rapidly developing climate change regulations

ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON MACAÉ MEXICO CITY MONTERREY NEW YORK PARIS RIO DE JANEIRO VITÓRIA

The Rapidly Emerging Climate Change Regulatory System

The Carbon and Energy ConnectionTexas Industrial Energy Management Forum

HoustonApril 2, 2009

The Rapidly Emerging Climate The Rapidly Emerging Climate Change Regulatory SystemChange Regulatory System

The Carbon and Energy ConnectionThe Carbon and Energy ConnectionTexas Industrial Energy Management ForumTexas Industrial Energy Management Forum

HoustonHoustonApril 2, 2009April 2, 2009

Scott D. DeatherageScott D. DeatherageThompson & Knight LLPThompson & Knight LLP

Dallas, TexasDallas, [email protected]@tklaw.com

214214--969969--12061206

ALGIERS AUSTIN DALLAS FORT WORTH HOUSTON MACAÉ MEXICO CITY MONTERREY NEW YORK PARIS RIO DE JANEIRO VITÓRIAClimate Change Regulation TimelineClimate Change Regulation Timeline

1992UNFCCC

1997Kyoto Protocol

2005EUETS

2007--Mass v. EPA--Lieberman-WarnerVoted Outof Sen.Comm.--GreenhouseGas ReportingLegislation--MidwesternGreenhouse Gas Reduction Accord

2008US Pres.Election

2009-2010--US Climate Change Legislation--Post-KyotoClimate ChangeTreaty

2006 --California Bill--WesternClimate Initiative

2003RegionalGreenhouseGasInitiative 2009

US GHGReportingRegulation


Developing Federal RegulationDeveloping Federal RegulationDeveloping Federal Regulation


Current US Federal Legislation Current US Federal Legislation and Climate Changeand Climate Change

Massachusetts v. EPAMassachusetts v. EPA–– April 2, 2007, the US Supreme Court April 2, 2007, the US Supreme Court ruled that human emissions of greenhouse gases (ruled that human emissions of greenhouse gases (GHGsGHGs) are ) are causing climate change and are thereby an “air pollutant” causing climate change and are thereby an “air pollutant” governed by the federal Clean Air Act. EPA failed to justify nogoverned by the federal Clean Air Act. EPA failed to justify not t regulating greenhouse gas emissions from automobiles.regulating greenhouse gas emissions from automobiles.

Cases pending on regulation of greenhouse gas emissions from Cases pending on regulation of greenhouse gas emissions from power plants under the Clean Air Act.power plants under the Clean Air Act.

EPA recently sent “endangerment finding” to White House for EPA recently sent “endangerment finding” to White House for review which would open up GHG regulation under CAA.review which would open up GHG regulation under CAA.

Major Concern: Major Concern: Clean Air Act structure far from ideal for Clean Air Act structure far from ideal for regulating regulating GHGsGHGs. Need alternative legislation.. Need alternative legislation.


New Federal Greenhouse Gas New Federal Greenhouse Gas Reporting RequirementReporting Requirement

Gases that must be measured and reported: Gases that must be measured and reported:

CO2, methane, nitrous oxide and various fluorocarbons CO2, methane, nitrous oxide and various fluorocarbons Industries and sources that will be required to report: Industries and sources that will be required to report:

Steel, cement, aluminum, landfills, chemical, petroleum, Steel, cement, aluminum, landfills, chemical, petroleum, petrochemical, etc.petrochemical, etc.

Oil and gas industryOil and gas industryEmitters: Offshore oil and gas production, onshore natural gas Emitters: Offshore oil and gas production, onshore natural gas processing, natural gas transmission compression, onshore processing, natural gas transmission compression, onshore natural gas storage, LNG storage, and LNG import facilitiesnatural gas storage, LNG storage, and LNG import facilities

Suppliers: Petroleum products, including refiners, importers, aSuppliers: Petroleum products, including refiners, importers, and nd exporter and natural gas and liquids, including processing plantexporter and natural gas and liquids, including processing plants, s, importers, and exportersimporters, and exporters


Bailout and Stimulus BillsBailout and Stimulus Bills

Tax and other incentives for wind, solar, geothermal, Tax and other incentives for wind, solar, geothermal, biomass, and other renewable energy sourcesbiomass, and other renewable energy sources

Tax and other incentives for carbon capture and Tax and other incentives for carbon capture and storagestorage

Incentives for manufacturing renewable and energy Incentives for manufacturing renewable and energy efficiency propertyefficiency property

Incentives for alternative fuels, such as Incentives for alternative fuels, such as biofuelsbiofuels, , hydrogen, natural gas, and electricityhydrogen, natural gas, and electricity

Amounts are in the tens of billions of dollarsAmounts are in the tens of billions of dollars


WaxmanWaxman--Markey Discussion DraftMarkey Discussion Draft

Discussion draft for climate legislation released on Discussion draft for climate legislation released on Tuesday, March 31, 2009Tuesday, March 31, 2009

Not filed as a bill, but released to gain input from Not filed as a bill, but released to gain input from interest groups and other House membersinterest groups and other House members


Beyond Greenhouse Gas RegulationBeyond Greenhouse Gas Regulation

““Clean Energy”Clean Energy”----promotes renewable energy promotes renewable energy (including National Renewable Energy Portfolio (including National Renewable Energy Portfolio Standard), carbon capture and sequestration, lowStandard), carbon capture and sequestration, low--carbon transportation fuels, clean electric vehicles, carbon transportation fuels, clean electric vehicles, and a “smart grid” and electricity transmissionand a “smart grid” and electricity transmission

“Energy Efficiency”“Energy Efficiency”——requires actions to increase requires actions to increase energy efficiency across all sectors of the economy, energy efficiency across all sectors of the economy, including buildings, appliances, transportation, and including buildings, appliances, transportation, and industryindustry


Regulated Greenhouse Gases and Relative Regulated Greenhouse Gases and Relative Global Warming ImpactGlobal Warming Impact

carbon dioxide, COcarbon dioxide, CO22

methane, CHmethane, CH44

nitrous oxide, Nnitrous oxide, N22OOhydrofluorocarbonshydrofluorocarbons, , HFCsHFCsperfluorocarbonsperfluorocarbons, , PFCsPFCssulphursulphur hexafluoride, SFhexafluoride, SF66

nitrogen nitrogen trifluoridetrifluoride, NF, NF33

* Reflects the global warming capacity of each GHG relative to C* Reflects the global warming capacity of each GHG relative to COO22. Other . Other gases may be designated by EPA.gases may be designated by EPA.

GHGGHG GWP*GWP*

112525

298298124 124 –– 14,80014,800

7,390 7,390 –– 12,20012,20022,80022,80017,20017,200


GHG Reduction GoalsGHG Reduction Goals

By 2012, greenhouse gas reduction of 3% of 2005 By 2012, greenhouse gas reduction of 3% of 2005 levels (2005 levels = 7,206 million)levels (2005 levels = 7,206 million)

By 2020, greenhouse gas reduction of 20% of 2005 By 2020, greenhouse gas reduction of 20% of 2005 levelslevels




Covered EntitiesCovered EntitiesAny electricity source of GHG emissions, excluding Any electricity source of GHG emissions, excluding emissions resulting from the use of emissions resulting from the use of

petroleumpetroleum--based or coalbased or coal--based liquid or gaseous fuel, based liquid or gaseous fuel,

natural gas liquid, natural gas liquid,

renewable biomass, renewable biomass,

petroleum coke or petroleum coke or

hydrofluorocarbonshydrofluorocarbons, , perfluorocarbonsperfluorocarbons, sulfur , sulfur hexafluoride, nitrogen hexafluoride, nitrogen trifluoridetrifluoride, or any other , or any other fluorinated gas that is a GHG purchased for use at that fluorinated gas that is a GHG purchased for use at that entity.entity.


Covered EntitiesCovered Entities

Fuel Producers and Importers of the following:Fuel Producers and Importers of the following:

petroleumpetroleum--based or coalbased or coal--based liquid fuel, based liquid fuel,

natural gas liquid, ornatural gas liquid, or

petroleum coke. petroleum coke.

Fluorinated Gas ProducersFluorinated Gas Producers

Geological Sequestration SitesGeological Sequestration Sites



AdipicAdipic acid productionacid production

Primary aluminumPrimary aluminum

Ammonia manufacturingAmmonia manufacturing

Cement productionCement production

Lime manufacturingLime manufacturing

Nitric acid productionNitric acid production

Petroleum refiningPetroleum refining

Phosphoric acid productionPhosphoric acid production

Silicon carbide productionSilicon carbide production

Any source thatAny source that

Manufactures Manufactures acrylonitrileacrylonitrile, , carbon black, ethylene, carbon black, ethylene, ethylene dichloride, ethylene dichloride, ethylene oxide, or ethylene oxide, or methanol, andmethanol, and

Emits 25,000 tons COEmits 25,000 tons CO22e per e per year or moreyear or more



Any stationary source in the Any stationary source in the following industries: following industries:

Ethanol, ferroalloy, food Ethanol, ferroalloy, food processing, glass, processing, glass, hydrogen, iron and steel, hydrogen, iron and steel, lead, pulp and paper, and lead, pulp and paper, and zinc, andzinc, and


Any fossil fuelAny fossil fuel--fired fired combustion device combustion device individually or that as a group individually or that as a group that that

Is all part of the same Is all part of the same industrial source of those industrial source of those listed above, andlisted above, and


Any local distribution Any local distribution company that delivers company that delivers 460,000,000 cubic feet or more 460,000,000 cubic feet or more per year of natural gas to nonper year of natural gas to non--covered entitiescovered entities


Allowance Allocation and AuctionAllowance Allocation and Auction

Most details of auction and allocation have been left Most details of auction and allocation have been left up to future discussionup to future discussion

First quarterly auction to be held no later than March First quarterly auction to be held no later than March 31, 201131, 2011

What percentage will be auctioned versus allocated to What percentage will be auctioned versus allocated to sources without charge remains to be negotiatedsources without charge remains to be negotiated


Borrowing and BankingBorrowing and Banking

BorrowingBorrowing——a covered entity can borrow future a covered entity can borrow future allowances and pay pack a greater number as allowances and pay pack a greater number as “interest”“interest”

BankingBanking——allowances do not have an expiration date, allowances do not have an expiration date, so 2012 allowances could be used in 2014 or laterso 2012 allowances could be used in 2014 or later


State ProgramsState Programs

Within a year of passage, the Administrator shall pass Within a year of passage, the Administrator shall pass regulations allowing for conversion of allowances regulations allowing for conversion of allowances issued by California or RGGI into federal allowances issued by California or RGGI into federal allowances in an amount “sufficient to compensate for the cost of in an amount “sufficient to compensate for the cost of obtaining and holding such state allowances.”obtaining and holding such state allowances.”


OffsetsOffsets

Within 30 days of passage, an Offset Integrity Within 30 days of passage, an Offset Integrity Advisory Board will be established to make Advisory Board will be established to make recommendations to the EPA for use in promulgating recommendations to the EPA for use in promulgating offset regulations offset regulations

Within 2 years of passage, the EPA will promulgate Within 2 years of passage, the EPA will promulgate relevant regulationsrelevant regulations

A covered entity may satisfy a percentage of its A covered entity may satisfy a percentage of its compliance obligations by submitting compliance obligations by submitting 1.251.25 offsets in offsets in lieu of an allowancelieu of an allowance


OffsetsOffsets

Total offset market may not exceed 2 billion/yr. Split Total offset market may not exceed 2 billion/yr. Split evenly between domestic and international offsetsevenly between domestic and international offsets

The percentage use of offsets per entity = The percentage use of offsets per entity = (2,000,000,000 /(2,000,000,000 + allowances (2,000,000,000 /(2,000,000,000 + allowances established for previous year)) x 100established for previous year)) x 100

Offset limitOffset limit----half domestic, half internationalhalf domestic, half international


OffsetsOffsets

To be recommended by the Advisory Board within 90 To be recommended by the Advisory Board within 90 days of its establishment and established by EPA days of its establishment and established by EPA within 2 years of passage of lawwithin 2 years of passage of law

Start date Start date –– draft requires, as a matter of draft requires, as a matter of additionalityadditionality, , practices commencing only after January 1, 2009, practices commencing only after January 1, 2009, except as provided in 740(a). except as provided in 740(a).


Offsets from Other ProgramsOffsets from Other ProgramsAn offset credit may be issued for reductions occurring after JaAn offset credit may be issued for reductions occurring after January 1, nuary 1, 2009,from a project started after January 1, 2001 and offsets ha2009,from a project started after January 1, 2001 and offsets have been ve been issued under a regulatory or voluntary program that the Administissued under a regulatory or voluntary program that the Administrator rator determines:determines:

Was established by State or tribal law or regulation prior to JaWas established by State or tribal law or regulation prior to January 1, 2009;nuary 1, 2009;Has developed standards, methodologies and protocols through a pHas developed standards, methodologies and protocols through a public ublic consultation process;consultation process;Has published standards, methodologies and protocols that requirHas published standards, methodologies and protocols that require that e that reductions are permanent, additional, verified and enforceable;reductions are permanent, additional, verified and enforceable;Verified by a third party;Verified by a third party;Registered in a publicly accessible registry, with individual seRegistered in a publicly accessible registry, with individual serial numbers rial numbers assigned for each ton of carbon dioxide equivalent reduction; anassigned for each ton of carbon dioxide equivalent reduction; anddEnsures that no credits are issued for activities for which the Ensures that no credits are issued for activities for which the entity entity administering the program has funded, solicited or served as a fadministering the program has funded, solicited or served as a fund und administrator for the development of, the project that caused thadministrator for the development of, the project that caused the reduction.e reduction.


International OffsetsInternational Offsets

EPA may, under certain conditions, may allow offsets EPA may, under certain conditions, may allow offsets from a international activities (including from a international activities (including CERsCERs) to be ) to be accepted within the U.S. program, but only, among accepted within the U.S. program, but only, among other things, ifother things, if

The U.S. is party to an agreement with the host nation; The U.S. is party to an agreement with the host nation; and and

The project or activity is within a developing country.The project or activity is within a developing country.


State RegulationState RegulationState Regulation


Aspects of RGGIAspects of RGGIBaseline Years: 2002Baseline Years: 2002--20042004

Cap and Reduction Requirements: Stabilize CO2 emissions from poCap and Reduction Requirements: Stabilize CO2 emissions from power wer plants until from 2009 until 2015, then allowances will be retirplants until from 2009 until 2015, then allowances will be retired slowly ed slowly as the cap is lowered by 10% by 2020.as the cap is lowered by 10% by 2020.

Allocation: Allowances may be largely auctioned to utilities, raAllocation: Allowances may be largely auctioned to utilities, rather than ther than assigned at no cost; pilot project in 2007, and first auction inassigned at no cost; pilot project in 2007, and first auction in 2008. NY, 2008. NY, Mass, and Vermont have decided to auction 100% of allowances.Mass, and Vermont have decided to auction 100% of allowances.

Safety valve if allowances become too expensive.Safety valve if allowances become too expensive.

Trading and Offsets: Power companies can trade allowances to alTrading and Offsets: Power companies can trade allowances to allow low the most cost effective, efficient reductions. However, offsetsthe most cost effective, efficient reductions. However, offsets are are limited to specific types of projectslimited to specific types of projects

capturing landfill gas, eliminating leaks in natural gas distribcapturing landfill gas, eliminating leaks in natural gas distribution ution systems and propane systems, reducing methane from farming systems and propane systems, reducing methane from farming operations, and certain forest plantings.operations, and certain forest plantings.


California and Western StatesCalifornia and Western States

California AB 32, The California Global Warming Solutions Act ofCalifornia AB 32, The California Global Warming Solutions Act of 20062006

Baseline: 1990 greenhouse gas emissionsBaseline: 1990 greenhouse gas emissions

Cap and Reduction Requirements: Reduce emissions to 1990 levelsCap and Reduction Requirements: Reduce emissions to 1990 levelsby 2020by 2020

Trading: Allowed under legislation, but must be developed by stTrading: Allowed under legislation, but must be developed by state ate agencies.agencies.

Allocation: Not yet determinedAllocation: Not yet determined

Western Regional Climate Change Initiative: Members are ArizonaWestern Regional Climate Change Initiative: Members are Arizona, , British Columbia, California, Manitoba, New Mexico, Oregon, UtahBritish Columbia, California, Manitoba, New Mexico, Oregon, Utah, and , and Washington. Washington.

Several other states have joined as observers: Alaska, ColoradoSeveral other states have joined as observers: Alaska, Colorado, , Kansas, Nevada, Ontario, Quebec, Saskatchewan, Sonora, and Kansas, Nevada, Ontario, Quebec, Saskatchewan, Sonora, and Wyoming.Wyoming.


California Low Carbon California Low Carbon Fuel StandardsFuel Standards

US has developing renewable fuel standard that in US has developing renewable fuel standard that in essence requires more ethanol use in transportation essence requires more ethanol use in transportation fuel for domestic automobilesfuel for domestic automobiles

California is establishing by the end of 2009 a Low California is establishing by the end of 2009 a Low Carbon Fuel Standard that allows the use of ethanol, Carbon Fuel Standard that allows the use of ethanol, biodiesel, natural gas, hydrogen and other types to biodiesel, natural gas, hydrogen and other types to meet carbon emission levels in fuelsmeet carbon emission levels in fuels

Allows tradable credits for low carbon fuelAllows tradable credits for low carbon fuel


Midwestern StatesMidwestern States

Midwestern Regional Greenhouse Gas Reduction AccordMidwestern Regional Greenhouse Gas Reduction Accord

Nine states in the region, Wisconsin, Minnesota, Illinois, IndiaNine states in the region, Wisconsin, Minnesota, Illinois, Indiana, Iowa, na, Iowa, Michigan, Kansas, Ohio, and South Dakota, and the Canadian proviMichigan, Kansas, Ohio, and South Dakota, and the Canadian province nce of Manitoba. of Manitoba.

Calls for Calls for

2% reduction in energy use by 2015, with a 2% cut every year aft2% reduction in energy use by 2015, with a 2% cut every year after er that; that;

an increase in the availability of a cleaner ethanolan increase in the availability of a cleaner ethanol--gasoline mix gasoline mix known as E85; and known as E85; and

10% of the region's electricity to come from renewable sources b10% of the region's electricity to come from renewable sources by y 2015, with an increase to 30% by 2030. 2015, with an increase to 30% by 2030.

Reductions in greenhouse gases and establishment of a regional Reductions in greenhouse gases and establishment of a regional capcap--andand--trade system.trade system.


How to Survive in a How to Survive in a CarbonCarbon--Constrained EconomyConstrained Economy

1. Understand we are in the midst of a conversion to a carbon1. Understand we are in the midst of a conversion to a carbon--constrained economyconstrained economy——a change as enormous as the Industrial a change as enormous as the Industrial RevolutionRevolution2. Understand new regulatory paradigm in the twenty2. Understand new regulatory paradigm in the twenty--first first century where environmentalists use pension fund investments century where environmentalists use pension fund investments and shareholder petitions to pressure corporate actionand shareholder petitions to pressure corporate action3. Develop a corporate climate strategy3. Develop a corporate climate strategy4. Measure and monitor your carbon footprint4. Measure and monitor your carbon footprint5. Develop a strategy for climate risk disclosure5. Develop a strategy for climate risk disclosure6. Conduct climate change due diligence6. Conduct climate change due diligence7. Develop a carbon offset strategy and portfolio7. Develop a carbon offset strategy and portfolio


Scott D. DeatheragePartner1722 Routh StreetSuite 1500Dallas, Texas [email protected]

Blog Sites:

“The New Carbon Cycle” http://lawandenvironment.typepad.com/newcarboncycle/

and

“Law and the Environment” http://lawandenvironment.typepad.com/

rapidly developing climate change regulations

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