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

This post was written by Steve Nolan.

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

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

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

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

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

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

This post was written by David Wagner.

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

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

Reed Smith's Quarterly Climate Change Regulatory Teleseminar is on June 16

This post was written by David Wagner.

It's time for Reed Smith's (free) quarterly climate change report. Please join us via telephone on Thursday, June 16, 2011 from 12 p.m. to 1 p.m. EDT for a regulatory update on significant international, national and state issues concerning climate change and the future of greenhouse gas regulation. The topics are:

  • International update: how the fate of the Clean Development Mechanism and the Kyoto Protocol affect U.S. business
  • USEPA's greenhouse gas Tailoring Rule - Step 2: what your business needs to know for compliance and planning
  • Implications of the court's "cap and trade" ruling in Association of Irritated Residents v. Cal. Air Resources Board
  • State court update: upcoming decisions on insurers' obligation to defend and/or indemnify covered insureds for public nuisance, and other types of claims based on third-party allegations of damages from climate change
     

If you would like to attend this teleseminar, please email Sandy Petrakis.

Will a Clean Energy Standard "Win the Future"?

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

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

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

How a CES Would Work

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

How is CES Different from RES?

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

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

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

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

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

Some CES Design Elements to Consider

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

Determining Partial Credits for Carbon Capture and Storage and Natural Gas

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

Cost Caps on Utilities

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


Cost Recovery by Utilities

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

Status of State RPS Programs

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

Implementing a CES on the State Level

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

CES Program Coverage

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

Penalties for Non-Compliance

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

Banking

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

Next Steps

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

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

This post was written by Ariel Nieland.

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

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

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

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

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

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

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

This post was written by Jennifer Smokelin.

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

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

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

 This post was written by Jennifer Smokelin.

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

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

To see the full-text article, click here.

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

This post was written by Robert Dellenbach.

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

Highlights:

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

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

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

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

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

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

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

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

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

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

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

Click here to return to Scoping Plan overview.

Greenhouse-Gas Cap and Trade in the US

This post was written by Jennifer Smokelin.

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