Environmental Update

Environmental Update

August 01, 2001

One hundred seventy eight countries meeting in Bonn at the end of July reached agreement on several open issues that were preventing implementation of the Kyoto accord on global warming.  The United States is the only major country that is not participating.

Global Warming

Some commentators predicted that the Bush administration’s outright rejection of the Kyoto protocol earlier this year would deal a crippling blow to the agreement.  However, the Bonn accord is now expected to lead to a number of additional countries ratifying the agreement.

The agreement will enter into force once it has been ratified by at least 55 countries.  The 55 must include industrialized countries that account for at least 55% of the total reduction in carbon dioxide or CO2 emissions that are required from the industrialized group.  To date, 36 countries have ratified.  They include one industrialized country, Romania.  Germany has announced it will also ratify soon.

The goal of the Kyoto protocol is to reduce global greenhouse gas emissions by 5.2% from 1990 levels during the “first commitment period” of 2008 through 2012.

The European Union countries and the so-called Umbrella Group nations — which include Australia, Canada, Japan, and Russia — brokered a compromise in Bonn on a number of major implementation issues.

Credit for “carbon sinks” — or land use and forestry activities that absorb carbon from the atmosphere — will be awarded on a country-by-country basis based on changes in land use since 1990.  Forest management, cropland management, grazing land management, and revegetation will be recognized as eligible carbon sink activities.

“Clean development mechanism,” or “CDM,” rules were adopted that specifically allow energy efficiency, renewable energy and forestation projects to be credited. (Developed countries may earn credit for undertaking projects to reduce greenhouse gas emissions in developing countries.  These are called CDM projects.)

Penalties were adopted for countries that fail to meet emissions reduction targets during the first commitment period of 2008 through 2012.  These countries will have to reduce an additional 1.3 tons of emissions for every ton they are over the target starting in 2013.

These concepts — carbon sinks, CDM and compliance penalties — were already part of the original Kyoto protocol, but there was room for disagreement because the agreement was lacking in detail.  The parties agreed in Bonn on some of the important details.  However, specific rules to implement the core concepts still need to be developed.

Although the United States has rejected the Kyoto protocol, US positions on the three issues were considered during the negotiations.  For example, the US has been a longtime advocate for granting credit for carbon sinks.

US companies with operations in other industrialized countries, such as in Europe and Japan, will ultimately have their facilities in those countries subject to greenhouse gas emission reduction requirements since these nations are expected to ratify the protocol.  These requirements may result in significant costs to achieve CO2 emissions reductions at power plants and other industrial facilities.  Such costs could include the installation of more energy efficient and lower CO2-emitting equipment or purchasing CO2 emission credits or undertaking CDM or similar projects.

The Bush administration has said it is committed to addressing the problem of global warming, but it charges that the Kyoto protocol is flawed because the agreement does not require emissions reductions for developing countries like India and China.  The United States is currently conducting a cabinet-level review of global warming and is expected to outline an approach for dealing with the problem later this year, possibly in time for the next meeting of the environmental ministers scheduled for October 29 to November 9 in Marrakesh, Morocco.

Carbon Trading

A group of twenty-five companies and nonprofit organizations — including Alliant Energy, Cinergy, Calpine, Midwest Generation, NiSource and PG&E National Energy Group — committed in June to participate in a design phase of a pilot CO2 trading system.

The pilot exchange — called the Chicago Climate Exchange — is being developed by Environmental Financial Products and is intended to create a market for trading voluntary CO2 reductions within a framework that provides for methods to monitor and track CO2 emissions and determine what constitutes approvable reductions and offset projects.  Under the pilot trading program, participating companies will be issued tradable CO2 allowances and each participant must agree voluntarily to reduce its CO2 emissions by 2005 by 5% from 1999 levels.  Participants would be able to buy allowances to offset CO2 emissions or they could reduce their own CO2 emissions directly.

Regional Haze

The Environmental Protection Agency formally proposed new guidelines in late July for implementing “best available retrofit technology,” or “BART,” to comply with its regional haze rules.  The new guidelines could trigger costly retrofits of pollution control technology at older power plants located near national parks and federal wilderness areas.  These are called “Class I areas.”

Under the new guidelines, pollution retrofits may be required to comply with BART standards at power plants that were constructed between 1962 and 1977 and emit more than 250 tons a year of any of five pollutants that contribute to impaired visibility in national parks and wilderness areas.  The affected power plants are upwind from Class I areas.  The five pollutants are sulfur dioxide, or SO2, nitrogen oxide, or NOx, particulate matter, volatile organic compounds, and ammonia.

The new guidelines appear to establish flue-gas desulfurization or scrubbers as the presumptive BART standard for utility boilers.  Installing a scrubber at a large electric generating unit usually costs from $50 million to $100 million.

As proposed, the BART guidelines would set a presumptive SO2 control level requiring emissions reductions of 90% to 95% compared with uncontrolled operations.  This is an SO2 control level that is significantly more stringent than the existing federal acid rain program requirements.  While the guidelines call for states to conduct a case-by-case BART analysis for affected sources, states would be required to justify any deviation from the stringent presumptive BART control requirement.

The Environmental Protection Agency has asked for written comments on the proposed new guidelines by September 18, 2001.  These guidelines were originally scheduled to be proposed earlier this year by the outgoing Clinton administration, but were delayed for further review.  The Bush administration made only minor changes to the proposed rule.

States have until the period 2004 to 2008 to submit their regional haze plans.  BART-level controls would have to be in place at affected plants within five years after EPA approves a state’s plan.  A number of industry groups are challenging the regional haze rule in court.  The case is still pending in the US court of appeals for the District of Columbia.

Air Permits

The Environmental Protection Agency is taking a hard look at US rules for new construction and modification of power plants and other industrial facilities that potentially increase air pollution.  It is expected to suggest wholesale revisions in the program — called “new source review,” or “NSR,” later this year.

The current NSR program requires major new and modified sources of air emissions to undergo a complicated and extensive permitting review process, including the selection of control technology to meet stringent emission limits.  NSR permitting reviews have been notoriously costly, time-consuming and fraught with potential pitfalls.

The energy plan that the Bush administration issued in late May directed the Environmental Protection Agency to report within 90 days on the impact of the NSR program on investment in new utilities and refineries, energy efficiency, and environmental protection.  The recommendation to review the NSR program was an outgrowth of longstanding complaints that the NSR permitting regime stifles new and modified plant construction.

EPA issued a 90-day review background paper in June.  It has been holding both public and private meetings to collect comments.  It hopes to submit a finished report to President Bush by August 17, but the deadline could slip into September.

Meanwhile, the Department of Justice is reviewing its NSR enforcement actions at the same time to ensure consistency with the Clean Air Act and its implementing regulations.  EPA’s high profile NSR enforcement initiative has caused consternation in the regulated community, and generated allegations that the agency has changed its interpretation of certain NSR rules over time.  A number of NSR enforcement actions are pending against electric utilities, refineries, and other industries.  The industry is hoping that some of these cases might be dropped as a result of the review.

New York

The New York Department of Environmental Conservation, or “DEC,” released draft regulations in June that would drastically reduce SO2 and NOx emissions at New York power plants.

The draft regulations would reduce SO2 emissions by an additional 50% below federal Clean Air Act requirements by 2008.  They also call for reducing NOx emissions by 70% from current levels by extending summertime NOx controls to year-round status starting in 2004.  Once implemented, New York power plants will be facing some of the most stringent SO2 and NOx emission limits in the country.

New York hopes to reduce SO2 emissions by 130,000 tons a year and further reduce NOx by 20,000 tons per year.  The draft regulations would create an in-state trading program for New York SO2 emission allowances.  Under the new SO2 regime, New York power plants would still need to hold enough federal SO2 allowances to comply with the federal Clean Air Act.  However, compliance with the New York program should generate an annual surplus of federal SO2 allowances for New York sources.  The NOx reduction proposal would also expand the existing New York trading program for NOx allowances.

The draft regulations are currently under review by the governor’s office.  His staff is holding meetings with stakeholder groups.  The regulations are expected to be formally proposed this fall and will be subject to a public review and comment period.  They are expected to take effect in time to implement next year.

California

Both environmental groups and the City of San Francisco filed lawsuits recently challenging an agreement that would let a power plant in San Francisco increase electricity output from three diesel-fired peaking units by operating beyond its annual hours-of-operation limits.  Under the arrangement between the Bay Area Air Quality Management District and the plant, the peaking units are allowed to exceed air permit restrictions in exchange for payment of a $20,000 mitigation fee for each ton of excess NOx generated by the units.

The local air districts were given authority in two executive orders issued by Governor Gray Davis earlier this year to exceed annual hours of operation provided mitigation fees are paid.

The plaintiffs charge the agreement between the plant and local air district violates the federal Clean Air Act because the plant failed to undergo a new source review permitting process to modify its air permit and to obtain emission offsets to compensate for the increased NOx emissions from the units.  The lawsuits are pending before a federal district court in northern California.

Since the beginning of the year, Governor Davis has taken a number of steps to increase the state’s electricity generating capacity.  Davis issued a new executive order on June 12 that allows natural gas-fired power plants to operate at maximum capacity.  The order authorizes local air districts to permit gas-fired plants to exceed hourly, daily, quarterly, and annual emissions limits so long as the power is sold to the California Department of Water Resources or to an in-state utility and mitigation fees are paid to the air district.  The order provides for mitigation fees of $7.50 per pound of NOx — or $15,000 a ton — and $1.10 per pound of carbon monoxide — or $2,200 a ton — emitted in excess of the permit limits.

Approximately 1,200 megawatts of additional electric generation capacity is expected to be available this summer as a consequence of the governor’s June 12 action.  EPA Region IX is expected to cooperate with the California air districts to ensure that federal administrative consent orders are issued to authorize the temporary lifting of air permit limits.  Local environmental groups may also challenge actions by local air districts to implement the order.

— contributed by Roy Belden in Washington.