Pa. EQB Petitioned to Implement Cap-and-Trade Regulation for Greenhouse Gases

PA Law Weekly

(by Jean M. Mosites and Varun Shekhar)

On Feb. 28, Clean Air Council and Widener Commonwealth Law School Environmental Law and Sustainability Center, among others, resubmitted a petition to the Pennsylvania Environmental Quality Board, asking it to promulgate a regulation that would create a multi-sector cap-and-trade system in Pennsylvania to reduce greenhouse gas (GHG) emissions to achieve carbon neutrality by 2052.

The Petition

The petition includes a fully drafted regulation that establishes a cap on all reported GHG emissions, based on a 2016 base year. The cap would decline by 3 percent each year.

The petitioners acknowledge: “The proposed regulation will have an impact on all sectors of Pennsylvania’s economy, although the impact will vary among businesses and individuals, with some benefiting and some suffering adverse impacts.”

Capping GHG emissions means that the covered entities meeting certain thresholds—including producers of cement, glass, steel, lead and paper, any facility producing or importing electricity, and fossil fuel producers—all must obtain allowances, by auction or allocation, for each metric ton of reportable GHG emissions per year attributable to their operations in Pennsylvania. According to the EPA’s envirofacts database, close to 400 facilities in Pennsylvania report GHG emissions to the EPA.

The petition proposes that emissions from covered sources would be capped, with the cap declining each year by an amount equal to 3 percent of 2016 emissions. If the regulation becomes effective for 2020, the cap would be equal to 91 percent of 2016 emissions. Limited by the ever-declining cap and availability of allowances, each covered entity must reduce its GHG emissions over time to achieve carbon neutrality by 2052. Allowances under the proposed trading system would be priced at a minimum of $10 each in 2020, with the price increasing by 10 percent plus the rate of inflation each year. Any person may buy allowances regardless of whether that person emits GHG or not. If a covered entity cannot obtain sufficient allowances by auction or allocation, it may participate in the trading system and purchase needed allowances if they are available. Allowances may be freely traded or banked for future use.

The proposed regulation would allow manufacturers of certain products (but not fossil fuel suppliers or electricity generation) facing international and interstate competition to apply for some allowances to be distributed to them without cost. This mechanism is intended to prevent “leakage,” which refers to the relocation of production or emissions of GHGs to another jurisdiction in which GHG emissions are not commoditized. The number of free allowances directly awarded to such entities would be based initially on the company’s 2018 GHG emissions and be reduced by 5percent each year after.

The petition envisions potential future linkage with other trading systems. The Regional Greenhouse Gas Initiative currently has nine state participants, all from the northeast. RGGI, however, is limited to regulating GHGs emitted from electricity generation units, as is a similar system proposed in Virginia. The petition is based largely on the California cap-and-trade regulation, which is a multi-sector regulator of GHG emissions in a trading program that includes Ontario and Quebec. The California regulation, however, does not require a reduction of all GHG emissions to zero.

The Environmental Rights Amendment and the Petition

The petitioners cite the Pennsylvania Air Pollution Control Act and Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA), as legal authority for their petition. The ERA states the “people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment.” The commonwealth must conserve and maintain public natural resources for the benefit of all the people. The Pennsylvania Supreme Court in PEDF v. Commonwealth, 161 A.3d 911, 933 (Pa. 2017), stated the commonwealth “must act affirmatively via legislative action to protect the environment.”

The petitioners assert the ERA requires the commonwealth to control GHG emissions. They contend that because “a stable climate” should be understood to be a public natural resource, the ERA affords a right to a “natural climate unaffected by climate disruption,” although this right is not expressly included in the Pennsylvania constitution. The petition bypasses legislative consideration of this issue by asking EQB as an administrative body to promulgate a climate change regulation.

Petitioners also contend the allowances to be sold by the Department of Environmental Protection “may be considered to be represent ecosystem services” to be sold, “similar to revenue from timber sales from sustainable management of state forest land.” Without selling these allowances, petitioners warn that the commonwealth “will be unable to address the structural budget deficit or restore the corpus of the trust” created by the ERA.

Climate Change Law

Currently in Pennsylvania, the only express legislative direction related to climate change and greenhouse gases is the Pennsylvania Climate Change Act, Act 70 of 2008. It provides for a report on potential climate change impacts, duties of the DEP, establishment of a Climate Change Advisory Committee, and a voluntary registry of greenhouse gas emissions. Neither the Air Pollution Control Act nor the Climate Change Act provides express authority to regulate GHG emissions or establish a cap and trade system.

This is the second climate change-related petition submitted to the EQB in recent years. The first was initially submitted in 2012 by a group of individuals including several minors alleging the commonwealth violated the ERA by not developing a plan to regulate GHGs to address climate change. The DEP determined that the petition did not meet requirements for submission to the EQB, and the EQB denied it. The Commonwealth Court denied the petitioners’ petition for review for failure to exhaust administrative remedies, as in Funk v. Wolf, 71 A.3d 1097 (Pa. Commw. 2013). The petitioners then resubmitted a petition in 2013 and filed a mandamus petition with the Commonwealth Court, alleging that by failing to develop a comprehensive plan to regulate GHG “in light of the present and projected deleterious effects of global climate change,” the respondents (which included the DEP, DCNR, and PennDOT) have not met their obligations under the ERA. The court dismissed the petition, concluding the petitioners lacked a clear right to relief for purposes of a mandamus action, see Funk v. Wolf, 144 A.3d 228 (Pa. Commw. 2016), aff’d 158 A.3d 642 (Pa. 2017). On the question of the scope of the ERA for GHG regulation, the court stated “the ERA does not authorize respondents to disturb the legislative scheme” established by the Air Pollution Control Act. Id. at 250.

Status and Next Steps

The petition was originally submitted on Nov. 28, 2018, and resubmitted after House Environmental Resources and Energy Committee Chairman Daryl Metcalfe raised concerns that the DEP did not follow applicable notification requirements under EQB’s rulemaking petition policy, see 25 Pa. Code Chapter 23 (Environmental Quality Board Policy for Processing Petitions—Statement of Policy). Under that policy, the DEP initially reviews a rulemaking petition to determine whether the petition contains the background and related information required under 25 Pa. Code Section 23.1, EQB may lawfully take the requested action, and the proposal would not conflict with federal law. In December 2018, the DEP informed the petitioners that the petition satisfied these requirements. Following resubmission of the petition on Feb. 28, the DEP informed the petitioners on March 1, that the petition would be reviewed to ensure it still meets the eligibility criteria of EQB’s policy.

If the DEP determines it meets the criteria, the petition may be presented to the EQB at its April 16 meeting. The petitioners may make a short oral presentation on why the EQB should accept the petition and the DEP will make a recommendation on whether EQB should accept it. If EQB accepts the petition, the department must prepare a report and recommendation within 60 days (or longer if the report cannot be completed within 60 days) on whether EQB should approve the action requested in the petition. EQB may deny a petition if it has previously considered the same issue for which there is no new or different information, if the request concerns a matter in litigation, or if the requested action is inappropriate for EQB rulemaking due to policy or regulatory considerations. If regulatory amendments are recommended, the DEP will prepare a proposed rulemaking for EQB consideration within six months after mailing its report to the petitioners.

Among other things, the petition raises the legal issue whether the ERA confers extra-statutory authority on EQB and the DEP to act through administrative rulemaking in the absence of a clear statutory directive. Further developments on the petition for GHG rulemaking are expected later in 2019.

Jean M. Mosites is a shareholder in the environmental, energy and natural resources, and public sector groups of the Pittsburgh law firm Babst Calland Clements & Zomnir. Her practice includes client counseling on environmental compliance in the energy sector, resolving liabilities under federal and state remediation programs, as well as administrative appeals and environmental litigation in state and federal courts. Contact her at jmosites@babstcalland.com.

Varun Shekhar is an associate in the environmental group of the firm. His practice encompasses a variety of environmental programs, with emphasis on federal, state and local regulatory matters arising under the Clean Air Act (CAA). Contact him at vshekhar@babstcalland.com.