Opinion: Yes, The US EPA Can And Should Allow Offsets Under The Clean Power Plan

16 March 2015 | The US Environmental Protection Agency’s (EPA) proposed Clean Power Plan, the agency’s attempt to regulate existing sources of greenhouse gases (GHGs) in the electricity-generating sector under its Clean Air Act authority, may be the most controversial rule proposed by the agency. Weighing in at around 670 pages (with a 750-page technical support document,) it is certainly one of the most complex regulations ever attempted by the agency.

It should also be interpreted as offering the states maximum flexibility in how states handle their emission reductions, as we can see by zeroing in on just two sections of the Clean Air Act: Section 110 and Section 111.

Section 110 governs the State Implementation Plans (SIPs), which are the way in which ambient levels of criteria pollutants (like ozone), are to be enforced. Section 110 allows states to meet these goals in any way they wish as long as they do not interfere with another state’s compliance. Section 111, on the other hand, purportedly deals with reductions from source categories (such as electricity generating units).

Here, we’ll be looking at just two sub-sections of Section 111: Section 111 (b), which deals with new or recently upgraded sources of pollution; and Section 111 (d), which deals with older or existing sources of pollution not regulated by states under Section 110 (or as a hazardous air pollutant) . Since greenhouse gases are the only pollutants that exist in this category, and they have yet to be regulated, section 111(d) is as yet untested. The Clean Power Plan is the EPA’s attempt to do so.

Section 111(d) says the EPA may establish guidelines for how states meet reductions required, and it also says that the procedure governing approval of these state systems should be a “procedure similar to that provided by section 7410[Section 110].”

And guess what? Section 110 clearly leaves room for offsetting, as well as any measure that would reach the target required.

How Does the Clean Power Plan Work?

The Clean Power Plan sets individual targets for GHG emissions rates for each state through a formula the EPA developed, examining how various GHG reduction strategies could be implemented given each state’s own unique circumstances. In determining the state’s targets, the EPA critically made a decision that the Best System of Emissions Reduction (BSER) referenced by the Clean Air Act authority under its Section 111(d) provisions could include reductions in GHG emissions from end-user efficiency gains, electricity dispatch decisions, and new non- or low-carbon sources.

Because these reductions would not technically be from a regulated plant itself, they are characterized as “beyond the fenceline” reductions. It is this decision that is responsible for much of the rule’s complexity as well as the ability of the EPA to propose a more aggressive reduction target than could be achieved by changes at the electricity generating plant itself. This approach, the EPA says, allows the states maximum flexibility in meeting ion targets.

Unfortunately, the EPA has shied away from allowing states maximum flexibility for reductions by refusing to endorse (at this time) the use of GHG offsets, (such as biological offsets or reductions from other unregulated sources) even though the use of offsets is generally recognized as a more efficient way to reach tighter GHG reductions targets.

Lying at the heart of this decision, according to the EPA, is “legal uncertainty.” Because of the controversy in the United States surrounding any regulation of GHGs, the regulations are being, and will continue to be, challenged in court. One of these challenges suggests that in setting up the guidelines for the states, that the EPA (and presumably the states) cannot do any “outside of the fenceline” regulation, asserting that this differs from prior regulation of electricity generating units under other pollutants.

In response, the EPA correctly reasons that its authority under section 111(d) is different from its authority to regulate criteria pollutants under 111(b), and that the BSER can include the “outside the fenceline” reductions suggested, as well as emissions trading between sources. I believe the agency is absolutely correct in this interpretation, but this reasoning would suggest that offsets would also be legally allowed under Section 111(d).

To see why, we have to return to the relationship between Sections 110 and 111(d) that I alluded to at the start – namely, that Section 111(d) specifies that the Best System of Emissions Reduction adopted by a state be modeled on Section 110, which governs the State Implementation Plans . While the EPA has not had cause to consider the full meaning and implications of this statutory phrase before, I believe that it means that 111(d) provides that the “system” of emissions reduction can be anything that meets the target required by the EPA. Section 110 allows the states such autonomy in constructing how they will meet the ambient air quality standards for criteria pollutants. In Union Electric Co. v. EPA, 427 U.S. 246, 96 S.Ct. 2518, 49 L/Ed/ 2d 474 (1976), the Supreme Court upheld the EPA’s position that if a state proposes a strategy that is effective in meeting the ambient air quality standards, the EPA must approve that SIP. This follows statutory language in Section 110(a) and also supports the cooperative federalism at the heart of the Clean Air Act.

Though the EPA seems to distinguish between the reductions itproposes in the Clean Power Plan rulemaking and the use of offsets, if “outside the fenceline” reductions are allowed at all if the states so choose, which I believe they are because of the reference to Section 110, then they can be allowed in other arenas such as offsetting.

What it boils down to is this: Unless the EPA is willing to grant the same sort of flexibility to the states under Section 111(d) that it does under section 110, it reads the reference to section 110 out of the statute, which was not the intent of the drafters.

The EPA seems to be afraid that the use of offsets might be a step too far, and other commentators have suggested that the agency’s power under Section 111(d) becomes more precarious the further it moves from the fenceline. But the applicable law suggests otherwise. While the EPA may be trying to paint a smaller target for legal challenge or simply avoid the politics of proposing something that looks very much like a cap-and-trade system, these distinctions are not based on the law. As such, the EPA should clarify that the states could choose to keep or utilize verifiable offset emissions reductions and be compliant with the Clean Power Plan.

Because some of the states, such as California and the Northeastern states participating in the Regional Greenhouse Gas Initiative already have carbon trading programs allowing for GHG reductions from sources such as verified GHG offsets or other industries (such as the petroleum industry), this clarification would allow these states to keep or utilize such reductions and be compliant with the BSER rulemaking. Additionally, clarifying the allowance of verified offsets and reductions from other industrial sectors (if proposed by a state or states) would facilitate the creation of a GHG trading market, which the agency has correctly determined would allow for more reductions at lower costs.

Victor B. Flatt is the Taft Distinguished Professor of Environmental Law at UNC Chapel Hill School of Law.