December 11, 2018

Trimming the Old Red Tape that Hinders New Source Review

Dan Byers

Earlier this week, the Environmental Protection Agency (EPA) celebrated the one-year anniversary of an obscure guidance memorandum that surely deserves recognition as amongst the most arcane policy documents to garner a birthday commemoration. Titled “Enforceability and Use of the Actual-to-Projected-Actual Applicability Test in Determining Major Modification Applicability under the New Source Review program,” the memo marked the first step in a series of recent administrative reforms that restore common-sense to the much-maligned permitting program known as New Source Review (NSR). You can be forgiven if you neglected to note this anniversary on your calendar, but EPA was right to call attention to the measures, which begin to remove fundamental roadblocks to America’s manufacturing and industrial competitiveness.

Established by Congress in 1977, the NSR program was intended to provide an important backstop to environmental protections by requiring that new facilities or major modifications to existing facilities do not significantly deteriorate air quality or cause the exceedance of ambient air quality standards. NSR creates a “pre-construction” permitting regime that applies to new construction and “major modifications” of nearly every major type of industrial facility—power plants, refineries, cement, glass, steel, paper and others.  In essence, NSR ensures facility owners continue to be good stewards of the environment as they grow and/or improve their business.

This principle is paramount, of course, but the problem is that the well-intended NSR “shield” to protect the environment has evolved into a “sword” that discourages investment in existing facilities. The reasons for this are numerous and complex, but follow a typical pattern.  A business is presented with a need or opportunity to make facility upgrades or replace faulty equipment with improved technology that enhances operations and often even reduces emissions rates. However, if the opportunity triggers NSR permitting, a lengthy and exhaustive review process ensues (obtaining a permit can take 18-months to 2-years when things go smoothly), this regulatory process may force a plant to retrofit with expensive additional controls that dwarf the cost of the original project, ultimately discouraging the investment. 

In some instances, NSR can even pose existential issues for a facility—and those that it employs—such as when necessary maintenance and equipment replacement trigger a permit review forcing an “upgrade-or-close” decision. Because equipment upgrades and other facility modernization efforts falling under NSR typically improve efficiency, reliability, and safety, these disincentives often result in perverse economic and environmental outcomes.

This phenomenon is nearly as old as the program itself. As a 2002 Resources for the Future white paper, New Source Review Under the Clean Air Act: Ripe for Reform explained:

The lawyers and engineers who wrote the act thought they could secure greater environmental progress by imposing tougher emissions standards on new power plants (and certain other emissions sources) than on old ones. The theory was that emissions would fall as old plants were retired and replaced by retrofitting control equipment. But experience over the past 25 years has shown that this approach is both excessively costly and environmentally counterproductive. The reason for this is that companies are motivated to keep old (and dirty) plants operating and to hold back on investments in new (and cleaner) power generation technologies. 

Sixteen years later, this paradox still plagues NSR, and the regulatory uncertainties imposed by the program have arguably worsened. Stakeholders at a congressional hearing earlier this year detailed the implications. Testimony from the Pennsylvania Chamber of Business and Industry explained how NSR drove a business to cancel a planned fuel switch to a cleaner burning fuel at their manufacturing facility because emissions methodologies required by EPA resulted in a projected increase in emissions rates, when in fact an emissions decrease would have occurred if the fuel switch had been permitted. Another witness told of a paper mill that sought to replace its existing paper machines with a new, more efficient machine, but was unable to credit the emissions reductions from the retirement of the older machines into a key NSR test related to the approval of the new one.

These examples defy common sense, and result in delays and missed opportunities to transition to cleaner, high-efficiency manufacturing processes. Perhaps most frustrating for facility owners is the excessive uncertainty associated with the permitting process. Even when companies are fully confident that a project makes business sense and will reduce emission rates, the uncertain cost and time necessary to navigate and successfully complete NSR permitting is a major impediment. Moreover, even when permits are unnecessary, the threat of activist lawsuits based on little more than disputed projections related to markets or operations can impose a risk premium that renders many projects untenable.

If the NSR program was ripe for reform back in 2002, it is rotten for reform now. Fortunately, EPA is slowly but surely tackling these shortcomings. The December 2017 guidance aimed to correct unrealistic assumptions regarding project emissions, and the series of subsequent administrative reforms have simplified emissions accounting and clarified critical terms of art such as “once-in, always-in,” “project netting,” “adjacency criteria,” and “common control.” Meanwhile, EPA’s Affordable Clean Energy (ACE) rule for power plants incorporates NSR reforms as a central feature, and additional actions (in the form of guidance as well as a formal rulemaking) are expected early in 2019.

Importantly, the NSR changes underway at EPA will not undermine compliance with air quality standards. As the program intends, and as the Clean Air Act requires, projects that will actually result in significant emissions increases will undergo intense permitting review to assure they won’t contribute to air quality violations. Those protections are layered throughout multiple CAA programs, and bedrock to its implementation. But these NSR improvements do mean that capital investment in new facilities or plant upgrades will no longer be shelved out of the gate due to an impossibly difficult and risky permitting process. Moreover, they should significantly lessen the obstacles that have caused businesses to continue operating older, less efficient facilities instead of investing in pollution-reducing upgrades and expansions.

While the esoteric verbiage and highly technical subject matter of EPA’s NSR reforms may have contributed to their relatively subdued reception, collectively, they are poised to catalyze capital investments and operational improvements across a broad range of industrial sectors. Alongside tax reform, other regulatory and permitting reforms, and the competitive advantages of the energy revolution, the promise of a new and improved NSR process should be considered an essential ingredient to ensuring a bright future for American manufacturers, the workers they employ, and the environment that we all share.