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legal guide | 2009
Climate Change Regulation:
What is ahead for 2009?
Environmental policies, such as the cap-and-trade program, are expected
to gain support from President-elect Barack Obama’s administration. But can we
afford this major initiative in the current economic climate?
B y M i k e Ne s t e r o f f
I
n a normal year, the election
of Barack Obama, who campaigned for president on a
promise to seek reductions in
greenhouse gas emissions, would
virtually guarantee dramatic new efforts by the federal government to
address climate change.
As a candidate, then-Sen. Obama
promised to take steps to address
climate change by seeking a national, economy-wide cap-and-trade market system to reduce carbon dioxide
emissions. With a working majority
in Congress, the new president will
have the means to make such a policy
happen.
This year, however, will be anything but normal. The collapse of the
credit markets and attendant widespread ripple effects have created an
economic world that is very different
from the one we faced just six months
ago. These changes, more than anything, could affect efforts to address
climate change.
Reversal of policies
President-elect Obama’s campaign
policies presented a distinct difference from the approach of the Bush
Administration.
After his inauguration in 2001,
President George W. Bush formally
withdrew the United States from
the industrial nations’ agreement to
reduce greenhouse gas emissions
on the grounds that it imposed unreasonable demands on businesses
and was too costly for the American
economy.
In addition, despite the Supreme
Court decision finding that the Environmental Protection Agency (EPA)
has authority to regulate carbon di-
At the same time, the first federal
cap-and-trade legislation to make it
to the floor of the Senate died there
last year for lack of enough votes to
beat a threatened presidential veto.
The result is that the first item on the
new administration’s climate change
agenda will probably be cap-andtrade legislation.
Establishing a
value for each
ton of carbon
emissions and
uncertainty over
price changes
could be some of
the cap-and-trade
program’s crucial
weaknesses.
The cap-and-trade movement
oxide and other greenhouse gases as
pollutants under the Clean Air Act, the
EPA under Bush has issued a laundry
list of reasons why it cannot do so.
The President-elect’s new EPA
administrator, however, is likely to
reverse the government’s previous
course and issue greenhouse gas
regulations. We can also expect the
United States to have much greater
involvement in international efforts
to address climate change.
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The cap-and-trade program has
received the most attention and its
outlines are becoming clearer as the
Western Climate Initiative (WCI) process moves forward.
Instead of a carbon tax on fuel,
which is what British Columbia adopted recently, a cap-and-trade system
sets an upper limit for total greenhouse gas emissions from regulated
sources. The states auction and/or
distribute allowances equal to one
ton of emissions per allowance.
The cap initially is set at existing emission levels for all regulated
sources, but is gradually ratcheted
downward to achieve an emissions
reduction goal, such as 15 percent
from 2005 levels by 2020. As that decrease occurs, sources must reduce
their emissions through new equipment or methods, or buy allowances
from another company or government
entity that has more allowances than
emissions.
As Featured in
legal guide | 2009
The theory behind cap-and-trade
is that the market will find the lowest-cost method to reduce emissions.
Still, some critics argue that an auction system could harm the ability of
American industries under the cap to
compete internationally. A chief benefit of the system is that states can
use the auction proceeds to invest in
energy efficiency, renewable energy
and clean technologies.
at the State level
Meanwhile, individual states, such
as Washington, Oregon and California, that previously banded together
to address greenhouse gas emissions
in the absence of federal legislation,
are moving forward with their own efforts. In 2007, for example, Washington adopted legislation that set ambitious targets to reduce greenhouse
gas emissions to 1990 levels by 2020,
a 25 percent reduction from 1990 levels by 2035 and a 50 percent reduction of 1990 levels by 2050.
To devise ways of reaching those
goals, state officials embarked on a
lengthy process involving a variety of
stakeholders from government, business and environmental groups. The
proposals they issued in February
2008 range from participating in the
WCI’s cap-and-trade program to supporting renewable energy sources,
mass transit, plug-in hybrid electric
vehicles, low-carbon fuels, green
building standards, denser development, expanded recycling, and preservation of agricultural and forest
lands. Some of those proposals are
now being turned into possible laws
for consideration during coming state
legislative sessions.
While a similar program for acid
rain successfully reduced sulfur dioxide emissions from U.S.-based power
plants, the WCI cap-and-trade proposal
will have a much broader application. It
will encompass, initially, any stationary
source, such as power plants, refiner-
ies or industrial facilities that annually
emit greater than 25,000 metric tons of
carbon dioxide-equivalent gases. Later,
the program will expand to cover residential and mobile sources, ultimately
regulating 90 percent of the greenhouse-gas emissions in the western
hemisphere by 2015.
The devil in the details
Many issues remain before the first
auction ever occurs. A primary one is
how much an allowance will cost.
When the Regional Greenhouse Gas
Initiative—a limited program that covers only power plants in participating
New England states—held its first auction in September 2008, allowances
went for $3.08 per ton. But the European Union’s auctions varied wildly, from
a high of about $38 per ton in 2006 to
roughly $2.67 per ton in 2007.
This disparity in prices illustrates
the difficulty in establishing what a
ton of carbon emissions should be
worth. Uncertainty about these prices
could be one of the program’s crucial
weaknesses.
WCI expects that allowances will
stay below $25 per ton through 2020.
The economic impact of the cost of
carbon allowances remains unclear,
but it is sure to be a focus of concern
as the details are debated this year.
Another important issue is what
the federal government will do. President-elect Obama’s preference for
a national cap-and-trade program,
while likely to be modeled after the
WCI, could end up replacing the WCI
efforts. That is not necessarily a bad
thing. One of the criticisms of the WCI
is that its regional limitations might
tempt polluting companies to move
operations to states not part of the
WCI program. A national program
would make that more difficult, but
would still not address issues of competitiveness with other countries that
do not regulate greenhouse gases.
Finally, despite efforts to pitch the
long-range economic benefits of the
cap-and-trade program and other
measures contemplated to address
greenhouse gas emissions, each program will incur some initial expense.
The question remains: Will these efforts stimulate the economy or add to
its already sizeable burdens?
State and local governments already face serious revenue shortfalls and painful cuts in critical areas. Local governments are leery of
unfunded mandates from the state;
businesses, even if they can secure
credit, also may well be reluctant
to spend additional capital to meet
green requirements.
With companies already struggling
and the unemployment rate rising,
there will also be considerable pressures to delay any increased regulations on greenhouse gas emissions
that might adversely impact industries. Proponents hold out the promise of job creation and the need to
start taking steps now.
While the economic environment
is unlikely to halt the legislative and
regulatory process entirely, the impact of climate change regulation on a
fragile economy is certain to be a major consideration in the coming year.
Mike Nesteroff is
a shareholder and
chair of Lane Powell’s Sustainability and Climate
Change Team. In
his 20 years at
Lane Powell, Nesteroff has handled
environmental litigation in Washington, Oregon and
Alaska. A frequent speaker on climate
change issues, he has also authored
several recent articles on climate
change. For more information, go to
lanepowell.com or call 206.223.7000.
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Reprinted with permission of Seattle Business magazine. ©2009, all rights reserved.