EPA’s transfer of primary enforcement authority to states for carbon capture and storage projects may decrease permitting delays but raise legal questions.

Louisiana has become the third state in the United States to receive primacy from the US Environmental Protection Agency (EPA), allowing it to assume permitting authority for carbon capture and storage (CCS) projects. EPA granted primacy to Louisiana on December 28, 2023, for Class VI wells, effective February 5, 2024.

This development comes at a time when facilities across the country are looking to address their greenhouse gas emissions through CCS projects but have been facing permitting delays from EPA. EPA is the primary authority for Class VI well permits, which are essential for the underground storage of carbon dioxide (CO2). To date, EPA has only approved two such permits and projects two-year review periods for the dozens still under review. States can streamline this process by assuming permitting authority, known as primacy, if they meet or surpass EPA’s standards.

This blog post summarizes the latest developments in Class VI primacy, focusing on Louisiana’s experience, and the broader legal and commercial implications on liability transfers and environmental attributes.

EPA’s Class VI Regulations

Section 1421 of the Safe Drinking Water Act mandates that EPA establish Underground Injection Control (UIC) program regulations to protect underground sources of drinking water (USDW) from risks associated with underground fluid injections. CO2 sequestration projects inject CO2 into the subsurface and are subject to these EPA regulations.

EPA’s Class VI regulations for CCS projects cover the entire lifecycle, from planning to post-closure to safeguarding USDWs. Key requirements include:

• financial responsibility to cover costs and address impacts to USDW without burdening the public;
• site characterization to confirm the area’s geology can securely contain the injected CO2;
• well construction designed to prevent CO2 leakage outside the designated zone;
• ongoing testing and monitoring to ensure well integrity, water quality, and control of the CO2 plume and pressure; and
• operational requirements tailored to the well’s design and geological setting to prevent risks to USDW or public health.

Class VI Primacy Applications and Approvals

EPA may transfer primacy to a state or tribe that requests “primacy” so long as that state or tribe develops a regulatory framework that matches or exceeds EPA’s Class VI standard. States applying for primacy also must meet the other application requirements under 40 CFR Part 145, including undergoing multiple stages of EPA reviews and providing a letter from the state’s governor, a statement from the attorney general, a memorandum of agreement between the state and the EPA regional administrator, and documentation of the state’s notification to the public of its intent to apply for primacy.[1]

North Dakota was the first state to obtain primacy for Class VI wells in April 2018, with Wyoming following in October 2020, and Louisiana now joining as the third state. Louisiana applied for Class VI primacy on September 17, 2021, having already managed the other five UIC well classes (industrial and municipal waste disposal wells, oil and gas related injection wells, solution mining wells, shallow hazardous and radioactive waste injection wells, and wells that inject non-hazardous fluids). After revising its application to address environmental justice concerns from public commentors, Louisiana received EPA’s approval for primacy in December 2023, effective on February 5, 2024. Following primacy, EPA will transition to an oversight role as it relates to Louisiana Class VI permit applications.

Texas, Arizona, and West Virginia are currently undergoing various pre-application activities to obtain their Class VI primacy, as explained below. EPA maintains a tracker on the progress of these applications.

Liability Transfer Provisions

Louisiana’s Class VI well regulatory framework includes liability transfer provisions, which state that following a set period and after meeting certain criteria, liability for Class VI well regulatory infractions may be transferred from the project owner or operator to the state. However, EPA may deem lenient liability transfer provisions to be inconsistent with its Class VI standard. To ensure consistency with EPA’s stringent regulations, Louisiana recently amended its regulations by extending the owner and operator liability period for closed storage facilities from 10 to 50 years. This extension addresses the potential for liability issues to arise decades after a project’s completion.

The criteria for liability transfers in Louisiana have also become more rigorous. For example, before liability can shift to the state, the operator must demonstrate that the storage facility poses no risk to USDWs or public health. Operators must also comply with all post-injection monitoring regulations, obtain a certificate of completion for injection operations, and close the facility in adherence to all applicable regulations.

Furthermore, Louisiana’s revised regulations contain a significant caveat regarding liability protection. Even after liability is transferred to the state, the original owners or operators maintain responsibility for any violations of underground injection control laws that occurred before the transfer. This change bolsters accountability for environmental compliance, even after project ownership has changed hands.

Like Louisiana’s Class VI program, North Dakota’s and Wyoming’s Class VI programs also include mechanisms for capping liability or transferring long-term liabilities for closed CO2 sequestration facilities to the state, potentially limiting the liabilities of owners and operators under EPA’s Class VI program. These states have also created funds sourced from fees charged to sequestering parties to cover expenses related to the long-term management of these facilities.

In North Dakota, a certificate of completion for CO2 storage can be issued 10 years after injection stops, provided all other requirements are met. The state collects a fee per ton of CO2 sequestered, which goes into a CO2 storage administrative fund for long-term facility oversight without capping the state’s liability.

Wyoming’s approach is similar, allowing operators to transfer liability to the state 20 years post-injection, with criteria similar to North Dakota’s. However, Wyoming caps its liability to the balance in its special revenue account, funded by sequestration fees.

Liability transfer regulations could have complex legal ramifications. For example, for EPA to delegate primary oversight of Class VI permits to a state, a state’s regulations must be at least as stringent as EPA’s. Given this requirement, the inclusion of a liability transfer mechanism might invite third-party challenges to the EPA’s decision to grant primacy, particularly if the provisions are perceived as undermining the EPA’s regulations.

Additionally, owner and operator liability periods could introduce potential complications with tax credit recapture. For instance, should CO2 unintentionally escape from a storage site, the Internal Revenue Service may seek to recapture tax credits awarded under Section 45Q of the Internal Revenue Code. The timing of the liability transfer and the leak could be crucial in determining tax implications. For example, in states where liability transfer occurs before the end of the tax credit recapture period, tax credits may still be subject to recapture despite a project otherwise achieving liability transfer protection. In addition, the question arises whether tax credit recapture periods may be revised to more closely match extended liability transfer provisions.

Moreover, the liability transfer regulations may inadvertently impact the ability of project owners or operators to secure environmental attributes. Markets that trade in environmental attributes could exclude projects with liability transfer provisions from earning credits for reduced emissions, partly due to potential risks arising from lenient liability transfer regimes. Consequently, these projects might be disadvantaged in both compliance-based and voluntary carbon markets.

Environmental Justice Primacy Requirements    

On December 9, 2022, EPA issued a memorandum to state governors emphasizing the need for states seeking primacy in the UIC Class VI program to integrate environmental justice and equity into their permitting processes.[2] In response, Louisiana pledged to implement environmental justice principles highlighted in EPA’s guidance for securing primary regulatory authority.[3] These principles include:

1. establishing an inclusive public participation process;
2. mandating that well owners or operators perform an environmental justice review during the Class VI permit application process, which may necessitate an enhanced public comment period based on the findings;
3. integrating considerations of environmental justice and civil rights into the evaluation of permit applications;
4. enforcing Class VI regulatory protections;
5. implementing mitigation measures; and
6. examining the potential risks that each proposed Class VI well poses to minority and low-income communities.

Louisiana’s commitment to these measures aligns with EPA’s vision for incorporating environmental justice into the regulatory framework for carbon sequestration projects. How other states applying for primacy integrate these principles may be influential in determining the likelihood of future EPA transfers of primacy.

Looking Forward

Texas, Arizona, and West Virginia are in various stages of developing their own Class VI primacy applications and liability frameworks. Texas has submitted its primacy application, which requires applicants to engage with environmental justice communities with enhanced public outreach if communities are affected by a particular project proposal.[4] Arizona has announced its intent to seek primacy, with a focus on environmental justice reviews as part of the permitting process.[5] West Virginia’s primacy application contains similar environmental justice considerations.[6]

These states’ liability transfer and environmental justice strategies are shaping the landscape for future CCS projects, presenting legal and political challenges. Leakage from Class VI wells could lead to civil and regulatory liabilities, which may complicate the accounting for tax credits and environmental attributes. These evolving state programs underscore the need to balance the promotion of CCS projects with adherence to regulatory standards and environmental justice commitments.

This blog was prepared with the assistance of Gina Kwon.

Endnotes

[1] Primacy Enforcement Authority for Underground Injection Control Program, EPA, https://www.epa.gov/uic/primary-enforcement-authority-underground-injection-control-program-0 (last updated on Feb. 2, 2024).

[2] Memorandum from Michael S. Regan to Governors (Dec. 9, 2022), https://www.epa.gov/system/files/documents/2022-12/AD.Regan_.GOVS_.Sig_.Class%20VI.12-9-22.pdf

[3] State of Louisiana Underground Injection Control Program; Class VI Program Revision Application, Federal Register, https://www.federalregister.gov/documents/2023/05/04/2023-09302/state-of-louisiana-underground-injection-control-program-class-vi-program-revision-application (last updated on May 4, 2023).

[4] Geologic Storage of Carbon Dioxide (CO2),Railroad Commission of Texas, https://www.rrc.texas.gov/oil-and-gas/applications-and-permits/injection-storage-permits/co2-storage/#ClassVI (last visited Jan. 4, 2024).

[5] PUBLIC NOTICE/PUBLIC HEARING | Underground Injection Control (UIC) Program Primacy Application, Ariz. Dep’t. Env’t Quality (Oct. 13, 2023), https://azdeq.gov/public-notice-underground-injection-control-program-primacy-application.

[6] Groundwater/UIC Program, West Virginia Department of Environmental Protection, https://dep.wv.gov/WWE/Programs/gw/Pages/gwhome.aspx (last visited Feb. 2, 2024).