Cancún or Can'tcún? Summary of COP 16

This post was written by Jennifer Smokelin.

Last year, after months of build up, politicians, scientists, environmental activists, and Reed Smith attorneys flocked to Copenhagen for COP15: a conference that many hoped would produce a binding international agreement on carbon emissions and an actionable plan for addressing climate change. These goals, of course, weren't realized. Nearly twelve months later, the Conference of the Parties convened once again, this time in Cancun, Mexico. The issues, controversies, and conflicts were very similar.

The outcome of COP 15 last year was the Copenhagen Accord – an agreement that was not adopted by the UN congress as a whole because of the objections of 5 countries. The outcome of this year’s COP (over the objection of one country, Bolivia) are the Cancun Agreements. The Cancun Agreements are a lot less than the comprehensive agreement that many countries wanted and leave open the question of whether any of its measures, including emission cuts, will be legally binding. This is a modest step in international climate negotiations and in its modesty highlights the international discord on the subject and punts a lot of the harder decision to future COPs. For example, the Cancun Agreements declare that deeper cuts in carbon emissions are needed, but do not specify any given mechanism for achieving the pledges each country has made.

The following is a summary of progress (or lack thereof) on key international issues.

Future of the Kyoto Protocol

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

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

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

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

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

Green Climate Fund

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

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

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

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


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

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


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

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

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

Reed Smith's (Free) Quarterly Climate Change Teleseminar is December 16

This post was written by David Wagner.

Please join us on Thursday, December 16 from Noon to 1 p.m. (EST) for our quarterly report on climate change. In this one-hour teleseminar, Larry Demase, Jennifer Smokelin, Todd Maiden, Douglas Everette and Dave Wagner will span the globe and discuss:

  • Significant developments at the global climate change conference, COP 16
  • The Impact of California's New "Proposition 26" on the Implementation of California's Global Warming Solutions Act (aka "AB 32")
  • USEPA's Issuance of PSD and Title V Permitting and BACT Guidance for GHG Sources Subject to the "Tailoring Rule"
  • Recent Federal Requirements Related to Carbon Capture and Storage
  • Issues and Problems to Consider Regarding 2011 GHG Emissions Monitoring & Reporting

To register for the event, please click here.

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.

California Air Resources Board (CARB) Releases Preliminary Draft of Cap-and-Trade Regulations

This post was written by Rose Standifer.

California has moved one step closer to implementing a comprehensive cap-and-trade program for greenhouse gas (GHG) emissions. On Tuesday, November 24, 2009, the California Air Resources Board (CARB) released a preliminary draft of regulations for a GHG cap-and-trade program. The regulations are far from complete. Key components of the program, such as how to allocate emission allowances, have not yet been developed. CARB will be holding a public workshop to discuss the preliminary draft on Monday, December 14, 2009 and will be accepting comments on the preliminary draft through Monday, January 11, 2010. An updated draft will be issued in Spring 2010, with the goal of issuing final regulations in September 2010 and launching the cap-and-trade program on January 1, 2012.

California’s Global Warming Solutions Act of 2006, also known as AB 32, mandates that California reduce GHG emissions to 1990 levels by 2020. In December 2008, CARB issued a Scoping Plan that outlines California’s strategies for meeting this mandate. Establishing a California cap-and-trade program is a prominent component of the Scoping Plan. Cap-and-trade refers to a system in which production of pollutants is capped, producers receive allowances that give them the right to pollute up to specified amounts, and a market is created for trading allowances among producers. For more background on AB 32, the Scoping Plan, and cap-and-trade programs, please review our earlier postings.

California’s cap-and-trade program will include a stringent declining emissions cap, meaning the amount of emissions allowed will be reduced for each subsequent compliance period. The proposed regulations outline three three-year compliance periods (2012 to 2014, 2015 to 2017, and 2018 and 2020). But CARB is considering shortening the compliance period to one year. 

Sectors subject to the cap-and-trade program include large stationary sources of GHG emissions, electricity deliverers, and fuel deliverers that emit at or above a 25,000 metric ton of carbon dioxide equivalent (MTCO2e) threshold. In the Scoping Plan, CARB outlined a staggered approach for phasing regulated sectors into the program. Under the staggered approach, certain sectors would be covered by the program starting in the first compliance period (e.g. 2012 to 2014) with additional sectors becoming covered in subsequent periods. The proposed regulations retain the staggered approach, with 600 of California’s largest GHG-emitting stationary sources subject to the program starting January 1, 2012. But CARB has indicated that it is considering abandoning this approach and making all regulated sectors subject to the program starting January 1, 2012.

Once covered by the cap-and-trade program, an entity will hold emission allowances that it can (1) surrender to cover its emissions, (2) bank for future use, (3) trade to another entity, or (4) retire. The preliminary draft outlines the process for each of the options. But the biggest issue left open is how emission allowances will be allocated in the first instance. Options include free allocation, auction, or a mix of the two. CARB has formed a 17-member Economic and Allocation Advisory Committee (EAAC) to advise CARB on allocation and implementation issues. EAAC is expected to issue a report regarding allocation strategies in January 2010 and the recommendations in this report will be addressed in the revised draft regulations to be issued in Spring 2010.

Additional issues addressed by the preliminary draft include offsets and linkage to other trading programs. Offsets are tradable credits that represent GHG emission reductions in areas or sectors outside the scope of the cap-and-trade program. The preliminary draft proposes that covered entities be allowed to use offsets to cover up to four percent of their emissions. Thus, instead of surrendering emission credits to cover those emissions, the entity would use offsets. Emission reductions achieved by offsets must be real, permanent, verifiable, enforceable, and quantifiable. Further, the reduction must be additional to what is required by law or regulation or would otherwise have occurred.

The preliminary draft also outlines how California’s program could be linked with regional or national cap-and-trade programs. Outside of California and the Northeast, however, little is happening with regards to cap-and-trade programs. National cap-and-trade regulations are currently stalled in Congress. Thus, rather than linkage, the issue is really one of preemption. There is concern that a later-enacted national program could conflict with California’s program or that express preemption of California’s program could hamper California’s ability to meet its AB 32 mandate. Aside from a standard severability provision, preemption is not discussed in the preliminary draft but it will remain an issue in the national debate.

The full text of the preliminary draft regulations can be found here. For additional information, including specific applicability questions, please contact the Reed Smith lawyer with whom you regularly work.

USEPA Finalizes First Nationwide Mandatory Greenhouse Gas Reporting Requirements

This post was written by Rose Standifer and Jennifer Smokelin.

Mandatory reporting of greenhouse gases (GHG) is now required nationwide. On Tuesday, September 22, 2009, the U.S. Environmental Project Agency (EPA) issued its Final Mandatory Reporting of Greenhouse Gases Rule. The final rule requires mandatory reporting of GHG from most large GHG emissions sources in the United States. The stated purpose of the rule is to collect accurate and timely emissions data to inform future policy decisions. Reporting requirements begin on January 1, 2010. Initial reports, covering emissions during 2010, are due on March 31, 2011.

The EPA estimates that the new program will apply to approximately 10,000 facilities and cover approximately 85% of all GHG emissions in the United States. Similar to the California mandatory GHG reporting program, which began earlier this year, applicability is determined by source category and/or emissions levels. In general, suppliers of fossil fuels and industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHG emissions are required to submit annual reports to the EPA under the rule. Key source categories excluded from the rule’s scope include electronics manufacturing, food processing, industrial landfills, coal suppliers, and wastewater treatment facilities. The EPA estimates that most small businesses will be excluded as well because their emissions will fall below the 25,000 metric ton threshold. How to report is obviously a big concern and the EPA has developed a general “Applicability Tool” to help emitters evaluate whether they are subject to the rule’s reporting requirements. An earlier posting on our blog also provided advice to facilities on how to establish that they do not have to report. That information can be found here.

In general, reporting is done on a facility level, even where there are multiple sources at one facility. Facility is broadly defined to include any plant, building, structure, source, or stationary equipment that is located on contiguous or adjacent property and under common control. The key exception to the facility-wide reporting requirement is that certain suppliers of fossil fuels as well as vehicle and engine manufacturers will report at the corporate level.

Specific gases to be reported include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), sulfur hexafluoride (SF6), and other fluorinated gases including nitrogen trifluoride (NF3) and hydrofluorinated ethers (HFE). The final rule sets forth specific methodologies for calculating emissions of these gases. The methodologies must be used, with only one exception. The EPA will allow the use of “best available data” for reporting between January and March 2010. Facilities can request an extension of the exception past March 2010 but the EPA has expressed that no extensions beyond December 2010 will be granted.

Unlike the California program, the final rule does not mandate third-party verification of the reported data. In California, third-party verification is required beginning in 2010. Under the nationwide program, however, reporters can self-certify their data, which will then be verified by the EPA.

EPA estimates that, for the first year of reporting, the annualized costs of reporting for the private sector will be approximately $115 million and that, for subsequent years, those costs will be reduced to $72 million.

The EPA is currently providing information about the new rule. For additional information, including specific applicability and reporting questions, please contact the Reed Smith lawyer with whom you regularly work.

Dodging the Bullet: Advice to Facilities Whose Emissions May Be Under the Reporting Threshold of USEPA's Proposed Mandatory GHG Inventory Reporting Regulations

This post is written by Jennifer Smokelin.

EPA is proposing a rule to require mandatory reporting of greenhouse gas (GHG) emissions in the United States (the "Proposed GHG Rule"). EPA is developing this rule in accordance with the FY2008 Consolidated Appropriations Act, which was signed into law in December 2007. The Proposed GHG Rule would require reporting of anthropogenic GHG emissions covered under the United Nations Framework Convention on Climate Change (UNFCCC).

Almost all the literature set forth by EPA and commentators under this proposed regulation carefully considers the question, "Who would report?" But an equally important question—about which there is far less discussion—is, "How do you establish that you don't have to report?"

Large Sources: EPA is proposing mandatory reporting for facilities that emit 25,000 mtCO2e or more annually. For reference sake, 25,000 mtCO2e is equivalent to emissions from annual energy use of about 2,200 homes. It is also equivalent to just more than 58,000 barrels of oil consumed or 131 railcars' worth of coal.

In addition, for some 19 source categories created by the proposed rule, all of the facilities with that particular source category within their boundaries would be subject to the reporting requirements. These source categories include large manufacturing operations such as petroleum refineries and cement production. 

If your facility is not in one of these 19 source categories, you need to report only if you emit 25,000 mtCO2e or more annually.

Small Sources: EPA is clear that very small sources – households, certain commercial buildings, and individual vehicle owners – will not need to report. The average annual household emissions in the United States are about 11.3 mtCO2e, well below the threshold for reporting. Also, if your facility simply has "stationary fuel combustion units" (boilers, combustion turbines, engines, incinerators, and process heaters) and no other emission sources within their boundary—say, commercial office space—you do not need to report if the aggregate maximum rated heat input capacity of the stationary fuel combustion units summed is less than 30 mmBtu/hr. If a building does have an aggregate maximum rated heat input capacity equal to or greater than 30 mmBtu/hr, then that facility may need to do further calculations to determine if it meets the threshold for reporting. However, EPA is seeking further comment on this strategy in the proposal.

Mid-Size Sources: What about mid-size manufacturing facilities—will they have to report? The short answer is that some mid-size facilities will have to report, and others will not.

How do you determine whether your mid-size facility will have to report? Under the proposed regulations, there is an affirmative obligation on the owner or operator of a facility to review the "appropriate records" to determine whether the threshold has been exceeded. The question, of course, is whether your facility has these "appropriate records" for review, or whether such records will need to be generated in the first reporting year.

Annual Emissions Estimates: In general terms, to determine the applicability of the thresholds, a facility will have to estimate the annual emissions of CO2, CH4, N2O, and fluorinated GHG (as defined in §98.6) in metric tons from stationary fuel combustion units, miscellaneous uses of carbonate, and any applicable source category listed in the Proposed GHG Regulations. (See Proposed GHG Regulation, §98.2(b))

A facility would then sum the GHG emissions totals from each of these three subcategories and determine if its facility-wide emissions are under 25,000 mtCO2e.1

Exemptions from Emission Reports: The Proposed GHG Rule expressly states that the owners and operators of a facility that does not meet the 25,000 mtCO2e threshold are not required to submit an emission report for the facility. However, such owners and operators must reevaluate the applicability of reporting (which reevaluation must include the revising of any relevant emissions calculations or other calculations) whenever there is any change to the facility or supplier that could cause the facility or supplier to meet the applicability requirements of reporting. Such changes include, but are not limited to, process modifications, increases in operating hours, increases in production, changes in fuel or raw material use, addition of equipment, and facility expansion.

Penalties: Are there penalties for those who fail to estimate and collect the data needed to decide whether or not to report? The Proposed GHG Rule states:

Any violation of the requirements of this part shall be a violation of the Clean Air Act. A violation includes, but is not limited to, failure to report GHG emissions, failure to collect data needed to calculate GHG emissions, failure to continuously monitor and test as required, failure to retain records needed to verify the amount of GHG emission, and failure to calculate GHG emissions following the methodologies specified in this part. Each day of a violation constitutes a separate violation.

(emphasis added) Thus, there are potentially serious consequences for failing to collect appropriate data and properly calculate GHG emissions to determine whether reporting requirements apply to your facility. The proposed regulations are silent with regard to record-retention requirements for non-reporting facilities; however, particularly if the facility falls just slightly short of a threshold, a prudent owner or operator of the facility should follow the recordkeeping provision for reporting entities – in case the facility's responsibility to report is called into question.

GHG Reporting ("Once in, always in"): Also note that EPA is adopting a "once in, always in" approach to GHG reporting: Once a facility is subject to the reporting requirements, the owners and operators of the facility must continue for each year thereafter to comply with all requirements of this part, including the requirement to submit GHG emission reports, even if the facility does not meet the applicability threshold for reporting in a future year. (See Proposed GHG Regulation, §98.2(g))

A final point bears mentioning that the threshold requirements for reporting under this Proposed GHG Rule have a strong likelihood of being repeated as the thresholds for permitting under the federal cap and trade system when it is eventually enacted. Therefore, determinations of applicability with regard to threshold reporting under the Proposed GHG Rule may have implications with regard to whether your facility is a "covered source" for purposes of the expected federal cap and trade system.

For all the reason stated above, mid-sized manufacturing facilities that are close to the reporting thresholds would be well served to carefully analyze and sufficiently document their determination with regard to "near misses" of the threshold, and discuss such determination with counsel. In fact, even though third-party verification of calculations and emissions—or even opinions from legal counsel—are not required under the Proposed GHG Rule, they should be considered by certain mid-sized facilities.

If you would like to comment on the provisions of the Proposed GHG Rule, set forth above or otherwise, please contact Jennifer Smokelin, Larry Demase, Todd Maiden, Lou Naugle, or the Reed Smith attorney with whom you usually work. Comment period will be open for 60 days after publication of the proposed rule in the Federal Register, which has not occurred yet.

Footnote 1: Suppliers of industrial GHGs have to report if they are supplying product that is equivalent to 25,000 mtCO2e or more when released.  Thus, if you are a mid-sized supplier of industrial GHGs, you would need to follow the regulations and keep records and perform calculations to determine if you are supplying product that is equivalent to 25,000 mtCO2e or more when released.

California PUC and Energy Commission Release Joint Proposed Opinion on Strategies for Reducing GHG Emissions

This post was written by Todd O. Maiden and Rose L. Standifer.

On Sept. 12, 2008, the California Public Utilities Commission ("CPUC") and the California Energy Commission ("CEC") released their joint proposed opinion on strategies to help reduce greenhouse gas ("GHG") emissions and meet the goals of AB 32, the California Global Warming Solutions Act of 2006. The Proposed Final Opinion on Greenhouse Gas Regulatory Strategies, prepared jointly by CPUC President Michael Peevey, and CEC Chairman Jackalyne Pfannenstiel and CEC Commissioner Jeffrey Byron, provides recommendations, and outlines a variety of options for the California Air Resources Board ("CARB") to consider in deciding how to design a program to achieve the GHG emission targets in the electricity sector. After public comments, the full CPUC and the full CEC will individually consider adopting the finalized opinion at their respective meetings Oct. 16, 2008.

An "Interim Opinion," adopted in March 2008 by the two Commissions, recommended aggressive regulatory measures that maximize energy efficiency and expand renewable energy development beyond the 20 percent goal, and consideration of a multi-sector cap-and-trade program to capture additional cost-effective reductions of GHG emissions. The Interim Opinion also recommended that the "deliverers" of electricity to the California grid would be responsible for complying with the AB 32 regulations.

Currently, the electricity sector accounts for 25 percent of California's GHG emissions. The CARB's Climate Change Draft Scoping Plan expects that the electricity industry will contribute at least 40 percent of the total GHG reductions from direct mandatory approaches and measures. With the addition of a potential cap-and-trade program, the electricity sector may be called upon to reduce its emissions even more. The Proposed Final Opinion describes specific mechanisms for requiring the electricity industry to meet the goals set out in the draft Scoping Plan. To achieve these ambitious cuts in GHG emissions, the Proposed Final Opinion offers recommendations and options in energy efficiency and renewable resources and combined heat and power ("CHP"), and describes a complementary cap-and-trade program. In more detail, the Proposed Final Opinion:

  • Reaffirms the commitment to pursue all of the state's cost-effective energy efficiency options and urges the expansion of renewable energy to 33 percent of energy usage for all retail providers.
  • Considers electric sector costs and rate impacts of reaching the 2020 GHG levels through more energy efficiency, greater use of renewable energy, and increased CHP, and concludes that the impacts will vary depending on service territory and on the design of the ultimate program developed by the CARB. (Staff and consultants of the Commissions developed a variety of illustrative scenarios that indicate that, unrelated to AB 32 compliance, utility rates are likely to rise above the rate of inflation because of increased capital and operating costs and load growth. Under some scenarios related to AB 32 policies, however, utility costs may be reduced compared with business as usual, after accounting for the adoption of significant energy efficiency measures by consumers.
  • Recognizes the value of higher energy efficiency provided by CHP projects, and recommends that for larger installations (over the size-threshold adopted by CARB), the GHG emissions for electricity consumed onsite and/or delivered to the grid be included in the cap-and-trade program, and receive allowance allocations comparable to other electricity providers and consumers.
  • Identifies auctioning as the preferred method to distribute emission allowances. Starting in 2012, 80 percent of the emission permits or allowances would be distributed for free to electricity deliverers and 20 percent would be auctioned, with 100 percent auctioned by 2016.
  • Recommends that free allowances be allocated to deliverers based on energy output and electricity fuel source. (Allowances would be granted to the electricity retail providers on behalf of their customers, with the allowances offered for sale in an independent, centralized auction. These allowance allocations will change over time based on historical portfolio emissions to a sales basis by 2020, to allow transition time for retail providers with emission intensive portfolios.)
  • Proposes that auction revenues be used for AB 32-related purposes, and all revenues auctioned by the retail providers be used to support investments in renewables, efficiency, new energy technology, infrastructure, and customer bill relief.
  • Urges, in considering market structure, that the key market design feature is maintaining environmental integrity. (Market structure should encourage open and transparent allowance trading with many participants, unlimited banking of allowances and offsets, and offsets that must meet AB 32 requirements to be real and permanent. Offsets should not be limited geographically. If a multi-sector regional cap-and-trade is developed, a three-year compliance period should be established to allow time to implement emission reduction measures and to account for hydrologic conditions that can significantly impact the electricity sector.)

The development of this Proposed Final Opinion has been an open public process beginning with a joint Commission symposium in April 2007 that addressed GHG emissions and various types of possible cap-and-trade markets. A number of workshops have helped craft the recommendations. The Proposed Final Opinion on Greenhouse Strategies, A Summary of the Proposed Opinion, and Frequently Asked Questions are available from the Energy Commission, and are also available from the California Public Utilities Commission.

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.