Yesterday was a banner day for offshore wind farms in the mid-Atlantic.  Promoters and advocates received a favorable environmental assessment, a new form and two calls for nominations. 

The Environmental Assessment.  Secretary Ken Salazar of the Department of the Interior gave wind developers a big boost when he announced the Department's decision to move forward with government leases of offshore areas for wind farms. This comes at a crucial time for wind turbine manufacturers; Danish turbine giant Vestas A/S announced last month that it would be closing one factory, laying off ten percent of its work force in light of the recession and increased competition from China, and considering additional layoffs in the United States. 

The Department's finding of "no significant impact" from activities related to site assessment such as geotechnical surveys or the installation of meteorological towers opens the door to the gathering of data without completion of a further environmental impact statement.  Completion of the environmental assessment is not a green light for all projects, but it is estimated that it will take two years off the planning and construction schedule.  Specific projects still will need to complete an environmental impact statement.  One issue, for example, may be birds. The red knot, an intercontinental migrating species of sandpiper, flies almost twenty thousand miles each year from Brazil to Canada and back, stopping off for saltwater taffy along the Delaware Bay. Birdkill is a substantial problem for wind farm operators. Efforts to put the red knot on the federal endangered species list will only make solving that problem harder.

New Jersey, Delaware, Maryland and Virginia are all excited about the potential opportunities. Governor McDonnell (a Virginia Republican) wants to make Virginia the Energy Capital of the East Coast.   Governor O'Malley (a Maryland Democrat) noted:  “We need the energy. We have the resources. We need the jobs, and we need a more renewable and cleaner, greener future for our kids.”  

The Lease Form.  To streamline the issuance of wind farm leases on the Outer Continental Shelf the Department's Bureau of Ocean Energy Management put together a "first-of-its-kind" lease form, BOEM Form 0008.  Comments were solicited last fall and they were limited.  One that was significant was that lessees should make available data they collect.  Certain wind data could be kept as proprietary and confidential.  The Form is silent on that subject.  Notwithstanding, the wind energy industry is enthusiastic about the Form.  Comments by The Offshore Wind Development Coalition felt that with 15 offshore wind projects on the blocks in the U.S., the Form "will provide an essential ingredient for continued progress."     

The Calls.  The Department of Interior also issued a "Call for Information and Nominations" for almost 80,000 acres approximately 10 miles off Ocean City, Maryland, and for a little more than 110,000 acres 23 miles off Virginia Beach, Virginia.   The Calls solicit any additional lease nominations and request public comments about "site conditions, resources and other existing uses of the identified area that would be relevant to BOEM’s potential leasing and development authorization process."  An earlier solicitation of interest for Maryland obtained nine "indications of interest" for commercial leases.  This interest is local, interstate and international.  The achievement of Maryland is the result of sustained effort to get to this point.  Since 2009, in a "state interagency marine spatial planning process" the Maryland Department of Natural Resources (DNR) worked  with "resource experts, user groups, The Nature Conservancy (TNC), Towson University and the Maryland Energy Administration (MEA) to compile data and information about habitats, human uses, and resources offshore Maryland."

Offshore wind farms are coming. "Blow the man down" is a 19th Century sea shanty chronicling the rough life of a mate aboard sailing packets plying the North Atlantic.  It may be time to update the reference.

Notwithstanding that millions tune in to the long-running reality TV show America's Next Top Model, the real modeling action is not in Hollywood.  Instead, it is on computer mainframes churning out annual simulations of 100,000 years or more of catastrophes such as hurricanes, earthquakes and terrorist attacks. Such analysis drew the attention of the Maryland Court of Appeals in its seminal opinion last Wednesday in People's Insurance Counsel Division v. Allstate Insurance Co. (attached), which affirmed the appropriateness of modeling in an insurer's decision to issue, or not, homeowners' insurance policies.

The facts in Allstate were relatively simple. In 2006 Allstate determined that it would no longer write homeowners' policies on Maryland properties within one mile of the Atlantic Ocean. It subsequently extended that decision to completely exclude from new policies five Maryland counties, and portions of an additional six counties (all identified by zip code). It relied on a model developed by Applied Insurance Research, Inc. (AIR), which showed that the hurricane losses Allstate would suffer in the identified zip code areas were too high. Dutifully Allstate filed the appropriate papers with the Maryland Insurance Administration. The Administration found nothing exceptional about the application. The People's Insurance Counsel Division (PICD) (a part of the Office of the Attorney General) did, however, and requested a hearing.  It lost before the Commissioner of Insurance, then before the Circuit Court and again before the Court of Special Appeals (see our post).  

PICD then appealed to Maryland's highest court and argued before the Court of Appeals that Allstate had failed to meet its burden of showing that its decision was not "arbitrary, capricious or unfairly discriminatory."  See Md. Ins. Code § 27-501(a)(1).   Following from that, PICD further argued that the designation of areas by zip code did not have an objective basis and therefore was arbitrary and unreasonable. See Md. Ins. Code § 19-107(a).  Allstate's proofs consisted primarily of computer modeling evidence, which the Commissioner found sufficient.

Much of the opinion is directed to the parsing of Maryland's Insurance Code and its legislative history to determine whether § 27-501 even applied (the Court of Special Appeals had found it did not, and the Court of Appeals reversed that portion of the decision). We leave it to the insurance blogosphere to address that further.

What is of interest to this readership is how modeling came into the decision and where modeling stands as a result.

In the proceeding Allstate offered a model that simulates hurricanes from genesis to decay and the damages that would be suffered.  Basically, AIR modelers "developed mathematical functions that describe the interaction between buildings and their contents and the local intensity to which they are exposed." PICD at 7.  Allstate established with expert evidence that catastrophe risk is not diversified ("adding additional catastrophe risk does not reduce overall risk because of pooling but actually increases the overall risk") and that historical loss data is incomplete and outdated "making it difficult to estimate losses."  PICD at 7.  Accordingly, "it has become standard practice for insurance companies to use catastrophe models to anticipate the likelihood and severity of potential future catastrophes before they occur." PICD at 5-6.

The advantages of modeling are substantial; 

(1) It was able to capture the effects on catastrophic loss distribution of changes over time in population patterns, building codes, amounts insured, and construction costs;
(2) It provides a complete picture of the probable distribution of losses rather than just estimates of probable maximum losses;
(3) Because simulation models can be tested more easily than other approaches, it leads to greater stability in estimating expected annual losses;
(4) It provides a means to determine the impact of new scientific information; and
(5) It provides a framework for performing sensitivity analyses and “what if” studies. PICD at 6

As the Court noted, "By using computer models, they can get 100,000 years of simulated loss experience, which is good not just for State-wide pricing but also for loss characteristics related to hurricanes down to the ZIP Code level." PICD at 7. 

PICD retained an actuary to rebut Allstate's proofs; he testified with respect to "actuarial science." He was hampered, perhaps fatally, when the Commissioner refused to allow him "to express any opinion with respect to the model that formed the basis of Allstate's amended filing." PICD at 11. We were not there but the Court of Appeals paints a picture of a non-committal expert. He offered that the decision to not write new policies was unreasonable "'because there is no showing that it is reasonable.'" And he "declined to choose" the method Allstate should have chosen to reduce its risk.  PICD at 11.

In a post-hearing submission PICD argued that "Allstate was required to produce valid statistical data demonstrating the probability of a hurricane sufficiently strong to cause catastrophic damage actually making landfall in Maryland and that it failed to do so."  PICD at 23.  The statistical standard was based on dicta in an earlier Court of Special Appeals decision, Crumlish v Ins. Comm'r, 520 A.2d 738 (1987), which the Commisioner and the Court distinguished.  First, Crumlish's requirement for statistical evidence was not a universal requirement. PICD at 25. More significant was the "catchall" exception added to § 27-501 which established a "standard approved by the Commissioner that is based on factors that adversely affect the losses or expenses of the insurer under its approved rating plan and for which statistical validation is unavailable or is unduly burdensome." PICD at 25.

"That is what the Commissioner did in this case."  PICD at 25.  In other words, the Commissioner found Allstate's evidence met its burden of demonstrating that its use of modeling as the basis to stop writing policies in certain areas was reasonably related to its business and economic purposes and was not discriminatory. 

The dissent would have adopted the Crumlish dicta and required Allstate to offer statistical evidence concerning the landfall of destructive hurricanes in Maryland. PICD, dissent at 5.  Such an assessment was either to be based on the historical record (an impossibility as no hurricane had ever made landfall in Maryland) or "climate science" (which one would think would include modeling).  PICD, dissent at 9, 10.  According to the dissent, all Allstate provided was a computation of the "relative risk" of a hurricane landfall in Maryland as once in 25,000 years based on the worst 5% of hurricanes that made landfall in North Carolina, Virginia, and Delaware.  Allstate justified its decision based on hypothetical hurricanes, i.e., a model.  PICD, dissent at 7.

The Court properly rejected this distinction.  The use of probabilistic catastrophe risk modeling came of age following the destruction caused by Hurricane Andrew in South Florida in 1992. As stated by modeler RMS in its 2008 A Guide to Catastrophe Modeling (p6):  "It became clear that a probabilistic approach to loss analysis was the most appropriate way to manage catastrophe risk. Hurricane Andrew illustrated that the actuarial approach to managing catastrophe risk was insufficient; a more sophisticated modeling approach was needed."  Another modeling firm, EQECat, put it this way:  "The main concern for all users is the uncertainties in the models. Some time ago, the only way to estimate a probable loss was to trust few statistical studies of past losses from some historical events and or on the experience of the underwriter. The uncertainty in these models was quite large as confirmed once a new event [such as Hurricane Andrew] took place. The main problem is that there is not enough historical data, and the standard actuarial techniques of loss estimation are inappropriate for catastrophe losses." 

One of the purposes of catastrophe modeling is to assist the user (often an insurer) in avoiding the alliteratively named "risk of ruin."  If all the industry is using a tool that can minimize the risk of run, it would ill-behoove a court to take away that tool.  In Allstate the Maryland Court of Appeals agreed. 

Nevertheless, if one is looking for guidance on how modeling will be received in the courts, there is one significant question left unresolved by this decision:  how will competing models be treated?  PCID's expert seems to have been completely out of his league. Whatever his actuarial credentials, if the issue is modeling then a modeling expert is needed. And at the very least the AIR model was subject to challenge. In a review published just this month, Assessing US Hurricane Risk: Do the Models Make Sense?, AIR takes on its competition, RMS, and states:  "with this latest round of updates, we [modelers] find ourselves more divergent in our views of risk than ever." (p5)  As one example of this divergence, "Catastrophe modeling companies have vastly different views on what influence sea surface temperatures (SSTs) in the Atlantic Ocean have on U.S. hurricane landfall risk." (p12).  If AIR is correct, perhaps application of the RMS model would have altered the list of excluded zip codes. More fundamentally, does the uncertainty established by competing models (and that is inherent in modeling) impose an unavoidable and unacceptable arbitrariness in application?  That is for another day.  For the moment, modeling companies and those who use them likely will proceed full speed ahead.

Post scriptum - Climate change seems to have been a subject not to be discussed.  As noted by the dissent, if Allstate was worried about the science of climate change, it didn't bring it up.  Nevertheless, the dissent did bring it up and asserted that meteorological change occasioned by climate change could be a legitimate basis for Allstate's decision.  The modeling firms think otherwise. Eqecat's CEO Bill Keogh has stated because of the uncertainty associated with climate change's effect on hurricanes, " it has no role in catastrophe risk modeling."

Peoples Insurance Counsel Division v Allstate Insurance Company.pdf (78.07 kb)

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. 

2000 years ago all roads led to Rome.  Nowadays, as Our Children’s Trust recently found out, the road of a climate change lawsuit leads to Washington.  All are familiar with the path to Washington taken by Massachusetts v. EPA and American Electric Power v. Connecticut.  Last week a different path surfaced:  the trial court.  The District of the District of Columbia became the Washington venue of Alec L. v. Jackson when  the Northern District of California transferred the federal climate change suit instigated by Our Children’s Trust. 
 

Our Children’s Trust (OCT) is an Oregon public interest group that is quarterbacking a set of lawsuits and regulatory petitions seeking to reinvigorate federal and state regulation to combat climate change.  OCT burst on the climate change litigation scene last May with suits or petitions in all 50 states, invoking the public trust doctrine as available to protect the atmosphere – a new twist on an old doctrine. 

Besides a dozen lawsuits in state court, one was also brought in federal court in the Northern District of California (where another climate change lawsuit – Native Village of Kivalina v. ExxonMobil - was also filed).  Alec Loorz, a teen-aged environmental activist, and other youths, in company with Kids vs Global Warming and Wildearth Guardians, sued Lisa Jackson, Kenneth Salazar, Thomas Vilsack, Gary Locke, Steven Chu and Leon Panetta. You may recognize the defendants as the EPA Administrator and the Secretaries of Interior, Agriculture, Commerce, Energy and Defense, respectively.

In the amended complaint, after explaining the plaintiffs’ circumstances (youths¹ and an environmental group that will be harmed by the effects of climate change), the defendants’ alleged misfeasance (failure to act to restrain and reduce carbon dioxide emissions), the effects of climate change and the need to take action (among other reasons: “A failure to act soon will ensure the collapse of Earth’s natural systems resulting in a planet that is largely unfit for human life.”  Complaint ¶ 9.), a single cause of action is set forth. Plaintiffs allege, among other things:  

143. The United States government is a co-tenant sovereign trustee of the atmosphere and shares a duty with other co-tenant sovereigns, including Tribal Nations, to protect the atmosphere as the trust asset and prevent its waste or harm for the benefit of the people, including Plaintiffs and future generations of citizens

146. Defendants, and each of them, have wasted and failed to preserve and protect the atmosphere Public Trust asset, and have caused and will continue to cause imminent injuries as described above, from increased greenhouse gas emissions, global heating, and adverse impacts to natural and other resources.

147. Defendants, and each of them, have injured Plaintiffs by failing to protect the atmosphere as a Public Trust asset.

Needless to say, the government defendants don’t agree.  But instead of contesting the merits or challenging standing or asserting the political question defense in California, defendants sought something simple:  just a change of venue to Washington, D.C. Plaintiffs opposed.    

The district court sided with the defendants in a nine-page opinion that addressed the relevant considerations point by point.  As set out by the Supreme Court, transfer is appropriate based upon an ‘individualized, case-by-case consideration of convenience and fairness.’  Opinion at 2 (citing Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988)).  The relevant factors to be considered included:  (1) plaintiffs’ choice of forum, (2) convenience of the parties and witnesses, (3) ease of access to sources of proof; (4) local interest in the controversy; (5) familiarity of each forum with the  applicable law; and (6) relative congestion in each forum.  Opinion at 3 (citing Ctr. for Food Safety v. Vilsack, No. 11-00831 JSW, 2011 U.S. Dist. LEXIS 31688, at *18 (N.D. Cal. Mar. 17, 2011)).

Without delving into each of the factors, a fair summary of the court’s view might be:  because the effects of global warming are felt equally by every citizen and the decisions directing the government’s response were made in Washington, there was no compelling reason to keep this case in California and there were good reasons to transfer the case to the District of Columbia.  It is not a very satisfactory analysis.

While it is likely that climate change on the whole is bad, some will be advantaged by it (for example, farmers in Canada with longer growing seasons, or shippers that can use the Northwest Passage to the detriment of the Panama Canal); others will be disadvantaged (such as homeowners facing increased insurance premiums in hurricane-prone states, or asthmatics troubled by the particulate arising from more frequent wildfires caused by lack of rain).  To say that all will be affected equally seems plainly wrong. Nevertheless, the court made that point on several occasions to support its conclusion that the plaintiffs did not have an interest localized to the Northern District of California.  See Opinion at 4, 7, 8-9. 
 
Conversely, to find out why the District of the District of Columbia was the proper forum, one needed to look at who the defendants were:  heads of regulatory bodies who resided in or near Washington and whose allegedly improper decisions were likely made there as well.  Opinion at 4, 5, 6, 7, 8.  This reasoning suggests that a plaintiff seeking to avoid transfer should assert his or her claim against the local representative of the federal agency or department.  Of course that would likely be met with a motion to dismiss for failure to join an indispensable party because an agency's local representative would not be the one making the decisions about responding to climate change.  Which further suggests that under this factor, a suit about federal government policies against the federal government is always most appropriate in Washington.  Such a rule sounds like a bad idea.

But bad idea or not, the OCT plaintiffs are now in Washington.  Transfer has eliminated the possibility of an appeal to the relatively more liberal Ninth Circuit. Presumably, this was what inspired the motion to transfer. But it has also put the case into a more favorable news market offering better hours for prime time access to a decision.   

A hearing date is not set but the case will be taken seriously. Already the National Association of Manufacturers has weighed in on the side of the government.  On the plaintiffs' side, they have drummed up support from nearly two dozen law professors and scholars to explain the application of the public trust doctrine.

¹It may only be us but the youth plaintiffs do not appear terribly sympathetic. By the tender age of 16 they have the suffered the misfortunes of going hiking on Icelandic glaciers, visiting Patagonia in the company of Robert Kennedy, Jr. and traveling to Africa.  Complaint ¶¶ 30, 37, 45.

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.

Yesterday was a good day for renewable fuels enthusiasts and not because someone figured out how to make ethanol cocktails from pond scum.  In Houston American renewable fuel use literally took off on its maiden flight and in Washington the Supreme Court denied certiorari in a suit brought by the oil industry challenging the USEPA's regulations promulgating a revised renewable fuels standard.

In National Petrochemical Refiners Association and the American Petroleum Institute v. EPA, the plaintiffs asserted the EPA's final rule, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program, 75 Fed. Reg. 14,670 (Mar. 26, 2010), was invalid because it "violate[d] statutory requirements setting separate biomass-based diesel volume requirements for 2009 and 2010; [was] impermissibly retroactive; and it violate[d] statutory lead time and compliance provisions."  630 F.3d 145, 147 (D.C. Cir. 2010).  From those arguments, one might justifiably conclude that watching paint dry would be far more exciting than this opinion; we will leave it to others to explicate.  E.g., see the case comment in the Texas Journal of Oil, Gas and Energy Law Blog. In any event, the court of appeals denied all of petitioners' arguments and left EPA's rulemaking completely intact.  The Supreme Court saw no reason to step in. 

What does the standard mean in the real world?  It is huge.  Among other things, according to the EPA's website it raised the mandated volume of renewable components in motor vehicle fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022.   And it "appl[ied] lifecycle greenhouse gas performance threshold standards to ensure that each category of renewable fuel emits fewer greenhouse gases than the petroleum fuel it replaces."  In other words, if one measures all the greenhouse gases emitted in the production of, for example, one gallon of corn-derived ethanol, fewer gases would be emitted than in the production of one gallon of gasoline.

But the standard is not huge for airlines.  It only applies to motor vehicle fuel. 42 U.S.C. § 7545(o)(1)(C)(i).  Nevertheless, airlines are starting to line up for renewable fuels.  A case in point is the news story in yesterday's Houston Chronicle, Algae helps power flight to Chicago.  The gist of the story is that a United Airlines Boeing 737 lifted off from George Bush Intercontinental Airport for Chicago with a fuel tank filled with a blend derived from algae and conventional aviation fuel.  Passengers noted nothing different despite participating in history.  As stated by United:  "the first U.S. airline to fly passengers using a blend of sustainable, advanced biofuel and traditional petroleum-derived jet fuel."  More details are provided in the press releases from Solazyme (the biofuel manufacturer) and United. The blend was 40/60 algae to conventional fuels, complied with the ASTM D7566 specification for aviation fuel, and is a "drop-in replacement[] for petroleum-based fuel, requiring no modification to factory-standard engines or aircraft."  Tomorrow Alaska Airlines takes off with used cooking oil product in its tanks. The price for this "green" fuel?  One internet source puts it at between $17 and $26 per gallon. 

Is this cutting edge?  For the United States, yes, for Europe not at all. Lufthansa flies 8 flights daily to and from Hamburg and Frankfurt using 50% biofuel in one engine. The press release goes on to explain the single engine:  "next to reducing CO2 emissions, the main aim of this long-term operational trial, [is] to examine the effects of biofuel on the maintenance and lifespan of aircraft engines."  That is, the two engines will be torn down to the last o-ring at the next overhaul and compared, providing valuable data for future operations.

Both United and Lufthansa emphasize the role renewable fuel has in their sustainability initiatives.  Good public relations and potential competitive advantage may be reason enough to incorporate biofuels.  But besides green-ness can $17 per gallon be justified? It might be if it could reduce costs elsewhere, and faithful readers have already figured out where that might be. As we reported recently, the EU will start imposing carbon emission fees on flights originating or terminating in the European Union. Bio-fueled flights can get credits and reduce their fees.  With that, a little innovation, some economies of scale, and some luck, we might soon find ourselves enjoying a little pond scum at 30,000 feet.

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. 

When people bring up new climate change legislation today they aren't seeking to reinvent the Clean Air Act or implement the Kyoto Protocol.  Rather, the goal is to block responses to climate change.

A case in point is a bill that passed the House of Representatives on a voice vote yesterday, H.R. 2594, the European Union Emissions Trading Scheme Prohibition Act of 2011. As its name implies, H.R. 2594 is not about a climate change fix. Instead it is all about getting in the way of a fix. Its operative provision provides:  "The Secretary of Transportation shall prohibit an operator of a civil aircraft of the United States from participating in any emissions trading scheme unilaterally established by the European Union."  We understand about the need for the government to interfere with business activities in rogue states, but this seems somewhat far afield.

Nevertheless, this did not come out of the blue. In 2008 the European Union announced in Directive 2008/101 that all airlines flying in, into or out of European airspace would have to participate in the EU Emissions Trading Scheme. This meant that operators would have to surrender to regulators one "allowance" for every ton of carbon dioxide emitted on such journeys. Failure to obtain the requisite allowances would invoke fines, and the obligation to obtain the allowances would continue.

Following a monitoring and verification period in 2010 and 2011, where baseline emissions were established, the ETS regime is scheduled to take off on January 1, 2012.  Based on their established baselines airlines will be allocated allowances, most of which will be distributed for free. However, to the extent an airline wishes to grow, or new entrants arrive, or efficiency requirements kick in, expenditures will be required. Standard & Poors estimates it could cost over one billion euros in the first year, and between 23 billion and 35 billion euros through 2020.  

Numerous governments and domestic and international aviation officials are lined up attempting to block or divert the European program.  A resolution of the International Civil Aviation Organisation in October 2010, Resolution A37-19, set forth goals and advocated further study and cooperation, but imposed no obligations.  The ICAO asserts that airline carbon dioxide emissions should be left to its self-governance.  The Air Transport Association (and others) filed a lawsuit in 2009 which ultimately ended up at the European Court of Justice asserting that the EU was violating international law.  Specifically, the plaintiffs argued:  "As proposed, the EU ETS provisions would regulate an entire flight from across the United States to the EU, even though the flight would be in EU airspace for only a tiny fraction of the journey, ... If the EU ETS regime implemented an international agreement agreed by third countries, as well as by the EU, we would not be here today. ATA challenges EU ETS because it is a unilateral measure, which has not been agreed by countries outside the EU, yet nevertheless applies EU law to third country carriers in third country airspace."  

In June 2011 the Obama administration demanded that U.S. airlines be exempted from the scheme.  And at the end of September 21 non-EU members of the ICAO issued a declaration at their New Delhi meeting rejecting the EU ETS program.  None of this has availed.  On October 6 an Advocate General of the European Court of Justice rendered her opinion and concluded, among other things:

145. As many of the governments and institutions involved in the proceedings have correctly concluded, Directive 2008/101 does not contain any extraterritorial provisions. The activities of airlines within the airspace of third countries or over the high seas are not made subject to any mandatory provisions of EU law by virtue of this directive. In particular, Directive 2008/101 does not give rise to any kind of obligation on airlines to fly their aircraft on certain routes, to observe specific speed limits or to comply with certain limits on fuel consumption and exhaust gases.

146. Directive 2008/101 is concerned solely with aircraft arrivals at and departures from aerodromes in the European Union, and it is only with regard to such arrivals and departures that any exercise of sovereignty over the airlines occurs: depending on the flight, these airlines have to surrender emission allowances in various amounts, (131) and if they fail to comply there is a threat of penalties, which might even extend to an operating ban.

More succinctly, as set forth in the European Court of Justice's press release:  "EU legislation does not infringe the sovereignty of other States or the freedom of the high seas guaranteed under international law, and is compatible with the relevant international agreements."     

Where is this all headed?  The ECJ itself should render its opinion by early 2012.  Unless it undoes Directive 2008/101, some are predicting a trade war.  Even if everyone grudgingly goes along with participation in the scheme, "carbon leakage" is likely to be a significant factor.  Long-haul flights that now stop in Europe may find it more cost-effective to stop over in the Middle East, which does not impose any charge for carbon dioxide emissions.  And of course, the traveler is likely to see higher fares.

Will H.R. 2594 make any difference?  We think it unlikely.  In a time of budget cuts and market reliance, what is to be gained by establishing another bureaucracy when United Continental, Delta and American Airlines can find gates at Abu Dhabi, Doha and Dubai?

This is the last of three parts concerning Ceres’ recently released Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.   We already have looked at the first two Recommendations to Regulators.  Today we finish with number 3:  more clarity in disclosure expectations.  Id. at 51. 

It is always easier to make apples-to-apples comparisons when everyone is speaking the same language.  Uniform and detailed disclosure requirements would help achieve that goal.  However, the down side of specifying what will be disclosed is that it assumes the specifier knows all that needs to be identified.  The scariest part of climate change is that we probably do not yet know how all the changes will interact.  Correlated risk is a prime example. 

IRMI describes “correlated risk profiles” as those “that move in concert when affected by the same set of stimuli.”  Insurers run from correlated risk and the Ceres report rightly poses a troubling concern in that regard:  “If … climate change has the potential to introduce correlated risks across previously uncorrelated assets and to drive market values in ways that cannot be predicted from historical trends, the insurance industry may be poorly positioned to meet its investment objectives.”  Climate Risk Disclosures at 39.  According to the report, few companies recognize the potential for correlated losses across their business.  Id. at 43.  And the ones that do say no more than that climate change will increase insured losses and may negatively impact the businesses in which insurers invest.  Id.   We don‘t think that this is news to those who did not specifically mention correlated risks in their submissions. 

What we take from all this is that no one yet knows in a meaningful way where the climate change correlated risks lie.  Or they are keeping mum (see our first posting on the Ceres report concerning competitive advantage).  So the question for a regulator is the following:  Is one better off with answers that are less-constrained and potentially more revealing, or is more specificity in the guidance more helpful?  If one is a regulator who knows all the questions that should be asked, one should opt for more specificity.  But if one does not, then one might support providing unstructured disclosure opportunities.

The Ceres report, of course, is not all about recommendations, but we have gone on for too long to delve further.  Before we close, however, we did want to address the need for stronger research.

The Corporate Liability section attracted our particular focus, as climate change liability suits and their insurance have been a central feature of the blog.  Those of us following this subject drop the names of the three liability damages suits, Comer, General Motors and Kivalina, and the insurance suit, Steadfast, like they were business cards. 

The statement that got our dander up was this:  "Since the first suits were filed in 2003, their numbers have rapidly proliferated—more than 120 suits were filed in 2010 alone, nearly two-thirds of them in the U.S."  Id. at 11.  This is an accurate paraphrase of its source, a sentence in a short article published by the Geneva Association.   The problem is that the source, at best, is misleading.  While there may have been 120 climate change suits filed in 2010, as demonstrated by the comprehensive set of charts kept by the Climate Change group at Arnold & Porter LLP there were none filed that were seeking damages under common law theories.   Those suits continued to be the three:  Comer, GM and Kivalina.

We will be the first in line to agree that the insurance industry should be concerned about climate change liability suits.  But that concern has not yet had to focus on 120 climate change liability suits, because they have not been filed yet.

That being said, the Ceres report brings to the fore statements by representatives of a multi-trillion dollar industry that is in the eye of the climate change storm.  Those statements otherwise might languish in some regulator’s dark bottom drawer.  The report is a valuable resource; we look forward to next year’s reprise.