EPA ISSUES FINAL GREENHOUSE GAS MONITORING

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1 Climate Change and Renewable Energy Practice Group EPA ISSUES FINAL GREENHOUSE GAS MONITORING AND REPORTING RULE On September 22, 2009, the United States Environmental Protection Agency (the EPA ) issued its final greenhouse gas monitoring and reporting rule that will require as many as 10,000 facilities in the United States to measure their greenhouse gases ( GHGs ) starting January 1, 2010, and start reporting them in early 2011 (the GHG Reporting Rule ). Some industry groups had asked the EPA for a delay until 2011 to start monitoring and 2012 to start reporting their GHG emissions. The EPA chose not to provide such a delay and regulated facilities have only three and a half months to prepare for the monitoring that they must begin January 1, This may be particularly challenging for those companies that must install or modify continuous emission monitors ( CEMs ). Following a Congressional amendment to the Omnibus Spending Bill in December of 2007 that required the EPA to issue a proposed rule by September of last year, and a final rule by June of this year, the EPA under the Obama Administration has now moved forward with an initial step in establishing a GHG regulatory system. Under the GHG Reporting Rule, the EPA has adopted a substantial program of GHG monitoring and reporting with a publicly available registry. The program is economy wide and covers 80 percent or more of GHG emissions in the United States. The EPA is in part implementing the GHG Reporting Rule to gather information for future regulatory and policy decisions. Thus, many of those sources that will be required to report under the GHG Reporting Rule may be regulated under a federal GHG cap and trade system being discussed by Congress and the Obama Administration. While the GHG Reporting Rule does not impose any reduction obligations, but as seen in prior reporting rules that do not require reductions, such as the Toxic Release Reporting of SARA Title III, companies reporting emissions manage what they measure. In other words, once companies are required to publicly report their emissions, they usually start to invest in ways to reduce those emissions. I. WHEN MUST YOU START MONITORING? As stated above, the monitoring must begin on January 1, II. WHEN MUST YOU START REPORTING TO EPA? date. The first report must be submitted to the EPA by March 31, 2011, and annually thereafter on this 1

2 III. WHAT GASES ARE COVERED? The EPA has identified the traditional GHGs for reporting: carbon dioxide ( CO 2 ), methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, chlorofluorocarbons, perfluorocarbons, and certain other fluorinated gases. For purposes of comparing emissions of the various gases using a single unit, the gases are converted into the equivalent GHG impact of CO 2. The conversion is based on the principle that gases other than CO 2 have a greater impact in terms of causing the greenhouse effect and thereby global warming. For example, one metric ton of methane emissions expressed in carbon dioxide equivalent ( CO 2 e ) units would be reported as 21 metric tons of CO 2 e. This is critical in understanding the threshold levels for application of the reporting requirements, as the non-co 2 GHG emissions must be converted to CO 2 e before determining whether the GHG reporting obligations apply to a particular facility. It is also important to keep in mind that reporting will be in metric tons. IV. WHAT FACILITIES ARE COVERED? Four categories of facilities are required to measure and report their GHG emissions. In addition, vehicle manufacturers would be required to report the GHG emissions of their vehicles. We will focus on facility-based emitters in this Client Alert. A. Source Categories The first category of facilities required to report under the GHG Reporting Rule are facilities that fall under a list of source categories identified by the EPA. These sources include, among others: coal-fired electric generating plants subject to the Acid Rain program, aluminum, ammonia, cement, electronics, lime, petrochemical, petroleum refining, certain underground coal mines, and municipal landfills. B. Other Facilities That Emit 25,000 Tons Per Year or More of CO 2 e of Combined Emissions From Listed Source Categories The second category of sources required to report are facilities that emit 25,000 or more metric tons of CO 2 e per year of combined emissions from stationary fuel combustion units, miscellaneous uses of carbonate, and all source categories that are listed and located at the facility in any calendar year. 2

3 These sources include, among others: electricity generation, electronics, ethanol production, food processing, glass production, iron and steel production, ferrous alloy production, oil and natural gas systems, pulp and paper, industrial landfills, and wastewater treatment. C. Facilities That Do Not Meet the First Two Source Categories, but That Emit 25,000 Metric Tons of CO 2 e Per Year From Stationary Fuel Combustion Sources The third source of facilities required to report are those that meet all of the following conditions: (1) the facility does not contain any source category designated in the first two groups of categories; (2) the aggregate maximum rated heat input capacity of stationary fuel combustion units at the facility is 30 mmbtu/hr or greater; and (3) the facility emits 25,000 metric tons of CO 2 e per year or more from all stationary fuel combustion sources. D. Entities That Sell, Import, or Export Fossil Fuels, Industrial GHGs, and CO 2 The final category of entities required to submit GHG emission reports under the GHG Reporting Rule are suppliers of coal, coal-based liquid fuels, petroleum products, natural gas and natural gas liquids, producers of industrial GHGs as listed in the GHG Reporting Rule, importers and exporters of industrial GHGs and CO 2, and importers and exporters of industrial GHGs and CO 2 exceeding 25,000 metric tons of CO 2 e per year. V. WHAT MONITORING AND MEASUREMENT APPROACH MUST BE USED? The EPA reviewed several monitoring or measurement options in developing the GHG Reporting Rule. The EPA selected the option of combined direct emission measurement and facility-specific calculations. Facilities that already have CEM devices are generally required to add a GHG measurement capability. Those that do not have CEM devices would have the choice to install them or to use facilityspecific calculation methods. 3

4 VI. WHAT CERTIFICATION AND VERIFICATION IS REQUIRED? The EPA reviewed several options regarding certification and verification of the GHG emissions reported to the EPA. The agency decided to require certification by a designated representative of the facility submitting the report and to have the EPA verify the emissions report. No third-party verification is currently required. VII. WILL THE INFORMATION REPORTED TO THE EPA BE AVAILABLE TO THE PUBLIC? The information provided by the regulated facilities will be made available to the general public by a Web site developed by EPA. VIII. WHAT CORPORATE FINANCIAL DISCLOSURE AND CORPORATE STRATEGIES SHOULD BE DEVELOPED AS A RESULT OF THIS NEW REGULATION? The GHG Reporting Rule is one of the significant steps made by the Obama Administration to implement climate change regulation and extends GHG measurement and reporting to a large part of the economy. As companies continue to review and develop their strategies for evaluating the potential risks and opportunities that a GHG regulatory system and potential cap and trade system would present, the GHG Reporting Rule is the one of the first salvos in what will be a concerted effort by Congress and the President to impose a GHG regulatory system in the United States. Since establishing a company s carbon footprint is now mandatory for many companies, understanding the implications of the reporting and public disclosure of the amount of GHG emissions raises several issues. With this rule and potential future legislation that may be passed as early as this year or early next year, many publicly traded companies should also consider their disclosures in their filings with the Securities and Exchange Commission to determine if any further description of the risks or opportunities presented by climate change legislation should be discussed. Companies that may be regulated by any future climate change legislation, whether state, federal, or both, should develop a climate change strategy. Such strategies should include an evaluation of the number of GHG or carbon allowances that may be required to comply with climate legislation. One allowance would be required for every ton of emissions of CO 2 e. In addition, those companies selling or importing fossil fuels may be required to obtain allowances for every ton of CO 2 e of fuel sold. In engaging in this planning, companies should consider the extent to which low cost offsets purchased today could reduce the ultimate liabilities of the company in the future. Many utilities, oil and gas companies, and other potentially regulated companies are already investing in carbon offset projects or purchasing credits now. In what could be one of the most significant environmental regulatory programs in the history of the United States, planning today could pay off with significant savings or dividends in the future. For many companies, climate change impacts should be a key strategic issue for the board and management to consider. 4

5 This client alert is sent for the information of our clients and friends. It is not intended as legal advice or an opinion on specific circumstances and is not intended or written to be used, and may not be used, by any person for the purpose of avoiding penalties that may be imposed under United States federal tax laws. The lawyers at Thompson & Knight LLP are available to assist you in working through any of these topics. Please contact the Thompson & Knight attorney with whom you regularly work or the following attorney for assistance. CONTACT: Scott D. Deatherage Thompson & Knight LLP One Arts Plaza 1722 Routh Street, Suite 1500 Dallas, Texas Direct: