Procopio and BlueScape Cap-and-Trade Webinar 12-8-11

The California GHG Cap-and-Trade Rule is Final: What Do You Know?! Webinar: December 8, 2011 James A. Westbrook John J. Lormon President Partner BlueScape Environmental Procopio, Cory, Hargreaves & Savitch LLP jwestbrook@bluescapeinc.com jwestbrook@bluescapeinc com john.lormon@procopio.com john lormon@procopio com www.bluescapeinc.com www.procopio.com1

James A. Westbrook Bio • President BlueScape President, • Full-service environmental consulting • Experienced with CA and EPA GHG regulations, and p g , carbon offsets • Technical capability to develop and manage climate change programs • Cap-and-trade compliance strategy, GHG emissions and compliance calculations, data monitoring and p , g reporting systems, allowance/credit management2

John J. Lormon Bio • Partner at Procopio, Cory, Hargreaves & Savitch LLP, specializing in environmental, climate change, and air quality law • Managed numerous Clean Air Act cases involving stationary and mobile sources, including energy generation and transmission facilities • W k d on l Worked large scale carbon emission, di l b i i diesel and l d soot projects in Los Angeles and Long Beach Harbor • Experienced in energy project siting and permitting gy j g g • American Bar Association section on Energy, Environment and Resource Vice-Chair Climate Change, Sustainable Development and Ecosystems3

Agenda • Subarticle 3: Applicability pp y • Subarticle 4: Compliance Instruments • Subarticle 5: Registration and Accounts • Subarticle 6: Allowance Budgets g • Subarticle 7: Compliance Requirements for Covered Entities • Subarticle 8: Disposition of Allowances • Subarticle 10: Auction and Sale • Subarticle 11: Trading and Banking • Subarticle 12: Linkage to External Trading Systems • Subarticle 13: Offsets • Subarticle 14: Compliance Instruments from Other Programs • Subarticle 15: Enforcement and Penalties (and Litigation) • Subarticle 16: Other Provisions4

Applicability • Covered Gases -- CO2, CH4, N2O, SF6, HFCs, PFCs, NF3, Fluorinated GHG • Covered Entities – Operators of Facilities, ex. refineries, cement, cogeneration, cogeneration stationary combustion – First Deliverers of Electricity • Electric Generating Facilities in CA • Electricity Importers – Fuel Suppliers • Natural Gas, utility and intrastate , y • Gasoline Blendstock, Distillate (Diesel), LPG – Carbon Dioxide Suppliers • Opt-in, Voluntary, Opt in Voluntary Other Participants5

Importer Power Plant IOU/POU Power Plant Out-of-State Food Co Fuel Supplier Oil/Gas Producer Refinery Power Plant IPP6

First Compliance Period Inclusion Thresholds, Jan. 1, 2013* Covered Entity CO2e Emissions any Year 2008-2011 Operators of Facilities 25,000 25 000 MT/yr Electricity Generation Facilities 25,000 MT/yr Electricity Importers y p 1. All emissions for imports from p specified sources that emit 25,000 MT/yr or more 2. All emissions for unspecified sources are above the threshold Carbon Dioxide Suppliers 25,000 MT/yr, include sum from different capture processes Petroleum and Natural Gas Facilities 25,000 MT/yr *The rule becomes effective Jan. 1, 2012 Jan 17

Second Compliance Period Inclusion Thresholds, Jan. 1, 2015 Covered Entity CO2e Emissions any Year 2011-2014 Fuel Suppliers 25,000 MT/yr, full combustion or oxidation of fuel imported and/or delivered Electricity Importers 1. Zero MT/yr for specified source 2. Zero MWh/yr for unspecified source as of Jan. 1, 2015 How Do I GET OUT!? Not easy: - Less than 25,000 MT/yr during one entire compliance period - Drop out the next compliance period - Sh tdo n Shutdown8

Compliance Program • Certain utilities and energy-intensive industries need energy intensive “Compliance Instrument” (“CI”) per metric ton of GHG emissions • ARB creates CI (§ 95820): – CA GHG emissions allowances – ARB offset credits – Sector-based offset credits – External GHG ETS offset credits – ARB early action offset credits9

Compliance Program (cont.) • Allowances allocated for free to some entities others entities, pay • Primary methods to allocate allowances = auctions • Allowances are tradable • ARB set minimum price - $10 per metric ton • Market demand for allowances will increase – Result: higher prices for certain unwanted goods and services (the “Price Signal”) ( g ) • Goal: more clean and efficient energy compliance10

Compliance Program (cont.) • Auction proceeds used in part for: used, part, – Alternative energy investments – Utility customer rebates • Cost increases for electricity, fuel, and goods passed onto customer • Reduce impact from out of state energy and goods out-of-state by: – Imposing compliance p g p g p program on importers of p electricity – Free allowances to certain at-risk industries11

Allowance Caps • Goal: reduce GHG emission to 1990 levels by 2020 at approximately 3% per year • First Compliance Period: 1/1/2013 – 12/31/2014 – 2013: 162.8M metric tons of CO2e – 2014: 159.7M metric tons of CO2e • Second Compliance Period: 1/1/2015 – 12/31/2017 – Natural gas and fuel distributors added – Cap rises in 2015 to 394.5M metric tons CO2e p – 2020 cap declines to 334.2M metric tons of CO2e12

Compliance Requirements • Reporting and Recordkeeping • Phase-In of Compliance Obligation – 1st compliance period – 2nd compliance period – During a compliance period • Emission Categories f C E i i C t i for Compliance li • Biomass-Derived Fuels • Compliance Obligations Related to Instruments • Timely / Untimely Surrender • Under-Reporting p g13

Emission Categories for Obligations Covered Entity Obligation Considerations Operators of Facilities - Verified or assigned combustion and vented emissions - Liquid fuels not included in 2015 First Deliverers of - Verified or assigned combustion and vented emissions Electricity - Separate calculations for generators and importers - Resource shuffling not allowed - RPS and QE Adjustments j Natural Gas Suppliers - Verified or assigned fuel deliveries, full combustion - Less deliveries to covered entities Gasoline and Diesel - Verified or assigned fuel deliveries, full combustion - Except deliveries outside California14

Compliance Instrument Obligations by Year First Compliance Period* Period Compliance Obligation Prior to 2012 Rule not effective 2012 Register for Trading Allowance Auctions in August and November 2013 Obligations begin 2014 Annual obligation – 30% surrendered for 2013 emissions, by Nov 1. 2015 Remaining obligations for 2013-2014 emissions Surrendered b N 1 S d d by Nov 1. *For a facility with a compliance obligation in the first period.15

Disposition of Allowances • Different sectors – different treatment – Free allocations – Purchases: auctions and trades • Electric distribution sector allocation of allowances: – 2013: 95.8M metric tons of CO2e – 2020: 83.1M metric tons of CO2e – 8 year allowance decrease of 13 3%13.3% • Industrial sector – Remainder of electric and ARB’s reserve allowances – Approximately: • 2013: 64.6M metric tons of CO2e • 2020: 226.9M metric tons of CO2e • 8 year allowance decrease of 20.5% y16

Disposition of Allowances (cont.) • Electric generating utilities – POUs • Free • Used for compliance – IOUs • Initially free • Must be “monetized” by consignment to ARB for auction for monetized benefit of ratepayers • Industrial – First Compliance Period free to ≥ 25,000 metric tons of CO2e 25 000 – Approximately 90% of historical emissions – Purchase 10%17

Disposition Allowances (cont.) • Industrial sector decline in free allowances – “Adjustment factor” to incentivize change in energy use – “Leakage” – risk businesses will move out-of-state • High risk industries – Some 100% free allowances – Others 75% in Second Compliance Period or 50% in Third Compliance Period – Zero allocation sectors • Importers: electricity, natural gas, and covered fossil fuel • Independent power generators • Out-of-state entities18

Auction and Sale • Allowances available at Auction: – IOU allowances – ARB reserves – All Allowances not allocated f f t ll t d for free t industry to i d t • Auction procedure: – Units of 1,000 – One-bid – Bid is blind – Highest bid wins – Financial assurance of bidder – Reserve price (floor)19

Auction and Sale (cont.) • Price controls: – Auction price • 2012 and 2013: ARB maintains certain allowances in a “price “ i reserve” account t control spikes: $40/ ll ” t to t l ik $40/allowance with 5% over inflation/year • 2014-2020: reserve price plus 5% per year above CPI • Limit on use of agents to hold allowances • Corporate affiliation disclosure required • Li it on number of allowances th t can b h ld b Limit b f ll that be held by regulated entity or affiliated parties – 2.5M plus 2.5% above 25M = 5.9M for 2013 p20

Linkage • Refers to external trading systems • ARB procedures for approval • Linkage options might include: g p g – Western Climate Initiative (WCI) – Regional Greenhouse Gas Initiative – E European Union U i21

Offsets for Compliance • Up to 8% offsets for compliance obligations • Project offsets can come from only the US • Project p j protocols are currently limited – forestry, y y, urban forestry, dairies, ODCs • Offsets may be available from sector-based programs such as REDD • Offsets must meet extensive, stringent requirements • Early Action Offsets22

Enforcement and Penalties • Failure to submit allowances for emissions or late submission 4x the original requirement plus other penalties • Failure to properly report allowance allocations – No penalty up to 5% – 75% replacement of allowance23

Enforcement and Penalties (cont.) • Criminal penalties per H&S Code § 42400: – Strict liability: up to $1,000 and/or 6 months – Negligence: up to $25,000 and/or 9 months – Knowing: up to $40,000 and/or 1 year – Willful and intentional: up to $75,000 and/or 1 year • Injunctive relief and civil action not dismissed upon filing of criminal complaint24

Enforcement and Penalties (cont.) • Civil penalties per H&S Code § 42401: – Violation of abatement order: $25,000 – Strict liability: up to $10,000 – Negligence: up to $25,000 – Knowing: up to $40,000 • Falsifies document: up to $40 000 $40,000 – Willful and intentional: up to $75,000 • Unreasonable risk of great bodily injury: up to $125,000 ($500,000 for ($ 00 000 f corporation) )25

Enforcement and Penalties (cont.) • Bounty hunter reward equal to 10% of civil or criminal p y q penalties up to $5,000 • Administrative penalties up to $10,000 per day up to $100,000 • In determining amount, ARB considers all relevant circumstances, including H&S Code § 42403(b) criteria: – Extent of harm – Nature and persistence of violation – Length of violation – Frequency – Record of maintenance – Unproven or innovative nature of control equipment – Mitigation actions taken by defendant, including nature, extent and time of response26

Legal Challenges to Compliance Program • Legislative, regulatory & judicial – Illegal discrimination against out-of-state fuel and electricity suppliers – Violates Interstate Commerce Clause – Imposes state mandated fees upon imports – Prop 26, CEQA, consistency with federal CAA GHG regulations – Compliance program not consistent with AB 32’s mandate: • Cost effective equitable distribution of cost burden q • Environmental justice claims – State Case – Assoc. of Irritated Residents – St t /F d Case: Our Children’s Trust “Public Trust” State/Fed C O Child ’ T t “P bli T t”27

Action Items and Summary • Recommend you PLAN for compliance now y p • Threshold issues - are you a covered entity or not? • How do you plan to comply? How will you satisfy financial assurance obligation? • Do D you need t b offsets, go to auction or plan to reduce emissions? d to buy ff t t ti l t d i i ? • How can you reduce cost and future risk and collateral impacts? • When will you get registered for trading? • What is your compliance management system? – Information management and verification – Trading plans – Reporting p p g procedures • Monitor rule changes and court decisions? • You need a team behind you! Role of Legal, Technical and Financial28

Contact with Questions • James A. Westbrook President BlueScape Environmental 11440 West Bernardo Court, Suite 300 San Diego, CA 92127 office: 858.695.9200 x201 mobile: 858.774.2009 jwestbrook@bluescapeinc.com j tb k@bl i www.bluescapeinc.com • John J. Lormon Partner Procopio, Cory, Procopio Cory Hargreaves & Savitch LLP 525 B Street, Suite 2200 San Diego, CA 92101 direct: 619.515.3217 direct fax: 619.744.5417 john.lormon@procopio.com www.procopio.com i The Webinar presentation will be posted on Slideshare.com and the Procopio website.29

Procopio and BlueScape Cap-and-Trade Webinar 12-8-11

by James Westbrook on Dec 06, 2011

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Procopio and BlueScape Cap-and-Trade Webinar 12-8-11 — Presentation Transcript