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May 18, 2023

EPA Unveils Sweeping New Power Plant Emissions Rule Relying on Carbon Capture and Storage and Hydrogen Technologies

Advisory

The Biden Administration recently unveiled an ambitious new plan to reduce greenhouse gas (GHG) emissions from power plants. The proposed new rule, part of the Biden Administration’s goal to decarbonize the power sector by 2035, is based on the emissions reductions that can be achieved through various technologies, including the installation of carbon capture equipment to capture 90% of carbon emissions on new and many existing fossil fuel-fired power plants. EPA estimates that the new regulations would avoid 617 million metric tons of carbon dioxide emissions through 2042, resulting in US$85 billion in climate and public health benefits.

EPA has had nearly a year to develop rules that will survive legal challenges following the Supreme Court’s ruling invalidating the Obama Administration’s Clean Power Plan in West Virginia v. EPA last summer. Whether an EPA determination that carbon capture and storage (CCS) and hydrogen co-firing technologies have been “adequately demonstrated” is likely to be a central question in eventual litigation over a final rule.

This is the first installment in a series that will be exploring the implications of EPA’s proposal in greater detail.

A Multi-Pronged Regulatory Package

EPA’s proposed regulatory package includes five distinct actions setting GHG emissions limits:

  • Revised new source performance standards (NSPS) for new and reconstructed fossil fuel-fired combustion electric generating units (EGUs) (generally natural gas-fired)
  • Revised NSPS for modifications to existing fossil fuel-fired steam-generating EGUs (generally coal-fired)
  • New GHG emissions guidelines governing state programs for existing steam-generating EGUs (generally coal-fired)
  • New GHG emissions guidelines governing state programs for the largest, most frequently operated fossil fuel-fired combustion EGUs (generally natural gas-fired)
  • Repeal of the Affordable Clean Energy Rule (a Trump-era rule that the D.C. Circuit vacated in 2021, which vacatur the Supreme Court reversed in West Virginia v. EPA)

EPA has also requested comment on how to establish emission guidelines governing state programs for small, frequently used and large, less-frequently used combustion EGUs, which are not covered by the proposed rule.

Each of the proposed actions is promulgated under EPA’s Clean Air Act § 111 authority, which directs the agency to determine the “best system of emission reduction … that has been adequately demonstrated” (BSER), taking into account the cost of the reductions, non-air quality health and environmental impacts, and energy requirements. For many of the categories and subcategories of EGUs covered by the proposed rule, EPA has identified CCS and/or low-GHG hydrogen co-firing with natural gas as the BSER. However, while EPA relied on CCS and hydrogen in setting the standards, states and individual power plants may use any technology that achieves the same amount of emissions reductions to comply.

Together, the proposed regulatory package is intended to sharply cut GHG emissions from the power sector, which EPA identifies as the largest category of stationary sources of GHG emissions in the U.S., comprising approximately one-quarter of total U.S. GHG emissions. EPA’s proposal also highlights the importance of lower-carbon electricity generation to decarbonize other sectors, including transitioning automobiles to electric vehicles and transitioning oil and gas home and building heating to electricity. EPA also expects the proposal to reduce emissions contributing to particulate matter and ozone pollution, including in communities that have expressed environmental justice concerns.

EPA’s proposal would give states and power plant operators almost a decade to come into compliance with the new standards, with the first hydrogen-based standards taking effect in 2032 and the first CCS-based standards taking effect in 2035. As a result, fossil fuel power plants that elect to shut down prior to 2032 are not required to decrease their current emissions rates under the plan, and plants that commit to shutting down before 2040 will not be required to meet the most stringent proposed emissions standards during the 2032-2040 period. EPA touts the extensive lead time and compliance flexibility in the rule as beneficial to ensuring continued grid reliability as the power sector decarbonizes.

Regulating in the Shadow of West Virginia v. EPA

A history of litigation looms large over EPA’s current proposal. Neither the Obama nor the Trump Administrations' EPA power plant emissions standards were able to withstand litigation challenges, and the Biden Administration’s EPA rules are nearly certain to set off a new round of legal battles. EPA appears to have crafted the proposed rules with the Supreme Court’s recent decision in West Virginia v. EPA in mind to withstand such challenges.

In 2015, EPA concurrently promulgated two rules designed to reduce GHG emissions from the power sector. The first established an NSPS for GHGs from new steam-generating EGUs, which established CCS as the BSER for this category of power plant. The second rule, known as the Clean Power Plan (CPP), addressed carbon emissions from existing fossil fuel-fired power plants. Within the BSER for the CPP, EPA relied on the concept of “generation shifting” — reducing national carbon emissions by shifting from coal-generated plants to natural gas-generated plants, and from natural gas-generated plants to renewable sources such as solar and wind.

Essentially, EPA set standards so stringent that facilities would likely be unable to comply using only technologies that could be implemented at the facility itself (known as “inside-the-fenceline”). As a result, power plant operators would be required to engage in “outside-the-fenceline” activities such as building or investing in new lower carbon power plants or purchasing emission credits in a cap-and-trade system.

In last summer’s 6-3 decision, the Supreme Court in West Virginia v. EPA, finding that EPA’s claim to such transformational authority constituted a “major question” under the Major Questions Doctrine requiring a clear statement from Congress, ruled that EPA lacked authority to require outside-the-fenceline generation shifting across the power sector. The Court, however, recognized EPA’s ability to regulate GHG emissions under § 111 using more traditional pollution control approaches.

EPA’s current proposal reflects its aim to stay within the guardrails of the Supreme Court’s decision, focusing on traditional standards based on technology that can be implemented at each individual facility. EPA explains that the CCS and hydrogen technologies are both inside-the-fenceline approaches that power plants can implement without relying on cap-and-trade or off-site investment credits (even though CCS will typically require sequestration of the captured CO2 off-site). EPA’s current proposal is therefore different from the 2015 Clean Power Plan, and any future litigation over the plan is likely to address specific statutory interpretation and record-based legal questions that are distinct from those decided in West Virginia v. EPA. Still, parties challenging the rule will likely also raise broader issues related to the Major Questions Doctrine and other themes from the Supreme Court’s recent decision.

Adequate Demonstration of CCS and Hydrogen Technologies

For the proposal to stand up to judicial scrutiny, it will likely be critical for the EPA to show that the technologies it relied on in setting its standards ― in particular CCS and hydrogen ― have been adequately demonstrated. This will likely involve statutory interpretation questions relating to the meaning of adequate demonstration, as well as an examination of the administrative record to determine whether the agency has a sufficient technical basis for its conclusions.

CCS has been utilized in several applications across the U.S., but within the power sector, deployment of the technology remains very limited. EPA has considered CCS to be an appropriate BSER for some types of power plants dating back to 2015, however the validity of these 2015 standards was never decided by a court.

Proponents of CCS highlight that the technology has been available and in use for decades, but a lack of federal policy support has stifled its growth. EPA’s proposal is optimistic that recent decreases in the cost of CCS, combined with increases to the 45Q tax credit for CCS in the Inflation Reduction Act (IRA) will support increased deployment of the technology within the power sector.

The effects of the IRA are already being seen across the CCS industry. EPA has administered a program for carbon sequestration since 2010, but at present the program has only half a dozen active permits. Since the passage of the IRA, permit applications have skyrocketed, with over 70 currently pending before the agency.

Similarly for hydrogen, EPA cites to IRA tax credits and an influx in funding from the Infrastructure Investment and Jobs Act to provide a significant boost to the technology’s economic feasibility. EPA proposes to define “low-GHG hydrogen” narrowly, including only hydrogen with an emissions intensity of no greater than 0.45 kgCO2e/kgH2. This mirrors the eligibility criteria for the maximum tax credit available under the IRA, and likely would only include “green” hydrogen produced from electrolysis using renewable electricity sources.

If implemented, the proposed rule has the potential to drive increased demand for CCS and hydrogen across the power sector. Arnold & Porter will be exploring the proposal in greater detail in the upcoming weeks to evaluate potential impacts on these and other industries.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.