Alert 08.10.20
Alert
Alert
By Michael S. McDonough, Mark E. Elliott, Rebecca M. Lee, Emily Huang
06.29.21
In a 9-4 vote on May 7, 2021, the Governing Board of the California South Coast Air Quality Management District (SCAQMD) approved Rule 2305 and its companion, Rule 316, which impose a first-of-its-kind “indirect source” rule that would collect revenue from distribution and fulfillment warehouses at least 100,000 square feet in size unless those facilities are able to earn “points” by attracting a sufficient number of zero-emission (ZE) and near-zero emission (NZE) trucks to their facilities, making substantial investments in new ZE and NZE on-site equipment and charging infrastructure, and/or installing solar panels. Rule 2305 (the Rule) aims to reduce nitrogen oxide (NOx) emissions and diesel particulate matter (DPM) in the South Coast Air Basin by up to 15 percent over the next three years. The companion Rule 316 requires warehouse owners and operators that fail to meet the minimum points criteria to pay “mitigation fees” that purport to reimburse SCAQMD for administrative costs associated with ensuring compliance with Rule 2305.
Rule 2305 is unique in that, unlike most other air regulations, it seeks to regulate facilities not based on emissions the facilities themselves emit or control but based on emissions from trucks and other vehicles that visit warehouses—vehicles that are not owned or controlled by the warehouses. Local California air districts like the SCAQMD are prohibited from regulating vehicle tailpipe emissions, but the Rule seeks to bypass this restriction by purporting to regulate fixed facilities (i.e., warehouses) rather than the vehicles themselves. Air districts may adopt such indirect source rules only under certain statutory conditions. To date, only one other California air district has imposed an indirect source rule, which underwent lengthy court challenges before its final implementation.
Rule 2305 is also unique because it creates the Warehouse Actions and Investments to Reduce Emissions (WAIRE) “points” program, whereby warehouses either show a certain number of ZE/NZE truck visits per year or else help to fund certain measures designed to reduce NOx, DPM and carbon emissions. These measures can include substantial investments to acquire new on-site equipment and/or build new charging infrastructure, or they can include funding for particulate filters or installing solar panels. In the absence of these direct investments, warehouses will be assessed a “mitigation fee” payable to the SCAQMD for funding other ZE/NZE programs.
I. Rule 2305’s Points-Based WAIRE Program
The Rule’s WAIRE points program would impose a new obligation on warehouses to earn a certain minimum number of “points” based on the number of truck trips to their facility in a given year. By awarding a certain number of points for certain actions, the program seeks to incentivize warehouses to fund NOx and DPM reductions in the South Coast Air Basin either by their direct investments in emissions reducing measures (such as purchasing ZE/NZE warehouse equipment, solar panels or charging infrastructure) or by paying a “mitigation fee” to fund the air district’s emissions-reducing measures. These actions can generate various amount of WAIRE points credited to the warehouse as part of its compliance with the Rule.
The WAIRE program provides a “menu” of implementation measures for impacted businesses to earn points, which must be earned in addition to compliance with existing federal and state warehousing regulations. These measures include the following:
Using the warehouse’s record of Weighted Annual Truck Trips (WATTs), SCAQMD will calculate the operator’s WAIRE Points Compliance Obligation (WPCO) score, or the total number of points the operator must accumulate to achieve compliance. Alternatively, warehouse operators may earn points by implementing a customized WAIRE plan. Businesses pursuing a custom plan must submit an application that includes, among other things, an explanation of how the proposed plan will earn points based on incremental costs of the plan and the resulting NOx and DPM emission reductions, relative to baseline conditions.
Businesses that fail to accumulate sufficient points by completing pre-approved activities, or through an SCAQMD-approved custom plan, are subject to mitigation fees. SCAQMD will calculate the fee based on whatever portion of the operator’s point obligation is not covered by WAIRE points from other NOx and DPM emissions reductions during a specific compliance period. All fees paid are then deposited into a fund for air quality improvements in surrounding areas.
Impacted owners and operators are required to submit an Annual WAIRE Report for the preceding year by January 31 of every year for which they have a compliance obligation. The first (Phase I) Annual Report must be submitted by January 31, 2023, for the compliance period of January 1, 2022 to December 31, 2022. Warehouse operators, in particular, must also submit an Initial Site Information Report by July 1st of the year in which they must submit their first Annual WAIRE Report for a specific warehouse facility.
II. Available Exemptions
The approved Rule contains three exemptions for warehouses that meet the following criteria:
III. Potential Legal Issues
Rule 2305 represents SCAQMD’s first regulatory foray into indirect source rulemaking—a potentially controversial approach to air regulation in which requirements are imposed on a source not because of emissions the facility itself generates, but because of emissions from vehicles that intermittently visit the site. Examples of indirect sources include shopping malls, parking lots and highways—areas where vehicular emissions occurbut are not responsible for operating vehicles or the level of emissions from their tailpipes.
In response to concerns that auto manufacturers were improperly being held responsible for motor vehicle emissions from facilities like parking lots, Congress amended the Clean Air Act to bar the United States Environmental Protection Agency (EPA) from regulating or requiring states to regulate indirect sources. See 42 U.S.C. § 7410(a)(5)(A)(i). The California Air Resources Board (CARB) adopted a similar bar prohibiting local air districts from adopting indirect source rules, except as otherwise enumerated in the Health & Safety Code. See Cal. Health & Safety Code § 40468.
California law allows SCAQMD to adopt indirect sources only under specific circumstances, i.e., either (1) “in those areas of the south coast district in which there are high-level, localized concentrations of pollutants” or (2) “with respect to any new source that will have a significant effect on air quality in the South Coast Air Basin.” Cal. Health & Safety Code § 40440(b)(3). Such indirect source rules must meet other statutory requirements, including narrowly tailoring the rule to only trips that would not occur but for the indirect source, properly accounting for feasibility and cost effectiveness, not duplicating other requirements applicable to the source or vehicles at issue, and not infringing on the rights of cities and counties to regulate land use. Id. § 40717.5.
Given the rigorous requirements for indirect source rulemaking in SCAQMD, and the EPA or CARB’s general disfavor for such rules, Rule 2305 potentially rests on shaky legal ground. The Rule unquestionably would apply beyond just “new” warehouse sources, and its applicability is not limited to South Coast areas with particularly high localized NOx or DPM concentrations. Moreover, as regulated stakeholders argued during the comment period, the Rule would neither force truck fleet owners or operators to upgrade their trucks, nor authorize warehouses to require transition of truck fleets to ZE/NZE technologies. Truck operators could bypass Rule 2305 entirely by simply conducting warehouse business outside SCAQMD’s jurisdiction, which could have the effect of actually increasing total vehicle miles and emissions from truck trips, thereby defeating the entire purpose of Rule 2305.
It is also uncertain whether courts will decide that Rule 2305’s “mitigation fee” amounts to a tax rather than a fee under California law. “Taxes” require a two-thirds vote of the California Legislature to be adopted; “fees” do not. Previous courts have found that charges that go beyond a specific defined benefit to the payor and are designed to fund a wider societal benefit can qualify as “taxes” subject to a legislative vote.
IV. Anticipated Impacts
If it survives potential legal challenges, Rule 2305 will heavily impact Southern California warehouses and other supply chain actors who might be required to undertake potentially costly changes to their operations to achieve compliance. These new regulatory burdens could increase the cost of transporting goods to and from Southern California warehouses, forcing warehouses to make costly investments in charging infrastructure for future NZE/ZE trucks that may never materialize. The Rule may also shift more warehousing businesses to less costly warehouses in neighboring Arizona and Nevada, which could have the perverse effect of increasing vehicle miles and truck emissions in California. Thus, the Rule may effectuate a two-fold penalty on California residents, who may not only pay more for goods they consume every day, but simultaneously suffer from greater NOx and PM vehicle emissions.
V. What’s Next
Impacted warehouse owners and operators are encouraged to evaluate their options under the WAIRE program carefully and determine whether to join potential industry challenges to the new Rule. In the meantime, regulated businesses must search for a viable yet cost-effective method to comply with Rule 2305, if the Rule is upheld. As the new requirements are phased in over the next three years, both warehouses and other supply chain actors should evaluate the WAIRE “menu” options and what actions may be the most cost-effective for the business and/or result in the lightest impacts to California consumers. Facilities also should assess any unforeseen circumstances that may justify pursuing partial or complete exemptions.
Pillsbury is well-suited to counsel clients in assessing Rule 2305, including its legality, potential exemptions and developing compliance programs to satisfy Rule 2305’s regulatory requirements. As implementation and potential litigation develops around the Rule in the months to come, Pillsbury can assist in determining clients’ best next steps and possible impacts from future indirect source rules in SCAQMD and beyond.