After months of anticipation, EPA finally issued its greenhouse gas “Tailoring Rule” on Thursday, May 13, 2010.  According to EPA, the rule is necessary to “tailor” the applicability of two Clean Air Act programs – the Prevention of Significant Deterioration (PSD) and Title V Operating Permit programs – to avoid impacting millions of small greenhouse gas (GHG) emitters once the first-ever GHG standards for motor vehicles take effect in 2011.  The final rule differs significantly from EPA’s original proposal (the thresholds are much higher than proposed), but the controversy remains the same:  Can EPA, via regulation, alter the definition of a term defined by statute?

The critical term, for purposes of PSD and Title V, is “major stationary source.”  The Clean Air Act defines “major stationary source” to include only those sources emitting greater than 250 tons per year (tpy) of a regulated pollutant, or 100 tpy for certain categories of sources such as refineries and utilities.  The Tailoring Rule, as finalized, essentially changes that applicability threshold from 100/250 tpy to 75,000 tpy for GHGs, expressed in carbon dioxide equivalent (CO2e).  The final rule threshold is three times higher than the original proposal of 25,000 tpy. 

EPA’s practical justification for changing the threshold at all is that GHGs are emitted in much greater quantities than any of the “traditional pollutants” for which the 100 and 250 tpy thresholds were designed.  The reason EPA is raising the threshold even higher than proposed is largely due to the concerns expressed by state agencies with regard to whether they would have the resources needed to apply PSD and Title V to sources of GHGs even under EPA’s initial proposal.  According to EPA, without a higher applicability threshold, literally millions of GHG emitters would find themselves subject to the Clean Air Act for the first time ever, which would likely create a “permit gridlock” at state agencies around the country. 

The final Tailoring Rule establishes two phases for applying PSD and Title V to GHG emission sources.  In the first phase, set to begin January 2, 2011, sources already subject to Title V and PSD for another pollutant will have to address their GHG emissions as well.  EPA refers to these sources as “anyway” sources, since they will have to go through permitting “anyway” for another pollutant, regardless of their GHG emissions.  Electric utilities will be one of these “anyway” sources, but PSD permitting requirements will only apply to utilities that undertake a project that triggers PSD, and Title V permitting requirements will only apply to utilities that must revise, renew, or apply for a new Title V permit. 

Specifically, for PSD, specific projects will only trigger permitting requirements if the project would trigger PSD “anyway” and it is also expected to increase GHG emissions by more than the new threshold of 75,000 tpy CO2e.  Such projects will not only trigger permitting requirements, but also the need to install the “best available control technology” (BACT) for GHG emissions.  For Title V, utilities will only have to address GHG emissions in any new Title V permit applications and in any renewals or revisions to any existing Title V permits, but EPA suggests that adding a reference to the reporting requirements under the mandatory GHG reporting rule should suffice.

The second phase established in the final Tailoring Rule will bring in other large sources of GHG emissions on July 1, 2011.  Phase II will cover all sources capable of emitting greater than 100,000 tpy CO2e, regardless of whether they are an “anyway” source.  Phase II will also mark the beginning of PSD applicability for projects that only result in increases in GHG emissions and would not otherwise trigger permitting requirements.

EPA also included in the preamble to the rule two promises for additional “follow-up actions” in the future.  In the first, EPA promised to complete another rulemaking by July 1, 2012 to apply PSD and Title V to even more sources beginning in July of 2013.  In the second, EPA promised that it will not regulate sources emitting less than 50,000 CO2e until at least 2016.  EPA plans to take comment on whether and how to fulfill each of these two promises.  In addition, EPA also noted that sources that obtain a final permit before each phase becomes effective will not have to reopen those permits even if the new rules would render the source or project subject to PSD or Title V for GHG emissions.

Despite hopes by several industries for a specific exemption, EPA did not make exceptions for specific source categories in the final Tailoring Rule, preferring to follow a “uniform threshold-based approach” instead.  One notable example specifically mentioned is the category of sources that combust biomass – generally considered to be a “carbon neutral” source of GHG emissions.  EPA refused to exempt such emissions from the threshold calculations for PSD and Title V, which means that new and modified sources of biomass-related GHGs will have to address those emissions just like a fossil fuel-fired emission source.