Climate Law Update: Climate Change & Sustainable Energy News : Thelen Reid Law Firm : Renewable Energy, Construction, Project Finance Lawyers & Attorneys

In general under a cap and trade system, credits or allowances represent the right to emit a certain amount of greenhouse gases. A debate has long been raging over whether at the beginning of the trading system to sell or give away the credits.

The British Columbia law would establish a cap for designated large sources of gases by issuing a limited number of what officials call “tradable compliance units” or emissions allowances for a given period of time. The emitters will then have to obtain units equivalent to the amount of greenhouse gases they emit within the specified time period. The units would then have to be surrendered to the government as proof of compliance.

The act identified three types of compliance units, including allowance units issued by the government; emissions reduction credits, which are offset credits from approved emission reduction or removal projects in the province, and recognized compliance units from other cap and trade systems, such as the Western Climate Initiative. Each unit would equal a ton of carbon dioxide or its equivalent.

Kate Thompson, a spokeswoman for the province's Ministry of Environment, told Climate Law Update that the legislation was silent on whether the emissions allowances would be auctioned or handed out for free. "That hasn't been decided yet," she said.

She said the legislation would likely progress through the provincial Parliament by May.

The Western Climate Initiative, which British Columbia joined last year, is considering a recommendation from a subcommittee that would require all of the partnership's participants to auction between 25 percent and 75 percent of their allowances, with the final figure not yet determined. Officials of the initiative are accepting public comments on the recommendation until April 16.

Under the April 2 proposal, the allowances would be sold through a coordinated process, with each of the states and provinces auctioning its allowances throughout the Western Climate Initiative region. Proceeds would go to the partners in the initiative, which include British Columbia and its sister province Manitoba, as well as the U.S. states of California, Oregon, Washington, New Mexico, Arizona, Utah and Montana. The initiative is expected to have its market system developed by August (see WCI document repository here).

Those hoping for an auction system would seem to have gotten some ammunition in the pages of the newest report on the subject, prepared for the environmental group WWF (also known as the World Wildlife Fund for Nature) by the market analysis firm Point Carbon. The report, which looked at the trading system set up in Europe, estimated that windfall profits for electricity generators in five countries between 2008 and 2012 could hit 71 billion Euros, or $111 billion.

According to the report:

"Windfall profits are highest in countries that have a high level of pass-through of [carbon dioxide] costs into wholesale power prices, countries with emissions intensive (coal) plant setting the price the majority of the time, and countries that allocate the highest percentage of free allowances to the power sector." 

An official of the WWF called the findings "a stark warning to the rest of the world on the danger of free allocations of pollution permits (see WWF statement here)."

The report said that when the European Union set up the system it allowed most of the allowances to be distributed free of charge, as a way of providing a "soft landing" to companies faced with having to deal with an emissions trading system for the first time. In addition, the study noted that in the first phase of the system starting in 2005 more allowances were handed out than required because the allocations were based on estimates rather than measured emissions.

Other jurisdictions are also dealing with the thorny issue of whether to charge for the allowances when they are initially distributed. California utility and energy officials recently adopted a recommendation to the California Air Resources Board that included advocating at least a partial auction of allowances. But it left for later critical details, such as what percentages should be sold or handed out for free (see Climate Law Update story here).                

(Photo of B.C. Environment Minister Barry Penner via Legislative Assembly of British Columbia)

Brendan Cummings, a California attorney for the environmental group Center for Biological Diversity, which successfully sued the highway agency over the mileage standards, expressed some cautious support for the new development. But, he told Climate Law Update, “it shouldn’t have taken a lawsuit for the federal government to realize fuel economy standards are one of the best ways we can address global warming.” He said a “true analysis of the societal and environmental costs” of carbon emissions would lead to “much higher fuel economy standards.”

Noting that the Federal Register notice avoids any mention of greenhouse gases or global warming, Cummings said the agency still appeared to be “in denial or delusional or intentionally hiding the ball, or all three.”

Eric Bolton, a transportation department spokesman, referred questions about the Federal Register statement to the document itself.

“Everything is supposed to be in there,” he said.

The California air agency’s vote reduced to 7,500 cars the number of non-polluting vehicles that major automakers are supposed to sell in the state from 2012 to 2014. The previous requirement had been 25,000 but officials realized that development of qualifying vehicles appeared to be lagging. The board also established a requirement that could result in 58,000 new plug-in hybrids over that same period. However, if manufacturers produce 25,000 no-emission vehicles, there are no remaining plug-in hybrid requirements. 
 

In addition, the agency will move forward with plans to meld together its programs designed to cut smog-forming pollution, which was the original intent of the emissions standards, with those meant to curb greenhouse gases. Those latter standards have run into an obstacle at the federal level, where the Environmental Protection Agency has refused to grant the state a needed waiver to proceed (see previous Climate Law Update story). State officials have sued to overturn the decision.

“That’s to simplify the program and make it easier to understand,” said air board spokeswoman Gennet Paauwe. “What the board felt, it was time to overhaul the program.”

She said while the state awaits a resolution of the waiver issue it has to move forward with developing the regulations.

Nichols, in the air board’s statement issued Thursday, said the decision would lead to more green choices for consumers while continuing to pressure automotive engineers to make improvements.

“We must continue to push for all types of technologies – fuel cells, electric vehicles and hydrogen-powered cars – as we fight our duel battles against smog and global warming,” she said.

(Photo: California State University-Pomona)

Johnson, in the letter to Boxer, the California Democrat who chairs the Senate Environment and Public Works Committee, and Sen. James Inhofe, the committee’s ranking Republican from Oklahoma, seemed to acknowledge a decision to regulate could have wide ramifications:

"Such an approach makes sense because, as the Act is structured, any regulation of
greenhouse gases - even from mobile sources - could automatically result in other regulations applying to stationary sources and extend to small sources including many not previously regulated under the Clean Air Act. Consequently, any individual decision on whether and how sources and gases should be regulated may dictate future regulatory actions to address climate change. My approach will allow EPA to solicit public input and relevant information regarding these interconnections and their possible regulatory requirements.

"This approach gives the appropriate care and attention this complex issue demands. It
will also allow us to use existing work. Rather than rushing to judgment on a single issue, this approach allows us to examine all the potential effects of a decision with the benefit of the public's insight. In short, this process will best serve the American public."

But Johnson in his letter also noted that his agency is facing legal action and petitions on the issue. Among them, although he did not mention it specifically, is an attempt by a number of organizations to impose greenhouse gas controls on a proposed Utah power plant (see Climate Law Update story).

The latest move follows by weeks Johnson’s issuance of his formal reasons for turning down California’s attempt to regulate greenhouse gas emissions from motor vehicles, in a move that also has raised hackles on Capitol Hill and among environmentalists (see Climate Law Update story).  

In his letter Thursday, Johnson wrote that he would direct the EPA staff to prepare an "Advance Notice of Proposed Rulemaking" to "discuss and solicit public input on these interrelated matters." That document would be issued later this spring and then would be followed by a public comment period. "The agency will then consider how to best respond to the Supreme Court decision and its implications under the Clean Air Act," he wrote.

Officials in Johnson's office did not return a call from Climate Law Update seeking comment on the latest move. 

Boxer, an outspoken environmental advocate, issued a statement accusing Johnson of "foot-dragging." She said the letter "makes it clear that EPA doesn't intend to take any real action to combat global warming before President Bush leaves office."

Aides to Inhofe, who has called global warming “the most media-hyped issue of all time,” could not be reached for comment Thursday.

Environmental groups and California government officials ripped Johnson. Said David Bookbinder, chief climate counsel for the Sierra Club, in a written statement (see press release):

"One year after the Supreme Court recognized the grave problem of climate change and ordered EPA to take the formal steps necessary to begin controlling global warming-causing pollution, Administrator Johnson has decided that what he needs to do is think about it some more.  After a year of navel-gazing, Administrator Johnson says that later this spring he will ask the public to provide EPA with (a) the "best available science" on global warming, and (b) their views on the "interconnections" between various parts of the Clean Air Act that "may" be affected by any decision to begin limiting GHG emissions.  Then, after months of public comments and some unspecified period thinking about them -- and only then -- will EPA "consider how best to respond to the Supreme Court decision and its implications under the Clean Air Act."

The Natural Resources Defense Council also weighed in (see press release), with a statement by David Hawkins, the environmental group’s climate center director. Hawkins said the announcement “follows an industry script designed to delay any real action to reduce global warming pollution for as long as possible and certainly until the next administration.”

Both Hawkins and Bookbinder threatened new court action. Hawkins said the NRDC would, as part of a coalition of groups, “return to federal court next week to enforce compliance with the Supreme Court’s decision.”

The negative reaction was not limited to environmental groups. Stanley Young, a spokesman for the California Air Resources Board, told Climate Law Update the "EPA's inaction heaps delay upon delay." However, he said the air board would continue moving forward with implementing California's own greenhouse gas reduction law, AB 32.

Kenneth Alex, a top lawyer for California Attorney General Jerry Brown, in an interview with Climate Law Update, said the latest move was part of “an ongoing abdication of responsibility and it’s nothing new.” Brown has been aggressively moving to require local governments and private entities in California to take steps to curb greenhouse emissions.

“In essence,” said Alex, a supervising deputy attorney general, “they’ve opened a public comment period on nothing.”

(Photo: Sen. Barbara Boxer via official Web site)

Although Brown, among other actions, has already sued and settled with one California county (see also press statement), and struck a separate legal deal with a major petroleum company (settlement and press release), he received a generally warm welcome from the officials. He even drew laughter when he told them his office would “help” them move forward by suing their city councils.

Brown advocated what he called “elegant density” in urban areas as a primary means of achieving lower emissions by reducing the time people spend commuting in their cars. According to California Energy Commission estimates, nearly 41 percent of the state’s greenhouse gas pollutants come from transportation.

“It’s up to you. You’re the custodians of land use and land use is connected to vehicle miles traveled,” Brown said in outlining his anti-sprawl agenda.

“The biggest thing of all is to shift the outward pressure and make it turn inward to a more elegant dense vibrant urban experience. That’s what local government has to do,” he said. “Now we have to get people from the suburbs to start coming back.”

Brown noted with some bemusement that when he was mayor of Oakland he advocated attracting 10,000 more residents into the central urban area but was met by opponents wielding CEQA challenges. He also noted that the slumping housing and construction market could actually give local officials some breathing room to “align land use with the need for a lower-carbon future.” Local officials, he said, need to include the new concepts in the design of general plans and city zoning, rather than waiting until they are presented with specific development projects.

Brown, a former California governor, noted he has long been talking about limits on growth and consumption, sometimes to little effect.

"Turns out that California never grew so fast as when I declared we were into an era of limits," he joked.

Nichols, who in the past has criticized Brown’s legal tactics in his push to force consideration of global warming in long term development, transportation and industrial plans, nevertheless echoed much of his theme in her remarks. She said that unlike previous attempts to control other forms of air pollution, “we can’t get there from here with technology alone.” Part of the reason for that, she said, is the length of time it takes to replace the existing fleet of vehicles on the road.

“For the first time under AB 32 we are going to have to take action that limits the growth and amount of use of [vehicle miles traveled],” Nichols said. “That’s the little hidden fact that’s not being talked about as much when people talk about the global warming problem.”

She noted that the state has in the past not had a lot of success in promoting so-called smart growth, and she recalled that some “brute force” attempts to limit vehicles, such as through fees and bans on parking, have been rejected “pretty roundly.” But she suggested much of that might have to change.

“We’re going to have to find some ways to create new incentives as well as, I think, potentially new directions that we’re going to be developing in this area,” she said.

Local government representatives in the coming weeks and months will be getting a big dose of global warming. On Friday, they were invited to attend another meeting in Oakland with officials putting together the air board’s AB 32 blueprint, or “scoping plan.” In addition, four more workshops in the series kicked off Thursday were scheduled for April 3 in Sacramento, April 24 in Visalia, May 15 in Los Angeles and May 23 in Monterey. More information is available from the Local Government Commission.

(Photo of Jerry Brown via Wikipedia)

Although some groups, including those concerned about pollutants affecting poor and minority populations, have opposed cap and trade markets, the idea has gained support among other environmentalists and business groups. Peevey strongly backed the approach in remarks before the commission voted Thursday:

“A cap and trade program is likely to produce additional emissions reductions beyond the mandatory programs, it can tackle a wider variety of sources, potentially at a lower cost. It also encourages investment in innovative technologies that lower greenhouse gas emissions.”

But Peevey acknowledged that officials have only just begun to take on what he called the “thorny issue of allocation,” referring to the critical question of how emissions credits or “allowances” will be distributed among those producing greenhouse gases. Under a cap and trade system, credits represent the right to emit a certain amount of greenhouse gases. The document approved by the two commissions recommends that some credits be auctioned, suggesting that the money be used to benefit ratepayers or support energy efficiency and renewable energy investments. But it does not resolve important questions such as what proportion of the credits should be auctioned and how many sold or given away for free:

"Based on the current record, we are not able to determine the proper
relative roles of auctions and administrative allocation of allowances in a
deliverer-based system. Several parties recommend that there be a gradual
transition over several years from relatively more administrative allocations
initially to relatively greater reliance on allowance distribution via auctions.
Distributing some amount of allocations administratively in the early years of
the program could reduce the immediate impact on entities that would bear the
costs of obtaining allowances, and would give them more time to develop
emission reduction strategies. Based on the current record, it may be reasonable
to provide a transition from small amounts of auctioning in the early years to
greater amounts in later years. However, we require more analysis before
making a determination on this issue."

Peevey, during his presentation, said it would not be the commissions’ intention to punish utilities based on their past investments or decisions made prior to the passage of AB 32. However, he cautioned that the state’s retail electricity providers “are starting off in very different positions” with respect to their emissions. He noted, for instance, that some large public utilities spew twice as much carbon dioxide per unit of energy produced than do the state’s private utilities and some other public entities.

The allocation recommendation is expected to be addressed in a subsequent document to be ready in August.

Although other commission members lauded the recommendation, Commissioner Timothy Alan Simon expressed some concerns about the potential impact on municipally owned utilities. He said he would “closely monitor” the next phase to make sure that those utilities, over which the commission has no regulatory authority, are “treated fairly.”

Here's the Times' description of the opposition:

The 21-point "Environmental Justice Movement Declaration" challenges the stance of Gov. Arnold Schwarzenegger (pictured above with New York Gov. George Pataki discussing an emissions market program in 2006), a national advocate of a cap-and-trade program that would allow heavy polluters, often located in poor neighborhoods, to partly buy their way out of lowering their emissions.

"Under a trading scheme, 11 power plants to be built around Los Angeles could offset emissions by extracting methane from coal seams in Utah or planting trees in Manitoba," said Jane Williams of the California Communities Against Toxics, which fights pollution in low-income areas.

The defiant tone of news conferences in Los Angeles, Fresno, Oakland, Sacramento and San Diego indicated that political turbulence might be ahead as the state Air Resources Board hammers out a strategy to drastically reduce greenhouse gas emissions, as required under a 2006 law.

Joining Williams in leading the movement was Angela Johnson Meszaros, director of the California Environmental Rights Alliance. They are co-chairs of the California Air Resources Board's Environmental Justice Advisory Committee. That panel was established under California's AB 32, the 2006 law mandating sharp reductions on emissions blamed for changing the planet's climate. 

In addition to Schwarzenegger, cap and trade schemes, at least for the electricity sector, have drawn support from the California Public Utilities Commission President Michael R. Peevey, large sectors of the utility industry such as Pacific Gas and Electric Company and even garnered cautious backing from environmental groups, such as the Natural Resources Defense Council.

The document is in the form of a proposed decision to be presented for consideration by the full five-member CPUC. If adopted by the panel, the paper would  then constitute a recommendation to the California Air Resources Board, which is the key body in charge of implementing AB 32,  the law that mandates big reductions in California climate-change emissions by 2020 and which officials hope to have up and running by 2012.

Peevey wrote:

We favor inclusion of the electricity sector in a cap-and-trade program for
a number of policy reasons. While we fundamentally favor a certain minimum
level of mandatory reductions from existing programs as described above, a
cap-and-trade system in combination with these mandatory reductions should
be able to produce the GHG emissions reductions required by AB 32 at a lower
cost than reliance on additional mandatory reductions. This is because emissions
trading maximizes flexibility in achieving emissions targets by allowing
obligated entities to rely on the least-cost options across the entire economy.

Significantly, Peevey wrote that any cap-and-trade program must include a component to include electricity imported from other states. While California gets about 20 percent of its juice from neighboring states, those imports represent more than half of the greenhouse gas emissions from the sector, he noted.

It was partly along those lines that he recommended that electricity deliverers to the grid bear the burden of complying with AB 32. Other options would have placed the responsibility on retail providers; in-state generators, with no inclusion of imports in the cap-and-trade system; and in-state generators, with retail providers as the point of regulation for imports. All the choices were evaluated against a set of criteria including "environmental integrity," accuracy and ease of reporting, compatibility with ongoing reforms in energy markets and legal issues.

The so-called deliverer option worked best, Peevey wrote:

After evaluating the point of regulation options against these key criteria,
we find that the deliverer option best meets the criteria. Each of the other
options has serious shortcomings regarding one or more of our priorities. The
deliverer system provides for the environmental integrity of the system by
covering imported power as well as in-state generation. It also shares a number
of common characteristics with a pure generation-based point of regulation
making it likely to be compatible with the eventual design of a cap-and-trade
system that is broader in geographic scope (regional and/or national). The
deliverer point of regulation also improves the ability to report and track
emissions in the sector and minimizes the impact of AB 32 GHG regulations on
California’s wholesale electricity markets. Finally, the deliverer method can be supported on legal grounds.

Despite advocating the inclusion of a market-based approach in efforts to control climate-changing emissions from the electricity sector, Peevey shied away from backing an immediate move along those lines for natural gas. He cited "key differences between the electricity and natural gas sectors" for his recommendation to leave gas out of the equation for now. Those included, he wrote, "significantly fewer options" for reducing greenhouse emissions in the natural gas sector and the "very limited availability of low-carbon alternatives" to gas. However, he added that as California gains experience with a cap-and-trade system and other developments occur, "it may become appropriate" to add the natural gas sector to such a system.

Peevey cited support for a cap-and-trade approach from a wide range of interests, not all of whom usually see eye-to-eye, including environmental groups, utilities, power suppliers and others.

There isn't unanimity among all of the parties, however, as reflected in written comments filed with the CPUC.  Environmentalists, including The Natural Resources Defense Council, filed comments urging officials to "move forward in designing a [greenhouse gas] cap and trade program for electricity. Those same organizations also advocated that California go ahead with "a cap and trade system that includes natural gas, even if regional and federal programs have not yet emerged." Meanwhile, El Paso Corporation, a large natural gas supplier, submitted arguments urging a wait-and-see approach to imposing a gas cap and trade system. The Utility Reform Network, a vocal California ratepayer group, asked that any cap and trade system adopted for 2012 exclude electrical generation, arguing that the state would be better off "promoting existing policies that result in real GHG reductions" and taking other steps, such as developing a regional tracking system for the emissions.