How do companies survive and prosper in an emerging carbon constrained economy? This presentation describes the developing greenhouse gas regulatory program developing in the United States at the state and federal level. It then describes how companies can survive and prosper with the dramatic changes that are occuring that will restrict greenhouse gas emissions across the country.
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Surviving And Prospering In A Carbon Constrained Economy
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The Devil in the Details: Climate Change
Regulation under Obama and How to Survive
in the New Carbon-Constrained Economy
Carbon-Constrained
DRI Webcast
December 15, 2008
Scott D. Deatherage
Thompson & Knight LLP
Dallas, Texas
Scott.Deatherage@tklaw.com
214-969-1206
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Outline of Presentation
What climate change regulatory developments will
serve as a foundation of an Obama climate change
regulatory push?
What is climate change regulation likely to look like
under an Obama administration?
How can companies survive and seek competitive
advantage under a new climate change regulatory
system?
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Climate Change Regulation Timeline
2005
1992 EU
UNFCCC ETS
1997 2003 2006 2007 2008 2009-2010
Kyoto Regional --California Bill --Mass v. U.S. Pres. --U.S. Climate
Protocol Greenhouse --Western EPA Election Change
Gas Climate Initiative --Lieberman- Legislation
2009
Initiative Warner --Post-Kyoto
U.S. GHG
Voted Out Climate
Reporting
of Sen. Change
Regulation
Comm. Treaty
--Greenhouse
Gas Reporting
Legislation
--Midwestern
Greenhouse Gas
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Reduction Accord
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New Federal Greenhouse Gas
Reporting Requirement
December 21, 2007, Omnibus Spending bill requires
EPA to promulgate GHG reporting rules above
appropriate threshold levels in all sectors of
economy.
Proposed regulation was due in September of 2008,
and a final regulation in June 2009.
The Bush Administration would not let EPA issue a
draft regulation, even though the Agency was
prepared to do so.
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EPA Advance Notice of Rulemaking under the
Clean Air Act in response to Mass v. EPA
“Future projections show that, for most scenarios assuming no
additional GHG emission reduction policies, atmospheric
concentrations of GHGs are expected to continue climbing for
most if not all of the remainder of this century, with associated
increases in average temperature.”
EPA Administrator Johnson:
“[T]he potential regulation of greenhouse gases under any
portion of the Clean Air Act could result in an unprecedented
expansion of EPA authority that would have a profound effect
on virtually every sector of the economy and touch every
household in the land.”
“I believe the ANPR demonstrates the Clean Air Act, an
outdated law originally enacted to control regional pollutants
that cause direct health effects, is ill-suited for the task of
regulating global greenhouse gases.” 6
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Part II: Climate Change Regulation under
Obama
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Obama-Driven Legislation
Where will the new Administration start?
Ground already plowed: Numerous bills already have been
introduced in Congress, much analysis and debate has occurred
in committees
State laws being enacted and regulations being developed
These bills will serve as the starting point for developing a
federal climate change bill
Massachusetts v. EPA and EPA Advanced Notice of Rulemaking
“Climate Change Mavericks”?: Former opponents and almost
running mates Sens. McCain and Lieberman may be Obama
allies in passing climate change legislation
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Greenhouse Gas Reporting
Legislation Already Passed
Obama EPA will use Bush EPA work on greenhouse
gas reporting rules to develop reporting system in
2009
The GHG reporting requirements will identify many of
the industries and facilities that likely will be regulated
under federal legislation
The language in the Omnibus Spending bill requiring
EPA rules on GHG reporting is very broad, giving EPA
great latitude in establishing the regulatory landscape
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New Federal Greenhouse Gas
Reporting Requirement
What industries and sources will be required to report?
What gases will be included? CO2 or all six greenhouse gases?
What threshold levels of emissions will be required to report?
What de minimis level of emissions will be excluded? 10,000
metric tons of CO2 equivalents?
Will transportation emissions be measured and reported? If so,
will suppliers of natural gas and refined petroleum products be
required to estimate emissions of downstream users or will this
be measured by the transportation industry?
What about buildings and other indirect emitters?
Reported emissions will be available on the Internet for review by
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Cap and Trade
In the U.S. in the early 1980s,
economic and legal experts
began developing theory of
emissions markets
“Cap”=limit on emissions
decreasing over time, results in
lower emissions
“Trade”=parties can trade
pollution allowances granted by
the government to each facility
The Clean Air Act of 1990
established an emissions trading
market for sulfur dioxide
emissions from coal-fired power
plants
Result—Emissions reduced at
significantly less cost to industry
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GHGs and Relative
Global Warming Impact
GHG GWP*
carbon dioxide, CO2 1
methane, CH4 21
nitrous oxide, N2O 310
hydrofluorocarbons, HFCs 140 – 11,700
perfluorocarbons, PFCs 6,500 – 9,200
sulphur hexafluoride, SF6 23,900
* Reflects the global warming capacity of each GHG relative to CO2
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What Will the Cap Be?
Lierberman-Warner: 4% below 2005 levels by 2012;
19% below 2005 by 2020; 71% below 2005 by 2050
Dingell-Boucher: 6% reduction by 2020; 80% by 2050
Obama: Economy-wide cap-and-trade system;
Reduce to 1990 levels by 2020; 80% below 1990 levels
by 2050
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The Emissions Threshold
What threshold of emissions of greenhouse gases will
be regulated?
In some bills filed in Congress, 10,000 tons per year of
carbon dioxide equivalent (CO2e) would be the
threshold
Setting the threshold will determine the number of
facilities regulated and the economic impact of the
regulations
Obama position not yet known
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Some of the Potentially Regulated Facilities
Power plants Pipelines
Refineries producing liquid Cement
fuels
Steel
Natural gas processing
Producers or importers of
plants
fluorocarbons,
Importers of fossil fuels perfluorocarbons, and
and natural gas sulfur hexafloride
Manufacturing—chemical, Emitters, refiners, or
cement, aluminum, etc. importers of more than
10,000 tons of CO2
Transportation
equivalents
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Distribution of Emission Allowances
Emission allowances are the “pollution rights” distributed to
individual facilities that have to be turned into the government at
year end to cover each ton of emissions
Options for distribution:
Free distribution to each facility;
Auction of allowances to an open market; or
Some combination of both
Many northeastern states are auctioning 100 percent of
allowances. EU Emissions Trading system distributed for free,
but looking a auction. Lieberman-Warner mixed approach
starting with small auctioned amount that rises over two decades
Obama’s current position: auction 100 percent of allowances
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Banking of Allowances
Allowances can either expire or have no expiration date
Banking means the allowances have no expiration date and can
be carried forward and used in future emission years
Banking allows greater flexibility to facilities and reduces the
financial impact of the regulations
It also may increase the market value of the allowances
No indication on Obama position on banking; Lieberman-Warner
allowed banking
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Safety Valve
The term “safety valve” refers to a price cap or other means of
preventing price of allowances from rising beyond a certain point
Industry supports a safety valve
Financial community and offset developers oppose a safety
valve and want to allow the market to determine the price for
carbon
Lieberman-Warner did not have a specific safety valve, but would
have created a sort of “Carbon Fed” that would have stepped in
under certain circumstances
No indication on the Obama position on a safety valve
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Offsets
“Offsets” refer to the use of emission reductions from
activities or facilities that are not required to reduce
their emissions under a greenhouse gas regulatory
regime; they can be domestic or international
Offsets provide a means of lowering of the cost of
emission reductions
International offsets are generally the least expensive
offsets
Key Issue: Percentage of domestic and international
offsets allowed; Lieberman-Warner 30% limit, allowing
up to 15% international offsets
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What If Congress Does Not Pass Legislation
Does Obama have an Ace in the hole?
Under Mass v. EPA, the U.S. Supreme Court opened
the door for greenhouse gas regulation under the
federal Clean Air Act
Obama EPA could take regulatory action under the
Clean Air Act, even if Congress does not pass
legislation
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Action on Advanced Notice of Rulemaking
The Bush EPA has already laid out the groundwork for
greenhouse gas regulation under the Clean Air Act, even though
concluding that it would not be a wise idea
The Obama EPA could decide on a regulatory approach and
develop rules under the CAA
Could be a means of putting pressure on Congress and industry
to formulate and pass climate change legislation, lest regulation
be developed under the CAA
The Obama administration will likely work with the states that are
developing greenhouse gas regulations: RGGI, California and the
WCI, and the Midwestern States
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Mobile Sources: Fuel Efficiency Requirements
for Automobiles
With auto industry in the tank, little resistance will likely arise
from the big three auto companies
Waxman replaced Dingell on the House Energy Committee,
ending roadblock for fuel efficiency standards for the auto
industry
It appears highly likely that fuel economy standards will be
raised significantly over time
Thus, the auto industry regulation issue in Mass v. EPA very
likely will be resolved
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Regulation of Stationary Sources of GHGs as
Hazardous Air Pollutants
The implications of Mass v. EPA are that once GHGs
are determined to be air pollutants, and an
endangerment finding will be issued by Obama EPA
Section 112 of the CAA permits EPA to regulate
hazardous air pollutants (HAPs)
Question of whether GHGs meet the definition of
HAPs
Litigation over these issues already occurring over
state and federal air emissions permit applications
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BACT for GHG Emission Sources
Sections 165 of the CAA: Prevention of Significant
Deterioration of areas where air quality standards are
being met
“Best Available Control Technology” for controlling
GHGs
State regulation and state and federal litigation over
coal-fired power plants
Current litigation and administrative appeals to the
EPA Environmental Appeals Board
EPA could begin requiring GHG emission limits in federal
PSD permits
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EPA Environmental Appeals Board
In re Deseret Power Electric Cooperative, PSD Appeal No. 07-03 (Nov.
13, 2008)
Review of challenge of EPA issuance of PSD permit for a waste coal-
fired power plant in Bonanza, Utah
Sierra Club argued EPA failed to meet CAA sections 165(a)(4) and
169(3) by not applying BACT to limit CO2 emissions from the facility
Remanded permit to EPA Region 8 to “reconsider whether or not to
impose a CO2 BACT limit in light of the agency’s discretion to
interpret, consistent with the CAA, what constitutes a 'pollutant
subject to regulation under this Act.’”
Stated cognizance of the national scope of issue, and asked whether
all parties would be “better served by the agency addressing the
interpretation of the phrase ‘subject to regulation under this Act’ in
the context of an action of nationwide scope.”
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All of This Regulatory Pressure Will Bring
Industry into the Debate
We may see more industry pushing for a
Congressional solution
Industry does not favor regulation under the CAA or
multiple state systems
Industry may be looking for better deal from the
“sausage grinder” of Congress
United States Climate Action Partnership—a group of
major corporations proposing climate change
legislation be adopted http://www.us-cap.org/
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Part III: Surviving in the Carbon-Constrained
Carbon-Constrained
Economy
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How to Survive in the Land of Obama’s
Carbon-Constrained Economy
1. Understand we are in the midst of a conversion to a carbon-
constrained economy—a change as enormous as the Industrial
Revolution
2. Understand new regulatory paradigm in the twenty-first
century
3. Develop a corporate climate strategy
4. Measure and monitor your carbon footprint
5. Develop a strategy for climate risk disclosure
6. Conduct climate change due diligence
7. Develop a carbon offset strategy and portfolio
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Step 1: Understand That We Are in the Midst of the
Emergence of a Carbon-Constrained Economy
Climate change regulation is and will drive us toward
a carbon-constrained economy
The investment required over the next twenty years to
achieve this transition will rise to trillions of dollars
The changes required compare to the Industrial
Revolution
Companies must adapt to survive and gain
competitive advantage
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Step 2: Understand the Twenty-First Century Regulatory
Paradigm: Stakeholder Ecosystem
Government
Public/ Lenders
Regulators
Community
Investors
Non-governmental
Company
Organizations
Competitors
Employees
Partners
Consumers
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Step 3: Develop a Corporate
Climate Strategy
Management and board of directors need to develop a
strategy for dealing with a carbon-constrained
economy
The following steps will provide the major elements of
a corporate strategy
How do your business units reduce costs and find
new revenue streams?
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Step 4: Measure Your Carbon Footprint
A corporate climate change strategy cannot begin
without understanding the type and volumes of
emissions from the various aspects of the enterprise
The World Resources Institute
(http://www.ghgprotocol.org/) provides protocols for
measuring direct and indirect emissions
Federal GHG reporting rules will provide the
mandatory system in 2009
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Step 5: Develop a Strategy for
Climate Risk Disclosure
Current SEC regulations require environmental disclosure:
Management Discussion and Analysis, capital expenditures for
any environmental controls, and litigation—all with materiality
threshold
Development of a strategy for climate risk disclosure is
becoming an important corporate issue for directors and
managment
Proposed legislation to require SEC guidance and rules on
climate risk disclosure
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Xcel and Dynegy Settlements with New York Attorney
General Require Climate Risk Disclosure
The potential impact of present and probable future climate change
regulation and legislation;
Climate-change related litigation;
Physical impacts of climate change;
Current carbon emissions;
Projected increases in carbon emissions from planned coal-fired power
plants;
Company strategies for reducing, offsetting, limiting, or otherwise
managing its global warming pollution emissions and expected global
warming emissions reductions from these actions; and
Corporate governance actions related to climate change, including
whether environmental performance is incorporated into officer
compensation
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Step 6: Conduct Climate Change Due Diligence
Although uncertainty exists as to the details of climate change
legislation and greenhouse gas emission regulation, it appears
likely they will come into effect
Future climate change costs could be substantial for certain
types of companies and facilities
Purchasers, lenders, and investors should begin conducting due
diligence into the carbon footprint of all future mergers and
acquisitions where greenhouse gas emissions could be
significant
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Step 7: Develop a carbon offset
strategy and portfolio
As cap-in-trade goes into effect at the state and
national levels in the United States, cost reductions
will be essential
Purchasing carbon allowances and offsets may be
significantly less expensive than installing equipment
to reduce emissions
Carbon purchasing, trading, and hedging will become
an essential process for major emitters, requiring a
carbon trading desk
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Carbon Credit Projects
Fuel switching, e.g., coal to Energy efficiency, such as
natural gas, or biomass for fossil replacing boilers at refinery;
fuels;
Renewable Energy—wind, solar
Capture and flaring or other use energy, geothermal, and
of coal-bed methane; hydropower;
Biofuels from waste oils (no Cogeneration;
approval yet for a biofuel from
Capture of CO2 from LNG, gas
agricultural crops);
processing plants, coal-fired
Projects related to biofuel power plants and injection for
production (e.g., burning of enhanced oil and gas recovery or
bagasse to produce electricity); into saline aquifers; and
Landfill gas to produce electricity Avoided deforestation and
or to put in natural gas pipeline; reforestation
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US Carbon Market—Transitioning from
Voluntary to Compliance Market
Currently, only the Northeastern States under RGGI have started
a compliance market—first trades just recently occurred
Current U.S. market primarily a “voluntary” market—entities and
individuals voluntarily offsetting their carbon footprint
20 or more states developing cap-and-trade system and the
potential for a national cap-and-trade system is increasing
A significant portion of the U.S. voluntary market will quickly
transcend into a compliance market for energy, chemical,
manufacturing, and transportation industries
Future U.S. mandatory or compliance market predicted to be
anywhere from $100 billion to $300 billion per year by 2012-2014
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Conclusion
The Obama Administration will
issue greenhouse gas reporting rules in 2009;
push for cap-and-trade climate change legislation in
2009 or 2010;
move forward with cap-and-trade regulation under the
CAA, if Congress does not pass legislation; and
move forward with Post-Kyoto negotiations.
The result will be a carbon-constrained economy over
the coming decades
Companies should begin developing a climate change
strategy to survive and seek competitive advantage in
this new carbon-constrained economy 42
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Scott D. Deatherage
Partner
1722 Routh Street
Suite 1500
Dallas, Texas 75201
214-969-1206
Scott.Deatherage@tklaw.com
Blog Sites:
“The New Carbon Cycle”
http://lawandenvironment.typepad.com/newcarboncycle/
and
“Law and the Environment”
http://lawandenvironment.typepad.com/
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