The Clean Air Rule: Washington’s Greenhouse Gas Regulation
This month, the Washington Department of Ecology adopted the Clean Air Rule, a much anticipated program for reducing greenhouse gas (“GHG”) emissions in the state. Washington is among a handful of states to take aim at climate change with comprehensive regulation.
Assuming the rule survives legal and political challenges, it will set limits on GHG emissions for stationary sources, such as power plants and manufacturing operations, and for petroleum producers and importers and natural gas distributors.
How The Clean Air Rule Works
In general, entities with annual baseline or projected GHG emissions of at least 70,000 metric tons carbon dioxide equivalent (“CO2e”) must reduce emissions by 1.7 percent of baseline emissions each year. Sources with at least 100,000 metric tons CO2e per year must comply starting in 2017. Sources with lower emissions have later compliance dates.
This mandate applies to a range of GHG producers, such as energy generating facilities, refineries, some landfills, a college, and a military installation, among others.
Parties in energy-intensive, trade-exposed industries (“EITEs”) are presented a choice for their emission reduction requirements. Depending on an EITE’s efficiency relative to industry norms, it may be entitled to less stringent requirements. This system rewards efficient operations. An EITE can also opt to be treated like a non-EITE party, though, once made, this decision is permanent.
EITEs are typically involved in manufacturing activities like glass-making, airplane assembly, and pulp and paper production.
In addition to the entities that must reduce GHG emissions, the Clean Air Rule also permits voluntary participation by parties otherwise not covered by the rule.
Participating entities can reduce emissions at their sources or obtain and retire emission reduction units (“ERUs”). ERUs may be generated by emission reductions beyond required levels, emission reductions achieved by qualifying projects in the state, and, in decreasing amounts, emission allowances from approved regulatory programs in other jurisdictions. ERUs can be banked for later use and exchanged.
The rule also establishes an ERU reserve that will serve several purposes, including, for example, accommodating modest economic growth, encouraging renewable energy development, and promoting emission reduction projects that meet certain environmental justice criteria.
Questions Surrounding The Rule
The Clean Air Rule has a colorful past and an uncertain future. The rule followed a failed attempt to enact a GHG emissions cap-and-trade program through the state legislature in 2015. The adopted version of the rule is also Ecology’s second try at a GHG regulation. In response to stakeholder comments, the agency withdrew an initial proposed version a month after it was introduced earlier this year.
Ecology projects that the rule will cost from $400 million to $7 billion and will yield $10 billion in benefits over a 20-year time horizon. But assumptions underlying that analysis have been questioned, including the regulation’s effect on compliance incentives, transaction costs, and market behavior.
Ecology has also been under a court order to complete the rule-making by the end of this year. The plaintiffs in that litigation submitted critical comments on the proposed rule, declaring it a “regulatory plan that exempts, excuses and makes allowances for not reducing emissions that can technically, economically and feasibly be reduced.”
Over the summer, other commenters offered various legal theories concerning the validity of the rule. These ranged from assertions regarding Ecology’s lack of statutory authority to promulgate the rule to possible constitutional violations to unlawful taxation. Whether and how these theories will play out should a legal challenge occur remains to be seen.
The state implementation framework for the federal Clean Power Plan (“CPP”) is also in the offing. The Clean Air Rule provides that compliance with the CPP will satisfy obligations under the Clean Air Rule. However, details about the state’s CPP proposal have not been forthcoming.
Finally, a carbon tax initiative is slated for the ballot this November. The Clean Air Rule indicates that Ecology will reconsider the rule if “another program establishes GHG reduction requirements.”
Early Compliance Planning Is Advisable
For many businesses, compliance with the Clean Air Rule involves a host of strategic decisions that will have to be made soon. These may include:
- How to optimize compliance options – reducing emissions at a source and/or utilizing ERUs;
- How to value ERUs;
- Whether to bank ERUs;
- Whether to self-generate ERUs or to obtain them from other parties;
- How and whether to undertake emissions reducing projects;
- How and whether to obtain emissions allowances from other jurisdictions;
- What to include in compliance reports and how to institutionalize reporting obligations;
- How to locate a qualified third-party verifier; and
- For EITEs, whether to seek treatment as a non-EITE party.
Some GHG producers must comply with the rule in 2017. For many others, the compliance period begins only three years later in 2020. Despite uncertainty surrounding the Clean Air Rule, businesses will benefit by planning now for this new and complicated regulation.
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The opinions expressed in this article are those of the author and do not necessarily reflect the views of Riddell Williams or its clients. This article is for general informational purposes and is not intended to be, and should not be taken as, legal advice.
Our group has played a key part in addressing some of the most challenging environmental issues in the Pacific Northwest and throughout the nation. Our clients include utilities, pulp and paper manufacturers, petroleum companies, regional energy companies, airlines and airfreight carriers, steel manufacturers, waste management companies, technology businesses, real estate development partnerships, private landowners, and some of the state’s leading environmental groups.