Winter 2011 Update

In This Issue As 2011 comes to a close, it might seem to some that climate law remained static over the past 12 months. There was no controversial 1 Australia Passes New Climate federal legislation, á la Waxman-Markey, seeking to impose a new Legislation regulatory regime on (GHG) emitters. EPA failed to 3 California’s Cap-and-Trade promulgate final standards under the Clean Air Act aimed at reducing Regime Set to Come Online GHG emissions from power plants and refiners, missing several deadlines over the past year. Negotiators at the United Nations Climate Change 3 Quebec Establishes Conference in Durban failed to agree on little more than continuing to Cap-and-Trade System work with hopes of agreeing on a replacement to the 4 UNFCCC in Durban Ends with at some point in the future. This notwithstanding, developments both Agreement to Agree domestically and internationally have set the stage for potentially significant changes in the next 12 to 24 months. Australia, California and Quebec are each on the verge of implementing new laws establishing cap-and-trade programs to regulate GHG emissions, and EPA is expected in 2012 to finally promulgate rules establishing standards on the amount of GHGs that power plants and refiners may emit before facing fines under the Clean Air Act. These new programs likely will impose significant new regulatory compliance obligations on certain GHG emitters. In addition, the new GHG cap-and-trade systems are being designed with an eye towards “linking up” with similar programs in other jurisdictions, creating the possibility of a complex international market for GHG compliance instruments. As the articles below describe in more detail, while developments in climate change law largely stayed out of the headlines in 2011, much has occurred over the past year, and more is scheduled occur over the course of 2012.

Australia Passes New Climate Legislation Perhaps the most significant development in climate law in the past year occurred in Australia where, on November 8, 2011, the Senate passed the Clean Energy Act of 2011 (CEA), which aims to reduce GHG emissions by five percent by 2020 and by 80 percent by 2050. To achieve these reductions, the CEA establishes a cap-and-trade program that will go into effect on July 1, 2012. Generally, any business that emits GHGs from stationary energy sources (e.g., power stations); industrial processes (e.g., manufacturing); non- legacy waste (e.g., landfill or waste treatment); fugitive emissions (e.g., emissions from active coal mines and oil and gas projects); or a facility over which the business has “operational control” and emits 25,000 1 metric tons of carbon-dioxide equivalent (CO2e) GHGs or more in a

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compliance year will be required cap-and-trade system, with the be surrendered, but up to 5% to acquire and surrender carbon price of emissions allowances set of liability can be offset using permits under the CEA. by a market under an emissions domestic offset credits. In the trading scheme. For the first flexible price phase, there is no Similar to other cap-and-trade three years of the second phase, limit on the number of domestic programs, regulated entities will offset credits which may be need to obtain and surrender emissions allowances will be surrendered, and up to 50% of emissions allowance equal to subject to a price floor of between liability can be satisfied using such entity’s annual discharge of $15 AUD and $17 AUD, and a price international offset credits during GHGs. One allowance will allow ceiling based on a formula tied to the first five years of the flexible the discharge of one metric ton of international emissions allowance phase, after which time there is no CO e GHG in a compliance year, prices, after which time there will 2 limit on the number of international and the Australian government be no price restrictions. credits that may be used. will have control over the number The CEA, like other GHG cap- of permits in circulation, which and-trade systems, allows for Australia’s apparent open number will decrease over time. If the generation of emissions approach to accepting offset an emitter is unable to obtain and allowances through what are know credits generated under foreign surrender the requisite number of as offset projects. Offset projects or international regimes begs permits, a charge is imposed based generally involve payments made the question as to whether this on the unit shortfall. could be a precursor to a truly by an emitter for a commitment international GHG cap-and-trade The Australian cap-and-trade by a third party to reduce or system, as was first envisioned program will operate in two sequester a specified amount during the creation of the Kyoto distinct phases. Starting in 2012 of GHG emissions and generate Protocol. Given the aggressive and continuing into 2015, emitters allowances in addition to those pricing of GHG emissions of 25,000 tons of CO e GHGs will provided by the government. 2 allowances under the CEA, offset be required to purchase emissions Under the CEA, an emitters can credits generated under cap-and- allowances from the government meet its obligations by obtaining trade regimes where allowances for a fixed price, which, for the and surrendering allowances that are trading at a discount to those first year, is set at $23 AUD per are (1) issued by the government, in Australia (such as RGGI) may be ton. This appears to be extremely (2) generated through an offset extremely attractive to Australian aggressive pricing, particularly project completed in Australia; emitters. What impact this would when compared to other cap- or (3) generated through an have on individual carbon markets and-trade systems, such as the offset project approved under remains to be seen, but the Regional Greenhouse Gas Initiative the Kyoto protocol, a separate international nature of Australia’s (RGGI) in the United States, where international agreement or the cap-and-trade system means similar allowances are trading law of a foreign country. It is that participants in GHG cap-and- at less than two dollars per ton not year clear whether Australia trade systems across the globe of CO e GHG, and the European 2 will establish standards for the need to be keeping a close eye on Union Scheme, verification or certification of developments Down Under. where allowances are trading at a offset credits approved under little more than 11 dollars per ton. foreign or international cap- Trading of emissions credits in the 1 CO2e is a measure used to compare and-trade regimes; however, first phase will not be permitted. various GHGs based upon their global there are restrictions on their warming potential. The second phase, beginning in use. In the fixed price phase, 2015, will resemble a traditional international offset credits cannot

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California’s Cap-and-Trade Regime Set to Come Online

In 2006, California enacted AB or from a trading market. As appears that emitters may be able 32, which seeks to lower GHG currently structured, the amount of to use compliance instruments emissions to 1990 levels by 2020. allowances available will decline generated in other countries to Despite numerous challenges, by about 3 percent each year as meet obligations under AB 32, which have been chronicled in emissions are reduced. provided that CARB must approve prior Climate Change Updates, on the use of such instruments. As In addition to allowances, offsets noted with respect to Australia’s October 20, 2011, the California Air from CARB-certified offset Resources Board (CARB) adopted projects in forestry management, cap-and-trade program, if CARB final regulations for a cap-and- urban forestry, dairy methane allows for the widespread use trade program that will help the digesters, and the destruction of of international compliance state meet its emissions reduction ozone-depleting substances may instruments, such as offset credits, targets. Beginning in 2013, cap- be used to cover eight percent of to meet emissions obligations in and-trade regulations promulgated a company’s emissions. AB 32 California, there could be profound by CARB consistent with AB 32 provides for detailed and rigorous effects on international carbon will apply to all major industrial validation of proposed offset markets, particularly in those sources and electric utilities, and credits and CARB has promulgated jurisdictions where offset projects will expand in 2015 to cover the technical protocols for certifying can be developed at relatively distributors of transportation GHG-reduction projects designed low cost. fuels, natural gas, and other to generate credits. fuels. Generally, any facility that 1 The Western Climate Initiative is a California’s cap-and-trade emits more than 25,000 metric collaboration among seven US states regulations are designed to link tons of CO2e GHG annually must and four Canadian provinces to reduce obtain and surrender compliance with similar programs in US states regional GHG emissions to 15 percent and Canadian provinces that are instruments – either allowances below 2005 levels by 2020, largely members of the Western Climate or offsets – in amounts equal to its through the creation a regional cap- Initiative (see next article).1 It also and-trade system. GHG emissions. CARB expects the regulations to cover the sources of 85 percent of the state’s emissions from about 360 businesses and 600 facilities. Quebec Establishes Similar to other cap-and-trade Cap-and-Trade System systems, including Australia’s Fresh on the heels of Canada’s Similar to the cap-and-trade proposed program described much-anticipated withdrawal programs described above, the above, emitters in California will from the Kyoto Protocol, the Quebec program will require need to obtain and surrender province of Quebec, a member emitters of 25,000 metric tons or emissions allowance equal to of the Western Climate Initiative, more of or more of CO2e GHGs such entity’s annual discharge of adopted a regulation in December per year to obtain and surrender GHGs. CARB will freely distribute establishing a cap-and-trade allowances equal to annual GHG the majority of initial allowances system for GHG emissions that emissions. In the initial years, to industrial sources to prevent aims to reduce GHG emissions by regulated emitters will receive emissions leakage (i.e., moving 20 percent below 1990 levels by a number of free emissions GHG-emitting operations out of 2020. Quebec’s cap-and-trade allowances based on historic GHG state). Electric utilities will also program nominally will begin on emissions. Beginning in 2015, receive free allowances, some January 1, 2012; however, the the number of free allowances of which must be sold at auction regulations will not be enforced allocated to emitters will decline to benefit ratepayers. Additional until 2013, allowing emitters time by one to two percent annually. allowances, if needed, can be to familiarize themselves with the To the extent that a regulated purchased at quarterly auctions new regulations. entity’s emissions exceed it

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allocated emissions allowances, a cap-and-trade program near from within those jurisdictions that emitter will need to purchase implementation; however, other US and, possibly, from outside as allowances from other emitters states, including New Mexico, and well. California is the world’s or through government-run Canadian provinces have similar eighth largest economy; Australia auctions. The Quebec regulations programs under consideration. is the world’s 13th largest, and establish minimum auction prices (See December 2010 Climate by some measures, the world’s $10 CD per ton in 2013 and $15 Change Update). fastest growing economy. The CD per ton in 2020 – expensive implications that the proposed when compared to RGGI, though * * * cap-and-trade regimes might have inexpensive relative to the In the next 12 months, three new on industries in these jurisdictions Australian system. GHG cap-and-trade programs could be profound. Likewise, the international nature of these Because these regulations came are scheduled to come online. new cap-and-trade systems out of Quebec’s membership in Certainly, there will be legal could have dramatic impacts on the Western Climate Initiative, challenges in the interim, but existing cap-and-trade programs, the program is designed to assuming these programs survive as global demand for compliance seamlessly interact with other intact, large emitters of GHGs in instruments may increase Climate Initiative participants. these jurisdictions will have to significantly. At the moment, California is navigate a new regulatory regime the only other participant with complicated by market forces

UNFCCC in Durban Ends with Agreement to Agree

While climate legislation at the In 1992 the Parties to the no binding commitments under the national, state and provincial level Convention agreed “taking into Protocol. has advanced some in the past account their common but In 2007, the Parties agreed to year, international talks taking differentiated responsibilities” that what is known as the Bali road- place under the rubric of the United developed countries would take map, which sets out the process Nations Framework Convention on the lead in addressing climate for reaching a comprehensive Climate Change (UNFCCC) have change and that the overriding made little progress. agreement on long term priority of developing countries cooperative action on climate 1 The 17th Conference of Parties should be “poverty eradication.” change. The deadline the Parties (COP 17) that recently took It was soon decided that the set themselves for reaching such place in Durban saw heated Convention was not ambitious an agreement was COP 15 in debate about the appropriate enough and, in 1997 the above Copenhagen in 2009. direction for future climate principles influenced the change talks with accusations Expectations of reaching a from the developing world that negotiation of the Kyoto Protocol comprehensive legally binding developed nations are reneging on under which developed nations agreement were very high in long-established principles and agreed to assume legally binding some quarters in advance of commitments. A little context greenhouse gas (GHG) emission Copenhagen, but US domestic is crucial to understanding what reduction obligations. The first political obstacles, the growing was eventually was agreed to in commitment period setting out financial crisis and the emergence Durban in the early hours of the those obligations under the of certain developing countries, last morning of the COP and what Protocol expires at the end of particularly China and India, it likely could mean in practice. 2012. Developing countries have as major GHG emitters and

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economic powerhouses changed The Parties managed to gloss over in 2009. The situation, however, the fundamental dynamics. Far these differences in Cancun in appears to have echoes of the from agreeing to a comprehensive 2010 and some limited progress Bali road-map of 2007, which legally binding treaty, COP 15 was made in incorporating the ran into strong headwinds, and almost collapsed into acrimony into relevant it emerges at a time when there and discord. At the eleventh hour COP decisions. The key ingredient is far less consensus about the a small group of prime ministers of any climate change solution, role of developed and developing and presidents of key countries i.e. reductions of GHG emissions, nations and when the urgency of presented the rest of the Parties nevertheless remained in the form the climate problem has rightly with the Copenhagen Accord under of voluntary pledges rather than or wrongly been overshadowed which they recognized, for the hard commitments. by the ongoing global financial first time, the need to hold global crisis. Furthermore, there is The Parties approached Durban temperature rise to less than 2 considerable room for debate knowing that the only legally degrees Celsius, invited voluntary about what an ‘agreed outcome binding emissions reduction emissions pledges and promised with legal force’ actually means obligations under the Kyoto fast-start and long term climate Protocol are due to expire at the and whether this will in practice change finance to the developing end of 2012. The key questions lead to anything more substantive world under a new Green Climate were whether any developed than the voluntary pledges of the Fund. A divided COP was only able nations would agree to extend Copenhagen Accord. Meanwhile, to “take note of” this Accord. their Kyoto Protocol commitments it is a fact that emissions have The last two COPs in Cancun in and whether the price of doing so continued to rise under the legally 2010 and now Durban have been would be to require legally binding binding Kyoto Protocol that was dealing with the aftermath of this commitments from key developing meant to cut them. breakdown in momentum in the nations, a move which some would The scientific consensus remains UN process. The good intentions argue only reflects their current that urgent action is needed now of the Bali road-map, driven economic status but others would to ensure that emissions peak by a high degree of consensus say is a significant departure from by 2015 and reduce dramatically about the urgency of the climate the founding principles of the thereafter in order to produce a problem, have been replaced with Convention. meaningful chance of avoiding the political and economic calculation After a fraught debate with worst impacts of significant climate driven by the financial crisis in the brinkmanship on both sides, the change. Scientists of every stripe, West and fears of a shift in the Parties produced a compromise skeptic or believer, also agree that balance of global power, which whose real impact will only be seen policy should be driven by the facts. China’s new status as the world’s over time. The European Union Durban has given the UNFCCC biggest aggregate GHG emitter and a number of other developed an agenda to talk about over the only exacerbates. In this new nations agreed to extend their coming years and has preserved context, developed countries no commitments under the Kyoto the structures and obligations of longer feel able to take a lead Protocol in return for the launch of the Kyoto Protocol. It, however, on climate change as required a process for achieving an ‘agreed does postpone the real debate by the concept of “common but outcome with legal force’ for all and action until the end of the differentiated responsibilities,” Parties by 2015, which will become decade. This may represent the which underpins both the enforceable by 2020.2 best that could have been achieved Convention and the Kyoto Protocol. politically, but it remains to be seen Developed countries, by contrast, To an extent, this puts the U.N. as to how effective in practical and with little historic responsibility process back on a multi-lateral scientific terms it will be. for present levels of GHGs in the track towards a potentially atmosphere, see attempts to meaningful binding agreement. 1 UNFCCC Article 4.2(a) renege upon that principle as a Arguably this constitutes progress fundamental breach of trust. from the position in Copenhagen 2 Draft decisions -/CP.17 and -/CMP.7

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Climate Change Update is published by the Environmental, Capital Markets, Tax, Intellectual Property, International Trade and Private Equity Groups of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, +1 212 310 8000, http://www.weil.com.

Editor:  Thomas Goslin (DC) [email protected] +1 202 682 7508

Contributing Authors:  Annemargaret Connolly (DC) [email protected] +1 202 682 7037 Thomas Goslin (DC) [email protected] +1 202 682 7508 Nick Flynn (LO) [email protected] +44 20 7903 1306

Climate Change Update Editorial Board: If you would like further information or have questions concerning the contents of this issue, please contact:

David R. Berz (DC) [email protected] +1 202 682 7190 Annemargaret Connolly (DC) [email protected] +1 202 682 7037 Stephen D. Kahn (NY) [email protected] +1 212 310 8820 Alexander D. Lynch (NY) [email protected] +1 212 310 8971

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