The President gave an indication of his environmental focus in his inaugural address, and then again in his state of the union speech. The focus would be on climate change. 

Central to that focus would be the EPA Adminstrator, but that would not be Lisa Jackson who tendered her resignation at the end of 2012.  If Washington gossip is any guide, Ms. Jackson's replacement will be Gina McCarthy, the current head of EPA's Office of Air and Radiation.

We went looking to see if we could draw a bead on where Ms. McCarthy might lead EPA.  We found a recent speech and it was directly on point. On February 21, Ms. McCarthy addressed an audience at the Georgetown Law Center at a conference on Climate Change and Energy Policy. (The conference was videotaped. Ms. McCarthy has the podium from about 4:50 to 5:30 if you are interested.)  

Ms. McCarthy has a reputation of being something of a pragmatist. Her talk was consistent with that. A brief summary might be:  Climate change is here and we have to deal with it, but in addressing carbon dioxide there can be great benefits from doing so in the form of reducing pollution, increasing efficiency and empowering communities.

Pollution reductions will come in at least three forms. First, if more renewable energy sources are developed, there will be less emissions. Second, if production and use is made more efficient there will be less emissions. Third, if production is focused on fossil fuels that emit less pollutants when burned (that is, not coal), there will be less emissions.  We note that this strategy is already at work.  The growth of wind and solar power has been meteoric.  Ms. McCarthy promoted electric cars, which are far more efficient than gasoline-powered ones (although she ignored compressed natural gas vehicles, which are low emission and have some compelling advantages over electric cars).  And we have covered before  the catastrophe for coal signaled by the proposed Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources: Electric Utility Generating Units, which forecasts not a single new coal plant through 2030.

Significantly, or perhaps not, she did not mention fracking and the phenomenal recent growth in natural gas production.  That was surprising.  A recent Harvard Magazine article  summarized the pollution and greenhouse gas effects of the natural gas bonanza: 

The shift from coal to gas in the electricity sector has also yielded an environmental bonus—a significant reduction in emissions of CO2, because CO2 emissions per unit of electricity generated using coal are more than double those produced using gas. … [T]he U.S. Energy Information Administration (EIA) reported that domestic emissions of CO2 during the first quarter of 2012 fell to the lowest level recorded since 1992. An ancillary benefit of the coal-to-gas switch has been a significant reduction in emissions of sulfur dioxide, the cause of acid rain, because many of the older coal-burning plants selectively idled by the price-induced fuel switch were not equipped to remove this pollutant from their stack gases.

Efficiency pervaded her remarks. A striking number is the $1.7 trillion she stated automobile fuel efficiency standards had saved consumers at the pump. But that is just the tip of the iceberg. EPA will help Americans make buildings, processes and communities more efficient.  According to Ms. McCarthy the EPA Climate Showcase Communities saved $19 million per year based in large part on efficiency.

We are somewhat troubled by the “eye of the beholder” syndrome exhibited here.  Certainly consumers saved money at the pump.  But they spent more at the car dealer.  How did they fare overall?  The answer depends on how long they owned their car and the price of gas.  According to research in 2012 by TrueCar.com for the New York Times, at $4/gallon “[e]xcept for two hybrids, the Prius and Lincoln MKZ, and the diesel-powered Volkswagen Jetta TDI, the added cost of the fuel-efficient technologies is so high that it would take the average driver many years — in some cases more than a decade — to save money over comparable new models with conventional internal-combustion engines.”  

Ms. McCarthy’s vision of empowerment is through information.  If building owners get the knowledge of how to make their buildings more efficient, they will  because it makes sense to do so.  If communities are provided the relevant information, they will make enabling smart choices.  Indeed, she closed on the importance of information, referencing three sources.  First, EPA has now been collecting information on greenhouse gas emissions for two years.  That information is publicly available.  People should look at this because it identifies the sources of the climate change problem.  Electric utilities are far and away the biggest emitters of greenhouse gases (which is to say, all of us are because, with rare exceptions, all of us use electricity generated with fossil fuels).  

Second,  she touted the EPA’s 2012 report, Climate Change Indicators in the United States (18MB).  This is a valuable resource. Twenty-six “indicators” are assessed as to what they show about a world beset by climate change.  All are familiar with reduced ice sheets, reduced snowpack and higher average temperatures.  Less familiar is the documented increase in ragweed pollen season and retained ocean heat.  And the report is honest about what is not known.  Although 7000 Americans were reported to have died of heat-related illnesses in the last 30 years, trends have not been determined.  Although one might think that a hotter world would lead to more hurricanes, the data have not proven that yet.

Last, Ms. McCarthy praised government research into adaptation and the various reports issued and to be issued.

Some view agency heads in Washington as essentially valueless; talking heads, here today and gone tomorrow.  The bureaucracy was there when the new head arrived and will be there when the now old head leaves.  What this view misses is that the agency head can muster the agency’s resources in support of one initiative, argue for it on Capitol Hill, at the White House and in the press, and give the extra boost when the going gets rough.  Gina McCarthy was instrumental in building the northeast’s cap-and-trade program (the Regional Greenhouse Gas Initiative) in her native Connecticut.  Certainly, that idea on a national basis is percolating again.

2012 has drawn to a close.  We chronicle here six of the most significant stories on the climate change front in the last six months.  For those looking for hope that government is taking action to rein in greenhouse gas emissions, the focus is on California, where cap-and-trade stepped into reality with California's first emissions auction.  Nationally and internationally regulation is at a standstill or going backward.  In the courts, the climate change liability plaintiffs were pounded again as the Ninth Circuit confirmed the dismissal of Native Village of Kivalina v. ExxonMobil Corp.  Responding to climate change, however, is a different story.  Superstorm Sandy was a wakeup call on adaptation and the impacts of extreme weather; the National Flood Insurance Program managed to obtain statutory authority to include climate change in its considerations.

1.  Superstorm Sandy –  Climatologists are confident that the changing climate will lead to more frequent and more severe storms.  Sandy, following Hurricane Irene the previous year, delivered on both predictions.   A nine-foot storm surge at Battery Park.  Transformers exploding and putting Manhattan into darkness.  The Hoboken PATH station  submerged.  $50 billion in damage.  Superstorm Sandy set records and was completely consistent with the concerns of proponents of climate change mitigation and adaptation.  Did it have anything to do with climate change or was it simply a chance confluence of events?  The weather pattern was unusual.  There was a hurricane (albeit fading), coupled with a nor’easter, intersecting with an arctic high pressure front, under a full moon.  Individually, those are independent of climate change.  But there was also a record lack of sea ice, which has a measured and observed effect on global atmospheric circulation, which could result in severe weather coming together more severely.  So quite possibly Sandy is a result of climate change.  More important than the academic debate, however, is the impact on adaptation.  Regardless of one’s views on climate change, Sandy demonstrated that a major metropolitan area is vulnerable to extreme weather.  Steps will be taken to flood-proof subways, bury electric lines, raise seawalls, improve evacuation plans  and emergency response,  etc.  All of these are part of the steps needed to adapt to climate change.   Whether it is acknowledged as linked to climate change or not (but see Bloomberg Business Week cover following Sandy:   “It’s Global Warming, Stupid!”), adaptation is going to happen. 

2.  Presidential Election - Climate change was an important part of the campaign:  "The Obama-Biden cap-and-trade policy will require all pollution credits to be auctioned, and proceeds will go to investments in a clean energy future, habitat protections, and rebates and other transition relief for families."  The 2008 election campaign that is. It was a completely different position in 2012. Or maybe not different at all.  No one could tell because nobody was talking about it.  Even Sandy wasn't enough to propel climate change into the debate in the last week of campaigning.

3.  Native Village of Kivalina v. ExxonMobil - The last filed of the original quartet (American Electric Power, General Motors, Comer, and Kivalina) of climate change nuisance cases, Kivalina finally made it to a federal appellate court, where in September it met the same fate as its brethren:  dismissal affirmed.  Plaintiffs asked for rehearing.  The Ninth Circuit wasn't interested.  As of this writing, the only case left is Comer v. Murphy Oil USA, which is on appeal following its dismissal last March (for the second time) by the Southern District of Mississippi.  According to that court, plaintiffs lose for a wide variety of reasons:  standing, political question doctrine, res judicata, collateral estoppel, displacement, statute of limitations and proximate cause.   

4.  Cap-and-trade - California, alone among the fifty states, instituted its multi-industry full-fledged cap-and-trade program auctions in November.  All of its allowances for 2013 were sold at a price slightly above the mandated floor price of $10/ton.  Regulators and environmental groups hailed the auction as a success; some business groups were less enthusiastic.  The California Chamber of Commerce sued the California Air Resources Board to invalidate the auctions.  Meanwhile, the Regional Greenhouse Gas Initiative in the northeast continues with its allowances trading at the floor price, and with less than 2/3 of its allowances selling in its August and December auctions.  Some commentary concludes that it is time for RGGI to shut down as its CO2 emission goals have been met.    From where we sit, RGGI's success or failure can't be judged until its carbon trading is done in connection with  a robust economy.  The world economic malaise suppresses business, and with it, carbon dioxide emissions.  California may face the same issue.  

5.  National Flood Insurance Program Reform - Could a poisonously partisan Congress vote for this: 

(1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to--(A) develop recommendations on how to--(i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and (ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of--
(I) the rise in the sea level; ..."?  

Not the Congress we know.  Or so we thought.  Somehow, somewhere, someone put this into a draft, which made it into and out of a committee, ended up on the floor of both houses, survived two votes and came out as an enrolled bill for the president's signature.  The president signed it into law in July.  This was part of the miscellaneous section of the Moving Ahead for Progress in the 21st Century Act  (aka the Transportation and Student Loan Bill), which may explain how this occurred.  In any event, climate change considerations are statutorily mandated as part of the NFIP.  42 USC § 4101a(d)(1).  We can expect a report by July 6, 2013.  Id. § 4101a(d)(1)(B).  Who'd have thunk? 

6.  Global GHG Regulation - COP-18, the Conference of the Parties to the United Nations Framework Convention on Climate Change, wrapped up in Doha, Qatar in the middle of December widely panned as ineffective.   While it extended to 2020 the Kyoto Protocol addressing global greenhouse gas emissions, major nations (Canada, Russia, Japan and New Zealand) dropped out, and the United States continued to refuse to participate.  Thus, only about fifteen percent of global emissions are now covered by the protocol (the EU and other European nations, as well as Australia, continue to support the protocol).   Developing nations (whose emissions are not restricted by Kyoto) had hoped to obtain commitments for funding "climate finance" of $100 billion, but that did not occur either.  One can see parallels between the Kyoto Protocol and the Western Climate Initiative and RGGI.  In all three members have dropped out and the commitment to address greenhouse gas emissions waivers. 
 
The fiscal cliff was the focus at the end of 2012; climate change got short shrift.  2013 may establish that that was short-sighted.

When we discuss climate change litigation with colleagues or acquaintances unfamiliar with it, they are always a little incredulous.  “The plaintiffs allege what?  How could you prove that?  There's no way they can win.”  Courts, however, cannot rule from their impressions; instead, they must parse arguments and facts and explicate the legal reasoning that supports shutting climate change cases out of the courtroom.  We have addressed in this blog many of those decisions as the climate change cases have wound their way up the appellate ladder.  That statement-of-reasons rule, however, does not apply when a court is being asked to grant rehearing en banc.  Then a judge can just say, “I’m not interested.”  And the case is done.

That happened at the end of November in Native Village of Kivalina v. ExxonMobil Corp. when the Ninth Circuit issued its denial (see attached) of plaintiffs' petition for rehearing:  “The full court has been advised of the petition for rehearing en banc, and no judge of the court has requested a vote on the petition for rehearing en banc.  Appellants’ petition for rehearing en banc is DENIED.”  Unless the plaintiffs file a petition for certiorari with the Supreme Court, and the Court accepts it (which we think unlikely with no circuit court split and the dismissal being a fairly simple extension of the Court's decision in American Electric Power), Kivalina is done.  That means that there is no federal common law of nuisance relevant to greenhouse gas emissions whether a plaintiff seeks injunctive relief or damages.  The federal Clean Air Act displaces the claim in both instances. 

Two slim reeds remain for plaintiffs in the first wave of climate change litigation.  First, they need to prevail on an appeal before the Fifth Circuit in Comer v. Murphy Oil USA, Inc., which will require overcoming over half a dozen independent bases for dismissal found by the trial court.  Or second, they must succeed on a state-law-based theory of nuisance.  As we have noted recently, the Clean Air Act is likely to be found to preempt such claims. 

In light of the string of defeats in American Electric Power, Comer and Kivalina for plaintiffs, we went looking to see where the climate change plaintiffs' lawyers were going next.  The websites of the lead Comer and Kivalina lawyers, Gerald Maples and Matt Pawa, were not helpful.  However, journalist Andrew Longstreth didn’t rest on the websites; he reached out directly to Messrs. Pawa and Maples. Here is the future he found: 

"Pawa said that he and his co-counsel in the Kivalina case are discussing their options, which include asking the Supreme Court to hear an appeal or filing a new case in state court that asserts state common law claims. Pawa likened the current state of climate change litigation to the early stages of suits against cigarette makers and companies with asbestos liability. Before plaintiffs' lawyers in those cases were able to win judgments and settlements, they were stymied by defense arguments. "We haven't exhausted our theories or our efforts," he said.

As stated above, the Supreme Court and state law nuisance paths do not seem likely to succeed.  Mr. Maples suggested a different path:

"Future success in climate change litigation, he said, may depend on whether state attorneys general get involved, as they did in the tobacco litigation of the 1990s. With home insurance premiums rising as a result of climate change, Maples said, the litigation could become attractive to state AGs, who like consumer protection cases.  'If you can't afford insurance, that's almost like not affording food,'"

So, is climate change litigation going to take a new turn and become an issue about consumer protection and insurance rates?  After reviewiing the Fourth Amended Complaint in Comer, we suggested in 2011 that this theory was something that bore watching.  Here is the theory in action as alleged in Comer:  “[Defendants' greenhouse gas emissions] put Plaintiffs' property at greater risk of flood and storm damage, and dramatically increase Plaintiffs' insurance costs." (Fourth Amended Complaint ¶ 37.)   Thus, with the demise of federal common law claims, consumer protection law claims may be the next wave. 

20121127 Order (denying rehearing en banc), Kivalina v. ExxonMobil.pdf (34.55 kb)

The Virginia Supreme Court surprised us today.  It issued its opinion (attached) on rehearing in AES Corp. v. Steadfast Insurance Co., hardly changed from its original decision finding that the allegations in Native Village of Kivalina v. ExxonMobil Corp. did not constitute an occurrence.  The concurrence, however, is substantially altered, and it is there that one can get a taste of the mischief to which this decision may lead.

We have blogged this subject on several occasions.  In a nutshell, AES sought coverage for climate change liability claims asserted by claimant Inupiat Eskimos, who alleged that AES’s (and others’) carbon dioxide emissions were the cause of the excessive erosion of their community on a spit of land north of the Arctic Circle.  AES tendered the claim to Steadfast, who accepted the defense subject to a reservation of rights, and then filed a declaratory judgment action against AES in Virginia.  Following dueling motions for summary judgment, Steadfast prevailed before the trial court.  AES took an appeal to the Virginia Supreme Court.  Notwithstanding specific allegations of negligence by AES, the Court concluded:   “[e]ven if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.”    In sum, “If an insured knew or should have known that certain results would follow from his acts or omissions, there is no 'occurrence' within the meaning of a comprehensive general liability policy.”  Thus, the trial court was affirmed.

AES sought rehearing because three authorities on which the Court relied established that there was no occurrence where the insured knew to a “substantial certainty” or “substantial probability” that injury would occur.  As the Kivalina plaintiffs made no such “substantial certainty” allegation, AES asserted the Court’s holding was in error.

We learned today that the Court disagreed.  Well, actually, we don’t know if the Court disagreed.  There is no mention of “substantial certainty” or “substantial probability” although the Court continues to cite the exact same authorities.  One could just as reasonably conclude that the Court felt AES’s argument simply was not relevant.  Virginia law, according to the Court is as follows:  “For coverage to be precluded under a CGL policy because there was no occurrence, it must be alleged that the result of an insured’s intentional act was more than a possibility; it must be alleged that the insured subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.“  The Kivalina plaintiffs did not allege that AES intended the erosion of the spit, so the allegations had to be read to demonstrate that the erosion in Alaska was a natural or probable consequence of the emissions of carbon dioxide from AES’s plants’ emissions somewhere in the lower 48.  From where we sit, there seems a great distance from the alleged damage in Alaska being a “substantial certainty” or being a “probable consequence.” 

We note a trial court's recent ruling (attached) in another climate change liability case, Comer v. Murphy Oil:, where the Southern District of Mississippi dismissed the climate change claims: 

The assertion that the defendants’ emissions combined over a period of decades or centuries with other natural and man-made gases to cause or strengthen a hurricane and damage personal property is precisely the type of remote, improbable, and extraordinary occurrence that is excluded from liability.

So one court rules that allegations of climate change effects are extraordinary, improbable and remote, while another rules they are to be taken as stated.  Regardless, the Court's decision should resolve AES’s quest for coverage from Steadfast.  Other Kivalina defendants will take note and ensure that Virginia is struck from possible litigation venues for their coverage claims.

Will this decision have major implications?  Yes, but probably not in the climate change space.  It is one decision, on one issue, on one set of facts.  We will be very surprised if future plaintiffs do not take note of the decision and ensure that their pleadings more adequately state negligence claims so as to bring insurance money to the table (assuming at some point they can get past motions to dismiss). 

Other jurisdictions have their own jurisprudence on “occurrence” and they are not likely to mirror Virginia’s.  We feel that we can say that with some authority based on the statements made by Justice Mims in his concurrence.  Justice Mims felt that Virginia law left the Court with no option but to find there was no occurrence:  “under the reasoning of our precedents, allegations of negligence and allegations of accident must be mutually exclusive.  … Because “accident” is synonymous with “occurrence,” which is what these CGL policies cover, I concur with the majority that our precedents require us to conclude that they do not provide coverage for AES’s allegedly negligent acts.”  But that leads to a real problem:  “I also must acknowledge the broader effect that this conclusion, and the underlying case law that compels it, may have on other CGL policies in which the insured risk is defined as an “occurrence.  Our precedents may have painted us into a jurisprudential corner.”   Can it be that commercial general liability policies in Virginia do not cover negligence?  Stand by.  This is sure to be the subject of future litigation.

20120420 AES v. Steadfast (Va. Apr. 20, 2012).pdf (42.88 kb)

20120320 Comer v. Murphy Oil USA Inc., Order of Dismissal (S.D Miss).pdf (172.02 kb)

Tuesday EPA issued its proposed rule (see related post) concerning new source performance standards for greenhouse gas emissions for electric power plants.  This all started when EPA refused to address greenhouse gas emissions coming out of cars.  Cars to power plants.  Some may be wondering how the camel got into this tent.

The story begins of course with Massachusetts v. EPA, 549 U.S. 497 (2007), where the Supreme Court held that greenhouse gases emitted in automobile exhaust were "air pollutants" within the meaning of the Clean Air Act.  This meant that EPA had to assess whether they caused or contributed to "air pollution which may reasonably be anticipated to endanger public health."  42 U.S.C. § 7521(a)(1).

That assessment was completed in December 2009 and EPA concluded in the "Endangerment Finding" that "that six greenhouse gases taken in combination endanger both the public health and the public welfare of current and future generations." 74 Fed. Reg. 66,496 (Dec. 15, 2009).  The Endangerment Finding did not impose any requirements, but it set the stage for regulation.  In September 2009 EPA and the US Department of Transportation issued proposed rules to establish greenhouse gas emission standards for certain motor vehicles.  The final rule was published on May 7, 2010 and went into effect on January 2, 2011.  75 Fed. Reg. 25324 (May 7, 2010).  The camel's nose was in the tent.

And with that, EPA now had the prerequisite to set greenhouse gas emissions limits elsewhere.  At least that is EPA's position.  In a nutshell, stationary sources that emit 250 tons per year of "pollutants" are subject to the Prevention of Significant Deterioration (PSD) program.  One element of the PSD program is that Best Available Control Technology (BACT) analysis is required for "each pollutant subject to regulation" under the Clean Air Act.  42 U.S.C. 7475(a)(4).  When the motor vehicle greenhouse gas regulation kicked in on January 2, 2011, greenhouse gases were subject to regulation, and therefore electric utilities emitting greenhouse gases were required to conduct a BACT analysis.  All of the camel was in the tent.

All of these regulations (and others) were challenged.  Oral argument in those cases was heard before the D.C. Circuit at the end of February.  The regulated community awaits; who knows what the camel is thinking.   

Wow!  Whether one likes the president or not, one must concede he's not afraid of leading. Just a little over seven months from the election he has drawn a line in the sand and proposed a rule that may fundamentally alter America's energy mix and takes a big step toward addressing carbon dioxide emissions.  Or it does nothing at all.  We are talking of course of Tuesday's announcement of new source performance standards for electricity plants.   In EPA's words:

The EPA is proposing standards of performance that require that all new fossil fuel-fired EGUs meet an electricity-output-based emission rate of 1,000 lb
CO2/MWh of electricity generated on a gross basis. This proposed standard is based on the demonstrated performance of natural gas combined cycle (NGCC) units, which are currently in wide use throughout the country, and are likely to be the predominant fossil fuel-fired technology for new generation in the future.  EPA, Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources: Electric Utility Generating Units (proposed rule) at 13 (Mar. 27, 2012) .

So natural gas is in.  And what about the other fossil fuels?  New plants using coal or oil and even IGCC (integrated gas combined cycle) can be built but EPA expects that they will need to use carbon capture and storage (CCS) to meet the standards.  Id.

What brought about this groundbreaking new rule?  We set forth the legal foundation in a companion post.  Suffice to say here that EPA has moved a long way from the days before Massachusetts v. EPA, 549 U.S. 497 (2007), when greenhouse gases were not Clean Air Act "pollutants."  But the non-regulatory drivers were perhaps even more significant.  All are aware of "fracking".  The use of horizontal drilling with hydraulic fracturing in shales a mile beneath the surface has unleashed a torrent of natural gas.  As Forbes reports this month natural gas prices are half of what they were just a few years ago.  And the glut is not seen to be abating.  EPA has seized on this surfeit:  "technological developments and discoveries of abundant natural gas reserves have caused natural gas prices to decline precipitously in recent years and have secured those relatively low prices for the near-future."  Proposed Rule at 15.  As a result, "energy industry modeling forecasts uniformly predict that few, if any, new coal-fired power plants will be built in the foreseeable future."  Id. 

In other words, the proposed regulation will have hardly any effect (even none) on coal-fired generation because no one was going to build those plants anyway.  "Our IPM modeling, using Energy Information Administration (EIA) reference case assumptions, projects that there will be no construction of new coal-fired generation without CCS by 2030. Under these assumptions, the proposed rule will not impose costs by 2030."  Id. at 17.

We have read the commentary that this is the death of coal.  The cost of capturing and storing carbon dioxide, which will be the only way for a new coal plant to meet the new standard, is prohibitive. Accordingly, no coal plants will be built. According to EPA, however, coal-fired production was dead anyway because of the glut of natural gas. 

Crystal balls are notoriously unreliable.  Some may remember that nuclear power was to make electricity too cheap to meter. But that didn't happen.  America built the largest man-made construction the world has ever seen (the interstate highway system) on the assumption that gasoline would always be abundant.  That was in error.  An oil embargo introduced Americans to long lines at the fuel pump and locking gas caps. Most forget that natural gas production peaked in the early 1970s, not to be exceeded again until over twenty years had passed.  The point is:  smart people took their best science and made plans.  But reality somehow did not get the message. 

For what it is worth, here is our crystal ball on the demise of coal.  First, CCS technology is pertinent not only to coal. Combustion of natural gas emits carbon dioxide as well. The regulatory imperative will push natural gas plants to address their CO2, and coal will be able to take advantage of improvements in CCS technology. Second, the United States has been called the Saudi Arabia of coal. To expect that industry to dry up and blow away is naïve. Shale gas went from a vanishingly small fraction of the US energy mix to over 20% in five years or less. Innovation made this possible.  Just as ten years ago we could not imagine today's natural gas industry, we may not be able to recognize our coal resource in another ten years. Third, we thought it was fundamental that energy security depends on a mix of energy sources. It would be foolhardy to rely completely on natural gas.  It will only take one cold winter and a natural gas pipeline calamity to make coal seem like a sensible alternative. 

Whether the proposed rule will actually have an impact depends on numerous factors.  All can agree, however, that climate change has been thrust back on the national agenda. 

Last week a big step forward was taken by the Western Climate Initiative (WCI). Or what remains of it. On January 1, 2012 members were to establish binding caps on emissions of carbon dioxide from electricity generators and certain industrial sources, issue allowances for those emissions and then permit the trading of those allowances.  At least that was the plan back in September 2008 when  Design Recommendations for the WCI Regional Cap-and-Trade Program was released and when climate change response was popular and states had money in their budgets.  Since then Arizona, Montana New Mexico, Oregon, Washington and Utah have withdrawn from the WCI leaving only California and four Canadian provinces.  As the WCI puts it:  "British Columbia, California, Ontario, Quebec and Manitoba are continuing to work together through the Western Climate Initiative to develop and harmonize their emissions trading program policies."  And of those remaining only two (California and Quebec) are moving forward with a cap-and-trade program.

So is this the end of regional greenhouse gas initiatives?  After all, on the East Coast New Jersey has bolted from the Regional Greenhouse Gas Initiative, while New Hampshire attempted to bolt and New York faces a lawsuit (attached) aimed at ejecting New York.

We think not.  Our reasoning is three fold. 

First, climate change is not going away.  We are going to have to do something.  The theory behind regional initiatives -- that they act as a laboratory for experimenting with greenhouse gas regulation -- remains valid.  And until federal legislation takes over (certainly not in 2012), regional initiatives are going to be the only game in town. 

Second, organizations exist around the globe to develop manufacturing or construction or laboratory or telecommunications or you-name-it standards.   Companies ignore these organizations at their peril and often join so they can influence the result and at a minimum have inside knowledge of what the standard is and how it came to be.  Regional initiatives operate in a similar manner where the development of the rules and the issues behind them are  critical in effectively implementing the rules.  States and provinces that are out in front on climate change issues are going to have two advantages going forward.  They will have a program in place when federal rules ultimately come along; that primacy will undoubtedly influence the federal program.  And they will have experience implementing the program which likely will translate into a more effective program when compared with newly minted greenhouse gas regulators.

And third they are reported to add economic benefit.  In November RGGI released a report by The Analysis Group that analyzed  the effect of RGGI:   "The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States."   

To quote the report's authors:

Key findings include:

■The regional economy gains more than $1.6 billion in economic value added (reflecting the difference between total revenues in the overall economy, less the cost to produce goods and services)
■Customers save nearly $1.1 billion on electricity bills, and an additional $174 million on natural gas and heating oil bills, for a total of $1.3 billion in savings over the next decade through installation of energy efficiency measures using funding from RGGI auction proceeds to date
■16,000 jobs are created region wide
■Reduced demand for fossil fuels keeps more than $765 million in the local economy
■Power plant owners experience $1.6 billion in lower revenue over time, although they overall had higher revenues than costs as a result of RGGI during the 2009-2011 period

This is not a surprise.  By limiting the emission of carbon dioxide, RGGI drove up, at least initially, the cost of electricity production.  This had the effect of promoting more efficient use of electricity. 

So practitioners would do well to pay attention to California's efforts.  It is likely to be the source of what ultimately happens in Washington.

Thrun v. Cuomo (RGGI Complaint).pdf (1.34 mb)

NOAA reported that 2011 was one for the record books:  12 weather and climate-related disasters each causing over $1 billion in damage.  One might expect (or hope) that a national climate change policy would be coming into place to prevent repeating or setting a new record.  One would be disappointed.  U.S. climate policy is "uncertain," to quote Michael Morris, CEO of American Electric Power, "dysfunctional" is the word applied by Resources for the Future, "hamstrung" is how the chief UN climate change negotiator and Executive Secretary of the UNFCCC, Christiana Figueres, calls it.  

We don't disagree with these viewpoints; they are accurate.  But if a response to climate change is the goal, it is worse than these commenters are acknowledging because not only has Congress shown that it is incapable of getting anything done, other avenues are not delivering either.  As the year expires we thought it might be helpful to sift through the year's detritus and assess  the status of attempts to reduce carbon dioxide emissions, distinct from overt attempts like passing laws and adopting regulations.

1. Tax emissions - Some will remember our blog on the federal lawsuit brought by Mirant Corp. against Montgomery County challenging the County's tax on carbon emissions which fell only on Mirant. The County challenged the federal court's jurisdiction and won before the federal district court. In June, however, the Fourth Circuit reversed.  With that Montgomery County folded its tent and abandoned its carbon tax.

2. Favor renewable energy - The inexorable scrutiny of the markets has proved the undoing of several former high-flying renewable energy ventures. Most well-known is the debacle with Solyndra LLC, whose well-publicized collapse generated scrutiny by the FBI and Congress. Others that have failed with less limelight in 2011 include numerous solar companies (Solar Millennium, Stirling Energy Systems, Evergreen Solar, Spectrawatt), as well as ventures in wind (Skycon), energy storage (Beacon Power), and biofulels (Range Fuels).

3. Impose liability for emissions of carbon dioxide - The results here are mixed.  Everyone points to American Electric Power v Connecticut for the principle that for greenhouse gas liability claims the federal common law of nuisance has been displaced by federal regulation. They could equally point to Connecticut v AEP before the Second Circuit for the principle that the political question doctrine does not bar these types of claims or to the Fifth Circuit panel in Comer v Murphy Oil USA that held similarly.  However, even if the cases are permitted to move forward, they face daunting problems in proof of causation.

4. Force state action to regulate carbon dioxide - We blogged last May and just this month about the tidal wave of litigation unleashed by Our Children's Trust, an Oregon environmental group that had orchestrated a dozen suits asserting the defendant States had an obligation under the public trust doctrine to restrain carbon dioxide emissions, as well as regulatory petitions in about 40 jurisdictions. 

Time has not been good to OCT. First, its petitions have been denied by at least 23 agencies (Arkansas, Connecticut, Georgia. Hawaii, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Michigan, Nevada, New Hampshire, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, and Wyoming).  Where OCT filed lawsuits, three states (Arkansas, Minnesota and New Mexico) responded with motions to dismiss.  The lawsuit against Montana was dismissed. In the federal lawsuit, the plaintiffs lost a motion to transfer.

5. Reach regional agreements - With great fanfare the Regional Greenhouse Gas Initiative was launched in 2005. Despite a recent study that claims significant economic benefit to the states in RGGI, its future success is unclear. New Jersey pulled out, New Hampshire tried to leave but the governor vetoed the bill. In New York, there is a court challenge. 

6. Voluntarily trade carbon dioxide emissions credits - The only carbon exchange in North America came to an end in 2010 when the Chicago Climate Exchange closed its doors.  A shadow of its former self, the CCX now registers verified emission reductions based on a comprehensive set of established protocols.

7. Develop carbon capture and storage - The most prominent project in the US came to a halt in July when American Electric Power concluded not to build a full-scale CCS plant at its Mountaineer, West Virginia plant. As noted above, AEP explained its decision as based on the uncertainty of US climate policy.  The lack of direction in American climate change response hurts business. AEP walked away from a $300 million Department of Energy match.  It didn't help that the Virginia consumer advocate, in successfully arguing against including CCS costs in the rate base, asserted:  “Any potential benefit is speculative and outweighed by the enormous cost of the pilot project.”

Some may think no policy is the best policy.  We think otherwise.  Climate change is happening.  There will be a response.  All will benefit if that response is choreographed over time, rather than rushed into when political consensus ultimately concludes that something must be done NOW.  Maybe in 2012?  Happy New Year. 

Durban, South Africa.  Home to the Shark Tank (where Kwazulu-Natal's rugby team, the Sharks, plays), extensive beaches and South Africa's busiest port.  But not home to a new treaty to address climate change.  COP-17 gets underway on Monday and the delegates haven't even met yet; some might think we are being somewhat premature.  We think not.  There is an election here next year.  Europe is mired in a sovereign debt crisis.  China and India will not derail their economic growth just to appease the industrialized West. 

Notwithstanding that there will not be any legally binding agreement, the discussions in Durban are of some moment.  Before we get to that, let's make sure we are all on the same page.  COP-17 is the annual "Conference of the Parties", the yearly meeting of the United Nations Framework Convention on Climate Change. In diplomat-ese, it is also 7th Session of the Conference of the Parties serving as the Meeting of the Parties (CMP7) to the Kyoto Protocol. The ultimate objective of the Framework Convention is “to stabilise greenhouse gas concentrations at a level that will prevent dangerous human interference with the climate system”.  Nearly all nations (including the United States) are members.

There are three primary subjects that will be considered in Durban:

1.  Kyoto Protocol - This treaty entered into force in 2005 and established a regime to address greenhouse gas emissions around the world.  There were two tiers:  developed nations and developing nations.  The standards for the first group were stricter than those for the second.  While most nations signed on to the treaty, the United States (and Andorra, Afghanistan and South Sudan) did not.  The United States' primary criticism is that the Protocol did not appropriately take into account the massive greenhouse gas contributions that are now coming from developing nations like China and India.  Now Kyoto is set to expire.  COP-17 is to set up the next stage.  However, the United States, Russia and Japan have stated that they will not sign on for a second stage.  The consensus of observers is that Kyoto will not be extended.

2.  Green Climate Fund - At COP-15 (Copenhagen in 2009), developed nations promised to provide by 2020 $100 billion per year or more to help developing nations address climate change.  As noted by the Overseas Development Institute in the United Kingdom, how to do this is not simple, even apart from finding the funds.  The payors (wealthy nations) favor funds to reduce emissions and running funds through the World Bank (where large donors have more control). The payees (poorer nations) have a much more pragmatic approach.  They favor direct access to funds and more adaptation than mitigation.  To quote Greenpeace Africa:  “The argument is that the developed countries, especially the United States and Western Europe, built their economies on dirty energy – principally coal. So they’re chiefly responsible for the greenhouse gases, such as carbon dioxide, that are causing climate change. Yet the worst of the climate change impacts are being felt in least developed countries. So there is definitely a strong argument for the developed countries to greatly help poorer countries to switch to renewable energies.”  In October the UN Transitional Committee submitted a draft instrument on the structure of the Fund.  News reports state that the United States does not support the draft.

3.  REDD+ - Reducing emissions from deforestation and forest degradation is an additional path to addressing greenhouse gas emissions, separate and apart from combustion sources.  Forest degradation is responsible for up to 20% of global greenhouse gas emissions.  The UN organized a program in 2008 to address this problem.  "Reducing Emissions from Deforestation and Forest Degradation (REDD) is an effort to create a financial value for the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development.“REDD+” goes beyond deforestation and forest degradation, and includes the role of conservation, sustainable management of forests and enhancement of forest carbon stocks."  Some have claimed that REDD is "the fastest-moving portion of the whole climate negotiations."   Some environmental groups want a portion of the Green Climate Fund earmarked for REDD.

So why does this have any significance for businesspeople in the United States?  We start from the premise that climate change is occurring. No dispute about that. There will be significant changes as a result. No dispute about that either. And humans, as is their nature, will respond to the change in their habitat.  Likewise, no dispute.  In the jargon, there will be adaptation - armoring the shore against rising sea levels, further restrictions on water usage for drought areas, more hurricane-proof building codes, enhanced floodplain analysis - and there will be mitigation - efforts at reducing the emissions of greenhouse gases.  For better or worse, the COP meetings set the rules of the mitigation game, and influence responses to adaptation.  Although the Kyoto Protocol was not adopted in the United States, it led to the establishment of a billion dollar trading system in Europe on carbon credits.  It influenced RGGI and the Western Climate Initiative here.  We have written about how the European system is set to impact American air carriers at the first of the year.  Down the road, we believe the nations of the world, including the United States, will come together to address climate change.  The frameworks that are in place - built by the COP meetings - will inevitably be important in cementing and implementing the mutuality of purpose.

Subchapter 10 Climate Change, Article 5, Sections 95800 to 96023, Title 17,

California Code of Regulations, to read as follows:

Article 5: CALIFORNIA CAP ON GREENHOUSE GAS EMISSIONS AND

MARKET-BASED COMPLIANCE MECHANISMS

Note: All text is new.

"All text is new."  And so it is and so begins a new chapter in California's odyssey into the regulation of greenhouse gas emissions, which began over 5 years ago with the passage of AB 32, the Global Warming Solutions Act of 2006.  Under that law, greenhouse gas rules - including market controls - adopted by the California Air Resources Board are required to take effect by January 1, 2012.  Thus, market control regulations - a cap and trade program - were adopted unanimously by the CARB on October 20 and submitted to the Office of Administrative Law by last Friday, October 28.

Cap and trade has two parts.  What does the cap look like? The CARB's implementing resolution explains that the regulation

"Establishes a declining aggregated emissions cap on included sectors. The cap starts at 162.8 million allowances in 2013, which is equal to the emissions forecast for that year. The cap declines approximately 2 percent per year in the initial period (2013–2014). In 2015, the cap increases to 394.5 million allowances to account for the expansion in program scope to include fuel suppliers. The cap declines at approximately 3 percent per year between 2015 and 2020. The 2020 cap is set at 334.2 million allowances[.]"

An "allowance" is a "limited tradable authorization to emit up to one metric ton of carbon dioxide equivalent."  Cal. Code Regs. tit. 17 § 95802(a)(8).  Initially large industrial facilities will receive a free allocation, with auctioned allowances to come.  Electric utilities will receive their allowances for free, with ratepayers to receive the benefit of the value of those allowances.

Trade is what one does if one does not have the right number of allowances.  Allowances can be bought and sold in the present, or  banked for future needs (such as to guard against shortages and price swings), or even retired.

Let there be no mistake.  This is not a small program.  The regulations run on for 260 pages with 43 pages of definitions.  They cover 350 businesses operating 600 facilities.  By 2013 electric utilities and certain large industrial facilities will be obligated to comply.  Distributors of transportation, natural gas and other fuels will see themselves subject to regulation in 2015.  California's goal is to return to 1990 levels of greenhouse gas emissions by 2020.  The cap and trade program "sets a statewide limit on sources responsible for 85 percent of California’s greenhouse gas emissions, and establishes a price signal needed to drive long-term investment in cleaner fuels and more efficient use of energy."

The program is comprehensive.  Besides specifying the calculation of allowances and describing the operation of allocation and auction schemes, the program also sets forth in detail the use of offsets ("a GHG emission reduction or GHG removal enhancement that is real, additional, quantifiable, permanent, verifiable, and enforceable" Cal. Code Regs. tit. 17 § 95970).  Perhaps most interesting because it suggests a self-replicating paradigm in the minds of the California authorities, is the set of provisions recognizing "compliance instruments from external GHG emission trading systems."  Cal. Code Regs. tit. 17 §§ 95940-43.  In other words, if a cap and trade program is implemented elsewhere, California can take notice and give credit.  And since that will enhance business activity with California, other jurisdictions (such as those in the Western Climate Initiative and in Canada) have an incentive to replicate California's model.

Will any of this work?  CARB will not learn by happenstance.  Its implementing resolution requires annual updates, which will measure, among other things the effectiveness of the cap-and-trade program, its stimulation of investment and innovation in clean technology, shifts in transportation fuel use and supply, the working of offset protocols, carbon capture and sequestration technology, and, last but not least "federal greenhouse gas activities, including federal equivalency for a State program."  Our last post concerned a House bill that forbade American air carriers from participating in the the EU Emissions Trading System (Europe's cap and trade program). We wonder what the response in Washington will be to these efforts by the world's eighth largest economy?  We suspect they will tread gingerly and note that California voters had a chance to rein in AB 32 last November but rejected a ballot initiative (Proposition 23) that would have done just that.