COP-16: What is Business Doing in Cancun?
It is a frustrating time for business entities that are seeking policy certainty that will unleash investment in a global low carbon economy. For instance, U.S. policy certainty seems to have been pushed off for at least two years based on the failure of Congress to pass cap-and-trade legislation and the mid-term election outcomes that signal even less support for such legislation. Internationally, there is a growing sense of business concern with the United Nations Conference of the Parties’ ability to agree upon a comprehensive way forward after 2012 when the first commitment period of the Kyoto Protocol expires. Yet hundreds of private sector technology, retail and investor interests are in Cancun for the 16th Conference of the Parties and looking to find strategic ways forward nonetheless.
Probably the focal point of the business community during the Cancun meetings took place outside the negotiating halls at the nearby World Climate Summit http://www.wclimate.com/World_Climate_Summit/HOME.html described by its organizers, including Richard Branson and Ted Turner, as the forum for “business and finance to accelerate solutions to climate change. The summit is a new open and collaborative platform where the most inspiring, influential and innovative business, finance, and government leaders convene to collaborate, implement, and scale solutions locally and globally, during the next 10 years.”
Some key takeaways from the World Climate Summit:
· Policy certainty is absolutely necessary to send signals to the capital markets for investment at scale in clean energy technology, but the private sector must engage in turning this corner itself rather than simply waiting for more policy signals to emerge. Innovative collaboration must advance rapidly as part of this effort. Several new partnerships and initiatives were pledged at the event.
· Climate change-focused business interests need to break out of their sector by sector trade association silos to more strategically influence national and international policy debates. A specific example that created a lot of stir was the suggestion made during the opening plenary with Siemens, Coca-Cola, Climate Change Capital and Ernst & Young. During this session, it was noted that climate-focused business association strategies must emerge to more aggressively take on the U.S. Chamber of Commerce and similar groups in other capitals that create the misperception that addressing climate change is strictly about higher costs to society. Business must cohesively engage and build the opportunity case in a way that the public and lawmakers grasp while also pushing back on business opposition of more entrenched and powerful interests.
· China was repeatedly cited and lauded by the business community for its efforts to advance a clean energy, industrial revolution that seeks to harness the capital and technology of the private sector. The United States was generally an afterthought or source of frustration in these business discussions. Specifically, investors are supportive of China’s 12th 5-year plan that will seek an overall reduction of the national carbon footprint by 40%-45% by 2020. The plan identifies specific complimentary policies and measures for the “Magic 7” industries that are its foundation: 1) Energy efficiency and environmental protection technologies, 2) Next-generation information technology, 3) Bio-technology, 4) High end manufacturing, 5) Alternative and renewable energy, 6) New Materials (special performance and high composite materials), and 7) Clean Energy Vehicles. In addition, most analysts expect the plan will produce a domestic cap-and-trade regulation in the next few years and ahead of the United States.
· The U.S. Overseas Private Investment Corporation www.opic.gov will provide at least $350 million in financing for new private equity investment funds and set a target for this fund to invest more than $1 billion in renewable resources projects in emerging markets, representing one of the largest initiatives by the U.S. Government to support the international effort to mitigate climate change. No Congressional action is required for this to move forward. It signals an increasing effort by the Obama Administration to meet pledges for international climate finance that also leverage private sector capital.
COP 16: The Heat Goes On......
In news that is sure to come as a surprise to those of us who were trapped under 2 feet of snow earlier this year (remember the Snowpocalypse?), the World Meteorological Organisation (WMO) has released data at the UN climate talks in Cancun confirming that 2010 was one of the hottest years globally on record. Specifically, it appears that 2010 will rank in the top 3 warmest years since the beginning of instrumental climate change records in 1850, continuing a warming trend that scientists have linked to the steadily increasing emission of heat trapping gasses into the atmosphere.
At various times in the course of the ongoing climate change debate, there has been a disconnect in some areas of the U.S. between scientific reports such as the WMO's and governmental or other public perceptions of and reactions to climate change. That appears to be changing, however, based on a couple of recent reports concerning the effects of climate change on particular resources. For example, as reported by the AP on December 2, Alaska wildlife officials have released a report acknowledging that scientific and traditional evidence increasingly shows climate change at unprecedented rates throughout the Arctic. The Alaska report, entitled "Climate Change Strategy," says warming temperatures could affect Alaska's bodies of water and also notes the potential for fire patterns, altered stream flows, and coastal erosion. This represents a significant departure for the state, which is suing to overturn the federal listing of polar bears as a threatened species because of declining sea ice habitat.
In a similar vein, a New York Times piece released just before Thanksgiving notes that residents of the Larchmont neighborhood in Norfolk, VA, are now forced to pay close attention to the lunar calendar to avoid the effects of tidal flooding that increasingly are disrupting life in their community (as well as elsewhere along the East Coast). The Norfolk residents are forced, among other things, to park their cars in different areas, change their routes, avoid traveling to certain locations at certain times, etc. The principal cause of this disruption is the fact that Norfolk -- which is bounded on three sides by water -- has experienced the highest relative increase in sea level on the East Coast -- 14.5 inches since 1930. As water backs up into city streets and front lawns become too saline to support grass, the residents have vigorously lobbied city, state, and federal authorities to take action. Indeed, significant investments have already been made, but with the sea level continuing to rise, there is a growing perception that it makes less sense to continue to do so. In any event, as with the report out of Alaska, the issues in Norfolk highlight the disconnect between public perceptions/action regarding climate change and reality that is increasingly difficult to ignore. So, whereas Virginia AG Ken Cuccinelli is trying to prove that a prominent climate scientist engaged in fraud when he was a researcher at the University of Virginia, the affected residents of Norfolk are less interested in such politically motivated debate. Rather, as one resident interviewed for the Times article expressed, "No one who has a house here is a skeptic."
California's Proposition 23
This coming campaign season, Californians will be given the opportunity to vote on Proposition 23, an initiative that would suspend California's clean energy legislation, the Global Warming Act of 2006 or AB32. The California Jobs Initiative, a movement reportedly financed by Texas oil companies, is charging that AB32 will cost California 1.1 million jobs and $3.7 billion a year in higher energy costs.
Proponents of AB32 are answering the charge. Joe Romm, a well-known climate expert and blogger, considers it to be "one of the most progressive pieces of environmental legislation ever enacted." According to Romm, in addition to reducing pollution levels and dependence on foreign oil, AB32 is spurring market growth in California’s clean tech and clean energy industries. His climate blog reports that AB32 has stimulated more than $9 billion of private investment, helped pave the way for more than 12,000 companies, and has contributed to the creation of more than 100,000 green jobs. Also, by sending a clear carbon price signal, AB32 provides the long term market certainty necessary for businesses to invest. As a result, California’s clean energy sector has grown stronger and now sits at the forefront of our nation’s energy innovation. In 2007 alone, Californian businesses patented 1,401 new clean technologies, constituting one sixth of all clean energy technology patents in the nation for that year. Contrary to the arguments of the jobs initiative, supporters of AB32 argue that the law has helped buoy California’s economy through the recent recession. Perhaps more importantly, as California has historically done with clean air legislation, AB32 serves as a model for federal action. Suspending AB32 would further complicate the struggles to enact federal legislation on climate change. If California decides that it cannot afford to address climate change, other states will be hesitant to follow California's lead. This would not be welcome news for climate change activists at a time when our most respected environmental groups feel as if they’re losing the battle over the climate bill. Regardless of the outcome this November, it will serve as an important referendum over energy policy.
Two Climate Takes On Warren Buffet & Burlington
It can happen from time to time that there are different viewpoints in a practice group. Here are two perspectives from attorneys on MLA’s climate team regarding Warren Buffet’s planned purchase of Burlington Northern Santa Fe Corp. The bloggers suggest what the financial guru’s $34 billion investment implies for coal and cap-and-trade legislation.
Peter Gray:
According to Wall Street Journal reporter Josh Mitchell, Berkshire Hathaway Inc.'s planned $34 billion purchase of Burlington Northern Santa Fe Corp. suggests that Berkshire CEO, Warren Buffett, believes President Obama's climate change policies will boost the freight rail industry. According to Mitchell, White House support of a cap-and-trade program to reduce global warming emissions "could also boost the popularity of freight travel, which is 5.5 times more fuel-efficient than trucks in carrying goods, according to a recent government study."
I disagree. If the President's climate change policy is adopted, it is likely to decrease the profitability of the rail system as a way to move freight. My reasoning is as follows.
According to the National Mining Association, coal accounts for 75% of railroad shipments. Thus, whatever hurts coal also hurts the railroad business.
Coal transport currently is down: less coal is being used because the economic downturn has led to lower energy demand. Cap-and-trade would accelerate that trend: the cost of power produced from coal would increase, relative to other less carbon-intensive fuels, under cap-and-trade because coal users would have to purchase allowances to cover the CO2 emissions associated with coal use. As a result, LESS coal would be used, which means less coal would be transported by rail.
So, I reach a very different conclusion than Mr. Mitchell: Mr. Buffet must believe that efforts to adopt cap-and-trade legislation will FAIL.
Jon Sohn:
I agree Warren Buffet is against Cap-and-Trade. He has stated this several times publicly. What is less clear to me, and where Peter and I may diverge, is the real world impact cap-and-trade, as currently conceived in Congress, will have on coal at least in the next 15-20 years. The likely legislative scenario, for better or worse, is significant free allowances (not purchased) provided to the coal industry in the medium-term that softens the blow of any regulation.
Further, there are enormous incentives for Carbon Capture & Storage that directly benefit the coal industry. Duke Energy, amongst others, is in favor of cap-and-trade legislation and sees a role for coal in their portfolio going forward. Clearly there are many powerful coal interests against cap-and-trade due to their fears of less coal demand, and a general industry preference for no cap as a matter of principle. Nonetheless, EPA projections on Waxman-Markey actually see overall higher coal electricity demand out through 2025. This is largely due to anticipation of artificially suppressed carbon prices and free allowances. Currently, it is virtually impossible to permit a conventional new coal plant in the United States and it may be easier to move forward on new investments under a cap-and-trade regime because of resulting policy certainty and the provisions noted above.
My take is that Buffet's bet is that coal, particularly coal that is cleaner in terms of traditional pollutants, will be in significant demand for the medium-term whether or not cap-and-trade legislation passes Congress. I don’t see the dire consequences for the coal industry that my colleague suggests above.
Don't Yank the Tariff Provisions from the House Climate Change Bill
President Obama deserves a share of the credit for the historic vote by the House June 26 to pass the first climate change bill. The bill is far from perfect, but it is an important step in the right direction. In comments following the House vote, however, President Obama took a step in the wrong direction. In urging the Senate to swiftly pass their counterpart to the House bill, President Obama raised questions about a provision that would impose a tariff on the import of goods from countries where the cost of such good benefits from weaker climate change laws:
"At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there….I think we're going to have to do a careful analysis to determine whether the prospects of tariffs are necessary, given all the other stuff that was done and had been negotiated on behalf of energy-intensive industries."
Removing the tariff provision from the bill would give its opponents a strong argument for its defeat. Opponents argue that by imposing what they classify as an exorbitant energy tax on products such as steel, cement and chemicals the climate bill would simply force manufacturers to shift production to foreign countries with more favorable energy costs, resulting in no net reduction of greenhouse gas emissions AND loss of jobs in the US.
This is a potent argument which, if left unanswered, could doom the bill in the Senate. Although President Obama suggested that there may be better alternatives to the "protectionist" provision in the House bill he did not elaborate on them. One alternative that has received some favorable press is the so-called "sectoral approach" in which certain energy-intensive industries seek to reach agreement on a global standard for GHG emissions from facilities in the sector.
Although the sectoral approach is arguably sound in principle, the fear is that in practice the affected sectors would be able to push through weak standards which undermine the battle against global warming. It is almost like begging the fox to guard the henhouse. Another alternative would allow the United States to scrap its cap-and-trade system if China and India do not adopt similar programs. This avoids the fox/henhouse problem, but creates a bigger one: in effect, it cedes to foreign countries the decision of whether WE should combat climate change. The House approach avoids both problems, and should be followed in the Senate.
House of Representatives Passes Groundbreaking Climate and Energy Bill -- The American Clean Energy and Security Act (ACESA) Now Heads to the Senate for Debate
Late last week, the House of Representatives narrowly approved game-changing climate change legislation, the American Clean Energy and Security Act (ACESA), also called Waxman-Markey (HR 2454), the first major environmental legislation to be approved by either the House or the Senate in almost twenty years. Much has already been said about ACES that industry may find confusing, and this alert sorts out what the bill does -- and doesn't -- do and identifies the key issues you will need to address as the debate moves to the Senate.
The come-from-behind 219-212 vote took place amidst defections by supporters in industry and environmental organizations alike, with even the White House expressing concern about global trade impacts as the vote approached. The passage of ACESA may have been a near thing, but it still would be hard to exaggerate the turning-point the House vote represents. Its commitment for a 20 percent cut in CO2 emissions from 2005 levels by 2020, a 42 percent cut by 2030, and a huge 83 percent cut by mid-century would:
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- Transform the US economy and in particular the energy sector;
- Create a multi-billion dollar new market in valuable rights to emit greenhouse gases;
- Provide a terrific boost to the "green economy" that the federal stimulus jump-started;
- Enhance prospects for a bi-lateral agreement with China;
- Virtually assure a new international climate deal in Copenhagen this December; and
- Lay a foundation on which subsequent congresses can build (many scientists say that even these emissions cuts are not nearly enough to get the job done).
The ACESA legislative runs well over a thousand pages, but its basic theory is not hard to understand. The regulatory reality for US industry is in the details of this extremely complex bill.
Regulating Greenhouse Gas Emissions
ACESA prohibits most industrial greenhouse gas releases into the atmosphere, sets an adjustable limit, or "cap," on total releases, and requires major emitters to obtain tradable emissions allowances that have been limited so that the cap will not be exceeded. Initially, the supply of marketable carbon dioxide equivalents allowed under the cap will about equal demand, but as the supply is ratcheted down, over time, supply will not nearly meet demand, and the price of allowances will go up steeply. Candidate Obama wanted the billions of dollars of emissions allowances to be auctioned off to the highest bidders, but as President he went along with the House's decision to allocate most of the valuable "pie" of allowances free by economic sector. This will set the stage for an enormous debate in the Senate over which industrial sectors will receive the many billions of dollars in allowances and economic incentives related to this allocation.
Allowances will be available by government allocation, purchase at auction, or open market trading among holders, with surrender to the government when covered emissions occur. Eventually, up to 85 percent of allowances will be auctioned. Trading will include banking, averaging, and borrowing against future allocations, in addition to market instruments not specifically mentioned in the bill. The Federal Energy Regulatory Commission and the Commodity Futures Trading Commission rather than the Environmental Protection Agency (EPA) would regulate allowances, offset credits, and renewable energy credits. Reflecting recent turmoil on Wall Street, the House voted to bar over-the-counter carbon derivatives trading. In short, the now relatively unregulated markets for trading of newly created carbon and renewable energy credits, futures, and derivatives would come under federal supervision.
The "cap-and-trade" provisions would be implemented and enforced by the EPA under the federal Clean Air Act. The cap-and-trade system would preempt existing state and regional climate change management schemes, but states would be free to enact new, more stringent greenhouse standards. State efficiency codes for buildings would not be preempted despite federal preemption of state appliance standards.
Cap-and-trade would be phased in by regulating greenhouse emissions from electrical plant smokestacks in 2012, industrial sources in 2014, and natural gas and fossil-fuel distribution in 2016. The last phase is important: to handle the tens of millions of small emitters not caught up in this scheme, fuel distributors, e. g., for space heating and gasoline and diesel for vehicles, would have to obtain allowances to cover their customers' emissions, other than the utility and industrial sources already covered by cap-and-trade.
The bill authorizes a limited number of allowances to be created by “offsetting” unregulated greenhouse emissions, including by sequestration that permanently captures carbon in soils and forests. Under the bill, offsets can also be generated by projects that destroy potent greenhouse chlorofluorocarbons, if authorized in advance by the EPA Administrator. Regulations for quantifying and monitoring these offsets have to be written and are bound to become controversial. Again, the devil is in the details of this complex bill.
Emissions Limitations and Efficiency Requirements
Additional specific emissions limitations and efficiency requirements also apply, regardless of allowance allocations. The EPA would use the existing Clean Air Act to develop technology-based standards limiting emissions from some sources not covered by cap-and-trade. These highly specific requirements reflect a bargaining process that will continue in the Senate. Also, the bill would create a new national renewable portfolio standard (RPS) that would require utilities by 2012 to generate six percent of their electricity from energy efficiency measures or from renewable energy sources like wind and solar. The RPS would increase by roughly three percent each year until 2021, when it would top out at 20 percent. The RPS standard would not preempt more stringent state RPS standards, and states would be permitted to require utilities to retire federal renewable energy credits received in excess of the federal standard. The bill also calls for state planning programs to reduce emissions from transportation and for land use and other state and federal plans to foster adaptation to climate changes that already appear almost certain to occur.
Economic Incentives
Economic incentives (subsidies, grants, waivers, etc.) are provided to relieve hardship and promote a more rapid transition to the "low carbon" economy the bill contemplates. These provisions likewise provide important political bargaining opportunities, alongside the initial allocation of allowances, and together these will be a major focus in the Senate. The welter of provisions includes tax and funding incentives for renewable energy, energy efficiency, smart grid improvements, transportation programs, fuel-switching from coal to natural gas. and programs to capture and sequester greenhouse gas emissions. For example, ACESA directs many billions of dollars to the evolving technology of coal-fired electrical generation with carbon capture and store (CCS).
Representatives from states with large agriculture or forestry markets secured provisions to grandfather biodiesel facilities from the low carbon requirements of the 2007 energy law and broaden the definition of renewable biomass to gain additional credit under the RPS and the existing renewable fuels standard. The bill addresses the harvest of biomass from dead or damaged trees or "late successional" stands and clarifies that the agricultural and forestry sectors are exempt from the bill's emissions cap. Eleventh-hour agreements to address the concerns of farm-state lawmakers secured an additional billion dollars for agriculture producers who engage (or engaged prior to 2001) in conservation and stewardship practices that reduce or sequester greenhouse gas emissions but would not otherwise qualify under the offsets section of the bill. Additional allowances for rural electric cooperatives, and language blocking EPA from going forward with methods for calculating international indirect emissions from land-use changes from biofuels production as part of a final renewable fuel standard (RFS) expected this summer, were also obtained. Finally, the bill also would launch a major global effort to stop deforestation that would add yet more CO2 savings in 2020 equal to 10 percent of current US emissions.
Conclusion
Some have called the passing of ACES "a stunning achievement, a rare alignment of the stars," and "the single most important vote a member will ever cast," yet others, including some environmental organizations, have called it a massive give-away of billions of dollars of newly valuable emissions rights. However it may have been characterized, ACESA is a milestone in the lengthy US process of coming to terms with climate change. Whether it will be as epochal an achievement as some commentators have said will play out in the Senate, to which all eyes now turn. Regarding economic impact, the Congressional Budget Office found that the cost of ACESA to the average American household in 2020 would be, in the words of a prominent former Energy Department official, about the cost of "a postage stamp a day" so that ACESA would basically “pay for itself.” A prominent economist added that his figures show that more than 80 percent of the value of the billions in allowances will go back to consumers and to public purposes, leaving about 20 percent of the value of allowances for industry. These assertions will be tested and the debate on the issue will be joined by many others as the focus now shifts to the Senate.
The Importance of Incentivizing the Agricultural Industry to Participate in Climate Change Response (and How Did We Forget About Biochar)?
There has been plenty of criticism - some warranted, some not - of new language, pushed by the farm lobby, governing carbon offsets in the climate change legislation. Prior to this amendment, precisely what qualified as an offset was unstated. EPA would be given responsibility for promulgating rules that would define offsets, within broad parameters set forth in the legislation. By contrast, Title V - "Agricultural and Forestry Related Offsets" - identifies an "initial list" of specific types of agricultural and forestry practices that would qualify as offsets, and gives the Department of Agriculture authority to establish a program governing the generation of offset credits from agricultural and forestry-based sources.
One critic asserts that the farming lobby is overreaching. Having already gotten a "free pass" as the "one major source" of carbon emissions not covered by the House climate bill, this critic chastises the farm lobby for demanding another "that they be allowed to earn some extra cash by reducing their carbon footprint on their farms and selling these 'offsets' to factories and power plants unlucky enough to be subject to the carbon cap regime." This is the classic example of cutting off one's nose to spite one's face. Offsets represent a critical tool in our arsenal for battling climate change. Thankfully, the climate change bill already recognizes that by expressly authorizing regulated entities to reduce their emission allowance requirements through development or acquisition of offsets. The new language simply clarifies that if farms invest in carbon-reducing activities, the resulting carbon offsets could be sold to regulated entities for use in meeting GHG emission obligations under the climate bill. This is precisely what we should be doing - facilitating achievement of the GHG reduction targets specified in the bill.
My only criticism is that sponsors of the ag offset amendment omitted from the list of qualifying offsets a very important one: biochar. Biochar is a charcoal-like product that is produced by heating crop residues, animal manure and many other organic wastes in an oxygen-depleted environment. Heating agricultural wastes in this manner generates an off-gas, which can be used for fuel, and a solid -- biochar -- which effectively sequesters carbon. If biochar is placed in soil, the carbon it contains will remain in place for hundreds of years without releasing carbon dioxide (CO2). Thus, instead of the crop residues and animal manure being broken down by biological processes that release CO2 into the atmosphere immediately or within a matter of weeks, the carbon is sequestered and will not be released into the atmosphere for centuries. As a result of this practice, agriculture can become "carbon negative" -- which is better than "carbon neutral." Acknowledged experts such as Durwood Zaelke have demonstrated that widespread adoption of this practice by agriculture could as big an impact on reducing atmospheric CO2 levels as renewable energy. Let's hope the Senate corrects the omission of biochar from the list of accepted agricultural offsets.
Chairman Waxman's Climate Bill
To paraphrase German Chancellor Otto von Bismarck, don't ask how legislation or pork pies are made.
Think of the House Energy and Commerce Committee's new compromise on climate legislation as freshly baked pork pie.
Let's first consider the US emissions reductions goals. Did the Committee bake a pie small enough to get the US on the track to meeting scientifically defensible emissions reductions targets? No.
The bill would cap emissions 17 percent below 2005 levels by 2020, instead of the original draft’s 20 percent below. Committee chair/chef Henry Waxman essentially promised (again with some poetic license to your author) to bake a smaller pie -- later. He noted the bill retains its original target reductions in the future: 42 percent by 2030 and 83 percent by 2050. We will see -- later.
Let's consider the allocation of the highly valuable rights to emit. These are akin to slices of the pork pie.
The President campaigned on selling slices to fund clean energy and beleaguered consumers. But the Congress would prefer to get the credit for giving away pieces of pie itself.
In fact, this was Chef Waxman's secret ingredient. He bought support for the climate bill by doling out valuable slices for free. The bill gives 35 percent of the allowances to local electric distribution companies -- over a third of the entire pie in one gulp. Another free slice goes to the auto industry for research on new technology. Another one may go to refineries. Still more slices will be given to ailing manufacturing industries such as steel and cement.
That's a lot of pie.
Indeed, the pie is disappearing fast. It's over halfway eaten already.
Once it seemed likely that free slices might go to leaner, fitter wind, solar, biomass, and other green technologies. But did the committee dole out slices to clean energy when it sliced up the pie? If they did, we missed it.
Chef Waxman surely understands what he is doing. But is this the way the pie-baking was supposed to go? Chancellor Bismarck was right: don't ask how legislation or pork pies are made.
Breaking News: Climate Compromise in the House
The big news today in Washington is that the House committee working on climate change legislation has actually reached a major compromise that allows significant progress toward federal climate legislation this year.
The new deal calls for a 15 percent renewables target for a Renewable Electricity Standard by 2020, with an additional 5 percent to come from energy efficiency measures. The deal will expand the amount of biomass generation included, a crucial concession for southern lawmakers who worry their region might suffer economic impacts dispropornal to the rest of the nation.
On the structure of cap-and-trade, electric utilities will get 35 percent of the system's pollution allowances for free. The administration has pushed for auctioning all of the pollution allowances, while the House discussion draft distributed earlier remained silent on the issue.
A full version of the bill is expected as early as today with debate in House Energy and Commerce committee expected next week. Chairman Henry Waxman promised to get a bill to the House floor by Memorial Day. He now appears on track.
Climate Legislation Made Easy
Democrats in Congress released their most recent climate change bill yesterday.
The so-called Waxman-Markey discussion draft attempts to satisfy all constituencies:
The US Climate Partnership -- the powerful coalition of utilities, car makers, manufacturers and environmental organizations -- got its vision of a cap-and-trade scheme adopted. That means the environmentalists are pleased with strong GHG emission reduction targets (80 percent below 2005 levels by 2050). Meanwhile, heavy industrials (iron and steel, aluminum, cement, glass, chemicals and paper) will benefit from a 15 percent reserve of the system's emission allowances -- a structure designed to keep down allowance prices (and thus the cost of compliance) for businesses most vulnerable to international competition.
The renewable industry got a renewable portfolio standard, which would force utilities to provide at least 25 percent of their energy from renewable sources by 2025. The coal industry also came out with $10 billion to fund carbon capture and sequestration research. (That's on top of the billions already provided under the recently enacted stimulus plan.)
As critics have already noted, the bill fails to take on the make-or-break issues. For starters, it skips the thorny question of how to distribute allowances. The Obama administration wants to auction all of the pollution allowances while businesses are pushing to distribute some allowances for free.
Avoiding that issue allowed the bill to avoid another tricky one: where should any auction money go.
Critics will see these omissions as a fatal flaw -- akin to introducing a carbon tax proposal without a specific tax percentage.
I see this as a master stroke. The best chance for passing a cap-and-trade bill is to get the key adversaries -- environmentalists, vulnerable industries and coal -- to the negotiating table. Or at least to agree on the shape of that table. Then they can have a debate about these key issues out in the open.
Waxman and Markey have done just that. And set the stage to actually pass ambitious climate legislation this year.
The Week in Cap and Trade: The Waiting Game
All eyes continue to be on the House Committee on Energy and Commerce chaired by Rep. Henry Waxman. Waxman has promised to deliver legislation on energy and climate change with a cap-and-trade provision to the full House by Memorial Day, but so far has released no draft bill for debate.
Committee member Congressman Mike Doyle told Point Carbon (subscription required) last week that he expects to see a draft of the bill “in the next week or two.”
Meanwhile, the man who lost his chairmanship to Waxman, Rep. John Dingell called for the administration to craft its own legislation, instead of leaving that task to Congress, reports E & E News (subscription required). "If they don't,” Dingell predicted, ”the drafting or completing of the legislation will be very difficult."
Any legislation may have a hard time generating popular support. A new Gallop poll released last week showed weakening support among voters for environmental action. When asked whether they would sacrifice the environment for economic growth, a majority of Americans responded “yes” for the first time in 25 years.
The New York Legislature Takes Action on a Number of Pieces of Legislation Related to Climate Change
The 2008 New York legislative session came to a close on June 27th. With so much attention on climate change and rising energy prices, its not surprising that several pieces of legislation relating to the environment and energy were passed by both the State Senate and the State Assembly and are currently awaiting action by the Governor.
One significant legislative initiative driven by Governor David Paterson was the adoption by the Senate and Assembly of an expanded net metering law to allow businesses, municipalities and non-profit utility customers to receive credit on their utility bill for excess energy produced through solar or wind technologies. Under current law only residential customers are allowed to sell power back to the utilities. While non-residential customers will be capped at the lesser of 2 mega watts or their peak load, the expansion of net-metering is expected to further spur the development of solar and wind projects in New York.
The Senate and Assembly also came together to pass legislation that provides a 4 year real property tax abatement for solar electric generating systems placed in service in New York City. The abatement ranges from 5 percent - 8 ¾ percent of the cost of the solar equipment depending on whether the equipment is placed in service. Again, this legislation (coupled with the net-metering expansion mentioned above) is expected to spur development of solar projects in New York City.
Another lesser know legislative effort relating to the environment and climate change was the passage of legislation by the Senate and the Assembly establishing the New York State Greenhouse Gases Management Research and Development Program. The legislation amends the Public Authorities Law to authorize the New York State Energy Research and Development Authority (“NYSERDA”) to provide grants for research that promotes new technologies that will avoid, abate, mitigate, capture and/or sequester carbon dioxide and other greenhouse gases. The legislation authorizes NYSERDA to make grants of up to $150,000 to research entities in New York, but is subject to funding being included in the State Budget. Research entities are defined as not-for-profit colleges, universities or other institutions that conduct an intensive ongoing program of research and study.
One piece of legislation passed in the waning days of the legislative session by both the Senate and the Assembly that is just now starting to attract some attention is the Plastic Bag Reduction, Reuse and Recycling Act. This bill requires operators of retail stores over 10,000 square feet, retail stores with five or more branches of 5,000 square feet or more, and retail stores over 50,000 square feet in an enclosed shopping mall, to establish an at-store recycling program to include:
- a visible and accessible collection bin;
- a prohibition on the placement of plastic bags in a solid waste facility by stores;
- a requirement that stores make reusable bags available for purchase;
- a requirement that compostable plastic bags indicate that they cannot be recycled; and
- a requirement that plastic bags include the phrase "please return to a participating store for recycling" or a similar recycling message approved by the Department of Environmental Conservation.
The legislation establishes fines of up to $500 in cases where a person knowingly or intentionally violates the recycling program requirements.
Notable legislative efforts that failed during the 2008 session included a “bigger better bottle bill” to require container deposits on plastic water bottles, expanded regulation of wetlands, a power plant siting law for projects of 80mw or greater (draft legislation contemplated an expedited review process for clean energy or renewable projects), electronic waste recycling, and a greenhouse gas cap. All of these failed initiatives are likely to come back with greater support from the Governor (who only took office in March) in 2009 and may stand a greater chance of passage depending on the outcome of the State legislative races this November.
Water Agencies Seek Inclusion in Climate Legislation
For some time we have been hearing about changing precipitation patterns, rising sea levels, and other various ways that climate change will severely impact our nation’s hydrologic systems. In the debate over climate legislation water groups are advocating for congressional funds to assist with mitigating the effects on water supplies of a changing climate. Although water groups are pleased to have been included in funding proposed in the most recent version of Lieberman-Warner, the amendment offered up by Senator Boxer is not specific about what portion of the $136 billion in funding that drinking, waste, storm-water utilities would be eligible for under the energy block grant program. In the last few weeks, water groups have stepped up their efforts and sent letters to Senator Boxer and Congress pushing for assistance and inclusion in a cap and trade program.
The May 16th letter sent by the National Association of Clean Water Agencies (NACWA) seeks “clearly designated federal funding” to assist wastewater treatment agencies with: On May 20th eight water groups followed-up NACWA’s effort with a letter outlining three broad objectives they are calling on Congress to implement: In an earlier post, we blogged about obtaining GHG credits through managed water supply systems and concluded that water utilities should be proactive in developing strategies for dealing with nitrogen oxide and methane emissions that are almost certain to be regulated under federal climate legislation. Now industry groups, such as NACWA, are actively pursuing inclusion in whatever allocation or cap and trade program our future holds.
Climate Change Tort Suits: Hot or Cold?
Kivalina, Alaska, a village located eighty miles north of the Arctic Circle on a barrier island, is falling into the sea.
Since the early 1980s, sea ice ‑ which offers seasonal protection from storm surges ‑ has been forming later and melting earlier. As a result, the village is exposed to more winter storms of increasing severity.
In 2006, the US Army Corps of Engineers (“CoE”) concluded that the situation in Kivalina had become “dire” and that the entire town would have to be relocated within six years. A group of 400 Kivalina residents have filed suit against twenty petroleum producers, coal-burning utilities, and other energy companies, asserting that their carbon dioxide (CO2) emissions create a public nuisance and that they conspired to mislead the public about climate change.
Native Village of Kivalina v. ExxonMobil Corp. et al., CV 08-1138 (N.D. Cal., Filed Feb. 26, 2008). Citing a report by the CoE, the Kivalina villagers allege that environmental changes associated with global warming have exacerbated flooding and erosion threats to Kivalina and other coastal villages in the Arctic.
They seek recovery of the estimated $400 million cost to relocate their village, which they claim is a result of the defendants’ climate-changing activities.
By no means is the Kivalina suit the first action in which plaintiffs have sought to recover climate change-related damages from a CO2-emitting industry. Electric utilities and leading automobile manufacturers have each defended similar actions. They defeated these suits by filing motions to dismiss, asserting that the lawsuits raised a political question ‑ how best to address climate change ‑ which is the type of policy determination that should be reserved for the political branches of government, rather than the courts.
So long as the legislative and executive branches remain undecided on climate change, the political question doctrine promises to keep such litigation in check. Many observers, however, believe that Congress eventually will pass, and the President will sign, climate change legislation. At that point, courts may have less ability to dismiss cases on the ground of the political question doctrine.
How will these climate change tort actions fare then?
In this Legal Backgrounder, we explore the next line of defenses to such actions. In brief, defendants to climate change tort suits likely can assert several other facial challenges, such as lack of standing and preemption, which may stop such litigation in its tracks. Moreover, climate change suits must overcome formidable causation problems. The charge of civil conspiracy adds a new wrinkle: it is the same strategy that forced big tobacco to settle. There are numerous differences, however, between tobacco and CO2, which portend a steeper climb for plaintiffs in climate change tort suits.
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The US's Existing Climate Protection Laws: Will They Work?
Less than a decade has passed since the accepted wisdom was that the US would enact a greenhouse gas control regime to implement the framework climate treaty and the Kyoto Protocol, which the Senate would have ratified after much debate. Yet today it appears that our national climate strategies are going off in unanticipated directions that would have astonished the climate pundits of ten years ago.
Last December, Congress enacted a fuel, vehicle mileage, and overall energy efficiency law that will clearly help lower carbon emissions. The Senate will vote on a comprehensive climate bill in June, if the sponsors have their way, but that bill is a far cry from implementing legislation for Kyoto. The states may soon have blanketed a large part of the nation with regional and state climate initiatives that will be so pervasive that they will set the bar for the key components of over-arching federal legislation – and preserve a major role for state and local governments. There is even talk of bilateral climate agreements with India and China, and also a totally new international approach that would target greenhouse gas emissions sector-by-sector across the economies of the developed nations.
Furthermore, while all this is taking place, it appears that the Environmental Protection Agency and the environmental community have discovered – with the help of the Supreme Court – that the US has had a greenhouse gas regulation law in place for decades, well before Kyoto. By ruling a year ago that greenhouse gases are “air pollutants” under the motor vehicle emissions control provision of the Clean Air Act, the Court made the entire Act a little pregnant with the potential for federal regulation of all manner of greenhouse gas sources – the thousands of sources controlled under state implementation plans to achieve federal ambient standards, new and modified stationary sources, emitters of air toxics, sources in clear-air areas of the country, and others regulated under the Act. The particular trigger for new motor vehicle emissions regulation is a statutory determination that greenhouse emissions may reasonably be found to endanger public health or welfare, but other Clean Air Act provisions contain the same or a similar trigger for greenhouse “air pollutants” as well.
The key Clean Air Act provisions involved were rather elegantly analyzed for a House subcommittee on April 10, 2008 by the EPA’s air program administrator Robert Meyers in 19 pages of testimony, which he prefaced by saying that a full explanation “could easily fill a text book.” The relevant sections, most of which are covered in the seven petitions states and private organizations have filed, are an alphabet soup of the Clean Air Act specialists favorite programs: NAAQS, SIPs, PSD BACT, Non-attainment RACT, NSPS, HAPS MACT, aircraft, ship, and locomotive emissions provisions, and the welter of road and non-road vehicle and equipment engine and fuel emissions requirements that the Act authorizes.
To plunge into the greenhouse ramifications of any one of these programs is to plunge deep. Our Ports and Harbors Practice, for example, is considering the myriad of greenhouse gas controls that may be relevant to shippers, port authorities, transportation networks, and others on, or on the way to or from, the nation’s ports and harbors.
The EPA has tried to put off the reckoning, but the Clean Air Act has been held to be applicable to greenhouse emissions. The question is, can we live with it – can we make it work as a climate statute? States and environmental groups appear at first to be saying yes, we can, but the EPA is skeptical and has initiated a national head-scratching over the issue. The groups are pressing for a court order for EPA to come clean and issue the endangerment finding, which the groups say they have conclusive evidence that the Agency has already made. The EPA has come to the brink of making the endangerment finding more than once, only to recoil from taking the first fateful step toward conscripting the Clean Air Act into the federal climate arsenal.
Recently, the Agency has contrived to prolong its agony. It announced that it would issue an advanced notice of proposed rule making this spring inviting the public to offer its comments on climate science (endangerment) and “the broader ramifications” to “many relevant sections of the Clean Air Act” of using it as the primary policy tool for controlling greenhouse emissions. These comments would then help the Agency issue a second proposed rule that would set forth the Agency’s views on how to comply with last year’s Court decision.
The environmental plaintiffs are pressing hard for a court order requiring EPA to make the endangerment finding. They argue that the Supreme Court’s decision leaves no room for the EPA to organize a national town hall meeting on the advantages and disadvantages of using the Clean Air Act to control greenhouse gases. They reason that the Court required the agency to make an endangerment finding or give cogent scientific reasons why it could not. No other paths lie open, they say.
The Agency’s invitation for public comment seems designed to resurrect its view, rejected by the Court, that the Act would provide only an “inefficient, piecemeal approach” to controlling emissions and that a regulatory scheme that included “all significant sources and sinks” would be best. Perhaps. But an agency rule making is not the place for this legislative debate, one which Congress has already initiated and seems inclined to bring to a conclusion in a time frame that may turn out to be less protracted than EPA’s two-step rule-making process is likely to be.
In fairness to EPA, regulating greenhouse emissions through the Clean Air Act is likely to be a bit like opening Pandora’s Box to find a Trojan Horse inside. The statute may reach greenhouse “air pollutants,” but just barely, and its extensive implementing provisions were not designed with climate protection in the front of the congressional mind. The Agency appears to have concluded, we think correctly, that if it regulates motor vehicle greenhouse emissions as the states and environmental groups demand, they have to act favorably on petitions that the groups have also already filed to regulate the greenhouse emissions from a full Mother Hubbard’s cupboard of emitter bones and snacks already alluded to – airplanes, ocean vessels, off-road and recreational vehicles, sources in mining, agriculture, and construction, outdoor power equipment, and the like. This may not be the systematic, finely tuned, and comprehensive solution the nation deserves to the climate challenge, but such is the logic of the situation in which US climate policy is now mired.
It may well be that the states and environmental plaintiffs are forcing the issue on the Clean Air Act, not actually expecting or even wanting to remake it as a climate protection statute. Their purpose may be to force Congress to reach the same conclusion EPA has reached and thus pressure Congress into enacting a comprehensive climate law before the courts turn the Clean Air Act into a greenhouse gas nightmare. Chairman John Dingell appears to have fallen hard for the strategy, recently calling for federal cap-and-trade legislation to correct the “hideous mistake” the Supreme Court made. But in the meantime, the EPA is obliged to try to reconcile existing law with demands for piecemeal greenhouse regulation under the welter of Clean Air Act provisions that various groups have lined up like dominoes, ready to ask the courts to tip over.
EPA’s strategy has been dismissed by state and environmental groups as one of delay until the Administration comes to an end January 20, 2009. Listening to the skillful but beleaguered EPA Administrator at press conferences on the President’s program lends some support to this view. But Administrator Johnson does make a point that while the Clean Air Act Endangerment Stew is simmering, Congress has enacted – in important part with Administration endorsement – a law that actually may lower vehicle and other carbon emissions below the steep upward trajectory they were on only a couple of years ago. The Energy Independence and Security Act (EISA) of 2007 specifies a national mandatory fuel economy standard, a “CAFE standard,” of 35 miles per gallon by 2020, which should, the White House says, increase vehicle efficiency by 40 percent. The new law also hikes the renewable fuels mandate passed in 2005 to 36 billion gallons by the year 2022 (although plenty of pundits have begun to point out the climate and air quality downside of corn ethanol.) The new Act includes a lighting efficiency requirement for phasing out incandescent bulbs by 2014 and lighting efficiency improvements of up to 70 percent by 2020. There are also significant appliance and federal operations energy efficiency requirements in the legislation.
Based on the President’s “20 in 10” program set out in his 2007 State of the Union message (20 percent reduction in gasoline use by 2010), the Administration’s other energy savings and “green” source programs, and the EISA, the EPA has argued, somewhat logically, that all these measures are more effective than – or at the least the functional equivalent of – the command-and-control regulations that may in time be served up from the Clean Air Endangerment Stew. In fact, EPA has suggested in the past that these steps comply legally with the Supreme Court’s decision in Massachusetts v. EPA. This is what the national town hall advanced notice of proposed rule making is all about. It is also the current version of the rule making that EPA once wanted to launch, i.e., a multi-departmental rule that would involve several statutes (including the Clean Air Act) and implement the President’s 20-in-10 agenda.
More fundamentally, the Clean Air Endangerment Stew has now locked the courts, the EPA, and Congress in a struggle over how tripartite constitutional government should approach climate policy, a classic separation of powers issue that only lacks the states to make this a battle over federalism as well. As we move forward on climate in Congress, it might be wise to heed the admonition of Chancellor Bismarck. “Do not ask how legislation and sausages are made.”
Congress in 2008
Federal climate change legislation may be on the way. The Senate has targeted a vote in June, and the House by the end of the year, although a bill both chambers can agree upon is unlikely until 2009, if then. It would be a great mistake, however, to view 2008 as a lost year on the climate front. The fundamental elements of Senate and House bills will be debated and accessible to all who probe beneath the surface. The fundamental regulatory structure and economic impact of climate legislation will have been thrashed over thoroughly by the end of the year. To interested stakeholders, the time to weigh in is now. [summary]
While the candidates count delegates, key Senators and Members count votes and try to predict how far toward climate legislation the Congress will progress this year. The short answer: final legislation is not likely this year, although both chambers may come very close. Because the Senate has targeted a vote in June, and the House by the end of the year, it would be a great mistake to view 2008 as a lost year on the climate front, however. To get to these votes, or even to try to get legislation in shape for a vote, means that the fundamental elements of the Senate and House bills will be debated and visible to all who probe beneath the surface. Passage is quite likely in 2009, but the fundamental regulatory structure and economic impact of climate legislation will have been thrashed over thoroughly. The Congress in 2009 will not by any means be writing on a clean slate. To interested stakeholders, the time to weigh in is now – if not already past.
In the Senate, Senator Lieberman optimistically reports that he believes a vote would be veto-proof at sixty votes if the June vote occurs after the Lieberman-Warner bill reaches the Senate floor soon after the Memorial Day recess. But approval may falter if the many amendments Senators are likely to seek come into play. To reach the 60-vote total, the co-sponsors may have to agree to amendments that, while attracting support from fence-sitting senators, may cause others thought safely on board to fall off the fence. Thus, for the US Senate to approve a strong bill this year, the managers will have to walk a fine line from here on out.
Does Senator John McCain support the bill? His support for decisive action on climate is well-documented. But his desire and determination for a role for nuclear power in addressing the climate challenge may place a serious obstacle in the path of approval, because many "climate senators," including the Chair of the Committee on Environment and Public Works that has favorably reported out the Lieberman-Warner bill, Barbara Boxer of California, have expressed opposition to inclusion of incentives for nuclear power. When other ticklish issues are added to the long list of amendment-prone provisions, the prospects for passage this session look decidedly less optimistic.
In the House, Speaker Nancy Pelosi (D-CA) and special climate committee chair Edward Markey (D-MA) were not joking when on April Fools Day they expressed their determination to have climate legislation pass the House by the end of the year. But they have complicated their own task by stressing the importance of including India and China in climate solutions. Strictly speaking, there is no role for addressing these two nations' large GHG emissions totals in domestic US climate legislation; Pelosi and Markey are hoping that India and China will be addressed either through the Kyoto agreement process or through the time-tried pathway of bilateral agreements. But bringing up India and China, the twin Achilles' Heels of climate action, the two members appeared to be drawing attention to their critics' strongest reason for avoiding unilateral US action until the largest global emitters are brought into some sort of accord on joint action.
The issues to be addressed in a domestic climate law are truly daunting, and suggest that next calendar year, after the presidential election, is a more likely time to expect climate legislation for the US. Even then, the challenge cannot be overstated. The issues include negotiating out provisions to cover caps and baselines fairly and effectively, with key decisions to be made about how each plant, company, sector, and state will be expected to comply, not to mention vital assumptions going into a domestic framework regarding the limits to be placed on GHG emissions for the nation and the planet. Baselines need to be set, and the effects of mergers, acquisitions, and corporate reorganizations taken fairly into account. These issues exist even before taking up the much-discussed topic of the role trading/banking/offsets will play, especially vis-a-vis Clean Air Act-California AB 32-style performance standards. One of the very largest and most contentious areas will cover congressional decisions – no doubt after fierce lobbying – of the impact of legislation on different economic sectors (transportation, chemicals, manufacturing, not to mention electrical utilities and fuels production and consumption). In this connection, legislation can be made (or derailed) by proposed provisions regarding phase-in, byes and safety valves, and cost-spreading.
Allocating emissions allowances is about as controversial as the new legislation can possibly become, with major debate about the grandfathering existing sources, whether to auction all or just some of the rights to emit, and allowance retirement. After both creating enormous value in the form of legislative permission to emit GHGs, and auctioning or allocating the newly-minted rights to emit, already it is clear that a large federal direct and indirect subsidy program will be launched, that may favor green technology and conservation and disfavor existing unaltered high-GHG emitting technologies. Early action credits will certainly receive attention, but to what extent and in what form? This has yet to be fully resolved, nor has the point at which allowance purchase may finally be set to occur: upstream/downstream, at the point of energy use or the point of carbon release.
Now is the Time to Assess the Impacts of Climate Change on Your Business
Companies can no longer postpone consideration on the impact of climate change regulation and the resulting carbon-constrained economy on their business until the day after climate change legislation is enacted. Jeffrey Immelt, CEO of General Electric, recently described his company's consideration of climate change regulation on its business plans as follows: "I run my company assuming there is going to be a market for carbon some day, and a cap and trade system some day. No publicly traded company should have a different philosophy. The day you decide is already ten years too late for me." (Remarks before the National Governors Association Annual Meeting, Washington, DC, February 23, 2008.)
In the absence of federal climate change legislation, how should a company evaluate the impact of forthcoming climate change regulation on their business plans? Companies can start by recognizing that in many parts of the country climate change regulation already has been enacted at the state level, and that federal policy is likely to resemble this effort, only on a national scale. In this regard, most northeastern states have joined the Regional Greenhouse Gas Initiative ("RGGI"), which will take effect January 1, 2009. Under RGGI, greenhouse gas emissions from fossil fuel burning power plants will be capped at 2009 levels until 2015, and thereafter must reduce emissions 2.5 percent annually until 2018. Similar schemes have been adopted in several other states. These measures will have a significant impact on the cost of electricity; businesses that buy power from these utilities will face higher energy costs which could price their products out of the market. Planning for such contingencies must begin now.
Another sign of the changing perception of the pressures on the carbon economy is the recent adoption of the so-called "Carbon Principles" by three of the world's largest financial institutions – JP Morgan Chase, Citi, and Morgan Stanley. Under the Carbon Principles, these financial institutions state that they will consider the cost of carbon emissions or mitigation of the emissions on their investment decisions and investment advice. Thus, for example, before financing a coal-fired power plant these banks would estimate the cost per ton of carbon of carbon dioxide emissions which the plant might have to pay to emit under future legislation – and consider that cost as part of the investment decision. This new approach will have profound effects on carbon-intensive industries: for firms with plans to expand operations or open build new plants, the cost of borrowing just went up.
While costs will undoubtedly increase, climate change legislation will also create opportunities for investment and new ways to do business. These are but a few of the concrete climate change-related developments that firms can assess now.
With that in mind, every business should consider starting the evaluation process to determine where they are today and how they may be able to prosper in the new climate change world.
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Published McKenna Long & Aldridge LLP Climate Change Advisory (March 2008)
