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

The report noted that many in the industry favor free allocations, as a way of reducing the costs of complying with carbon dioxide reductions. But discouraged that approach, warning of potential excessive profits and noting the "overly generous" allocations under the first phases of Europe's trading system. 

With electric power generation responsible for about 40 percent of the nation's carbon dioxide emissions, or about 2.7 billion tons annually, according to the report, the industry has a big stake in the outcome of any legislation.

The issue is not confined to the federal level. In states such as California, which is contemplating a cap-and-trade program to help the state meet the demands of its groundbreaking AB 32, regulators are also wrestling with the subject. California officials are expected to make a recommendation on the allocation question this summer (see Climate Law Update story here).    

Under Lieberman-Warner, credits covering about 45 percent of the emissions would be distributed for free in 2012, according to the report, while another 573 million tons worth would be handed out to distribution companies. Those allowances would then be auctioned off to raise money for energy efficiency programs or to provide customer rebates. The Bingaman-Specter bill, on the other hand, would provide about 80 percent of the allowances for free in 2012.

At a hypothetical value of $10 a ton -- no one really yet knows how much the credits would be worth -- the value of the free credits allocated to the 100 largest utilities under the Lieberman-Warner approach would be about $10.4 billion. That comparable figure under the competing measure would be more than $18 billion.

Restricting the amount of free credits is clearly favored by at least one sponsor of the report, the Natural Resources Defense Council. In a statement accompanying the release of the assessment, Dan Lashof, science director of the environmental group's climate center said (see full text of statement here):

"Billions of dollars in allowances are at stake under the proposals to cap and reduce global warming pollution. The value of pollution allowances should benefit consumers and smart programs that deliver real pollution reductions, not polluters." 

Along with the NRDC, the report was sponsored by Ceres, a coalition of investors and environmental groups, as well as two utilities, Pacific Gas and Electric Company and Public Service Enterprise Group of New Jersey.

The report also shows stark differences between utilities based on whether credits are distributed based on the utility's emissions, or its electricity output. The emissions-based method would "penalize companies that have invested in low- and zero-carbon technologies in advance of the cap-and-trade program," the report noted.

Under an emissions scenario, the Southern Company, described by the Wall Street Journal's online site Environmental Capital as "coal heavy," would get $600 million in credits under the proportions outlined under the Lieberman-Warner bill, as opposed to $734 million if the allowances were doled out based on emissions.

For a company such as Northern California's PG&E, reliant on hydro, nuclear, natural gas and renewable generation, the differences would be even more dramatic. The company would get as little as $2 million to $4 million in allowances under the emissions scenario but receive between $99 million and $174 million if allocations were based on output, according to the report.

On a somewhat different subject, the report made another fairly startling point: Since 1990, overall carbon dioxide emissions from power plants have gone up by 29 percent; but emissions of other pollutants, including sulfur dioxide and nitrogen oxide, have dropped more than 40 percent. The difference, suggested the report's authors, was that the latter two pollutants are regulated under the Clean Air Act, while carbon dioxide has not been.      

 (Photo: Lake Almanor, California, part of PG&E hydroelectric system; Wikipedia)

The Pew organization is one of six nonprofit groups involved in the Offset Quality Initiative, which participants said was intended to support policy makers as they develop regulatory standards for climate change policies involving offsets. They distinguished their efforts from others that are intended to address voluntary emissions offsets.

"Our primary focus is on the regulatory side," said Mike Burnett, executive director of Portland, Oregon's The Climate Trust, one of the groups involved in the project. But he said it was not the coalition's goal to develop its own standards or to rate those developed by others.

Peace, however, said it was important to have some standards and to allow them to have some flexibility to make room for innovative projects. At the same time, she advocated the concept of "additionality," a buzz word that covers "high quality" projects that would not have happened but for offset programs being in place.

"If you"ve been doing it for 20 years and somebody comes to you and says, 'I'm gong to pay you for an offset -- well, that's not a very high-quality offset," Peace said.

The projects getting funding under the PG&E deal all have a stamp of approval from the California Climate Action Registry, a state-formed nonprofit that is one of the entities involved in the Offset Quality Initiative. PG&E's announcement included a statement from Gary Gero, interim president of the registry, who commended the utility "for taking on the challenge to fund real, transparent and verifiable carbon emission reduction projects." 

Most of PG&E's purchase, 200,000 metric tons, comes from  The Conservation Fund's Garcia River Forest (pictured, from Conservation Fund Web site). Although owned by a conservation organization, the 24,000-acre redwood and Douglas fir forest is being managed as a working timber producer, according to a statement from the organization. The credits derive from the fact that less timber is harvested than allowed under a "sustainable" easement on the land held by the Nature Conservancy.

As the Conservation Fund put it:

"The Fund harvests trees significantly below the maximum amount allowed by the easement and by California’s stringent environmental regulations. It is this sustainable management practice that provides “additionality” by trapping more CO2 in the trees than would normally be trapped with allowable harvest levels. This additional salvaged CO2 is sold as certified emissions reductions credits, calculated by independent auditors and verified through the Registry."

Money for the purchases, which also include 14,000 credits from the Sempervirens Fund, which protects giant sequoias, comes from ClimateSmart program in which PG&E customers voluntarily enroll and pay extra on their utility bills to make their energy use "climate neutral."

Among the efforts to certify voluntary market programs was a project announced by the Center for Resource Solutions, a San Francisco nonprofit. Its Green-e Climate, according to a statement and presentations made at the Carbon Forum conference, requires that "greenhouse gas emission reductions be verified according to strict project-level certification." The goal is to guarantee consumers clear information about the projects, that offsets have not been double-sold or double-counted and that they come from projects that would not have happened "business as usual." The program relies on certifications including those offered by the Clean Development Mechanism,  the Gold Standard and the Voluntary Carbon Standard.  Green-e announced it had certified offerings by four retailers of carbon offsets, including one, 3Degrees, that has among its portfolio a project in Brazil that captures methane from hog farms. 

"We are verifying the products that are being sold to consumers," said Lars Kvale, Green-e climate manager, at the San Francisco conference. In many cases, he said, consumers "don't necessarily know what they're getting or what they're buying." 

The state's largest utilities, including PG&E, have until 2010 to meet the state's demands.  The Chronicle noted that the standard, which state policy makers are now working to boost to 33 percent, has been tough to meet:

Even PG&E's achievement comes with a caveat. The company now has enough power contracts to hit 20 percent, but some of those contracts won't kick in until after the state deadline passes, delivering power to PG&E customers in 2011. That isn't a legal problem. If a utility falls just short of 20 percent by the end of 2010, it can still comply with the law by overshooting the 20 percent goal the following year.

But that caveat underscores the difficulty utilities have had in meeting California's ambitious renewable-energy goals. Simply put, the state does not have enough geothermal generators, wind farms and solar power plants to produce as much clean energy as California's politicians and citizens want. More renewable-power projects have been proposed, but it's an open question how many will get built. 

Nevertheless, numerous projects are on the drawing boards and the state's ambitious goals would seem to provide significant incentives for at least some of them to go forward, and quickly, as California attempts to meet its self-imposed demands to reduce greenhouse gas emissions under legislation such as 2006's AB 32.