M2C2 Updates on Environment & Energy and Carbon Management
March 31, 2010While much has been written about what the US Environmental Protection Agency's (EPA) and the National Highway Transportation Safety Administration's (NHTSA) forthcoming light-duty vehicle greenhouse gas (GHG) emissions control rule (74 Fed. Reg. 49454, Sept. 28, 2009) may mean for federal Clean Air Act jurisprudence generally - and indeed, we discuss that topic as well separately below - it is equally interesting to contemplate what that rule will mean for the composition of US vehicle fleet itself in the years ahead.
The rule covers passenger cars, light-duty trucks, and medium-duty passenger vehicles built in model years (MY) 2012-2016. Roughly subject to a current corporate average fuel economy (CAFÉ) standard of 21 miles per gallon (mpg), that fleet consists of a mix of vehicle types and sizes but remains dominated by conventional gasoline engine technology, and, to a lesser extent, diesel engine technology. Under the rule, the CAFÉ standard for that fleet mix would increase to 35.5 mpg by MY 2016.
In order to achieve the dramatic emission reduction requirements of the rule, auto manufacturers are going to have to deploy a variety of new vehicle technologies and platforms over a relatively short period of time. We expect the bulk of those technologies to be non-obvious to the consumer - i.e., various engine and lubrication technologies. A significant portion of the rule's requirements is likely to be met by hybrid vehicles, a technology that is here to stay. Even plug-in electric hybrids are expected to achieve a toe-hold in the market by the middle of this decade, helped in part by various electric vehicle refueling infrastructure incentives that we expect Congress to take up as part of a broader energy bill at some point.
We do not expect electric (or battery) powered vehicles to make significant inroads during the time period envisioned by the rule, however; indeed, EPA and NHTSA all but concede that developments in battery and related technologies continue to advance but not at a pace that enabled the agencies to model those developments as part of the rulemaking process. We note, however, that Nissan just announced its battery-power Leaf with a surprisingly reasonable price tag of $25,000, so perhaps we are unfairly pessimistic.
EPA and NHTSA estimate that the average cost increase for a MY 2016 vehicle due to the rule is less than $1,100. That's a lot of money for the consumer, particularly in challenging economic times.
The Obama Administration already has signaled that a more stringent follow-up rule to cover GHG emissions beginning in MY 2017 is under development.
Carbon Management
Although Senators Graham (R-SC), Lieberman (ID-CT) and Kerry (D-MA) remain poised to release text of their bi-partisan climate bill on or about April 22, 2010, we remain skeptical that a climate bill will advance in the Senate this year. Indeed, the Obama Administration already has signaled that its legislative approach to climate will slip to 2011, which means that the November 2011 elections will play a significant role in the shape of future climate legislation.
It seems likely that the Graham/Lieberman/Kerry bill will adopt a sectorial approach to cap-and-trade, with utilities (and possibly other major sources above a minimum emissions threshold) targeted first. Industrial sources would be added into the cap at a future date. Transportation fuels, meanwhile, would be addressed through a "linking fee" that effectively is a carbon-based tax that consumers would pay at the pump.
With Congress slow-walking the climate agenda, EPA continues to take steps to establish a carbon management regulatory regime. The final rule regarding light-duty vehicle greenhouse gas emission standards and corporate average fuel economy standards (discussed above) is pending at the Office of Management & Budget, which means that publication in the Federal Register is imminent. And publication of that final rule in the Federal Register means that greenhouse gases (GHG) will thereafter be "subject to regulation" under the federal Clean Air Act (CAA), a development of significance to stationary and mobile source emitters alike.
With respect to stationary sources, and under its so-called "Tailoring Rule," EPA has signaled that it will (1) defer enforcing GHG emission limits until 2011 or later, and (2) focus initially on sources that emit 75,000 tons per year or more of GHGs. Politically, that signal could be an effort to head-off Senator Rockefeller's "Stationary Source Regulations Delay Act" which was introduced on March 4, 2010. That bill directs EPA not to take any action under the CAA with respect to stationary source permitting of GHGs for the two-year period beginning on the date of the enactment of the legislation.
Significantly, on March 29, 2010, EPA issued a statement confirming that it would delay implementation of stationary source controls until January 2, 2011, with more details to be provided in the separate forthcoming Tailoring Rule. Unfortunately, we understand that the release of the Tailoring Rule has been delayed, which means that uncertainties remain in how EPA will proceed with respect to stationary source controls. One issue that isn't uncertain is that EPA will not grandfather sources; in other words, if a facility's permit remains in play on January 2, 2011 and the facility is otherwise subject to CO2 controls, those climate controls will be folded into the permit.
The States, meanwhile, continue to roll out laws and regulations governing carbon capture & storage (CCS). Those enactments roughly follow the model CCS approach set forth by the Interstate Oil & Gas Compact Commission several years ago. They even include long-term stewardship approaches. Count us among those who believe that if a developer wanted to advance a CCS-based project, there is now a growing number of States in which the legal framework is nearly already in place.