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Current Climate Change Legislation
in the United States
Bob Schick
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, TX 77002
(713) 758-4582; [email protected]
Texas Association of Environmental Professionals
August 21, 2008
© 2008 Vinson & Elkins LLP
All Rights Reserved
Legislation is expected next year
• Legislation on Climate Change is currently on hold
until the new administration.
–
Both Senator McCain and Senator Obama have promised
GHG legislation in their campaigns.
–
With Democrats retaining control of the House and Senate,
experts expect that Congress will pass some form of GHG
legislation in 2009.
–
This legislation will be based on work that has been
performed to date with the Lieberman-Warner Climate
Security Act of 2008 and the Boxer Amendments.
© 2008 Vinson & Elkins LLP
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Regulation of “covered entities”
• Lieberman-Warner Climate Security Act of 2008 (S.
3036)
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Proposes a national “cap-and-trade” program regulating the
emission of greenhouse gases (“GHG”)
–
Major regulated GHGs include:
•
CO2, methane, NOx
–
S. 3036 would require “covered entities” to maintain and
surrender emissions allowances equal to the amount of GHGs
attributable to their activities
–
Some emission allowances are given away for free to the
regulated community, whereas others are set aside for
auction
© 2008 Vinson & Elkins LLP
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What is a “covered entity?”
•
“Covered entity” includes:
–
–
For upstream/midstream natural gas sector:
•
natural gas processing plant
•
natural gas production facility in the State of Alaska
•
facility that produces natural gas for combustion in the U.S.
•
entity that holds title to natural gas, including LNGS, when imported into the
U.S.
For downstream oil sector:
•
–
For heavy industry and the electricity generation sector:
•
–
facility that produces, or an entity that imports, petroleum based fuels
any facility that uses more than 5,000 tons of coal in a calendar year
For downstream fuel producers:
•
facility that manufactures, or holds title to upon import, a petroleum-based
fuel or coal-based liquid or gaseous fuel
© 2008 Vinson & Elkins LLP
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Compliance obligation
•
The Act requires covered facilities to surrender emission allowances for:
–
–
–
–
GHGs emitted by the covered entity through the use of coal
(downstream)
GHGs that will be emitted through the use of petroleum-based fuel or
coal-based liquid or gaseous fuel manufactured or imported by the
covered entity during the previous calendar year (upstream)
GHGs that were manufactured or imported by the covered entity
during the preceding calendar year (where the GHG is not itself a
petroleum or coal-based fuel or natural gas) (upstream)
GHGs that will be emitted through the use of natural gas or NGLs
processed or imported by the covered entity during the previous
calendar year (upstream)
© 2008 Vinson & Elkins LLP
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Focus on fossil fuels
• The Act targets fuels derived from coal, natural gas,
and petroleum
• Does not impose any allowance submission
requirements for combustion of non-fossil fuel based
fuels, such as:
–
–
–
–
Ethanol
Biodiesel
Wood
Waste products (e.g., discarded tires, hazardous waste)
• Clear regulatory target on fossil-fuel based fuels
© 2008 Vinson & Elkins LLP
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Calculating GHG emissions
• “Use” is not defined, but is largely interpreted to mean
presumed combustion
• How will GHG emissions be calculated from the
combustion of fossil fuels?
– Currently unknown; left to future EPA rulemaking
– Act requires consideration of fuel consumption,
materials consumption, production, or “other
relevant activity data”
• May ultimately require an army of “carbon
accountants”
© 2008 Vinson & Elkins LLP
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Non-compliance penalties
• Covered entities must surrender allowances within 180
days of the end of the calendar year
• Penalties for noncompliance:
–
–
Cash penalty equivalent to the number of owed allowances
multiplied by the greater of:
• $200, or
• 3X the average market value of the emission allowance
during the calendar year for which the allowances were
due
Covered entity must also compensate for any shortfall the
following calendar year
© 2008 Vinson & Elkins LLP
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Tracking GHG emissions
• Recordkeeping/recording requirements via the
Federal Greenhouse Gas Registry
• EPA is tasked with developing regulations ensuring
the complete, accurate, and reliable tracking of GHG
emissions in the U.S
• The Registry must also track the production,
manufacture, and importation of fuels and other
products the use of which result in GHG emissions
• EPA must also develop rules for calculating the carbon
content and GHG emissions from each reported fossil
fuel
© 2008 Vinson & Elkins LLP
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Regular Auction requirements
• Reserve price in 2012 is $10 (price floor)
• Reserve price between 2013 and 2027 is the previous
year’s price adjusted upward at the rate of inflation (as
measured by the Consumer Price Index) plus 5%
• No reserve price established by statute beyond 2027
© 2008 Vinson & Elkins LLP
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Emission credits
• Destruction credit
–
Credits to entities that destroy greenhouse gases (does not apply to
methane)
• Sequestration credit
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Credits to entities that capture and geologically sequester CO2 in the
U.S.
• Non-emissive use credit (a.k.a. “feedstock” credit)
–
Credits for entities that used, in the U.S., a petroleum- or coal-based
product, natural gas, or NGL as a feedstock
• Export credit
–
Credits to entities that export:
• manufactured petroleum-based fuel or coal-based liquid or
gaseous fuel, or GHG; or
• processed natural gas, or NGL.
© 2008 Vinson & Elkins LLP
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Emission allowance offsets
• Project sponsors can generate offsets they can use to satisfy
their compliance obligations.
• Two types: domestic offsets and international offsets
• Limit on the number of authorized offsets:
–
–
Domestic: 15% of the annual number of allowances
International: 5% of the annual number of allowances
• Project-specific offset programs must be approved by the EPA
and provide “real, verifiable, additional, permanent, and
enforceable reductions in greenhouse gases or increases in
sequestration”
–
–
Projects must monitor for “reversals”—intentional or unintentional
loss of carbon dioxide to the atmosphere
Generated offsets can be invalidated for partial or complete
reversals
© 2008 Vinson & Elkins LLP
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Eligible domestic offset projects
• Agricultural and rangeland sequestration and
management practices
–
E.g., altered tillage, winter cover cropping, reduction of
nitrogen fertilizer use, etc.
• Forestry activities
–
E.g., afforestation, reforestation
• Methane capture and combustion
• Any other terrestrial offset practice that results in the
avoidance or reduction of GHG emission
• Estimated value: $300 billion through 2050
© 2008 Vinson & Elkins LLP
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Eligible international offset projects
• International offsets:
–
–
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EPA charged with promulgating regulations governing the
issuance of offsets to projects that reduce GHG emissions or
increase sequestration of CO2 in countries outside the US
International offset projects must meet the same requirements
required by domestic offset projects
International offsets are not permitted for “a project at a facility
that competes directly with a U.S. facility”
© 2008 Vinson & Elkins LLP
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Use of international allowances
• International allowances:
–
GHG allowances issued by foreign governments pursuant to their
own GHG legislation; note the distinction from GHG offsets issued
by the EPA in recognition of foreign projects
• International allowances can only be used as a supplement to the
offset program
–
–
Domestic offsets are capped at 15% of the annual # of allowances,
and international offsets are capped at 5% of the annual # of
allowances.
If, in a given year, EPA does not award domestic/international offsets
up to the 15% (domestic) or 5% (international), international
allowances or international forest carbon credits may be used to
satisfy the balance
• Allowances must be from approved foreign GHG programs.
© 2008 Vinson & Elkins LLP
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Bonus Allowance Accounts
• 1-4% of annual allowances from 2012 to 2030 are allocated to a
Bonus Allowance Account to promote CCS projects.
• The emission unit from which the CO2 is captured must meet
specific performance standards limiting the amount of CO2
emitted from the unit
• EOR projects are eligible for bonus allowances, but the bonus
allowance multiplier (i.e., the factor used to compute the number
of bonus allowances associated with the capture and
sequestration of a metric ton of CO2) is reduced
–
–
Amount of reduction to be determined by EPA
Reduction is in recognition of lower costs of the project when
compared to sequestration solely for the purpose of disposal
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Early Action Allowances
• Recognizes steps taken since January 1,
1994 to produce “verified and credible
reduction” of GHG emissions
• Entities eligible for Early Action Allowances:
–
–
Holders of emission allowances issued by
California
Holders of emission allowances issued by RGGI
% of allowances for early action program
Year
Percentage
2012-2014
5
2015
4
2016-2017
3
2018-2025
1
• Can provide alternative route for covered facilities to obtain free
allowances in the early years of the program
• Estimated value: $30.7 billion through 2050
© 2008 Vinson & Elkins LLP
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Framework for geological
sequestration
• Act also requires the EPA to develop regulations for
permitting commercial scale underground injection of
carbon dioxide
• Regulations must include provisions for:
–
–
–
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monitoring and controlling long-term storage of carbon dioxide
preventing the release of carbon dioxide
protection of underground sources of drinking water, human
health, and the environment
long-term liability associated with commercial-scale
geological sequestration
• liability can exist for groundwater contamination, leaks,
seismic activity
© 2008 Vinson & Elkins LLP
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Carbon dioxide transportation study
• Secretary of Energy study to assess the feasibility of
pipeline construction for the transportation of carbon
dioxide for sequestration or enhanced oil recovery.
• Study must identify:
–
–
–
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technical, siting, financing, or regulatory barriers relating to the
construction of CO2 pipelines
market risks relating to the construction of CO2 pipelines
means by which to ensure the safe handling and
transportation of CO2
regulatory, financing, or siting options to mitigate market risk
or help ensure the construction of CO2 pipelines
© 2008 Vinson & Elkins LLP
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Geological Storage Study
• Secretary of the Interior assessment of the geological
extent of all potential storage formations in the United
States, including:
–
–
–
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capacity of the potential storage formations
injectivity of the potential storage formations
estimate of potential volumes of oil and gas recoverable by
injection and storage of industrial carbon dioxide in potential
storage formations
risks associated with the potential formations
© 2008 Vinson & Elkins LLP
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Economic impacts of L-W at 2030
EIA
EPA
Duke Univ.
Allowance Cost
$61-91
$61
$38
Gasoline
+14.4 to 16.5%
+33%
No est.
Natural gas
+20.7 to 28.9%
+21%
+21.3%
Electricity
+9.9 to 25.2%
+44%
+29.6%
GDP
-0.3 to -0.7%
-0.9%
-0.93%
Source: Energy Information Administration, Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008);
Brian Murray & Martin Ross, The Lieberman-Warner America’s Climate Security Act: A Preliminary Assessment of Potential Economic Impacts; Nichols Institute for
© 2008 Vinson
&Security
ElkinsActLLP
Environmental Policy Solutions; Duke University (Oct. 2007); Environmental Protection Agency, EPA Analysis of the Lieberman-Warner
Climate
of 2008
(March, 2008).
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Economic projection
• Most economic models assume that nuclear power
will play a much larger role in providing electricity
generation in light of GHG regulation
• Some studies also suggest a preliminary move toward
natural gas for electricity generation in the near term,
with a move back to coal once CCS becomes viable.
–
The Duke University studies suggests a substantial drop in
coal use (40% below baseline in 2020), but a recovery in
2030-2050 because of CCS
© 2008 Vinson & Elkins LLP
Source: Brian Murray & Martin Ross, The Lieberman-Warner America’s Climate Security Act: A Preliminary Assessment of Potential Economic Impacts;
Nichols Institute for Environmental Policy Solutions; Duke University (2007).
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7000
160
6000
140
5000
120
100
4000
80
3000
60
2000
40
1000
Cost of allowance ($)
# of Allowances
Projected value of allowances over time
20
0
0
2012
2020
2030
2040
2050
Year
Allowances
Price of allowances
Total value of allowances over lifetime: $5.6 TRILLION
© 2008 Vinson & Elkins LLP
FN: Chart based on EPA cost estimates
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Distribution of auction proceeds (2012)
Deficit reduction fund
23%
International climate change
adaptation and national
security fund
4%
International clean energy
deployment fund
2%
Climate Security Act
administrative fund
4%
Climate change worker
training and assistance
fund
4%
Climate change comsumer
assistance fund
14%
Transportation sector
emissions reduction fund
4%
Energy efficiency and
conservation block program
8%
State wildlife adaptation
fund
8%
Low and zero carbon
electricity technology fund
8%
BLM, USFS, wildlife
DOE advanced research
adaptation fund
projects
12%
Climate change
1%
transportation energy CCS kickstart program
4%
technology fund
4%
© 2008 Vinson & Elkins LLP
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Distribution of auction proceeds (2050)
Climate change
worker training and
assistance fund
5%
Deficit reduction fund
27%
Climate change
consumer assistance
fund
26%
Transportation sector
emissions reduction
fund
5%
International climate
change adaptation
and national security
fund
12%
Energy efficiency and
conservation block
program
3%
Climate Security Act
administrative fund
2%
BLM, USFS, wildlife
adaptation fund
9%
State wildlife
adaptation fund
6%
Climate change
transportation energy
technology fund
2%
DOE advanced
research projects
1%
Low and zero carbon
electricity technology
fund
2%
© 2008 Vinson & Elkins LLP
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Emergency off-ramps
• Carbon Market Efficiency Board
–
–
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New quasi-governmental agency will monitor the economic impact of
the national GHG emissions market
7 members, appointed by the President with the advice and consent
of the Senate.
Board has the authority to carry out cost-relief measures to “ensure
functioning, stable, and efficient markets for emission allowances.”
Powers include:
• Increase the number of borrowed allowances from future periods
• Increase the number of foreign allowances a covered entity may
submit for its compliance obligation
• Increase the number of offsets that can be used to satisfy
allowance obligations
• Increase the time to repay borrowed allowances
© 2008 Vinson & Elkins LLP
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Carbon Market Working Group
• The Working Group has the authority to promulgate
regulations to “enhance the integrity, efficiency,
orderliness, fairness, and competitiveness by the
United States of a new financial market for emission
allowances.”
• Working Group will consist of:
–
–
–
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EPA administrator
Secretary of the Treasury
Chairman of the SEC
Chairman of the Commodities Futures Trading Commission
Chairman of FERC
Other Executive branch officials as appointed by the President
© 2008 Vinson & Elkins LLP
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Hurricane Season: Emergency
Preparedness and Response
Significant Incidents Happen
• Regardless of training, management, or policies,
companies will be faced with situations that will trigger
emergency responses.
•Explosions
•Fires
•Toxic Releases
•Natural Disasters
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Significant Incidents Happen
• The number of loss events annually have
doubled in the past 25 years.*
• Loss events have caused damages of over
$300 Billion in the past 10 years.*
*Source: Swiss Re, Sigma No. 1/2008
© 2008 Vinson & Elkins LLP
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Responding to an Incident
• The order of priority in responding to an
emergency:
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–
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People
Environment
Property
Business Impacts
• An appropriate Emergency Response Plan, trained
personnel, and proper equipment are the foundation of
emergency response preparedness.
© 2008 Vinson & Elkins LLP
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Preparing for an Emergency Response
• Emergency Response Plans (ERPs) are
legally required.
– Do your ERPs comply with government
regulations?
– Are your ERPs realistic and workable?
– Are your ERPs site specific and coordinated with
the public emergency agencies?
– Have your ERPs been updated to reflect changes
in personnel, facilities, operations, and capabilities?
© 2008 Vinson & Elkins LLP
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Emergency Response Plans
• ERPs are necessary and must be site specific.
Generic ERPs do not comply with the regulations.
• Federal regulations specify what needs to be in ERPs.
• ERPs must be compatible and integrated with the
disaster, fire and/or emergency response plans of
local, state, and federal agencies.
• ERPs must be rehearsed regularly.
• ERPs must be reviewed periodically and be amended
when necessary.
© 2008 Vinson & Elkins LLP
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