Article from:
INTERNATIONAL LEGAL NEWS
August 12, 2008
Regulatory Uncertainty in Climate Change Initiatives
Brach Eichler L.L.C., Roseland
By Lindsay P. Kern & Frances B. Stella
Climate change has become a topical issue both in the United States and around
the world. Legal, political and business leaders in the United States will have to address
climate change in a more structured way. This article will highlight this issue using a
comparison of Europe’s framework and that of the United States, which is still
developing its own system.
The United National Conference on Environmental and Development took place
in Rio de Janeiro in 1992 and developed the United Nationals Framework Convention on
Climate Change (“UNFCC”), the first major treaty that addressed the issue of climate
change in 1992.1 The UNFCC laid the groundwork for negotiations that would take
place in Kyoto, Japan in 1997.
The Kyoto Protocol, which came into effect on February 16, 2005, sets binding
emissions limitations on signatory states.2
The signatory states were separated into
Annex I countries, developed countries that made specific emissions reductions
commitments under Kyoto and non-Annex I countries, mainly developing countries that
were not required to make similar commitments.3 The goal of the Kyoto Protocol was to
reduce emissions of six principal types of greenhouse gases (“GHGs”). 4 Each Annex I
1
31 I.L.M. 849 (1992) (hereinafter UNFCCC).
31 I.L.M. (1998) (hereinafter “Kyoto Protocol” or “Kyoto”).
3
See Kyoto Protocol.
4
The six GHGs: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur
hexafluoride. See Kyoto Protocol.
2
signatory has its own required percentage of reduction and these figures are based on the
1990 emissions of the individual state.5
In an effort to encourage signatories to the treaty, particularly developing
countries, Kyoto allows the Annex I countries to utilize alternative methods to reduce
GHGs. Kyoto provides for carbon market trading allowing countries with emissions
credits to spare to transfer or trade their emissions credits with other signatories. 6 Kyoto
also provides for the Clean Development Mechanism, allowing Annex I parties with an
emission-reduction or emission-limitation commitment to implement an emissionreduction project in developing countries and receive credits for that investment.7 The
third mechanism is Joint Implementation allowing flexibility for countries to limit their
GHGs. Joint Implementation provides for an Annex I country to earn emission reduction
units (ERUs) from an emission-reduction or emission removal project in another Annex I
country, which can be counted towards meeting its Kyoto target. 8 These alternatives are
meant to be used in conjunction with efforts to reduce emissions by making more fuel
efficient vehicles and other existing emissions reduction measures within the country.
The European Union signed on to Kyoto as a block, rather than separate
countries. The European Union made provisions so that it would decrease its emissions
as a whole, allocating among the countries the percentage each country is required to
lower its emissions.
The European Union also set up the EU Emission Trading Scheme (EU ETS),
which allows emitting industries to decrease their emissions by the required percentage
5
Id.
Id.
7
Id.
8
Id.
6
or, alternatively, to allow them to buy credits from an entity, which can bring its
emissions standards below the Kyoto guidelines and still run their business.
The United States withdrew its support of the Kyoto Protocol in 2001, thus is not
required by international treaty to decrease its GHG emissions. GHG emissions have
become an important issue in the United States and several states and regions have passed
initiatives to reduce GHG emissions. There are some areas where the federal government
has acted on this issue: tax incentives for renewable energy, energy efficiency and
restrictions with regard to gas mileage on cars. However, the federal government has yet
to implement a comprehensive program to address GHG emissions on a national level.
Regions and individual states in the United States have begun to set up emission
reduction and/or cap and trade programs to begin to address GHG emissions reductions.
One such program, the Regional Greenhouse Gas Initiative (“RGGI”) is a
cooperative effort by nine Northeast and Mid-Atlantic states to discuss the design of a
regional cap-and-trade program initially covering carbon dioxide (CO2) emissions from
power plants in the region.9 In the future, RGGI may be extended to include other
sources of GHG emissions, and greenhouse gases other than CO2.10
The RGGI
Memorandum of Understanding (MOU) calls for signatory states to stabilize their CO2
emissions for the first six years, followed by an emissions decline of 2.5% per year over
the following four years, through 2018.11 The first auctions will begin in the fall of 2008,
9
Connecticut, Delaware, Maine, Maryland, Masachusetts, New Hampshire, New Jersey, New York, Rhode
Island, and Vermont. In addition, the District of Columbia, Pennsylvania, Ontario, Quebec, the Eastern
Canadian Provinces, and New Brunswick are observers to the process. See http://www.rggi.org.
10
Id.
11
Id.
with the first three-year compliance period scheduled to begin on January 1, 2009.12 The
MOU establishes a cap and divides the emissions budget among the participating states.13
California’s plan for decreasing GHG emissions and for establishing carbon
markets is set forth in the California Global Warming Solutions Act of 2006.
California’s scheme, also known as AB 32, establishes a 2020 final cap and gradual
reductions from 2012 until 2020 and goes well beyond the reductions call for in the
RGGI MOU.14 The goal is to reduce statewide GHG emissions to 1990 standards to
2020.15 California’s plan to implement this goal is the strongest state-wide effort in the
United States. The draft plan proposes that utilities produce a third of their energy from
renewable sources such as wind, solar and geothermal, along with expanding and
strengthening existing energy efficiency programs and building and appliance standards
that have already saved Californians more than $50 billion over the past 30 years in
reduce costs for energy.16 The draft plan also calls for a cap-and-trade program for more
than 85% of the state’s GHG emissions, which would be implemented with the Western
Climate Initiative that includes seven states and four Canadian provinces to create a
carbon trading market.17
The Western Climate Initiative (“WCI”) began with an agreement signed by the
Governors of Arizona, California, New Mexico, Oregon, and Washington on February
26, 2007 to collaborate and implement measures to reduce GHG emissions.18 Since then,
the states of Montana and Utah have signed on to the WCI, as well as the provinces of
12
Id.
Id.
14
See AB 32 Fact Sheet-California Global Warming Solutions Act of 2006. (http://www.arb.ca.gov.).
15
Id.
16
See California Charts Course to Fight Global Warming, June 26, 2008. (www.arb.ca.gov).
17
Id.
18
See Western Regional Climate Action Initiative, February 26, 2007.
13
British Columbia, Manitoba, Quebec, and Ontario in Canada.19 The regional goal of the
WCI is to reduce GHG emissions 15% below 2005 levels by 2020. 20 These goals do not
replace goals that states have set for themselves; they are meant to be consistent with all
separate state initiatives.21 The WCI is in the process of developing a cap-and-trade
program as one element of the program to meet its goals. 22 There are currently five
subcommittees working on issues, such as Reporting, Electricity, Scope, Allocations, and
Offsets. The subcommittees will be releasing their reports in September 2008, which will
also include timelines and critical paths for members to implement programs to meet
these goals.23
In addition, there are many different private organizations and businesses
developing voluntary emissions trading markets, e.g., The Chicago Board of Trade
Climate Exchange.
While the European Union has developed and begun implementing emissions
reductions and cap-and-trade programs among its member states, the United States has
opted out of the Kyoto Protocol and has yet to establish a comprehensive national
program to begin addressing GHG emissions reductions. Instead, the regional and state
piecemeal regulatory schemes and voluntary private markets have resulted in regulatory
uncertainty and no framework for industries to have any security in long term
development and planning to reduce emissions. These regional and state initiatives
(http://www.westernclimateinitiative.org).
There are six other states, one additional Canadian province, and six Mexican border states who
participate as observers. On July 17, 2008, Ontario joined as a member state. See Western Climate
Initiative, Draft Design Recommendations on Elements of the Cap-and-Trade Program, May 16, 2008.
(http://www.westernclimateinitiative.org).
20
Id.
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Id.
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Id.
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highlight the need for a national comprehensive program that incorporates regulatory
flexibility and a market based approach to drive innovation to address this global
problem.24
24
The Lieberman-Warner Climate Security Act of 2008 (S. 3036/S. 2191) would have created a federal
cap-and-trade program and would have required EPA to promulgate rules to meet GHG emission
reduction targets. On June 6, 2008, the proposed bill died on the Senate floor.