President Barack Obama's new environmental regulator said Tuesday her agency would reconsider a memorandum issued under the previous administration that guides authorities on how to consider carbon dioxide emissions in permitting.

Environmental Protection Agency chief Lisa Jackson's decision to review the memo and start the rule-making process for a final ruling on how CO2 should be considered is a partial victory for environmental groups and fits into the President's strategy to aggressively cut greenhouse gas emissions.

Specifically, Jackson said her agency would reconsider a memorandum by prior administrator Stephen Johnson on the federal Prevention of Significant Deterioration, or PSD, program under the Clean Air Act.

The decision puts pressure on Congress to legislate on greenhouse gas regulations if it wants to avoid EPA action, which industry fears would be much more heavy handed.

Johnson wrote his memo after an EPA appeals board decision required EPA's Denver office to consider including CO2 emissions regulation as part of a permit for a proposed expansion of the Deseret Power Electric Cooperative's coal-fired power plant in Bonanza, Utah. The memo reversed the appeals board decision, which could have set a precedent for any power plant or other emitters in the country.

Jackson said permitting authorities "should not assume that the memorandum is the final word on the appropriate interpretation of Clean Air Act requirements."

"Today's action is the latest in a series of steps intended to ensure EPA policies and procedures are consistent with EPA's overall mission to protect human health and the environment," the agency said later in a press release.

The memo published by Johnson was one of a number of "midnight" rules issued in the waning days of President George W. Bush's administration that environmentalists allege benefit industry and created obstacles for a new regulatory environment under President-elect Obama.

The Deseret decision was a blow to oil, coal and manufacturing groups fearing new regulation under the Clean Air Act's PSD program, which requires that new and upgraded power plants be subject to the best technology for controlled pollutants emitted in significant amounts.

"If the environmental groups succeed in having this policy overturned, the number and types of facilities requiring EPA permits would explode," said Quentin Riegel, the National Manufacturing Association's deputy general counsel. That, said Riegel, would result "in an impassable regulatory gridlock that would overwhelm permitting authorities and bring new permits to a halt."

Groups such as the Environmental Defense Fund estimate around eight gigawatts of new coal-fired power plants seeking EPA approval could be affected by the challenge of Johnson's memo, including projects owned by Duke Energy Corp. (DUK) and American Electric Power Co. (AEP).

Jackson made the decision on the memo after a group of environmental organizations, including the Sierra Club, petitioned the EPA to reconsider Johnson's ruling and put on hold the memo's mandate.

But Jackson, in a letter viewed by Dow Jones Newswires, said the agency declined to put the Johnson memo's policy on hold. Instead, she would soon start the agency process for drafting a new rule for a final decision on how to consider carbon dioxide in the permitting process.

The new EPA chief noted, however, that the memorandum doesn't bind states from issuing permits under their own State Implementation Plan, which could leave the door for state governments to enact more stringent permitting policies.

Environmental groups applauded Jackson's decision, saying it was the first step toward controlling carbon dioxide.

"Jackson...is clearly choosing a new, more responsible direction for the EPA," said Patrice Simms, a senior attorney for the Natural Resources Defense Council, one of the groups that filed the petition.

"The EPA is putting coal plants and other new large polluters on notice that the policy of ignoring CO2 emissions is coming to an end," she said.

Jeff Holmstead, head of environment policy at Bracewell & Guiliani LLP and a former EPA air administrator, called Jackson's decisions "a clever procedural move" that allows the Obama administration to distance itself from the Bush administration without actually changing how CO2 is regulated.

Any new regulations have to go through the rule-making procedure that Obama's EPA chief said she would soon initiate.

But the decision does put Congress on notice to start drafting legislation to regulate greenhouse gases such as CO2.

Industry and many lawmakers say they would prefer Congress to write greenhouse gas legislation rather than the Executive branch write rules under the Clean Air Act, saying that using current law is too blunt of an instrument that could devastate the economy and force business overseas.

Obama officials have used the threat of regulating carbon dioxide under the Clean Air Act to try and light a fire under Capitol Hill lawmakers, many of whom are wary of voting for legislation that would likely raise costs across the economy.

"This reminds Congress that (climate legislation) needs to be at the top of the agenda," said John Stowell, Duke's environmental policy chief. Duke has two coal-fired power plants under construction, one of which is designed to later capture and store greenhouse gases, when the technology becomes commercially available.

-By Ian Talley, Dow Jones Newswires, 202-862-9285; ian.talley@dowjones.com