A local air district is developing a rule that would require both existing and proposed warehouses to reduce trucking emissions or pay a mitigation fee.
The South Coast Air Quality Management District (SCAQMD or District) is developing a so-called Indirect Source Rule (ISR) that would require Southern California warehouses to reduce emissions associated with trucking activity and on-site equipment. Proposed Rule 2305, recently released by the District in discussion draft form, would establish the Warehouse Actions and Investments to Reduce Emissions (WAIRE) Program — which would apply to owners and operators of warehouses located in the South Coast Air Basin (Basin) with greater than 100,000 square feet of indoor space in a single building. If the SCAQMD’s development timeline holds, Proposed Rule 2305 will phase in on July 1, 2020.
As of April 2018, the Southern California Association of Governments (SCAG) region, which encompasses the Basin, was home to approximately 34,000 warehouses with 1.17 billion square feet of warehouse building space and undeveloped land that could accommodate an additional 338 million square feet of new warehouse building space. Looking ahead, SCAG estimates that total demand for warehouse space in its region in 2040 will be between 1.514 billion square feet and 1.809 billion square feet.
In 2015, a total volume of 598.3 million tons of freight valued at US$1.7 trillion moved throughout Southern California using various modes of transportation, with a daily average of 1.6 million tons valued at US$4.7 billion. Trucks are the dominant mode for freight moving in Southern California by both volume and value, moving 502.1 million tons valued at close to US$1.2 billion in 2015.
While important details on Proposed Rule 2305’s levels of stringency and flexibility remain unavailable, the Southern California logistics industry could be facing compliance difficulties and significant costs. Despite the warehouse sector’s limited control over the types of trucks servicing their facilities (warehouses generally do not own or operate trucking fleets), Proposed Rule 2305 would impose obligations on warehouses to indirectly reduce trucking emissions via implementation or funding of measures identified by the SCAQMD. While these measures have not yet been finalized, or even formally proposed, they will likely include the following options, among others: installation of zero-emission truck charging/fueling stations; installation of rooftop solar; and purchase and use of zero-emission yard trucks.
Under Proposed Rule 2305, if implementation of these measures were infeasible for a warehouse operator, then the operator would be required to pay a mitigation fee to the SCAQMD. The mitigation fee, which has not yet been set, effectively could operate as a tax on warehouse activity in Southern California. In addition to increasing costs for existing warehouses, Proposed Rule 2305 likely would have an effect on the siting, design, and operation of new warehouses, including actions by local land-use authorities (i.e., cities and counties).
The South Coast Air Basin includes portions of Los Angeles, Riverside, and San Bernardino counties and all of Orange County, covering 6,745 square miles. The Basin does not meet the state or federal ambient air quality standards for ozone and particulate matter, and existing regulations have to date proved insufficient to bring the Basin into compliance. The SCAQMD is the local agency responsible for attaining these clean air standards in the Basin. The Air Quality Management Plan (AQMP) is a regional blueprint prepared by the SCAQMD for achieving the standards. The 2016 AQMP analyzes existing and potential regulatory control options and seeks to achieve multiple goals in partnership with other entities promoting reductions in greenhouse gases (GHGs) and toxic risk, as well as efficiencies in energy use, transportation, and goods movement.
One of the most significant air quality challenges in the Basin is reducing emissions of the ozone precursor nitrogen oxides (NOx) to meet the ozone standard attainment deadlines. According to the 2016 AQMP, mobile sources contributed about 88% of total NOx emissions in the Basin in 2012. However, the SCAQMD lacks the authority to directly regulate mobile sources; instead, that authority lies with the US Environmental Protection Agency (EPA) and the California Air Resources Board (CARB). The EPA is currently implementing a rulemaking called the Cleaner Trucks Initiative, while CARB is working to require reduced NOx emissions from on-highway heavy-duty diesel engines (see CARB Workshop Previews Upcoming Heavy-Duty Diesel Changes). However, the SCAQMD expects that these regulatory efforts ultimately will be inadequate to achieve the necessary scale of emissions reductions. According to the SCAQMD, “after considering all existing rules and regulations, an additional 45% reduction of NOx is needed by 2023, and a 55% reduction is needed by 2031 [to meet the standards].”
Facility-Based Mobile Source Measures
In an effort to secure the NOx reductions required for the Basin to attain the ozone standards, the SCAQMD included in the 2016 AQMP to-be-determined emissions reductions from to-be-developed Facility-Based Mobile Source Measures (FBMSM) that would regulate indirect sources. The federal Clean Air Act defines an indirect source as any facility, building, structure, or installation, or combination thereof, which generates or attracts mobile source activity that results in emissions of any pollutant (or precursor) for which there is an air quality standard. The FBMSM address five types of indirect sources: new development and redevelopment projects; commercial marine ports; railyards and intermodal facilities; warehouse distribution centers; and commercial airports. At the SCAQMD’s March 2018, board meeting, district staff recommended development and adoption of rules targeting these indirect sources, relying on authority granted to the SCAQMD under the California Health and Safety Code Sections 40716(a)(1) and 40440(b)(3).
Proposed Warehouse ISR
After a series of working group meetings on FBMSM in general and warehouses in particular, the SCAQMD released Proposed Rule 2305 in discussion draft form on November 13, 2019. The rule would apply to owners and operators of warehouses in the Basin with greater than 100,000 square feet of indoor floor space in the same building. The rule would impose a Warehouse Points Compliance Obligation (WPCO) on warehouse operators, and would allow operators to meet their WPCO by generating and surrendering so-called WAIRE Points via implementation of specified emission-reducing measures. These measures, which have not yet been finalized, would be listed in a menu-like table in the adopted rule.
Warehouse Points Compliance Obligation
A WPCO is calculated by taking the weighted annual truck trips (WATTs) of a warehouse and multiplying that figure by a Stringency factor (a dimensionless multiplier that will control the stringency of Proposed Rule 2305) and an Annual Variable (a dimensionless multiplier that may be used to increase the stringency of Proposed Rule 2305 over time). WATTs include each one-way trip to or from a warehouse to deliver or pick up goods stored at that warehouse, over a 12-month compliance period. The factor is considered “weighted” because Class 8 truck (e.g., tractor-trailer) trips are weighted more heavily than other truck trips due to their higher emissions. The Stringency factor and the Annual Variable are undetermined in the proposed ISR. If a warehouse operator lacked truck trip data, then the rule would provide a default formula based on the size of the warehouse and number of days operating, with cold-storage facilities presumed to be the most trip-intensive.
The WPCO must be met by surrendering WAIRE Points — which may be generated by implementing emission-reducing measures to be listed in Table 3 of Proposed Rule 2305 — to the SCAQMD. Notably, WAIRE Points may be earned only for actions that are “surplus” (i.e., actions that go beyond existing local, state, and federal regulations). In other words, if an action was required for compliance with a regulation, then WAIRE Points cannot be generated.
Proposed Rule 2305 would allow WAIRE Points accumulated by a warehouse owner or operator in a given compliance year to be transferred in one of three ways. First, an operator could transfer excess WAIRE Points from one of its warehouses to another of its warehouses. WAIRE Points so transferred would be subject to a reduction via a to-be-determined locational discount, because the primary purpose of Proposed Rule 2305 is to reduce emissions in the immediate vicinity of warehouses. This locational discount is intended to account for the reduced health benefits in the immediate vicinity of a warehouse if that warehouse utilizes WAIRE Points generated at another warehouse (i.e., the emissions reductions are occurring elsewhere). The net effect of the locational discount is seemingly that a warehouse will need to secure more WAIRE Points via transfer than if it had self-generated WAIRE Points.
Second, operators could bank WAIRE Points for up to three years, for later use at a warehouse in which they operate, but the points still must be surplus at time of surrender. For example, if the points were earned for early action on a pending regulation, then they could not be used in future years when the regulation is in effect.
And third, a warehouse owner could earn points and transfer the points to an operator of that same warehouse, subject to the aforementioned three-year banking limitation. As currently drafted, Proposed Rule 2305 would only allow transfers of WAIRE Points within an individual warehouse (i.e., from owner to operator) or between warehouses controlled by the same operator. Transfers between different operators would be prohibited.
Alternative Compliance — Mitigation Fee
The rule would include an alternative compliance option to allow warehouse operators to pay a mitigation fee in lieu of generating and surrendering WAIRE Points. Importantly, the mitigation fee level has not yet been determined. In an apparent attempt to discourage exclusive reliance on the mitigation fee, the SCAQMD is proposing an escalation of the fee if a warehouse operator uses it for more than 50% of its WPCO in consecutive years. Currently, Proposed Rule 2305 would set the escalator at 10% year over year.
Under Proposed Rule 2305, warehouse owners would be required to submit an initial notification to the SCAQMD two months after rule adoption and thereafter within two weeks of certain changes at the warehouse: a new operator; a change in warehouse square footage; and upon request of the SCAQMD Executive Officer.
Warehouse operators would be required to submit an Initial Site Information Report and annual WAIRE Reports to the SCAQMD. The Initial Site Information Report would have to include warehouse specifications, truck trip data, and a compliance plan to satisfy the WPCO for the next compliance period. The annual WAIRE Report is backward-looking, and would include truck trip data and details on WAIRE points earned in the prior compliance period.
The obligations in Proposed Rule 2305 would first phase in for warehouses less than 250,000 square feet and thereafter for smaller facilities. For warehouses greater than 250,000 square feet, the first compliance period would be July 1, 2020, to June 30, 2021; the Initial Site Information Report would be due January 1, 2021; and the annual WAIRE Report would be due July 30, 2021. Put another way, operators of warehouses greater than 250,000 square feet would need to start generating WAIRE points on July 1, 2020.
The SCAQMD is requesting stakeholder feedback on the discussion draft rule by December 6, 2019. In the near term, the SCAQMD will hold a Technical Working Group meeting on December 10, 2019, and a full Warehouse Working Group meeting on December 13, 2019.
The District intends to release a California Environmental Quality Act (CEQA) Draft Environmental Assessment in mid-January 2020. The CEQA analysis that the District must prepare before adopting Proposed Rule 2305 may be voluminous given the complexity of the actions that might be taken by the logistics industry in response to the rule. In particular, the analysis of climate change impacts may be counterintuitive (showing an increase in GHG emissions) should the SCAQMD prioritize electricity- and hydrogen-powered trucks at the expense of other technologies. For example, the majority of natural gas-powered trucks operating in California today are running on renewable natural gas that can have a negative carbon intensity.
The SCAQMD plans to release the 75-day package (i.e., the Draft Rule, Draft Staff Report, and Draft Socioeconomic Analysis) on February 14, 2020, and the 30-day package (i.e., refinements of the 75-day package) on March 31, 2020. The District is targeting formal adoption of Proposed Rule 2305 at its May 1, 2020, Governing Board meeting.
Latham & Watkins will continue to monitor and report on Proposed Rule 2305 and its potential impacts on the logistics industry.
The author would like to thank Jennifer Garlock for her contribution to this blog post.
 Southern California Association of Governments, Southern California Association of Governments Industrial Warehousing Study — Final Report, at ES-1.
 Id. at 7-12.
 Institute for Applied Economics — Los Angeles County Economic Development Corporation, Goods on the Move! Trade and Logistics in Southern California — The Industry, Its Jobs and Its Economic Contribution — A Southern California Industry Study, at ii (May 2017).
 See http://www.aqmd.gov/home/air-quality/clean-air-plans/air-quality-mgt-plan/facility-based-mobile-source-measures (last visited Nov. 20, 2019).
 See 42 U.S.C. § 7410(a)(5)(C).