On Friday, October 20, 2023, the Colorado Department of Public Health & Environment (“CDPHE”), Air Quality Control Commission (“AQCC”) voted to adopt the Greenhouse Gas Emissions and Energy Management for Manufacturing Phase 2 Rule (“GEMM 2 Rule”) that implements key provisions of Colorado’s Environmental Justice Act (“EJ Act”)—HB 21-1266. The Colorado Legislature passed the EJ Act in July 2021 and one of its main provisions required that the state’s industrial and manufacturing sector reduce its greenhouse gas (“GHG”) emissions by 20% by the year 2030, as compared to the sector’s 2015 emissions. The final GEMM 2 Rule helps accomplish this goal by imposing strict mass based GHG reduction requirements on 18 industrial and manufacturing facilities within the state and imposing additional reduction requirements of harmful air pollutants for those facilities that are located within or less than one mile from a Disproportionately Impacted Community (“DIC”) and within 15 miles of a residential community.
A high-level summary of the GEMM 2 Rule and its most significant provisions is provided below.
Who is Affected by the GEMM 2 Rule?
The GEMM 2 Rule affects stationary sources in the industrial and manufacturing sector that emit greater than or equal to 25,000 metric tons (“mt”) of CO2 equivalent (“CO2e”) emissions per year. The rule also applies to any other manufacturing facilities that exist within Colorado as of the effective date of the rule and emit equal to or greater than 25,000 mt of CO2e in any year following the rule’s effective date.
While the GEMM 1 Rule passed in October 2021 limited GHG emissions from the state’s largest energy intensive and trade exposed industries in the industrial and manufacturing sector—namely four facilities in the cement and steel industries—the GEMM 2 Rule specifically identified 18 industrial and manufacturing facilities (“GEMM 2 Facilities”) as subject to the rule: American Gypsum Company LLC, Anheuser Busch Inc., Avago Technologies, Carestream Health, Inc., Cargill Meat Solutions, Front Range Energy, LLC, Golden Aluminum Inc., JBS Swift Beef Company, Leprino Foods, Microchip Technology, Molson Coors USA LLC, Natural Soda, LLC, Owen-Brockway Glass, Rocky Mountain Bottle Company, Sterling Ethanol, LLC, Suncor Energy USA, Western Sugar Cooperative, and Yuma Ethanol, LLC.
What Does the GEMM 2 Rule Require?
GEMM 2 Facilities are required to achieve facility-specific, onsite GHG reductions from their baseline emissions by implementing a portfolio of technically feasible and cost effective GHG reduction measures at their facilities. The GEMM 2 Rule’s cost effectiveness threshold was set at the 2030 social cost of GHGs—currently set at $89/ton. Such reduction measures may include equipment upgrades, efficiency improvements, the installation of additional controls, or onsite carbon capture, utilization and storage, among others.
CDPHE’s Air Pollution Control Division (“APCD”) first established each facility’s baseline emissions by using the higher of the facility’s reported 2021 or 2022 GHG emissions. In addition, facilities that demonstrated to the APCD that they had invested in capital projects that increased the facility’s production capacity between 2015 and 2030, but had not yet realized the additional production capacity, were eligible for a baseline adjustment equal to 75% of the facility’s increased production capacity, or 100% of the facility’s increased production capacity if the facility had already reduced its GHG emissions by 20% or greater.
The APCD then assigned tiered reduction requirements to the GEMM 2 Facilities based on the facilities’ GHG reductions since 2015 and their overall contribution to the group’s cumulative GHG emissions. Therefore, facilities that achieved significant GHG reductions since 2015 were assigned a lower 2030 reduction obligation than those facilities that achieved fewer GHG reductions, or increased their GHG emissions, since 2015. In addition, facilities with a high quantity of GHG emissions were assigned a greater 2030 reduction obligation than those facilities that emit a smaller quantity of GHGs. By considering these factors, the APCD sought to equitably distribute the GHG reduction requirements among the 18 GEMM 2 Facilities.
Depending on the facility’s assigned reduction requirement, the GEMM 2 Facilities must achieve an interim GHG reduction requirement of between 0 to 1.75% less than the facility’s baseline emissions beginning in 2024, and a final GHG reduction requirement of between 1 to 12.5% less than the facility’s baseline emissions by 2030. An additional GHG reduction of between 3 to 6% was assigned to certain facilities based on their percent contribution to the GEMM 2 Facilities’ cumulative total GHG emissions.
Finally, the GEMM 2 Rule requires facilities located within, or within one mile of, a DIC and within 15 miles of a residential community to prioritize onsite reductions of harmful air pollutants. As explained below, the amount of harmful air pollutant reductions is determined by the facility’s GHG Reduction Plan that must be submitted to the APCD by September 2025.
How does the Rule Work?
Beginning in 2024, GEMM 2 Facilities must secure their interim reduction requirement of between 0 to 1.75% and sustain this reduction through 2029.
Next, no later than September 20, 2025, GEMM 2 Facilities must develop and submit a GHG Reduction Plan to the APCD. The GHG Reduction Plan must include information on the facility’s emissions, a list of all GHG reduction measures that are technically feasible for implementation at the facility, and a portfolio of GHG reduction measures, the average cost of which is equivalent to the 2030 social cost of GHGs, that the facility is required to implement by 2030 to help the facility achieve its 2030 final GHG reduction requirement. The GHG Reduction Plan must also identify the estimated reduction of harmful air pollutants associated with the GHG reduction measures identified in the plan.
If a facility proposes to implement a technically feasible and cost-effective portfolio of GHG reduction measures, but the proposed measures do not achieve the facility’s 2030 GHG reduction requirement, the facility may purchase GHG credits for compliance. However, if the facility is located within one mile of a DIC and within 15 miles of a residential community, the facility must first identify the harmful air pollutant reductions associated with the GHG measures in its GHG Reduction Plan, up to 50% above the 2030 social cost of GHGs, and secure the harmful air pollutant reductions associated with these measures at the facility before they can participate in the GHG credit trading market.
To generate GHG credits, GEMM 2 Facilities must reduce their GHG emissions beyond their 2030 GHG reduction requirement. These GHG credits, which expire after 3 years, can then be traded among the GEMM 2 Facilities to help the facilities with few available onsite GHG reduction measures to comply with their 2024 and 2030 reduction requirements. No facility is required to place their GHG credits into the market, and individual GEMM 2 Facilities may enter into private GHG credit transactions at any time. Furthermore, the APCD will host an annual GHG credit auction whereby GEMM 2 Facilities can submit offers for sale and bids for GHG credits to the APCD.
Finally, if a facility cannot achieve its interim or 2030 GHG reduction requirement by implementing onsite GHG reduction measures, and there are not enough credits available in the GHG credit market to allow the facility to purchase credits to achieve its reduction requirement, the GEMM 2 Facility can pay into a state-managed GHG reduction fund, on a per metric ton of CO2e basis, up to the amount required to achieve the facility’s GHG reduction requirement for that year. The GHG reduction fund will then be used by the state to finance GHG reduction projects at other industrial and manufacturing sites, or finance otherwise cost-prohibitive onsite reduction measures at GEMM 2 Facilities. While the GHG reduction fund is not currently available, the APCD must propose establishment of the fund by September 2025, and implement the fund via rulemaking by the end of 2025.
By 2030, GEMM 2 Facilities must achieve their remaining GHG reduction requirement and sustain that reduction in perpetuity.
Compliance and Enforcement
GEMM 2 Facilities must demonstrate compliance with their annual GHG reduction requirements during two separate compliance periods. GEMM 2 Facilities must demonstrate compliance for the first compliance period—2024, 2025, and 2026—in 2027 by aggregating the facility’s annual GHG reduction requirement in each of those years and demonstrating to the APCD that the facility secured the reductions by the end of 2026. Next, GEMM 2 Facilities must demonstrate compliance for the second compliance period—2027, 2028, and 2029—in 2030 by the same method. Finally, beginning in September 2031, GEMM 2 Facilities must submit an annual report to the APCD that demonstrates compliance with the facility’s 2030 reduction requirement every year thereafter.
If a facility fails to demonstrate compliance in any compliance period, the facility’s annual GHG reduction requirement will be adjusted downwards by at least two times the amount, in mt of CO2e, by which the facility exceeded its aggregated GHG emission reduction requirement in either compliance period, or in any year after 2029. The GEMM 2 Facility must secure this additional “mitigation” reduction no later than three years after the compliance period or year of noncompliance.
In addition, the APCD maintains all the enforcement mechanisms available to it under the Colorado Air Pollution Prevention and Control Act, including the assessment of daily civil penalties.
Conclusion
The GEMM 2 Rule is the first regulation of its kind in the United States. While it is complex, the APCD anticipates that the GEMM 2 Rule’s 2024 interim reduction requirements will result in a 12% reduction in GHG emissions from the GEMM 2 Facilities by 2024. In addition, the APCD anticipates that the remaining reduction requirements will reduce the GEMM 2 Facilities’ GHG emissions by 20% by 2030. Accordingly, the GEMM 2 Rule will assist the state in achieving the EJ Act’s goal of reducing the state’s industrial and manufacturing sector GHG emissions by 20% by the year 2030 and help Colorado to cement itself as a national leader in climate and sustainability regulations.
If you would like to learn more about Colorado’s GEMM 2 Rule or discuss it in more detail, please contact John Jacus or Cole Killion.