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I N S I D E T H E M I N D S

The Legal Impact of Leading on Responding to Climate Change Developments and Complying with New

2013 EDITION

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Using Disjointed Global and Domestic Climate Change to the Client’s Advantage

JP Brisson, Claudia O’Brien, and Bob Wyman Partners Latham & Watkins LLP

By JP Brisson, Claudia O’Brien, and Bob Wyman

Introduction

Many commentators once thought that the world would regulate climate change through a grand , brokered by the UN and dutifully implemented by each member state. The reality of climate change has been a messier, bottom-up situation. ranging from municipalities to to nation-states have adopted a hodge- podge of relatively new mechanisms, like and carbon , alongside more traditional legal structures, like command-and-control regulation and litigation. The result is a patchwork of divergent legal mandates that can be daunting to any emitter—especially those with operations in multiple jurisdictions.

Background: History of the United Nations Framework Convention on Climate Change

After more than twenty years of effort, the United Nations Framework Convention on Climate Change’s (UNFCCC’s) multilateral approach to addressing climate change has not produced binding greenhouse gas (GHG) emission reduction commitments from the world’s largest countries. Adopted in 1992, the UNFCCC initially appeared to be an effective instrument of international climate , as the signatory nations established the to the UNFCCC in 1997, committing signatory nations to binding GHG emission reduction targets.1 The Kyoto Protocol entered into force without US ratification, however, and the end of the first commitment period in 2012 saw a number of signatory nations refuse to adopt second-period commitments (among them, , , New Zealand—three countries where emission reduction programs are moving forward nonetheless).2 The UNFCCC continues to host negotiations around a post- 2020 climate agreement, but contemporary efforts to implement legally

1 Kyoto Protocol to the United Nations Framework Convention on Climate Change (1998). 2 See Douglas Bushey and Sikina Jinnah, Evolving Responsibility? The Principle of Common but Differentiated Responsibility in the UNFCCC, 6 BERKELEY J. INT’L L. (2010). The central dynamic of the UNFCCC negotiations since the United States indicated it would not sign the Kyoto Protocol has been tension between a group of developed countries refusing to take on binding commitments without commitments from emerging economies, and those emerging economies refusing to take on substantial commitments until the United States and other developed countries take on significant commitments first.

Using Disjointed Global and Domestic Climate Change Policies…

binding climate policies are meanwhile proceeding outside of the UNFCCC context, resulting in a legal considerably more diverse and, perhaps, more challenging than the UN may have envisioned.

Legal Mechanisms

Even in the absence of an international climate change treaty, independent state actors have begun to take meaningful action on climate change. These actions have taken a variety of forms: cap-and-trade programs, carbon taxes, traditional command-and-control regulation and litigation, and innovative new programs, such as the California and the ’s Low Carbon Fuel Standards (LCFS).

Cap-and-Trade Programs3

A number of events at the end of the last decade seemed to collectively signal the demise of coordinated international climate change policy: the timing of the UNFCCC’s 2009 failed Copenhagen conference, the US Senate’s failure in 2010 to pass a cap-and-trade bill, and the EU Emissions Trading System (EU-ETS) security breaches in 2010 and 2011, to name a few. Subsequent developments have indicated that cap-and-trade is alive and well as a policy mechanism with the potential for international coordination.

Market Development

Cap-and-trade programs continue to proliferate even in the absence of a meaningful UNFCCC framework. The EU-ETS (which came into force in 2005 as a way for the EU to meet its Kyoto Protocol obligations) is currently the largest emissions trading scheme in the world, applying to

3 The terms “cap-and-trade program,” “carbon trading scheme,” and “emissions trading system” (among others) generally refer to a system in which the government or entity administering the program sets a “cap” on total emissions levels for a given period and then issues, by auction or direct allocation, “allowances” to covered entities (i.e., sources of emissions). Each allowance constitutes an authorization to emit a single unit (usually a metric tonne) of GHGs (usually in terms of “CO2-e,” or “carbon dioxide equivalent,” which refers to the amount of carbon that would be emitted from a tonne of carbon dioxide). Entities may freely buy and sell allowances on the secondary market, provided they hold enough allowances at the end of a compliance period to cover their total emissions during that period.

By JP Brisson, Claudia O’Brien, and Bob Wyman more than 12,000 installations.4 The Regional Greenhouse Gas Initiative, known as RGGI, comprises nine states in the Eastern United States and has been operational in the United States since 2008. Cap-and-trade programs have recently gone into effect in California and Québec,5 and Australia6 and South Korea have also adopted programs slated to begin operation in 2015. New Zealand also operates an emissions trading program, although it is not capped in the traditional sense. Moreover, has announced plans to launch a pilot carbon trading program in two cities and five provinces: Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen, and Tianjin.7

Several of these systems are making efforts to “link” to other systems.8 The European Commission and Australia have agreed to link their respective emissions trading systems,9 and the EU and Switzerland have been in the process of negotiating a link since 2010.10 As of February 2013, California

4 Emissions trading schemes: overview, PRACTICAL COMPANY, http://corporate. practicallaw.com/9-366-4077 (last visited Feb. 2, 2013). 5 Cal. Code. Regs. tit. 17 § 95801 (2013); Environmental Quality Act, RSQ 2012, c Q-2 no. 46.1 (Can). 6 Clean Regulations 2011 (Cth) (Austrl). 7 Each of the seven pilot programs will be different so that China can experiment with different emission trading scheme designs and study how the schemes function under varying economic conditions. China currently plans to launch its nationwide trading scheme in 2015 or 2016; as currently planned, it would become the world’s largest trading system. 8 “Linking” in the context of cap-and-trade programs can refer to a variety of arrangements between two systems, representing varying degrees of connection. For example, a program could be said to be linked if entities in one program could retire another program’s allowances for compliance. This would represent simple market efficiency in that each covered entity would have access to a larger market and a greater number of market participants, yielding greater liquidity. Or two systems could share common auctions of the allocation of compliance instruments, representing a still greater level of coordination. 9 International Carbon Market, CLIMATE ACTION, http://ec.europa.eu/clima/policies/ets/ linking/index_en.htm (last visited Feb. 7, 2012). 10 Swiss Confederation Federal Office for the Environment, Third round of Swiss-EU negotiations on linking of emissions trading systems (Oct. 26, 2012). On December 20, 2010, the Environmental Council of the European Commission authorized the Swiss Confederation to negotiate a link between the EU and the Swiss GHG emissions trading systems. The Swiss ETS involves approximately fifty firms with around 6 million tonnes of CO2, as compared to the 12,000 firms with around 2 billion tonnes of CO2 under the EU ETS. The first round of negotiations took place on March 8, 2011; the second round took place on September 20, 2011, in Zurich; and the third round of negotiations took place in Brussels on October 26, 2012. Switzerland enacted a revised CO2 Act, which came into force on January 1, 2013, in an effort to ensure that its CO2 is compatible with the EU ETS. It is expected that negotiations to link the EU ETS and the Swiss ETS will be completed during the course of Using Disjointed Global and Domestic Climate Change Policies…

and Québec are also in the process of linking their programs; Californian and Australian representatives met to discuss linking in January 2013, although the two parties have not announced any formal arrangement. The government of China, too, intends to link its eventual nationwide trading program to other programs, though not until after 2020.

The development of cap-and-trade systems in parallel to and (to some extent) outside of the UNFCCC framework illustrates several points that are fundamental to the contemporary legal framework for climate change issues:

• In spite of several conspicuous failures, cap-and-trade programs remain a viable legal mechanism (if not the preferred mechanism) for both regulating GHG emissions within a and coordinating with other jurisdictions. • Unilateral action coupled with post facto linking may prove a more important source of legal mandates than traditional multilateral negotiations. • The wide variety of sovereign jurisdictions implementing cap-and- trade programs calls into question the notion that nation-states are the primary actors in addressing global social and environmental ills. In turn, this “bottom-up” environment entails a unique set of challenges for legal practitioners, policymakers, and multinational companies alike.

Policy Issues

Programs vary both in their scope and in the magnitude of their carbon price. California is somewhat ambitious in that its program is an economy- wide program that extends beyond the power sector, which is the only sector RGGI affects, and industrials, which the EU ETS covers. The cap- and-trade program in California first regulates the power sector and industrial sources of GHG emissions and then extends to all downstream fuels in 2015—meaning entities that sell or import or , for example, in California, will be responsible for the emissions associated with the products they sell and that are consumed in the state. Starting in

2013 and that the two governments will agree to a bilateral agreement setting out the terms of such linking.

By JP Brisson, Claudia O’Brien, and Bob Wyman

2015, consumers in California will see an increase in the price of those downstream fuels that reflects the price of carbon. The government intends for the increase in price to incentivize individuals and companies to make more efficient choices. This regulatory approach is novel, and it will be interesting to see whether it works as intended.

In addition to identifying a scope of coverage across the economy, cap- and-trade programs need to identify their geographic coverage. Of course, the extent of a jurisdiction provides a natural border for a cap-and-trade program, but this is complicated by the issue of “leakage.” Leakage occurs when a price on carbon incentivizes the diversion of economic activity to an area outside of the cap instead of the implementation of emission reduction measures within the cap. For example, a cement company may respond to a cap-and-trade compliance obligation by relocating to a jurisdiction without a price on carbon, or an electric may swap power from a capped source from a generator not subject to the cap to avoid a compliance obligation for the power. In response, a cap-and-trade program may implement measures that regulate extraterritorially, in a sense, such as applicability to imports or an obligation not to engage in “ shuffling” (that is, the swapping of dirty power for clean power).11

The cap-and-trade program in California also is somewhat unique in that in a variety of ways, it has effects outside of California’s borders. In many cases, entities that sell energy into California may be regulated and responsible for the emissions associated with that energy. Power, natural gas, and gasoline imports are all regulated under the program—a feature not included in RGGI or other similar programs around the world. Because the cap-and-trade program covers certain companies outside of California, as well as many companies inside the state, the scope of the potential changes and compliance costs it will create is significant.

11 California’s Air Board defines resource shuffling for the purposes of its cap-and- trade program as “any plan, scheme or artifice to receive credit based on emissions reductions that have not occurred, involving the delivery of electricity to the California grid.” Cal. Code. Regs. tit. 17 § 95802(a)(250) (2013). Using Disjointed Global and Domestic Climate Change Policies…

A major issue in a cap-and-trade program is determining where to set the cap. The lower the cap, the more scarce allowances will be, and the higher the costs of compliance, in general. Setting a cap too high results in oversupply of allowances, low compliance costs, and little trading. This can be good for industry, but politically bad for the program as an instrument of environmental policy. RGGI, for example, has proposed in February 2013 to reduce its cap by 45 percent for 2014 in response to perceived oversupply.

Legal Implications

To the extent that cap-and-trade programs are emerging as a persistent legal mechanism for addressing climate change, a number of unique legal relationships arise.

Contract Law

First and foremost, the typical cap-and-trade program’s creation of a commodity—allowances or offsets12—with its own distinct market value opens a whole range of legal practice implications outside of the traditional purview of (at least as practiced in the United States). Environmental compliance programs take on elements of a corporate or commodities practice, as entities must obtain enough instruments to satisfy a compliance obligation, typically through trading documentation similar in many respects to documentation used for more conventional physical commodities or derivatives. In this way, law and commodities

12 An “offset” or “offset credit” is an instrument representing either a unit reduction of GHG emissions or a unit removal (sequestration) of GHG from the atmosphere. Offsets are generated by offset projects, such as a forestry project. Offset projects are developed according to certain protocols that may be published and administered by either an independent registry (e.g., the Climate Action Reserve) or a governmental entity (e.g., the California Air Resources Board). After scandals involving the UNFCCC’s Clean Development Mechanism (CDM) offset program, offset programs have typically expended a great deal of effort to ensure the environmental integrity of their offsets. For example, the California Air Resources Board requires that offsets issued according to its protocols must represent a GHG reduction or removal that is “real, additional, quantifiable, permanent, verifiable, and enforceable.” Certain cap-and-trade programs allow the use of at least some offsets for compliance purposes in lieu of allowances, spawning an international secondary market for offsets.

By JP Brisson, Claudia O’Brien, and Bob Wyman

principles can play a key role in environmental compliance under a cap-and- trade program.

Commodities Regulation

The existence of a full-fledged market for instruments, including forward transactions, trades on exchange, and the participation of market makers, also could potentially raise questions about commodities regulations and an entirely new regulatory interface with (in the United States, at least) the Commodities Futures Trading Commission (CFTC). With RGGI, the California cap-and-trade program, and Dodd-Frank all simultaneously under way in the United States, this area of law could see significant movement. Certainly, cap-and-trade instruments are not unique in this respect, but fall under the larger umbrella of “environmental commodities” that implicate commodities regulation.13

Energy Law

Cap-and-trade programs may potentially touch on areas of energy law to a greater extent than typical command-and-control regulation. In the United States, the Federal Energy Regulatory Commission (FERC) is responsible for regulating interstate wholesale electricity markets.14 California’s program has already run across FERC at least once in the program’s infancy. Philip D. Moeller, Commissioner of FERC, wrote a letter in August 2012 to California’s Governor Brown requesting that California suspend enforcement of certain aspects of its cap-and-trade program.15 The letter expressed concern that California’s program could negatively impact interstate wholesale electricity markets, and California accordingly obliged, suspending enforcement of the offending provisions for eighteen months.16

13 Other examples of environmental commodities include credits (RECs) associated with state-level renewable portfolio standard (RPS) compliance in the United States and Renewable Identification Numbers (RINs) associated with the federal Renewable Fuel Standard, administered by the US Environmental Protection Agency (EPA). 14 16 U.S.C. § 824(a) (2006). 15 Letter from Commissioner Philip D. Moeller to the Honorable Edmund G. Brown (Aug. 6, 2012), available at http://www.ferc.gov/about/com-mem/moeller/moeller-08-06-12.pdf (last visited Feb. 6, 2013). 16 Letter from CARB Chairman Mary D. Nichols to the Honorable Philip D. Moeller (Aug. 16, 2012) http://www.arb.ca.gov/newsrel/images/2012/response.pdf (last visited Feb. 6, 2013). Using Disjointed Global and Domestic Climate Change Policies…

California’s cap went into effect in January 2013; it is difficult to predict what future involvement with FERC will arise.

Transactional Practice

Certain aspects of offsets create a host of legal issues beyond allowances. Particularly in programs such as California’s, where a compliance entity may be responsible for replacing offset credits that have proved to be invalid, offset credit transactions raise many concerns more typical of a corporate acquisition or financing. Indeed, offset projects themselves can be financed by compliance entities as a creative strategy for reducing compliance costs. On a related note, practitioners may be involved in the attachment and/or perfection of a security interest in offset credits, raising still-novel legal questions in the United States under the Uniform Commercial Code (UCC).

Jurisdiction-Specific Issues

The sheer variety of political settings that have given rise to cap-and-trade programs has created unique legal challenges for market participants. Cap- and-trade programs are or could be in effect in jurisdictions ranging from the municipal (Beijing) to the provincial (Québec) to the regional (RGGI) to the national (Australia) and even supra-national (the EU). This jurisdictional variety can give rise to a range of legal issues in its own right. In the United States, for example, the sub-national character of extant cap-and-trade programs have created a new context for relatively obscure issues under the US , including the applicability of the Dormant Commerce Clause, the Supremacy Clause, and the Compact Clause.17 No case has yet definitively determined whether and how these issues apply to RGGI and the California program,18 and California’s

17 Daniel Farber, Climate Policy in a System of Divided Powers: Dealing with Carbon Leakage and Regulatory Linkage, UC BERKELEY RESEARCH PAPER NO. 2174024 (Nov. 11, 2012). 18 For example, a company brought a lawsuit against the governor of New York alleging that RGGI was either unconstitutional under the Compact Clause or preempted by federal law. Indeck Corinth v. Paterson (N.Y. Sup. Ct., filed Jan. 2009). The parties entered into a consent to resolve the dispute. Indeck Corinth LP v. Paterson, ENCON, et al, Index No. 005280-2009, Dkt. No. 008 (N.Y. Sup. Ct. filed March 9, 2010).

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potential link with Québec could raise similar constitutional issues in an entirely different—and international—context.19 In the meantime, carbon markets may rise and fall on rumors of a constitutional challenge.

The EU-ETS’s unique multi-jurisdictional nature presents a historical example of specific legal challenges arising out of international cap-and-trade. A series of allowance thefts in the EU threw the market into such chaos that it resulted in the suspension of trading. In the legal turmoil that followed, a major issue inhibiting the return of market liquidity was concern over whether innocent purchasers of stolen allowances acquired good title to those allowances. The problem was complicated by both the international aspect of the contractual relationship and the nebulous nature of allowances as intangible goods in their own right.20

Advocacy

The dynamic status of current and emerging cap-and-trade markets creates major opportunities for a regulatory practice in advocacy before an agency. In the United States, cap-and-trade programs are typically implemented through notice-and-comment rulemaking, providing many opportunities for industry advocacy. In this context, low compliance costs are achieved by achieving a favorable regulatory outcome. In the context of cap-and-trade’s market dynamics, however, a “favorable regulatory outcome” could very well just mean an efficient market design or a market design that caters to a company’s strengths. A relatively clean energy company, for example, may be better advised to advocate for administrative rules that reward early emission reduction action, rather than advocating outright opposition to a cap-and-trade program.

Emissions Accounting

Emissions accounting is fundamentally important to compliance in a cap- and-trade program, given that the total emissions determine an entity’s compliance obligation. Emissions accounting can be especially important

19 See Farber, supra note 17. 20 See answer to Question 7 in the Commission General Questions and Answers on Registries, CLIMATE ACTION (June 2012), http://ec.europa.eu/clima/policies/ets/registry/faq_en.htm (last visited Feb. 6, 2013). Using Disjointed Global and Domestic Climate Change Policies…

for large companies with multiple, varied sources of emissions (for example, vertically integrated energy companies). Such companies will have an interest in determining exactly which business unit bears a compliance obligation both for internal bookkeeping purposes and for targeting future reductions. Precise understanding of and engagement with the relevant regulations and regulatory processes can give an entity an advantage when it comes to compliance.

Carbon

Instead of adopting a cap-and-trade program, a number of jurisdictions have adopted a carbon tax. Jurisdictions with a carbon tax include Finland, Ireland, and British Columbia, Canada. Australia’s carbon cap- and-trade program starts out as a carbon tax, transitioning in 2015 to cap- and-trade. One theoretical difference between the two types of programs is in terms of certainty: a cap-and-trade program provides quantity- certainty and price-variability (by setting a hard cap and letting the market determine the price), and a carbon tax provides the opposite (by taxing carbon emissions at a certain level price, without mandating the achievement of a certain targeted emissions level for the program overall).21 In practice, the line can blur. For example, the adoption of an allowance price floor in a cap-and-trade system could be construed, in a sense, as a tax on carbon of at least the floor level. Carbon tax design involves other elements that make it similar to a cap-and-trade program. For example, a tax may cover carbon emissions in certain industries only.

Like many of the cap-and-trade regimes discussed, carbon taxes can be characterized as bottom-up initiatives in that they emerge largely autonomously from individual jurisdictions. Carbon taxes will mean divergent legal mandates that demand a great deal, particularly from entities operating in multiple jurisdictions. As with cap-and-trade, emissions accounting and emissions management will be key components of a compliance strategy.

21 Robert N. Stavins, A U.S. Cap-and-Trade System to Address Global Climate Change, Brookings Institution (2007), http://www.hamiltonproject.org/files/downloads_and_links/A_ US_Cap-and-Trade_System_to_Address_Global_Climate_Change.pdf.

By JP Brisson, Claudia O’Brien, and Bob Wyman

Command-and-Control Regulation

The United States’ failure to pass new federal climate change legislation has left the US Environmental Protection Agency (EPA) regulating climate change at the federal level under its existing Clean Air Act (CAA) authority. The CAA regime is hardly the model that would be chosen for well thought- out regulation of GHG emissions; indeed, many commentators originally viewed EPA’s CAA authority as a political bargaining chip to be used toward passage of a national cap-and-trade program. The program creates an interesting example of command-and-control climate change regulation (with a potential cap-and-trade overlay)—and there certainly are aspects of this authority that are unsuited for regulating GHG emissions. Climate change regulatory authorities may also fall within other governing , including those under the jurisdiction of other federal agencies. As the following summary of these federal mandates illustrates, the development of climate change policy is not comprehensive or well coordinated. Nonetheless, the regulatory framework is developing at a rapid pace.

Clean Air Act

EPA’s first regulation of GHG emissions under the CAA came in May 2010 with its GHG emission standards for light-duty vehicles in model years 2012 through 2016.22 These standards, like all of EPA’s GHG emissions standards for mobile sources, measure compliance on a fleet- wide basis with GHG emission reductions primarily coming from increased fuel economy and other technology improvements to new motor vehicles. EPA’s regulation of GHG emissions from mobile sources effectively triggered its regulation of GHG emissions from stationary sources under the CAA, as EPA confirmed and finalized in an April 2010 interpretation.23 That 2010 interpretation also addressed the timing of GHG permitting requirements for stationary sources, finding that they would not apply until at least January 2, 2011, when the light-duty vehicle standards were to take effect.24

22 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards, 75 Fed. Reg. 25,324 (May 7, 2010). 23 See Reconsideration of Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs, 75 Fed. Reg. 17,004, 17,007 (April 2, 2010). 24 Id. Using Disjointed Global and Domestic Climate Change Policies…

The inclusion of GHGs in the scope of the stationary source permitting scheme presented unique challenges that illustrated some of the difficulties with GHG regulation under the CAA. EPA’s existing thresholds used to determine when emissions of a particular pollutant would subject a new or modified stationary source to PSD and Title V25 permitting programs— either 100 or 250 tons per year—were developed based on criteria pollutants and would have swept tremendous numbers of small sources into the regulatory scheme if applied to GHGs. As a result, EPA promulgated the Tailoring Rule, which adopted a phased approach to PSD and Title V applicability for GHG emissions.26

While EPA’s rules have provided clarity on when PSD and Title V permitting requirements would apply, the actual substance of what EPA is requiring in the permitting scheme is still somewhat uncertain; in particular, there is ambiguity on what constitutes GHG best available control technology (BACT) for the purposes of PSD. While EPA’s guidance on applying PSD and Title V requirements to GHG emissions relies heavily on energy efficiency as GHG BACT,27 this does not provide absolute certainty for regulated sources, since BACT is determined on a case-by-case basis.

The next stationary source GHG regulation EPA is likely to finalize will be its promulgation of performance standards for new power . In April 2012, EPA proposed GHG New Source Performance Standards (NSPS) under CAA Section 111(b) for new -fired power plants.28 EPA’s proposal would set an output-based standard of 1,000 pounds of CO2 per megawatt-hour.29 This standard is based on the performance of natural gas combined-cycle technology, and EPA concedes that the standard would require new -fired power plants to utilize carbon capture and sequestration (CCS) to comply.30 EPA has yet

25 Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, 75 Fed. Reg. 31,514, 31,516 (June 3, 2010). 26 Id. 27 EPA, PSD and Title V Permitting Guidance for Greenhouse Gases (March 2011), available at http://www.epa.gov/nsr/ghgdocs/ghgpermittingguidance.pdf. 28 Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources: Electric Utility Generating Units, 77 Fed. Reg. 22,392 (April 13, 2012). 29 Id. at 22,392. 30 Id.

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to finalize that proposal, and EPA has not yet proposed a standard for existing or modified fossil fuel-fired power plants under its CAA Section 111(d) authority.

EPA has also established reporting and disclosure requirements on GHG emissions and climate change under its CAA authority. For example, EPA’s Greenhouse Gas Reporting Rule31 requires large sources and suppliers to report GHG emissions and other relevant data to EPA each year. In the 2011 reporting year, more than 8,000 facilities in forty-one source categories reported GHG emissions to EPA.32 EPA’s reporting requirements have major implications for other programs, as well. For example, California’s state-level GHG reporting rule is based on the EPA rule and is used to determine entities’ cap-and- trade compliance obligations.33

A good example of the nuances of the Greenhouse Gas Reporting Rule and associated emissions accounting protocols is ReCommunity’s fuel determination proceeding in 2012. ReCommunity creates a fuel from non-recyclable plastics derived from the waste stream and can be co- fired with coal to reduce GHG emissions. It is the type of product that probably did not exist before climate change awareness set in, and it is no wonder that permitting the product created issues under the existing regulatory framework. Biogenic emissions accounting and GHG emissions reporting rules are new to EPA’s regulatory agenda, and the fuel determination requires a strong grasp of existing agency practice and the new material.

As GHG regulation drives new low-carbon industries, CAA practice will dramatically change. For example, a first-of-its kind coal with CCS technology is being built in California, and the regulatory path to operation has been dramatically altered by climate change regulation. The project requires a PSD permit, including BACT review for GHGs. The sequestration component of the project involves the development

31 Mandatory Reporting of Greenhouse Gases, 74 Fed. Reg. 56,260 (Oct. 30, 2009). 32 GHGRP 2011: Reported Data, EPA, http://www.epa.gov/ghgreporting/ghgdata/reported/ index.html (last visited Feb. 6, 2013). 33 Regulation for the Mandatory Reporting of Greenhouse Gas Emissions, Cal. Code Regs. tit. 17, §§ 95101-157. Using Disjointed Global and Domestic Climate Change Policies…

of a first-of-its-kind mitigation, reporting, and verification plan to ensure that CO2 from the project is sequestered in geologic formations to comply with both the California Environmental Quality Act (CEQA) and California’s cap-and-trade program. And depending on timetables, a CAA NSPS for GHGs may apply.

SEC Disclosure

The US Securities and Exchange Commission (SEC) is responsible for ensuring that disclosures are sufficient for publicly traded companies, although they are necessarily vague because of the unpredictability of future regulations. The SEC issued interpretive guidance in February 2010, outlining existing SEC disclosure requirements “as they apply to climate change matters”34—for example, discussing the disclosure of impacts of climate change-related legislation, regulation or international accords on the business where they would be material.

NEPA

The National Environmental Policy Act (NEPA) requires federal agencies to prepare an environmental impact statement for all “major Federal actions significantly affecting the quality of the human environment.”35 This is another area where disclosure of GHG emissions and climate change has evolved. The Council on Environmental Quality issued draft guidelines to federal agencies discussing how to “improve their consideration of the effects of [GHG] emissions and climate change” in the NEPA process.36

Litigation

Another bottom-up source of climate change law has been litigation, particularly in the United States. Some of the best-known lawsuits related to

34 SEC, Commission Guidance Regarding Disclosure Related to Climate Change (Feb. 2, 2010) available at http://www.sec.gov/rules/interp/2010/33-9106.pdf. 35 42 U.S.C. § 4332(2)(C) (2012). 36 Memorandum from Nancy H. Sutley, Council on Environmental Equality, on Draft NEPA Guidance on consideration of the Effects of Climate Change and Greenhouse Gas Emission to Heads of Federal Departments and Agencies (Feb. 18, 2010), available at http://ceq.hss.doe. gov/nepa/regs/Consideration_of_Effects_of_GHG_Draft_NEPA_Guidance_FINAL_0218201 0.pdf.

By JP Brisson, Claudia O’Brien, and Bob Wyman

climate change in recent years include American Electric Power Company (AEP) v. Connecticut;37 Comer v. Murphy ;38 and Native Village of Kivalina v. ExxonMobil.39 All essentially attempted to declare GHG emissions a nuisance, but none has resulted in climate change liability for the defendants (although the Kivalina plaintiffs have recently filed a petition for a writ of certiorari with the US Supreme ). Those are not the most common types of climate change-related lawsuits, however. Many more lawsuits today challenge specific projects, under either NEPA40 or CEQA.41 These lawsuits commonly allege a project’s failure to mitigate GHG impacts adequately, increase GHG impacts, or offset GHG impacts. While cases such as AEP and Kivalina have targeted major existing sources of GHG emissions and attempted to either receive monetary damages or force the relevant companies to take action to reduce their emissions, NEPA and CEQA cases attempt to stop specific individual projects from being built or implemented because of their potential impact on climate change.

There has also recently been some limited action related to climate change under the Act, including an increase in petitions to the US Fish and Service to list species as threatened or endangered because of climate change. For example, in 2008, the US Fish and Wildlife Service listed polar bears as a threatened species in response to a petition from environmental groups.42 A series of lawsuits challenged the listing almost immediately upon promulgation. Environmental groups challenged the decision not to list the polar bear as “endangered,” rather than “threatened,” and petitioners, including the state of , challenged the decision to list at all. These challenges have culminated in the D.C. Circuit’s ruling in March 2013 upholding the polar bear’s “threatened” designation.43

37 Am. Elec. Power Co. (AEP) v. Connecticut, 131 S.Ct. 2527 (2011). 38 Comer v. Murphy Oil, 585 F.3d 855 (5th Cir. 2009). 39 Native Village of Kivalina v. ExxonMobil, 696 F.3d 849 (9th Cir. 2012). 40 National Environmental Policy Act, Pub. L. No. 91-190, 83 Stat. 852 (codified at 42 U.S.C. §§ 4321-70h). 41 Cal. Pub. Res. Code § 21094.5, 21094.5.5 (West 2013). 42 Endangered and Threatened Wildlife and Plants; Determination of Threatened Status for the Polar Bear (Ursus maritimus) Throughout Its Range, 73 Fed. Reg. 28,212 (May 15, 2008). 43 In re Polar Bear Endangered Species Act Listing and Section 4(d) Rule Litigation-MDL No. 1993, Nos. 11-5221, 11-5219, 11-5222, 11-5223, --- F.3d ---, 2013 WL 765059, (D.C. Cir. March 1, 2013). Using Disjointed Global and Domestic Climate Change Policies…

The arrival of cap-and-trade programs in the United States has also produced unlikely bedfellows in climate change litigation. In the recent case of Citizens Climate Lobby and Our Children’s Earth Foundation v. California Air Resources Board,44 for example, both environmental nonprofit organizations and large emitters intervened on behalf of the state to defend the state of California’s offset program from a court challenge. The petitioners alleged that California’s offset program resulted in the issuance of offsets for reductions that were not “additional”—that is, projects that would have occurred regardless of whether there was an offset program. In a rare display of solidarity, industry and nonprofit interests converged on ensuring the availability of bona fide offsets as a compliance pathway in California. In a market-based system such as cap-and-trade, practitioners should not be surprised to see situations like this occur again and again. Indeed, one of the purported strengths of a market mechanism is that all parties have an interest in ensuring that the program works as intended—which, for regulated entities, means a more efficient and cost-effective market. Savvy market players will be ready to think outside the box and seize these opportunities.

Lifecycle Emissions

California and Europe are now regulating fuels using newer approaches based on lifecycle analyses of the associated emissions. California, for example, has implemented the low-carbon fuel standard (LCFS), and an equivalent proposal has been adopted in Europe to assign an emission factor to various fuels based on the lifecycle emissions. The LCFS relates to green fuels and attempts to distinguish between different types of renewable fuels, such as ethanol sourced from corn versus fuels created from cellulosic , and to assess whether ethanol from Brazil, for example, is more or less efficient than ethanol from specific regions of the United States. Meanwhile, the proposal in Europe intends to assess the emissions generated as part of the sourcing of .

The three goals of the EU LCFS are to provide an incentive to:

1. Optimize GHG performance of

44 Order Denying Petition for Writ of Mandate, Citizens Climate Lobby v. CA Air Res. Bd., No. CGG-12-519554 (Cal. Super. Ct., March 8, 2013).

By JP Brisson, Claudia O’Brien, and Bob Wyman

2. Encourage the use of lower GHG intensity fuels 3. Reduce GHG emissions from fossil fuel pathways.45

Discussion around the measure indicates this approach is targeted at containing types of fuels such as the in Canada, which are being generated in a way that is not necessarily environmentally sustainable. Essentially, the premise of this program is that emissions associated with sourcing the oil are significant enough that they should be taken into account when the fuel is regulated. This is a new trend with few , but it is an area that is likely to experience some interesting developments over the next five to ten years and will impact the resource allocation related to fuels. Already, the California LCFS is in the midst of a constitutional challenge based on the dormant Commerce Clause in federal court.46

The EU LCFS sets a target to “reduce as gradually as possible cycle GHG emissions per unit of energy from fuel and energy supplied by up to 10% by 31 December 2020.”47 This will be achieved through mandatory and optional components. The mandatory component requires suppliers to reduce the lifecycle GHG emissions from fuels and energy supplied by a minimum of 6 percent by December 31, 2020,48 either by increasing and alternative energy supplies or by reducing flaring and venting at the point of production.49 The optional element allows member states to impose additional lifecycle GHG emission reductions targets on suppliers, a certain portion of which could be achieved through the use of offsets. 50 In its use of offsets, the LCFS shares some qualities with emissions trading programs and raises similar issues for the practitioner.

45 European Commission, Directive 2009/30/EC amending Directive 98/70/EC on fuel quality: Consultation paper on the measures necessary for the implementation of Article 7a(5), http://ec.europa.eu/environment/air/transport/pdf/art7a.pdf (last visited Feb. 2, 2013). 46 Rocky Mountain Farmers Union v. Goldstene, 843 F.Supp.2d 1042 (E.D. Cal. 2011). 47 EU Directive 2009/30/EC amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC, 2009 O.J. (L 140) 88, Article 7a(2). 48 Id. at Art. 7a (2)(a). 49 Id. at Preamble (9). 50 Id. Using Disjointed Global and Domestic Climate Change Policies…

Conclusion

A wide variety of expertise is necessary to address the new developments in environmental law. For example, the EPA has undertaken substantial efforts to enforce the regulations in the Clean Air Act related to climate change. As a result, Clean Air Act lawyers must be well-versed in climate change issues, as well. The piecemeal cap-and-trade programs all over the globe add to the need for attorneys who deal with environmental commodities and and who can evaluate emission reduction projects to determine whether they are viable and appropriate investments. Such attorneys must also be able to draft the related emission trading agreements. The lack of coordination among the various entities regulating climate change, coupled with a bottom-up approach, results in a greater need for counsel—and for counsel who are well-versed in the full range of climate change programs.

Because companies require more assistance from their legal advisers, it has generated more work for those in the field of environmental law. For example, Southern California recently completed work on the Poseidon Project, which is the largest desalinization plant in the United States. That project was required to be GHG-neutral to be approved under CEQA and various state environmental , necessitating a team of experts who could defend against climate change challenges, negotiate climate change requirements, and obtain the GHG offsets to develop the project. Of course, environmental litigation is also directly affected by climate change, and as a result, almost every type of environmental lawyer must be well-versed in different aspects of climate change law, and transactional attorneys must be able to assess the potential liabilities to the greatest extent possible.

Key Takeaways

• Make your clients aware that California’s cap-and-trade program may apply extraterritorially. Entities that sell energy, including power, natural gas, and gasoline, into California may be regulated and responsible for the emissions associated with that energy, even if the business is not located within the state.

By JP Brisson, Claudia O’Brien, and Bob Wyman

• Help your clients strategically plan their production activities more efficiently to gain a competitive advantage and to identify compliance strategies that worked well in a specific jurisdiction so they can easily roll them out in other jurisdictions that adopt similar regulations. • Inform your clients that they can minimize liability by increasing the efficiency of production processes so they generate fewer GHG emissions when creating or refining a product, whether it is coal, gas, or a certain widget. • Gain experience in environmental commodities and contracts, and be able to evaluate emission reduction projects to determine whether they are viable and appropriate for a client’s investment. Be able to draft the related emission trading agreements, as the piecemeal cap-and-trade programs all over the globe add to the need for attorneys with these capabilities.

JP Brisson, a partner and leading environmental lawyer at Latham & Watkins LLP, advises oil and gas, industrial, and financial institution clients on a range of environmental matters, including carbon finance, renewable energy, and commodities. Mr. Brisson is a partner in Latham’s Environment, & Resources Department and co- chair of its Air Quality and Climate Change Practice. He has close to fifteen years of experience advising clients on carbon credit transactions and climate policy more generally and is ranked by for his work in this area. Mr. Brisson was previously vice president in Goldman Sachs’ Global Commodities business, where he played a key role in establishing Goldman’s US carbon trading desk.

Claudia O’Brien is a partner in the Washington, DC, office of Latham & Watkins LLP and is global chair of the firm’s Air Quality & Climate Change Practice. She represents clients in agency petitions, rulemaking proceedings, and litigation, as well as on compliance and enforcement, in a full range of federal environmental statutes. Ms. O’Brien has particular expertise in all aspects of the Clean Air Act and the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), the Clean Act, the Resource Conservation and Recovery Act (RCRA), and the Endangered Species Act (ESA), as well as regulations impacting genetically engineered plants. She possesses specialized technical and business knowledge of power plants (both fossil-fueled and biomass-fueled) and the pesticide industry, and particular expertise in toxicology and risk assessment.

Using Disjointed Global and Domestic Climate Change Policies…

Bob Wyman, a partner with Latham & Watkins LLP, is the global chair of the firm’s Environment, Land & Resources Department and the global co-chair of the Air Quality and Climate Change Practice. Mr. Wyman writes and speaks extensively in the areas of air quality, cleantech and renewable energy, climate change, corporate disclosure, corporate civil and criminal liability, and , among other topics. He served on US Environmental Protection Agency’s (EPA’s) Clean Air Act Advisory Committee for eighteen years (from 1991 to 2009). He also served on US EPA’s Advanced Coal Technology and the Air Quality Management Work Groups. Mr. Wyman has been ranked as a prominent practitioner by Chambers USA, the Los Angeles Business Journal, California Lawyer, Ethisphere’s Attorneys Who Matter, and Best Lawyers.

Acknowledgments: We wish to thank Michael Dreibelbis, an associate, as well as Douglas Bushey, Majda Dabaghi, Miles Farmer, Laura Glickman, Ben Lawless, Michele Leonelli, Suzannah Sava-Montanari, and Stacey VanBelleghem for their assistance in writing this chapter. Michael Dreibelbis is an associate in the Environment, Land & Resources Department of the New York office of Latham & Watkins LLP. He represents clients in transactional and regulatory matters, including environmental commodities trading, complex corporate transactions, regulatory advocacy, and CERCLA proceedings. He holds degrees from Princeton University and Columbia Law School.

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