Law and the Environment

ERCOT Releases a Study on Price Effects from Cap and Trade

The Electric Reliability Council of Texas has issued a study of the potential impact on electricity prices in Texas if a cap-and-trade system were imposed through federal legislation.  The study assumes that a price for carbon (cost per ton of carbon dioxide emitted) from electric utilities would have to be between $40 to $60 in order to incentivize reductions in C02 emissions.  At that price, the impact to consumers was estimated to be about $27 per month if no change in electrical usage occurs.  (The equivalent of about 10 stops at Starbucks.)  The system-wide effect was estimated to be about $10 billion dollars.  ( A substantial sum of money, but perhaps small in comparison to the 2008 Texas "gross state product" of $1.245 trillion).  The question is to what extent energy efficiency steps could reduce this cost impact by reducing the amount of electricity used.  If one invested in compact florescent bulbs, there could be a net break even or savings over time to the average consumer.  For industry, adapting to higher electricity costs is not as simple.  Some industries may be able to find inexpensive means of reducing electrical usage, others may find that it is very difficult.  Thus, the impact will vary across industries.

The other question to keep in mind is that Congress may impose price caps or "safety valves" to keep the price of carbon from reaching $40 to $60, so this level of impact may never occur, at least over the next five to ten years. 

The conclusions of the study were as follows:

In the reference case, with $7/MMBtu natural gas prices, expected load levels and the existing and committed level of wind and other generation, the carbon allowance costs must rise to between $40 and $60 per ton in order to reduce carbon emissions from electric generation in ERCOT to 2005 levels by 2013. This  level of allowance costs would result in an annual increase in wholesale power  costs of approximately $10 billion and would increase a typical consumer’s  monthly bill by $27;   

At higher natural gas prices, brought about by increased demand for natural gas  due to carbon dioxide emission limitations or other reasons, allowances would rise  to a higher cost (well over $60/ton in the case of $10/MMBtu natural gas prices) in  order to achieve the desired reductions. At this higher gas price, the annual  increase in wholesale power costs to meet the 2005 level of emissions through  reductions by generators in the ERCOT region would be in the range of $20  billion;     

Increases in wholesale power costs due to carbon emissions limits may result in lower energy demand. These reductions in system energy use have the potential to allow the emission reduction targets to be met at a lower allowance cost. Total CO2 emissions are reduced below 2005 levels at a carbon allowance price between $40 and $60 per ton for expected load levels at $7/MMBtu natural gas, but fall below 2005 levels between $25 and $40 per ton if total energy use was reduced by 10%. This level of allowance costs would result in an annual increase in wholesale power costs of approximately $7 billion, a savings of $3 billion over the cost of meeting the 2005 levels of CO2 emissions in the reference case. At this allowance cost, a typical consumer’s monthly bill would increase by $17, a monthly savings of $10 over the reference case;     

The additional wind generation envisioned by the CREZ plan (up to a total of  18,456 MW) reduces carbon emissions by 17.6 million tons above the reduction  due to existing and committed wind generation even with no carbon emissions  limits imposed by climate-change legislation;     

The additional CREZ wind generation allows the targeted emissions reductions to be met at a lower allowance cost. At $7/MMBtu gas, the 2005 carbon emissions levels are met at an increase in annual wholesale power costs of approximately $7 billion, which is a $3 billion savings compared to the reference case. At this allowance cost, the increase in a typical consumer’s monthly bill would be $22;     

The combination of additional CREZ wind and lower energy usage results in  smaller increases due to CO2 emissions limits in both wholesale power costs and  the typical consumer’s monthly bill at a $7/MMBtu gas price, as compared to the  reference case;     

The combination of additional CREZ wind generation and 2% lower energy usage  does not offset the impact of an increase of natural gas prices from $7/MMBtu to $10/MMBtu on the level of allowance costs at which emissions reductions targets would be met.

EPA Issues Finding That Lays Foundation for Regulating Greenhouse Gas Emissions under the Federal Clean Air Act

In a long expected finding, the U.S. Environmental Protection Agency (EPA) issued a regulatory decision that lays the foundation for EPA to regulate greenhouse gas emissions under the federal Clean Air Act (CAA).  The decision announced on Friday, April 17, 2009 is entitled Proposed Endangerment Finding and Cause or Contribute Findings for Greenhouse Gases  and was published in the Federal Register.  This is a major step by the Obama Administration to attempt to force Congress to pass a climate change bill regulating greenhouse gases.  Time magazine may have said it best in an article entitle EPA's CO2 Finding: Putting a Gun to Congress's Head.  Whilee it was known that EPA was working on and would announce the finding, the actual announcement has gained enormous coverage in the media and serves as the Administration's opening salvo in its ultimate work to try to convince enough senators to vote for a bill to get beyond the 60 votes need to bypass a filibuster.

The EPA regulatory decision follows a U.S. Supreme Court decision two years ago that concluded the EPA under the Bush Administration had failed to articulate why greenhouse gases should not be regulated as emissions from automobiles.  In so doing, the Court indicated that greenhouse gases were pollutants under the Clean Air Act.  Now that EPA is going to issue a final regulatory decision after 60 days of public comment and several public hearings, it is clear that EPA can, and will, take action absent Congressional action.

Regulation under the Clean Air Act is messy and may not include a cap and trade program, but simple command and control in the form of emission reductions without the ability to trade for other facility allowances or domestic or international offsets.  This would not be good for industry.

Certain industry groups have already begun to work to promote their version of a cap and trade program.  The group USCAP, which stands for United States Climate Action Partnership, has issued a document entitled A Blueprint for Legislative Action, providing a general outline of a climate change program based on cap and trade.

The one question that will likely play out is how the world will look if Congress does not pass a bill or passes late next year or even later.  Permits for coal=fired power plants and other greenhouse gas-emitting facilities are already being challenged, and environmental groups and other plaintiffs are challenging the permits in court as not meeting CAA requirements to address all pollutants including greenhouse gases.  If EPA issues a final decision that greenhouse gases are an air pollutant, do these cases then have a much greater change of success?  Will EPA and the states be required to address greenhouse gas emissions in federal Title V permits?  These are the types of questions that will come to the fore relatively quickly.

What about cement kilns, lime plants, refineries, natural gas processing plants, manufacturing plants, will they be challenged as well?  Coal-fired power plants may not be the only plants whose permits are challenged.

One need not look beyond the administrative case of In re Deseret Power Cooperative.  This was a case in which the permit for a power plant in Utah that was challenged because the plant permit did not address CO2 emissions under the Prevention of Significant Deterioration program under the CAA. the challengers argued the plant should implement the Best Available Control Technology or "BACT" to achieve greenhouse gas, largely CO2 emissions. 

The EPA Appeals Board remanded the issue back to the EPA, then under the Bush Administration, not to require such technology or reductions as the Appeals Board concluded that the decision was not supported by the administrative record.  The Appeals Board called on EPA to address the issue of CO2 and other greenhouse gases being pollutants governed by the CAA.

Other cases have been brought against various sources and several petitions have been filed with the EPA to regulate mobile sources and stationary sources.

With the finding by EPA, all such permits, petitions, and proceedings could be affected.  Could this be a snowball effect with EPA and states finding themselves forced to regulate greenhouse gas emissions before Congress makes any final decisions whether to regulate greenhouse gas emissions?  The next year promises to be a challenging time for industry as they face a great deal of uncertainty as to how greenhouse gases will be regulated and how individual facilities and companies will be affected.  It appears more likely that some form of greenhouse gas regulation will be required.  For those companies that may be affected, it is time to develop a corporate strategy to address the risks and any opportunities that greenhouse gas regulation may bring.

Texas Warming Up to Carbon Capture and Storage

Although Texas is probably at the polar opposite from California in recognizing and passing state legislation to address climate change, the State is very much behind promoting carbon capture and storage (or sequestration) (CCS).  Texas stands to gain as much as any state if carbon capture and storage becomes a real industry. 

 

Carbon dioxide (CO2) can be used to enhance oil recovery from depleted oil fields and to extract methane from deep coal seems.  Texas has plenty of both.

 

It is not surprise then that the Texas legislature is considering a number of bills addressing CCS.  Last Wednesday, both the House Environmental Regulation Committee and the House Energy Regulation Committee heard testimony on four such bills (HB 469 and HB 2811 in Energy Resources; HB 1796 and HB 2669 in Enviro. Reg.).

 

The testimony regarding the CCS bills was very positive from both the regulated community and from environmental groups.  The federal government is looking to Texas to lead the way in this area because of our highly-developed oil and gas laws and vast underground storage capacity.  Entrepreneurs and local government leaders testified about the economic potential for CCS, while environmentalists and the EPA testified about the benefits to the environment that CCS would have.  It is amazing in the State of Texas that industry and environmentalists can agree on anything.  They usually do not.

 

Hearings on four CCS bills have been conducted so far.  None of these bills have been voted out of  committee.   Descriptions of these bills are provided below:

 

HB 469 - This bill provides state tax incentives for coal-fired electric generating companies that sequester CO2, and for oil companies that use CO2 from coal-fired electric generating companies for enhanced oil recovery projects.

 

HB 1796 - This bill authorizes the TCEQ to adopt rules regarding the location, construction, maintenance, monitoring, and operation of offshore deep subsurface geologic repositories for the storage of carbon dioxide, and for a pilot study of state-owned offshore land to identify potential locations for a carbon dioxide repository. 

 

HB 2669 - This bill divides jurisdiction for CCS between the Texas Commission on Environmental Quality (TCEQ) and the Railroad Commission (RRC).  The TCEQ would have primary jurisdiction with the RRC having jurisdiction under some limited areas.

 

HB 2811 - This bill provides the authority for the allocation of matching state funds for projects involving certain electric generating plants that sequester CO2.  The bill also authorizes a grant and loan program to accelerate the commercialization of technologies for the control of air contaminant emissions by electrical power generating facilities, including the capture, transport, and storage of carbon dioxide.

 

The Texas Railroad Commissioner, the agency that regulates the oil and gas industry in Texas, has been very outspoken about the opportunities for CCS in Texas and he is promoting the business.  Stay tuned as Texas may be adding significant incentives for the CCS business in this legislative sessions.

 

 

TCEQ Remediation Division Announces Assignments in All Sections

The Texas Commission on Environmental Quality (TCEQ) Remediation Division has issued its assignments of all those staff members to one of the new sections recently established by Section headBrent Wade.  The team leaders and each person assigned to that leaders group have been announced.  We were looking for people with long-held experience to be in charge of and assigned to the group that will work on the Texas Voluntary Cleanup Program, the Texas Innocent Owner/Operator, and the Municipal Settings Designation Program.  However, this was not the decision. 

We are hoping to have the opportunity to work with the team leaders and team members to help them understand the needs of the real estate and banking industries that are involved in redeveloping contaminated properties.  It is critical in these tough economic times and during the freeze in lending to be sure that the Brownfield programs understand and provide their vital role in the Brownfield redevelopment process.

We hope to develop close working relationships with these staff members as the process evolves over the next year.

If you would like a copy of the assignments, please do not hesitate to contact me.

EPA Sends Endangerment Finding Regarding Greenhouse Gas Emissions to White House

The US Environmental Protection Agency has forwarded an "endangerment finding" under the Clean Air Act that would lay the foundation for EPA greenhouse gas emission regulations under the Act.  Under the Massachusetts v. EPA case in which the US Supreme Court remanded an EPA decision under the Bush Administration to not regulate greenhouse gas emissions from automobiles, EPA may use the endangerment finding, that greenhouse gas emissions as a pollutant are a risk to human health and welfare, to move forward with restrictions on greenhouse gas emissions if Congress does not pass greenhouse gas legislation this year or early next year.

This is a second major step in only a short time.  Recently, EPA issued a proposed regulation that would require many industries and businesses to monitor and report their greenhouse gas emissions (GHG Reporting Rule).  In the preamble to the GHG Reporting Rule, EPA states that one purpose for the rule is to gather information for future regulatory and policy decision making. 

Taken together these two steps reveal a move forward by EPA to develop the basis for a greenhouse gas regulatory system.  The Obama Administration has not slowed at all with climate change actions and rhetoric, despite what many thought would be a slowdown on climate change as a result of the economic situation in the country.

Texas Commission on Environmental Quality Announces New Managers in Remediation Division

The Texas Commission on Environmental Quality (TCEQ) has named the new managers of the five sections of the remediation division of the agency.  A few years ago, the TCEQ "reorganized" such that people in the remediation division worked on all types of projects Superfund, Petroleum Storage Tank, Voluntary Cleanup, and Corrective Action.  One of the complaints voiced by the regulated community was that the parties that knew an area well were struggling in the other areas.  In particular, I led a group of ten or more environmental attorneys and consultants to meet with the TCEQ last fall, and discuss our concerns that one of the leading Voluntary Cleanup Programs in the country was becoming less effective as a result of the reorganization. 

We thought that the parties who were working on the VCP matters were not in tune with the purpose of the program and did not understand fully the VCP Program, the Innocent Owner/Operator Program (IOP), and the Municipal Setting Designation Program. 

Fortunately, Brent Wade took over the remediation division and determined to put the programs back in specialized groups.  He recently announced the managers of those programs as follows:

PST/Dry Cleaners - Bill Shafford

 

Superfund/SSDAP - Bob Patton

 

QA/Technical Support - Pat Fontenot

 

VCP/CAS - Ashley Forbes

 

Financial Monitoring/Contract Support - Chris Drewy

 

These changes will take effect April 1.  The remediation division is working toward hiring the people who will make up the staff of each section now.

 

This is a very positive step for the TCEQ and those individuals and firms that work with the remediation division.  In addition, we believe that it will help to maintain a top voluntary cleanup program in Texas.  This will help the real estate industry in Texas that has been hit by the financial crisis as VCP and IOP applications had numerous delays and unnecessary requests from those staff who were working hard, but simply did not fully understand or appreciate the Brownfield programs.

THE BAILOUT BILL AND STIMULUS BILL: OPPORTUNITIES FOR RENEWABLE ENERGY, ENERGY EFFICIENCY, CARBON CAPTURE AND STORAGE, AND ALTERNATIVE TRANSPORTATION FUELS

The American Recovery and Reinvestment Act of 2009, otherwise known as the “Stimulus Bill”, which President Obama signed into law on February 17, 2009, made significant changes in prior tax incentives for renewable energy, energy efficiency, and carbon capture and storage.  Understanding these changes may provide opportunities for those companies that are engaged in these business areas, and provide significant assistance to municipalities that are looking for opportunities to address these issues.  The Stimulus Bill should not be discussed alone, but should also be discussed in the context of the Emergency Economic Stabilization Act of 2008 (the “Bailout Bill”), that served as the vehicle for the economic rescue legislation  signed into law on  October 3, 2008 by President Bush.  The legislation is organized into three (3) separate divisions, but the one that we will explore in this Alert along with the Stimulus Bill, is Division B, entitled the Energy Improvement and Extension Act of 2008.  The Stimulus Bill and the Bailout Bill together have created significant incentives for renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels.

Many of these projects will reduce greenhouse gas emissions, and may qualify for carbon credits through voluntary carbon credit programs or current or future state and federal climate change legislation. Combining both the incentives and carbon credit revenue may allow projects that would not otherwise be financially feasible to become economically sound or increase the rate of return on projects to make them attractive to project developers and investors.

The Bailout Bill – tax incentives and extensions for tax credits

The Bailout Bill provided significant tax incentives and extensions for tax credits for the following projects:  (i) renewable energy, (2) energy efficient and conservation, (3) carbon capture and storage, and (4) transportation and domestic fuel.  Below are examples of tax incentives and credits related to the foregoing projects:

Renewal Energy

·                     Extends through 2009 (placed in service before January 1, 2010) the tax credit for producing electricity from wind.

·                     Extends through 2010 (placed in service before January 1, 2011) such tax credit for other facilities, including closed and open-loop biomass, solar energy, small irrigation power, landfill gas, trash combustion, and hydropower. Modifies rules for and definitions of refined coal, trash and biomass facilities, and hydropower production.

·                     Includes marine and hydrokinetic renewable energy as a renewable resource for purposes of the tax credit for producing electricity from renewable resources.

 

Energy Efficiency and Conservation

 

·               Allows a new tax credit for investment in qualified energy conservation bonds for capital expenditures to reduce energy consumption in public buildings, implement green community programs, develop alternative and renewable energy sources, and promote mass commuting facilities.

·               Extends through 2009 the tax credit for non-business energy property expenditures. Includes energy-efficient biomass fuel stoves as property eligible for such tax credit. Modifies tax credit standards for water heaters, geothermal heat pumps, and energy efficiency improvements.

·               Extends through 2013 the tax deduction for energy efficient commercial buildings.

·               Extends through 2009 the tax credit for residential energy efficiency improvements.

Carbon Capture and Storage

·                     Allows a 30% investment tax credit rate for advanced coal-based generation technology projects and increases the maximum credit amounts allocable for such projects to $2.55 billion.

·                     Increases to 30% the investment tax credit rate for coal gasification projects and the aggregate credit amount for such projects.

·                     Sets forth special rules for refund claims of the coal excise tax by certain coal producers and exporters.

Transportation and Domestic Fuel

·                     Increases and extends through 2009 income and excise tax credits for biodiesel and renewable diesel used as fuel.

·                     Extends through 2009 the excise tax credit for alternative fuel and fuel mixtures. Requires such fuels to include compressed or liquefied biomass gas and to meet certain carbon capture requirements.

·                     Allows a new tax credit for new qualified plug-in electric drive motor vehicles. Limits the amount of such credit based upon the gross vehicle weight rating of such vehicles. Terminates such credit after 2014.

·                     Extends through 2010 the tax credit for alternative fuel vehicle refueling property expenditures. Includes electricity as a clean burning fuel for purposes of such credit.

·                     Provides for the treatment of certain income and gains from alcohol, biodiesel, and alternative fuels and mixtures as qualifying income for publicly traded partnerships.

·                     Extends through 2013 the taxpayer election to expense costs of certain refinery property.

The Stimulus Bill  - tax credits, grants and other incentives

The Stimulus Bill contains more than $42 billion in energy-related investments from tax credits.  More specifically, the Stimulus Bill extended renewable production tax credits for (1) wind projects through  December 31, 2012 and (2) closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities through December 31, 2013.

The Stimulus Bill also authorized various grants and other incentives related to renewable energy, energy conservation and energy efficient projects.  Below are examples of the grants and other incentives authorized by the Stimulus Bill.

·                     Authorizes $1.6 billion in clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities, and trash combustion projects.

·                     Authorizes $2.4 billion in qualified energy conservation bonds to finance state, local, and tribal government programs designed to reduce greenhouse gas emission and other qualified conservation activities.

·                     Increases alternative refueling property credit for businesses to a 50 percent credit and increases the cap for these credits to $50,000, for hydrogen to $200,000, for 2009 and 2010.  Increases the credit for individuals to 50 percent and the cap to $2000 for 2009 and 2010.

·                     Authorizes $3.1 billion for states to promote energy conservation and to reduce the rate of energy demand

·                     Authorizes $2 billion for manufactures of advanced vehicle batteries and components

·                     Authorizes $5 billion for installation of energy efficiency improvements in the homes of low-income families in order to reduce the energy bills of these families

·                     $2.5 billion for applied research, development, demonstration, and deployment activities, such as $800 million for biomass projects, $400 million for geothermal projects, $50 million for research to increase the energy efficiency of information and communications technology.

·                     $400 million for electrification of transportation.

·                     $300 million to create an alternative fuel vehicle pilot grant program.

·                     $300 million for the energy efficient appliance rebate program and the Energy Star Program

The Bailout Bill and Stimulus Bill provide significant opportunities for parties engaged in projects in renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels.  Coupled with the potential for carbon credit revenue, many projects in these areas may become increasingly attractive.

EPA Reported to Have Sent Greenhouse Gas Reporting Rule to White House

The U.S. Environmental Protection Agency (EPA) has reportedly sent a draft rule to the White House for review that would require emitters of greenhouse gases to report their emissions to the EPA.  In December of 2007, Democratic Senators added a provision to the Omnibus Spending bill that requires  EPA to issue a draft rule for greenhouse gas reporting and to establish a greenhouse gas emission registry in 2008.    A draft rule was reported to have been sent to the Bush White House for review last year.  The Bush Administration decided to put off the proposal of a draft rule, and to leave that work to the next administration.

In the last couple of days, the EPA has apparently sent a draft rule to the Obama White House for consideration.  The rule would likely be an economy-wide reporting system that would establish time tables for industry and other significant greenhouse gas emitters to measure and report their emissions to the EPA.  The EPA, in turn would then likely make the emissions levels available on the Internet, much like other emissions and discharges under environmental statutes.  This could require not only a significant amount of work for industry to attempt to measure or at least estimate their greenhouse gas emissions, but it would make their emissions publicly available.

The Omnibus Spending bill required EPA to issue the final rule for the greenhouse gas and reporting system this year.  This step would lay the ground work for any cap-and-trade system that may be established by Congress, or one established by the Obama Administration under the Clean Air Act.