By Roy Belden

Kyoto Protocol

More than seven years after the Kyoto protocol on global warming was written in December 1997, the treaty will finally take effect. Russian President Vladimir Putin signed the treaty in early November. It will enter into force on February 16, 2005.

US companies with power plants, factories or other industrial facilities in most of Europe, Japan and Canada will now have to take steps to limit carbon dioxide, or CO₂, emissions from their plants. Emissions will have to be reduced during the first compliance period from 2008 to 2012.

Thirty three of the so-called “Annex I” industrialized nations that signed the global warming treaty have now ratified the protocol. These 33 countries will now be required to meet reduction targets ranging from 5 to 8% below their 1990 greenhouse gas emission levels. The United States has rejected the Kyoto protocol on the grounds that dramatic reductions in greenhouse gas emissions would harm the US economy. The Kyoto protocol had to be ratified by 55 or more countries whose combined CO₂ emissions levels represent at least 55% of the CO₂ emissions from the Annex I countries in 1990 before the treaty could take effect. As of November 25, 129 nations have now ratified the treaty accounting for 61.6% of the 1990 CO₂ emissions. The United States accounts for approximately 36% of the 1990 CO₂ emissions from industrialized countries.

In related news, Kyoto protocol signatory countries are scheduled to meet in Buenos Aires in December at the “Tenth Conference of the Parties to the United Nations Framework Convention on Climate Change.” Discussions at the 10th conference are expected to focus on climate change mitigation policies and their impacts and various implementation issues now that the Kyoto protocol has received the necessary approvals.

Several European countries have already moved aggressively toward implementing the protocol emission trading programs. Russia’s ratification of the global warming treaty is expected to jump start an international financial market for trading in greenhouse gas reduction credits. On January 1, 2005, the European Union emission trading program officially gets underway. The European Union countries have agreed to cap CO₂ emissions covering approximately 12,000 industrial facilities in Europe. Emission allowance allocations will be granted pursuant to national allocation plans that have already been adopted by each of the member countries. Allowances will be allocated for the first trading period of 2005 to 2007.

Under the national allocation plans, industries such as power generation, iron, steel, and pulp and paper, will be allocated tradable allowances worth one ton of CO₂ each. Companies that do not have a sufficient allocation of CO₂ allowances will need to buy additional allowances on the open market or reduce their emissions. Conversely, companies with a surplus of CO₂ allowances may sell them on the open market.

Other Kyoto protocol mechanisms for generating tradable greenhouse gas emission reductions involve “joint implementation” projects in which an Annex I country or company in an Annex I country can receive “emissions reductions units” or ERUs generated by emission reduction projects in another Annex I country. ERUs can be sold or otherwise transferred among companies in Annex I countries. In addition, the treaty establishes a mechanism where Annex I parties can create “certified emissions reductions” or CERs through the development of projects that reduce net emissions of greenhouse gases in non-Annex I countries. Annex I parties, including the governments as well as private companies, can assist in financing these projects and purchase the resulting CERs as a means of reducing their own emission reduction requirements.

The Netherlands, for example, has recently entered into an agreement with the International Finance Corporation to create a “Netherlands European carbon facility” that will acquire ERUs developed through joint implementation projects in Europe and in other Annex I countries. Numerous other greenhouse gas emission reduction projects between Annex I countries and between Annex I and non-Annex I countries are reportedly in the works.

Bush Agenda

The election of President Bush to a second term and larger Republican majorities in Congress are expected to give new momentum to the president’s “clear skies initiative.” It calls for significant reductions in nitrogen oxide, or NO_x, sulfur dioxide, or SO₂, and mercury from power plants. The initiative stalled in the last Congress. Both administration officials and the committee chairmen in Congress say that enactment of the Clear Skies Act will be a top legislative priority for 2005.

The Clear Skies Act would force substantial reductions in NO_x, SO₂, and mercury emissions from power plants by setting nationwide emission caps in a two-phase process. The Senate version of the Clear Skies Act would set nationwide caps of 2.1 million tons of NO_x in 2008, 4.5 million tons of SO₂ in 2010, and 34 tons of mercury in 2010. These caps would decline in 2018 to 3.0 million tons of SO₂, 1.7 million tons of NO_x, and 15 tons of mercury. The President’s plan would achieve the reduction targets through a mandatory “cap-and-trade” emission allocation program for the three pollutants similar to the SO₂ allowance trading under the federal acid rain program. The Clear Skies Act does not provide for any cuts in CO₂ emissions from power plants.

It is still debatable whether the president has the votes to put his bill through Congress. Republicans are expected to have a 10 to 8 majority in the key Senate Environment Committee, but Senator Lincoln Chafee (R-Rhode Island) has often sided with Democrats on environmental issues. The Bush administration is expected to pursue a dual track of trying to put its Clear Skies Act through Congress while at the same time having the Environmental Protection Agency issue regulations that would achieve many of the same objectives. EPA is expected to finalize its proposed “clean air interstate rule” (formerly called the “interstate air quality rule”) by the end of the year. The clean air interstate rule will require power plants in 29 eastern, midwestern and southern states and the District of Columbia to reduce NO_x and SO₂ emissions from power plants by 2015. EPA is also planning on finalizing its clean air mercury rule (formerly called the “utility mercury reductions rule”) that will require cuts in mercury and nickel emissions from coal and oil-fired power plants. EPA is under a court order to issue a rule to reduce mercury emissions from coal-fired power plants by March 15, 2005.

Some industry sources have asserted that going forward with the clean air interstate rule will reduce the desire of some lawmakers to push for enactment of the Clear Skies Act. EPA officials do not view pursuing parallel legislative and regulatory tracks as counterproductive, and instead point out that while a legislative approach is clearly the Bush administration’s preference, the clean air interstate rule will keep the power industry on track to achieving significant NO_x and SO₂ emission reductions by 2015.

The Clear Skies Act would apply to all fossil fuel-fired power plants in the United States that meet the applicability thresholds. Conversely, the clean air interstate rule is limited to certain fossil fuel-fired power plants in 29 states and the District of Columbia, and the final rule is expected to be challenged in the courts by environmental groups. A legal challenge may delay implementation of the Phase I reduction targets under the clean air interstate rule.

Other Bush administration legislative priorities for the next Congress that convenes in January include enacting a comprehensive energy bill with a provision authorizing oil exploration and drilling in the Arctic National Wildlife Refuge or ANWR, a chemical plant security bill, and legislation to cap damages and set standards for awards in asbestos cases. The Bush administration wants to try again to put Alaskan oil drilling though Congress now that it has a larger Republican majority. The House passed an energy bill last year with an ANWR provision and a similar measure was narrowly defeated in the Senate last year by a margin of 52 to 48.

Cooling Water

In November, EPA issued a proposed “Phase III” rule that imposes new requirements on cooling water intake structures for manufacturing and industrial facilities that are not covered under the Phase II rule it issued on July 9, 2004. The Phase II rule covered large existing power plants. Phase I of the cooling water regulations were issued on June 19, 2003 and address new facilities. The proposed Phase III cooling water regulations were issued under section 316(b) of the Clean Water Act, which requires EPA to develop rules requiring that the “best technology available” be used to protect aquatic organisms from being impinged or pinned against water intake screens or drawn into the cooling water system.

The Phase III regulations could require significant upgrades to existing cooling water intake systems at affected plants, particularly at plants that withdraw water from lakes or rivers with sensitive aquatic habitats and species. The rule is expected to cover larger chemical plants, pulp and paper mills, iron and steel facilities and other large industrial plants with significant water use requirements.

EPA proposed three options for Phase III facilities. The most stringent option would apply to industrial facilities that have a total design intake structure capable of withdrawing at least 50 million gallons a day from any waters in the US. The second option would cover industrial facilities with a total design intake structure capable of removing at least 200 million gallons a day from any water body. The third option would apply to a more limited subset of eligible facilities, namely industrial facilities with a total design intake structure capable of removing at least 100 million gallons a day from an ocean, estuary, tidal river or one of the Great Lakes. Under all three options, the facility must use at least 25% of the water for cooling purposes to be covered by the rule. Manufacturing facilities with intake structures below these thresholds would continue to be subject to section 316(b) requirements on a case-by-case basis.

The proposed technology performance standards are substantially similar to the standards in the Phase II rule for large power plants. The requirements are based on the type of water body from which the water is withdrawn and, in general, facilities will need to reduce impingement mortality by 80 to 95% and reduce entrainment of aquatic organisms by 60 to 90% from uncontrolled levels. The proposed rule identifies several compliance alternatives, including using existing construction and design technologies to reduce impingement and entrainment of aquatic organisms (including reducing flow velocity or implementing a closed-cycle recirculating cooling system), selecting additional fish protection technologies (such as screens with fish return systems), and using restoration measures (such as restocking affected fish or creating alternative habitats).

The new requirements will be implemented through the renewal of existing National Pollutant Discharge Elimination System, or NPDES, permits. The comment period on the proposed Phase III rule is open until March 24, 2005, and the rule is expected to be finalized later in 2005.

Mercury

In early December, EPA published a notice in the Federal Register inviting the public to submit comments on new data and information it has received in connection with the clean air mercury rule (formerly called the “utility mercury reductions rule”). EPA is under a court order to issue the final rule, which would regulate mercury and nickel emissions from existing and new coal- and oil-fired electric power plants, by March 15, 2005.

The agency said in the notice that it received more than 680,000 comments from the public. Several of the submittals included modeling analyses, and the notice summarizes several of those analyses. EPA has preliminarily revised its approach to analyzing the benefits of reducing mercury emissions from power plants based on the comments it received, and it is inviting further comment on that revised approach.

EPA is under a 1998 court-approved settlement agreement with the Natural Resources Defense Council to develop mercury standards for coal-fired plants. In January 2004, EPA published two alternative approaches for regulating mercury and nickel emissions from coal- and oilfired power plants. The first alternative closely tracks the administration’s “clear skies initiative” with respect to mercury reduction measures, and it proposes a “cap-andtrade” rule to regulate mercury from existing coal-fired plants. This alternative would implement a 34-ton first phase cap on mercury emissions commencing in 2010 followed by a 15-ton cap starting in 2018. Mercury allowances would be issued to coal-fired plants based on a unit’s share of the total heat input from existing coal units multiplied by an adjustment factor depending on the type of coal: one for bituminous, 1.25 for sub-bituminous, and three for lignite coals. Mercury is generally more difficult to remove from lignite coals than from bituminous coals.

The second alternative takes a traditional commandand-control approach to regulating mercury and nickel under section 112 of the Clean Air Act, and it proposes specific emission limitations based on so-called “maximum achievable control technology” or MACT. Under this approach, the MACT standards would have to be achieved within three years after the final rule is issued. EPA projects that mercury emissions would be reduced from the current level of about 49 tons to 34 tons through implementation of the proposed mercury MACT standards.

 EPA prefers using the more flexible “cap-and-trade” approach. This alternative has been met with strong resistance from the environmental community. EPA will be accepting comments on the notice of data availability until January 3, 2005. It must issue the final clean air mercury rule by March 15, 2005, and it is a near certainty that the final rule will be challenged in court.

In related news, the Department of Justice has asked a federal district court to dismiss a lawsuit filed by three environmental groups in an effort to force EPA to issue final MACT standards for new and existing coal- and oilfired power plants. The lawsuit appears aimed at pressuring EPA into issuing a final clean air mercury rule that is more stringent than the current alternatives. The lawsuit highlights the intense scrutiny that EPA’s proposed mercury rule is facing.

The environmental groups alleged that the proposed clean air mercury rule is inadequate and fails to comply with the section 112 MACT-setting standards of the Clean Air Act. In its motion to dismiss, the US government takes the position that it does not have to promulgate MACT standards if it acts on or before March 15, 2005 to remove coal- and oil-fired power plants from the list of sources subject to the section 112 standard-setting requirements. In developing a final mercury “cap-and-trade” rule, EPA would need to first remove coal- and oil-fired power plants from the section 112 category list. A decision in the case is expected in early 2005.

Colorado RPS

Colorado became the first state to pass a renewable portfolio standard via a statewide vote. On November 2, 53% of Colorado voters supported the adoption of Amendment 37, which will require Colorado’s seven largest utilities to supply a certain percentage of their retail electricity sales from renewable energy sources. Starting in 2007, Colorado utilities must meet a 3% target, which will increase to 10% by 2010.

Eighteen states now require that a portion of the electricity supplied in the state be generated from renewable resources. Earlier this year, Hawaii, Maryland, New York, New Mexico and Rhode Island also adopted RPS requirements, and several state legislatures are expected to enact additional RPS programs in 2005.

 Colorado has yet to fill in many of the details of its new program. The state program is expected to apply to renewable energy plants using wind, hydroelectric, biomass, geothermal and solar energy. The Colorado ballot initiative may signal a growing interest in using voter referendums as a mechanism for putting RPS programs in place. The downside of such voter initiatives is that inevitably the ballot language provides few details on the program is supposed to work.

Brief Updates

In mid-October, a New York trial court upheld the emergency action of the New York State Department of Environmental Conservation to keep its NO_x and SO₂ emissions reduction programs on track. The rules call for significant reductions in NO_x and SO₂ emissions from power plants to levels that are well below current federal requirements. The new NO_x rule will implement a statewide NO_x trading program with a program-wide cap for NO_x emissions during the non-ozone season of October 1 to April 30. NOx emissions are already controlled statewide during the summer ozone season months. The NO_x reduction requirements became effective immediately.The SO₂ rule requires SO₂ emissions to be reduced by 50% below current federal acid rain program levels starting onJanuary 1, 2005, with full implementation completed by January 1, 2008.