Law and the Environment

Will EU Mandate Carbon Capture and Storage?

The European Union (EU) is reported in Reuters to be preparing to debate laws that would require all utilities to capture and store carbon dioxide (CO2) by 2025.  According to the article, Carbon Capture and Storage (CCS) would eliminate a third of global greenhouse emissions.  Such a step would take a substantial bite out of what scientists at the National Academy of Science, the American Association for the Advancement of Science, the Royal Society, and the International Panel on Climate Change assert is causing climate change, global warming, and will cause substantial to the Earth and future generations.  Whatever the science, the EU has established and is moving forward with more restrictive greenhouse gas emission limits and restrictions.  A future requirement for power plants to capture the CO2 they emit would reduce the emissions, but some parties question the technology to capture and store the gases and the impact of any potential leakage back into the atmosphere.

In CCS, the CO2 can be used to enhance oil and gas recovery.  CO2 has long been used for this purpose over many decades.  Much of this CO2 is from natural sources.  Already many small scale and a few larger scale CCS projects are in operation or under construction. 

Alliance Bernstein, a US investment firm, has conducted a study on climate change and investment opportunities and has found that CCS is a necessary step to address climate change.  Moreover, the firm has identified those industries that will likely prosper in this new CCS and carbon-constrained world, and those that will likely suffer in such a new world. Those entities that can invest in, develop, and profit from the construction of collection, pipelines, and injection facilities for CCS, will be highly profitable.

The potential for a European plan would certainly spur investment in research and construction to achieve this goal.  Oil company representatives believe the injection and storage of CO2 is a well-established technology, based on many decades of experience.  Others question whether the much larger scale of CCS will pose new challenges.

One of the challenges is the concern of liability if the CO2 leaks and returns to the surface, say into someones home.  In Texas, the Legislature seeking to gain selection for the FutureGen project that was to be in large part funded by the US government, passed a law providing liability protection for the project.  Some industry experts have called for a sort of "Price-Anderson Act" that protected or at least set a cap for nuclear power plants in the United States.

The initial proposal was to only require new power plants built after a certain date to install CCS.  It appears there is some talk about requiring all plants to retrofit by 2025.  The cost may be steep, depending on the approach used. One estimate was a $1.5 billion investment per plant, which may be hard to finance without government assistance.

Other technologies and approaches may in fact be able to achieve CCS for much less.  The area is still in initial development, and new ideas and innovative approaches may make CCS a reality.  To achieve the goals suggested by the IPCC, CCS would have to be required more globally, in the US, China, India, and perhaps other countries. 

At a recent climate change seminar in Austin, Texas, the Chairman of the Texas Railroad Commission spoke out in favor of taking steps to assist the oil and gas industry in finding ways to implement a system of installing a system to use capture CO2 in enhanced oil and gas recovery programs.  The Lieberman-Warner bill that will be debated in the US Senate in June of this year contains provisions for encouraging CCS.  Thus, whatever political argument exists over climate change, the concept of CCS to attempt to address this issue has some support on more than one side of the political spectrum.

In Australia, the State of Victoria, which has about a 500-year supply of coal, is considering investing $120 million Australian dollars in CCS.

If the EU passes a law with future deadlines for installing CCS, this industry will take off, and investment capital will follow--assuming the right incentives, and perhaps public financing, are used to spur this new approach to reducing greenhouse gas emissions.

Guest Column on EnergyLaw360

I recently published a guest column on EnergyLaw360 entitled Laws Set Stage for Carbon Trading Opportunities.  The article discusses the new federal greenhouse gas emissions reporting law that was enacted and how EPA must publish final rules by September 2009.  These rules will serve as the foundation for coming climate change legislation that will create a cap-and-trade system for regulating greenhouse gas emissions, and create significant opportunities in developing greenhouse gas emission reductions that can be monetized in the form of carbon credits.

Governor Vetoes Bill That Would Have Allowed Two Coal-Fired Power Plants in Kansas

In a rather stunning development, Governor Kathleen Sebelius vetoed a bill passed by the Kansas Legislature to allow two coal fired-power plants to receive their air emissions permits in a move to overturn the Kansas environmental agency to hold them back in response to the greenhouse gases they would emit. The veto in effect is a current ban on coal-fired power plants in Kansas. This development shines a spotlight on the need to develop a coherent and effective climate change and energy policy for the United States. Carbon capture and storage or sequestration will be a necessary part of those policies.

After vetoing the bill that would have allowed 11 million tons of greenhouse gases to be produced from two new coal-fired power plants, the governor signed Executive Order 08-03, which establishes the Kansas Energy and Environmental Policy Advisory Group.

"We know that greenhouse gases contribute to climate change,” Sebelius stated. “As an agricultural state, Kansas is particularly vulnerable. Therefore, reducing pollutants benefits our state not only in the short term – but also for generations of Kansans to come.”

Sebelius has named Jack Pelton, chairman, president and chief executive officer of Cessna Aircraft Company, to lead this group.

"I am so pleased that one of our most prominent business leaders has agreed to serve as chair,” Sebelius said. “Jack understands the balance between continuing to grow our economy and making sure that we protect our environment and maximize our natural assets for future generations. The Advisory Group will explore opportunities in all sectors of our economy to accomplish the goal of reducing our greenhouse gas emissions; and, at the same time, continue to take advantage of the economic prosperity provided by job growth throughout Kansas."

In her State of the State Address this past January, Sebelius discussed the need for Kansas to join 36 other states in developing a state plan to deal with climate change. The Energy and Environmental Advisory Group will develop recommendations to the governor involving opportunities to reduce greenhouse gas emissions, as well as a recommended timetable for implementation.  Other issues to be examined by this group include a study of the impact electrical production has on community economic development and the opportunities to diversify Kansas’ energy portfolio.

The process will be facilitated by the Center for Climate Strategies (CCS). Their work is supported by the Energy Foundation and the Sandler Family Supporting Foundation, which includes the Rockefeller Brothers Fund. CCS has developed climate action plans in: Arizona, New Mexico, Montana, Colorado, Washington, Minnesota, North Carolina, and Vermont. State plans are underway in South Carolina, Florida, Arkansas, Michigan, Maryland, and Alaska.

The veto decision places increasing pressure on state legislatures and the federal government to develop a coherent and national climate change and greenhouse gas management plan that incorporate an energy policy and strategy the US has lacked for decades.  It is clear that climate change policy and energy policy are inextricably intertwined, requiring policy decisions in the near future as Congress and the current President have failed to take on these issues.

One of the other key issues not discussed is the reality that coal-fired power plants must capture and store or sequester the carbon underground.  The capture phase presents some challenges but could be implemented with existing technologies.  Cost is the primary concern and utilities cannot justify the expense unless legislation requires the investment.  The transportation and storage or sequestration below ground is an old technology used to enhance oil and gas recovery.  Thus, to begin requiring new coal-fired power plants to capture the carbon dioxide from these plants and to inject it underground is a step that is critical to using a low cost source of energy in a manner that protects the environment.  By capturing the gases emitted from coal-fired power plants, other pollutants like sulfur dioxide and mercury would also removed from the emissions of the plants that would otherwise be released to the atmosphere.

This veto and effective prohibition of coal-fired power plants demonstrates it is clearly time for the sake of the utility industry and the public that we have a coherent energy and climate change policy for the United States. Hopefully, we will see consistent and dedicated work in Congress this year and leadership by a newly-elected president in 2009, whomever that party may be.

Climate Change Risk Highest Concern According to Survey of Insurance Industry Analysts

A recent survey conducted by Ernst & Young and Oxford Analytica shows that Climate Risk is the biggest concern among insurance industry analysts.  According to the Ernst & Young description, the research report sought the views of more than 70 analysts from around the world. They came from over 20 disciplines that shape the business environment, including: law, finance, the sciences, business strategy, geopolitics, regulation, medicine, economics, and demographics. They were drawn from 12 of the world’s most important sectors: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications, and utilities. Interviews were open ended and no predetermined list of risks was used. Each analyst was asked for his or her own evaluation of the most important strategic challenges facing global businesses.

The top ten risks are:

1.         Climate change: long-term, far-reaching and with significant impact on the industry.

2.         Demographic shifts in core markets: offers business opportunities but risk that other sectors will capitalize first.

3.         Catastrophic events: rising costs and serious impact on earnings for insurers.

4.         Emerging markets: risk and opportunity but competitive threat from new players.

5.         Regulatory intervention: increased scrutiny impacting on operations and practices.

6.         Channel distribution: technology is changing the way insurance is sold and purchased.

7.         Integration of technology with operations and strategy: an enabler to keep pace with competition but lack of integration is a threat at the strategic business level.

8.         Securities markets: changes in capital providers and the way capital is entering the insurance industry are causing major changes in the industry.

9.         Legal risk: significant and unexpected change in the legal environment, such as government legislation or evolving case law, will continue to have a critical impact on the insurance industry.

10.       Geopolitical or macroeconomic shocks: likely causes unknown but consequences potentially severe.

John McCain Traveling through Europe Discussing Greenhouse Gas Restrictions

Senator John McCain has been traveling in Europe, and has met with the current Prime Minister Gordon Brown of the United Kingdom and former Prime Minister Tony Blair.  Their talks were wide ranging, but included discussions of actions to address climate change and the use of a cap-and-rade system to achieve greenhouse gas reductions.  They also discussed a post-Kyoto treaty.

"I want to make clear again we will not have a global agreement that is effective unless India and China are part of it," McCain said.  "I am convinced that if we work at it, we will convince India and China that it is in their interests to be part of a global agreement to reduce greenhouse gas emissions.  I think that there will be sufficient international pressures and domestic pressures as well as the facts of the environmental challenges that will bring them into a global agreement."

Senator McCain also met with the European Union environment commissioner Stavros Dimas, who oversees Europe’s emissions trading scheme.

Pension Funds Reach Agreement with Dynegy to Disclose Climate Risks by the End of the Year

Two of the largest pension funds have forced Dynegy Inc., to agree to report on climate risk by the end of this year, and how the company will address this risk.  The California State Teachers' Retirement System and North Carolina Retirement Systems, both of which owned substantial shares in the company, filed a shareholder resolution with Dynegy in January to require the company to report on the feasibility of adopting specific greenhouse gas reduction goals for its existing and proposed power plants.

In exchange for an agreement by Dynegy to make the report, the two pension funds withdrew the resolution.  Dynegy is apparently developing a plan to disclose climate change information to its shareholders, which likely will include the company’s annual greenhouse gas emissions, as well as a plan for mitigating those emissions.  The mitigating steps may include purchase of greenhouse gas offsets or carbon credits.

At the same time, Dynegy is planning to construct coal-fired power plants in Arkansas, Georgia, Iowa, Michigan, Nevada and Texas. Two plants are under construction in Arkansas and Texas.

This development indicates a growing capability of institutional investors to force climate change disclosure from major companies.

Congress Includes Greenhouse Gas Reporting Requirement and Registry in Omnibus Spending Bill

On December 21,2007, Congress moved forward with the foundation of any future greenhouse gas regulatory system by including in the Omnibus Spending bill a requirement that EPA promulgate an economy-wide greenhouse gas reporting regulation and create a greenhouse gas registry.  President Bush has signed this spending bill, making this obligation law.  A proposed regulation is due nine months from December 2007, and a final regulation 18 months from December 2007.  The details of this system will be developed by EPA unless additional legislation is passed in the next nine months further defining the parameters of the reporting requirements and registry.  Absent such legislation, how EPA will handle this mandate under the current Administration is not clear, particularly with respect to which industries and sources will be required to submit reports, what de minimis level of emissions will be set, and what other exemptions will be provided.  In any event, it would appear that a greenhouse gas reporting requirement will go into effect in less than two years.

Lieberman-Warner Climate Security Act Bill Contains Climate Risk Disclosure Provision

As companies prepare for their SEC filings and issuance of annual reports the question of climate risk disclosure becomes an issue to consider. With the events and rapid developments in the courts, states, Congress, and in Bali, companies may find it of particular importance this year to review their environmental disclosures for potential additional statements about climate change and greenhouse gas regulation. Of course, this will depend on their business and the location of their facilities.

What is important to consider is the fact that three separate climate change bills filed in Congress call for the SEC to issue an interpretive release, including the Lieberman-Warner Climate Security Act, that was the first climate change bill voted out of the Environment and Public Works Committee.  This bill may be considered by the full Senate in 2008.

The text of the climate risk disclosure provision, similar to provisions in two other Senate climate change bills, is found in Section 9002 of the Climate Security Act, S. 2191, and is set forth below:

(a) Regulations- Not later than 2 years after the date of enactment of this Act, the Securities and Exchange Commission (referred to in this section as the `Commission') shall promulgate regulations in accordance with section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) directing each issuer of securities under that Act, to inform, based on the current expectations and projections and knowledge of facts of the issuer, securities investors of material risks relating to--

(1) the financial exposure of the issuer because of the net global warming pollution emissions of the issuer; and

(2) the potential economic impacts of global warming on the interests of the issuer.

(b) Uniform Format for Disclosure- In carrying out subsection (a), the Commission shall enter into an agreement with the Financial Accounting Standards Board, or another appropriate organization that establishes voluntary standards, to develop a uniform format for disclosing to securities investors information on the risks described in subsection (a).

(c) Interim Interpretive Release-

(1) IN GENERAL- Not later than 1 year after the date of enactment of this Act, the Commission shall issue an interpretive release clarifying that under items 101 and 303 of Regulation S-K of the Commission under part 229 of title 17, Code of Federal Regulations (as in effect on the date of enactment of this Act)--

(A) the commitments of the United States to reduce emissions of global warming pollution under the United Nations Framework Convention on Climate Change, done at New York on May 9, 1992, are considered to be a material effect; and

(B) global warming constitutes a known trend.

(2) PERIOD OF EFFECTIVENESS- The interpretive release issued under paragraph (1) shall remain in effect until the effective date of the final regulations promulgated under subsection (a).

This provision has not become law, but the SEC is currently reviewing a petition filed by various state pension funds and other socially conscious investors and environmental groups, asking for the SEC to issue an interpretive release to provide guidance for companies and to require climate risk disclosure.  Whether this provision becomes law or the SEC independently adopts an interpretive release, the demand for climate risk disclosure in Congress and a significant part of the institutional investment community suggests that corporations that may be impacted by future greenhouse gas emission regulation should evaluate their corporate strategy regarding climate risk disclosure.

California Federal District Court Dismisses Auto Industry Challenge of California Greenhouse Gas Emission Standards for Cars and Trucks

A federal District Court in California granted summary judgment to the State of California in a suit filed by the auto industry challenging California's power to pass legislation limiting greenhouse gas emissions from automobiles.  California submitted a request for a waiver under the federal Clean Air Act to enact their own emissions standards for automobiles, but the US Environmental Protection Agency (EPA) has yet to rule on the request.  The case follows the ruling in the US Supreme Court that EPA may regulate greenhouse gases under the federal Clean Air Act and the carbon dioxide is an “air pollutant” under the Act.

The auto industry argued that California was prevented from were barred from regulating greenhouse emissions by the federal Energy Policy and Conservation Act, and that regulations proposed by the California Air Resources Control Board are preempted by U.S. foreign policy.

The District Court granted summary judgment to California, holding that the state's law would not conflict with federal authority nor bar the state from regulating greenhouse gas emissions.  Further he concluded that if the EPA granted a waiver under the federal Clean Air Act to allow California’s proposed emissions standards, enforcement of such regulations would be consistent with the Clean Air Act.

The judge stated in his ruling, “Although regulations proposed by California ... must broadly advance EPA's primary purpose to protect public health and welfare and must be at least as stringent as the corresponding EPA regulations in the aggregate, the proposed, California regulations need not establish perfect compliance with all provisions of the Clean Air Act.” 

The two-year delay in EPA issued a waiver for California resulted in the recent filing of a lawsuit against EPA to attempt to force action.  Fourteen other states — including New York, Illinois and Massachusetts.  The waiver also would allow these states and other states to adopt the California greenhouse gas emissions standards for automobiles.  These standards would reduce emissions by 2009 from cars and light trunks by 25% and from sport utility vehicles by 18%. 

“Evidence presented to this court supports the conclusion that regulation of greenhouse gases emitted from motor vehicles has a place in the broader struggle to address global warming,” the opinion said. “Ultimately, the court concludes that plaintiffs have not met their burden to demonstrate that the regulation stands as an obstacle to the Energy Policy and Conservation Act’s objectives.”

Nine Midwestern States and the Province of Manitoba Enter into Greenhouse Gas Accord

Governors of nine midwestern states, along with the Canadian province of Manitoba today signed the Midwestern Regional Greenhouse Gas Reduction Accord to establish a regional multisector cap-and-trade program to reduce greenhouse gas emissions and to promote the use of renewable energy.  With the Western States Climate Initiative and the Regional Greenhouse Gas Initiative in the northeast, the action by the Midwestern states brings the number of states to 22 that have committed to reducing greenhouse gas emissions. 

The governors were Governor Jim Doyle of Wisconsin, Governor Tim Pawlenty of Minnesota, Governor Rod Blagojevich of Illinois, Governor Mitch Daniels of Indiana, Governor Chester J. Culver of Iowa, Governor Jennifer Granholm of Michigan, Governor Kathleen Sebelius of Kansas, Governor Ted Strickland of Ohio, Governor M. Michael Rounds of South Dakota.  The Premier of Manitoba, Gary Doer, also signed the agreement.

Some of the key aspects of the Accord are as follows:

·     Establish greenhouse gas reduction targets and timeframes consistent with MGA member states’ targets;

·     Develop a market-based and multi-sector cap-and-trade mechanism to help achieve those reduction targets;

·     Establish a system to enable tracking, management, and crediting for entities that reduce greenhouse gas emissions; and

·     Develop and implement additional steps as needed to achieve the reduction targets, such as a low-carbon fuel standards and regional incentives and funding mechanisms.

These Midwestern states now must set firm emissions reductions targets and timetables for reducing greenhouse gas emissions.

The governors are also calling for greater use of non-petroleum energy sources such as wind power and grain-based ethanol.    Under the agreement, 15 percent of all gasoline stations in the region would be selling ethanol mixes by 2015, and one-in-four by 2025. 

These states combined are the fifth largest emitter of greenhouse gas emissions behind the United States as a whole, Russia, China and India. 

This new accord puts even greater pressure on Congress, as almost half the states have already committed to restricting greenhouse gas emissions.