Environmental, Land and Natural
Resources Alert
May 8, 2009
Authors:
+1.206.370.7631
Reporting Rule and So Much More: Setting
the Stage for Cap and Trade for U.S. and
International Trading Transactions
Brianne P. Anderson
Mandatory Reporting Scheme for U.S.
Elizabeth Thomas
liz.thomas@klgates.com
briannne.anderson@klgates.com
+1.206.370.6655
Maria Cull
maria.cull@klgates.com
+1.44.(0)20.7360.8185
Denise M. Lietz
denise.lietz@klgates.com
+1.206.370.8024
Gordon F. Peery
gordon.peery@klgates.com
+1.617.261.3269
K&L Gates comprises approximately
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The U.S. Environmental Protection Agency (EPA) has published a proposed rule in
the Federal Register, Mandatory Reporting of Greenhouse Gases, 74 Fed. Reg.
68,16448 (April 10, 2009) (to be codified at 40 C.F.R. pts. 86, 87, 89, 90, 94, 98,
600, 1033, 1039, 1042, 1045, 1048, 1051, 1054, and 1065), that would require
industries across the U.S. economy to report greenhouse gas (GHG) emissions.
These proposed rules set the stage both for Congressional action and further
regulatory action to regulate emissions of GHGs. Interested parties must submit
comments to the EPA on or before June 9, 2009 (a comment period that is unlikely
to be extended based on the EPA’s denial of already-submitted extension requests).
Hearings to take public comment are scheduled on May 18 in Arlington, VA and on
May 21 in Seattle, WA; pre-registration is required.
The proposed rule covers carbon dioxide (CO2), methane, nitrous oxide,
hydrofluorocarbons, perfluorocarbons, sulfur hexafluorides and other fluorinated
gases. These gases are expressed as metric tons of carbon dioxide equivalent
(CO2e), which accounts for the relative potential to impact climate change associated
with individual GHGs.
Three broad categories of sources would have to report: facilities that emit GHGs;
suppliers of fossil fuels and industrial GHGs; and manufacturers of vehicles
and engines:
•
Some facilities will report based on type of industry and others based on levels
of emissions. Twenty categories of industrial facilities would have to report
regardless of the facility’s annual GHG emissions. These include aluminum,
cement, lime and petrochemical production facilities; certain electric power and
generation systems; and certain manure management and landfill facilities.
Certain other facilities that, through stationary fuel combustion or miscellaneous
carbonate use (these are facilities, not otherwise listed in the proposed rule, that
use limestone, dolomite or other carbonates in their processes), emit more than
25,000 metric tons of CO2e annually must report. The initial reporting year
would generally be calendar year 2010, with the initial report due in 2011.
•
Suppliers of fossil fuels and of industrial GHGs would have to report the annual
volume of fuel or product that is placed into the economy and the emissions
associated with the complete oxidation of the fuel or release of the product.
Suppliers include the producers, importers, and exporters of fossil fuels and
industrial GHGs. A threshold applies to industrial GHG suppliers (only those
Environmental, Land and Natural Resource Alert
that supply product that is the equivalent to
25,000 metric tons or more of CO2e per year
when released would be required to report), but
not to fuel suppliers. The initial reporting year
for suppliers would be 2010, with the initial
report due in 2011.
•
Manufacturers of vehicles and engines would
use existing testing and certification protocols to
report GHG emission rates, though the proposed
rule would expand the reporting requirements to
encompass new vehicles and engines, as well as
additional GHGs. However, while the proposed
rule does not include any reporting requirements
for operators of mobile source fleet operators,
the EPA specifically solicited comments
addressing whether fleet operators should be
required to report emissions to the EPA.
Vehicle and engine manufacturers would begin
reporting for model year 2011.
Each facility, supplier or manufacturer would be
responsible for determining if its operations or GHG
emissions trigger the reporting requirements. The
EPA expects that approximately 13,000 facilities,
the majority of which are large facilities in the
electricity generation or industrial sectors
representing 85 to 90 percent of total U.S. GHG
emissions, will be required to report under the
proposed rule. Once subject to the rule, a facility,
supplier or manufacturer would continue to report its
GHG emissions even if it falls below the reporting
thresholds in future years. Most small businesses,
homes, commercial buildings and sources in the
agricultural sector (with the exception of livestock
operations with GHG emissions from manure
management systems) likely fall well below the
threshold reporting trigger of 25,000 metric tons
of CO2e per year and are not included in the
source categories required to report regardless
of emission level.
Currently, there are two ways to calculate GHG
emissions: direct measurement or facility-specific
calculations based on specified facility
characteristics and feedstock. The EPA proposes to
require direct measurement of GHGs only at
facilities that are currently required to collect such
measurements under other EPA programs (for
example, the Acid Rain Program). Other facilities
would report the annual volume of emissions in
metric tons using the calculations set forth in the
proposed rule. If a facility supplies fossil fuels, it
would report to the EPA its annual volume of fuel
supplied and, if it is a refinery that itself directly
emits GHGs, the emissions resulting from
combustion of fuel. If a facility supplies industrial
GHGs it would report the annual volume of product
it supplies and associated emissions. The EPA
estimates the average cost of reporting under this
proposed rule would be approximately $0.04 per
metric ton of CO2e.
The stated goal of the proposed GHG reporting
program is to gather information to inform future
climate change policy decisions. The GHG
reporting would not itself regulate or control GHG
emissions or require emissions reduction. Yet by
identifying which emitters must report, under what
circumstances they must report, and what they must
report, the rule facilitates imposition of emissions
limits and trading schemes in certain sectors.
Thus, the EPA’s proposed rule serves as a platform
for the establishment of other federal climate
change policies and the development of marketbased solutions to address the practical results of
those policies. Notably, EPA has published its
proposal at the same time that key members of
Congress are conferring on climate and energy
policy, including the viability of a U.S. marketbased program for reducing GHGs, the proposed
American Clean Energy and Security Act of 2009
(the “Clean Energy Act”).
EPA’s GHG rule coincides in a few important
respects with the Clean Energy Act and, along with
the EPA’s recent proposed finding that GHGs cause
or contribute to air pollution that endangers health
and welfare (also called the endangerment finding),
puts additional pressure on Congress to develop and
finalize certain parts of that act, including Title III.
Title III would require covered entities (i.e., entities
that emit more than 25,000 metric tons per year of
CO2e) to have tradable federal permits, or
“allowances” for each ton of pollution emitted into
the atmosphere. The allowances issued each year
would be reduced over time (i.e., the program in the
current draft of the Clean Energy Act reduces the
number of available allowances issued by 3% below
2005 levels in 2012, 20% below 2005 levels in
2020, 42% below 2005 levels in 2030 and 83%
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Environmental, Land and Natural Resource Alert
below 2005 levels in 2050 under the current draft
of the Clean Energy Act). The 25,000 metric ton
reporting threshold under EPA’s GHG rule
coincides with the threshold in the Clean Energy
Act that exempts entities emitting less than 25,000
metric tons of GHG emissions from the requirement
to obtain federal permits.
Once implemented, the GHG reporting rule will be
a catalyst for the development of a broad-based,
widely-used market for trading GHG emissions
allowances, both in the United States and
internationally. Many entities that currently do not
report or control GHG emissions, but will submit
annual reports after the rule becomes effective, may
need to obtain additional allowances via a cash
market in emission allowances or pursue other
strategies (e.g., obtaining “offsetting” reductions
at a lower cost from other sources) under the
Clean Energy Act. Our multidisciplinary team
of environmental and over-the-counter and
exchange trading specialists continue to monitor
the frequent changes in GHG regulation and the
trading market that will develop out of those and
other important changes.
A Look Ahead? New Emissions
Trading Scheme for the UK
Although the United States is just initiating its GHG
programs, the United Kingdom (“UK”) has had
GHG requirements in place for several years and
can provide an indication of how GHG regulation
may take shape in the U.S. The UK Government
is presently moving forward at a swift pace to
implement the Climate Change Act 2008 and to put
in place the Carbon Reduction Commitment (CRC),
a mandatory auction-based cap and trade system for
non-intensive users of energy. This is just one of a
number of new legislative initiatives to achieve the
ambitious policy of an 80% reduction in CO2
emissions by 2050, with real progress by 2020.
Unlike the U.S. efforts discussed above, which
focus on large GHG emitters, UK businesses
falling within the CRC include shops, offices,
hotels, hospitals leisure facilities light industry
and many more.
The qualifying threshold for the scheme is the
consumption of 6,000 MWh of electricity per year
and the use of a half hourly meter to measure
consumption (a type of meter generally used in the
UK for buildings with peak electrical loads over
100kW). Although the threshold may sound high,
the draft consultation document indicates that the
CRC will impact corporate entities rather than sites.
There are therefore complex issues to be addressed
by group companies (including those with US
parent companies), joint ventures, franchises and
other corporate structures that operate at multiple
sites within the UK.
The consultation paper includes proposals that will,
in certain circumstances, identify landlords as the
relevant entity under the CRC. All businesses
occupying qualifying properties will be subject to
the CRC. This means that small businesses,
regardless of their corporate structure, will be
caught by the CRC if they occupy qualifying multitenanted buildings such as retail parks and office
blocks. Businesses occupying qualifying properties
have two issues to address. First, how will the CRC
impact them? And, second, how will the landlord
interpret the CRC in the context of current lease
structures which are not designed to accommodate
the CRC? The CRC is due to start in April 2010.
The structure and mechanisms used in the CRC are
new. There is much at stake for those caught within
the CRC, not least because it is revenue neutral to
the treasury and returns the income generated from
the auctioning of credits to the participants. The
winners will receive a rebate in excess of their
auction costs while the losers will be out of pocket.
There are also reputational issues at stake: A
publicly available league table (similar to the
standings in U.S. sports) will be published by the
Government, ranking the best and worst performers
under the CRC in terms of emissions reductions.
The current consultation seeks comments on how
this league table should be structured.
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Environmental, Land and Natural Resource Alert
The consultation is open for comment until June 4,
2009. Based on our experience to date, the speed at
which the legislation has been developed will result
in unintended consequences. The best way to avoid
such consequences is for business to respond to the
consultation with comments.
2020 target. Broad principles have been developed
to address carbon leakage, new entrants and the
like, but the detail is still to be implemented at
national level, so there is still much in play for
impacted industries.
Some of the late changes to the climate change
package present real opportunities for the energy
industry. 300 million EUETS allowances,
equivalent to £5-7 billion ($7.5-$10.5 billion)
depending on EUETS allowance prices, have been
pledged to support carbon capture and storage
projects and also renewables. We will continue to
track the implementation of this legislation as it
presents valuable opportunities to certain business
able to benefit from European support.
Additional International Climate
Change Legislation
On April 6, 2009 a major package of six climate and
energy laws aimed at reducing Europe's greenhouse
gas emissions by 20 per cent by 2020 cleared a final
legislative hurdle. This legislation includes
significant changes to the EU Emissions Trading
Scheme (EUETS) which usher in a transition to
Europe-wide auctioning of credits and a yearly
reduction in a new Europe-wide cap to achieve the
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©2009 K&L Gates LLP. All Rights Reserved
May 8, 2009
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