Environtmental update

Environmental update

February 01, 2005

By Roy Belden

Kyoto Protocol

With the Kyoto protocol on climate change scheduled to enter into force on February 16, 2005, the jockeying for the post-2012 round of emission reductions has already started.

The Kyoto protocol will require industrial facilities in most of Europe, Japan and Canada to reduce their carbon dioxide, or CO2, emissions during the first compliance period from 2008 to 2012. In general, the so called “Annex I” industrialized nations that ratified the protocol must reduce emissions by 5% to 8% below 1990 levels. The United States signed the protocol, but the Bush administration refused to implement it on grounds that requiring substantial reductions in greenhouse gas emissions would have a crippling effect on the US economy.

Most of the countries that signed the Kyoto protocol are scheduled to hold informal talks later this year about how much to reduce emissions after the initial round of reductions is completed in 2012. The US has not agreed to participate in the informal talks. Discussions regarding which nations will commit to achieving greenhouse gas reductions in the post-2012 Kyoto regime are expected to be contentious. In December, Italy said it would pull out of the Kyoto protocol after 2012 if the United States, China and India have not agreed to participate by then.

Meanwhile, the European Union officially launched a CO2 emission trading program on January 1. Most of the European Union countries are participating; however, four countries — Greece, Italy, Poland, and the Czech Republic — have not yet received approval for their emission allocation plans. In mid-January, the European Commission filed complaints against Greece and Italy in the European Court of Justice for failure to submit allocation plans. Under the European Union CO2 trading program, allowances were allocated to participating countries for the first trading period that lasts from 2005 to 2007. Each country will then allocate its allowances among the various individual industrial facilities (including power plants, and iron, steel and pulp and paper factories) within its borders. Companies that are allocated too few CO2 allowances to cover their emissions will have to buy the additional allowances they need on the open market or else reduce their emissions. The European Union is also reportedly considering expanding its trading program to include non-European Union countries, such as Norway and Switzerland, that have agreed to implement the Kyoto protocol.

In the United States, the US Department of Energy announced that it signed an agreement with Power PartnersSM, a joint government-industry initiative in which participation is voluntary, to reduce greenhouse gas emissions from power plants. Power PartnersSM has mainly power industry trade associations as members. The members are the American Public Power Association, the Edison Electric Institute, the Electric Power Supply Association, the Large Public Power Council, the National Rural Electric Cooperative Association, the Nuclear Energy Institute and the Tennessee Valley Authority. Each of the members has promised the Department of Energy to encourage its own member companies to undertake voluntary efforts to achieve “greenhouse gas intensity” reductions by using low-emission or no-emission technologies such as nuclear, hydroelectric, wind and other renewables, natural gas and advanced coal technologies.

Power PartnersSM is one of thirteen business groups that have signed on to a voluntary DOE program called Climate VISION (for “Voluntary Innovative Sector Initiatives: Opportunities Now”). After it took the United States out of the Kyoto treaty, the Bush administration said it would try to persuade US businesses to make voluntary reductions in greenhouse gas emissions with the aim of reducing the “greenhouse gas intensity” of the US economy by 18% by 2012. The members of Power PartnersSM have agreed collectively to aim for reductions in greenhouse gas intensity of 3% to 5% (measured as emissions per unit of electricity produced) by 2012 period as compared to baseline emissions during the period 2000 to 2002.

Multi-Pollutant Measures

The “Clear Skies Act” that the Bush administration says it wants to put through Congress appears likely to remain bottled up in the Senate environment committee unless the administration agrees to significant changes in the bill.

The committee chairman, James Inhofe (R – Oklahoma), reintroduced the bill in late January and a Senate subcommittee held the first hearing on it on January 26. Inhofe is expected to proceed to a “mark up” — or session in which the committee votes on the bill and sends it to the full Senate — by the end of February. The bill that the Bush administration wants would require significant reductions in nitrogen oxide, or NOx, sulfur dioxide, or SO2, and mercury emissions from power plants. The reductions would be achieved through a mandatory “cap-and-trade” emission allocation program similar to SO2 allowance trading under the federal acid rain program. Democrats object to the bill because it does not require any cuts in carbon dioxide emissions. They also complain that the reduction targets are not stringent enough and that the compliance deadlines are too far out into the future.

The legislation died in committee in the last Congress. The administration will need the support of at least one Democrat on the Senate environment committee to move the bill to the full Senate. Republicans have a 10 – 8 majority on the committee, but Senator Lincoln Chafee (R-Rhode Island) has said publicly that he opposes the bill in its current form. A tie vote in committee would kill the bill unless it can be attached as an amendment to other legislation being considered on the Senate floor. Even then, support among moderate Republicans for the Clear Skies Act is not certain and Senate Democrats could filibuster to block a vote in the full Senate because Republicans would not be able to muster the 60 votes required to cut off debate. Meanwhile, the House of Representatives appears to be taking a wait-and-see approach; there is no point in taking up the measure in the House if it is certain to die in the Senate.

The Bush administration has given Senator Inhofe until March to make progress. If by March the bill is still stalled, then the US Environmental Protection Agency will finalize a proposed “clean air interstate rule” in mid-March in time to coincide with a March 15 court-ordered deadline to take action to reduce mercury emissions. Some of the initial mercury reductions in the clean air mercury rule are linked to the significant NOx, and SO2 reductions that would be achieved by the installation of control technologies to achieve the reductions mandated under either the clean air interstate rule or the Clear Skies Act. As a result, if the Clear Skies Act is not well on the way to being enacted, then EPA will be compelled to implement the clean air interstate rule.

The administration had previously said it intended to move forward with the clean air interstate rule by the end of 2004; however, it appears to have backed off to give Senator Inhofe more leverage in his negotiations with committee members about the Clear Skies Act. The Bush administration prefers legislation over EPA rules because a new law would not be subject to challenge in the courts and the emission reductions would apply to power plants nationwide. The clean air interstate rule that EPA proposed would require power plants in only 29 eastern, midwestern and southern states and the District of Columbia to reduce NOx, and SO2 emissions by 2015.

Particulate Matter

The Environmental Protection Agency identified 224 counties in 20 states and the District of Columbia in early January that failed to meet the fine particulate matter, or PM2.5, national ambient air quality standard. The was imposed in July 1997. The states and the District of Columbia will have until April 2010 to act. The nonattainment areas are mainly in the Midwest, the midAtlantic states, the southeast, and California, with Ohio (31 areas), Georgia (28 areas), Pennsylvania (23 areas) and Indiana (19 areas) having the highest number of PM2.5 nonattainment areas.

Certain environmental groups and public health organizations are expected to file court challenges. These groups complain that EPA should have designated more areas as not meeting the PM2.5 national ambient air quality standard.

Particulates are particles found in air, including dust, dirt, soot, smoke and liquid droplets. The primary sources of fine particulates are motor vehicles, power plants, wood-burning stoves and forest fires. Fine particulates are believed to pose a health risk, particularly to older individuals and children, because of their ability to lodge deeply in the lungs due to their small size (less than 1/30th the size of an average human hair).

The PM2.5 nonattainment designations will be effective on April 5, 2005, and states will have three years to adopt rules that will bring them into compliance. States with PM2.5 nonattainment areas will then have until 2010 to achieve compliance, with the possibility of an extension to as late as 2015 for areas where there are more severe PM2.5 problems and emission control measures are not feasible or available. EPA is also in the process of developing a menu of options from which states can choose for achieving reductions. In addition to specific emission standards, EPA is expected to encourage states to consider emissions trading and pollution fees as other mechanisms for achieving needed reductions. EPA plans on issuing a proposed rule outlining implementation measures in the first quarter of 2005.

Many of the new PM2.5 nonattainment areas will face significant PM2.5 emission reduction requirements for the first time. The PM2.5 implementation rules in certain states may require existing power plants and industrial facilities to install costly new pollution control technology or to upgrade existing control equipment to reduce fine particulate emissions. Superfund The US Supreme Court issued a much-anticipated decision in December in Cooper Industries, Inc v. Aviall Services, Inc., a case that held that private Superfund cost-sharing actions might be brought without having to wait for the federal government or a state government to file a cost recovery lawsuit. In a 7-2 decision, the court held that a federal or state government enforcement proceeding or a judicially- or administratively approved settlement is a prerequisite before a party liable for Superfund costs can seek a share of the cleanup costs or “contribution” from other responsible private parties.

The decision means that companies will be less willing in the future to take voluntary steps to clean up a site without first having been sued by the federal government or a state government. The Supreme Court’s opinion makes it clear that even if the federal government or a state is involved in overseeing a cleanup, there must first be a legal proceeding or a settlement in place. Cleanups under voluntary state brownfields remediation programs would not appear to qualify as a “civil action” or a “settlement” under the court’s interpretation. The need to wait in the future until the federal government or a state government initiates an enforcement action will mean delays in cleanups and increased costs associated with added governmental oversight. The decision would also foreclose cost-recovery actions against the federal government in cases where companies took voluntary steps to clean up sites that were previously owned or operated by the federal government.

In the Aviall case, Aviall Services purchased contaminated industrial property from Cooper Industries, and it agreed to remediate the site after the state environmental agency threatened to bring an enforcement action. The state was involved in overseeing the voluntary cleanup, and after substantial costs were incurred, Aviall sued Cooper Industries to try to recoup a share of its remediation costs. This scenario is not unlike many other ongoing voluntary cleanup actions at current and former industrial sites.

The court’s decision overturns a long-standing interpretation of Superfund adhered to by a majority of the federal appeals courts, and the ruling may prompt Congress to amend the Superfund statute to provide for a specific right of contribution from other responsible parties when a liable party is conducting a voluntary cleanup.

The Aviall decision does not affect contribution rights that exist under state statutes and common law; however, it does end what had been a standard procedure for seeking recovery of cleanup costs from other responsible parties. Under Superfund, an “owner or operator” of a “facility” may be jointly, severally and strictly liable for the costs of investigating and cleaning up a release of hazardous substances.

Coal Plants Sued

Two large coal-fired power plant projects are under siege from environmental groups, and certain environmental permits for the plants are being attacked in the courts. A Wisconsin trial court upheld a challenge in late November to a certificate of public convenience and necessity, or CPCN, issued by the Wisconsin Public Service Commission to the Wisconsin Energy Corporation. The CPCN order authorized the construction of two 615-megawatt pulverized-coal units in Wisconsin. Five separate petitions were filed challenging the issuance of the CPCN, with the lead petition being filed by Clean Wisconsin, Inc. The petitioners alleged that the CPCN application was incomplete, and they asserted that various aspects of the CPCN Order were contrary to law. The court concluded that the application was legally deficient because it failed to propose at least two alternative sites for the new plant and it did not include agreements for the use of needed transmission lines. The court also identified several inadequacies in the final CPCN order that were contrary to the applicable law, including a failure to adequately explain why the use of high sulfur coal was preferable to the use of natural gas, oil or low sulfur coal.

The Wisconsin energy priority law provides that it is the policy of the state to consider the following options in the listed order to meet energy demands: energy conservation and efficiency, noncombustible renewable energy resources, renewable energy resources, natural gas, oil or low sulfur coal, and high sulfur coal and other carbon-based fuels. The court set aside the CPCN order and sent the matter back to the Wisconsin Public Service Commission for further proceedings. The Wisconsin Energy Corporation has petitioned the Wisconsin Supreme Court seeking an expedited review of the trial court’s decision.

The Sierra Club recently sent a 60-day notice letter to a project company planning to construct a 550- megawatt circulating-fluidized-bed coal- and coal refuse-fired power plant in Illinois. The Sierra Club is alleging that the air permit for the plant is no longer valid because construction did not commence within 18 months after the permit was issued by the Illinois Environmental Protection Agency. The project’s air permit was originally issued on July 3, 2001. The Sierra Club reportedly intends to file suit soon after the 60-day notice period expires unless progress is made in reaching a settlement.

Brief Updates

Pennsylvania joined the growing ranks of states that have adopted a renewable energy standard or RPS in late 2004. The Pennsylvania RPS will require that 18% of the state’s electricity be generated by alternative energy sources by 2020. A total of 8% of the RPS requirement must be met by so-called “tier I” renewable energy sources, including solar, wind, geothermal, low impact hydropower, biomass, and coal mine methane. The remaining 10% may come from “tier II” alternative energy sources, including waste coal, integrated combined-cycle coal gasification, municipal solid waste, large scale hydropower, pulping and wood manufacturing byproducts, demand side management programs, and distributed generation systems.

Oral argument in New York v. EPA, a lawsuit challenging a December 2002 EPA regulation that would modify the applicability provisions in the “new source review” or NSR permitting program, is scheduled for January 25, 2005 in the US appeals court in Washington. Fourteen states and a coalition of environmental groups have challenged the regulation. A decision is expected later in 2005. If the court upholds the regulation, then states will be facing a January 2006deadline for revising applicable regulations implementing the new NSR program requirements.

Cinergy released a report to its shareholders in December that addresses the potential financial risks of implementing future greenhouse gas emission reduction requirements. The report was prepared in response to a shareholder resolution. It also discusses the potential costs of complying with emission reduction targets in the Clear Skies Act that the Bush administration is trying to put through Congress, other versions of the multi-pollutant legislation, and the pending utility mercury reductions rule and clean air interstate rule proposed by EPA. American Electric Power and TXU have also reported on similar potential financial risks to their shareholders. The AEP report was released at the end of August, and the TXU report was issued in September.

The New York Public Service Commission announced that it has moved up the start date of the state’s renewable portfolio standard from 2006 to 2005 so that projects can participate in the program and still qualify for federal production tax credits. Projects must be in operation before January 1, 2006 to qualify for federal credits. The credits are worth 1.8 cents a kWh. They can be claimed on the electricity output for 10 years. The New York RPS requires that at least 25% of electricity sold to New York consumers must be generated from renewable energy sources by 2013.

Power plants, refineries, and other industrial facilities in the Los Angeles area will have to reduce their NOx emissions further starting in 2007 under recent changes to the so-called “regional clean air incentives market” or RECLAIM. The rule changes affect approximately 330 facilities and call for approximately a 20% reduction in NOx emissions. Affected RECLAIM facilities must reduce NOx emissions by 7.7 tons a day by 2011, starting with four tons a day in 2007 and increasing by 0.925 tons a day in each of the following four years. There will be a limited exemption for qualifying facilities that have already installed state-of-the-art pollution control. The RECLAIM rule revisions will also restore some of the emission trading authority for power producers that was suspended during the California energy crisis. Full trading rights will be restored on January 1, 2007.

The three major California utilities will now be required to calculate the financial costs of greenhouse gas emissions as part of their long-term energy purchases. The California Public Utilities Commission directed the utilities in mid-December to include a “carbon adder” when evaluating the cost to purchase electricity from power producers under long-term contracts. Under the Commission’s mandate, the utilities will reportedly need to assume a CO2 emissions cost of between $8 and $25 per ton. The Commission is expected to provide further guidance on the presumptive CO2 emission cost at a later date.