The Temperature's Rising:
Business Law Considerations for Greenhouse Gas Regulation
By Elizabeth Thomas, Sally Brick, Kristin Boraas, Ken Gish and Kari Vander Stoep*
Elizabeth Thomas is a partner at Preston, Gates & Ellis LLP in the Environmental and Land Use
Department. She is a member of the Energy and Utilities Practice Group. Liz was also a member of the
Energy Facility Site Evaluation Council’s Standards Review Committee.
Sally Brick is an associate at Preston Gates in the Environmental and Land Use Department. She has
previously provided advice to a coalition of greenhouse gas emitters in New Zealand and has worked on
climate change issues at the United Nations Environment Programme and the Center for International
Environmental Law.
Kristin Boraas is an associate at Preston Gates in the Litigation Department. She is a member of the
Environmental Litigation Practice Group and coauthored an article entitled, “California Passes
Environmental Regulations for Vehicles in Response to Global Warming.”
Ken Gish is an associate at Preston Gates in the Energy and Utilities Practice Group.
Kari Vander Stoep was a 2003 summer associate with Preston Gates & Ellis.
I. Introduction
Despite the opposition of the Bush Administration to ratification and enforcement of the Kyoto
Protocol, emitters of greenhouse gases (“GHG”) cannot afford to ignore the growing concern
with global warming. Shareholders are beginning to demand corporate responsibility for GHG
emissions. State Attorneys General are holding the feet of the Bush Administration to the fire,
suing to force the Environmental Protection Agency (“EPA”) to regulate GHG emissions.
Members of Congress, including members of the President’s party, persist with legislation that
would require mandatory reductions in GHG emissions.
GHG emitters should not sit on the sidelines as the mud flies between the political players in the
climate debate. The environmental consequences of steadily increasing global temperatures will
impact major landowners whose property values decrease as a result of rising sea levels, storm
damage, and decreased or contaminated water supplies. Unresponsive corporate GHG emitters
will be disadvantaged compared with US corporations that are aggressively chronicling their
GHG emission reductions and actively participating in voluntary emissions trading programs.
On a global scale, the current reluctance of the United States to participate in the Kyoto Protocol
will only put this country’s corporate emitters at a competitive disadvantage to corporations in
countries whose governments are mandating emissions reductions today.
*
The authors greatly appreciate the assistance of Doug Howell, Diane Stokke and Holly Harris, who provided
comments on this article.
Attorneys and clients who take a long-term view recognize that regulation of GHG emissions is
on the horizon, and it will have ramifications for permitting and various types of transactions.
This article explores the current state of the law regarding GHG emissions1 and provides
suggestions for the practitioner on protecting clients’ interests for a range of reasonably
foreseeable regulatory schemes.
Part II of this Article describes existing regulation of GHG emissions, and highlights recent and
emerging developments. It explains the international treaty regime that provides the backdrop
for GHG regulation at the national level. Part II also discusses federal regulation of GHG,
including the Administration’s view on the Kyoto Protocol, its alternative voluntary emissions
reduction plan, and various Congressional initiatives designed to increase US commitment to
GHG regulation. Part II further discusses state and local regulatory developments.
Part III outlines ongoing or proposed judicial and quasi-judicial actions that test the regulatory
authority of certain agencies to impose GHG regulation. In particular, it discusses a recent suit
filed by three state Attorneys General against the EPA, urging the listing of carbon dioxide
(“CO2”)2 as a criteria air pollutant pursuant to the federal Clean Air Act (“CAA”). In addition,
the Attorneys General of seven states recently filed a 60-day notice with the EPA, announcing
their intention to file a lawsuit that would force the EPA to address GHG emission levels. Part
III also addresses efforts by institutional investors to hold boards of directors accountable for
their corporations’ GHG emissions.
Part IV sets out some considerations in planning for GHG mitigation; in particular, the likely
regulatory focus on power plants, the choice between implementing mitigation projects or paying
someone else to (project vs. monetary approach), and the emerging US markets for tradable
permits.
Part V highlights some client counseling issues that practitioners should be aware of. For
example, in planning for future regulation it may be prudent for clients to take advantage of
voluntary national or state registries for GHG, and to carefully document the GHG element in
any transaction in order to protect the potential value of mitigation efforts and identify and
allocate potential risks.
1
A greenhouse gas is any gas that absorbs infrared radiation in the atmosphere. Greenhouse gases include water
vapor, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), halogenated fluorocarbons (HCFCs), ozone (O3),
perfluorinated carbons (PFCs), and hydrofluorocarbons (HFCs). Greenhouse gases allow incoming solar radiation
to pass through the Earth's atmosphere, but prevent part of the outgoing infrared radiation from the Earth's surface
and lower atmosphere from escaping into outer space. This process occurs naturally and has kept the Earth's
temperature about 59 degrees Fahrenheit warmer than it would otherwise be. Increased concentrations of greenhouse
gases caused by human activities such as fossil fuel consumption, trap more infra-red radiation, thereby exerting a
warming influence on the climate. http://yosemite.epa.gov/oar/globalwarming.nsf/content/glossary.html#E.
2
Carbon dioxide is a colorless, odorless, non-poisonous gas that is a normal part of the ambient air. Carbon dioxide
is a product of fossil fuel combustion. Although carbon dioxide does not directly impair human health, it is a
greenhouse gas that traps terrestrial (i.e., infrared) radiation and contributes to the potential for global warming.
http://yosemite.epa.gov/oar/globalwarming.nsf/content/glossary.html#E.
II. Existing Regulatory Structure and Recent Developments
International Regulatory Landscape
International Treaty Regime
Two international agreements provide the overarching schema for regulating GHG emissions:
the 1992 United Nations Framework Convention on Climate Change (“UNFCCC”), and the
1997 Kyoto Protocol to the Convention (“Kyoto Protocol”). In 1992, countries negotiating the
UNFCCC adopted a framework convention, which contains general principles and establishes
institutions, but does not include binding targets for reductions in GHG emissions. Instead, the
UNFCCC includes a non-binding "aim" for industrialized countries - to return emissions to 1990
levels by the year 2000. As is common with framework conventions, the UNFCCC explicitly
contemplates that Protocols may be added.3
The Kyoto Protocol contains more detailed and explicit commitments from member countries,
and was adopted in 1997 at the Third Conference of the UNFCCC Parties (held in Kyoto). Most
significantly, the Kyoto Protocol sets legally binding targets and timetables for cutting developed
country emissions of the six main greenhouse gases: CO2; methane (CH4); nitrous oxide (N2O);
hydrofluorocarbons (HFCs); perfluorocarbons (PFCs); and sulphur hexafluoride (SF6). Under
the Protocol, developed countries commit to reducing their collective emissions by at least 5%.
The Kyoto Protocol could enter into force within the next year. Fifty-five Parties to the
UNFCCC must ratify the Protocol for it to become effective, and it must also be approved by
enough developed country Parties so that 55% of that group’s emissions are subject to the
Protocol.4 As of July 3, 2003, 110 countries had signed on to the Protocol, and developed
country ratifications account for 43.9% of 1990 CO2 emissions. Ratification by the Russian
Federation is all that is needed to bring the Protocol into force. Australia and the United States
have stated that they will not join the Protocol.5
An Alternative to Kyoto
Economists Warwick J. McKibbin and Peter J. Wilcoxen have suggested an alternative to the
Kyoto Protocol, arguing that failing to acknowledge the costs of climate policy ultimately will
doom global efforts to curb GHG emissions.6 The McKibbin and Wilcoxen report faults Kyoto
for the inherent incentive for countries to avoid monitoring emitters and enforcing caps. The
report suggests an alternative to Kyoto that would give countries a fixed number of long-term
emissions permits to sell based on 95% of 1990 emission levels.
3
Article 17.
Article 25.
5
See discussion of US position below.
6
Warwick J. McKibbin and Peter J. Wilcoxen, Climate Change After Kyoto: A Blueprint for a Realistic Approach,
THE BROOKINGS REVIEW, Spring 2002, Vol. 20, No. 2, at 7-10.
4
Countries also would have the ability to sell additional short-term permits when necessary to
supplement the long-term permits. The short-term permits would be sold at an internationally
agreed-upon price. At the end of each year, emitters would be forced to reconcile their emissions
with their permits. If there is a permit shortfall, the emitters would be required to purchase shortterm permits to make up the difference. The authors contend this system will lead to better
monitoring and compliance than the Kyoto Protocol because the failure of emitters to purchase
the appropriate level of permits will deprive governments of permit revenues. In addition, the
holders of long-term permits will pressure their governments to enforce the scheme in order to
maintain the value of their permits. The authors claim their approach also encourages countries
to implement domestic permit programs before an international program is established, allowing
their economies as much time as possible to adapt to the risks of climate policy.
The Federal Regulatory Landscape
The Bush Administration and the Kyoto Protocol
Federal (in)action with regard to GHG must be seen through the lens of the Bush
Administration’s opposition to the Kyoto Protocol. In March 2001, President Bush announced
that the United States would not ratify the Kyoto Protocol, favoring instead a long-term solution
hinged on economic growth.7
Even in the face of criticism both internationally and at home, President Bush has not flinched in
his position on the Protocol.8 Thus, in the short term at least, US policies on GHG emissions
need not, and probably will not, reflect the types of emission reduction obligations contained in
the Kyoto Protocol. However, the Administration is working on policies and initiatives related
to GHG. Although not binding, these policies and initiatives impose some incentives and
pressures on US businesses now and, arguably, have implications for the regulatory landscape in
the medium and perhaps long term as well.
The Administration’s policies on climate change
The Bush Administration has targeted power plant pollution, but notably without addressing
CO2. The Clear Skies initiative requires emissions reductions in nitrogen oxides (NOx), sulfur
dioxide (SO2) and mercury.9 Thus, Clear Skies unambiguously reflects the Administration’s
policy that CO2 should not be the subject of binding reduction schedules. The Administration’s
flexible approach is represented in Climate, Voluntary Innovative Sector Initiatives:
Opportunities Now – or Climate VISION – a plan that was unveiled in February 2003. Under
7
Letter from the President to Senators Hagel, Helms, Craig and Roberts, dated March 13, 2001.
A June 23, 2003 EPA report on the state of the environment dedicated just a few paragraphs to global climate
change. See “Draft Report on the Environment” at www.epa.gov/indicators. A June 19, 2003 article in The New
York Times reported earlier drafts of the EPA report included references to studies that concluded global warming is
partially the result of “rising concentrations of smokestack and tail-pipe emissions and could threaten health and
ecosystems.” These references were removed from the report released on June 23, 2003. Andrew C. Revkin and
Katharine Q. Seelye, Report by the E.P.A. Leaves Out Data On Climate Change, THE NEW YORK TIMES, June 19,
2003, at A1.
9
The President’s Clear Skies Act of 2003 was introduced in both Houses of Congress on February 27, 2003 (HR
999 and S. 485). On June 5, 2003, the US Senate Subcommittee on Clean Air, Climate Change, and Nuclear Safety
held a hearing on S. 485.
8
Climate VISION, industry leaders are asked to voluntarily sign on to reduce their GHG
emissions. In contrast with the Kyoto Protocol regime, the President’s plan does not require
reductions in total emissions, but rather reductions in GHG intensity, which is the ratio of
emissions by economic output.10 The Administration expects industry groups to voluntarily
reduce their GHG emissions by 18% for each unit of gross domestic product by 2012.
Successful voluntary reductions may create an institutional framework for later regulation. Even
though the President’s Climate VISION plan does not impose compulsory reductions in GHG
emissions, some commentators believe that the voluntary policy paves the way for future
mandates. Once some companies voluntarily reduce their emissions, they will have a vested
interest in all companies being similarly constrained by obligatory emission caps.11 There is also
an incentive for companies that accept voluntary reductions to seek value for such reductions for
use in a tradable permit scheme.
Congressional Initiatives
Undeterred by Presidential policies, members of Congress have actively sought climate change
regulation. The Pew Center on Global Climate Change calculated that there were seven climate
change-related legislative proposals introduced in the 105th Congress (1997-1998), 25 in the
106th Congress (1999-2000), and in the 107th Congress (2001-2002), over 75 bills, resolutions,
and amendments were introduced that addressed climate change in some way.
The Byrd-Hagel Resolution, however, was a huge victory for those opposing imposition of the
Kyoto Protocol on the United States. In June of 1997, Sen. Robert Byrd (D-WV) introduced,
with Sen. Chuck Hagel (R-NE) and 44 other cosponsors, a resolution stating that the impending
Kyoto Protocol (or any subsequent international climate change agreement) should not: 1)
mandate limits or reductions of GHG emissions for developed countries unless specific
commitments also are imposed on developing countries, or 2) mandate limits or reductions if
such limits or reductions would result in harm to the US economy.12
The Byrd-Hagel Resolution passed 95 – 0. President Bush cites this unanimous vote when
explaining his position on the Protocol. While the Clinton Administration approved the Protocol,
it has not been submitted to the Senate for ratification.
Congress has not abandoned the Protocol, however. Dissenters from President Bush’s position
are attempting to advance the issue by introducing their own legislation. Sen. Joseph Lieberman
(D-CT) and Sen. John McCain (R-AZ) introduced the Climate Stewardship Act13 on January 9,
2003 that would require a reduction to 2000 CO2 emission levels by the year 2010, and a
reduction to 1990 levels by the year 2016.
10
Since the intensity measurement links emissions to gross domestic product, this formula allows GHG emissions to
increase, as long as they grow at a slower rate than the economy.
11
Competitive Enterprise Institute, cited in Allison Freeman, Top Administration, business officials tout GHG plan,
Greenwire, Feb. 13, 2003. As an example, DuPont Co. has retrofitted its manufacturing facilities to cut its
emissions and is now backing Congressional proposals to impose a mandatory cap.
12
S. Res. 98, 105th Congress.
13
S. 139, 108th Congress.
The emissions reductions mandated in the Climate Stewardship Act are achieved through a
market-based emissions credit trading system – otherwise known as the “cap-and-trade”
approach and modeled after the CAA’s acid rain trading program. The trading system would
rely upon a government inventory of emissions and emission reductions for individual
companies and utilities.14 Companies would be required to submit one tradable allowance for
each metric ton of GHG emissions, and companies could buy and sell credits among themselves.
Thus, some companies could decide that it was cost effective to make large reductions and sell
their extra emission credits; others could simply buy additional credits to match their emission
levels. Any company not meeting its emissions limits would be fined for each ton of greenhouse
gases over the limit at the rate of three times the market value of a ton of GHG.
An alternative legislative proposal goes one (GHG) better than the Clear Skies legislation. The
proposal seeks to address the same three power plant emissions that the Clear Skies legislation
limits, but also sets limits on CO2 emissions. On February 12, 2003, Sen. Jim Jeffords (I-VT),
along with 19 co-sponsors including Maine Republicans Susan Collins and Olympia Snowe,
introduced the Clean Power Act of 2003.15 Under the Clean Power Act, CO2 will be capped at
21% below 2000 levels. The Clean Power Act would allow for some use of market-based
mechanisms, such as emissions trading, auctions or other allocation methods in order to comply
with emissions targets.
Other senators have turned their attention to a power plant emissions bill that addresses CO2
emissions. Senators Thomas Carper (D-DE), Lincoln Chafee (R-RI) and Judd Gregg (R-NH)
introduced the Clean Air Planning Act in April 2003, 16 setting national emissions caps on CO2,
as well as SO2, NOx and mercury. Specifically, it sets a 2013 deadline to cap CO2 emissions at
2001 levels.
Proposed DOE Reporting Guidelines
The Department of Energy (DOE) published, on December 5, 2003, a proposed rule to revise
guidelines for voluntary reporting of GHG emissions and sequestration. Such reports are placed
in a registry of emissions reducers, where entities that reduce GHG emissions receive special
recognition. Under the proposed rule, entities emitting more than 10,000 tons of CO2 would be
required, when registering emissions reductions, to provide an inventory of their total emissions
and calculate the effectiveness of their entity-wide emissions reduction programs. This
represents a significant increase in the information gathering requirements for large emitters
wishing to register their emissions reductions. Entities emitting less than 10,000 tons would be
able, under certain conditions, to register their emissions reductions without conducting an
emissions inventory. The deadline for receipt of public comments was February 3, 2004.
14
The Secretary of Commerce would determine the amount of allowances allocated to each entity and the amount to
be auctioned. The Secretary's determination would be subject to a number of factors identified in the bill. Proceeds
from the auction would be used to reduce energy costs of consumers and assist disproportionately affected workers.
15
S. 366, 108th Congress.
16
S. 843, 108th Congress.
NEPA Considerations
A recent Eighth Circuit decision held that where a project will increase the low-cost availability
of "dirty fuels," the courts can require that environmental impact statements (EIS) consider air
emissions from their downstream use. Moreover, the Court indicated that the EIS may have to
consider air pollutants that are not capped by statute, and this may include CO2 emissions despite
the Federal government's reluctance to regulate them. Mid States Coalition for Progress v.
Surface Transportation Board, 345 F.3d 520 (8th Cir. Oct. 2, 2003) concerned a proposal by the
Dakota, Minnesota & Eastern Railroad Corporation (the "Railroad") to construct and upgrade a
rail line. The federal licensing agency for the project, the Surface Transportation Board (Board),
had to complete an EIS under the National Environmental Policy Act (NEPA). Environmental
groups challenged the Board's approval of the project, arguing that the final EIS should have
addressed the increased air emissions, including CO2, facilitated by the Railroad project’s
provision of reduced-cost coal, which could in turn increase coal consumption at power plants.
NEPA requires federal agencies to consider "indirect" adverse environmental effects, which must
be caused by the action and must be reasonably foreseeable rather than speculative. The
Railroad argued that the effects of increased coal generation were too speculative because coalhauling contracts had not yet been finalized. The Court was not convinced, and vacated the
Board's final decision so that its deficiencies could be corrected. The Court held that increased
consumption of coal, and the associated air emissions, were reasonably foreseeable as a result of
the Railroad's project. More specifically, the nature of the air quality effects of the Railroad's
project was reasonably foreseeable, even though the extent of the effects was not. According to
the Court: “The nature of the effect ... is far from speculative. ... [I]t is reasonably foreseeable —
indeed, it is almost certainly true — that the proposed project will increase the longterm demand
for coal and any adverse effects that result from burning coal.” The Court noted that, during the
NEPA review process, parties had identified computer models used in the electric power industry
that could simulate the effects of coal consumption from the proposed rail line.
Significantly, the Court implied that the EIS should have considered CO2 emissions. The final
EIS proceeded on the assumption that air emissions would be limited to the level mandated by
law. The Sierra Club argued, however, that because certain pollutants — including CO2 — are
not subject to a regulatory cap, the EIS had erroneously disregarded them. Although the Court
did not specifically list the uncapped pollutants, it appeared to accept the Sierra Club's argument:
“[The Board's] 'assumption' may be true for those pollutants that the [Clean Air Act]
amendments have capped ... but it tells the decision-maker nothing about how this project will
affect pollutants not subject to the statutory cap.” Thus, the Court concluded that, for the most
part, the Board had completely ignored the effects of increased coal consumption. The Coalition
for Progress case has drawn attention from environmental groups and the media because of this
novel suggestion that NEPA review should include reasonably foreseeable CO2 emissions.
Washington State & Local Regulatory Developments
Washington has toyed with the idea of regulating GHG, but has yet to do so. Since at least 1995,
Washington agencies have focused on mitigation for energy-related GHG emissions. The
agencies have targeted primarily power generation, although there is a recognition that more than
half the GHG in the state arise from transportation rather than power generation or other
industrial sources.17 In past years, the Washington Legislature considered, but did not adopt, a
number of bills that would have imposed limitations and/or mitigation requirements on thermal
generating facilities and other emitters of GHG. As of this writing, the Legislature has only
adopted a clearinghouse for information about climate change, not any regulatory
requirements.18
EFSEC Standards
In Washington State, the Energy Facility Site Evaluation Council (“EFSEC”) has exclusive
permitting authority over fossil-fueled generating facilities with a capacity in excess of 350
megawatts.19 EFSEC has imposed CO2 reporting and/or mitigation requirements on generating
facilities that have been permitted since 1996.20 EFSEC imposes requirements on a case-by-case
basis. For example, the Chehalis Generation Facility generally must offset actual annual CO2
emissions in excess of 1.8 million on a ton-for-ton basis – i.e., at actual cost; while the Sumas 2
Energy Generation Facility must pay $0.57/ton for CO2 emissions that exceed a hypothetical
efficient plant baseline used by the Oregon energy facility siting council.
Recognizing the desirability of a predictable agency approach to CO2, EFSEC is taking steps to
develop standards relating to CO2 mitigation for new projects. Based on work done by the
“EFSEC Standards Development Group” in 2001-02,21 EFSEC promulgated a draft CO2
mitigation rule on October 1, 2003.22 As proposed, the rule would have required that a new
fossil fuel-fired generation facility mitigate, at $0.87 per metric ton, twenty percent of the CO2
that it would emit over a thirty year period. Holders of new EFSEC certificates could mitigate
by either paying the money to a qualified third party with experience in mitigation activities or
using the money themselves to develop their own mitigation programs. If a facility opted to
develop its own mitigation program, that program would require EFSEC approval prior to
initiation.
Following promulgation of the draft rule, EFSEC conducted two public meetings took written
comments through December 1, 2003. Extensive comments were submitted, and may trigger
substantial revisions to the preliminary draft rule. EFSEC is reviewing the comments and
conducting a Small Business Economic Impact Statement and a Benefit/Cost Analysis for the
17
Washington State Office of Trade and Economic Development, “2001 Biennial Energy Report,” January 2001, at
p. 5-2.
18
RCW 28B.30.642 (authorizing the Washington Climate and Rural Energy Development Center). Bills that would
have established a registry for GHG emission inventories, providing an opportunity to chronicle voluntary
reductions in anticipation of a mandatory program, failed during Washington’s 2003 legislative session (HB 2119
and SB 5945).
19
RCW 80.50.060.
20
See, e.g., site certification agreements (“SCAs”) issued by EFSEC for the Chehalis Generating Facility, the Satsop
Combustion Turbine Project, the Sumas 2 Energy Generation Facility, and the Wallula Power Project. These SCAs
are all available on EFSEC’s website at http://www.efsec.wa.gov/proj.html.
21
This group had members from diverse interest groups and disciplines and met in a series of facilitated meetings
from December 2001 – August 2002. Its final report is at http://www.efsec.wa.gov/standards/kroghtoc.htm.
22
The draft is available at http://www.efsec.wa.gov/standards/Draft463-NEW(CO2).pdf.
proposed rule. The Council anticipates publishing a formal rulemaking notice in April 2004 and
adopting the final rule later this summer.
Ecology and PSCAA
In past years, neither the Washington State Department of Ecology (“Ecology”) nor the Puget
Sound Clean Air Agency (“PSCAA”) – the two agencies with air permitting authority – has
required applicants for air permits under the state or federal Clean Air Acts to limit or mitigate
emissions of CO2 or other GHG, except to the extent that such gases are defined as “pollutants”
under the federal CAA. However, in December 2002, PSCAA issued a notice that it intended to
amend its rules under the Washington State Environmental Policy Act (“SEPA”).23 The notice
announced a hearing on January 13, 2003, but PSCAA subsequently cancelled the hearing and
has taken no further action on the rule. The proposed amendment would have changed a policy
statement under PSCAA’s Reg. I, Sec. 2.12(c)(4)(ii)(c) from “consider energy efficiency and
conservation to reduce greenhouse gases” to “mitigate emissions of greenhouse gases.” Whether
PSCAA has the legal authority to require GHG mitigation has not been resolved.
Ecology has rulemaking for greenhouse gases on its 2004 agenda.24 At the direction of
Washington Governor Gary Locke, the Ecology rule will be designed to address fossil-fueled
power plants that fall below EFSEC’s 350-megawatt jurisdictional threshold. It is expected to
impose CO2 mitigation requirements that are substantially similar to whatever requirements are
contained in the final EFSEC rule. One issue of concern is limiting Ecology’s CO2 mitigation
requirement to power plants when Ecology has air permitting authority over many other
industrial, commercial and transportation facilities that emit CO2.
Other States’ Actions
California
In an atypical attempt to regulate CO2 from transportation emissions, California passed
legislation last year limiting emissions from automobiles.25 The bill requires the development of
GHG standards for automobiles beginning in the 2009 model year. The likely practical effect of
the legislation will be to increase automotive efficiency. The legislation does not authorize fees
or taxes, limitations on vehicle miles, or reductions in the speed limit or vehicle weight, so the
only feasible alternative is to increase engines’ energy efficiency.26 Not surprisingly, AB 1493
generated intense opposition from automobile manufacturers.27 California is unique in its ability
to adopt transportation emission regulations that are stricter than the CAA because it
implemented laws in this area before the CAA went into effect. 42 U.S.C. § 7543(b)(1). Other
23
Puget Sound Clean Air Authority Notice to Amend Rules under SEPA, Seattle Daily Journal of Commerce,
December 23, 2002 (Public Notice Section), at 15.
24
Department of Ecology Rule Agenda January 2004, available at http://www.ecy.wa.gov/lawsrules/misc/wsr0403021.pdf.
25
AB 1493, 2001-2002 Leg. Sess. (Ca. 2002).
26
AB 1493.
27
George Skelton, Signing Vehicle Emissions Bill a No-Brainer for Davis, LOS ANGELES TIMES, July 4, 2002, § 2, at
8; Steven Hayward, California CO2 Bill’s Unintended Consequences, ENERGY DAILY, July 31, 2002, Vol. 30, No.
146.
states do not have the same freedom to pass regulations that go beyond the CAA; however, they
may adopt the auto emission standards in effect in California.
Oregon
In 1997, the state passed legislation that called for new power plants to offset their CO2
emissions by 17%.28 Power plants may comply with this requirement by paying The Climate
Trust, a nonprofit organization envisioned by the legislation to implement emission reduction
projects.29 The Climate Trust uses the money garnered from payouts under the legislation to
reduce or sequester CO2 emissions.
Massachusetts
Massachusetts, meanwhile, cracked down on its oldest, dirtiest power plants in regulations
passed in 2001.30 The “filthy five” escaped regulation in earlier legislative enactments as
previous regulations exempted some older plants.31 The new regulations limit emissions of
several pollutants, including CO2.32 Some expect the regulations will reduce pollution from
these plants by more than 50%.33
III. Other Attempts To Require Regulation or Reductions of GHG
Litigation Against the EPA
While federal legislation may eventually impose definitive restrictions on CO2 emissions, a few
states are not waiting that long. Instead, a multi-state coalition plans to work within existing
regulations to force federal action on climate change immediately. On June 4, 2003, the
Attorneys General for Massachusetts, Connecticut and Maine filed a lawsuit in the federal
district court of Connecticut against the EPA. The suit targets the agency’s failure to list CO2 as
a criteria air pollutant under Section 108 of the CAA. Success in the suit would impact all
sources of CO2, notably transportation emissions, because the EPA would be forced to develop
national ambient air quality standards for CO2, which would limit the level of the pollutant
allowable in the ambient air.34
In a separate action, the Attorneys General of twelve states, along with three major metropolitan
cities and most environmental groups35, filed suit against the EPA to force regulation GHGs.
28
H.B. 3283 (Or. 1997).
http://www.climatetrust.org/.
30
310 CMR 7.29 Emissions Standards for Power Plants.
31
http://www.clf.org/hot/20010423.htm.
32
310 CMR 7.29(1).
33
http://www.clf.org/hot/20010423.htm.
34
See Press Release of The Office of Massachusetts Attorney General Tom Reilly, Massachusetts, Connecticut and
Maine Sue EPA on Global Warming, June 4, 2003.
35
State plaintiffs in this action include Connecticut, Illinois, Maine, Massachusetts, New Jersey, New Mexico, New
York, Oregon, Rhode Island, Vermont and Washington. American Samoa, the District of Columbia and the cities of
New York and Baltimore joined in the suit along with fourteen environmental groups. California is filing a separate
complaint.
29
This suit challenges an August 28, 2003 determination by the EPA that it will not regulate CO2
and other GHGs. EPA’s decision relied on a determination that Congress has not granted it the
authority under the Clean Air Act to regulate GHGs for climate change purposes.36 The
plaintiffs have asked the Court of Appeals for the D.C. Circuit to review EPA’s decision. They
contend that the EPA does have authority under the Clean Air Act to regulate GHGs and must do
so. Massachusetts Attorney General Tom Reilly declared the October 23, 2003 filing, “a
watershed event in the fight to stop global warming.”37
Addressing Climate Change in the Corporate Boardroom
Some environmentally focused investors are targeting the boards of corporate emitters of GHG.
In January 2003, the administrators of the Presbyterian Church’s Foundation and Pension Fund
(worth $8.2 billion) and the state of Connecticut’s pension fund (worth $17 billion) announced
the filing of “shareholder disclosure resolutions” with the boards of directors of the “Filthy Five”
utilities: American Electric Power, Southern Company, Cinergy, TXU and Xcel Energy.38 The
boards are requested to report on the economic risks of past, present and future emissions of
CO2. In total, shareholders have introduced resolutions on climate change at 27 US companies
this year.39
Denise Nappier, Treasurer of the State of Connecticut and principal trustee of the Connecticut
Retirement Plans and Trust Funds, testified at a US Senate Environment and Public Works SubCommittee hearing on the Bush Administration’s Clear Skies legislation on June 5, 2003. She
gave the following justification for investor interest in climate change: “The consequences for
those companies that do not act responsibly today and take steps to assess and mitigate the risk
associated with climate change can be quite devastating. For example, companies could face the
prospect of losing their competitive edge, incurring litigation costs, or being saddled with
unforeseen capital expenses, just to name a few. All of these factors – and others – can erode
shareholder value and place today’s seemingly solid investment in jeopardy.”40
IV. Planning for GHG Mitigation
What is Required and Who is Affected?
It remains difficult to predict what if any GHG requirements will be imposed in the United
States. On a state-by-state or local basis, we may continue to see a patchwork of inconsistent
requirements imposed, as in Washington and Oregon. On the federal level, political pressure,
coupled perhaps with a favorable ruling in the Attorneys’ General litigation, may lead to
emissions limits, a cap-and-trade system, or offset requirements. It is the sense of these authors
that within several years, some federal regulatory action is likely due to increasing public
36
See http://www.epa.gov/newsroom/headline_082803.htm.
See http://www.oag.state.ny.us/press/2003/oct/oct23a_03.html.
38
Jennifer Alvey, Institutional Investors Gang Up On “Filthy Five” CO2 Emitters, PUBLIC UTILITIES FORTNIGHTLY,
March 1, 2003, at 42.
39
Press Release of Coalition for Environmentally Responsible Economies, Treasurers Express Concern About Risks
To Investments From Climate Change, April 1, 2003.
40
Statement by Connecticut Treasurer Denise L. Nappier, US Senate Committee on Environment and Public Works,
Subcommittee on Clean Air, Climate Change, and Nuclear Safety, June 5, 2003.
37
concern about the impacts of climate change. Under any of the currently proposed approaches,
markets for tradable CO2 emission credits will almost certainly continue to develop and be relied
upon by the regulated community.
Focus on Power Plants
It seems likely that power-generating facilities will be a primary target of any approach because
of their substantial contribution, on a national level, to GHG emissions, and because of the
relative ease of regulating their emissions. Federal legislation, recent state enactments and the
state AGs potential litigation focus on power plant emissions. California, with its recent climate
change transportation legislation, is a notable exception to the focus on power plants.
Options to Satisfy Requirements: Monetary and Project Approaches
Emitters are often given some choice as to how they will address CO2 regulatory requirements.
In both Oregon and Washington, although requirements differ, the entity whose CO2 emissions
are targeted has the option of either developing projects to offset GHG emissions – a “project
path”; or making payments to an organization whose chief mission is mitigating for such
emissions – a “monetary path.” Each has advantages and disadvantages.
With either approach, regulators will want to be satisfied of several factors. They will want to
know the basis for the quantification of benefits. They will want to know that the measures are
“additive,” that is, that absent the regulatory requirement the benefits would not occur. Further,
regulators will want protection against “leakage,” that is, against the possibility that benefits will
be lost over time, e.g., through development of forested land. (This is of particular concern with
offshore projects.) Under a monetary path, the burden of demonstrating these factors and
protecting against these risks can be shifted to the provider of credits.
The Oregon Energy Facility Siting Council recently adopted amendments to its rules regulating
“project paths” or “offset projects” for energy facility applicants anticipating CO2 emissions.41
The amendments identify the following projects as qualifying “offset” projects, but the list is not
exhaustive: energy efficiency; demand-side management measures for electricity and natural
gas; electricity generation from renewable energy; fuel switching; CO2 sequestration through
afforestation, reforestation, forest management and forest conservation; capturing flue gas CO2
for sequestration; electricity generation from methane from a landfill or from biogas (animal
waste or waste water) or from fugitive methane emissions from existing or abandoned coal
mines; and vehicle CO2 emissions reductions. The amendments prohibit the Siting Council from
considering offsets related to nuclear power.
The Siting Council’s amended rules also require that an offset project “result in an avoidance,
reduction, or displacement of actual carbon dioxide emissions from fossil fuels or the
sequestration of carbon dioxide emissions resulting from a specific and identifiable action(s).”
The applicant must not sell or trade its CO2 offsets, and must not allow any other entity to report
or use the offsets. With respect to using demand-side management as an offset project, the
amended rules state such benefits cannot be double-counted by the energy supplier and the party
41
Proposed Rule, OAR 345-024-0680, Carbon Dioxide Offset Projects (June 23, 2003).
conserving the energy. Rather, the energy supplier must have a contract with the conserving
party that transfers the credit for the offsets to the supplier. The amended rules also require that
the applicant: 1) demonstrate it owns the proposed offsets; 2) place in trust with the Siting
Council a CO2 offset transfer instrument; 3) demonstrate to the Siting Council that it or any
partners can fund and manage the offset project in the future; 4) establish a monitoring and
evaluation plan for the offset project; 5) provide documentation of any negative environmental
impacts of the offset project; and 6) establish that other countries hosting offset projects will
transfer such credits to the Siting Council. Except in limited circumstances, the Siting Council
will not give credit to an offset project for more than 30 years.
Emerging Markets for Tradable Credits
Already there are a number of sources for GHG credits and related programs. The Climate Trust
handles all monetary path projects in Oregon, and also is available to provide a range of services
– from consulting to project development – to projects in Washington. In part, it obtains credits
from the Bonneville Environmental Foundation, another non-profit organization that is engaged
in promoting renewable energy resources. The “Chicago Climate Exchange,” which is modeled
after CO2 trading programs in other countries and successful mandatory pollution trading
programs operating in the United States,42 was launched with substantial support from Midwest
utilities, and also serves Canada. This group of industry players created their own trading
program for CO2 without regulatory prodding. This voluntary environmental measure is what
Bush hopes to encourage; however, it is unclear that a trading program without target reductions
will be effective in meaningfully reducing CO2 emissions.
Many of the climate change bills gaining momentum in Congress contain either voluntary or
mandatory emission credit trading programs. In May 2003, researchers from the Massachusetts
Institute of Technology and National Economic Research Associates, Inc., issued a report that
takes a critical look at previous emissions trading programs implemented in the United States.43
The report draws five lessons from these attempts that can be applied to a cap-and-trade program
for GHG. First, the authors argue properly structured trading programs reduce compliance costs
by as much as 50% compared with command-and-control emissions reduction programs.
Second, the report refutes the notion that emissions trading is a way of avoiding emissions
reduction requirements. Third, the authors promote trading programs that clearly define the
allowance or credits that may be traded without requiring case-by-case pre-certification. Fourth,
the report notes that the benefits of trading programs are often achieved by establishing
“banking” mechanisms, rather than relying solely on trading among participants in the same
period. Finally, the authors observe that the complications involved with the initial allocation of
credits can be overcome and the political wrangling during this process does not destroy the
overall long-term environmental benefits that are the goal of the trading program. The authors
note that emissions trading is particularly well-suited to a GHG reduction program because such
emissions are uniformly mixed in the atmosphere and their impacts do not vary with the seasons
(as compared with lead, SO2 or NOx). The authors also endorsed a voluntary, opt-in emissions
trading program for GHG despite the problems identified with other opt-in emissions trading
42
http://www.chicagoclimatex.com.
A. Denny Ellerman, Paul L. Joskow, and David Harrison, Jr., Emissions Trading in the U.S.: Experience,
Lessons, and Considerations for Greenhouse Gases, Pew Center on Global Climate Change, May 2003.
43
programs. While previous voluntary programs have led to credits that did not represent real
emissions reductions, the report notes the benefits of fostering familiarity for participants and
encouraging early involvement in a system that eventually must be expanded globally.
V. Client Counseling Issues
Planning for Future Regulation
Entities may choose to participate voluntarily in a national or state registry. The Department of
Energy (“DOE”) and a number of states have adopted registries for GHG emissions and
reductions. Section 1605(b) of the Energy Policy Act of 1992 required DOE’s Energy
Information Administration to establish the Voluntary Reporting of Greenhouse Gases Program.
Under this program, a client can establish a public record of emissions, reductions or
sequestration achievements in a national database. A client may wish to file such a report to gain
recognition for environmental stewardship, or to demonstrate support for voluntary approaches
to achieving environmental policy goals. Guidelines for these reports are in the process of
revision, but, even after revision, the registries will remain an attractive option for qualifying
entities. Several states have also adopted registries. In theory, registering now may prove
helpful in the future if a comprehensive regulatory scheme is implemented because it might
allow the client to prove an emissions baseline, or lay claim to credits already earned. Much will
hinge, of course, on how well the prerequisites for registration match the conditions of a true
regulatory program.
Identifying & Protecting Potential Value
Tracking the benefits of GHG mitigation will be increasingly vital in any transaction. Given the
enormous uncertainty regarding what limits or mitigation may be required by whom, as well as
scientific uncertainty regarding the source of GHG and the effectiveness of various approaches
to CO2 offsets and sequestration, it is critically important to be specific in documenting any
transaction that may have a GHG element. For example, any conservation easement should
specify to whom any GHG mitigation benefits will accrue. Similarly, any agreement for
purchase of power from a renewable energy resource should specify whether the “green”
attributes of the project will remain with its owner or pass to the power purchaser.
Practitioners must remember to think broadly about potential GHG benefits and risks.
Agriculture can provide both a source and a sink for GHG emissions. Practitioners should
consider identifying and allocating these risks and benefits in transaction documentation relating
to agricultural land or activities.
Identifying & Allocating Potential Risks
Practitioners should work to protect clients against changing information and science. For
example, a client that is required to provide mitigation under either a monetary or project path
should obtain regulatory protection against Monday-morning quarterbacking. If the client takes
all actions required under its path, there should be no change in the mitigation obligation based
on later scientific developments that could show emissions were greater than believed or that an
offset or sequestration approach was less effective than expected. See OAR 345-024-0560 and –
0600 (the regulatory body can ensure implementation but “shall not require that predicted levels
of avoidance, displacement or sequestration of carbon dioxide emissions be achieved”).
Allocation of risks and credits is extremely important, especially when circumstances change
during a project. A client that is involved in a GHG mitigation project should, of course, strive
for clarity regarding ownership of credits, etc. in any documents relating to the transaction. The
documentation also should specify who would bear the risk of, e.g., project non-performance;
failure of the project to qualify under an after-adopted regulatory program; changes in the market
for credits; and changes in scientific understanding.
VI. Conclusion
Throughout the United States, public awareness of GHG issues has been rising steadily. Both
the regulatory framework to mitigate for emissions of CO2 and other greenhouse gases, and the
scientific understanding necessary to support such a framework, are evolving rapidly.
This state of flux creates risks and opportunities. Emitters of GHG face the risk that their
emissions will be limited, and/or that mitigation will be required. All parties face risks of
changes in regulation, and risks of interpreting contracts and other documents that were drafted
without thought to assigning obligations and benefits associated with emissions or mitigation.
However, opportunities also abound for clients and practitioners who think to address GHG
issues in advance of a regulatory scheme. Credits can likely be purchased at lower prices now
than after regulations are put in place. Owners of land may be able to obtain compensation for
the mitigation value of vegetation. Developers of renewable resources and other projects that
can reduce emissions may be able to secure supplemental funding. It will be important for
attorneys practicing in the areas of real estate and finance, as well as energy and environmental
law, to monitor developments in the law of greenhouse gases.
Elizabeth Thomas
Partner
Practice Area(s): Energy & Utilities, Environmental & Land Use, Environmental
Litigation, Telecommunications
Seattle: 925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
Tel: (206) 370-7631
Fax: (206) 370-6190
E-mail: ethomas@prestongates.com
Liz Thomas has represented municipalities, utilities, non-utility generators and private entities on a broad
spectrum of energy, water, wastewater and other utility issues. She has worked on administrative matters,
regulatory proceedings, litigation and legislation at the federal, state and local level. She has advised clients on
wholesale, retail and service agreements, and on rate design, cost allocation and finance issues. Liz has
worked extensively on planning, facility siting and development, permitting, construction, and change in
ownership. She has also worked with state and local governments and private clients to develop and implement
utility legislation and policies. For example, her legislative work has included advice and drafting on the State
Energy Policy Act (Laws 1991 ch. 201, creating a structure and financing mechanism for conservation and
cogeneration at state and school district facilities).
Liz is a member of the firm's water law practice group. She has represented clients in hydropower
licensing proceedings; prosecuted water rights and water quality permit applications and PCHB appeals;
represented clients in water rights adjudication proceedings; drafted and negotiated documents for water
system acquisition; and advised clients on issues relating to water supply, system planning, tribal claims, the
Endangered Species Act and the Clean Water Act. In 1992-93, she was appointed by the state legislature to
serve on an advisory committee to the Joint Select Committee on Water Resources on water issues arising
under the Growth Management Act.
Liz is a member of the Hydroelectric Regulation committee of the Energy Bar Association, and serves as
Preston Gates' contact person for the National Hydropower Association. Liz chaired the Energy Facility Siting
Process Review Committee created by the 1993 legislature. Her public service has included terms on the
Seattle City Light Citizens' Rate Advisory Committee (vice-chair), the Northwest Power Council's Conservation
Programs Task Force, the Cost Allocation Advisory Group for the Seattle City Council's Energy Committee and
the technical advisory committee for the Demand and Resource Evaluation Project of Puget Sound Power &
Light.
LIZ THOMAS' PRESENTATIONS AND PUBLICATIONS INCLUDE
•
Co-chair, LSI Northwest Power Supplies Conference (August 2003)
•
"Hydro Relicensing: Striking a Balance," presented at Northwest Power Supplies (LSI, Aug. 2003)
•
“The Petition Method of Annexation: Fire Protection Dist. V. Moses Lake,” presented at The 58th
Legislature – Studies in the Separation of Powers CLE Seminar (July 2003)
•
"The Temperature is Rising: Developments in Greenhouse Gas Mitigation," 30 Environmental and Land
Use Newsletter 1 (April 2003)
•
"Powering Forward," presented at Northwest Energy Conference (Apr. 2003)
•
Co-chair, LSI Pacific Northwest Power Supply Options Conference, Sep. 2002
•
“Water for Power,” presented at Washington Water Law Conference (LSI, May 2002)
•
“Generating Facility Permitting and Regulatory Approvals,” presented at Public Construction
SuperConference (ACI, Dec. 2001)
•
Co-chair, LSI Power and Water Conference, Aug. 2001
•
“Background on ESA,” presented at People, Water, Fish and Property (ULI District Council, Apr. 2000)
•
“The Clean Water Act and the TMDL Process,” presented at Washington Clean Water (LSI, Dec. 1998)
•
“Authority for Public Ownership of Telecommunications Facilities,” presented at Local
Telecommunications Infrastructure (LSI, Sept. 1998)
•
“The Clean Water Act and the TMDL Process,” presented at Washington Clean Water (LSI, Dec. 1997)
•
Co-author, Fundamentals of Water Law in Washington: Protecting Water Rights, Use and Quality (NBI
1997)
•
“Permitting and Regulatory Issues in Siting New Natural Gas-Fired Power Plants: Washington State
Perspective,” presented at Natural Gas in the Northwest (Oct. 1994)
•
“What Are Washington’s Policies on Siting New Natural Gas-Fueled Generation?” presented at Natural
Gas in the Northwest: Capitalizing In This Expanding Market (May 1994)
•
“What If Not Flow Control? Solid Waste Disposal Districts,” presented at Managing All the Resources
(NW Regional Solid Waste Symposium, Apr. 1994)
•
"The Myth of a Single, 'Green' Power Resource," 10-WTR Nat. Resources & Env't 65 (1996)
•
"Environment clouds future power needs," Puget Sound Business Journal (May 1996)
•
"EMFs: Still Haunting Property Owners," 10 Prob. & Prop. 12 (Nov./Dec. 1996)
•
"EMFs: The Newest Real Estate Hobgoblin?" 7 Prob. & Prop. 18 (Nov./Dec. 1993)
LIZ THOMAS' REPRESENTATIVE COURT DECISIONS
•
Fire Protection District v. City of Yakima, 122 Wn.2d 371, 858 P.2d 245 (1993)
•
Taxpayers of Whatcom County v. Whatcom County, 66 Wn.App. 284, 831 P.2d 1140 (1992)
•
City of Tacoma v. State of Washington, 117 Wn.2d 348, 816 P.2d 7 (1991)
•
State Dept. of Ecology v. State Finance Committee, 116 Wn.2d 246, 804 P.2d 1241 (1991)
•
Hite v. Grant County PUD, 112 Wn.2d 456, 772 P.2d 481 (1989)
•
Peoples' Org. For Washington Energy Resources v. Wash. Utils. & Transp. Comm'n, 104 Wn.2d 798,
711 P.2d 319 (1985)
EDUCATION & CREDENTIALS
B.A., Wellesley College, 1975
Phi Beta Kappa
J.D., cum laude, Harvard Law School, 1979
Law Clerk, Hon. A. David Mazzone, United States District Court for the District of Massachusetts, 1979-80
Bar Admissions: Washington, Massachusetts, U.S. Supreme Court