California Trial Court Hears Challenge to California's Carbon Offsets Program

This post was written by Phillip H. Babich.

San Francisco Superior Court Judge Ernest H. Goldsmith heard arguments on December 7, 2012 in a lawsuit challenging the carbon offset program in California. (Case No. CGC-12-519554). The lawsuit is aimed at invalidating the offset program, but it has the potential to increase compliance costs (perhaps significantly) for California’s Cap-and-Trade Program, a greenhouse gas emission-reduction program. Judge Goldsmith’s court room was filled to capacity.

Under California’s climate change legislation, the Global Warming Solutions Act of 2006, known as AB 32, the state’s Air Resources Board (ARB) has the goal of getting power plants, manufacturers, and other industries to reduce GHG emissions to 1990 levels by 2020, a 17-percent reduction. The primary mechanism for achieving the required reductions is a carbon auction system, and the state held its first carbon allowances auction last month. The offset program is a vital part of the state’s overall effort and is intended to provide flexibility and cost-effective compliance with the reductions mandated by AB 32.

ARB only accepts offset credits from emission-reduction projects that qualify for an established Offset Protocol. An Offset Protocol is a detailed set of requirements that include standardized methods for quantifying emission reductions from an offset project. The state is currently accepting carbon offset credits from four types of projects: (1) forestry/timber management; (2) urban forestry; (3) livestock operations, and, (4) destruction of ozone-depleting substances. Entities that are covered by AB 32 and are required to reduce GHG emissions, such as power plants, may purchase and use offset credits to achieve up to 8 percent of their compliance obligation. Offsets are expected to cost less than allowances under the program, thus reducing the overall cost of compliance for covered entities.

Petitioners in the offset lawsuit, Citizen’s Climate Lobby and Our Children’s Earth Foundation, allege that ARB has exceeded its regulatory authority by promulgating rules that allow for offsets that are not "in addition to any greenhouse gas emission reduction that otherwise would occur," as required under AB 32. In essence, Petitioners contend that ARB, through its Offset Protocols, could issue offset credits for projects that would not actually create additional reductions in greenhouse gas emissions. "Additionality" is a significant component of any offset program from a policy standpoint, one that assures the offsets produce GHG reductions that help the overall cap-and-trade program achieve its emission-reduction goals.

At last week’s hearing Judge Goldsmith asked George Hays, Petitioners’ counsel, for an example of a project that could receive credit without providing "additional" emissions reductions. Mr. Hays described a livestock operation that uses a methane gas digester to reduce GHG emissions. As part of answering the judge’s hypothetical, Mr. Hays added that the methane gas digester, even though it was an expensive investment in the livestock operation, would actually allow the operation to be more profitable. Because the methane gas digester would make the operation more profitable, Mr. Hays argued that the reductions in GHG emissions would not be additional. The livestock operator likely would invest in the digester in order to make more money.

Judge Goldsmith did not appear to be impressed with the argument. "Tisk, tisk, they made money," he said. "What’s wrong with that?"

Judge Goldsmith also appeared to have trouble accepting Petitioners’ premise that the Court should undertake a de novo review of ARB’s regulations implementing the offset provisions of AB 32, rather than give deference to ARB’s admittedly broad authority to implement the climate change legislation. Robert Wyman, counsel for a coalition of business interests that has intervened on the side of ARB, told the Court that the standard of review for the offset regulations is deferential, noting that the state legislature, in passing AB 32, instructed ARB to, among other things, seek advice from other governmental bodies and international agencies in crafting its GHG reduction programs. Judge Goldsmith appeared ready to side with this point of view, moving the parties to another issue even though Mr. Hays clearly had more to say on the standard of review.

Instead, what Judge Goldsmith wanted to hear from Mr. Hays was whether Petitioners’ position was to force ARB to do away with the entire set of Offset Protocols or instruct the agency to make changes. Mr. Hays conceded that he wanted to do away with the whole offsets program. Judge Goldsmith then wanted to know what Mr. Hays proposed should replace the program. Mr. Hays suggested a project-by-project assessment of GHG reduction projects to determine whether the projects would result in real, additional GHG reductions, rather than the standardized approach embodied in the agency’s Offset Protocols. Judge Goldsmith noted that that idea had already been tried under the Kyoto Protocol and it was a disaster.

It is not clear when Judge Goldsmith will issue his decision.

Slides and Audio from Reed Smith's December 6 Environmental and Energy Law Resource Teleseminar

On December 6, 2012 Reed Smith proided an update and discussion on the California Cap and Trade auction with insight from guest speakers from the California Manufacturers & Technology Association (CMTA) and Noble Americas Corp.

Topics included:

  • Auction Comments
  • Price Containment
  • Resource Shuffling
  • Offset Update

The slides and audio are available for download.

Be sure that we will monitor and analyze these issues and many other environmental and energy issues through the year on our blog and in future teleseminars.

California's AB 32 and Offset Basics

This post was written by Jennifer Smokelin, Jamon BollockNick Rock, Peter Zaman, Larry Demase and Todd Maiden.

To keep you updated on exciting developments in California’s groundbreaking cap-and-trade program, this final Reed Smith Client Alert in a three-part series focuses on offsets, another important element of the carbon trading system. Offsets will help regulated entities reduce the potentially enormous cost of complying with California’s cap-and-trade program. As intended by the California Air Resources Board (ARB), entities subject to limits on greenhouse gas (GHG) emissions may cushion the transition to expensive emission-reducing technologies by purchasing offset credits through the Compliance Offset Program. As a result, offsets could significantly impact a company’s ability to comply with the new program, due to begin on January 1, 2013. Additionally, rules governing offsets will likely shape compliance strategies. Our previous two Alerts in this series explained the fundamental features of the California Cap-and-Trade Program and the rules of the soon-to-be-launched auction system. To further understand cap and trade in California, this Alert will discuss the basic elements of the offset program and how offset credits will work in the cap-and-trade system.

California's AB 32 and GHG Market and Auction Basics

This post was written by Jennifer Smokelin, Nick Rock, Peter Zaman, Larry Demase and Todd Maiden.

On August 30, 2012, the California Air Resources Board (CARB) and about 150 market participants held a test auction for the purchase and sale of California carbon allowances. The California state legislature passed Assembly Bill 32 (AB 32) in September 2006 requiring the state to reduce greenhouse gases emissions to 1990 levels by 2020, a 17 percent reduction. California’s auction is part of a cap and trade program designed by CARB. California’s cap and trade program is just one piece in California’s efforts to meet the 17 percent reduction required under AB 32 by 2020. In sum, a carbon allowance allocation and the emissions offset program under AB 32 create the largest North American carbon market – but elements of the California program, such as specific auction rules, unlimited banking, limited use of offsets, and certain cost containment measures, will undoubtedly shape trading strategies different from those in existing carbon markets. In this Reed Smith Client Alert, we explain the auction and the auction rules.

California's AB 32 and Cap and Trade Design Basics

This post was written by Jennifer Smokelin, Todd Maiden, Larry Demase, Peter Zaman, and Nicholas Rock

California, the world’s fifth-largest economy and 18th in total carbon emissions if it were a separate country, is rapidly moving forward with the development of its cap and trade program scheduled to be implemented in 2013. This has drawn a lot of attention from businesses generating high quantities of carbon emissions or who consume large amounts of energy or fuel. Carbon futures linked to Californian’s cap and trade program slipped recently, but after a test auction in late August 2012, news articles reported that major banks are weighing whether to wade into the California carbon market, which experts believe could grow into a $40 billion-a-year market by 2020. The California state legislature passed Assembly Bill 32 (AB 32) in September 2006 requiring the state to reduce greenhouse gases emissions to 1990 levels by 2020, a 17 percent reduction—and eventually to an 80 percent reduction by 2050. There are complications to the California cap and trade system that do not exist in other cap and trade programs to date. For example, California’s program covers all six “Kyoto” GHGs—a multi-gas-wrinkle that the EU-ETS will only be tackling in this, its third compliance period. Further, the California Air Resources Board (CARB) retains the ability to reverse trades of carbon offsets or credits in order to enforce holding limits under the CARB regulations. These will present unique challenges to compliance entities, as well as to the brokers, traders, suppliers, and others trying to create a new carbon market. To understand the basic underpinnings of the California cap and trade system, this Reed Smith Client Alert sets forth design elements of the system: the “what, who, when, and hows” of cap and trade under AB 32.
 

Slides and Audio from Reed Smith's September 11 Environmental and Energy Law Resource Teleseminar

On September 11, 2012 Reed Smith focused on auctioning of California GHG credits during its quarterly teleseminar.

Topics included:

  • California (CA) Regulatory update
  • Cap and Trade Auction Issues (overview of "test" auction)
  • Lessons learned from EU ETS Auction
  • Recent changes to CA ARB regulations and proposed changes
  • Pending Climate Change Litigation

The slides and audio are available for download.

Be sure that we will monitor and analyze these issues and many other environmental and energy issues through the year on our blog and in future teleseminars.

California Assembly Passes Greenhouse Gas Bill

This post was written by Todd Maiden and Phillip Babich

On May 29 the California Assembly passed legislation that would direct funds generated in the state’s cap-and-trade auctions to programs intended to promote clean technology. Assembly Bill (AB) 1532 would apply to an estimated $1 billion that lawmakers expect to be raised in auctions this year and next. The bill is now in the state senate.

AB 1532 is a companion bill to the California Global Warming Solutions Act of 2006, more commonly known as on “AB32.” AB32 set up the framework for the State’s auctioning of greenhouse gas (GHG) emission credits. AB 1532 is meant to “establish[ ] procedures for deposit and expenditure of regulatory fee revenues derived from the auction of GHG allowances pursuant to the cap and trade program adopted by the Air Resources Board (ARB),” according to the bill’s summary.

AB 1532 authorizes the ARB to allocate funds from the cap-and-trade auctions to investments in, among other things, “[i]ndustrial and manufacturing facilities to reduce GHG emissions [through] energy efficiency, energy storage, and clean and renewable energy projects,” ‘[w]aste reduction and low-carbon recycled-content processing and manufacturing,” “low-carbon transportation and infrastructure,” “natural resource protection,” “ and “research and development, and deployment of innovative technologies[.]” AB 1532 also requires the ARB to adopt guidelines for funding criteria and seek input from other departments and agencies of the state government.

As AB 1532 makes its way through the California legislature, much is at stake for companies doing business in California. The annual estimated revenue from the auction of GHG emission allowances will range from $2 billion to $5 billion in 2013, and will further increase to between $17 billion and $67 billion in later years, according to the ARB. There is significant debate over where this money will be spent and who will benefit from this wealth transfer. As background, AB 32 is still the subject of great criticism, even though it was passed 6 years ago. The opposition, including the California Chamber of Commerce, is now challenging the cap-and-trade system proposed under AB 1532 as a means to blunt or stop AB 32.

Despite the slow start up for cap and trade in California, cap-and-trade markets are on the rise elsewhere. The World Bank reported yesterday in its annual publication, the “State and Trends of the Carbon Markets 2012,” that carbon market trading reached a record value of $176 billion in 2011, an 11% rise, and transaction volumes reached a new high of 10.3 billion tons of carbon dioxide equivalent (CO2e). The World Bank also indicated that emerging cap-and-trade schemes in California and Quebec—the state’s partner in the Western Climate Initiative—may contribute to future growth in the global carbon trade market.

Regardless as to whether a business supports or opposes California’s cap and trade program, businesses will need to understand the law and develop trading strategies to remain not just in compliance with the new law but competitive and profitable. The state is holding a “practice auction” in August so that businesses can understand the trading process. The first cap-and-trade auction is slated to occur in November, paving the way for a cap-and-trade program compliance start date of January 1, 2013 for most entities covered by the regulation.

 

Upcoming in 2012: 10 Environmental and Energy Issues to Watch in the United States

This post was written by Lawrence Demase, Douglas Everette, Robert Frank, Arnold Grant, Todd Maiden, Jennifer Smokelin, Robert Vilter and David Wagner.

As we look forward to 2012, the environmental and energy attorneys at Reed Smith will be on top of a range of issues, and offer the following analysis of what we view, in no particular order, to be 10 key issues likely to affect you and your business in 2012. This post is based on input and analysis from Reed Smith attorneys across the United States. The 10 issues to watch are:

  1. Offshore wind power generation
  2. Renewable energy incentive programs
  3. Hydraulic fracturing regulation
  4. Aggregation
  5. Greenhouse gas litigation
  6. California's cap-and-trade program
  7. California's Green Chemistry program
  8. New mercury standards for coal and oil-burning power plants
  9. Fallout from CERCLA decision in Burlington Northern and Santa Fe Railway Co. v. U.S.
  10. Conflict minerals and disclosure requirements

Please return to blog regularly and participate in our quarterly teleseminar to get updates and analysis on these and many other environmental and energy issues.

1. Offshore Wind Power Generation (Robert Vilter, New York)

The Obama Administration is pursuing the development of 10 gigawatts of offshore wind-generating capacity by 2020, and 54 gigawatts by 2030. This would produce enough energy to power 2.8 million and 15.2 million homes, respectively. However, because of complicated and overlapping federal and state regulations, it takes anywhere from seven to 10 years to receive approvals and to fully permit an offshore wind project – more than double the amount of time it takes to permit an offshore oil or natural gas platform. The U.S. Department of the Interior has announced a “Smart from the Start” wind energy initiative to facilitate siting, leasing and construction of new projects in an effort to shorten this time line. Keep in mind that offshore wind farms, such as Cape Wind, also face local hurdles to development, oftentimes in the form of opposition by well-funded citizen groups.

2. Renewable Energy Incentive Programs (Arnold Grant, Chicago)

The cash grant program enacted under Section 1603 of American Recovery and Reinvestment Act in order to help renewable energy developers has expired except for projects that (i) began construction before January 1, 2012, and (ii) are placed in service before a specified date. The date varies depending on the type of project. The major remaining federal tax benefits are the energy tax credit under IRC Section 48, the production tax credit under IRC Section 45, and accelerated tax depreciation under IRC Section 168. Various structures are available to help renewable energy developers monetize these incentives.

3. Hydraulic Fracturing Regulation (Larry Demase, Pittsburgh)

Hydraulic fracturing or “fracking” is a practice of stimulating and maximizing production of natural gas in shale formations that has been in use in the United States for more than 50 years, but which has recently gained public attention. It involves pumping, under high pressure, a mixture of very large quantities of water and very small quantities of chemicals and proppants to create fissures in the shale and to hold fissures open so that gas will flow in greater quantities to the well bore. The controversy over its use concerns the amount of water being withdrawn from ground and surface resources, alleged contamination of drinking water from the fracking fluid and the disposal and treatment of waste water. In 2011 the U.S. Environmental Protection Agency (EPA) announced it will study the impacts of hydraulic fracturing on drinking water resources. The results of EPA’s study are intended to provide decision makers with some answers to fundamental questions about the effect of fracking on drinking water. The results will also no doubt be the impetus for regulatory and policy changes that could have a significant impact on the shale gas industry. A panel of experts will analyze the effect of fracking using reported cases of alleged groundwater contamination, laboratory studies, toxicological assessments of chemicals used in hydraulic fracturing, their degradation and/or reaction products, and naturally occurring substances that may be released or mobilized as a result of fracking.

There will be two reports resulting from EPA’s study with the first to be completed in 2012. An additional report based on long term study projects is to be issued in 2014. In the meantime, look for states to address these issues in various ways.

4. Aggregation (Larry Demase, Pittsburgh)

As we’ve discussed in previous posts, aggregation is the process of determining whether emissions from multiple operations should be aggregated into a single source for air permitting purposes. A significant issue related to oil and gas operations is whether emissions from individual operations, such as wells, processing plants and compressor stations, should be combined so that they become major sources for permitting purposes, subject to Title V requirements and New Source Review.

In 2011, a number of public interest groups challenged air permits issued by the Pennsylvania Department of Environmental Protection (DEP) on the grounds that DEP should have included multiple sources of emissions in those permits so that they would be considered “major” permits. The Clean Air Council, Group Against Smog and Pollution, and Citizens for Pennsylvania’s Future have asserted before the Pennsylvania Environmental Hearing Board and the United States District Court for the Middle District of Pennsylvania, that DEP failed to properly apply the three-part test for deciding whether sources should be “aggregated” together for permitting purposes. One case asserts that the permittee should be penalized for failing to submit an “aggregated” permit application. Decisions in these cases could result in precedents that will impact development of the shale gas industry in Pennsylvania.

Initial decisions in all three cases are expected in 2012, but final results could be extended if the losing parties seek appeals.

5. Greenhouse Gas Litigation (Jennifer Smokelin, Pittsburgh)

Regarding greenhouse gas (GHG) litigation, there are two main areas to watch in 2012: (i) the United States Supreme Court (and the Ninth Circuit) in the aftermath of American Electric Power v. Connecticut (AEP), and (ii) four consolidated cases in the D.C. Circuit challenging the endangerment finding slated for argument at the end of February.

Before the Supreme Court ruled in Massachusetts v. EPA, certain states sued the nation’s five largest coal-fired electric power corporations in the Southern District of New York under federal and state common law, charging AEP and other defendants with contributing to the public nuisance of global warming and seeking an injunction to cap and reduce their carbon dioxide emissions. The AEP Court voted unanimously that federal common law had been “displaced” by the Clean Air Act (and the Obama Administration’s efforts to regulate emissions), and thus states cannot use federal common law to restrict greenhouse gas emissions. The AEP ruling leaves open the question of (i) whether states can sue under state law, and (ii) whether climate change victims can seek damages through the courts. The issues are likely to be litigated in 2012 in a case, Kivalina v. Exxon Mobil.

Following the decision in Massachusetts v. EPA, but before AEP was decided in the U.S. Supreme Court: (i) EPA published two endangerment findings under the Clean Air Act, triggering a mandatory duty for EPA to adopt regulations to control emissions from power plants, industries, motor vehicles, and other sources; (ii) EPA issued tailpipe emission standards for new cars and trucks under the Clean Air Act; and (iii) EPA issued Best Available Control Technology (BACT) guidance for new sources and New Source Performance Standards (NSPS) for existing sources of GHG emissions under the Clean Air Act. Four cases are consolidated in the D.C. Circuit that challenge EPA’s Endangerment Findings. The cases are Coalition for Responsible Regulation Inc., et al. v. EPA, case numbers 09-1322, 10-1092 and 10-1073; and American Chemistry Council v. EPA, case number 10-1167, in the U.S. Court of Appeals for the District of Columbia Circuit. Argument will take place February 28 and 29, 2012. This is a very complex series of cases that will affect not only utilities but many other industries as well, since the fundamental underpinning to all GHG regulation under the Clean Air Act is essentially up for review.

6. California’s Cap-and-Trade Program (Todd Maiden, San Francisco)

In October 2011, the California Air Resources Board approved final regulations implementing a “cap-and-trade” program under the state’s climate law (more commonly referred to by its legislative bill number, “AB 32”). These regulations became effective January 1, 2012, and many consider California a possible test case for similar programs in other parts of the country. Regulated entities under the first phase of this program include utilities and large industrial facilities (i.e., emitters of greater than 25,000 metric tons of CO2 equivalent per year). The regulations trigger two 2012 auctions for buying and selling rights to emit, and requires entities to comply with a series of progressively stringent emission caps beginning January 2013.

7. California's Green Chemistry Initiative (Todd Maiden, San Francisco)

In October 2011, California’s Department of Toxic Substances Control (DTSC ) released revised “informal” draft regulations of its Green Chemistry initiative titled the “Safer Consumer Products Regulation.” DTSC’s new informal draft makes substantial changes, specifically in the areas of timeframes, the prioritization of chemicals and products, alternative assessment compliance, and exemptions. The informal draft also significantly broadens the chemicals that will initially be regulated to include an estimated 3,000 Chemicals of Concern without limits on which product categories may initially be considered. These draft regulations are highly controversial, yet DTSC is projecting that it will likely finalize these regulations – or something close to them – in spring 2012.

In a related development, California’s Office of Environmental Health Hazard Assessment recently finalized separate regulations that regulate the hazard traits in chemicals of concern. While finalized, these regulations remain controversial within the regulated community, and we anticipate administrative or litigation challenges to these regulations as well.

8. New Mercury Standards for Coal and Oil-Burning Power Plants (Douglas Everette, Washington, D.C.)

The final version of EPA's Mercury and Air Toxics Standards, or MATS rule, was signed December 21, 2011. For the first time in history, power plants will have to reduce all of their air toxic emissions, not just mercury, arsenic and lead – but a wide range of toxic chemicals. For coal-fired generators, the MATS rule sets emissions limits for mercury, particulate matter (a surrogate for toxic metals), and hydrogen chloride (a surrogate for acid gases). For oil-fired units, limits are set for particulate matter, hydrogen chloride and hydrogen fluoride. Also revised are new source performance standards for power plants to address emissions of particulate matter, sulfur dioxide and nitrogen oxides. According to EPA, approximately 1,400 existing coal and oil-fired units are affected. Existing sources are required to comply within three years of the effective date of the MATS rule, with case-by-case extensions up to five years beyond the effective date for documented electric reliability issues. These extensions are not offered to new or reconstructed sources. Vigorous debate centers on the practical implementation of the MATS rule deadlines and whether the electric grid will have enough capacity to avoid outages stemming from coal power plant retirements.

9. Fallout from Burlington Northern and Santa Fe Railway Co. v. U.S. (Robert Frank, Philadelphia)

In Burlington Northern and Santa Fe Railway Co. v. United States (BNSF), 556 U.S. 599 (2009), the U.S Supreme Court decided two key issues for parties facing Superfund liability: the standard for establishing “arranger” liability and the standard for establishing divisibility of liability. Since then, more than 100 courts have cited the decision. On arranger liability, including two at the federal appellate level, the cases illustrate that courts are following the Supreme Court’s directive to conduct a fact-intensive inquiry into a defendant’s purported “intent” to dispose of a hazardous substance. It’s fair to say that courts have been more reluctant to establish liability under an arranger theory than in the era preceding BNSF and look for that trend to continue in 2012.

For example, last year, the Ninth Circuit issued its first “arranger” liability decision under CERCLA since being reversed by the Supreme Court in the 2009 Burlington Northern decision.

In Team Enterprises, LLC v. Western Investment Real Estate Trust, 647 F.3d 901 (9th Cir. 2011), plaintiff argued that the requisite "intent to dispose" element necessary to trigger CERCLA arranger liability could be inferred from the fact that the dry cleaning machine was designed in a way that made disposal inevitable. Plaintiff also argued that the fact that the manufacturer exercised control over the disposal process provided a sufficient basis to infer the requisite intent necessary to trigger CERCLA arranger liability. The Ninth Circuit held that a manufacturer of equipment used to recycle wastewater from dry cleaning machines, as a matter of law, had neither the intent nor the control necessary to be held liable as an arranger. The court held that, to sustain an arranger claim against a “company selling a product that uses and/or generates a hazardous substance as part of its operation,” the plaintiff must prove “that the company entered into the relevant transaction with the specific purpose of disposing of a hazardous substance.” The holding underscores the high bar plaintiffs must meet in order to establish CERCLA arranger liability following the BNSF decision.

Regarding divisibility, there have been fewer cases applying the Supreme Court’s divisibility holding in BNSF. Generally, the courts looking at whether a “reasonable basis” for apportionment exists have reviewed the evidence that defendants have submitted to determine whether they have met their burden of proof. These cases have been very fact-intensive and, so far, it is difficult to identify a trend.

10. Final Rules for Conflict Minerals (David Wagner, Pittsburgh)

Section 1502 of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to issue disclosure and reporting regulations regarding manufacturers’ use of conflict minerals from the Democratic Republic of Congo (DRC) and adjoining countries. The SEC was required to issue its conflicts minerals rules last year but missed the deadline. Look for the final rules – and plenty of implementation concerns – sometime in 2012. The legislation for conflict minerals is part of a broader multilateral effort to require manufacturers and other users of certain minerals to closely track and publicly disclose where their raw materials originate. It is designed to suppress end-use demand for minerals produced in certain high-risk areas where minerals operations and revenues have been linked to violent and repressive rebel groups.

The law focuses on forcing supply chain transparency for users of certain minerals (which are used primarily in electronic components, engine components, aerospace equipment, jewelry and other industries). It does not directly impose restrictions on mining or metals companies, or create any sort of embargo on the DRC.

Slides and Audio from Reed Smith's January 25 Environmental and Energy Law Resource Teleseminar

On Wednesday, Reed Smith held its quarterly environmental and energy law resource teleseminar and the slides and audio are available for download. We were ambitious and discussed 10 key issues likely to affect you and your business in 2012. Our high level discussion was on the following:

  1. Offshore wind power generation
  2. Renewable energy incentive programs
  3. Hydraulic fracturing regulation
  4. Aggregation
  5. Greenhouse gas litigation
  6. California's cap-and-trade program
  7. California's Green Chemistry program
  8. New mercury standards for coal and oil-burning power plants
  9. Fallout from CERCLA decision in Burlington Northern and Santa Fe Railway Co. v. U.S.
  10. Conflict minerals and disclosure requirements

Be sure that we will monitor and analyze these issues and many other environmental and energy issues through the year on our blog and in future teleseminars.

The Long and Winding Rule: USEPA's Cross-State Air Pollution Rule the Latest to Address Interstate Air Pollution

This post was written by Steve Nolan.

In previous posts, we have reported the vacation of the Clean Air Interstate Rule (CAIR) in 2008, CAIR's subsequent, temporary resuscitation later that year, and the 2010 release of the draft Transport Rule which was proposed to replace CAIR. On July 7, 2011, the U.S. Environmental Protection Agency (USEPA) released the final version of this rule, now renamed the Cross-State Air Pollution Rule (Cross-State Rule).

The Cross-State Rule is specifically directed at emissions from electric generating units in classes 2211, 2212 and 2213 of the North American Industry Classification System. Like CAIR, the new rule is intended to help downwind states achieve USEPA's National Ambient Air Quality Standards (NAAQS) for fine particulate matter and ozone. Also like CAIR, the new Cross-State Rule actually regulates sulfur dioxide (a chemical precursor of fine particulate matter) and nitrogen oxides (a chemical precursor of both fine particulate matter and ozone) generated by upwind states.

By 2014, USEPA estimates that the Cross-State Rule will reduce emissions of sulfur dioxide by 6.4 million tons per year from covered states compared with emissions in 2005, the last year before CAIR came into effect. This represents a 73 percent reduction from 2005. The corresponding figures for nitrogen oxide are a reduction of 1.4 million tons, representing a 54% change. Less stringent reductions will be required by 2012.

The states are allocated initial emissions allowances, and the new rule, like CAIR, establishes a cap-and-trade marketing scheme. However, because of the circuit court's holding in which it vacated CAIR in 2008, out-of-state trading is only allowed to a limited extent.

Further details of the Cross-State Rule’s implementation will become apparent as USEPA issues federal implementation plans for each of the states impacted by the rule. It is intended that the federal implementation plans will ultimately be replaced by state implementation plans. Furthermore, the reductions required of electric generating units in the near future may be further increased by USEPA’s new fine particle NAAQS and reconsidered ozone NAAQS, both of which are proposed to be released later this summer.
 

In Case You Missed It, Here Are Slides and Audio from Reed Smith's June 16 Climate Change Event

This post was written by David Wagner.

Last week, we discussed recent international and U.S. developments related to greenhouse gas regulation, and here are the slides and audio from the event. In particular, we addressed:

  • How the uncertain future of the Kyoto Protocol and the Clean Development Mechanism affect U.S. business (You can also find details on this issue here)
  • What your business needs to know for compliance and planning related to step 2 of USEPA's greenhouse gas Tailoring Rule
  • Implications of the court's "cap and trade" ruling in Association of Irritated Residents v. California Air Resources Board
  • Developments in state courts including upcoming decisions on insurers' obligation to defend and/or indemnify covered insureds for public nuisance, and other types of claims based on third-party allegations of damages from climate change
     

Will a Clean Energy Standard "Win the Future"?

This post was written by Todd Maiden, Jennifer Smokelin and David Wagner.

In the 2011 State of the Union address, President Obama urged lawmakers to establish a clean energy standard (CES) with a goal of 80 percent of the nation’s electricity to come from “clean” sources by 2035. The President emphasized that a CES would recognize electricity from not only renewable energy sources but also nuclear, coal with carbon capture and storage technology and natural gas. Calling the clean energy push “our generation’s Sputnik moment,” the President’s speech framed a clean energy standard in the larger context of improving the United States’ competitiveness in the global economy.

With this announcement, it’s fair to say we’ve officially shifted the federal political climate change discussion from cap and trade to the creation of a clean energy standard. Putting aside a comparison of the two approaches, here are a few things to know and watch for in the upcoming debate on a clean energy standard.

How a CES Would Work

In general, under a national CES, electricity supply companies would have to produce a certain percentage of their electricity from clean energy sources, purchase a like amount of credits, or a combination of both. Certified clean energy generators would earn credits for every unit of electricity they produce and could sell these along with their electricity to supply companies. The electricity supply companies would then submit the credits to a regulatory body to demonstrate compliance. Essentially, a CES is a form of “command and control” permitting on the electricity sector and would work much the same as if each electricity generating unit’s permit had an additional condition inserted to provide a certain portion of its electricity from clean (as defined in the proposal, see below) energy sources. But to the energy consumer, the CES proposal would look like a tax, in that the unit’s cost of energy would increase some finite amount, reflecting that cost to comply with the CES.

How is CES Different from RES?

A CES would require electric utilities to generate a portion of power from sources that emit less carbon dioxide such as solar and wind power. But the CES is broader - and presumably more palatable - than the Renewable Energy Standard (RES) legislation that failed to pass the Congress last year. As the President proposed last week, a CES would include nuclear, coal with carbon capture and storage, and natural gas, as well as typical renewable energy sources such as solar, wind, bioenergy, geothermal and hydroelectric power.

Core Principles of the Administration’s CES Proposal Includes Carbon Capture and Storage

It is important to note that a CES – due to its broad inclusion of many non-renewable, traditional energy sources such as natural gas - is, as portfolio standards go, generally viewed as a victory for business. The distinction between “clean energy” and “renewable energy” as described above has been supported by Republican administrations (see G8 Summit Declaration, paragraphs 59-64 (June 7, 2007), where the United States supported a definition of “clean energy” defined to include clean coal and nuclear as well as renewable sources) and a CES is by no means a new concept. How, exactly, the details of this Administration’s definition of the term differs from previous proposals remains to be seen.

Under the Administration’s broad CES proposal, one of its five core principles emphasized that full clean energy credits would be issued for electricity generated from renewable and nuclear power with partial credits given for coal using carbon capture and storage and “efficient” natural gas. It’s worth noting that one of the core principles also specifically proposed the promotion of new and emerging clean energy technologies, and, under this principle, the Administration singled out the promotion of coal with carbon capture and storage technology.
Political Wrangling over a CES

A diverse portfolio of fuels under a CES may attract some legislators while pushing some lawmakers away from certain fuels. For example, some commentators have observed that if natural gas is included in a CES that could result in electric utilities using less coal. And coal has strong backing in the U.S. Congress. There’s also likely to be debate on whether a CES bill should block the U.S. Environmental Protection Agency (EPA) from regulating the largest emitters of greenhouse gases. In other words, will the prospect of suspending EPA’s greenhouse gas regulations in exchange for a clean energy standard be used as a negotiating tool? Further, some legislators will have issues over enacting a government mandate that forces electric utilities to derive a certain percentage of their electricity from specific fuel sources.

Some CES Design Elements to Consider

In addition to discussing the portfolio of clean (or cleaner) energy sources, the discussion of a CES would also likely include issues such as determining partial credits for carbon capture and storage and natural gas, cost caps, cost recovery by utilities, the status of state renewable portfolio standards, state implementation issues, CES program coverage, and penalties for non-compliance.

Determining Partial Credits for Carbon Capture and Storage and Natural Gas

  • How would a CES calculate partial energy credits for coal with carbon capture and storage and for “efficient” natural gas?

Cost Caps on Utilities

  • Would a CES include a cap on the cost of the program or include some form of escape clause where the regulatory entity could exempt utilities from meeting its requirements? The possible inclusion of a cost cap arises from the difficulties in estimating in advance the actual cost of the program.


Cost Recovery by Utilities

  • Would electric utilities be allowed to recover the cost of penalties associated with non-compliance through a ratepayer surcharge?

Status of State RPS Programs

  • What would happen to the varying Renewable Portfolio Standards (RPS) currently in place in about 30 states? Would state RPS credits be eligible for a federal CES? Would a federal CES preempt these state standards? Alternatively, would a national CES establish a floor for using clean energy that states could exceed with their own standards?

Implementing a CES on the State Level

  • When it comes to the generation of clean energy, every state has a different starting point. Would a CES allow for differentiated clean energy targets among the states? How would it account for regional diversity in eligible clean energy resources?

CES Program Coverage

  • Would a CES carveout small utilities? Under some state RPS programs, small public utilities are exempt from the RPS target, have a lower target, or are required to develop their own targets.

Penalties for Non-Compliance

  • In order to motivate compliance, would a CES have enforceable standards with penalties for utilities that fail to reach the specified targets?

Banking

  • Would the CES standard allow for unlimited banking of credits, to encourage early investment?

Next Steps

These are just some of the issues to look for as the discussion of a CES ramps up. It’s early in the process but the Administration’s overriding interest in promoting economic growth, creating jobs, competing globally on green technology and investing in the country’s infrastructure is likely to spark significant interest in a national clean energy standard – and debate on Capitol Hill. Stay tuned.
 

New Climate Bill Likely to be Unveiled in the U.S. Senate Next Week

This post was written by Ariel Nieland.

Based on news reports, Senator John Kerry (D-Mass.), along with Senator Lindsey Graham (R-S.C.), and Senator Joseph Lieberman (I-Conn.) plan to release a revised climate bill aimed at cutting U.S. industry emissions of carbon dioxide and other greenhouse gases associated with global climate change. It may be unveiled as early as next week in time for Earth Day on April 22. A key issue raised in prior climate bills, which the new bill is not expected to address, is the creation of a national "cap and trade program" for managing greenhouse gases, such as the ones currently in place in the European Union to reduce greenhouse gases and in the U.S. to control acid rain-causing sulfur dioxide. The new climate bill will, however, likely provide for an overall cap on greenhouse gas emissions for certain utilities, with other industries to be phased in over time, as well as "a modest tax" on transportation fuels. The bill is also expected to incentivize construction of nuclear power plants, carbon capture and storage facilities, renewable energy sources such as wind and solar power, as well as oil and gas drilling.
 

Climate Change Regulation After Copenhagen: Now What? For Starters, Consider Turning Your GHG Emission Reductions into an Asset

This post was written by Larrry Demase, Jennifer Smokelin, Todd Maiden and David Wagner.

In this client update, Reed Smith attorneys (including COP15 delegates Larry Demase and Jennifer Smokelin) reflect on what transpired in Copenhagen and offer some advice regarding what regulated entities should do next.

Among other issues, the update discusses how to position your GHG-intensive business to minimize compliance costs in a carbon-constrained economy. It also addresses how to position your GHG emission reduction credits to serve as an asset. For example, regulated entities should make sure they have documented and verified all of the GHG credits to which they are entitled. One group of potential GHG credits that comes to mind after the economic downturn last year are credits available as a result of reduced GHG emissions. Consider: Have your facilities reduced GHG emissions in the past year, because of plant idling or reduced production capacity? Have you reduced your carbon footprint measurably and permanently? Or are you beginning to reduce your GHG emissions to improve efficiency? If so, some of these reductions in GHG emissions may be eligible for credits. These credits, which must be properly documented and verified, could potentially be sold or traded on various mandatory and voluntary markets (EU-ETS and/or the Chicago Climate Exchange, for example), or banked for compliance with the inevitable domestic cap-and-trade program.

In short, there may be opportunity here. Reed Smith can work with you to determine which GHG reductions at your facilities are eligible for credits, and help plan how to maximize the potential opportunities, or even how to profit from these credits.

In the US, Federal Legislation on Cap and Trade: What to Expect

This post was written by Jennifer Smokelin.

 In President Obama's Feb. 24, 2009 address to Congress, he called on "Congress to send me legislation that places a market-based cap on carbon pollution." His address, coupled with the President's FY 2010 budget proposal, outlined the Administration's plans to develop a comprehensive energy and climate change plan to invest in clean energy, end our addiction to oil, address the global climate crisis, and create new American jobs that cannot be outsourced. After enactment of the budget, the Administration indicated it will work expeditiously with key stakeholders and the Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. The Obama Administration anticipates that this program will be implemented through a cap-and-trade system, a policy approach that was used to regulate sulfur dioxide emissions and which significantly reduced acid rain at much lower costs than the traditional government regulations and mandates of the past. Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, the government projects that this program would fund investments in a clean energy future totaling $150 billion over 10 years, starting in FY 2012. The balance of the auction revenues would be returned to public programs to assist families, communities, and businesses in the transition to a clean energy economy.

 Given this emphasis, we are likely looking at federal legislation this year in the form of a federal cap and trade program (although this may be delayed somewhat due to the economic crisis). Stay tuned to this blog for comments regarding what will it look like, what business opportunities to expect, and what you can do now to shape legislation.
 

A CAP-ital Idea: Business Opportunities for Covered Sources in a US Cap-and-Trade System

 This post was written by Jennifer Smokelin.

Is cap-and-trade likely in the new administration? President Obama's comprehensive New Energy for America plan supports implementation of an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent below 1990 levels by 2050. Details of the to-be-proposed cap-and-trade program are still fuzzy – but where do we look for clues as to the design of the system, which may be passed as early as 2010?

The answer is look to what has previously been the most successful piece of proposed legislation to garner support in Congress to date. The only greenhouse gas cap-and-trade bill that has ever been voted out of a congressional committee is the Lieberman-Warner Climate Security Act of 2007, proposed by Sens. Joe Lieberman, (I-Conn.), and John Warner, (R-Va.). The Senate bill failed to muster the required 60 votes to close off debate in June 2008 and was withdrawn, but it is sure to return in 2009 after a new administration and Congress take office. Thus, it is important to analyze the business opportunities proposed in this bill, as some are likely to be included in whatever national legislation inevitably is passed.
 

To see the full-text article, click here.

California Air Resources Board Approves Climate Change Scoping Plan: California Cap and Trade Program

This post was written by Robert Dellenbach.

The California cap-and-trade program is a prominent component of the California Air Resources Board’s Climate Change Scoping Plan.

Highlights:

  • Caps on greenhouse gas emissions will be imposed beginning in 2012, and by 2015, 85 percent of California greenhouse gas producers will be subject to caps; these caps will decline over time to achieve 1990-level emissions by 2020
  • Tradable allowances will be distributed to producers, giving them the right to emit greenhouse gasses, up to their respective caps, for specific periods of time
  • By January 1, 2011, California regulators must finalize regulations for the system, including the mechanics of the market for trading allowances.
  • It has not yet been determined whether allowances initially will be granted, sold or auctioned – we expect many interests to weigh in before the final program is adopted
  • Development of this system will result in substantial cost and wealth transfers, requiring vigilance by affected businesses and offering a number of opportunities for entrepreneurs and opportunistic enterprises.

Cap-and-trade refers to a system in which production of pollutants is capped, producers receive allowances, giving them the right to pollute up to their respective caps, and a market is created for trading allowances among producers, The ability to trade allowances gives producers the opportunity to choose between reducing production or buying allowances from producers that don’t need them – by reducing their own production below their caps. Cap-and-trade systems have been adopted in Europe for greenhouse gas emissions under the European Union Emission Trading Scheme and in the US for the reduction of acid rain. A federal cap-and-trade program for greenhouse gas emissions has been proposed, but is not yet as developed as the program mandated by California AB32. In theory, the cap-and-trade market rewards more efficient constituents and offers flexibility to more deliberate constituents, allowing the benefits of reduced emissions to be achieved at the least overall cost. In practice, a number of challenges, including market resistance and the cost of administration, face cap-and-trade systems as they are implemented.

To implement the cap-and-trade program under the Scoping Plan, the state plans to:

  • impose a cap on total greenhouse gas emissions which will decline over time to achieve 1990 levels by 2020;
  • issue and distribute “allowances,” units of allowed emissions under the cap, to greenhouse gas producers;
  • award “offsets” for verifiable reductions in emissions not otherwise covered by a cap or other regulation that may be applied toward compliance in addition to allowances; and
  • create a market in which allowances and offsets may be traded.

The declining cap specifies the ceiling on greenhouse gas emissions for a specified producer at a given time. By 2012, caps will be imposed on electricity generation and large industrial facilities emitting more than 25,000 metric tons of CO2E per year, and by 2015 the caps will extend to other industrial facilities as well as commercial, residential and transportation fuel combustion. Each of the capped producers will require allowances or offsets to be able to emit greenhouse gasses after the applicable cap effective dates.

Creating a market for allowances and offsets offers flexibility and encourages innovation and investment while striving to achieve an overall reduction in greenhouse gas emissions. Opportunistic producers may sell their excess allowances or offsets to more deliberate producers, giving prospective sellers an incentive to innovate and invest in reduction programs and offering buyers additional flexibility in achieving compliance. Allowances may also be banked for future use, encouraging early emission reductions and reducing market volatility. In addition, allowances may be set aside for dedicated purposes, including early compliance and use by local governments for targeted projects.

The California cap-and-trade system will be linked with the regional cap-and-trade system being developed by the Western Climate Initiative, which was formed in 2007, and includes the states of California, Arizona, New Mexico, Oregon, Washington, Utah, and Montana, and the Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec. Regional cap-and-trade offers even greater flexibility and market stability and helps reduce “leakage,” the movement of greenhouse gas production from California to other areas.

A number of significant challenges will need to be addressed in the rule-making process. These include:

  • Determining and setting caps for individual producers;
  • The method for distributing allowances, whether by grant, sale or auction;
  • Measuring compliance with allowances and verifying milestones for offsets; and
  • The nature of incentives offered for early compliance.

Businesses and business operations in California should plan for the impact of the impending caps and consider providing input into the rule-making process. Allowances and offsets will represent substantial economic value, and many interests are expected to weigh in on development of the final regulations for the program.

Implementation of the cap-and-trade system in California and the Western Climate Initiative offers a number of opportunities for entrepreneurs and opportunistic enterprises. In addition to producers who can derive value from early reduction of greenhouse gas emissions, these include developers of alternative energy sources, biofuels, energy storage and management systems, green manufacturing processes, chemicals and building materials, and water purification and distribution technologies, valuation experts and financial engineers who can assist producers in evaluating alternatives and generating and trading allowances and offsets, market makers and brokers, and investors in the enterprises addressing each of these areas.

Click here to return to Scoping Plan overview.

Greenhouse-Gas Cap and Trade in the US

This post was written by Jennifer Smokelin.

Will national GHG cap and trade hit this country? If so, when? Will the cap and trade system affect your client? And can your clients take advantage of trading in GHG cap and trade before then (IETA estimates predict an overall growth to 70 billion Euro next year in the global market for carbon, of which EU-ETS is 75 percent)?  The Lieberman-Warner Climate Security Act of 2007 (S.2191), which would establish a national cap-and-trade system to reduce U.S. greenhouse-gas emissions, is much less stringent than some other climate bills in Congress, but Lieberman-Warner is so far the only one to pass out of committee; it's scheduled for a Senate vote in June. It would become effective in 2012 and affect 80 percent of the GHG emitting sectors in the United States. Further, U.S.-based entities can benefit today from the carbon markets created by the Kyoto Protocol and the European Trading System (ETS), even though the United States has not ratified Kyoto. They can do so by investing in Clean Development Mechanism (CDM) projects in "non-Annex I" countries like Mexico, and then trading the resulting Certified Emissions Reductions (CERs) into the ETS at a current estimated value of $27 per ton CO2 equivalent. In addition, under Lieberman-Warner as passed out of committee, foreign-generated credits might be used to meet required allowances in the early years of the U.S. cap-and-trade program.