Environmental Update

April 02, 2007 | By Andrew Giaccia in Washington, DC|New York

The US Supreme Court decision in early April confirming that the US government has legal authority to regulate greenhouse emissions from new motor vehicles could lead eventually not only to federal regulations on auto emissions, but also on greenhouse gas emissions from power plants.

The court held in a 5-4 decision that the Clean Air Act requires the Environmental Protection Agency to regulate air emissions from new classes of vehicles or engines that “in [its] judgment cause, or contribute to, air pollution which may be reasonably be anticipated to endanger public health or welfare.”The case is Massachusetts v. EPA. The court released its decision on April 2.

In a separate decision released the same day, the court sent back to a federal appeals court a case that Duke Energy won before the appeals court. The lower court had said Duke did not need a permit from EPA under the prevention of significant deterioration, or “PSD, program before making changes to some of its coal-fired power plants that extended the life of the plants and increased their electricity output. The appeals court held that none of the changes was significant enough to be a “major modification requiring a permit.”The Supreme Court said the lower court improperly reconciled the definitions of modification used in the “new source performance standard” and PSD programs. The case is Environmental Defense v. Duke Energy. The appeals court has been instructed to consider the issues further.

Climate Change

The debate over what to do about global warming has begun in earnest in Congress. Four bills are competing for attention. Most observers do not expect final action on a plan this year, but the broad outlines of a plan are starting to take shape.

Each of the four bills has a common element: it relies on a “cap-and-trade” scheme to limit emissions. Otherwise, the bills differ in greenhouse gas emissions targets, how fast the emissions reductions would be achieved and how greenhouse gas emissions allowances would be distributed.

No discussion of possible action on global warming at the federal level is complete without noting that many states have been moving to control greenhouse gas emissions without waiting for the federal government to act. Five states on the west coast (Washington, Oregon, California, New Mexico and Arizona), eight states in the northeastern US (Massachusetts, New Hampshire, Vermont, New York, Connecticut, Massachusetts, New Jersey, and Rhode Island) and Illinois have already set their own greenhouse gas emissions targets. Illinois has set a goal of reducing greenhouse gas emissions to 1990 levels by 2020. The eight northeastern states are moving to set up a regional cap-and-trade system for trading in carbon dioxide or CO2 emissions called the “regional greenhouse gas initiative,” or RGGI.

Turning to the main competing proposals in Congress, one of the main bills is a Lieberman-McCain proposal in the Senate. (The chief sponsors are Joseph Lieberman (IConnecticut) and John McCain (R-Arizona).) The bill, S.280, would restrict greenhouse gas emissions from electrical power, transportation, industrial and commercial sectors that emit more than 10,000 metric tons of CO2 equivalents a year. The bill defines a “covered entity” that would have to limit its emissions as one that

  1. owns or controls a source of greenhouse gas emissions in the electric power, industrial, or commercial sectors of the United States economy . . . refines or imports petroleum products for use in transportation, or produces or imports hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride; and
  2. emits from any single facility owned by the entity, over 10,000 metric tons of greenhouse gas per year, measured in units of carbon dioxide equivalents, or produces or imports—
    1. petroleum products that, when combusted, will emit,
    2. hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride that, when used, will emit, or
    3. other greenhouse gases that, when used, will emit, over 10,000 metric tons of greenhouse gas per year measured in units of carbon dioxide equivalents.

The bill would set a cap on carbon dioxide equivalent emissions starting in 2012. Starting in 2012, a covered entity would have to have an allowance for each metric ton of carbon dioxide equivalent emissions that it emits. For producers or importers of petroleum products and other chemicals, allowances would be required for the carbon dioxide equivalents that their products will emit in the US.

The bill would direct EPA to decide how to allocate allowances to covered entities and to a new Climate Credit Corporation (for auction).

The allowances would be tradable. The bill would set the total number of annual allowances at 6,130 million metric tons in 2012, but this figure would be reduced by the projected emissions that year from non-covered entities. The number of allowances would steadily decrease. It would fall to 2,096 million metric tons by 2050 (again reduced by emissions that year from non-covered entities). Covered entities could also use pre-certified international emissions credits, approved reduction projects in developing countries, domestic sequestration or reductions from non-covered entities.

The companion to the Lieberman-McCain bill in the House is H.R. 620. There are differences between the Senate and House versions. One difference is that the House bill calls for a sharper reduction in greenhouse gas emissions. The US cap on emissions would be 6,150 million metric tons in 2012 but would fall to 1,504 metric tons in 2050. A separate Senate bill sponsored by Senator Bernard Sanders (I-Vermont) and cosponsored by Barbara Boxer (D-California) would give EPA the discretion to establish a program to reduce greenhouse gas emissions, but specifically directs EPA to limit emissions from power plants and automobiles. Boxer is chairman of the Senate Committee on Environment and Public Works. The Sanders bill has a goal of capping greenhouse gas emissions at 1990 levels by 2020, but it would then move to reduce emissions by 80% from 1990 levels by 2050.

Starting in 2015, the bill would require certain emission standards from power plants that began operation after 2011 and were intended to provide electricity at a “unit capacity factor” of at last 60%. All power plants would be required to meet certain standards by December 31, 2030 regardless of when they began to operate. In addition to these requirements, the proposal would require power plants that

  1. ha[ve] a rated capacity of 25 megawatts or more; and
  2. ha[ve] an annual fuel input at least 50 percent of which is provided by coal, petroleum coke, lignite or any combination of those fuels to provide a minimum amount of their base quantity of electricity in specified calendar years from low-carbon generation.

Under the proposal, this requirement would begin in 2015 and steadily increase the required percentage of low-carbon generation. Compliance with low-carbon generation could be achieved through the use of low-carbon fuels, the purchase of electricity generated through the use of low-carbon fuels, the purchase of low-carbon credits or any combination of the above. . A third serious proposal in the Senate is a bill, S. 317, sponsored by Senators Diane Feinstein (D-California) and Thomas Carper (D-Delaware). The bill would regulate power plants with nameplate capacities greater than 25 megawatts that combust greenhouse gas-emitting fuels and generate electricity for sale.

The bill would also move to stop power companies from rushing new coal-fired power plants using conventional pulverized coal technology into service. Under this proposal, coal plants entering operation after January 1, 2007 would not receive free allowances unless the coal plants used clean coal technologies.

The bill would set emissions caps. From 2011 to 2014, the cap on emissions from affected power plants would be the total emissions in 2006. The cap would fall to the 2001 level of emissions starting in 2015 and for the next four years through 2019, it would decrease by 1% a year. Starting in 2020, the cap would decrease by 1.5% a year.

Under the bill, a set percentage of annual allowances would be allocated and a set percentage would be auctioned with a move over time to annual auctions of all the allowances. Allowances would be allocated based on the amount of generated electricity. The bill would also provide limited credit for certain early greenhouse gas or sequestration reduction measures, going back as far as reductions achieved in 2000. In addition, recognition may be accorded to international credits, use of other greenhouse gas trading programs and a system proposed for the use of offset credits for greenhouse gas reduction land-use sequestration projects.

In addition to these three bills, Senators Jeff Bingaman (D-New Mexico) and Arlen Specter (R-Pennsylvania) released the draft text of a bill soliciting comments. Bingaman is chairman of the Senate Energy Committee. The proposed bill would apply to coal, petroleum products, natural gas, natural gas liquids, and “any other fuel derived from fossil hydrocarbons (including bitumen and kerogen).” Allowances would be distributed to both industry and the states. An increasing percentage of allowances would be auctioned as the overall number of the allowances is reduced over time. For example, in 2012, 10% of the allowances would be auctioned (with 55% of that 10% allocated to industry and 29% to the states). In 2021, 20% would be available for auction (with 45% of that 20% allocated to industry and 29% to the states). The bill also proposes a “safety valve price” that would cap the cost required to emit a metric ton of carbon dioxide equivalent. Under the proposal, allowances would be provided based on the carbon content of a facility’s fuel.

In order to predict what type of legislation Congress might fashion, it is important to look past the halls of Congress and into the US at large. There is an increasing clamor from both industry and environmental groups for legislation. Action on global warming is inevitable. Many companies would rather know sooner than later what will be required of them. In addition, some companies feel they would be better off with a climate change bill enacted this year or next while Bush is still president than with a Democrat in the White House.

One large industry group pushing for action is the United States Climate Action Partnership, or “USCAP.” Its members include Alcoa, BP America, Caterpillar, Duke Energy, DuPont, Environmental Defense, FPL Group, General Electric, Natural Resources Defense Council, the Pew Center on Global Change, PG&E Corporation, PNM Resources and the World Resources Institute. USCAP advocates an economy-wide federal cap-and-trade program covering as many greenhouse gas emissions as politically and administratively as possible. It recommends a system of free allowances, at least in the initial stages of a program, and emission offsets (through domestic sinks and sources not subject to a cap or projects outside the US), as well as credit for reductions made in anticipation for any mandatory greenhouse gas program. The group proposes going as far back as 1995 as long as eligibility for any credit was based upon accurate data.

The US record with the sulfur dioxide and nitrogen oxide emission reduction programs that were enacted in 1990 suggests that cap-and-trade programs work. There are two main approaches for carbon controls — a tax on carbon or cap and trade. While there have been calls outside Congress for a tax, there seems little support for a new tax on Capitol Hill. Cap and trade is a strong early favorite. All the major 2008 presidential candidates — including John McCain (R), Hillary Clinton (D) and Barack Obama (D) — have gotten behind cap-and-trade proposals. USCAP also favors that approach.

Congressional leaders have set a goal of completing action on climate change legislation before the presidential election in 2008. Many interesting issues will have to be settled by then, including what limits to impose on emissions, what types of facilities to subject to a cap, how to distribute allowances, whether to “grandfather” existing power plants that are locked into long-term contracts to sell their electricity at fixed prices and whether existing state programs will remain intact.

The Bush administration has acknowledged the need for action on global warming, yet President Bush remains adamant that he will veto legislation implementing a cap-and-trade system. He believes only in voluntary action. However, the President signed an executive order in late January establishing renewable energy benchmarks for federal agencies. The order requires federal agencies with fleets of 20 or more motor vehicles to increase non-petroleum based fuel consumption 10% a year compared to a 2005 baseline.

Various climate change litigation theories such as “common law nuisance” have been attempted in the courts in an effort to force local companies to reduce their emissions. An example is Comer v. Murphy Oil, a case last year in Mississippi where claims were brought against oil and coal companies for the damage caused by Hurricane Katrina. Although the full ramifications of the US Supreme Court decision on April 2 in Massachusetts v. EPA remain to be seen, the impact of this decision, along with the threat of more litigation, are additional factors that will force the federal government to act. As long as there remains a vacuum at the federal level, states and citizen groups will try to take matters into their own hands. The result is a patchwork of controls that vary across the country.

Some utilities are not waiting for the federal government to act and are moving vigorously to invest in wind farms, solar and other forms of renewable energy. Other companies have engaged in voluntary carbon emission trading on the Chicago Climate Exchange or have already completed carbon emissions inventories, implemented reduction strategies and even started drafting contract templates in anticipation of emissions allocation trading.

IFC Standards

The International Finance Corporation issued 10 new environmental, health and safety guidelines for public comment in early February. The new guidelines set minimum standards with which the following types of projects will have to comply before the IFC will provide financing: liquefied natural gas facilities, nitrogenous fertilizers, health facilities, pharmaceuticals and biotechnology manufacturing, oleochemicals manufacturing, natural gas processing, coal processing, forest management, integrated steel mills and foundries.

The IFC guidelines are important because they establish benchmarks that commercial banks also tend to follow.

The new guidelines supplement 39 other industry guidelines the IFC issued earlier. The earlier guidelines cover such sectors as wind farms and geothermal projects.