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.

USEPA Announces Greenhouse Gas Endangerment Finding

This post is written by Larry Demase.

In response to the decision of the United States Supreme Court in Massachusetts, et al. v. Environmental Protection Agency, et al, 127 S.Ct. 1938 (2007), yesterday USEPA announced its finding, long anticipated, that greenhouse gases threaten the public health and welfare of the American people. This so-called endangerment finding also includes USEPA’s decision that greenhouse gas emissions from on-road vehicles contribute to the threat to human health and the environment and purportedly supports USEPA’s proposed greenhouse gas standards for light duty vehicles. According to Administrator Lisa Jackson, the Agency’s endangerment finding is also intended to support its proposed rule requiring new or modified source of greenhouse gases to utilize “best available control technology” to control or reduce emissions of greenhouse gases. 

Potentially, USEPA’s endangerment finding could trigger a series of steps by the Agency beginning with the designation under the Clean Air Act of greenhouse gases as “criteria” air pollutants and concluding with development of new source performance standards for major categories of new and modified stationary pollution sources along with state implementation plans which contain enforceable emission controls for existing pollution sources within individual states. See Sections 108(a)(i), 111 and 110(a) of the Clean Air Act. On December 2, 2009 in anticipation of the endangerment finding the Center for Biological Diversity and an organization called filed a petition with USEPA asking the Agency to go forward and regulate greenhouse gases pursuant to the provisions of the Clean Air Act. Petitioners propose that EPA establish national primary and secondary pollution “caps” for greenhouse gases pursuant to Section 109(a) of the Clean Air Act and expeditiously facilitate and aid the states in the state implementation process. This petition has been criticized within the environmental community as being counterproductive to the development of comprehensive legislation.

            USEPA’s decision to announce its action has two apparent purposes. The first is to encourage the House and Senate to move forward with climate change legislation because it is generally seen in most quarters that, if USEPA undertakes to control greenhouse gases under the Clean Air Act, it will bring litigation, uncertainty and more onerous requirements than a comprehensive economy-wide legislative approach. At present both the House and Senate bills being debated contain provisions which would prevent or limit USEPA’s regulation of greenhouse gases under the Clean Air Act, so a vote for the legislation could allow legislators some cover even if it had provisions that were not constituent friendly. The second apparent purpose is that yesterday was the first day of the United Nations Climate Change Conference in Copenhagen and USEPA’s action will help President Obama reinforce his leadership position in Copenhagen, and according to Ms. Jackson will demonstrate to the world the United States’ strong commitment to action on climate change. Reed Smith attorneys are attending the conference as delegates.

            The greenhouse gases covered by the endangerment finding are carbon dioxide, methane, nitrous oxide, hydrofluoro carbons, perfluorcarbons and sulfur hexafluoride.

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 Publishes Final Mandatory Greenhouse Gas Reporting Rule

This post was written by David Wagner.

The final rule implementing USEPA's Mandatory Greenhouse Gas Reporting Program was published in the Federal Register on October 30, 2009, and the rule will become effective on December 29, 2009.  For more information and an analysis of the rule, please review our earlier posting.

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.

USEPA Sends GHG Endangerment Finding to the White House

This post was written by Jennifer Smokelin.

Last Friday, the U.S. Environmental Protection Agency found that climate-warming greenhouse gases, including carbon dioxide, pose a danger to human health and welfare, according to the New York Times. EPA sent its finding to the Office of Management and Budget for review. Once the budget office clears the finding, it can be signed by Lisa P. Jackson, EPA’s Administrator, Lisa P. Jackson. There is also likely to be a public comment period on the proposed finding, but likely none that will prevent the endangerment finding from being finalized.

EPA has been charged for decades with regulating air pollutants under the Clean Air Act and, as the Supreme Court recognized in Massachusetts v. EPA (2007), GHG emissions are air pollutants subject to Clean Air Act regulations. An endangerment determination would confirm the Agency’s power, but also its obligation, to regulate greenhouse gases now.

A complete review -- including White House consent -- is expected to be completed by April 10 and the proposal officially signed by EPA Administrator on April 16, according an internal document presented to White House officials earlier this month and leaked to the news media. The endangerment proposal would be subjected to a 60-day public comment period after publication in the Federal Register on April 30 before moving into the final rule stage.

A review of the leaked internal EPA documents on this issue reveals that the endangerment finding proposes to address all six GHGs listed under the Kyoto Protocol as a group (rather than individually) and not just the four transportation-related GHGs. As a practical matter, the finding would pave the way for federal regulation of motor vehicle emissions of GHGs but it could also have ramifications for the future regulation of GHGs from all stationary sources under the CAA, including power plants, oil refineries, cement plants and other factories.