Using Section 111 of the Clean Air Act for Cap-and-Trade of Greenhouse Gas Emissions: Obstacles and Solutions

ABSTRACT The Environmental Protection Agency (EPA) is moving forward with regulation of greenhouse gases under section 111 of the Clean Air Act. The next step could be creating a cap and trade system for the electrical utility industry using "standard of performance" as the statutory foundation. Past litigation on EPA's proposed mercury cap-and-trade program provides insights about potential challenges to a carbon-trading program. This article describes those insights and discusses how EPA could set a national cap by defining a standard of performance for greenhouse gas emissions and then allow regulated facilities to use allowances to cover their greenhouse gas emissions. This article also looks to the specifics of the proposed California cap-and-trade program in order to demonstrate how EPA could allow states to use their participation in regional cap-and-trade programs to comply with section 111(d) requirements for existing sources. I. INTRODUCTION II. BENEFITS OF USING SECTION 111 A. Regulating GHGs under Section 111 Has a Strong Legal Foundation in Comparison to Other Sections of the Clean Air Act B. EPA Has a Robust Regulatory System in Place under Section 111 C. Standard of Performance Does Not Depend on a "Technological System" D. No Significant Difference Exists Between New and Existing Sources for the Issue of Trading E. EPA Could Later Transition NSPS to a Section 110 Program III. NEW JERSEY V. EPA: ARGUMENTS OVER TRADING AS A STANDARD OF PERFORMANCE A. What is a "Standard"? B. Must Each Source Decrease Its Emissions to Meet the Standard, Thereby Precluding the Use of Allowances? 1. Must Every Source Achieve Actual Emissions Reductions? 2. What is "Continuous Emissions Reduction"? 3. Does Cap-and-Trade Violate ASARCO by Implementing a Bubble Concept? C. Does Cap-and-Trade "Reflect the Degree of Emission Limitation Achievable"? D. Does Cap-and-Trade Reflect the "Best system of Emission Reduction "? IV. TRADING UNDER SECTION 111 A. Outline of a Trading Program 1. Defining the Cap 2. Allocating Allowances 3. Use of a Minimum Emission Reduction Baseline B. Trading as a Standard of Performance 1. Standard of Performance as a Cap 2. Standard of Performance as a Minimum Emissions Reduction Baseline 3. Measuring Achievable Emission Limitation by Considering Cap-and-Trade the "Best System of Emission Reduction" V. HARMONIZING STATE CAP-AND-TRADE PROGRAMS WITH SECTION 111(D) OBLIGATIONS A. Standards of Performance B. Scope of Coverage C. Banking D. Borrowing and Multi-year Compliance E. Offsets and Out-of-State Trading F. Initial Allowance Distribution: Allowance Reserve and Auction Price Floor VI. CONCLUSION D. Borrowing and Multi-year Compliance E. Offsets and Out-of-State Trading F. Initial Allowance Distribution: Allowance Reserve and Auction Price Floor VI. CONCLUSION I. INTRODUCTION Starting in January 2011, Environmental Protection Agency (EPA) began regulating large stationary source emissions of greenhouse gases (GHGs). First, EPA is implementing regulations for power plants and industrial facilities under the Prevention of Significant Deterioration (PSD) and Title V permitting programs. (1) Second, EPA will regulate power plant and refinery emissions using new source performance standards (NSPS) set forth under section 111 of the Clean Air Act (CAA). (2) All of these regulations face numerous challenges in the courts. (3) On December 23, 2010, EPA announced a schedule to develop rules regulating GHG emissions from refineries and power plants under NSPS. (4) Electricity generation represents thirty-four percent of overall U. …