Climate Change Update
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Winter 2011 Climate Change 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 greenhouse gas (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 Kyoto Protocol 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 Weil, Gotshal & Manges LLP Climate Change Update 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 Emissions Trading 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 Weil, Gotshal & Manges LLP Winter 2011 2 Climate Change Update 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.