Claudia O’Brien is a partner in Latham & Watkins’ Washington, D.C. office and a global Co-chair of the Air Quality & Climate Change Practice. In this interview, she talks about how the US Environmental Protection Agency (EPA) is expected to act and how the new national ambient air quality standards may impact the manufacturing industry across the United States.
What is the new implementation date for the fine particulate matter standard?
O’Brien: EPA set the new fine particulate matter standard on December 14, 2012, and it has set a deadline for implementation by 2020. EPA’s projections show that by 2020 the entire country, with the exception of seven counties in Southern California, will meet this new fine particulate matter standard without the addition of any new controls. If the implementation deadline was earlier than 2020, several counties and states in the US would need to impose additional measures to get to attainment.
Do you think EPA will lower the new ozone standard?
O’Brien: EPA is expected to propose the new ozone standard by the end of 2013 and to finalize it sometime in 2014. Betting people would suspect that EPA will reduce the standards. It’s currently set at 75 parts per billion and EPA is looking at changing it to 70, 65 or 60 parts per billion.
What is the lowest level EPA can reduce the ozone standard to?
O’Brien: The lowest level that EPA is looking at today is 60 parts per billion. That’s essentially background levels because you do get naturally occurring ozone from a combination of volatile organic compounds and nitrogen oxides.
If EPA lowers the ozone standard to 60 parts per billion, who will be affected?
O’Brien: If EPA sets the standard at 60 parts per billion, virtually the entire country will be in non-attainment with that standard. The only exceptions would be North Dakota, South Dakota, portions of Minnesota and Montana, and the very northern part of Maine. That means that the entire rest of the country will have to take emission reduction steps to try and meet the new standard.
The net effect would be the air regulatory regime that we see in the South Coast of California or in Houston translating across to the rest of the country. For those who are trying to operate any kind of manufacturing or commercial establishment in those areas — they know that these air quality requirements standards are very onerous.
What controls have been implemented in the South Coast of California to get attainment?
O’Brien: They have imposed NOx controls on boilers, gas turbines and internal combustion units, and those reductions can cost as much as US$20,000 a ton. And they require things like thermal oxidizers, vapor suppressants, near-zero or zero VOC coatings, and controls on storage tanks and transfer lines — an average cost of US$20,000 to US$25,000 a ton is not unusual. And marginal costs for facilities or operations that are more expensive to control can be much, much higher. So you can really be looking at costs of US$20,000 to US$100,000 per ton of emission reduced.
What are offsets and why are they important?
O’Brien: Non-attainment areas are not ever allowed to increase emissions. So if you are in a non-attainment area and you want to do anything that will create emissions, like add a new line to your manufacturing operation or build a new gas-fired power plant, your only option is to calculate the maximum emissions of what you want to build and find equivalent emission reductions somewhere else. Perhaps from someone shutting down a plant or paying to install extra pollution control equipment — either at your facility or at someone else’s.
What we’ve seen in Houston, for example, is that VOC offsets are running US$200,000 to USD$300,000 per ton if you can even find them. Typically you can’t find them; they are not out there on the market. You have to find someone who has an existing plant, offer to install controls on their plant that are beyond what would otherwise be required by law — and then you can use those credits to do what needs to be done at your plant. NOx credits are a little more available in Houston because they have a trading program for NOx. But they are running about US$100,000 a ton.
This makes it quite difficult to make modifications at a plant, expand a plant, or site something new in that non-attainment area. So if the entire country becomes non-attainment, it will create a very difficult situation for manufacturing.
Will there be increased industry-specific regulation as a result of the new ozone standard? What industries will be targeted?
O’Brien: There absolutely will be increased industry-specific regulation. EPA — and state and local governments — will look at each type of industry individually and what types of controls might be used there. For example, in the aerospace industry, the South Coast Air Quality Management District of California prohibited the application of certain VOC-containing materials and they have very specific limitations, like general primers can’t exceed 350 grams per liter VOCs.
These industry-specific requirements can impose significant difficulties — for example, if the mandated control is particularly expensive for an individual facility or if site-specific considerations make it infeasible, or if a lower-VOC product doesn’t perform as well. In those circumstances, you may see facilities shutting down. With the aerospace industry in the South Coast, many operations simply moved elsewhere in the country. But if the entire country is in non-attainment, then where do the companies go?
Almost every industry will be targeted, including manufacturers of automobiles, oil and gas, power plants, industrial boilers, chemicals, pesticides, any kind of wood products such as pulp and paper, and semiconductors.
What can companies do to mitigate the cost when faced with a non-attainment area?
O’Brien: One of the first things to think about is engage early; this is perhaps the number one message. You want to think proactively about how your industry might be targeted and come up with strategies that give your company the operational flexibility it needs. So you can look at regional emissions or local emissions trading programs for the non-attainment area; and you can look at getting variances for the standards where appropriate.
You also can look at plant-wide applicability limits, which would essentially be a plant-wide bubble. They are time consuming to negotiate but they can be very important — especially for industries like semiconductors, where there can be a lot of operational changes. A bubble lets you do a lot of operational changes so long as you keep your emissions below a certain cap. If a company had to get a permit change every time any kind of shift in machinery occurs — that could be devastating for industries that need to be quick to market.
You can do alternative compliance plans, think about equivalent ways to get the emissions reductions — get the flexibility written into the regulations. You can do safety valve approaches where you help the state design a system that basically says if the cost reaches a certain level per ton, the source can simply pay into a fund and the state uses the fund to pay for innovative emission reduction projects. There are a number of approaches that can make compliance with these standards more manageable for the manufacturing sector — but companies that don’t engage early on in the process may find themselves out of luck.