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

Under AB 32, ARB must create regulations that drive power plants, manufacturers, and other industrial sources to reduce their GHG emissions to 1990 levels by 2020, a 17-percent reduction. The primary mechanism for achieving these reductions is a carbon auction system, the first of which occurred in November 2012. Under this system, known as cap-and-trade, covered entities have a cap on the amount of GHGs they can emit each year (which decreases annually). If an entity is under its limit, it has surplus allowances which it can save or trade. If an entity is over its limit, it must purchase allowances to cover its overage. Another way for an entity to cover its overage is to purchase offset credits from the developer of a qualified GHG-reduction program.

ARB determines which GHG-reduction programs will qualify for offset credits. ARB makes this determination through its Offset Protocols, a detailed set of requirements that include standardized methods for quantifying emission reductions from an offset project. There are currently four types of projects that can qualify for offset credits: (1) forestry/timber management; (2) urban forestry; (3) livestock operations, and, (4) destruction of ozone-depleting substances. An example of a qualified offset program is a methane aerator used at a livestock operation to reduce methane gas emissions.
A covered entity can purchase and use offset credits to satisfy up to 8 percent of its compliance obligation. Offset credits may cost less than carbon allowances, reducing the overall cost of compliance for regulated entities.

In passing AB 32, the Legislature did not require ARB to implement an offset program. Indeed, the Legislature did not direct ARB to even implement the cap-and-trade system. Rather, the legislature set forth policy goals for GHG reductions, and directed ARB to implement regulations designed to reduce GHG emissions to 1990 levels by 2020. As the court noted in its decision, the Legislature gave ARB “vast discretion to develop regulations to curb GHG emissions.” However, AB 32 requires that GHG reductions are “in addition to any greenhouse gas emission reduction that otherwise would occur.” This “additionality” requirement is at the heart of CCL’s challenge.

CCL argued that ARB 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. CCL contended the ARB can only determine which emissions reductions from GHG-reduction programs are truly “additional” by making a project-by-project assessment, rather than the standards-based approach implemented through ARB’s Offset Protocols. This standards-based approach, according to CCL, allows ARB to issue offset credits for projects that do not 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. The Kyoto Protocol, for example, addresses the “additionality” problem through its Clean Development Mechanism (CDM). Under the CDM, a GHG-reduction program is “additional” if: (1) there is a barrier that prevents the proposed project, or (2) the proposed project is economically less attractive than another alternative, and (3) the proposed project is not typically deployed as a matter of common practice. The CDM tests, as Judge Goldsmith discussed in his decision, are the subject of heavy criticism for, among other things, not adequately determining whether a proposed project would, in fact, be additional. After reviewing shortcomings in the CDM, Judge Goldsmith found that “the factors which have rendered the CDM problematic in terms of administrative complexity, delay, and cost [are] highly persuasive in concluding that [ARB’s] rejection of the CDM’s project-by-project approach was justified programmatically and consistent with its legislative grant of discretion.”

CCL, however, scored one victory. Judge Goldsmith sided with CCL’s position that the Court should review the question of whether the Legislature granted ARB authority to use a standards-based approach to determine additionality under a de novo standard, rather than an arbitrary and capricious standard. However, the petitioner-friendly standard did not give CCL much more traction for its argument that promulgation of the Offset Protocols fell outside ARB’s delegated authority. For example, CCL argued that AB 32 prohibits the use of a standards-based approach because the law requires that “any” reduction be additional, construing “any” to mean that each and every offset project must actually have additional reductions in GHG emissions. CCL relied on a case holding that a ban on importing any product containing kangaroo meant a ban on each and every such product, not just those containing kangaroos protected by the Federal Endangered Species Act. In rejecting CCL’s argument, Judge Goldsmith took the liberty to analogize to the kangaroo case: “[T]he issue is not if some or all kangaroo products are banned; it is how to determine whether a product is from a kangaroo in the first place. While it is fairly simple to precisely determine whether a product is from a kangaroo, it is not as easy to precisely determine whether a reduction is additional.”

As for whether the Offset Protocols themselves were valid, the Court answered that question applying the arbitrary and capricious standard and resolved it in the affirmative. “The Court finds as to the Livestock Protocol, the Ozone Depleting Substances Protocol, the Urban Forests Protocol, and the U.S. Forests Protocol, that [ARB] has adequately considered all relevant factors and has demonstrated a rational connection between these factors, the policy implemented, and the purpose of the enabling statutes.”

Meanwhile, ARB is facing another legal challenge in Sacramento County Superior Court. On November 13, 2012, the California Chamber of Commerce filed suit against the Board challenging its authority to generate revenues through the cap-and-trade auction system. A hearing on the merits of the Chamber’s motion for writ of mandate is scheduled for May 31, 2013. Also still pending is a decision from the United States Court of Appeals for the Ninth District on whether the State’s low carbon fuel standard is constitutional (Rocky Mountain Farmers Union v. Goldstene). The appellate court heard oral arguments on October 16, 2012.

The next carbon auction is scheduled for February 19, 2013.

 

Citizens Climate Lobby v. California Air Resources Board is Case No. CGC-12-519554 (San Francisco County Superior Court)

California Chamber of Commerce v. California Air Resources Board is Case No. 34-2012-80001313 (Sacramento County Superior Court)

Rocky Mountain Farmers Union v. Goldstene is Case Nos. 12-15131 and 12-15135 (consolidated) (United States Court of Appeals for the Ninth District)
 

Since it looks like there will be no new agreement to a commitment period under the Kyoto Protocol, negotiators are aiming to agree on when Kyoto Protocol parties can agree on new commitments. The EU's aim is for binding and enforceable emission cuts to be agreed to by all parties and to have a deal by 2015 to take effect by 2020 at the latest. (This five year lag period may be ambitious; it took the Kyoto Protocol original commitment period eight years to be ratified and come into force after it was adopted).

China, the world's biggest carbon emitter, has suggested it might sign up to a legally-binding deal to cut emissions after 2020, but it has set conditions. China's conditions include that (1) other big emitters (including US and India) sign up to a legally-binding deal to cut emission; and (2) finance is provided under a Green Climate Fund agreed at talks last year in Cancun, which aims to channel up to $100 billion a year by 2020 to help developing nations. In the United States, the second largest global emitter, environmental issues have become a heated argument between Democrats and the Republicans. It was widely supposed going in to Durban that any type of commitment out of the United States before next year's presidential elections was unlikely. Not surprisingly, Todd Stern, the U.S. special envoy for climate change, said China's conditions were not acceptable. But the basis he gave was because the United States would not agreed to any condition on compliance: "no condition of receiving the financing, no trap doors, no Swiss cheese (with holes) kind of agreement." Jonathan Pershing, deputy U.S. climate change envoy, left open the possibility that countries may increase their emission cuts but he noted that the pledges were just made at the 2009 Copenhagen climate summit and codified last year in Cancun, Mexico and that a new one here in Durban was unlikely. However, note that the emission cuts listed in the Cancun Agreements are not binding and enforceable under the Kyoto Protocol.

In sum, although the final resolution remains to be seen, it seems unlikely that COP 17 will yield an agreement on a new commitment period under the Kyoto Protocol or secure significant additional financing to help poorer nations adapt to a warmer planet.

So when the Kyoto Protocol faces a regulatory gap, what will become of the CDM? The CDM is basically a way to get developing nations to reduce GHG emissions. Under the Kyoto Protocol and the European Union's Emission Trading System, CDM offset credits (known as Certified Emissions Reductions or CERs) can be used in lieu of allowances for compliance. But with the Kyoto Protocol facing a regulatory hiatus, will the demand for CDM offsets from the EU's Emission Trading System alone be enough to sustain the CDM? It's hard to say but it certainly does not bode well for any new CDM projects. Beyond 2012, the only unconditional demand for CDM offsets is from EU's Emission Trading System and that demand is estimated at 1.7 billion tons. Experts agree existing CDM projects are sufficient to fulfill that demand, and the market senses this: the value of primary trading in CERs has been trending downward for the last three years, with the market falling 48% in 2010 to $1.5 billion according to the World Bank. Given the fact that the CER market was valued at $7.4B in 2007, this drop is significant.

What does this mean for business? First, the global carbon market is shrinking, not just the CDM market. After 5 years of rapid growth, global carbon market is now stalled. The global carbon market grew from $15 billion in 2005 to $144 billion in 2009. But in 2010, it fell to $142 billion. This contraction is due to sliding CDM markets, for sure, but is also compounded due to a weak regional greenhouse gas credit market and the weak demand for assigned amount unit (AAU) credits (the so-called "hot air credits" under the Kyoto Protocol.) It is significant to note that the global carbon market shrunk even as global economy stabilized -- not a good sign for the market and businesses dependent on it. Second, with the Kyoto Protocol likely to be in regulatory hiatus, there will be little international pressure for comprehensive domestic climate change legislation. This may bring a sigh of relief to domestic industrial operators. However, this does not mean an end to regulation of GHGs by the U.S. Environmental Protection Agency (USEPA). USEPA's regulation is driven by statutory mandate -- not international pressure -- and domestic GHG regulations would not be affected by a regulatory gap under the Kyoto Protocol. Third, look out for a carbon tax, particularly in the European Union. Even with the Kyoto Protocol's regulatory gap, the EU's regulatory scheme to comply with Kyoto Protocol (including the EU-ETS) is mandated to be in effect through 2020, with ever-increasing, more stringent regulation of GHGs. Absent comprehensive repeals of these EU regulatory schemes, expect to see further regulation of GHGs in the EU. Given the current disfavor (and incidences of fraud) associated with the EU's Emission Trading System, expect EU regulators to look at other ways to regulation carbon, specifically taxation.
 

Perhaps. It’s not like there aren’t significant decisions to be made this year. To discuss future commitments for industrialized countries under the Kyoto Protocol, the Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol (CMP) established a working group in December 2005 called the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP). In Copenhagen, at its fifth session, the CMP requested the AWG-KP to deliver the results of its work for adoption by CMP 6 in Cancun.

At its thirteenth session in Bali, the COP launched a comprehensive process to enable the full, effective and sustained implementation of the UNFCCC through long-term cooperative action (LCA) now, up to and beyond 2010, in order to reach an agreed outcome and adopt a decision at its fifteenth session in Copenhagen. This process has been conducted under the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA). In Copenhagen, the COP decided to extend the mandate of the AWG-LCA to enable it to continue its work with a view to presenting the outcome to COP 16 for adoption. It is under the AWG-LCA that the Copenhagen Accord was reached at COP 15.

Like Last Year, the Environmental Law Resource Blog Will Provide Daily Updates of COP-16 Starting on November 30, 201.

With comprehensive climate legislation or even more-narrow energy legislation shelved in the United States there is little hope for any significant movement on a global climate change treaty this year – since most major nations will not agree to binding emission reduction in the face of inaction by the United States. This is frustrating to many world participants, particularly since it looks like US climate policy will not be making any significant strides towards placing a price on a ton of carbon in the wake of the recent elections. World leaders are therefore looking elsewhere – outside the UNFCCC process – to address climate issues. And where might they land? On a protocol, but not Kyoto – instead, some world leaders are looking to the Montreal Protocol to address global climate change. The Montreal Protocol was adopted in 1987 for a completely different purpose, to eliminate aerosols and other chemicals that were blowing a hole in the Earth’s protective ozone layers. And it has been amazingly successful at addressing this problem on a global level. The idea would be to use this successful template to address GHG emission – expanding the ozone treaty to phase out the production and use of the industrial chemicals known as hydro fluorocarbons or HFCs – one of the 6 Kyoto GHGS that has thousands of times the global warming potential of carbon dioxide. If the UNFCCC fails to address climate change, look to the Montreal Protocol to be expanded to address at least the high global warming potential GHGs under the Kyoto Protocol.
 

Specifically, the Copenhagen Accord offers a statement of purpose, which is to meet the “objective of the UN Framework Convention on Climate Change to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”; that is, to keep global warming to 2˚C. It offers $30 billion a year in financial support to poor countries with “balanced allocation between mitigation and adaptation,” growing to $100 billion by 2020, as the Copenhagen Green Climate Fund. The Accord includes key U.S. requirements such as international oversight of emissions reductions (transparency) for both Annex I and (more importantly) non-Annex I countries. The Accord also doesn’t address certain issues. Missing was hard-core MRV (monitoring, reporting and verification) for non-Annex I countries - the Accord only commits signatories to domestic MRV with “provisions for international consultation and analysis ... that will ensure that national sovereignty is respected” for non-Annex I countries. In other words, China will not open its books to verification by the West but will allow “clearly defined guidelines” for international consultation with regard to its domestic MRV. Missing also was any firm commitment to fund the promised $100 billion a year by 2020. A commitment (as requested by Africa and other vulnerable countries) for deeper emission cuts to hold the global temperature rise to 1.5˚C this century was not accepted. More of a surprise, missing was any 2050 goal of reducing global CO2 emissions by 80 percent - something that had been steadily included in discussion drafts up to that point. No overall targets for emission reduction for 2020 were specified, although individual parties are welcome to volunteer what they will reduce. Perhaps most tellingly, missing was any pledge to formalize the Accord as a binding treaty in Mexico City next year. In the end, it seems to be a short-term cash deal with a “to each his own” voluntary reduction pledge - but with non-Kyoto parties at the table.

Some countries criticized the side discussions that led to the Accord as a “back room” deal. In the language of the formal proceedings, the COP only “took note” of the presence of the Copenhagen Accord, and made it an attachment to the proceedings. Despite the informality of how it was developed, other countries were invited to join the Accord, and so far 27, including Australia and the European Union, have signed on with their own pledges. It is indeed a daunting task to try to get 193 countries to agree on anything, let alone something as complicated as addressing climate change, but Maldives President Mohamed Nasheed predicted Saturday that about 120 nations are already engaged in the overall international negotiation process and would sign up with reduction pledges before a 31 January 2010 deadline under the Accord to turn in pledges. If this “back room” approach proves successful, it raises questions as to whether the UN is the most effective forum to address international agreement on climate-change issues.

As we stated in the Day 1 post, the original goal of COP-15 had been an update to the Kyoto Protocol, and development of a Long-Term Cooperative Agreement, and in that it is a half-empty outcome. Negotiating the details of the two prime agreements still needs time, and many issues couldn’t be decided by party negotiators, but needed political decisions at the minister (or higher) level. But when the ministers arrived in Copenhagen, the gaps were too large and the time remaining too short to come to resolution. However, on the half-full side, there were originally four overriding issues that needed to be resolved: (1) How much will Annex I countries reduce their emissions of greenhouse gases? (2) How much will major developing countries such as China and India limit the growth of their emissions? (3) What is financial aid offered by Annex I countries to developing countries to engage in reducing their emissions and adapting to the impacts of climate change? (4) How is that money going to be managed? Looking at these four overriding issues, the Accord addresses but fails to completely resolve all of them. In that, COP-15 was a limited success. Clearly, there is still work to do this year and at the COP next year in Mexico City.

Beyond the COP, others have focused on how to reduce carbon dioxide emissions throughout the globe. The International Energy Agency (IEA) is one of the groups focused on this issue. The IEA is an intergovernmental organization that acts as an energy policy advisor to countries in their effort to ensure reliable, affordable and clean energy for citizens. After attending the IEA side event, it is obvious that much of what is going on at COP-15 is based on the work of the IEA. They have an incredible amount of real information in their data base and have prepared several roadmaps to advance innovative energy technology. The technology roadmaps identify gaps in financing, research and development, and the needed “revolution” in technology to reduce GHG emissions.

Underlying the IEA’s technology roadmaps is a model with two scenarios that predicts the necessary changes in world energy use to achieve GHG emissions reduction goals. One scenario is based on limiting GHG concentrations in the atmosphere at 450 ppm of CO2 equivalent (the current atmospheric concentration is about 385 ppm). This is called their 450 scenario and is equivalent to a 2 degree temperature increase. They also have a 550 scenario. When asked why they did not create a 350 ppm scenario, the IEA responded that they could not find one that would work.

Here are some key conclusions from their 450 scenario:

• a fifty dollar per ton carbon price is needed to “decarbonize” the energy sector in order to meet 2020 goals;
• a fifty percent cut in world-wide CO2 emissions is needed by 2050;
• current COP-15 pledges will not be enough to meet the 450 goal;
• major tools for achieving the 450 goal include (a) implementation of IEA energy efficiency recommendations, (b) decommissioning most of the world’s coal fired power plants, and (c) limiting use of gasoline to fifty percent of world’s transportation fleet; and
• natural gas will remain a large part of the energy sector with growth of gas production from shale (interesting news for my home state of Pennsylvania).

According to the IEA’s Richard Baron, it is also exploring the proposition that the carbon market should be brought to developing countries because the Clean Development Mechanism has not brought the type of emission reductions needed in those countries. The proposal is that new carbon mechanisms could cost-effectively support larger scale projects in developing countries. The objective is to move away from small projects to ones which can affect the developing countries’ own baseline. 

The IEA underscored that an energy technology revolution will involve a portfolio of solutions: greater energy efficiency, increased renewable energies and nuclear energy, and the near-decarbonization of fossil fuel-based power generation. It has identified carbon capture and storage (CCS) as the only technology available to mitigate GHG emissions from large-scale fossil fuel usage in fuel transformation, industry and power generation.

Tom Kerr, who is with the IEA’s Energy Technology Policy Division, reported there were currently only five CCS projects in existence in the world and none of them involved power plants. The IEA estimates that one hundred CCS projects will be needed by 2020 and three thousand by 2050 in order to meet the 450 scenario. The IEA believes CCS is required not just for new coal-fired power plants but natural gas and oil fired plants as well as for various manufacturing sectors of the world economy. The IEA is projecting more than enough capacity exists for CO2 storage under its 450 scenario. 

By the way, in support of the IEA’s carbon capture and storage efforts, Dave Wagner of Reed Smith is part of an IEA working group that will draft a model legal framework for carbon capture and storage that would be used to assist governments in the development of national legal and regulatory frameworks around the world.

But that doesn’t mean that things outside of the Bella Centre are not productive. In addition to the high level talks there are a number of important and informative side meetings going on here. For example, the International Emissions Trading Association alone has brought together panels on 105 different topics ranging from the September 2009 agreement of the G-20 leaders in Pittsburgh “to phase out subsidies for fossil fuel over the medium term” to a session involving the smart green grid industry in the United States.

One side event entitled, “The Environment: A Core Corporate Strategy” featured a discussion by a vice president at Applied Materials (makers of hardware for the computer and solar industry) who discussed the fact that “sustainability” had moved out of the traditional role of the environmental department in the corporate structure to the core of business management. He discussed changes by management that included going from two plants to one, adding onsite energy production and making dietary changes in the cafeteria. At the same event, a vice president from PG&E discussed why they resigned from the US Chamber of Commerce and how they had integrated climate issues into their businesses.

At another side event called, “Managing Carbon as a Currency”, a panel discussed how and why companies had to treat carbon reductions like currency, i.e., how GHG assets and liabilities should be determined and valued. The panel discussed efforts to identify and standardize different GHG trading instruments and various accounting and tax issues associated with a carbon asset as well as futures trading. Yvonne McIntyre, vice president at Calpine (a wholesale electric generator using only natural gas and geothermal sources to generate electricity) talked about the medium term opportunities for her company as it moved to replace coal as coal becomes more expensive. She stated that they “are already factoring the cost of carbon in our new long term contracts”. She also announced the permitting of a new large plant in California which had gone through the best available control technology process for carbon dioxide. 

Are businesses ready for climate change? A recent analysis of the 300 largest global companies by market capitalization reveals a high level of unmitigated climate-change risk, despite some improvements during the past year. Of the 1,000 largest U.S. companies by market cap, only 8.4 percent have stated environmental policies that address emissions of greenhouse gases. Recognizing this, the COP is trying to bring in business and share knowledge and viewpoints. Over the weekend, Jennifer Smokelin of Reed Smith attended the “Bright Green Expo” at the Copenhagen Forum – a showcase and information sharing opportunity of European (with some US) companies’ leadership on clean energy, with ceremonies being opened by statements from the Danish Prime minister and US Secretary of Commerce. And free Segue rides. 

One day before, the International Chamber of Commerce (ICC) - World Business Council for Sustainable Development (WBCSD) hosted a Business Day event at the Copenhagen Climate Conference, which was very well attended with executives of multinational corporations including Coca-Cola and Unilever.   Yvo de Boer, Executive Secretariat of the UNFCCC, told a meeting of corporate CEOs that the international climate change discussion was currently carried out between governments, with little involvement from the business world. He said the challenge for corporate leaders was to “make yourself relevant” to what happens at the U.N. climate conference, where negotiators from 192 countries are hammering out the details of a global warming pact. However, the business community points back at government today, calling for leadership. In an interview today, the Secretary General of the International Chamber of Commerce, the world business association, Jean Rozwadowski said “At one point, there were many that thought that the economic crisis would push climate issues down on the global agenda. However, there are many indications that this is not the case. The need for global leadership after the crisis is enormous. And a global climate agreement is a way for the world’s governments to demonstrate such leadership,” (as reported by the Danish business newspaper Børsen.). One thing is clear: If there is a framework agreed to at the COP, businesses will have to get ready, fast – with help of expertise from people in the “know”. And these events (like the one Reed Smith attended) help share the knowledge and make connections.

In today’s AWG-LCA briefing to non-governmental groups, Chair Michael Zammit Cutajar (Malta) strongly stated that the press had “misrepresented” some issues and clarified that the Kyoto Protocol does not expire in 2012. He stressed that the objective of the AWG-LCA and the larger COP-15 is not to “kill” the Kyoto Protocol. To be sure, the Kyoto Protocol will not expire in 2012. In 2012, Annex I countries must have fulfilled their obligations of reduction of greenhouse gases emissions established for the first commitment period (2008-2012) listed in Annex B of the Protocol. The target agreed upon was an average reduction of 5.2% from 1990 levels by the year 2012.

Under the Bali Action Plan, which mandates an “agreed outcome” in Copenhagen, the AWG-LCA Chair predictably stated his “hope” for COP-15 was a “strong substantive outcome” related to the long term goals of the climate convention. 

Over at the AWG-KP briefing to NGOs, Chair John Ashe (Antigua and Barbuda) stated that his group’s job was to revise Annex B (revisions to target and timetables for emission reduction commitments) to the Kyoto Protocol.   Curiously, this would include revised commitments without the United States since the United States has not ratified and has evidenced no intention of ratifying the Kyoto Protocol. 

What does this mean? If both groups accomplish these stated goals, then what would come out of Copenhagen is the Kyoto Protocol with revised commitments in Annex B, a “strong substantive agreement” on long term goals, and no greenhouse gas emission limits for the United States. So what does this really mean? Well, tune in tomorrow after negotiators talk in the corridors, meet informally with each other, and discuss negotiations with BINGOs, ENGOs, RINGOs and the other acronym-heavy constituencies.