract, it may be unworkable in practice, which is best exemplified by the NSPS’s application to new coal-fired EGUs.

To fully evaluate the severity of these practical challenges and the associated legal risks, it is important to understand the assumptions EPA made, as well as other features it incorporated into the proposal. In the agency’s estimation, the burden on new coal-fueled plants is mitigated in two ways. First, because of a cheap and abundant natural gas supply, EPA does not expect that any new coal-fired EGUs will be constructed through 2030. EPA appears to be picking the energy source, contrary to long-standing policy not to select the “winner.” Second, the agency anticipates that CCS, currently being tested only on a pilot scale, will become commercially available in time for use as a control technology for new coal-fired EGUs, an assumption that industry disputes.

The rule flexibility EPA offers to address the unavailability of technology needed to meet the rule’s emission limit puts the entire rule at significant legal risk. EPA offers industry a 30-year period over which it can average emissions to demonstrate compliance with the rule’s limit recognizing that, at least for the first 10 years, there is unlikely to be any technology that would cause a new coal plant to meet that limit. However, the Clean Air Act requires that emission control technologies imposed by the NSPS program be “adequately demonstrated.” If the proposed CO2 NSPS standard is unachievable for coal-fired EGU’s today, and technologies to meet the rules limits are at least 10 years away from availability on a commercial scale, EPA is on weak grounds to suggest that the 1,000 pounds per megawatt-hour limit meets the requirement that NSPS standards be based on “adequately demonstrated” technology.

There may be other associated legal vulnerabilities as well. For instance, the text of the Clean Air Act normally applies NSPS standards to all new and modified existing sources. In an apparent effort to mitigate the substantial impacts of the CO2 NSPS, EPA proposed to apply the NSPS only to new sources. Under the agency’s stated rationale, modified sources will not be regulated because the EPA is without sufficient information to propose an NSPS. That suggests an approach where data from individual source types should be at the core of the standard setting process. However, by proposing a single standard for all fossil-fuel types based only on natural gas, EPA took the opposite approach. This inconsistency may be at odds with the Clean Air Act’s requirements and calls into question the agency’s rationale to both exclude existing and modified sources and include all new sources in single standard.

As the rule is finalized and implemented, EPA’s assumptions about the future demand for coal may be validated. Even so, the legal risk of relying on a still-developing technology will remain, begging the question whether EPA’s aggressive approach was the right choice. By stretching the bounds of the NSPS program, EPA may need to propose a new CO2 NSPS rulemaking for existing sources or wait on the outcome of challenges to the proposed CO2 NSPS standard. By then, CCS may be closer to an “adequately demonstrated” control technology.