South Coast AQMD Adopts Warehouse Indirect Source Rule, First Reporting Months Away

On May 7, California's South Coast Air Quality Management District (South Coast AQMD) adopted Rule 2305 (the “Rule”) aimed at regulating nitrogen oxide (NOx) and diesel particulate matter emissions associated with truck traffic at warehouses. The Rule will drastically increase compliance costs for warehouse operators in the South Coast Air Basin, requiring such operators to achieve compliance through mechanisms like green projects or mitigation fees. South Coast AQMD estimates that the Rule will impact approximately 4,000 warehouses in the South Coast Air Basin, with an upper-end overall compliance cost estimate of $979 million annually. The first report due for warehouse operators under the Rule is September 1, 2021.

The Rule does not regulate emissions directly from warehouses or any other sources, but imposes requirements on facilities as “indirect sources” of pollutants because of the truck and other vehicle emissions occurring at those facilities. The Rule specifically applies to distribution warehouses greater than or equal to 100,000 square feet of indoor floor space in the same building, existing or new, anywhere within the South Coast Air Basin. South Coast AQMD has stated it generally expects implementation of the Rule will reduce the amount of smog-forming emissions from sources associated with a distribution warehouse—trucks and cargo handling equipment—by 10-15%.

The Warehouse Rule and Compliance Obligation

Pursuant to the Rule, South Coast AQMD will require qualifying distribution warehouses to implement a variety of actions to achieve a sufficient number of points to meet a calculated compliance obligation. The “Warehouse Actions and Investments to Reduce Emissions (WAIRE) Points Compliance Obligation” is calculated based on a formula in the Rule. Facilities then must submit a WAIRE Plan Application describing the plan to accrue points in order to meet the calculated obligation annually through implementation of a variety of specified actions or customized measures. Point-earning actions for compliance obligations include:

• acquiring and using natural gas;
• Near-Zero Emissions and/or Zero-Emissions on-road trucks;
• zero-emission cargo handling equipment; and
• solar panels or zero-emission charging and fueling infrastructure.

In some instances, WAIRE Points may be banked or transferred to other entities under the same operation control for compliance purposes, thus eliminating any opportunity for a secondary trading market.

Alternatively, a regulated facility may opt to pay a mitigation fee instead ($1,000 per WAIRE Point). South Coast AQMD states it will use the funds generated from mitigation fees to incentivize the purchase of cleaner trucks and charging/fueling infrastructure in nearby communities. 

Reporting requirements include an initial site information report and annual WAIRE reports that include truck trip information and WAIRE Points earned. 

The Rule also contains a few limited exemptions, including an exemption based on square footage usable for warehousing activities in multi-tenant facilities.

Implementation

The Rule includes a three year phase-in period, applying to the largest distribution warehouses first. The proposed Rule that was approved provided the following initial requirement dates, including an initial compliance period which is defined as the 12-month period during which a covered warehouse is required to earn WAIRE points to meet compliance obligations:

Environmental Justice Implications

With e-commerce booming during the pandemic economy, rapidly growing numbers of warehouses, and, by connection, expanding distribution channels that support them, will likely become the focus of more intense scrutiny by environmental justice communities and advocates – as well as that of the Biden Administration. By targeting air emissions stemming from activities associated with warehouses, including indirect source emissions resulting from freight trucks driving to and from warehouses, the Rule begins to address the longstanding concerns of neighboring environmental justice communities who often face the most direct impacts. 

Potential Legal Challenges and Next Steps

The Rule may be subject to legal challenge, which could potentially stay its implementation. For example, the Rule requires a warehouse to install solar energy panels, but that will not do anything to significantly reduce diesel truck emissions or ambient ozone concentrations created by truck activities. Several concerns were also raised that the mitigation fee included in the rule is an unlawful special tax. Environmental groups commented that the Rule is not sufficiently stringent to protect communities neighboring industry. South Coast AQMD was also required to comply with the California Environmental Quality Act (CEQA) for adoption of the Rule, and determined that in several areas, environmental impacts would be significant. Given the broad swath of competing comments, and the tendency for CEQA to invite litigation, a challenge may be imminent.

For now, distribution warehouses subject to South Coast AQMD’s Rule 2305 should consider evaluating the limited exemptions, preparing a compliance strategy, and planning based on the implementation schedule provided in Table 2 of the approved Rule. Affected warehouse operators should also begin preparing the first reports due under the Rule on September 1, 2021.

With an office in California, Beveridge & Diamond’s Air and Climate Change practice group helps private and municipal clients navigate all aspects of compliance with Clean Air Act regulations for criteria pollutants, hazardous air pollutants, greenhouse gases, and permitting processes. For more information, please contact the authors.