Winter 2007
Fueling the Future
The U.S. once ran entirely on coal and oil. But that is changing.
New sources of energy that can power the economy are rapidly going
online. The energy choices have expanded to include biodiesel, ethanol
and synfuels. And we are learning to conserve by building more
efficiently and using other choices, such as wind or solar.
Synthetic fuels worked in
the past. They may have a
place now. p. 8
The economics of ethanol
can work. And we don’t
need corn to make it. p. 12
Greenhouse gas is a
legal issue. Thank the
polar bear. p. 21
Energy demand projected
to 2030. Scenarios for
what might be ahead. p. 19
Also Inside:
Coal Bed Methane • Financing Alternatives • Efficient Buildings
“Alternative” Investments • Global Warming
CLIMATE
Reprinted from the 2007 Winter issue of Energy Magazine
Coping with Carbon Dioxide
Greenhouse emissions are an issue
in court rooms and board rooms.
By John F. Spinello, Jr., Craig P. Wilson, Sandra Y. Snyder
T
he year just-ended, 2006, brought
significant legal developments
concerning global climate change
(the trends observed in the warming of
the earth’s surface temperature) that
affect the energy sector in the United
States and worldwide. This trend of
increasing legal activity and policy debate
surrounding the issue of climate change
is a reflection of the ever-increasing attention focused on the issue by scientists,
economists, advocacy and independent
research groups, and policy makers here
and abroad. The New Year now upon us
promises even more significant developments in this area.
Emissions of carbon dioxide (CO2),
the most pervasive anthropologic greenhouse gas (GHG) in the atmosphere,
represent about 84 percent of total GHG
emitted in the United States. Most CO2
(98 percent) is emitted as a result of the
combustion of fossil fuels such as coal,
oil, and natural gas. Consequently, CO2
emissions and energy use are highly correlated. CO2 has a lifetime or residence
time of roughly 50 to 200 years, and is
mixed throughout the lower stratosphere
in relatively homogeneous concentrations everywhere along the surface of
the earth.
The legal and policy debate regarding
the management of GHG emissions is
playing out vibrantly in boardrooms,
courtrooms, and statehouses across the
country. For example, investors have
been demanding greater disclosure of
GHG emissions and analysis of the associated risks and opportunities; States
and environmental advocacy groups
Winter 2007
have filed lawsuits to compel the United
States Environmental Protection Agency
(USEPA) to regulate the emission of
carbon dioxide under the Clean Air Act
(CAA); States have banded together to
establish regional regulatory programs
to mandate GHG reductions from the
energy sector; State Attorneys General
have sued energy companies claiming
GHG emissions are a common law nuisance causing millions of dollars in damages; and private litigants have sought
to fix responsibility for damages caused
by severe weather on GHG emitters in
the energy sector. These are just a few
examples of the growing trend of legal
action in this area that will continue to
unfold in 2007, in addition to a widely
expected increase in congressional attention to climate change in the 110th
Congress—all of which raise significant
legal issues for energy companies and
their counsel.
The proposal to list the polar bear
cites receding sea ice as the only significant threat to the species, and rules out
other potential factors, such as oil and
gas development and subsistence hunting by Native Alaskans. Most of a polar
bear’s life is spent on sea ice hunting for
seals and other prey, and according to
scientific observations, sea ice has been
receding since 1978 in some areas of
the Arctic Sea by nearly 10 percent per
decade.
The potential listing is significant because the ESA prohibits federal actions
that are likely to harm a listed species
or its habitat. Specifically, Section 7 of
the ESA requires all federal agencies to
consult with the FWS and insure that
any action the federal agency takes, “is
not likely to jeopardize the continued
existence of any endangered species
or threatened species or result in the
destruction or adverse modification of
The Polar Bear
About the Authors
On December 27, 2006, the U.S. Fish
and
Wildlife
Service
proposed
listJohn
Spinello
is a(FWS)
Partner
in the Newark,
NJ office of K&L Gates. His practice
on bear
regulatory
counseling,
ingfocuses
the polar
as threatened
under environmental litigation, and legislative
and
regulatorySpecies
advocacy
clients
the
Endangered
Act for
(ESA),
due that include power plants and chemical
may bebyreached
tomanufacturers.
melting sea iceHecaused
climatejohn.spinello@klgates.com.
change. Interior Secretary Dirk KempCraigsaid,
Wilson
is aconcerned
Partner in
Harrisburg, Pa. office of K&L Gates. His
thorne,
“we are
thethe
polar
practice is concentrated in the areas of environmental compliance counseling
bears’ habitat may literally be melting.”
and transactional advice, environmental permitting, zoning and land
The listing proposal follows a petition
development He may be reached at craig.wilson@klgates.com.
filed by the Natural Resources Defense
Council
(NRDC)
andisother
environmental
Sandra
Snyder
an Associate
in the Newark, NJ office of K&L Gates. Ms.
groups
asserting
GHG
emissions
must
Snyder concentrates her practice
in environmental and natural resources law
beand
reduced
to litigation.
prevent the
elimination
related
Prior
to joining K&L Gates, Ms. Snyder worked as a
engineer
forthe
ExxonMobil.
ofchemical
polar bear
habitat by
end of the She may be reached at Sandra.snyder@
klgates.com.
century.
energy 21
habitat of such species…” Listing the
polar bear as a threatened species because of global warming could provide
a platform for third parties to challenge
federal agency actions that would directly
or indirectly impact the polar bear or its
habitat.
For example, decisions allowing the
burning of fossil fuel and the resulting
release of GHGs to the atmosphere, such
as clean air permits issued by the USEPA
or Federal Energy Regulatory Commission (FERC) decisions relating to new
fossil fuel plants, could be challenged.
Secretary Kempthorne suggests that
climate change policy would play out in
other forums, but the NRDC believes that
a positive listing decision will force action
to reduce GHGs. The FWS will spend
most of 2007 gathering information and
completing additional analysis on the
status of the U.S. polar bear population,
approximately 4,700 bears in Alaska,
before making a final listing decision. An
affirmative decision would likely prompt
more litigation under Section 7 of the
ESA, and the focused attention in 2007
on the fate of the polar bear may affect
future climate law and policy, whether or
not the species is listed as threatened.
Supreme Court Showdown
In 2003, the USEPA denied a petition
by the International Center for Technology Assessment (ICTA), seeking the regulation of GHG emissions from new motor
vehicle engines pursuant to the Section
202(a)(1) of the CAA. The USEPA cited
several bases for its decision, including
its determination that Congress had not
delegated to it the authority to regulate
GHG emissions under the CAA for the
purpose of addressing global climate
change.
When the ICTA appealed the Agency’s
decision, a divided panel of the D.C. Circuit Court of Appeals upheld the Agency’s
decision, though each of the two Judges
supporting the judgment expressed vastly
different reasons for their decision and
one judge dissented. The Supreme Court
granted certiorari and oral argument was
held in November 2006.
Based upon the focus of the Court’s
questions during oral argument, it is
possible that the Court’s decision will
22 energy turn on whether
the plaintiffs had
standing to bring
the action at all,
in which case the
Court may not
reach the merits
of the case (questioning at oral argument by Justice
Kennedy, considered a key swing
vote, however,
suggests that he
might be leaning
towards recognizing standing). If Plight of the polar bear opened the way to greenhouse litigation.
the Court does
reach the merits
of the argument and proceeds to define
Regulations S-K Item 101 and Item 303
the limits of USEPA’s authority to adare especially relevant to the disclosure
dress GHG emissions and climate change
of GHG emissions or risks associated
under the CAA, the decision will have far
with climate change. Item 101 requires
reaching implications.
disclosure of material effects that compli Most directly, if the Court finds auance with environmental law may have
thority under the CAA for USEPA to
on capital expenditures, earnings, and
regulate GHG emissions, the agency
competitive position, including continand states undoubtedly would be presgent effects. Item 303 requires discussion
sured to develop regulatory programs
and analysis of currently known trends,
addressing GHG emissions from motor
events or uncertainties that are reasonvehicles and other sources. Moreover, if
ably expected to have a material impact
GHG emissions are found to be subject to
on liquidity, capital, sales, revenue or
regulation under the CAA, many public
income. Some companies have included
companies might need to reconsider how
a discussion of climate related risks in S-K
they treat such emissions for purposes
Item 303 filings, sometimes at the behest
of environmental disclosure under SEC
of shareholders, though the SEC has
reporting requirements, GHG emissions
never expressly required this for climate
might need to be considered in corporate
related risks.
transactional due diligence investigations,
Since at least as far back as the Exxon
and the plaintiff’s bar would be further
Valdez oil spill in Alaska on March 24,
emboldened to raise nuisance and other
1989, environmental advocacy groups
claims stemming from alleged damages
have rallied institutional investors to decaused by climate change.
mand greater attention to environmental
stewardship, and advanced principles for
Corporate Disclosure
corporate governance intended to add a
Federal securities laws require public
measure of transparency and accountcompanies to ensure investors have acability to the way environmental obligacess to information about their financial
tions are managed. Following the Valdez
condition, including contingent liabilities,
incident, a group that became known as
by filing reports with the Securities and
the Coalition for Environmentally ReExchange Commission (SEC). Generally,
sponsible Economies (CERES) advanced
the SEC requires disclosure of informathe “Valdez Principles,” which over time
tion that is material to a company’s finanevolved into the CERES Principles. Since
cial position. Materiality is determined by
the early 1990s, CERES and similar
a “reasonable person” standard with no
organizations have grown in number
concrete thresholds set by the SEC. SEC
and sophistication and become deeply
Winter 2007
involved in the public debate over the appropriate response to climate change.
For example, the Carbon Disclosure
Project (CDP) and the Investor Network
on Climate Risk (INCR) are networks
of institutional investors and financial
institutions dedicated to promoting better understanding of the financial risks
and investment opportunities posed by
climate change. The CDP is an international coalition of institutional investors
with $31 trillion in assets under management. INCR, organized by CERES, is
comprised of 50 large public pension
funds and financial institutions with over
$3 trillion in assets under management.
In addition, the Interfaith Center on Corporate Responsibility (ICCR) focuses on
climate change and wide range of social
issues, and is comprised of 275 faith
based institutions with collective assets
over $110 billion.
In October 2006, CERES, INCR,
CDP, and other investor groups released
the Global Framework for Climate Risk
Disclosure: A Statement of Investor Expectations for Comprehensive Corporate
Disclosure. The Framework is intended
to encourage standardized disclosure of
risks associated with climate change, and
establish a benchmark for successful, voluntary, corporate climate disclosure. The
Framework provides for the disclosure
and analysis of the following elements:
• Historic and current GHG emissions
• Strategic analysis of climate risk and
emissions management
• Assessment of physical risks from
climate change
• Analysis of risk related to the regulation
of GHG emissions
According to the Framework, the
information provided is necessary for
investors to analyze companies’ business
risks and opportunities resulting from
climate change, as well as the companies’ efforts to address those risks and
opportunities, and should be disclosed
through SEC filings and/or other existing
reporting mechanisms. The Framework
guide favorably cites AEP’s disclosure
documents as examples of reporting.
CERES also issued a report this year
purporting to provide the first comprehensive examination of how the world’s
largest corporations in carbon-intensive
Winter 2007
sectors are positioning themselves to
address the risks of climate change. The
report scores and ranks ten industry
sectors and the major companies within
those sectors according to a point system
that considers issues of board oversight,
management execution, public disclosure, emissions accounting and emissions
management and strategic opportunities
in the area of climate change. The development of this report, like the CERES
Principles and the Framework, highlights
the ever-increasing attention being paid
by investor networks to the issue of corporate disclosure and governance on the
topic of climate change.
The attention of these investor networks, of course, is sometimes unwelcome. For example, in December
2006, institutional investors—five New
York pension funds and the Connecticut
State Treasurer’s Office - filed two “shareholders resolutions with the TXU Corp.
regarding the company’s plan to build
11 new pulverized coal-burning power
plants in Texas at an estimated cost of
$10 billion.” The shareholder resolutions note that the new coal plants cause
the company’s CO2 emissions to more
than double, so the resolutions “request
reports on how TXU is responding to
rising regulatory pressure to significantly
reduce carbon dioxide emissions from
power plants and how enhanced energy efficiency programs in Texas could
impact the company’s ability to sell its
new power.” The Benedictine Sisters
of Boerne, Texas filed a third resolution,
requesting that TXU’s board of directors
“adopt specific goals to reduce its CO2
emissions below 2004 levels and reduce
mercury emissions to levels that are
achievable using best available control
technologies.”
A (Growing) Band of States
In September 2003, the Governors
of nine New England and Northeast
States—Connecticut, Delaware, Maine,
Massachusetts, New Hampshire, New
York, New Jersey, Rhode Island, and
Vermont - announced the establishment
of the Regional Greenhouse Gas Initiative (RGGI) and their plans to develop
a regional “cap and trade” program to
reduce CO2 emissions from power plants
located in the participating States. On
December 20, 2005, seven Governors
signed a Memorandum of Understanding (MOU) setting forth in detail how
RGGI is designed to work. In addition,
the District of Columbia, Massachusetts,
Pennsylvania, Rhode Island, the Eastern
Canadian Provinces, and New Brunswick
are observers in the process.
Under the MOU, each state is allocated
a certain number of allowances, which
total just over 121 million short tons of
CO2 for the region. Generally, an allowance equals a ton of CO2. The program
applies to each fossil-fuel fired electric
generating unit with a rated capacity of
25 or more megawatts, and launches on
January 1, 2009, prior to which each
State is to issue allowances to power producers. States participating in RGGI are
discussing allocating allowances through
an auction. States are also required by
the MOU to allocate at least 25 percent
of its allowances for consumer benefit or
strategic energy purposes.
The first three-year compliance period
would conclude on December 31, 2011,
when there would be a “true-up”: power
plants that do not have enough allowances to match the amount of CO2 emitted during the three-year period would
need to purchase allowances from other
power plants in the RGGI system; power
plants that have more allowances than
needed to cover CO2 emissions for the
compliance period may sell them. The
MOU also identifies limited opportunities
to use off-set allowances—i.e., credit
for CO2 emissions reductions achieved
through actions taken in States outside
of RGGI and within the United States.
Then, beginning in 2015, each State’s
CO2 emission budget would decrease by
2.5% per year, through 2018 when each
State’s budget would be 10 percent below
its starting budget.
RGGI staff published a draft model rule
for the cap and trade program in March
2006, and finalized the model rule in
August 15, 2006. Participating States
must still adopt regulations, consistent
with the model rule, to implement the
RGGI cap and trade program in their
respective States. New York was the first
to issue a pre-proposal of its regulations
in December 2006.
energy 23
On the west coast, in September
2006, the California Legislature passed
Assembly Bill 32, the California Global
Warming Solutions Act of 2006, which
requires the California Air Resources
Board (CARB) to develop regulations
and market mechanisms (e.g., a cap and
trade program) to reduce California’s
GHG emissions by 25 percent by 2020.
In 2012, mandatory caps will begin to
apply for significant sources, ratcheting
emissions down to meet the 2020 goals.
In October 2006, California Governor
Schwarzenegger met in New York with
then Governor Pataki and discussed
California’s participation in the RGGI
program. Governor Schwarzenegger
later signed an executive order directing
CARB to link the California program
with RGGI, and possibly other state and
regional cap and trade programs.
The creation of regulatory programs by
individual states to reduce GHG emissions
in their respective states raises relatively
few legal issues, save for the question of
whether the applicable state law permits
the regulation of such emissions (CO2
may not be regarded as a pollutant or air
contaminant in a traditional sense and
prevention of climate change may not
be an appropriate subject of regulation
under some state statutes). Far more
significant legal issues arise, however,
when states act together in support of a
common regional approach. Such collective actions may implicate the Compact
Clause of the United States Constitution,
which provides, “No State shall enter into
any Treaty, Alliance or Confederation…
No State shall, without the Consent of
Congress, lay down any duty of Tonnage,
keep Troops, or Ships of War in Peace
time, enter into any Agreement or Compact with another State or with a Foreign
power, or engage in War, unless actually
invaded, or in such imminent Danger as
will not admit of delay.”
Not every agreement between states
is a compact requiring congressional
consent. The United States Supreme
Court has held that the Compact Clause
is limited to agreements that are “directed
to the formation of any combination
tending to the increase of political power
in the states, which may encroach upon
or interfere with the just supremacy of the
24 energy United States.” The Supreme Court has
further held it does not matter whether an
agreement is formal or informal, and it
is sufficient to require congressional consent if there is the potential for the agreement to threaten federal supremacy.
The potential for RGGI to encroach
upon federal supremacy may arise in
several contexts, but none so clear as
the President’s exclusive authority to
direct foreign policy. The President’s
prerogative to direct foreign policy
without interference by States was underscored in the Supreme Court’s decision
in American Insurance Association v.
Garamendi, holding a California statute
requiring disclosure of information about
Holocaust-era insurance policies to be
preempted as in conflict with agreements negotiated by the United States
and thus an impermissible interference
in the President’s prerogative to conduct
foreign policy. In reaching this result,
the Court observed that “our thoughts
on the efficacy of one approach versus
the other are beside the point, since our
business is not to judge the wisdom of
the National Government’s policy; dissatisfaction should be addressed to the
President, or, perhaps, Congress. The
question relevant to preemption in this
case is conflict, and the evidence here
is ‘more than sufficient to demonstrate
that the state Act stands in the way of
[the President’s] diplomatic objectives.’”
USEPA has noted the consistent concentration of GHGs around the earth’s
surface means reducing the emission of
GHGs in one part of the world (or part
of a country) will have no effect on climate, unless the entire world emits fewer
GHGs; and the President, of course, is
the only official properly posititioned to
represent the United States in international negotiations for a global approach
to climate change.
Taking It to Court
Given the President’s current approach
to the issue internationally, it seems likely
that the growing regional regulatory approaches being adopted by groups of
states will be challenged as violative of
the Compact Clause and in conflict with
the power of the President to conduct
foreign policy.
In 2005, several State Attorneys General and environmental advocacy groups
sued American Electric Power (AEP) and
several other power companies alleging
the GHGs their plants emitted are a common law nuisance, contributing to global
climate change and causing millions of
dollars in damages to their respective
states. The U.S. District for the Southern
District of New York ruled that the causes
and regulation of greenhouse gas emissions are “political questions” beyond
the court’s jurisdiction. The plaintiffs’
appeal of the decision is currently pending in the U.S. Court of Appeals for the
Second Circuit and is likely to be decided
in 2007.
Similarly, in September 2005, several
individuals and a putative class who sustained property and other damages as a
result of Hurricane Katrina, have sued
their insurance carriers for denial of coverage, and, in the same action, also sued
a host of energy companies for allegedly
emitting the GHGs that caused the severe
weather and the damages they sustained.
Companies sued include Murphy Oil,
U.S.A.; Chevron/Texaco Corporation;
and ExxonMobil Corporation. This matter is pending in the U.S. District Court
for the Southern District of Mississippi.
Congressional Focus
In the 109th Congress, Senators Lieberman and McCain introduced, Senate
Bill No. 139, the Climate Stewardship
and Innovation Act of 2005, that would
establish a national cap and trade program for GHG emissions. Efforts to
move this bill were defeated last year by
the Republican-controlled Senate. Senators Lieberman and McCain are likely to
reintroduce this bill in the 110th Congress, which will be led by the Democrats’
Senate Majority Leader Harry Reid and
Speaker Nancy Pelosi. Senator Barbara
Boxer (D-Calif.), will chair the Senate
Environment and Public Works Committee in the 110th Congress; Senator
Jeff Bingaman of New Mexico will Chair
the Energy and Natural Resources Committee. Both of these senators plan to
introduce legislation concerning climate
change. Senator Boxer has said she will
press for legislation like that enacted in
California in September 2006. Boxer
Winter 2007
also promises to conduct “intensive hearings on global warming.”
In the House, Rep. Henry Waxman
(D-Calif.), the incoming chairman of the
House Government Reform Committee,
introduced a bill in the 109th Congress to
freeze total U.S. greenhouse gas emissions at 2009 levels beginning in 2010,
followed by 2 percent annual reductions
through 2020. However, Rep. John Dingell (D-Mich.), who will chair the Energy
and Commerce Committee in the 110th
Congress, said the committee will “have a
look at” legislation that would set mandatory cuts in greenhouse emissions.
Conclusion
The year ahead will be an active and per-
Winter 2007
haps pivotal one in the evolution of climate
change law and policy in the United States.
Our scientific understanding of GHGs and
other influences on climate will further
develop with the release of assessments
undertaken through the Climate Change
Research Initiative, Congress will hold
hearings and focus attention on national
climate change policy, and the Supreme
Court may define the outer limits of federal
authority to regulate GHG emissions. In
addition, States are likely to face legal challenges as they launch regional regulatory
programs that clash with national foreign
policy, and investor networks will continue
to press the SEC and individual companies for greater disclosure and analysis
of climate risks, and private litigants will
continue to target GHG intensive industries
for “damages” allegedly caused by GHG
emissions.
At the same time, it is unlikely Congress
will enact a major new regulatory regime
for GHG emissions in 2007, even less
likely the President will alter his position,
and the Supreme Court may not decide
the merits of the case before it and dismiss
the matter on procedural grounds. In
this respect, the year ahead may presage
more significant developments in 2008
and beyond. Nevertheless, even if 2007
ends without major breakthrough developments, the substantial activity expected to
take place in courthouses, statehouses and
boardrooms across the country will inalterably shape and define future climate law
and policy in the United States.
energy 25
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