Emission Offsets: EPA Rules Clean Air Act Allows New Sources in Nonattainment Areas

The Environmental Protection Agency (EPA) has issued an interpretive policy ruling¹ under which construction of major² new or expanded stationary sources of air pollution could in certain circumstances be allowed in areas that have not attained the national ambient air quality standards. Approval of such construction would be subject to a number of conditions, most notably that the additional emissions from the new or expanded sources be more than offset by reductions at existing facilities within the region. This position has caused considerable controversy because it contrasts sharply with the widely held view that the Clean Air Act as currently written forbids approval of any additional sources in nonattainment areas. One of the first major policy issues facing the new EPA Administrator thus promises to be reconsideration of the interpretation, which became effective when promulgated.

Origin of the Ruling

The policy ruling arose in connection with the agency's implementation of regulations³ governing preconstruction review of new or modified stationary sources. In applying these rules to sources in nonattainment areas, EPA found itself caught in the middle of a political battle similar to the storm which surrounded the issue of preventing significant deterioration of existing air quality where it is better than the national standards require.⁴ On the one hand, the statute as interpreted by the courts subordinates demands for industrial expansion to the need for attaining and maintaining clean air.⁵ On the other, significant portions of the population in the affected areas tend to see economic stagnation as an intolerable price to pay for achieving this goal.

In order to escape from this dilemma, EPA anticipated in its policy ruling certain statutory revisions embodying political judgments on how to reconcile the demand for industrial growth with the need to clean up currently dirty air. The interpretive ruling is clearly based on § 119 of the conference version⁶ of the Clean Air Act amendments which failed to pass on the last day of the 94th Congress, but the ruling's provisions are in fact much broader.

Section 119 of the conference bill would have required the best available control technology for expansion of existing sources in nonattainment areas, but would not have permitted any new-source construction. One-for-one emission offsets were required but would have been available only from existing plants at the same site which are controlled or operated by the owner of the modified source. In addition, all of the owner's existing plants within that air quality control region (AQCR) would have been required to be in compliance either with all applicable emission limitations or with an approved attainment schedule before any offset arrangement could be approved. Finally, § 119 would have required the total emissions from the modified source and all existing sources at that location to be sufficiently less than the previously allowed level of emissions from the existing sources so as to represent "reasonable further progress" toward attainment of the national standards.

EPA's interpretive ruling echoes the § 119 language concerning compliance by all existing sources owned by [7 ELR 10030] the owner or operator of the new or modified source. However, the ruling allows construction of new sources as well as modification of existing facilities and provides that emission offsets are permissible from any existing sources within the same AQCR, regardless of whether they are under the same ownership as the new or modified source. The new source must meet the "lowest achievable emission rate for such type of source," and an emission offset must result in "reasonable progress" toward attainment of the national standards. EPA noted, however, that it will not question an offset arrangement as long as the emission reductions exceed new emissions by an amount greater than one-for-one.

Legality of the Agency's Interpretation

Sections 110(a)(2)(D) and 110(a)(4) of the Clean Air Act⁷ require that state implementation plans provide adequate authority to prevent new source construction which the state determines will preclude attainment or maintenance of national ambient standards in any AQCR or portion thereof within the state. EPA regulations in 40 C.F.R. § 51.18 which govern review and approval of new sources pursuant to these sections provide that each state plan must include means by which the state agency responsible for reviewing new source construction "will prevent such construction or modification if it will interfere with the attainment or maintenance of a national standard."

A companion section of the Code of Federal Regulations dealing with general control strategy provides at least one indication that this seemingly stringent directive is to be tempered by an "offset" mechanism to permit some industrial growth in nonattainment areas. Under 40 C.F.R. § 51.12(a), implementation plans must require the degree of emission reduction necessary to achieve attainment and maintenance of national standards in such areas,

including the degree of emission reduction necessary to offset emission increases that can reasonably be expected to result from projected growth of population, industrial activity, motor vehicle traffic, or other factors that may cause or contribute to increase [sic] emissions.

By itself, EPA's interpretive ruling appears to be valid under these authorities, because any offset arrangement would have to result in a net decrease in emissions within the nonattainment area to win approval, and hence could hardly be viewed as preventing or interfering with ultimate attainment of the national standards. The policy will not be implemented in a vacuum, however. Given industry's generally less than perfect performance in improving emission reduction up to now, it may be overly optimistic to believe that offsets based on dditional reductions will come easily in practice, or that operation of a newly constructed plant will be delayed indefinitely if the planned offset producing a new decrease in emissions has not actually materialized once the plant is built.

Purpose and Effect of the Ruling

EPA stated in the preamble to the interpretive ruling that its action had two purposes. The first is to provide interim guidance to EPA regional offices and to the state and local reviewing authorities that are responsible in all but six states for preconstruction review pursuant to 40 C.F.R. § 51.18. The second objective is to provide a focal point for congressional consideration of the problem of new sources in nonattainment areas. The agency believes that this question involves important national issues which are amenable to administrative treatment only on an interim basis and must ultimately be resolved by Congress through clarifying amendments to the Clean Air Act.

In devising an interim policy for industrial expansion in nonattainment areas, EPA obviously sought a middle ground between, on the one hand, the strict view that the Act allows no such expansion and, at the other end of the spectrum, the position, clearly illegal under the Act as construed by the Supreme Court in Train v. Natural Resources Defense Council,⁸ that all new or modified sources should be permitted in nonattainment areas simply upon compliance with the emission limitations applied to similar existing sources within the region. Although the legality of the agency's interpretation is somewhat ambiguous, the political logic of its choice is unmistakable.

Moreover, the hallmark of the interpretive ruling is its interim character. While the ruling became effective upon promulgation, EPA at the same time solicited public comment on both the policy interpretation and an advanced notice of proposed rulemaking to amend 40 C.F.R. § 51.18 in accordance with it. The agency also anticipates expeditious congressional action on the issue⁹ and is certainly ware that the policy interpretation is open to revision by the new administration in the meantime.

One final feature of the EPA ruling is that it allows privately-arrived-at offset arrangements among different sources and owners. This provision fosters development of a private market in "emission rights" somewhat akin to the transfer of development rights concept currently being experimented with by a number of states as a land use planning tool. Even though the ruling limits the scope of this market by prohibiting the banking of left-over emission "credit" once an offset arrangement has been executed, it represents one of the first instances in which the notion of using the private market mechanism to encourage emission reduction beyond the applicable requirements has surfaced in the Clean Air Act's regulatory scheme.

The new market mechanism raises equitable questions, however. It clearly favors owners of existing plants, especially old, heavily-polluting facilities. By retiring such a plant and "selling" the large emission reduction which results, the owner may be able to reap windfall profits, a resultthat is not necessarily desirable.

Prognosis

The interpretive ruling represents but a preliminary attempt to reconcile the pressure for further industrial growth in currently polluted areas with the statutory imperative of protecting the public health by attaining the national ambient air quality standards in those [7 ELR 10031] areas. If § 119 of last year's conference version of the Clean Air Act amendments still represents Congress' position on the issue of new sources in polluted areas, the only real point of disagreement between Congress and the interim EPA policy would seem to be the permissible scope of the offset mechanism. In this connection, it is worth noting that the transition staff paper¹⁰ on EPA gave the agency's interim policy on expansion in nonattainment areas a generally favorable rating. The paper discussed several possible implementation problems and long range consequences, but emphasized that offsets would be available only at the discretion of the state or local reviewing authority. A flat prohibition on construction of new sources in nonattainment areas may be contrary to the overall national interest, the paper suggested, and some provision for allowing new construction or expansion without regard to emission offsets when overriding social or economic needs so dictate may even be desirable.¹¹

On balance then, EPA's interpretive ruling on allowing new sources in nonattainment areas may be viewed as an administrative effort to initiate and impart direction to a policy that is destined to be made in the legislative arena. The shape of any future revisions of the ruling and the position EPA espouses during legislative consideration of the issue will furnish an early opportunity to evaluate the Carter Administration's performance in the area of environmental policy.

1. 41 Fed. Reg. 55524 (Dec. 21, 1976).

2. A major source is currently defined as one having an allowable emission rate of 100 or more tons per year (1000 tons for carbon monoxide). EPA is considering reducing the figures to 50 and 500, however. 41 Fed. Reg. 55559 (Dec. 21, 1976).

3. 40 C.F.R. § 51.18.

4. In this connection, see Guilbert, Up in Smoke: EPA's Significant Deterioration Regulations Deteriorate Significantly, 4 ELR 50033 (1974).

5. Union Electric Co. v. EPA, 96 S. Ct. 2518, 6 ELR 20570 (1976); Train v. NRDC, 421 U.S. 60, 5 ELR 20264 (1975); Sierra Club v. EPA, 540 F.2d 1114, 6 ELR 20669 (D.C. Cir. Aug. 2, 1976); Sierra Club v. Ruckelshaus, 344 F. Supp. 253, 2 ELR 20262 (D.D.C. 1972), aff'd per curiam, 2 ELR 20656 (D.C. Cir. 1972), aff'd by an evenly divided court sub nom. Fri v. Sierra Club, 412 U.S. 541, 3 ELR 20684 (1973).

6. S.3219, 94th Cong., 2d Sess. (1976). The text of the conference report appears at 122 Cong. Rec. H11959 (daily ed. Sept. 30, 1976).

7. 42 U.S.C. § 1857c-5(a)(2)(D) and (a)(4), ELR 41204.

8. 421 U.S. 60, 5 ELR 20264 (1975).

9. 41 Fed. Reg. 55525 (Dec. 21, 1976).

10. The paper is printed at 7 BNA Envir. Rep.-Current Dev. 1288 (Jan. 7, 1977).

11. Id. at 1292.