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06.05.2019 Virginia CO2 Rule Approved, But Cannot Be Implemented By: John M. Holloway, III (Jay)

At its April meeting, the Virginia Air Pollution Control Board (the “Board”) approved a final CO2 Cap and Trade Rule, (9 VAC 5-140-6045), (the “Rule”) to limit CO2 emissions from the power sector by a vote of 5-2.  This outcome was expected. However, just prior to the Board’s action, language was inserted by the Virginia General Assembly into the 2018-2020 biennial budget bill prohibiting Virginia’s membership or participation in the Regional Greenhouse Gas Initiative (“RGGI”) until the General Assembly decides otherwise.  (RGGI is a cooperative cap and trade program among nine northeastern states to reduce CO2 emissions from the power sector.)  Considering the Rule requires participation in RGGI, the prohibition effectively halts implementation of the Rule.  The Governor signed the budget bill despite pressure from environmental groups to veto it, thus making the implementation restriction the law for the moment.  This restriction can be changed in a future budget or through legislation.

The language in the budget bill restricting implementation is as follows:

LIMITATIONS ON USE OF STATE FUNDING

“a. Notwithstanding any other provision of the Code of Virginia, no expenditures from the general, special, or other nongeneral fund sources from any appropriation by the General Assembly shall be used to support membership or participation in the Regional Greenhouse Gas Initiative (RGGI) until such time as the General Assembly has approved such membership as evidenced by language authorizing such action in the Appropriation Act, with the exception of any expenditures required pursuant to any contract signed prior to the passage of this act by the General Assembly, nor shall any RGGI auction proceeds be used to supplement any appropriation in this act without express General Assembly approval."

DEQ cannot pick up a pen to implement the Rule without that action being considered an illegal expenditure.  While in Virginia the Governor has a line item veto, the prevailing legal position is that the Governor cannot use a line item veto to strike a substantive restriction.  The Governor decided not to challenge this legal restriction.  Nevertheless, he did direct DEQ to “identify ways to implement the regulation and achieve our pollution reduction goals.”

The final rule adopts the text of the proposed rule, except that DEQ made a revision and an addition to it.  No prior notice was provided for the changes, and DEQ presented them to the public for the first time at the meeting.  In fact, no writing addressing them was prepared.  The first time the public saw them was in the PowerPoint presentation made to the Board at the meeting by DEQ.  This action arguably violates the Administrative Process Act (APA), with some contending this means the Rule should be rescinded and re-proposed by the Board.

The revision made by the Board to the Rule addresses and simplifies the allowance allocation methodology for 2031 forward.  In response to comments by RGGI that post-2030 caps should be determined by a consensus of the RGGI states, the language now provides that “[f]or 2031 and each succeeding calendar year, the Virginia CO2 Budget Trading Program base budget is 19.60 million tons unless modified, as the result of a program review and future regulatory action.”    

The Board added a new section to the Rule to address future actions to be taken under the Rule if and when the General Assembly’s restriction is lifted.  Here are the three concerns about future implementation addressed by the new section:

  • If the allocation of conditional allowances is not complete before January 1, 2020, the program will be considered to be operating and effective as of the calendar year following the date the conditional allowances are allocated.
  • Permitting and compliance dates, including the due date for a permit, shall be adjusted to be in force 6 months after the date DEQ allocates the conditional allowances.
  • Any excess emissions tonnage identified by the new program implementation date may be addressed through program review and regulatory action as necessary to ensure compliance with the final compliance date.  DEQ will notify the Board and each affected CO2 budget source accordingly.
     

The Board added this section to make the Rule effective as quickly as possible after the budget language restriction is resolved.

The final Rule contains two wins for industry: (i) biomass is excluded from the final rule, and (ii) the rule clarifies that the industrial exemption applies on a unit basis, not a facility basis.  On the other hand, the final Rule still applies to fossil fuel-fired electric generating units at new industrial sources, meaning industrial sources constructed on or after January 1, 2019, none of whom will receive allowance allocations.

Potential Appeal

The final Rule was published in the Virginia Register on May 27, 2019.  If the Rule is appealed, a notice of appeal must be filed with DEQ Director Paylor within 30 days after its publication.  No later than 30 days after filing the notice of appeal, a petition for appeal must be filed in the Circuit Court of the City of Richmond.  The petition for appeal must state why the petitioner believes the regulation is unlawful and must conclude with a specific statement of the relief requested. 

Here are some of the potential arguments that could be made in an appeal:

  1. The Board approved the Rule with a revision and addition for which public notice was given only at the meeting via a PowerPoint presentation.  The argument here would be that this violated the Administrative Process Act.
  2. The Board arbitrarily included new industrial sources in the Rule without allowances.
  3. The Board should have deferred to the cost impact analysis of the State Corporation Commission (“SCC”), because the SCC has the exclusive Virginia constitutional authority to analyze utility costs and set rates.  DEQ acknowledged this fact multiple times in its responses to comments.
  4. DEQ acknowledged that much of the substance of how the program will be implemented is not in the Rule.  It says it intends to cure this with instructions to be issued to those parties subject to the Rule.  At a minimum, these details should be handled through guidance, not instructions.  Guidance is recognized as much more substantive and must go through notice and comment rulemaking.  Instructions do not.
  5. The Rule should be withdrawn and re-proposed with adequate notice and comment to incorporate the correct cost impacts and details of how the Rule will be implemented.
  6. Neither the Board nor DEQ has been granted authority by the Virginia General Assembly to regulate CO2. 
     

Regulation for Emissions Trading Programs, 35 Va. Reg. 2332 (May 27, 2019); HB1700 (conference report) (2019 Session).