Publication

July 5, 2007Client Alert

EPA Revises Air Rules to Encourage Construction of Ethanol Plants: “Major Source” Threshold Raised from 100 to 250 Tons Per Year in Attainment Areas

Effective July 2, 2007, the United States Environmental Protection Agency (EPA) has raised the threshold at which an ethanol plant will be considered a “major” source in an attainment area from 100 tons per year to 250 tons per year. 72 Fed. Reg. 24060 (May 1, 2007).

Seeking ways to encourage growth of the ethanol industry in the context of the national goal of energy independence, EPA acted to coordinate and revise key definitions in two Clean Air Act (CAA) permitting programs – the major New Source Review (NSR) program and the Title V program. The revised rules exclude ethanol manufacturing facilities that produce ethanol by natural fermentation processes from the definition of “chemical processing plants” and thus from the controlling definitions of “major” sources. The exclusion applies to all such facilities regardless of whether the ethanol is produced for human consumption, fuel or for an industrial purpose. EPA also addressed when fugitive emissions must be considered in determining if the facility is major under the revised definitions.

Major NSR Program

EPA’s major NSR program requires preconstruction review and permitting for construction or modification of major sources. It consists of two component programs: the Prevention of Significant Deterioration (PSD) program and the major nonattainment NSR program. See 40 CFR Parts 51 and 52.

The PSD program applies in areas that are in attainment with the health-based National Ambient Air Quality Standards (NAAQS) or for which there is insufficient information available to determine if they are in attainment (referred to as unclassified areas). For PSD purposes, the key term is “major emitting facility.” The definition includes a list of specific source categories. If the individual facility falls into one of those source categories and has the potential to emit 100 tons per year (tpy) of any pollutant for which the local area is in attainment with the NAAQS, that source is considered “major.” All other sources not listed are defined as major at a 250 tpy threshold.

The major nonattainment NSR program applies in those areas that are not in attainment with NAAQS. For nonattainment NSR purposes, the key term is “major stationary source.” The definition does not distinguish based on source categories, but defines a facility as “major” at either the 100 tpy threshold or a lower threshold depending on the nature and severity of the problems causing the nonattainment with NAAQS.

Title V Program

Title V of the CAA directs EPA to implement a permit program for the operation of major sources of air pollution. In essence, Title V operating permits become the required regulatory instrument after the preconstruction review and construction permits issued under the major NSR program have served their purpose and expired. The key term is “major source.” Any source that is major for either PSD or major nonattainment NSR purposes, is considered a “major source” for Title V purposes. See 40 C.F.R. Parts 70 and 71.

Rule Revisions

The rule revisions themselves are relatively simple and straightforward. EPA accomplished its goal of raising the threshold in the PSD program by revising the definition of the term “chemical process plants” to exclude ethanol production facilities that produce ethanol by natural fermentation. Given the role of that term in the various definitions of “major emitting facility”, “major stationary source”, and “major source” in the affected programs, this revision results in a change in the threshold from 100 tpy to 250 tpy in attainment areas. See 72 Fed. Reg. at 24077-78 (amending 40 C.F.R. Parts 51.165, 51.166, Appendix S to Part 51, 52.21, 70.2, 71.2).

(EPA noted that many federal agencies are now using North American Industrial Classification System (NAICS) codes in place of Standard Industrial Classification (SIC) codes. As the NAICS codes give particular attention to emerging industries like ethanol production and group similar production processes together, EPA considers them better suited for use in these definitions, and has defined the ethanol production facilities that produce ethanol by natural fermentation as those falling under NAICS codes 325193 and 312140. See 72 Fed. Reg. at 24061-62.)

Companion revisions were made in the PSD, nonattainment NSR and Title V definitions to address when fugitive emissions must be considered in calculating whether a facility is major. In attainment areas, existing facilities holding a PSD permit must continue to include fugitive emissions because their current permit terms are enforceable; new facilities will not need to include fugitive emissions in calculating emissions for purposes of the 250 tpy threshold. In nonattainment areas, existing facilities holding a nonattainment NSR permit must continue to include fugitive emissions in their calculations because their current permit terms are enforceable; however, new facilities will not need to include fugitive emissions in calculating emissions for purposes of the 100 tpy threshold.

EPA’s Policy Rationale for the Revised Rules

In its initial rule proposal, EPA identified two primary policy concerns and solicited comment on both. First, was the fact that the regulations in place treated ethanol produced for fuel and ethanol produced for food differently. Second, was the concern that defining the facilities as major at the lower 100 tpy threshold would create an impediment to growth of the industry.

Following review of the submitted comments, EPA determined that both of these policy concerns merited recognition in the revised rules. Since the ethanol production process is nearly identical whether the ultimate use will be for food or fuel, EPA found the disparate treatment unjustified.

EPA noted the Energy Policy Act of 2005 established a renewable fuel standard that will require increased use of renewable fuels in the US and stated “[i]t is clear that continued growth of the ethanol industry will play a vital role in achieving our nation’s energy and environmental objectives.” 72 Fed. Reg. at 24062. Comparing the benefits of the higher to the lower threshold, and the likelihood that the lower threshold would discourage development of larger capacity facilities, EPA reasoned that a

larger, more economically efficient plant that is able to produce more ethanol fuel could result in significantly more fuel production without a corresponding increase in energy use or pollutant emissions, thereby resulting in a net reduction of environmental impacts as compared to the greater number of smaller, less efficient ethanol fuel production facilities that would be needed to achieve the same level of production. Given the likelihood of larger capacity facilities being better able to reduce emissions per gallon of ethanol produced than a greater number of smaller facilities, it is more logical to increase the capacity at a larger facility than locating additional smaller capacity facilities in an area. Similarly, it is more logical to allow the construction of larger capacity facilities in an area than locating numerous smaller capacity facilities in an area.

Id. at 24072. EPA concluded that as a matter of policy the national goal outweighs the need to require ethanol production facilities to complete the PSD preconstruction review and permit process at the lower 100 tpy threshold in attainment areas in light of the limited potential environmental consequences resulting from raising the threshold to 250 tpy.

Also based on the comments received, EPA concluded that all facilities that produce ethanol using a natural fermentation process should be covered by the rule revisions, regardless of the type of feedstock utilized. As a result, the same rules apply whether corn, sugar beets, sugar cane, cellulosic biomass or any other feedstock is used in the natural fermentation process.

Enforcement Implications

Commenters on the EPA rule proposal raised concerns that changing the PSD major threshold on a go-forward basis would jeopardize prior consent decrees and settlement agreements EPA and states entered into with ethanol facilities based on the lower 100 tpy threshold. One commenter specifically referenced the actions initiated by EPA and the State of Minnesota against all 12 ethanol plants in Minnesota, and the companion case against the Wisconsin-based Ace Ethanol. Id. at 24069. Other commenters expressed concern that the change in threshold would result in the lack of a level playing field.

EPA dismissed those concerns, stating “[t]his rule should have no effect on the existing consent decrees and the obligations of the sources to implement the consent decrees. The consent decrees are binding legal documents. . . . Our rationale for this final rule is explained in detail elsewhere in the preamble to the final rule. That we took actions to enforce the requirements in place before this rule does not undermine the basis for this rule. . . . We believe that raising the threshold from 100 tpy to 250 tpy in attainment areas will likely encourage facility expansions and construction of larger, more economically efficient plants, which in turn, will emit less emissions per gallon of ethanol produced. The 100 tpy threshold on the other hand encourages the construction of more numerous, less economically efficient smaller facilities. In addition, as noted . . . , the environmental and health impacts of this rule are limited.” Id. at 24070.

Next Steps

Notwithstanding EPA’s conclusion that these rule revisions support the national energy-independence goal, and will result in limited environmental and health impacts, ethanol production has its environmental supporters and its environmental detractors. The Natural Resources Defense Council, Sierra Club, and the Environmental Integrity Project have scored two recent victories in challenges to EPA rules in the DC Circuit – resulting in decisions to vacate the National Emissions Standards for Hazardous Pollutants (NESHAP) Maximum Achievable Control Technology (MACT) rules for commercial and industrial boilers and solid waste incinerators, and the NESHAP MACT rules for the plywood and composite wood products industries. See, Michael Best Client Alert, "DC Circuit Hands EPA and Industry Two Defeats: Court Rejects EPA MACT Air Rules for Commercial and Industrial Boilers and Plywood and Composite Wood Products," July 2007. As these rule revisions go into effect, we watch to see whether they will be challenged on any of the several grounds raised by commenters who objected to EPA’s intended exercise of discretion, the changes in definition and resulting increase in the threshold for major sources in attainment areas.

For more information, please contact Linda H. Bochert at 608.283.2271, or lhbochert@michaelbest.com.

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