Surviving And Prospering In A Carbon Constrained Economy
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Surviving And Prospering In A Carbon Constrained Economy

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How do companies survive and prosper in an emerging carbon constrained economy? This presentation describes the developing greenhouse gas regulatory program developing in the United States at the......

How do companies survive and prosper in an emerging carbon constrained economy? This presentation describes the developing greenhouse gas regulatory program developing in the United States at the state and federal level. It then describes how companies can survive and prosper with the dramatic changes that are occuring that will restrict greenhouse gas emissions across the country.

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  • 1. WWW.TKLAW.COM The Devil in the Details: Climate Change Regulation under Obama and How to Survive in the New Carbon-Constrained Economy Carbon-Constrained DRI Webcast December 15, 2008 Scott D. Deatherage Thompson & Knight LLP Dallas, Texas Scott.Deatherage@tklaw.com 214-969-1206 1
  • 2. WWW.TKLAW.COM Outline of Presentation What climate change regulatory developments will serve as a foundation of an Obama climate change regulatory push? What is climate change regulation likely to look like under an Obama administration? How can companies survive and seek competitive advantage under a new climate change regulatory system? 2
  • 3. WWW.TKLAW.COM Part I: Before Obama 3
  • 4. WWW.TKLAW.COM Climate Change Regulation Timeline 2005 1992 EU UNFCCC ETS 1997 2003 2006 2007 2008 2009-2010 Kyoto Regional --California Bill --Mass v. U.S. Pres. --U.S. Climate Protocol Greenhouse --Western EPA Election Change Gas Climate Initiative --Lieberman- Legislation 2009 Initiative Warner --Post-Kyoto U.S. GHG Voted Out Climate Reporting of Sen. Change Regulation Comm. Treaty --Greenhouse Gas Reporting Legislation --Midwestern Greenhouse Gas 4 Reduction Accord
  • 5. WWW.TKLAW.COM New Federal Greenhouse Gas Reporting Requirement December 21, 2007, Omnibus Spending bill requires EPA to promulgate GHG reporting rules above appropriate threshold levels in all sectors of economy. Proposed regulation was due in September of 2008, and a final regulation in June 2009. The Bush Administration would not let EPA issue a draft regulation, even though the Agency was prepared to do so. 5
  • 6. WWW.TKLAW.COM EPA Advance Notice of Rulemaking under the Clean Air Act in response to Mass v. EPA “Future projections show that, for most scenarios assuming no additional GHG emission reduction policies, atmospheric concentrations of GHGs are expected to continue climbing for most if not all of the remainder of this century, with associated increases in average temperature.” EPA Administrator Johnson: “[T]he potential regulation of greenhouse gases under any portion of the Clean Air Act could result in an unprecedented expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every household in the land.” “I believe the ANPR demonstrates the Clean Air Act, an outdated law originally enacted to control regional pollutants that cause direct health effects, is ill-suited for the task of regulating global greenhouse gases.” 6
  • 7. WWW.TKLAW.COM Part II: Climate Change Regulation under Obama 7
  • 8. WWW.TKLAW.COM Obama-Driven Legislation Where will the new Administration start? Ground already plowed: Numerous bills already have been introduced in Congress, much analysis and debate has occurred in committees State laws being enacted and regulations being developed These bills will serve as the starting point for developing a federal climate change bill Massachusetts v. EPA and EPA Advanced Notice of Rulemaking “Climate Change Mavericks”?: Former opponents and almost running mates Sens. McCain and Lieberman may be Obama allies in passing climate change legislation 8
  • 9. WWW.TKLAW.COM Greenhouse Gas Reporting Legislation Already Passed Obama EPA will use Bush EPA work on greenhouse gas reporting rules to develop reporting system in 2009 The GHG reporting requirements will identify many of the industries and facilities that likely will be regulated under federal legislation The language in the Omnibus Spending bill requiring EPA rules on GHG reporting is very broad, giving EPA great latitude in establishing the regulatory landscape 9
  • 10. WWW.TKLAW.COM New Federal Greenhouse Gas Reporting Requirement What industries and sources will be required to report? What gases will be included? CO2 or all six greenhouse gases? What threshold levels of emissions will be required to report? What de minimis level of emissions will be excluded? 10,000 metric tons of CO2 equivalents? Will transportation emissions be measured and reported? If so, will suppliers of natural gas and refined petroleum products be required to estimate emissions of downstream users or will this be measured by the transportation industry? What about buildings and other indirect emitters? Reported emissions will be available on the Internet for review by NGOs, shareholders, plaintiffs’ attorneys, etc. 10
  • 11. WWW.TKLAW.COM Cap and Trade In the U.S. in the early 1980s, economic and legal experts began developing theory of emissions markets “Cap”=limit on emissions decreasing over time, results in lower emissions “Trade”=parties can trade pollution allowances granted by the government to each facility The Clean Air Act of 1990 established an emissions trading market for sulfur dioxide emissions from coal-fired power plants Result—Emissions reduced at significantly less cost to industry 11
  • 12. WWW.TKLAW.COM GHGs and Relative Global Warming Impact GHG GWP* carbon dioxide, CO2 1 methane, CH4 21 nitrous oxide, N2O 310 hydrofluorocarbons, HFCs 140 – 11,700 perfluorocarbons, PFCs 6,500 – 9,200 sulphur hexafluoride, SF6 23,900 * Reflects the global warming capacity of each GHG relative to CO2 12
  • 13. WWW.TKLAW.COM What Will the Cap Be? Lierberman-Warner: 4% below 2005 levels by 2012; 19% below 2005 by 2020; 71% below 2005 by 2050 Dingell-Boucher: 6% reduction by 2020; 80% by 2050 Obama: Economy-wide cap-and-trade system; Reduce to 1990 levels by 2020; 80% below 1990 levels by 2050 13
  • 14. WWW.TKLAW.COM The Emissions Threshold What threshold of emissions of greenhouse gases will be regulated? In some bills filed in Congress, 10,000 tons per year of carbon dioxide equivalent (CO2e) would be the threshold Setting the threshold will determine the number of facilities regulated and the economic impact of the regulations Obama position not yet known 14
  • 15. WWW.TKLAW.COM Some of the Potentially Regulated Facilities Power plants Pipelines Refineries producing liquid Cement fuels Steel Natural gas processing Producers or importers of plants fluorocarbons, Importers of fossil fuels perfluorocarbons, and and natural gas sulfur hexafloride Manufacturing—chemical, Emitters, refiners, or cement, aluminum, etc. importers of more than 10,000 tons of CO2 Transportation equivalents 15
  • 16. WWW.TKLAW.COM Distribution of Emission Allowances Emission allowances are the “pollution rights” distributed to individual facilities that have to be turned into the government at year end to cover each ton of emissions Options for distribution: Free distribution to each facility; Auction of allowances to an open market; or Some combination of both Many northeastern states are auctioning 100 percent of allowances. EU Emissions Trading system distributed for free, but looking a auction. Lieberman-Warner mixed approach starting with small auctioned amount that rises over two decades Obama’s current position: auction 100 percent of allowances 16
  • 17. WWW.TKLAW.COM Banking of Allowances Allowances can either expire or have no expiration date Banking means the allowances have no expiration date and can be carried forward and used in future emission years Banking allows greater flexibility to facilities and reduces the financial impact of the regulations It also may increase the market value of the allowances No indication on Obama position on banking; Lieberman-Warner allowed banking 17
  • 18. WWW.TKLAW.COM Safety Valve The term “safety valve” refers to a price cap or other means of preventing price of allowances from rising beyond a certain point Industry supports a safety valve Financial community and offset developers oppose a safety valve and want to allow the market to determine the price for carbon Lieberman-Warner did not have a specific safety valve, but would have created a sort of “Carbon Fed” that would have stepped in under certain circumstances No indication on the Obama position on a safety valve 18
  • 19. WWW.TKLAW.COM Offsets “Offsets” refer to the use of emission reductions from activities or facilities that are not required to reduce their emissions under a greenhouse gas regulatory regime; they can be domestic or international Offsets provide a means of lowering of the cost of emission reductions International offsets are generally the least expensive offsets Key Issue: Percentage of domestic and international offsets allowed; Lieberman-Warner 30% limit, allowing up to 15% international offsets 19
  • 20. WWW.TKLAW.COM 20
  • 21. WWW.TKLAW.COM What If Congress Does Not Pass Legislation Does Obama have an Ace in the hole? Under Mass v. EPA, the U.S. Supreme Court opened the door for greenhouse gas regulation under the federal Clean Air Act Obama EPA could take regulatory action under the Clean Air Act, even if Congress does not pass legislation 21
  • 22. WWW.TKLAW.COM Action on Advanced Notice of Rulemaking The Bush EPA has already laid out the groundwork for greenhouse gas regulation under the Clean Air Act, even though concluding that it would not be a wise idea The Obama EPA could decide on a regulatory approach and develop rules under the CAA Could be a means of putting pressure on Congress and industry to formulate and pass climate change legislation, lest regulation be developed under the CAA The Obama administration will likely work with the states that are developing greenhouse gas regulations: RGGI, California and the WCI, and the Midwestern States 22
  • 23. WWW.TKLAW.COM Mobile Sources: Fuel Efficiency Requirements for Automobiles With auto industry in the tank, little resistance will likely arise from the big three auto companies Waxman replaced Dingell on the House Energy Committee, ending roadblock for fuel efficiency standards for the auto industry It appears highly likely that fuel economy standards will be raised significantly over time Thus, the auto industry regulation issue in Mass v. EPA very likely will be resolved 23
  • 24. WWW.TKLAW.COM Regulation of Stationary Sources of GHGs as Hazardous Air Pollutants The implications of Mass v. EPA are that once GHGs are determined to be air pollutants, and an endangerment finding will be issued by Obama EPA Section 112 of the CAA permits EPA to regulate hazardous air pollutants (HAPs) Question of whether GHGs meet the definition of HAPs Litigation over these issues already occurring over state and federal air emissions permit applications 24
  • 25. WWW.TKLAW.COM BACT for GHG Emission Sources Sections 165 of the CAA: Prevention of Significant Deterioration of areas where air quality standards are being met “Best Available Control Technology” for controlling GHGs State regulation and state and federal litigation over coal-fired power plants Current litigation and administrative appeals to the EPA Environmental Appeals Board EPA could begin requiring GHG emission limits in federal PSD permits 25
  • 26. WWW.TKLAW.COM EPA Environmental Appeals Board In re Deseret Power Electric Cooperative, PSD Appeal No. 07-03 (Nov. 13, 2008) Review of challenge of EPA issuance of PSD permit for a waste coal- fired power plant in Bonanza, Utah Sierra Club argued EPA failed to meet CAA sections 165(a)(4) and 169(3) by not applying BACT to limit CO2 emissions from the facility Remanded permit to EPA Region 8 to “reconsider whether or not to impose a CO2 BACT limit in light of the agency’s discretion to interpret, consistent with the CAA, what constitutes a 'pollutant subject to regulation under this Act.’” Stated cognizance of the national scope of issue, and asked whether all parties would be “better served by the agency addressing the interpretation of the phrase ‘subject to regulation under this Act’ in the context of an action of nationwide scope.” 26
  • 27. WWW.TKLAW.COM All of This Regulatory Pressure Will Bring Industry into the Debate We may see more industry pushing for a Congressional solution Industry does not favor regulation under the CAA or multiple state systems Industry may be looking for better deal from the “sausage grinder” of Congress United States Climate Action Partnership—a group of major corporations proposing climate change legislation be adopted http://www.us-cap.org/ 27
  • 28. WWW.TKLAW.COM Part III: Surviving in the Carbon-Constrained Carbon-Constrained Economy 28
  • 29. WWW.TKLAW.COM How to Survive in the Land of Obama’s Carbon-Constrained Economy 1. Understand we are in the midst of a conversion to a carbon- constrained economy—a change as enormous as the Industrial Revolution 2. Understand new regulatory paradigm in the twenty-first century 3. Develop a corporate climate strategy 4. Measure and monitor your carbon footprint 5. Develop a strategy for climate risk disclosure 6. Conduct climate change due diligence 7. Develop a carbon offset strategy and portfolio 29
  • 30. WWW.TKLAW.COM Step 1: Understand That We Are in the Midst of the Emergence of a Carbon-Constrained Economy Climate change regulation is and will drive us toward a carbon-constrained economy The investment required over the next twenty years to achieve this transition will rise to trillions of dollars The changes required compare to the Industrial Revolution Companies must adapt to survive and gain competitive advantage 30
  • 31. WWW.TKLAW.COM Step 2: Understand the Twenty-First Century Regulatory Paradigm: Stakeholder Ecosystem Government Public/ Lenders Regulators Community Investors Non-governmental Company Organizations Competitors Employees Partners Consumers 31
  • 32. WWW.TKLAW.COM Step 3: Develop a Corporate Climate Strategy Management and board of directors need to develop a strategy for dealing with a carbon-constrained economy The following steps will provide the major elements of a corporate strategy How do your business units reduce costs and find new revenue streams? 32
  • 33. WWW.TKLAW.COM McKinsey Analysis of U.S. Greenhouse Gas Abatement Potential 33
  • 34. WWW.TKLAW.COM Step 4: Measure Your Carbon Footprint A corporate climate change strategy cannot begin without understanding the type and volumes of emissions from the various aspects of the enterprise The World Resources Institute (http://www.ghgprotocol.org/) provides protocols for measuring direct and indirect emissions Federal GHG reporting rules will provide the mandatory system in 2009 34
  • 35. WWW.TKLAW.COM Step 5: Develop a Strategy for Climate Risk Disclosure Current SEC regulations require environmental disclosure: Management Discussion and Analysis, capital expenditures for any environmental controls, and litigation—all with materiality threshold Development of a strategy for climate risk disclosure is becoming an important corporate issue for directors and managment Proposed legislation to require SEC guidance and rules on climate risk disclosure 35
  • 36. WWW.TKLAW.COM Xcel and Dynegy Settlements with New York Attorney General Require Climate Risk Disclosure The potential impact of present and probable future climate change regulation and legislation; Climate-change related litigation; Physical impacts of climate change; Current carbon emissions; Projected increases in carbon emissions from planned coal-fired power plants; Company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and Corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation 36
  • 37. WWW.TKLAW.COM Step 6: Conduct Climate Change Due Diligence Although uncertainty exists as to the details of climate change legislation and greenhouse gas emission regulation, it appears likely they will come into effect Future climate change costs could be substantial for certain types of companies and facilities Purchasers, lenders, and investors should begin conducting due diligence into the carbon footprint of all future mergers and acquisitions where greenhouse gas emissions could be significant 37
  • 38. WWW.TKLAW.COM Step 7: Develop a carbon offset strategy and portfolio As cap-in-trade goes into effect at the state and national levels in the United States, cost reductions will be essential Purchasing carbon allowances and offsets may be significantly less expensive than installing equipment to reduce emissions Carbon purchasing, trading, and hedging will become an essential process for major emitters, requiring a carbon trading desk 38
  • 39. WWW.TKLAW.COM Carbon Market Volumes & Values 2006-2007 39
  • 40. WWW.TKLAW.COM Carbon Credit Projects Fuel switching, e.g., coal to Energy efficiency, such as natural gas, or biomass for fossil replacing boilers at refinery; fuels; Renewable Energy—wind, solar Capture and flaring or other use energy, geothermal, and of coal-bed methane; hydropower; Biofuels from waste oils (no Cogeneration; approval yet for a biofuel from Capture of CO2 from LNG, gas agricultural crops); processing plants, coal-fired Projects related to biofuel power plants and injection for production (e.g., burning of enhanced oil and gas recovery or bagasse to produce electricity); into saline aquifers; and Landfill gas to produce electricity Avoided deforestation and or to put in natural gas pipeline; reforestation 40
  • 41. WWW.TKLAW.COM US Carbon Market—Transitioning from Voluntary to Compliance Market Currently, only the Northeastern States under RGGI have started a compliance market—first trades just recently occurred Current U.S. market primarily a “voluntary” market—entities and individuals voluntarily offsetting their carbon footprint 20 or more states developing cap-and-trade system and the potential for a national cap-and-trade system is increasing A significant portion of the U.S. voluntary market will quickly transcend into a compliance market for energy, chemical, manufacturing, and transportation industries Future U.S. mandatory or compliance market predicted to be anywhere from $100 billion to $300 billion per year by 2012-2014 41
  • 42. WWW.TKLAW.COM Conclusion The Obama Administration will issue greenhouse gas reporting rules in 2009; push for cap-and-trade climate change legislation in 2009 or 2010; move forward with cap-and-trade regulation under the CAA, if Congress does not pass legislation; and move forward with Post-Kyoto negotiations. The result will be a carbon-constrained economy over the coming decades Companies should begin developing a climate change strategy to survive and seek competitive advantage in this new carbon-constrained economy 42
  • 43. WWW.TKLAW.COM Scott D. Deatherage Partner 1722 Routh Street Suite 1500 Dallas, Texas 75201 214-969-1206 Scott.Deatherage@tklaw.com Blog Sites: “The New Carbon Cycle” http://lawandenvironment.typepad.com/newcarboncycle/ and “Law and the Environment” http://lawandenvironment.typepad.com/ 43