The New Carbon Cycle

Senate Environment and Public Works Committe Releases Climate Bill

The Senate Environment and Public Works Committee released its version of a climate change bill despite the fact that Republican senators on the committee were boycotting the mark up hearings.  The Senate apparently has an informal rule that two senators of the opposing party need to be present to make a quorum.  Senator Barbara Boxer decided to move forward based on the apparent actual rules that allows the committee to vote out a bill if there is a quorum of any party members.  The Democrats on the Committee voted unanimously to move the bill out of the Committee.

The bill will know be considered by other committees in the Senate.  If a bill is presented to the full Senate, it will probably be in 2010.

Allocation AWOL in Senate Bill

The long-awaited climate bill was released by the Senate Environment and Public Works Committee.  The bill raised the goal for greenhouse gas emission reductions from the Waxman-Markey 17 percent to 20 percent (based on a 2005 baseline) and in most ways follows the Waxman-Markey approach, but the authors Senators Barbara Boxer and John Kerry left the key issue of allocation versus auction for further debate in the Senate Finance Committee.  That committee is of course working on the health care bill.

In essence, Senators Boxer and Kerry "punted" on this issue and are leaving the concerns of industry to obtain higher levels of free credits through allocation and to reduce those that must be auctioned to the Finance Committee.  This may be a good sign for industry as there may be a better chance for negotiations under Senator Max Baucus' tutelage.  Mr. Kerry serves on that committee, but is not in charge as chairman.

The climate bill is now clearly set behind the health care bill and will not likely be reviewed by the Finance Committee until that bill is passed or defeated in the Senate.  A vote before the United Nations meeting on a successor treaty to the Kyoto Protocol in Copenhagen seems less likely, although Senator Kerry promises that a vote on a bill will occur in advance of this meeting.

Developing EPA Program to Regulate Greenhouse Gas Emissions

Two proposed rules related to greenhouse gas (GHG) regulation under the existing federal Clean Air Act (CAA) have reportedly cleared the White House Office of Management and Budget (OMB).  The two proposals are important developments in the regulation of GHG emissions from stationary sources.  The “tailoring rule,” as it has come to be known would limit the permits required for stationary sources under the  (CAA) Prevention of Significant Deterioration (PSD) program to new or modified sources that emit 25,000 tons of carbon dioxide equivalent (CO2e) annually, as opposed to 250 tons annually for many other pollutants under the PSD system.  The consistency with the CAA has been questioned.  Another proposal would amend or revoke the December 2008 memorandum issued by EPA, known by the then EPA Administrator as the  “Johnson Memo,” that concluded the PSD requirements would not apply to GHG emissions the agency or Congress made the regulation of GHGs mandatory under the CAA.  These two rulemakings together would be first steps in creating an EPA-based  system for regulating GHG emissions.

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.

New Book on "The Impact of Global Warming on Texas"

A new, or perhaps second edition, of a book is being published by the University of Texas Press entitled "The Impact of Global Warming on Texas."  I have not read the book, but will be reading it over the next few weeks.  An electronic version can be found at the website of the Texas Climate Initiative.   The book contains chapters written by various scientists, including several from Texas A&M University. 

US Energy Information Administration Estimates Climate Bill Impact on Consumers

The US Energy Information Administration issued a report on August 4, 2009 evaluating the economic impact on the individual US citizen of the passage of the Waxman-Markey climate change bill.  This bill is known as the American Clean Energy and Security Act, H.R. 2454.  Under the climate legislation passed by the House of Representatives in June, electricity, heating oil and other bills for average families will increase $114 in 2020 and increase $288 in 2030.  The impacts, if accurate, certainly would not create a significant burden on the average citizen.  Of course the devil is always in the details in all of these economic predictions.  The report can be reviewed on the EIA website.

Energy Efficiency and the Competitive Advantage of Our Nation

Management guru and professor Michael Porter's concludes in The Competitive Advantage of Nations that one of government's roles involves "acting as a catalyst and challenger, . . to encourage--or even push--companies to raise their aspirations and move to higher levels of competitive performance. . .."  In the Senate debate over the American Clean Energy and Security Act, H.R. 2454, the "Waxman-Markey Bill", the Senators should consider the extent to which energy efficiency contributes to both domestic firm competitive performance and to the competitive advantage of the nation as a whole.

No doubt companies that can substantially reduce their energy consumption can reduce costs and,therefore, increase profits.  As an example, Walmart is working with numerous potential vendors to reduce its energy consumption as its energy costs are significant.  Walmart's Sustainable Building Plans among other efficiency plans would reduce energy usage dramatically.  Other companies such as Dow cite substantial reductions in electrical use and concomitant reductions in greenhouse gas emissions.  Dow's energy savings program  has resulted in energy savings of $8.6 billion and has prevented 86 million metric tons of CO2 from entering the atmosphere. With the ability to monetize these greenhouse gas reductions in the form of carbon credits, these firms will have an additional incentive to reduce electrical and transportation fuel consumption.

In addition, these firms will be incentivized to switch transportation fuels for their fleets of trucks.  Natural gas is now abundant in the United States with the discovery of the means to extract natural gas from the various shales from across the United States that contain huge stores of natural gas.  Not only does the use of natural gas allow the potential savings in fuel costs over the long term, but the monetization of the greenhouse gas reductions by switching from diesel to natural gas permits yet another revenue stream to assist in financing a more sustainable and more efficient company.

As a nation, these changes make the firms in the country more competitive as costs of production decrease and allow the use of domestic fuels.  To the extent, new regulations promote not only energy efficiency and fuel switching, but the invention and domestic manufacture of new technologies and products for export, then the nation become even more competitive.

Nations that reduce their dependence on foreign oil will undoubtedly increase their domestic and international competitiveness.  Those that can design new, more distributed energy sources for their troops to produce water, drive electronic-based weapons and communications, and alternative ways of fueling mechanized aspects of their sea, ground, and air-based forces will have a stronger military.  The United States armed forces are spending significant money to develop these technologies.

McKinsey & Company recently issued a report entitled Unlocking Energy Efficiency in the U.S. Economy.  In this report, the leading business consulting firm states its central conclusion as follows:

Energy efficiency offers a vast, low-cost energy resource for the U.S. economy--but only if the nation can craft a comprehensive and innovative approach to unlock it.  Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and literally billions of devices.  If executed at scale, a holistic approach would yield gross energy savings worth more than $1.2 trillion, well above the $520 billion needed through 2020 for upfront investment in efficiency measures (not including program costs).  Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of projected demand, potentially abating up to 1.1 gigatons fo greenhouse gases annually.

The McKinsey Report demonstrates that a more energy efficient country is a more competitive country.

To put this in competitive context, Europe and China are pushing for more energy efficiency and the building of domestic sources of energy and fuel and the development of renewable energy technology firms, energy efficiency technology firms, and the domestic manufacturing of new 21st-century products.  Technologies like LED lighting that will reduce the consumption of electricity dramatically are the race to the future by companies around the world.  The countries that achieve development of firms with lower energy consumption and energy efficient technologies and alternative fuels will likely be the more dominant economic powers in this century.

Thus, a look back at Michael Porter's book and the application of its model to the current debate about the Senate version of the American Clean Energy and Security Act is warranted.  Putting politics and ideology aside, the empirically demonstrated need to move toward a 21st-century energy policy is critical to the future competitiveness of the nation.  This should be at least one of the critical strategies underlying the debate in the Senate over the next few months.

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.

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.

Significant Climate Change Developments Part 1: European Parliament Adopts 20/20/20 Plan on Climate Change

The European Parliament after eleven months of long and tumultuous debate among the various countries and constituencies reached an agreement called 20/20/20.  By 2020 the EU plans to address climate change by achieving: a 20% reduction in greenhouse gas emissions, a 20% improvement in energy efficiency, and a 20% share for renewables in the EU energy mix.  The EU plans to extend and amend its cap-and-trade program referred to as the EU Emissions Trading System or ETS to control greenhouse gas emissions as well. 

A compromise was reached to address concerns by industry in the former communist countries that depend almost entirely on old coal-fired power plants for their electricity.  The EU agreed to provide free carbon allowances to industries that face stiff international competition as a result of greenhouse gas reductions if they face a 5 percent increase in costs.  The former communist countries will receive 70 percent of their carbon allowances without charge in 2013.  The exemption will be fazed out over time and end in 2020, when all allowances in these countries must be purchased at auction.

The revised EU ETS will apply from 2013 to 2020 and is designed to reduce greenhouse gas emissions by 21 % of 2005 levels. The EU ETS is a "cap and trade" system: it caps the overall level of emissions allowed but, within that limit, allows participants buy and sell allowances as they require, so as to cut emissions cost effectively. The Community-wide quantity of allowances issued each year will decrease in a linear fashion, so as gradually to reduce the overall level of emissions each year.
 
The ETS currently covers over 10,000 installations in the energy and industrial sectors, which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas (GHG) emissions (the remaining 60 % will be covered by the 'non-ETS' Effort Sharing decision).
 
In the first and second ETS trading periods (2005 -2012) the great majority of allowances were allocated free of charge to installations. The revised directive establishes auctioning from 2013 in principle (as proposed by the Commission and backed by the Environment Committee), but includes several exceptions, as advocated by the European Council on 12 December 2008.

The "effort sharing" decision sets binding national targets for each EU Member State to reduce greenhouse gas emissions from non-ETS sources (e.g. road and sea transport, buildings, services, agriculture and smaller industrial installations), between 2013 and 2020. These sources currently account for about 60% of all EU greenhouse gas emissions. The decision aims to reduce these emissions by 10% overall between 2013 and 2020, so as to contribute towards the EU's overall aim of a 20% reduction in total greenhouse gas emissions by 2020. The effort sharing decision is the first of its kind worldwide.

The EU Parliament also approved a proposed directive providing for the legal framework for the new carbon dioxide capture and storage technology (CCS). To cut their CO2 emissions, industrial installations and power plants could in the future use this new technology to capture CO2 and store it "permanently and safely underground" in geological formations.  Great Britain's Prime Minister Gordon Brown succeeded in winning a fund of 6 billion Euros to invest in technology to capture and store carbon dioxide from coal-fired power plants in underground formations.  The fund will apparently be established by earmarking 300 million allowances for CCS.

A new regulation will set emission performance standards for new passenger cars registered in the EU. The compromise backs the Commission's proposed target of an average of 120g of CO2/km for the whole car industry by 2012, compared to the current levels of 160g/km. The regulation sets an average target of 130g CO2/km for new passenger cars to be reached by improvements in vehicle motor technology.  It will be supplemented by additional measures to achieve a further 10g/km reduction, so as to reach the 120g/km target, through other technical improvements. The compromise introduces a long term target for 2020 for the new car fleet of average emissions of 95 g CO2/km.
 
Manufacturers will be given interim targets of ensuring that average CO2 emissions of 65% of their fleets in January 2012, 75% in January 2013, 80% in January 2014 and 100% from 2015, have to comply with each manufacturer's specific CO2 emissions target. In case the average emissions of CO2 exceed the targets, manufacturers will have to pay fines.

The revised fuel quality directive requires fuel suppliers to reduce greenhouse gas emissions caused by extraction or cultivation, including land-use changes, transport and distribution, processing and combustion of transport fuels (i.e. fossil fuels like petrol, diesel and gas-oil and also biofuels, blends, electricity and hydrogen) of up to 10% by 2020.

The adoption of post-2012 greenhouse gas reductions is a critical first step in the process of moving toward a global carbon cap and trade system.  The EU has laid down the first step internationally to create the atmosphere for negotiations of a post-Kyoto climate change treaty. The negotiations in Poznan, Poland were to some extent inconclusive, but the Bush Administration was not going to make any commitments late in its administration and has not been willing to take steps to impose a greenhouse gas reduction program in the United States.  2009 could shape up to be the Year of Climate Change.

I will further discuss the other three developments in late 2008 that may lead to a global carbon-constrained economy.