Law and the Environment

Wall Street Green Trading Summitt Demonstrates Nascent Market for Carbon Credits, Clean Technology, and Renewable Energy in the United States

I recently attended the The Wall Street Green Trading Summit in New York.  The program was a sell out, but reveals a still startup market in carbon trading, clean technology, and renewable energy.  It is clear there is a growing number of capital providers who are watching this space and the larger investment houses and investment bankers are beginning to assign people to work on getting into this space.  Names such as Goldman Sachs and JP Morgan have joined smaller, less known companies in setting up investments capabilities in this area.  New hedge funds have been set up to take advantage of the nascent market that is wide open at this stage to new entrants. 

Not surprisingly, the comments on the carbon trading market (markets in CO2 and other greenhouse gas emission reduction credits) were that it is still forming until the United States enacts a carbon cap-and-trade system to address climate change, which all believe is a only few years away.  (For a discussion of this market, please refer to my carbon trading and climate change law blog  The New Carbon Cycle.)   It is clear that the enactment of such a program will unleash a substantial amount of capital, in the billions if not tens of billions of dollars, to invest in projects that reduce greenhouse gas emissions and generate carbon credits.  These credits can be bought and sold in the carbon trading market domestically, and if set up properly, in the global markets under the Kyoto Protocol or what comes after Kyoto.

Is is clear the adoption of a cap-and-trade system will unlock a huge pent up level of capital to address greenhouse gas emissions and global warming.  Wall Street is preparing for the establishment of a greenhouse gas regulatory system in the United States, and the ability to trade carbon credits with other countries.

Because no such system currently exists, many at the Wall Street Green Trading Summit referred to carbon trading, clean technology, and renewable energy as "the Wild West", since the markets are so new and developing.  All the speakers and attendants believe that carbon markets and the clean technology and renewable energy markets present an immense investment opportunity in the future as renewable energy requirements increase at state and federal levels, biofuels, such as ethanol and biodiesel, requirements are established through proposed EPA rules, and as limits on greenhouse gas emissions go into effect and carbon markets are established.  As we await what this Congress and this or a future president will do to address these issues, capital markets are positioning for potentially huge investments in this space.

Senate Majority Leader Reid Seeking Quicker Action on Energy Bill and Climate Change Legislation

WASHINGTON (Reuters) - The Senate's top Democrat on Thursday said he will seek a vote in coming weeks on an energy bill that could mandate more use of renewable fuels like ethanol, make federally owned buildings more efficient and require utilities to sell green power.

Sen. Harry Reid of Nevada, the Senate's Majority Leader, said he wants the chamber to vote on a bill before it leaves for its Memorial Day recess at the end of May.

"I want to do something this work period on energy," he told reporters in his office. "We are going to try to move in a direction to do some things to try to conserve."

Reid also said he will soon call together Democrats to chart a course to reduce U.S. greenhouse gas emissions.

"Climate change, other than the war in Iraq ... is the most important thing we can work on," Reid told reporters. "Our world is falling apart before us."

Climate change legislation, which could come in the form of several bills, would be handled separately from the energy package, Reid said.

Reid said he wants to bring together prominent U.S. Democrats, including the chairmen of the energy and environment panels -- Sen. Jeff Bingaman and Sen. Barbara Boxer, respectively, as well as other party members. Bingaman and Boxer are backing separate proposals.

Near-term energy legislation could include Boxer's plan to make federal buildings more energy-efficient, as well as proposals by Bingaman to boost U.S. use of biofuels like ethanol and require utilities to sell electricity from renewable sources like wind and solar, he said.

350 Million Dollar Settlement in Major Class Action Shareholder Suit in Europe: A New Trend?

From the American Bar Association a story on a huge class action settlement

Dutch Settlement Exports U.S.-Style Litigation

$350 million pact provides a new approach to securities fraud claims for non-U.S. investors

By Martha Neil

Love 'em or hate 'em, big-bucks plaintiffs cases have been a uniquely American phenomenon—until now. In a legal milestone that could expand the field exponentially, a settlement of more than $350 million was announced Wednesday in a securities matter involving European investors who bought their shares outside the U.S.

"As far as we know, it's the first class-wide settlement between European investors and a European company over European securities claims—and on its face, it's one of the absolute largest recoveries ever in Europe," says Allan Ripp. He is a spokesman for Grant & Eisenhofer, a Wilmington, Del., law firm representing the foreign investors.

Even more unusual, and in a uniquely European style, the issue was settled without any foreign lawsuit ever being filed on foreign investors' behalf.

Instead, the parties—Royal Dutch Shell PLC and groups representing individuals and dozens of institutional investors in nine European countries—are petitioning the Amsterdam Court of Appeals in the Netherlands to approve the agreement. The settlement, in which Shell did not admit to any wrongdoing, was announced in The Hague on Wednesday and resolves all claims brought by non-U.S. investors concerning the company's alleged overstatement of the value of its oil and gas reserves.

For more informatin see ABA Journal.

Another Environmental Reporting/Shareholder Initiative: Toxics Reporting

In another move on the environmental disclosure front, two groups have now issued a report calling for companies to disclose their "toxics policies."   Reflecting the move from pushing environmental regulation and legislation in the face of an unfriendly Congress and White House, these two groups, Investor Environmental Health Network and The Rose Foundation for Communities and the Environment  have issued a report entitled Fiduciary Guide to Toxic Chemical Risk.

This story from Greenwire discusses this report.

Russell J. Dinnage, Greenwire reporter

Chemical manufacturers' shareholder meetings are increasingly being turned into forums for social-activist investors to protest products they consider to be public-health threats, an environmental investment group says in a new report.

Seventeen companies faced proxy resolutions addressing the financial risks of toxic chemicals last year -- up from three in 2004 and 2005, the Investor Environmental Health Network says in the report released last week. All of those resolutions urged management to consider the financial risks associated with certain chemical products.

So far this year, more than 13 such proxy resolutions are in the works, the report says. They are expected to be submitted at the shareholder meetings of Apple Inc., CVS Corp., Dow Chemical Co. and DuPont Chemical, among others.

There are two reasons that stockholders have grown wary of chemical-company investments, the report says: Companies are facing more lawsuits seeking large damage awards, and mutual and pension funds are starting to see a link between their investments and public health threats.

Richard Liroff, a network director and co-author of the 52-page report, said manufacturers are wary of allowing litigation and regulation to act as their corporate consciences. "At some point, one wonders if these companies will begin to trade on litigation expenditures as a cost of doing business, just as tobacco companies have done," he said in an interview. "If that becomes the case, then they will surely begin to take big hits on their profits and sales of their products as a result."

The Investor Environmental Health Network represents 20 investment organizations with $22 billion in assets under management. The network was involved in 24 responsible-use stockholder resolutions in recent years, and all but one succeeded in garnering the 6 percent of shareholder support that legally requires management to address the issues being raised, Liroff said.

"What we've seen with our resolutions in many cases was support for the concerns coming from previously unknown quarters once the proxies are proposed," Liroff said. "That's the big money that talks. Sizeable resolutions on corporate governance are getting sizeable votes."

Key lawsuits

The report cites a landmark jury verdict in a Rhode Island public-nuisance case against Sherwin-Williams Co. and other former lead-paint manufacturers as an example of how share prices can be driven down even if a companies have long phased out harmful ingredients. The final damages awarded to the state and lead-paint victims of lead paint could eventually top $1.37 billion.

Also, the report marks an upcoming $5 billion consumer class-action lawsuit against DuPont concerning the company's sale of Teflon products as another example of a potential stumbling block for shareholder interests.

"Investors or trustees should not hold an image of icebergs in mind when considering the financial risks of toxics," the report says. "After all, an iceberg may be identified on radar and avoided. The growing waves of scientific interest in toxic chemicals may perhaps be better likened to tsunamis poised to strike vulnerable companies and their shareholders."

EPA Announces Proposed Rules on Renewable Fuels and New Mileage Standards for Vehicles

At a press conference on April 11, 2007,  just a week after the US Supreme Court issued its order rejecting the EPA's decision not to regulate greenhouse gases from automobiles, EPA Administrator Johnson, Energy Secretary Samuel Bodman, and National Highway Safety Administrator Nicole Nason, discussed the RFS program, increasing the use of alternative fuels and modernizing CAFE standards for cars.

“The Renewable Fuel Standard offers the American people a hat trick – it protects the environment, strengthens our energy security, and supports America’s farmers,” said EPA Administrator Stephen L. Johnson. “Today, we’re taking an important first step toward meeting President Bush’s “20 in 10” goal of jumping off the treadmill of foreign oil dependency.”

"Increasing the use of renewable and alternative to power our nation’s vehicles will help meet the President’s Twenty in Ten goal of reducing gasoline usage by 20 percent in ten years," Secretary Bodman said. "The Administration’s sustained commitment to technology investment will bring a variety of alternative fuel sources to market and further reduce our nation’s dependence on foreign sources of energy."

“While we must look at increasing the availability of renewable and alternative fuels, we must also continue to improve the fuel efficiency of our passenger cars and light trucks,” said Nicole R. Nason, Administrator of the National Highway Traffic Safety Administration. “As a part of the President’s “20 in 10” energy security plan, we need Congress to give the Secretary of Transportation the authority to reform the current passenger car fuel economy standard.”

Authorized by the Energy Policy Act of 2005, the RFS program requires that the equivalent of at least 7.5 billion gallons of renewable fuel be blended into motor vehicle fuel sold in the U.S. by 2012. The program is estimated to cut petroleum use by up to 3.9 billion gallons and cut annual greenhouse gas emissions by up to 13.1 million metric tons by 2012 -- the equivalent of preventing the emissions of 2.3 million cars. The RFS is an important first step toward meeting President Bush’s call on our nation to reduce gasoline use by 20-percent within 10 years by growing our renewable and alternative fuel use to 35 billion gallons by the year 2017.

The RFS program is designed to promote the use of fuels such as ethanol and biodiesel, which are largely produced from American crops. The program will create new markets for farm products, increase energy security, and promote the development of advanced technologies that will help make renewable fuel cost-competitive with conventional gasoline. In particular, the RFS program establishes special incentives for producing and using fuels produced from cellulosic biomass, such as switchgrass and woodchips.

The RFS program requires major American refiners, blenders, and importers to use a minimum volume of renewable fuel each year between 2007 and 2012. The minimum level or “standard” which is determined as a percentage of the total volume of fuel a company produces or imports, will increase every year. For 2007, 4.02 percent of all the fuel sold or dispensed to U.S. motorists will have to come from renewable sources, roughly 4.7 billion gallons.

The RFS program is based on a trading system that provides a flexible means for industry to comply with the annual standard by allowing renewable fuels to be used where they are most economical. Various renewable fuels can be used to meet the requirements of the program. While the RFS program establishes that a minimum amount of renewable fuel be used in the United States, more fuel can be used if producers and blenders choose to do so.

The RFS brings the nation closer to President Bush’s Twenty in Ten goal to reduce gasoline consumption 20 percent in ten years. To achieve this goal, the Bush Administration’s Alternative Fuel Standard (AFS) proposal builds on the RFS and requires use of 35 billion gallons of renewable and alternative fuels in 2017 - nearly five times the RFS target of 2012. The AFS proposal will displace 15 percent of projected annual gasoline use in 2017 through the use of fuels, including corn ethanol, cellulosic ethanol, biodiesel, methanol, butanol, hydrogen, and other alternative fuels. The Twenty in Ten plan also calls for reforming and modernizing CAFÉ standards to increase the fuel economy of cars. This will reduce projected annual gasoline use by up to 8.5 billion gallons, a further 5 percent reduction that will bring the total reduction in projected annual gasoline use to 20 percent. President Bush has called on Congress to act on these proposals by the start of the summer driving season this year.

Appearance on Public Radio Talk Show to Discuss Massachusetts v. EPA Case

On April 10, 2007, I appeared on the KERA, Dallas Public Radio, talk show called "Think" to discuss the recent US Supreme Court case Massachusetts v. EPA.  I appeared with Sterling Burnett of the Dallas-based National Center for Policy Analysis and Tim Greeff of the Natural Resources Defense Council.  This was a lively discussion. 

If you would like to listen to the program, please click here:

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Supreme Court Ruling on Greenhouse Gas Regulation Could Have Direct Impact on D&O and Environmental Insurance

After the ruling in Massachusetts v. EPA, corporate officers and directors may be reviewing their corporate strategy on addressing their greenhouse gas emissions and how the case may affect their companies.  In making these decisions, the issue of coverage of potential shareholder claims in any future litigation against the directors and officers and their companies raises a currently much discussed issue--Would any shareholder suits based on climate change and the effect on share prices be covered by director and officer insurance policies?    For further reading you may want to refer to David White's blog on Law and Insurance.

US Supreme Court Rules EPA Improperly Refused to Regulate Greenhouse Gas Emissions from Vehicles

In an opinion that literally will be discussed around the globe, the U.S. Supreme Court in a 5-4 decision ordered the U.S. Environmental Protection Agency to reconsider its decision not to regulate greenhouse gases under the federal Clean Air Act.  The Court concluded that EPA rejected such regulation on grounds not supported by the Act.  In Massachusetts v. Environmental Protection Agency, in addressing the issue that has been of great controversy between the press, Congress, and the White House, as well as among nations around the world, the highest court in the land ruled that scientific evidence supports the conclusion that human generated greenhouse gases are contributing to global warming and climate change and that the EPA was acting arbitrarily and not consistent with the law in refusing to regulate greenhouse gas emissions.

 

The global nature of the problem presented a major legal obstacle for the State of Massachusetts in the case.  The question was whether the plaintiff could show that the harm it sought to remedy would be direct and causally related to the greenhouse gas emissions from vehicles that could be reduced if EPA had acted to regulate them.  In his dissent, the Chief Justice argued this was pure speculation.  However, the majority of the justices ruled that Massachusetts had standing to challenge the decision by EPA under the Clean Air Act not to regulate greenhouse gas emissions from automobiles.

 

The Court ruled that Massachusetts owns coastal lands that are currently being and are predicted to be further swallowed by rising sea levels.   In demonstrating one has standing to challenge an administrative agency decision, it is generally necessary to show an injury, causation, and redressability (the ability of the court to remedy the injury of the plaintiff).  In considering this issued, the Court concluded that the states have special standing in the federal courts.  In addition, Justice Breyer, who wrote the opinion, pointed out that a party to whom Congress has provided a procedural right can assert that right without meeting all the normal standards for redressability and immediacy.  In this instance, the Court ruled that Congress had afforded the right to challenge in court a decision by EPA whether to regulate pollution from vehicles.

 

The first hurdle was for Massachusetts to show that it suffered a concrete and particularized injury that is either actual or imminent.   The majority ruled that the encroachment of rising sea levels on the coastline of Massachusetts was occurring and would occur so that the State met its requirements to show the harm is actual and imminent. 

 

In terms of causation, the majority concluded that EPA did not dispute the existence of a causal connection between human emissions of greenhouse gases and global warming.  It then ruled that the failure to regulate these emissions contributes to Massachusetts’ injuries.  Here the issue, later challenged by dissenting Justices Roberts and Scalia, was whether that the reduction of greenhouse gases from US vehicles would in fact reduce any coastal flooding if China and India increase their emissions.  The majority concluded that, regardless of the emissions from China and India, any significant reduction in greenhouse gas emissions would reduce coastal flooding—in essence identifying a linear relationship between emissions and the harm caused. 

 

The majority ruled that the reductions would slow even though they would not reverse rising sea levels and, therefore, reduce the injury to Massachusetts.  The court noted that EPA has taken the position that greenhouse gas emission should be reduced through voluntary measures, thus making it difficult for the Agency to conclude there was no causal relationship between the emissions and environmental harm--otherwise why would the Agency advocate reductions in emissions. 

 

Having decided that Massachusetts has the right to challenge EPA’s decision to not regulate greenhouse gas emissions, the Court then turned to a review of the basis of EPA’s decision not to regulate greenhouse gas emissions. EPA has refused to promulgate limits on greenhouse gas emissions from vehicles after receiving a petition from private parties requesting that EPA act to limit such emissions.  In reviewing this decision, the Court applied what is known as the “arbitrary and capricious standard”.  This standard of review under the Clean Air Act provides that the Court "may reverse any such actions to be found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law."

 

The provision at issue in the case involved the EPA's role in regulating pollution from vehicles.  The Clean Air Act states that EPA "shall by regulation prescribe . . . standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in the [Administrator's] judgment cause, or contribute to, air pollution which may be reasonably anticipated to endanger pubic health or welfare." 

 

EPA’s logic in its decision not to regulate greenhouse gases was first that greenhouse gases do not fit within the definition of an “air pollutant” under the Clean Air Act.  The Court interpreted the definition of air pollutant to include any air pollution agent, and that any physical, chemical, substance emitted into the ambient air could be considered an air pollutant.  The definition was deemed broad enough to include carbon dioxide and other greenhouse gases that cause global warming. 

 

EPA also stated in its explanation for its decision that even if it could regulate greenhouse gas emissions, it would not be appropriate to do so for two reasons.  First, the President had decided to use voluntary standards to accomplish the reduction of greenhouse gases.  Second, the issuance of regulations by EPA would detract from the President’s negotiations with developing nations to reduce their greenhouse gas emissions.  The Court ruled that EPA’s explanation did not constitute a reasoned basis for refusing to form a scientific judgment on the question of whether greenhouse gas emissions contribute to climate change.  It further ruled that the Agency cannot avoid its statutory duty to reach a decision whether greenhouse gases cause global warming based on scientific uncertainties about certain aspects of climate change.  “If the scientific uncertainty is so profound that it precludes EPA from making a reasoned judgment, it must say so.”  The court ruled that EPA’s action was “arbitrary, capricious, or otherwise not in accordance with law.”

 

In its opinion, the Court appeared to be influenced by certain EPA decisions.  One of the primary issues affecting the decision was that historically EPA had concluded that it in fact had the authority under the Clean Air Act to regulate greenhouse gases.  The other issue was the fact that EPA and the President have taken the position that greenhouse gases and climate change were serious issues and voluntary measures should be taken to reduce these emissions.  This decision appeared to color the Court’s decision that there was a sufficient causal link between greenhouse gas emissions and the harm currently being caused by global warming and future predicted harm.

 

Ultimately, the Court remanded the decision not to regulate these emissions from vehicles to EPA to base its decision on factors permitted by the Clean Air Act.  The result of this decision is that EPA now does not necessarily have to decide to regulate greenhouse gas emissions from vehicles, but it must reconsider its decision and base it on the legislative requirements. 

 

In addition to affecting EPA's decision regarding vehicle emissions, this case has implications for vehicle manufacturers in another set of cases in which they have challenged limitations on greenhouse gas emissions from vehicles enacted by California and other states.  The Supreme Court decision may bolster those states cases that they should have the power to regulate emissions from automobiles.

 

The more symbolic importance of the case is the ruling of the highest court in the United States that “the harms associated with climate change are serious and well recognized.”  The Court further agreed with Massachusetts that “A reduction in domestic emissions would slow the pace of global emissions increases, no matter what else happens.”  Such a ruling of cause and effect by the US Supreme Court may significantly increase public support for congressional action to regulate greenhouse gas emissions and embolden members of Congress seeking action on climate change.