Carbon issues will increasingly impact various segments of the real estate industry in unexpected ways. Executives need to be mindful of these issues as they unfold. The impact of carbon regulation on biomass boilers is an example.
Increasingly, CFOs and facility managers are adopting the cost-cutting strategy of exploring fuel sources other than electricity and diesel fuel to run the boilers in their facilities. In particular, facilities in rural areas are increasingly relying on biomass boilers, where woody energy sources are plentiful and relatively inexpensive.
The EPA has recently released its plans to regulate carbon emissions from biomass boilers subject to its Tailoring rule and MACT rule. The strictness of the MACT rule in particular is a relatively unexpected development that will potentially have a negative impact on firms who have taken action to proactively embrace clean energy strategies (and will, by extension, benefit firms that have not yet taken proactive action).
The following summary is intended to explain the recent history of EPA involvement in biomass regulatory issues, and discuss the likely next steps in the EPA regulatory process as it impacts firms with biomass interests.
Background
The United States Clean Air Act is a Federal law designed to control air pollution on a national level. It requires the Environmental Protection Agency (EPA) to develop and enforce regulations to protect the general public from exposure to airborne contaminants that are known to be hazardous to human health. 42 U.S.C. § 7401.
The EPA historically has not regulated emissions of carbon dioxide and other greenhouse gasses.
In 2003, twelve states and others brought suit to force the EPA to regulate greenhouse gas emissions from vehicles. Ten states, the EPA, and others opposed the petition. The Supreme Court in Massachusetts v. Environmental Protection Agency, 549 U.S. 497 (2007), determined that the EPA must reconsider its decision to not regulate greenhouse gas emissions from vehicles.
In 2009, the EPA issued a “proposed endangerment finding” and a related proposed “cause or contribute finding”. The findings determined that vehicle emissions of carbon dioxide and five other gasses threaten the public health and welfare. After extensive public comment, a final rule codifying these findings became effective in January 2010.
These findings set the stage for future regulation of greenhouse gas emissions from all sources - including vehicles, boilers, industry, etc - in accordance with the EPA’s duty under the Clean Air Act as announced by the Supreme Court.
As a result, the EPA has subsequently taken steps to regulate greenhouse gas emissions from a variety of sources, including biomass boilers.
The first step is through the Tailoring rule, which is now a final rule. The second is through three Emissions Standards for Boilers and Process Heaters and Commercial/Industrial Solid Waste Incinerators rules - one of which, the MACT rule, is directly relevant to biomass boilers. That rule was pending comment through August 23, 2010 and comments are now under consideration by the EPA.
Tailoring Rule
The EPA regulates air emissions under the Clean Air Act. According to a recent analysis in the New York times, which is reprinted verbatim in part here, under the Clean Air Act's New Source Review program, if a new facility is built or an existing plant is upgraded, and if the plant is expected to emit a certain amount of pollutants—usually 100 to 250 tons per year is the threshold—then the facility must apply for a permit from a state agency and demonstrate that it is using the "best available control technology" to restrict that pollution.
The low 100-250 ton threshold was designed for emissions like lead and sulfur dioxide, since 100 tons per year is an enormous amount of lead, and it ensures that only the very largest polluters are regulated. But 100 tons per year is a very low threshold for carbon-dioxide. If the EPA used this existing emissions baseline to regulate greenhouse gases, about six million different small boiler facilities would potentially have to apply for permits. To avoid that scenario, the EPA has enacted the Tailoring Rule.
Under the Tailoring Rule, the only entities that will be regulated under the New Source Review Program will be polluters who already have to apply for permits for other pollutants (like lead and sulfur-dioxide) and who emit more than 75,000 tons of greenhouse gases per year. That standard will apply to only about 550 big polluters in the entire country. After that, for the next two years, any new power plant expected to emit more than 100,000 tons of greenhouse gases per year will be covered.
As a result, new biomass boilers will have to comply with the Clean Air Act’s New Source Review program only if they emit more than 100,000 tons of greenhouse gasses per year, which generally only captures large, utility scale facilities.
However, the thresholds for this rule will likely be adjusted in future years in accordance with various policy goals that are yet to be developed. Most likely the threshold will gradually be adjusted downward over time, and will increasingly capture large commercial facilities.
National Boiler Maximum Achievable Control Technology (MACT) Rule
In June 2010 the EPA published three proposed rules regulating emissions of toxic air pollutants at 1) area source boilers 2) major source boilers and 3) solid waste incinerators.
The MACT rule (docket #EPA-HQ-OAR-2006-0790) concerning area source boilers is relevant to commercial facility biomass projects. It applies to boilers at facilities that emit or have the potential to emit less than 10 tons per year (TPY) of any single air toxic or less than 25 TPY of any combination of air toxics.
The Biomass Thermal Energy Council (BTEC) has prepared a report on the severe impacts this rule would have on the ability to cost-effectively install and operate small biomass boilers. The following assessment is contained in comments prepared by the BTEC and submitted to the EPA in opposition to the rule as written.
Under the proposed rule, new and existing biomass boilers at area source facilities would be required to meet new emission limits for carbon monoxide (CO) and particulate matter (PM) as indicated in the chart at the top of this post. The proposal is extremely strict.
Substantial practical problems identified by BTEC that will result from implementation of this proposed rule include:
• Potentially Unachievable and Unrealistic Standards
EPA’s proposed emissions limits rely on a data set that is not representative of real-world technologies. Biomass boilers that achieve EPA’s particulate matter (PM) standard are not the same boilers that achieve its carbon monoxide (CO) standard. Using EPA’s own data set, it is obvious that there is no biomass boiler tested that can achieve both the proposed levels for PM and CO. Requiring new biomass boilers to meet standards that no single biomass boiler has ever achieved in testing is unreasonable.
• High Compliance Costs and Economic Consequences
Under EPA’s new annual emissions testing requirement, testing expenses would add an estimated $8,000- $15,000 per boiler system. That added cost likely surpasses the biomass fuel bill for smaller systems and is a major budget consideration for larger biomass boiler systems. Also, proposed compliance technology requirements could cost more than the biomass systems themselves. Such costs negate the monetary and environmental advantages of using renewable, local biomass fuel, thus encouraging continued fossil fuel use and discouraging investment.
EPA’s emissions limits will drive up costs, reduce biomass boiler use and fuel demand, and result in potentially widespread economic losses in industries that rely upon this low cost fuel, such as the wood products manufacturing, forestry, and agriculture sectors.
BTEC recommendations for improvement to the rule include performance requirements that are more representative of real-world technologies and practical realities:
• Initial minimum performance standards of (CO) – 1,164ppm (@ 7% O2) and (PM) - 0.23 lbs/mmBtu for all boilers, with reductions thereafter based on data collected during the first two years of the Rule’s implementation;
• Initial third party boiler certification test with required annual tune-ups without ongoing costly stack testing. Once a boiler (or range of boilers) is tested, that boiler would be approved for installation until a change was made in the boiler design.
Numerous trade associations, business interests, and others have formally opposed the proposed rule as written, for many of the reasons listed above.
A final rule is expected to be adopted by December 16, 2010.
Compliance Timeline
Once the final rule is published (presumably at 40 CFR § 63.11193 of subpart JJJJJJ - National Emission Standards for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers Area Sources - for area source boilers) existing affected boilers must achieve compliance no later than 3 years after publication of the final rule. New affected boilers that start up on or before the publication of the final rule must achieve compliance no later than the date of publication of the final rule. New affected boilers that start up after publication of the final rule must achieve compliance upon startup.
Next Steps
The MACT rule as written will impose significant unplanned costs on biomass boilers that are installed or under development, or to be installed in the future.
A wide range of biomass industry trade groups, businesses, and politicians have submitted comments to the EPA that the proposed rule is unworkable, and that it needs to be adjusted to avoid imposing excessive and unreasonable compliance costs on biomass boiler projects.
Potential passage of this rule is important to be mindful of as projects are pre-developed and pro-forma assumptions are made.
From a strategy perspective, for any firm with an interest in biomass boilers potentially covered by the EPA’s rulemaking, an in-depth conversation with internal and external groups can and should take place now to develop a range of options for the worst, medium, and best case EPA scenarios.
