The New Carbon Cycle

Reported Post-2012/Post-Kyoto Carbon Credit Sale at Reduced Price

PointCarbon reported a deal between Norsk Hydro and Statkrafte Energy and carbon fund C-Quest Capital.  Finding buyers for post-2012/Post-Kyoto carbon credits has been a challenge.  PointCarbon reported that carbon brokers said that such deal would likely reflect aprice of 6-9 euros per ton CO2e.    The current price for CERs under the Clean Development Mechanism would be about 14 euros.  The discount for post-Kyoto credits would thus be 5-8 euros--a significant reduction reflecting the uncertainty of the negotiations at Copenhagen and at UNFCC meetings thereafter.  If a treaty is not finalized until next December, these low prices may continue until then.

EPA Issues Final Greenhouse Gas Monitoring and Reporting Rule

On September 22, 2009, the United States Environmental Protection Agency (EPA)  issued its final greenhouse gas monitoring and reporting rule that will require as many as 10,000 facilities in the United States to measure their greenhouse gases (GHGs) and start reporting them in early 2011 (GHG Reporting Rule).  Some industry groups had asked EPAfor a delay until 2011 to start monitoring and 2012 to start reporting their GHG emissions.  EPA chose not to provide such a delay and regulated facilities only have three and a half months to prepare for the monitoring that they must begin January 1, 2010.  This may be particularly challenging for those companies that must install or modify continuous emission monitors.

 

Following a Congressional amendment to the Omnibus Spending Bill in December of 2007 that required the EPA to issue a proposed rule by September of last year and a final rule by June of this year, the EPA under the Obama Administration has now moved forward with an initial step in establishing a GHG regulatory system.

 

In the GHG Reporting Rule, EPA has adopted a substantial program of GHG monitoring and reporting with a publicly available registry.  The program is “economy wide” and covers 85-90 percent of GHG emissions in the United States.

 

The EPA is in part implementing the GHG Reporting Rule to gather information for future regulatory and policy decisions. Thus, many of those sources that would be required to report under the GHG Reporting Rule may also be those that would be regulated under a federal GHG cap and trade system being discussed by Congress and the Obama Administration.

 

While the rule does not impose any reduction obligations, as prior reporting rules, such as the Toxic Release Reporting of SARA Title III, have shown, companies reporting emissions “manage what they measure.”  In other words, once companies must publicly report their emissions, they start to invest in ways to reduce those emissions.

 

I.     WHEN MUST YOU START MONITORING?

 

As stated above the monitoring must begin on January 1, 2010.

 

II. WHEN MUST YOU START REPORTING TO EPA?

 

The first report will have to be submitted to EPA by March 31, 2011, and then for subsequent years thereafter.

 

III.    WHAT GASES ARE COVERED?

 

The EPA has identified the traditional GHGs for reporting: carbon dioxide (CO2), methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, chlorofluorocarbons, perfluorocarbons, and certain other fluorinated gases. For purposes of comparing emissions of the various gases using a single unit, the gases are converted into the equivalent GHG impact of CO2. The conversion is based on the principle that the other gases have a greater impact in terms of causing the greenhouse effect and thereby global warming. As an example, one metric ton of methane emissions would be reported in terms of the carbon dioxide equivalent (CO2e) of 21 metric tons. This is critical in understanding the threshold levels for application of the reporting requirements, as the non-CO2 GHG emissions may need to be converted to CO2e before determining whether the GHG reporting obligations apply to a particular facility.

 

IV.   WHAT FACILITIES ARE COVERED?

 

Four categories of facilities are required to measure and report their GHG emissions. In addition, vehicle manufacturers would be required to report the GHG emissions of their vehicles. We will focus on facility-based emitters in this Article.

 

1. Source Categories

 

The first category of facilities required to report under the GHG Reporting Rule are facilities that fall under a list of source categories identified by the EPA. These sources include, among others,

 

• coal-fired electric generating plants subject to the Acid Rain program,
• aluminum,
• ammonia,
• cement,
• electronics,
• lime,
• petrochemical,
• petroleum refining,
• certain underground coal mines, and
• municipal landfills.

 

2. Other Facilities That Emit 25,000 Tons Per Year or More of CO2e of Combined Emissions From Listed Source Categories

 

The second category of sources required to report are facilities that emit 25,000 or more metric tons of CO2e per year of combined emissions from stationary fuel combustion units, miscellaneous uses of carbonate, and all source categories that are listed and located at the facility in any calendar year.

 

These sources include, among others,

 

• electricity generation,
• electronics,
• ethanol production,
• food processing,
• glass production,
• iron and steel production,
• ferrous alloy production,
• oil and natural gas systems,
• pulp and paper,
• industrial landfills, and
• wastewater treatment.

 

3. Facilities That Do Not Meet the First Two Source Categories, but That Emit 25,000 Metric Tons of CO2e Per Year From Stationary Fuel Combustion Sources

 

The third source of facilities required to report are those that meet all of the following conditions:

 

(1) the facility does not contain any source category designated for the first two groups of categories;

(2) the aggregate maximum rated heat input capacity of stationary fuel combustion units at the facility is 30 mmBtu/hr or greater; and

(3) the facility emits 25,000 metric tons of CO2e per year or more from all stationary fuel combustion sources.

 

4. Entities That Sell, Import, or Export Fossil Fuels, Industrial GHGs, and CO2

 

The final category of entities required to submit GHG emission reports under the proposed GHG Reporting Rule are suppliers of coal, coal-based liquid fuels, petroleum products, natural gas and natural gas liquids, producers of industrial GHGs as listed in the Rule, importers and exporters of industrial GHGs and CO2, and importers and exporters of industrial GHGs and CO2 exceeding 25,000 metric tons of CO2e per year.

 

V. WHAT MONITORING AND MEASUREMENT APPROACH MUST BE USED?

 

The EPA reviewed several monitoring or measurement options in developing the GHG Reporting Rule. The EPA selected the option of combined direct emission measurement and facility-specific calculations. Facilities that already have continuous emission monitoring (CEM) devices are generally required to add a GHG measurement capability. Those that do not have CEM devices would have the choice to install them or to use facility-specific calculation methods.

 

VI.   WHAT CERTIFICATION AND VERIFICATION IS REQUIRED?

 

The EPA reviewed several options regarding certification and verification of the GHG emissions reported to the EPA. The agency decided to require certification by a designated representative of the facility submitting the report and to have the EPA verify the emissions report. No third-party verification is currently proposed.

 

VII.     WILL THE INFORMATION REPORTED TO EPA BE AVAILABLE TO THE PUBLIC?

 

The information provided by the regulated facilities will be made available to the general public by a website developed by EPA.

 

VIII. WHAT CORPORATE FINANCIAL DISCLOSURE AND CORPORATE STRATEGIES SHOULD BE DEVELOPED AS A RESULT OF THIS NEW REGULATION?

 

The GHG Reporting Rule is one of the significant steps made by the Obama Administration into climate change regulation and extends GHG measurement and reporting to a large part of the economy. As companies continue to review and develop their strategies for evaluating the potential risks and opportunities that a GHG regulatory system and potential cap and trade system will present, the GHG Reporting Rule is the one of the first salvos in what will be a concerted effort by Congress and the President to impose a GHG regulatory system in the United States.  Since establishing a company’s “carbon footprint” is now mandatory, understanding the implications of the reporting and public disclosure of the amount of greenhouse gas emissions raises several issues.

 

With this rule and potential future legislation that may be passed as early as this year or early next year, many publicly traded companies should also consider their disclosures in their filings with the Securities and Exchange Commission to determine if any further description of the risks or opportunities presented by climate change legislation should be discussed in their public filings.

 

Companies that may be regulated by any future climate change legislation, whether state, federal, or both, should develop a climate change strategy. Such strategies should include an evaluation of the number of GHG or carbon allowances that may be required to comply with climate legislation. One allowance would be required for every ton of emissions of CO2e equivalent. In addition, those companies selling or importing fossil fuels may be required to obtain allowances for every ton of CO2e equivalent of fuel sold. In engaging in this planning, companies should consider the extent to which low cost offsets purchased today could reduce the ultimate liabilities of the company in the future.

 

Many utilities, oil and gas companies, and other potentially regulated companies are already investing in carbon offset projects or purchasing credits now. In what could be one of the most significant environmental regulatory programs in the history of the United States, planning today could pay off with significant savings or dividends in the future. For many companies, climate change impacts should be a key strategic issue for the board and management.

Should Trees Be Industry's Best Friends in a New Climate Change Regime?

The suggestion that trees should be industry's best friends under a new climate change or cap and trade program being considered by Congress, seems absurd at first.  Forests do not initially appear to most people to be a source of the problem when it comes to anthropogenic greenhouse gas emissions.  We generally think of planting trees as a local, individualized step to attempt to remove emissions from the atmosphere.  Often we think of tree planting as a symbolic rather than a substantive or significant action to reduce climate change.  Forests, however, are in fact a significant storing house for carbon and when burned, release a large amount of carbon dioxide and other greenhouse gases into the atmosphere. 

Forests provide the low-cost approach for the first tranche in anthropogenic greenhouse gas reductions as we seek the "low hanging fruit" of these reductions.  Forest preservation and regrowth provide the potential for the larger-volume and lower-cost source of greenhouse gas reductions and offsets for greenhouse gas emissions.  As carbon capture and storage by which CO2 from coal-fired power plants and other sources is injected underground for long-term storage takes several years to bring on line, Reduced Emission from Deforestation and Degradation (REDD) can serve to make a significant step toward emissions to be achieved by 2020 being discussed in Congress for a US climate change and cap and trade program, and in terms of international negotiations for a tray to follow the Kyoto Protocol.

The size of the emissions from forest destruction usually is startling.  It is in gross and relative terms rather astounding.  The destruction of forests actually accounts for somewhere between 17 and 22 percent of human greenhouse gas emissions.    Thus, controlling the greenhouse gas emissions from deforestation is critical to any global plan to reduce climate change, particularly in the first few years as costlier reductions can be developed over the next decade, and perhaps ways to reduce those costs.

A second aspect of deforestation relates to the areas that have already been lost or significantly degraded.  For example, farmland that was previously what we call “primary forest” or forest that existed in its natural state prior to being deforested or degraded.   In these areas, opportunities exist for reforesting the land through tree planting.  Two types of reforestation are possible.  First, the forest can be replanted with native species that would have been present prior to the destruction of the forests.  The second involves the planting of non-native species or otherwise planting for the purpose of harvesting some or all of the trees.  The second approach has the goal of using trees to absorb or sequester CO2 , and then using the harvested wood in ways that maintain the carbon in building or other products for a long time.

In understanding the challenges of private development of forest carbon projects, it is important to comprehend the issues of these projects.  First let us consider avoided deforestation projects.  One of the first issues is simply measuring the amount of carbon in the forests that would be released if destroyed.  There are certain protocols that can be used now developed by the Voluntary Carbon Standard (VCS), which has become the main standard setting organization for forest-related offset projects. 

Another issue is the question of permanence.  For growing forests a significant risk is permanence, that is, to what extent will the forest will be preserved over a very long period, as opposed to short term preservation with destruction to follow.  If the forest is logged or it burns or dies from disease, then the carbon sequestered in the trees, plant life, and soil, will be largely emitted to the atmosphere and future sequestration of carbon dioxide will not occur.  The carbon credits that are generated would be without substance if after five years the forest is destroyed.  Forestry projects are largely long-term projects, lasting 20 to 100 years in most cases.  Parties must show the registration entity and the verifiers that review the Project Design Document that the forest will not be cut down, burned, or harvested within the relevant project period.  One approach used by the VCS to address permanence concerns is to hold back a percentage of the verified credits and to release them back over time, say the 30-year life of the project, to the project developer.

One of the other major concern for forest projects is leakage.  For forest projects, leakage involves the question of whether the reduction in deforestation or degradation in one are simply moves that activity to a nearby property or a significant distance away.  As an illustration, burning forests for soy bean farming, which is such a significant problem in Brazil, moves from one part of a state in a country where actions have been taken to stop such burning to another area in that state or to an altogether different state.  Measuring and addressing these issues is required by the VCS.

Though the real game right now for REDD and reforestation projects lies with the VCS and voluntary carbon credits, it appears fairly clear that forest carbon projects will play a role and be large part of future US federal legislation and already has been accepted as an offset mechanisms in the California climate change regulatory system and will likely be part of the three multi-state climate change regulatory programs that are evolving and will go into effect even if Congress does not act to pass climate change legislation.  The discussions at the international level appear to be moving toward accepting forest-based offset credits.

The greenhouse gas emissions from forest destruction are so massive, that we cannot avoid taking on the need to reduce this destruction dramatically.  More and more major greenhouse gas emitters in the United States are beginning to review this opportunity and to look at investing in project-based REDD opportunities.  The thinking is that investment in a project or entering into emission reduction purchase agreements that allow a company to have a right to purchase REDD credits once approved and verified, provides a good hedging mechanism for future offset prices.  More and more of our clients are looking at both domestic and international forest carbon projects either as project developers or as investors to ensure that they take advantage of the opportunities that forest carbon projects provide.  Ironically, utilities and oil and gas companies may find that trees are truly their best friends when it comes to addressing the first few years of a cap and trade system in the United States.

Hart Energy's 2008 Energy Solutions Conference to Be Held in Houston, Texas

Texas - Thompson & Knight Partner Scott Deatherage will be a featured speaker at Hart Energy's 2008 Energy Solutions conference being held November 6th through 7th in Houston, Texas. Deatherage will discuss "The Future of Carbon Trading and Its Benefit to the Sustainable Industry" on November 6th.

The 2008 Energy Solutions conference will feature other timely discussions on the developments and challenges facing the global energy industry, including solutions being developed by refiners, automakers, fuel producers, governments, and capital markets to balance the supply and demand situation with sustainability requirements. The conference will also include the Global Energy & Environmental Excellence Awards Dinner, which recognizes and celebrates the remarkable progress the global energy industry, engine manufacturers, technology suppliers, and governments are making toward the sustainability of natural resources. For more information on the 2008 Energy Solutions conference, please visit the Hart Energy Conference website.

EU to Consider Forest-Based Carbon Credits in October

The European Union is poised to consider forest-based carbon credits or emission offsets.  The European Parliament’s Environment Committee’s review of the EU Emissions Trading Scheme (ETS) is scheduled to discuss the inclusion of forest-related credits on October 7, 2008.

Several Non-Governmental Organizations (NGOs) are lobbying for inclusion of forest-based credits in the greenhouse gas control schemes.  The Rainforest Alliance and the Climate, Community,  and Biodiversity Alliance provide verification and validation of forest-based carbon credits.

The United Nations is evaluating including avoided deforestation in the Clean Devlopment Mechanism under the Kyoto Protocol.  In the United States, several developing state programs would include forests and agriculture as land-based emission offsets.  The Lieberman-Warner bill that was ultimately filibustered in the Senate, included provisions allowing forest-based offset credits. 

If the EU would accept these credits and the UN would approve methologies for obtaining Certified Emission Reductions under the Kyoto Protocol, this would be a major supporting step.  Now, voluntary emissions reductions (VERs) can be obtained by, for example, seeking credits under the Voluntary Carbon Standard (VCS).

Carbon credits for avoided deforestation present a means, along with other actions, to help reduce the destruction of our remaining rainforests. 

Thompson & Knight Attorney Publishes Article on Climate Risk Disclosure

Texas- "Earlier this month, Xcel Energy entered into a settlement with the state of New York as a result of an investigation of several publicly traded utility companies with coal-fired power plants," according to Thompson & Knight Environmental Partner Scott D. Deatherage. His article "Climate Risk Disclosure: Xcel Raises Questions" was published in the September 17, 2008 editions of Energy Law360 and Environmental Law360.

According to the article, "the attorney general's office alleged that Xcel and four other named utilities - AES Corporation, Dominion Resources, Dynegy, and Peabody Energy - had failed to properly disclose climate risk in the companies' public filings." Deatherage says the settlement raises important questions, including "to what extent should publicly traded utilities that operate coal-fired power plants consider the Xcel settlement as appropriate precedent for future disclosure in SEC filings?" and "to what extent does the settlement reflect further pressure or liability on operators of existing or proposed coal-fired power plants?" He concludes, "the combined actions of environmental groups, certain state governments, and public pension and other public funds to influence the behavior of corporate America, and ultimately the legal and legislative process, may prove to be one of the broadest and most effective such campaigns ever witnessed."

Lehman Carbon Trading Desk Reportedly Shut Down after Firm Seeks Bankruptcy Protection

Lehman Brothers carbon credit business may be the first to fall as a result of the financial crisis.  Reuters reports that the bank shut down its carbon business as a result of the bank's decision to seek bankruptcy protection.  Lehman had reportedley invested in several projects that were largely located in China.  The number of carbon credits was estimated at 10 to 12 million Certified Emission Reduction Credits (CERs) under the Kyoto Protocol and worth an estimated $385.4 million.

Xcel Energy Settlement with New York Attorney General Requires Greater Climate Risk Disclosure

Xcel Energy entered into a settlement with Andrew Cuomo, the Attorney General of New York, as a result of an investigation of several publicly traded utility companies that the Attorney General's office alleged failed to properly disclosure climate risk in the companies' public filings.  The other utility companies that are being investigated are AES Corporation, Dominion Resources, Dynegy, and Peabody Energy.  In the settlement, Xcel Energy agreed to a variety of additional disclosures relating to climate risk.

The agreement requires that Xcel provide detailed disclosure of climate change and associated risks in its “Form 10-K” filings, the annual report required under securities laws and regulations issued by the Securities and Exchange Commission (SEC) to provide financial performance information to investors. 

The climate risk disclosure agreed to by Xcel includes analysis of the impact of the following: 

the potential impact of present and probable future climate change regulation and legislation;

climate-change related litigation;

physical impacts of climate change;

current carbon (or greenhouse gas) 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.

“This landmark agreement sets a new industry-wide precedent that will force companies to disclose   the true financial risks that climate change poses to their investors,” said Attorney General Andrew Cuomo. “Coal-fired power plants can significantly contribute to global warming and investors have the right to know all the associated risks. I commend Xcel Energy for working with my office to establish a standard that will improve our environment and our marketplace over the long-term.” 

Ceres has been a proponent of increased climate risk disclosure.  Ceres is a nonprofit organization, supported by what it asserts is institutional investors with more than $6 trillion in capital, including the treasurers and  comptrollers of Newy York, California, Florida, Maryland, Rhode Island and five other states, and two of the country's largest pension funds--CalPERS and CalSSTRS.

Ceres President Mindy S. Lubber said, “This groundbreaking settlement will send ripples far beyond Xcel Energy. It serves notice that all companies face financial exposure from climate change and will be expected to better inform investors of their strategies for dealing with it.”

The Director of the Natural Resources Defense Council's State Climate Change Program and the Deputy General Counsel of the Environmental Defense Fund, cheered the settlement.

Obviously, these statements reflect the views of parties that are promoting greater disclosure and hope they will be successful in forcing some form of change in the corporate emissions of greenhouse gases. Industry reaction has not been published as yet.  Many industries may find this development to raise additional questions as to disclosure obligations when it comes to the potential physical impact of climate change, the financial impact of current and future regulations, and future potential litigation.

These questions are particularly important for utilities that operate coal-fired power plants.  The degree to which other publicly traded companies feel compelled to consider similar disclosure will be something that will unfold over the next year or so.    At present, there is perhaps considerable uncertainty as to what is legally required.  In 2009, we may see developments that help reduce the uncertainty as to what degree of climate disclosure is necessary as new federal greenhouse gas reporting requirements will be issued and climate change legislation may be passed.  Many proposed bills offered in Congress require that the SEC create guidance and then regulations governing climate risk disclosure.

Andrew Cuomo’s investigation of the financial disclosure of Xcel and the other utilities is only one part of a larger attack by environmental groups, certain state governments, and public pension and other public funds on coal-fired power plants and the companies that owne and operate them.  As Congress and the Whitehouse had been an impossible place to achieve any climate change legislation, the environmental groups moved to the state legislatures, have filed lawsuits to try to force action under federal and state statutes, and have brought public nuisance suits.  Finally, they have tried to force action through shareholder initiatives and petitions and through an attempt to pressure public companies, especially those that operate coal-fired power plants to disclose what the environmental groups believe to be significant financial risk from operating plants that emit significant greenhouse gases.

If these actions are successful, the use of coal may be curtailed or the operators of coal-fired plants may begin to install a means of capturing the carbon dioxide emissions from the plants and injecting it underground.  If either occurs, alternative forms of producing electricity or capturing and “sequestering” carbon dioxide may lead to higher electricity prices.  Any federal legislation that places controls on carbon dioxide emissions from coal-fired power plant will likely increase power prices as well.

Northeastern States Set Auction Dates for RGGI Carbon Emission Allowances Auction

The Regional Greenhouse Gas Initiative (RGGI) has set dates for the first set of auctions for carbon dioxide emission allowances.  RGGI is a regional program whereby ten Northeastern states have entered into agreements, developed model rules, and passed legislation and have or are developing their own state regulations to implement the regional CO2 cap-and-trade system covering power plants.

The dates for auctioning the allowances required by the regulated power plants to continue operating have been set for September 10, 2008 and December 17, 2008.  These auctions will be the first sale under the first mandatory or compliance greenhouse gas regulatory system in the United States.  Most of the emission allowances may be auctioned under RGGI rather than provided for free as in the case of the European Union’s Emissions Trading Scheme (EU ETS).

Other states are working on such a system including California and several Western states, Canadian provinces, and Mexican states, and a separate group of Midwestern states.

The RGGI auctions will initiate the compliance trading market in the United States.  As this market develops, one significant issue will be whether the RGGI system has over allocated the number of allowances, as the EU ETS did in its initial phase.  In that case, the price for the allowances dropped to near zero.   The development of the market for RGGI allowances will be interesting given that many parties have asserted that more allowances have been issued to states for sale or allocatin than are required to allow the emissions of CO2 from the regulated power plants.

Clean Tech Inventors and Start Up Companies Looking for Capital

As gas prices climb and energy security and climate change drive public policy and private investment, inventors and entrepreneurs are moving into the clean tech and greenhouse gas reduction business at a rapidly growing pace.  The green inventors need capital to start get their business going.  To find this startup capital, they are looking to angel investors, venture capital funds, and private equity firms.

The investment community is investing more and more money in companies in the clean tech space. We are seeing more and more companies and inventors contacting us to find out how they can obtain financing, how greenhouse gas reductions from their technologies and processes can be monetized in the form of carbon credits, and what the regulatory and legislative landscape may be in the future that would make their inventions more profitable.

This is a growing area for our law firm and we see more venture capital firms and private equity firms looking to invest in this space.  All of the nascent companies require capital to get their business off the ground.  Some of the companies we are currently working with include companies looking to build wind power projects in Africa, to reduce fuel consumption from truck fleets, to reduce nitrogen fertilizer use, to avoid deforestation, and to develop geothermal energy projects.

Energy efficiency, energy security, climate change, and carbon trading opportunities will drive more capital to inventors and companies that develop the ideas and technology to solve these critical issues.  Finding capital will be an essential part of making these ideas and technologies a reality.