Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

1.         The Start of USEPA’s “Tailoring” Rule

Despite a lot of buzz, proposed bills and speculation, the U.S. Congress failed to comprehensively address GHG emissions last year. In filling the void, USEPA has taken several steps to regulate GHGs, including promulgation of the Tailoring Rule, the first rule under the stationary source provisions of the Clean Air Act controlling GHG emissions. It applies only to new and modified sources; certain larger GHG emission sources will be subject to permitting requirements for planned construction projects under the Tailoring Rule starting January 2, 2011. For further details on this and related issues, please contact Larry Demase, Lou Naugle, Todd Maiden, Harley Trice or Jennifer Smokelin.

2.         The Application of USEPA’s BACT Guidance for GHGs

USEPA recently released a key piece of the GHG permitting puzzle, a guidance entitled “PSD and Title V Permitting Guidance for Greenhouse Gases.” With the January 2011 implementation of the Tailoring Rule requiring large industrial sources to obtain permits for GHG emissions, this guidance aims to assist permitting authorities in enacting GHG permitting programs. In particular, the 97-page document addresses Prevention of Significant Deterioration (PSD) applicability to GHG and BACT (Best Available Control Technology), and other PSD requirements. The guidance also discusses Title V applicability requirements and GHGs, as well as permitting requirements for Title V permits with regard to GHGs. We’ve analyzed these BACT issues on our blog and discussed them in our quarterly climate change teleseminars. For further details on this and related issues, contact Larry Demase, Jennifer Smokelin or David Wagner.

3.         With the Defeat of AB 23 in California, the State Continues to Pursue Cap and Trade

Proposition 23 would have suspended California's Global Warming Solutions Act of 2006, also known as AB 32. AB 32 is one of the most aggressive and forward-thinking environmental laws in the United States, and sets targets to reduce greenhouse gas emissions to 1990 levels by 2020 and obtain 33 percent of the state’s power from renewable sources by 2020. California's voters’ rejection of a ballot measure to effectively suspend the implementation of AB 32 means California remains on track to issue aggressive cap and trade regulation of GHGs come 2012. For further details on this and related issues, contact Todd Maiden, John Lynn Smith, or Eric McLaughlin.

4.         SEC’s Corporate Disclosure Requirement Regarding Climate Change

Early last year, the Securities and Exchange Commission voted to adopt interpretive guidance addressing public company disclosure standards in connection with climate change. While this interpretive guidance is not intended to impose new standards, it continues to serve as an important reminder for public companies, potentially as part of their disclosure controls and procedures, to assess whether climate change may have a material impact upon their business and financial condition. For further details on this and related issues, contact Lou Naugle or Jennifer Smokelin.

5.         Following COP Failures in 2009 and 2010, Will 2011 Reverse the Trend?

This United Nations-sponsored conference of the parties (“COP”) in Copenhagen at the end of 2009 (also know as COP 15, as the 15th conference of parties under the UNFCCC) was thought to be the vehicle for a treaty on the reduction of GHG gases, but produced almost no significant results. Further, last month’s COP 16 did not seem to make any significant progress on major issues, but it did serve to affirm the UN as the venue for international climate action. With several UN climate meetings in 2011, including COP 17, we’ll again look for significant international agreement on climate issues in 2011. For further details on this and related issues, contact Larry Demase, Jennifer Smokelin or David Wagner.

6.         Increasing Interest in Regulations Related to Carbon Capture and Storage

Although carbon dioxide (CO2) is a valuable and marketable commodity, there are several barriers to the near-term deployment of commercial-scale carbon capture and storage (CCS) projects in the United States. They include cost and the related lack of economic drivers, regulatory uncertainty, and an inadequate legal framework for CCS. There is, however, a growing federal interest in CCS, and Jennifer Smokelin recently discussed a few examples of this interest, including USEPA’s BACT guidance and a GHG reporting rule. In particular, a USEPA rule requires permit holders to create a CO2 monitoring, reporting and verification plan, and to report the amount of CO2 sequestered using a mass balance approach under the Clean Air Act. Regulated entities must collect data in 2011 and begin submitting reports to USEPA by March 31, 2012. Also, in 2011, look for more CCS activity on the state level, including recommendations in support of a comprehensive legal/regulatory framework for permitting proposed CCS projects in California. Internationally, we expect the International Energy Agency to work with countries to implement its CCS Model Regulatory Framework. To learn more about CCS issues, please contact Jennifer Smokelin or David Wagner.

7.         Mandatory GHG Emission Monitoring and Reporting Requirements

GHG reporting requirements from certain sources that emit 25,000 metric tons or more of GHGs per year are due March 31, 2011. Douglas Everette addressed issues and problems to consider regarding GHG emissions monitoring and reporting in Reed Smith's 4th Quarter Climate Change Report. In addition to this rule and the GHG reporting requirements related to carbon capture and sequestration (discussed above), USEPA finalized a rule that requires the annual reporting of GHG emissions from qualifying facilities in the upstream oil and natural gas sector, including onshore production. USEPA is operating on an expedited timetable, requiring applicable industries under these rules to begin collecting data January 1, 2011, and begin submitting the first round of reports to USEPA by March 31, 2012. For more information on the rules, please go to Jennifer Smokelin’s post or send her an email.

8.         Single Stationary Source Determinations for Oil and Gas Operations

Here’s an air issue of particular relevance to Marcellus Shale well sites: whether and to what extent air emissions from the exploration, extraction and production activities related to well sites should be aggregated. The aggregation of gas (and oil) activities by regulatory bodies will influence whether they must obtain a minor source permit or a major source permit for purposes of Title V permitting, new source review and prevention of significant deterioration. With respect to Marcellus Shale, the pollutant-emitting activities include individual compressor stations, such as internal combustion engines, boilers, and emergency generators, and multiple compressor stations connected by pipelines. In 2011, aggregation will be an issue related to USEPA’s upcoming air quality standards for ozone and fine particulate matter (PM 2.5), technical guidance developed on the state level (including by Pennsylvania’s Department of Environmental Protection), and the scope of the federal requirement to report GHG emissions for “all petroleum and natural gas equipment … located in a single hydrocarbon basin.” To discuss these issues, please contact Lou Naugle, Larry Demase, Jennifer Smokelin or David Wagner. 

9.         For the First Time, USEPA Will Issue GHG Emission Standards

Under a recent settlement filed in federal appeals court, USEPA will propose GHG emissions standards for power plants by July 2011 and for refineries by December 2011. The standards, known as New Source Performance Standards, would set the level of GHG emissions new facilities may emit and also address emissions from existing facilities. For more information, contact Larry Demase, Lou Naugle or Jennifer Smokelin, or visit Larry’s blog post on this development.

10.       With the Approval of the Cape Wind Renewable Energy Project in Nantucket Sound, Other Approvals Are Expected in Late 2011

In early 2010, the federal government approved the Cape Wind energy project in Nantucket Sound, a $1 billion wind farm in the U.S. Outer Continental Shelf. According to the government, the Cape Wind project will generate enough power to meet 75 percent of the electricity demand for Cape Cod, Martha's Vineyard and Nantucket Island combined, and, as compared with conventional power plants, will cut carbon dioxide emissions by 700,000 tons each year. Building on the Cape Wind lease, the U.S. Department of the Interior announced in November that it would work quickly to identify priority areas and expedite leases for offshore wind projects in the Atlantic Ocean. The first leases are expected to be offered in Maryland, Delaware, New Jersey, Virginia, Rhode Island and Massachusetts waters by the end of 2011, to be followed shortly thereafter by New York, Maine, North Carolina, South Carolina and Georgia. For questions related to this issue, including applications for offshore transmission lines, please contact Larry Demase or David Wagner.

11.       The Clean Development Mechanism and the Uncertainty in the Carbon Markets Created by HFCs

The United Nations’ Clean Development Mechanisn (CDM) allows industrialized countries to invest in emission reductions wherever it is cheapest globally, and certified emission reductions (CERs) are a type of carbon credit issued by the CDM Executive Board for emission reductions achieved by CDM projects.  In late November, the CDM Executive Board decided to revise the rules governing hydrofluorocarbon-23 (HFC-23) destruction on the basis that carbon credits related to HFC-23 are creating windfall profits and threatening the integrity of the carbon market.  The CDM Executive Board’s decision came just days after a European Commission proposal to ban the use of HFC-23 in the EU Emissions Trading Scheme as of January 2013. The Commission explained that “the acceptance of credits from industrial-gas projects has been controversial for some time. Certain gases [such as HFC-23] have a very high global-warming potential, and abatement is very cheap. This can create huge financial rewards for project developers.” A majority of CERs issued to date have come from HFC-23 projects, mostly in China and India, and these two countries, especially China, are not happy. As Larry Demase anticipated in Reed Smith's 3rd Quarter Climate Change Report, this issue is creating significant uncertainty and it could have a destabilizing effect on the CER market. To learn more, please contact Larry Demase or Jennifer Smokelin.

Future of the Kyoto Protocol

As background, the Kyoto Protocol is the binding international agreement regarding greenhouse gas emissions and is the framework for international reduction of such emissions. The protocol was signed at COP 3 with the signatures of (now) 121 countries. The agreement sets binding greenhouse gas emissions targets for 37 industrialized countries including the European Union in a first phase from 2008-2012. Because it is legally binding it has been instrumental in framing countries’ legal response to climate change – like the EU ETS, Europe’s cap and trade system. But what happens after 2012?

At COP 16, there was clearly a divide between rich and poor countries over the future of the Kyoto protocol after 2012. Maintaining Kyoto is crucial to the future of the Clean Development Mechanism and the offset market, such as LULUCF and REDD+. The Kyoto Protocol is the connecting tissue on all the international GHG framework issues –if it falls (like a house of cards) so do the rest.

From the get-go of COP16 it was clear there was disagreement with regard to the future of the Kyoto Protocol. The crisis over Kyoto erupted at the start of the talks when Japan said it was not prepared to sign on to a second phase of the agreement without commitments on reducing emissions from emerging economies such as India and China because without these other economies, the Kyoto Protocol only committed 30% of the world’s GHG emission to any sort of emission reduction. By the end of COP16, Japan softened its position but Russia and Canada became even more forceful about scrapping Kyoto – meaning that if all three backed out, only 18% of global carbon emissions would be covered by the second phase of the Kyoto Protocol. 18% is not enough to do any sort of good from a climate standpoint.

Midway through the second week, EU and a group of small island Pacific states jointly proposed a new international treaty at the talks to commit developing and developed countries to reducing their climate emissions. The move outraged many developing countries, including China, Brazil and India, who fear that rich countries will use the proposal to lay the foundations to ditch the Kyoto protocol and replace it with a much weaker alternative

In the end the continued resistance by some countries to the Kyoto Protocol was a stumbling block for any meaningful and comprehensive reduction agreements. Still, negotiators finally found a compromise in the Cancun Agreements and, late into the night, delegates cheered speeches from governments that been demanding during negotiations – as, one by one, they endorsed the final draft. However, not much concrete was actually agreed to. The Cancun Agreements state that countries will “aim to complete” work about extending the Kyoto Protocol “as early as possible and in time to ensure that there is no gap between the first and second commitment periods.” Developed nations will consider extending the Kyoto Protocol, but only as part of a wider agreement that commits all countries to making emissions cuts. The text refers to findings by the UN panel of climate scientists that greenhouse gas emissions by developed nations would have to fall by between 25 and 40 percent below 1990 levels by 2020 to avoid the worst damage

Green Climate Fund

The debate over the future of the Kyoto agreement was not the only potential breaking point in the talks. The US climate envoy, Todd Stern, was accused of blocking a deal on the Green Climate Fund by insisting the details be fully worked out at Cancún – instead of deferred to the next set of climate negotiations. If you recall, the Copenhagen Accord (negotiated at COP 15) created the Green Climate Fund, where developed nations promised new funds "approaching $30 billion for 2010-2012" to help developing countries. In the longer term, "developed countries commit to a goal of mobilizing jointly $100 billion a year by 2020." However, the Copenhagen Accord was never formally adopted by the UNFCCC congress and the Copenhagen Accord avoided the crucial point of how to fund this Green Climate Fund, particularly the long-term $100 billion. Of the agreed $30 billion that was pledged since Copenhagen, only $8 billion has actually been committed to international climate change programs and only $4 billion has actually been received. Going into COP 16, a recent report from the high-level Advisory Group on Climate Change Finance convened by UN Secretary General Ban Ki-Moon found that while it will be challenging, the developed countries can meet their pledges.

The Cancun Agreements formally set up a financial structure or “Green Climate Fund” that provides funding and technology to less developed nations to stave off the threats posed by climate change. The Fund will manage the annual $100 billion pledged by developing countries at the Copenhagen COP, money that is to be handed out beginning in 2020.

In the Cancun Agreements, the structure of the fund is set out in detail, including governance, voting and accountability. The board will have 15 members from developed and 25 from developing countries. The World Bank is appointed to serve as Trustee for the first 3 years.

Going in to COP16, negotiators recognized the big problem in designing the Fund was giving its operational control to a body with significant financial proficiency, and identifying a financial caretaker for the fund that has the institutional capability to handle billions of dollars. The Cancun Agreements resolved the financial caretaker issue (World Bank), but didn’t advance significantly on the first part of the problem

CCS

Discussions on whether CO2 capture and storage (CCS) can be included under the Kyoto Protocol’s Clean Development Mechanism (CDM) have been underway since COP-10 in 2005. At each COP, a decision is often discussed and yet ultimately postponed, with Parties’ positions on support or opposition seeming immobile. At COP-16, on December 4th, the Subsidiary Body for Scientific and Technical Advice (SBSTA) proposed a draft decision that, while recognizing that there are issues with CCS and CDM, provided a new context that both respects the issues and establishes a process for resolving them. In contrast, previous decisions on this issue have simply listed concerns, framing the decision in a “yes” or “no” framework.

In the end, the COP parties adopted as one of the Cancun Agreements a decision that carbon dioxide capture and storage in geological formations is eligible as project activities under the clean development mechanism, provided that the issues identified at COP 15 (in decision 2/CMP.5, paragraph 29, to be exact) are resolved and the next SBSTA “elaborate modalities and procedures for the inclusion of carbon dioxide capture and storage in geological formations as project activities under the clean development mechanism, with a view to recommending a decision to the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol at its seventh session (that is, COP 17)” Thus there is now a path towards getting CCS included under CDM.

REDD+

REDD+ (“reducing emissions from deforestation and (forest) degradation”) essentially supports developing countries financially and technically, to either prevent deforestation or regenerate forests through afforestation. The resulting carbon sequestration is aimed to reduce overall emissions, while the move itself will enable sustainable forestry and halt degradation. The negotiating language covering REDD+ was the most settled coming into Cancun.

The final language is a careful compromise among the parties. The negotiation points in COP 16 were limited to a few obstacles, specifically related to financing (see above) and whether REDD+ can be counted in countries'" Nationally Appropriate Mitigation Actions". The Cancun Agreements build an international system to reduce deforestation, another important step in officially adopting proposals from the Copenhagen Accord. For much of the developed world, REDD is being viewed as a mechanism to reduce global GHG emissions. At present, developed nations are facing severe economic and political roadblocks to implementing concrete emissions reduction targets through domestic legislation – they can use REDD credits instead to meet reduction targets. However, funding REDD remain unclear, particularly in the long term. As of now, REDD would be financed in an adhoc approach through seed funds set up by developed nations and through private sector voluntary carbon markets. When negotiators meet next year in South Africa they will need to add more substance to these efforts.

In sum, in Cancun 193 nations attempted to hammer out their differences and finalized the Cancun Agreements that alone will not solve global warming. The Cancun agreements did formalize many of the proposals of the Copenhagen Accord and establish a temperature target for climate change mitigation, an agreement on reducing emissions from deforestation and forest degradation (REDD), and the architecture for a climate green fund that apply to all parties and not just developed countries. Look for clarification on all these issues at the next COP. Most agree that REDD will rapidly move forward over the next few years with encouragement from developed nations (for the cheap offsets) and developing countries (for the preservation of forests and offset profit) that view REDD as a faster vehicle to control deforestation and GHGs, as well as a source of economic incentives to tackle clear cutting and forest fires.
 

But at another place in the BACT guidance, in one case study regarding refineries, carbon capture is ruled out as a possible emissions control technology. The guidance clarifies that, even if the technology would allow CCS at the facility, officials would be justified in rejecting it as a control strategy if the hypothetical facility were far from the nearest storage site and there were no pipeline to move the emissions there.

In short, USEPA’s guidance clearly does not require CCS as BACT for any facility, but USEPA is subtly indicating that, although CCS technology is not quite ready for prime time, it is likely to be “prime” in the future.

USEPA gives away its hand less subtly with the finalization of two rules recently that pave the way to CCS regulation. One rule creates a new "Class VI" injection well for carbon sequestration that would be regulated under a different set of construction, monitoring and testing requirements under USEPA's Underground Injection Control (UIC) Program authorized by the Safe Drinking Water Act.

The second rule would require permit holders to create a CO2 monitoring, reporting and verification plan and to report the amount of CO2 sequestered using a mass balance approach under the Clean Air Act.

The assessment explained that, assuming no additional costs for subsurface rights or long term liability costs, a Pennsylvania-based network would bear total capture and compression costs of $43 to $69 per ton, along with transport and storage costs of $3 to $4 per ton. This per-ton cost range is competitive with international CCS projects that exist or have been proposed. The reports added that, based on these numbers, the preliminary cost analysis for capture, transport and storage of carbon dioxide from six plants would be about $8 billion, with additional annual operating costs of $269 million. However, these estimates will vary depending upon further detailed engineering analysis and the actual volume of carbon dioxide that is captured, transported and stored.

John Quigley, DCNR’s Secretary, emphasized that “CCS cannot be a viable emission reduction solution unless and until certain substantial legal issues are worked out.” He explained that “[s]ome business entity would be required to gain legal control over vast amounts of underground storage space—as much as 100 square miles per plant, according to U.S. Department of Energy estimates. Federal and state laws are unclear on ownership rights for that storage space. Sweeping federal or state legislation would be needed to assemble the necessary property rights for a CCS network in Pennsylvania.”

Geologic sequestration research and development (R&D) projects (projects that receive federal funding for researching monitoring techniques and practices) would not be required to develop MRV plans or report the additional information required for geologic sequestration, but could choose to opt-in to these requirements.

For those facilities that inject CO2 for the purposes of enhanced oil and gas recovery and only report injection data, USEPA estimates the annualized cost of reporting for each facility to be $4,000. For those facilities that inject CO2 for the purposes of long-term geologic sequestration, additional reporting and monitoring would be required as indicated above and the estimated annualized cost of reporting for each facility required to report geologic sequestration is $300,000.

Most facilities that inject CO2 underground hold permits through USEPA’s Underground Injection Control (UIC) permitting program under the Safe Drinking Water Act. This rulemaking does not change any of the requirements to obtain or comply with a UIC permit. Through a separate rulemaking effort USEPA has proposed federal requirements under the UIC program for the underground injection of carbon dioxide to ensure protection of underground sources of drinking water. This action fulfills a separate but complementary goal which is to track the total amount of CO2 sequestered and to confirm that it remains sequestered and is not emitted to the atmosphere over the long term.

The first annual reports of CO2 injection amounts would be due to USEPA by March 31, 2012 for injection that occurs in 2011. The public comment period for this proposed rulemaking will be open for 60 days after publication in the Federal Register. In addition, a public hearing on this proposal will be held on April 19, 2010, in Arlington, VA.