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Pruitt Overturns Past Guidance, Brings in NSR Project Netting


On March 13, 2018, EPA Administrator Pruitt issued a memorandum, “Project Emissions Accounting Under the New Source Review Preconstruction Permitting Program” that substantially changes “Step 1” in the NSR emissions calculation. “The purpose of this memorandum is to communicate the EPA’s interpretation that its current NSR regulations provide that emissions decreases as well as increases are to be considered at Step 1 of the NSR applicability process, provided they are part of a single project.” This determination overturns prior guidance dating back to March 2010 that had forbid accounting for any emissions reduction credit in “Step 1,” requiring any such “reductions” to be included solely in the Step 2 netting calculation. The March 13, 2018 memorandum, which recites the “presidential priorities for streamlining regulatory permitting requirements for manufacturing,” represents the next step in Administrator Pruitt’s commitment to “simplifying” the NSR process and “achieving meaningful NSR reform.”

ANALYSIS

The March 13, 2018 memorandum begins by analyzing the two steps in the NSR applicability determination: Step 1, which requires “a determination of whether the proposed project, by itself, is projected to result in a significant emissions increase”; and if such an increase is projected to occur, then Step 2 evaluates “whether the project will result in a significant net emissions increase, considering any other increases and decreases in actual emissions at the source that are contemporaneous with the particular project and are otherwise credible.” The memorandum notes that this second step is often called “netting.”

The memo next notes that in the past, “EPA has sometimes described the consideration of both increases and decreases in emissions under Step 1 of the NSR applicability process as ‘project netting.’” The memo rejects this term as “confusing,” and instead states that it is more appropriate to call it “project emissions accounting.” Critically, the memo states that “in the context of Step 1, the term ‘netting’ is misplaced insofar as ‘netting’ more properly describes looking at those other projects that may have been or will be undertake at a given facility over the contemporaneous period.” In contrast, “’project emission accounting’ more accurately captures what Step 1 of the NSR applicability is really all about – i.e., taking account of the true emissions impacts of the project itself.”

The Pruitt memorandum then builds on this recognition and cites the D.C. Circuit decision in New York v. EPA, 413 F.3d 3, 40 (D.C. Cir. 2005), for the proposition that the “plain language of the CAA indicates that Congress intended to apply NSR to changes that increase actual emissions” and that “central to the CAA’s definition of ‘modification’ is that there must be a causal link between the physical or operational change at issue – i.e., the ‘project’ – and any change in emissions that may ensue.” From this analysis, the Pruitt memorandum determines that “it is necessary to account for the full and direct effect of the proposed change itself” and that “EPA should give attention to not only whether emissions may increase from those units that are part of the project but also whether emissions may at the same time decrease at other units that are also part of the project.” The memo finds that the phrase “sum of the differences” in 40 C.F.R. § 52.21(a)(2)(iv)(c) and (d) supports this reading.

The March 13, 2018 memorandum then turns to 40 C.F.R. § 52.21(a)(2)(iv)(f), which states “sum of the emissions increases,” which was the language cited by EPA previously to reject the possibility that there could ever be negative numbers for emissions in Step 1. The memorandum distinguishes the prior interpretation first by noting that (f) uses the values previously calculated under (c) and (d) and hence might include negative values, and that an example involving Clean Units (later vacated) demonstrated that (f) could include negative numbers in the “sum of emissions increases.”

Having reached the conclusion that 40 C.F.R. § 52.21(a)(2)(iv) allows consideration of negative numbers, the March 13, 2018 memorandum goes on to make several more points:

  • Emissions decreases in Step 1 do not need to be “creditable” or “enforceable” as required for emissions decreases in Step 2, unless the “potential to emit” approach to calculation is used, in which case 52.21(b)(4) would apply.

  • Emissions decreases calculated under Step 1 are subject to the same emissions tracking, documenting and, under certain circumstances, reporting, as any other emissions calculation using the “projected actual emissions” test. See 40 C.F.R. 52.21(r)(6).

  • EPA will generally accept a source’s identification of the “project,” but reserves the right to take enforcement as “circumvention” if there is “some wholly artificial grouping of activities.”

EPA concludes the memorandum with a note that it will be issuing action on “project aggregation” in the future.

COMMENTARY

The March 13, 2018 memorandum represents a second significant change to the implementation of the NSR program under the Trump Administration and Administrator Pruitt. It builds upon the first change, where EPA stated it will not “second guess” the source’s emissions projections under the “projected actual emissions” test, by now allowing a source to consider decreases as well as increases in Step 1. Together, these changes greatly increase the flexibility of the NSR program and will allow changes at a source that might not have occurred if the Step 2 analysis is required. Let's consider why.

NSR Step 2 requires consideration of other contemporary increases and decreases, so, for example, a “swap” of an emissions unit that could emit 150 tons of NOx for an existing unit that emits 120 tons of NOx could trigger NSR if there had been a contemporaneous increase elsewhere at the source greater than 10 tons. Under the new approach outlined in the March 13, 2018 memorandum, so long as the projected NOx emissions from the swap (using the PAE test) are less than 40 tons greater than the existing unit's baseline actual emissions, the change would not trigger PSD (assuming all other pollutants were less than significant). As EPA forecasts, this should result in an increase in efficiency projects that previously would not have occurred.

The environmental community will argue that this interpretation is inconsistent with the intent of Congress, occasionally repeated in the courts, that “old” units are meant eventually to shut down or be forced to retrofit by the NSR program. On the other hand, Congress also said that minor changes should not trigger NSR review. By building its analysis on New York, the leading case for a restrictive analysis, and focusing on the “actual” emissions effects of a project, the March 13, 2018 memorandum has redefined NSR applicability in a way that will be difficult to challenge directly.

The Pruitt Administration has signaled that more is on the way, so stay tuned for future developments!

 

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