U.S. Supreme Court Hears Arguments in Landmark Case on Federal Greenhouse Gas Regulation

My colleague, Daniel Lee, followed oral argument yesterday in the U.S. Supreme Court's consideration of federal greenhouse gas (GHG) regulation in Utility Air Regulatory Group v. EPA, and provides this analysis:

During oral argument for Utility Air Regulatory Group v. EPA this Monday, the Supreme Court conflicted over a number of issues including the application of Chevron deference,  the scope of the Court’s holding in Massachusetts v. EPA, and the nature of the Prevention of Significant Deterioration (PSD) program under the Clean Air Act (CAA). At the broadest level, the Court will decide whether the EPA’s PSD program regulating emissions from stationary sources will apply to greenhouse gas emissions. Much of the Justices’ questioning focused on whether EPA’s interpretation, that the PSD statute required regulation of GHGs, was reasonable and would receive Chevron deference. Pointing out that the parties had advanced four separate interpretations of the statute, Justice Sotomayor suggested the statute’s “quintessential ambiguity” implicated Chevron. Justice Kagan went further to suggest that EPA’s interpretation was “most reasonable” in light of its longstanding adherence to the position and that there is “nothing that gets more deference than this Agency with respect to this complicated a statute.” 

To overcome the Chevron hurdle, petitioners emphasized the incongruence between the local focus of the PSD program and the broader, global effects of GHGs. However, Justice Ginsburg countered that GHGs had “severe effects at the local level” according to EPA’s endangerment finding. In contrast, Justice Alito emphasized that GHGs are nevertheless distinguishable from other substances regulated under the PSD program because of the large quantity of GHGs emitted. 

 

Less aggressive was the questioning from Justice Kennedy, whose vote has often been the deciding factor for the Court. Justice Kennedy reaffirmed that the Court must abide by Massachusetts v. EPA, but nevertheless indicated that he “couldn’t find a single precedent that strongly supports” the EPA’s position. Yet he also opined that Brown & Williamson, a case relied on by the industry petitioners, was also distinguishable. 

 

If EPA’s interpretation is upheld, PSD and Title V permitting programs will continue to apply broadly to industrial emitters of GHGs.  If EPA’s interpretation is not upheld EPA could continue to regulate GHGs through the New Source Performance Standards program but would presumably need to withdraw the PSD and Title V permits issued for GHGs and many sources currently undergoing PSD and/or Title V permitting would see their permitting burdens greatly reduced. Additionally, Utility Air Regulatory Group v. EPA will likely add further contour to the sprawling case law on Chevron deference in the context of environmental regulation.

 

See our previous report on the Supreme Court's grant of certiorari in Utility Air Regulatory Group and its related cases for additional background on the controversy's road to the Supreme Court.

California Air Resources Board Issues Draft Update to AB 32 Scoping Plan

This week the California Air Resources Board (ARB) released a draft of its AB 32 Climate Change Scoping Plan Update. The original Scoping Plan was adopted in 2008 and must be updated every five years. The Scoping Plan serves as a blueprint for achieving AB 32’s goal of reducing greenhouse gas (GHG) emissions to 1990 levels by 2020.

The draft Update summarizes programs implemented over the last five years under AB 32 and outlines actions necessary to continue California’s progress toward the 2020 emissions reduction goal. The draft Update shows that California is on track to meet the 2020 emissions reduction goal and inventories the progress made across different economic sectors and programs like cap and trade. With the Update, ARB continues its strategy of achieving AB 32 goals through a mix of emissions reduction measures, including regulatory programs, incentives, and market-based approaches.

The draft Update also provides key recommended actions to maintain the momentum of emission reductions and advance emissions reduction goals beyond 2020. Areas of focus include:

  • Energy - reducing GHGs from electricity generation as well as reducing energy use through greater efficiency.
  • Transportation, land use, fuels, and infrastructure - from increasing the use of low carbon fuels and electric vehicles, to changing how communities are developed.
  • Water - increasing the efficiency of water use in order to reduce the carbon footprint of supplying water to various sectors within the state.
  • Agriculture - implementing GHG emission reduction management practices.
  • Forests, rangelands, and wetlands - integrating carbon management into resource management plans to reduce emissions associated with the use of these resources and optimize carbon sequestration on these lands.
  • Waste - reducing waste, maximizing recycling and composting, and developing markets and infrastructure for the reuse of waste.

On October 15, ARB will hold a public workshop on the draft Scoping Plan Update. Public comments may be submitted on the draft Update on or before November 1. The Board will discuss the draft Update at its October 24 and 25 meeting. ARB anticipates issuing the Proposed Scoping Plan Update prior to the Board’s December meeting, with approval of the Update expected in spring 2014.

President Obama Unveils Climate Action Plan

Today President Obama released his Climate Action Plan and highlighted the key components of the Plan at a speech at Georgetown University. The Plan has three primary goals: (i) cutting greenhouse gas (GHG) emissions in the U.S., (ii) preparing the United States for the effects of climate change, and (iii) leading international efforts to mitigate climate change. During his speech, President Obama listed three measures to address the first two goals: use more clean energy, waste less energy, and cut carbon emissions. The Plan includes some important new directives from the President, it incorporates some initiatives that are already underway and outlines some of the Administration’s intentions, without providing hard timelines or goals. 

The Climate Action Plan is limited to initiatives that the President can implement without Congressional approval.  Nevertheless, it has the potential to significantly affect a broad range of energy sector interests.  A summary of the Plan's key components follows. 

Using more clean energy:

  • The Interior Department is directed to support deployment of 10,000 MW of renewable energy on public lands by 2020. 
  • The Department of Defense (DoD) is directed to build 3,000 MW of renewable energy at military installations by 2025.
  • Federal agencies will aim to install 100 MW of rooftop solar on federally-subsidized housing by 2020.
  • The federal government commits to obtain 20% of its electricity from renewable sources by 2020.
  • The Red Rock Hydroelectric Plant, on the Des Moines River in Iowa, will be placed on the federal Infrastructure "Permitting Dashboard" for high-priority projects.
  • Federal agencies will streamline the siting, permitting, and review process for transmission projects.
  • The U.S. will seek a global agreement in the World Trade Organization modeled after the 2011 agreement among 21 Asia-Pacific Economic Cooperation economies to reduce tariffs to 5% or less by 2015 on 54 environmental goods, including solar panels and wind turbines.
  • The FY2014 budget will include $7.9 billion for clean energy research and development.
  • The Department of Agriculture’s Rural Energy for America program will provide renewable energy and energy efficiency grants and loan guarantees directly to agricultural producers and rural small business.
  • Natural gas will continue to be relied upon as a “transition fuel” while America works to develop an “even cleaner” energy economy.

Wasting less energy:

  • $8 billion in loan guarantee assistance will be allocated to advanced fossil energy projects. A draft solicitation will be published by the Department of Energy in the coming weeks.
  • More stringent fuel economy standards will be applied to heavy-duty trucks, buses, and vans post-2018, to improve upon the Model Year 2014-2018 standards adopted in 2011.
  • Targeted GHG emission reduction goals of a total of 3 billion metric tons by 2030 to be achieved through energy efficiency standards for appliances and federal buildings.
  • The Department of Agriculture's Energy Efficiency and Conservation Loan Program will make available to rural utilities $250 million in loans to finance energy efficiency. 
  • Expansion of the Better Buildings Challenge – for commercial and industrial buildings to achieve 20% greater energy efficiency by 2020 – to multifamily housing.

President Obama’s remarks were focused on carbon emissions and their impact on the environment. The President stated that oil and gas production will continue to be an important part of the U.S. economy, even though elements of the Climate Action Plan would negatively affect hydrocarbon energy companies. The Plan directs EPA to finalize new rules on GHG emission limitations for new and existing power plants.  In a separate memorandum released today, the President sets a timeline for EPA to propose a rule for existing power plants by June 2014, and to finalize it by June 2015.  The memorandum also directs EPA to issue a new proposal for limitations on new power plants by September 20, 2013. EPA has been working on a GHG emissions limitation rule for some time, releasing a draft rule in April 2012 that would have limited CO2 emissions from new power plants to 1,000 lbs of CO2 per MW-hour. In the face of two million comments on the draft rule, EPA stated in April 2013 that the rule would not finalized that month, as originally planned. The Plan does not dictate the substance of the new emissions rule.  As a result, the extent to which EPA’s proposed and final rules will commercially affect fossil fuels (particularly coal) remains to be seen.

 

As part of the Administration’s efforts to provide international leadership, the Plan calls for eliminating fossil fuel tax subsidies in the FY 2014 budget and public financing of new coal plants overseas, except where there is no other economically feasible alternative or carbon sequestration systems are used. The Plan also commits to working towards an “ambitious, inclusive, and flexible” international climate change agreement at the next United Nations Climate Change Conference in 2015.

 

As noted above, the Climate Action Plan commits to install 3 GW of renewable energy on military installations by 2025.  Renewable energy procurements at military facilities have been proceeding at a measured pace for some time.  For example, in September 2011 the U.S. Army announced plans to solicit and award multiple indefinite delivery, indefinite quantity contracts aimed at awarding Power Purchase Agreement task orders for up to an aggregate amount of $5 billion.  In order to timely achieve both the Army's goal and the Plan's goal of 3 GW by 2025, the DoD will have to consider alternatives for accelerating the pace of  renewable energy deployments.  In this regard, we have identified three categories of issues that threaten to delay timely renewable energy deployments by the DoD:

  • Economic Issues: Issues concerning the parameters for setting rates payable by DoD pursuant to power purchase agreements.  These issues have, in some cases, caused renewable energy sponsors to conclude that the DoD is unwilling to pay market rates for their energy, thereby raising project viability concerns.
  • Procurement Issues:  The DoD currently utilizes a "two track" system where renewable energy procurements can be initiated both at the Base Command level and through a centralized process administered by the Pentagon.  This approach has led, among other things, to duplication of effort and uncertainty on the part of some renewable energy sponsors.
  • State Regulatory Issues: Issues regarding the extent to which franchised electric utilities are entitled to pre-empt sales of  renewable energy to DoD bases.  Because the ability to pre-empt would effectively invalidate power contracts between the DoD and renewable energy sponsors, these issues have diminished the interest of some sponsors in pursuing contracts with DoD.  

Any effort to accelerate the pace of renewable energy deployments will likely confront these issues (among others).  Thus, clarification of DoD's position on these matters should be a priority.  Equally important, a "standardized" set of terms, conditions, or guidelines for specific categories of renewable resources should be developed to provide a baseline approach for addressing recurring legal or commercial issues.

 

If the existing initiatives and new directives and goals set forth in the President’s Climate Action Plan all come to fruition, the energy economy in the United States could be transformed on many levels.

Results for Third California Cap and Trade Auction Released

The results are in for the third California cap and trade auction.  A metric ton of CO2e went for $14 in the third auction, which took place on May 16, 2013. The top bid at the auction was $50.01, with a mean bid of $16.67 submitted. All of the 14.5 million 2013 vintage allowances available at the auction were sold, with 1.78 bids submitted for each available allowance. Demand was down compared with the second auction, that took place in February 2013, where roughly 2.5 bids were received for every available 2013 vintage allowance. In the third auction, just over 90% of the allowances were purchased by entities that have compliance obligations under the cap and trade program. Allowance prices have continued to slowly rise, with a settlement price of $10.09 per metric ton CO2e in November 2012, $13.62 in February 2013, and $14 in this most recent auction. See my earlier blog post for some details on auction rules.

CARB also held an advance auction of 2016 vintage allowances on May 16. 7.5 million of roughly 9.6 million allowances available were purchased at this advance auction. The settlement price was the same as the minimum bid price allowed, $10.71 per metric ton CO2e. Though all of the 2016 vintage allowances offered were not sold in the third advance auction, demand rose over the second advance auction held in February 2013. In the third advance auction, CARB received about eight bids for every ten 2016 vintage allowances available; in the second advance auction, there were about five bids for every ten 2016 vintage allowances. 

An Allowance Price Containment Reserve sale will take place June 27, 2013. The next allowance auction will be held August 16, 2013.

California Links to Québec's Cap and Trade System

On April 19, 2013, the California Air Resources Board (CARB) voted to link the California cap and trade program to Québec’s cap and trade system. CARB approved changes to the California cap and trade regulation on Friday to allow for the linkage, which is effective January 1, 2014. In practical terms, the linkage opens a new market for greenhouse gas allowances and offsets for California’s regulated entities and offset generators. As Québec’s cap and trade participants enter the California market, regulated entities in California could face tighter competition in bidding for allowances at CARB’s quarterly auctions. 

CARB is also planning for additional amendments to the California cap and trade regulation this year. Many of the potential changes were teed up for consideration in CARB Resolutions 12-33, 12-51, and 11-32. Topics up for potential amendment include:

  • Refining the definition of resource shuffling and clarifying how CARB will deal with the problem. CARB will base proposed amendments to resource shuffling provisions on the recommended actions presented by staff in October 2012. 
  • Providing transition assistance to electrical generating facilities with legacy power purchase agreements that do not provide for recovery of the cost of compliance with the cap and trade program. 
  • Exemption for steam and waste heat emissions from combined heat and power. 
  • Exemption for emissions from waste-to-energy facilities during the first compliance period (2013-2014).
  • Evaluate trade exposure categorizations and modify leakage risk determinations for rare earth mineral extraction activities, acid battery recycling activities, and liquid hydrogen production.
  • Product benchmarks for rare earth mineral extraction, acid battery recycling, dry gas extraction, food processing, foundries, metal casting, metal forging, and ethanol production. Staff may also propose benchmark modifications for thermal and non-thermal oil extraction, natural gas extraction, petroleum refining, hydrogen production, coke calcining, flat glass and container glass manufacturing, recycled boxboard manufacturing, and tissue product manufacturing.
  • The allowance allocation approach for the petroleum refining sector for the second (2015-2017) and third (2018-2020) compliance periods.
  • Allowance allocation to California universities that took early actions to reduce greenhouse gas emissions and invest in energy efficiency and combined heat and power.
  • Issues surrounding the implementation of the offset program.
  • New offset protocols for coal mine methane capture and rice cultivation practices.
  • Ensuring allowances prices do not exceed the highest tier price of the Allowance Price Containment Reserve.
  • Requirements for the retirement of renewable energy credits from electrical generating facilities to prevent double-counting.
  • Changes to implementation of the Auction Platform and Compliance Information Tracking Services System (CITSS) and modification of the current schedule for auctions and reserve sales.
  • Modification of information disclosure requirements for the CITSS.
  • Modification of current auction purchase limits.

CARB currently plans to release the language of draft proposed amendments in June 2013 and will consider adopting them in October 2013.

Results of California Cap and Trade Quarterly Auction Released

On February 19, 2013, the California Air Resources Board held its second auction of greenhouse gas (GHG) emission allowances for its Cap and Trade Program. This was the first quarterly auction for 2013; the first auction was held November 14, 2012. All ‘covered entities’ – GHG emitters regulated under Cap and Trade – were eligible to participate in the auction. Voluntarily associated entities, i.e. groups who wish to retire allowances or sell allowances on the market, were also eligible to participate. Some key rules of the auction: 

  • Participants submit sealed bids, for multiples of 1,000 allowances. 
  • For 2013 auctions, the minimum bid is $10.71 per allowance.
  • One allowance equals the right to emit one metric ton of CO2 (or other GHGs in CO2-equivalent terms). 
  • Allowances are awarded beginning with the highest bid and proceeding through successively lower bids until the total number of allowances available for sale have been awarded.
  • The final price of allowances for all participants in the auction, the “settlement price,” is the lowest bid received at which the supply of available allowances for sale is exhausted.

In this auction, the settlement price for 2013 vintage allowances was $13.62. All of the approximately 13 million allowances offered for sale were sold. The auction also included the advance sale of 2016 vintage allowances. The settlement price for 2016 allowances was $10.71. 4,440,000 2016 vintage allowances were sold, approximately half the total number offered for sale. There were approximately 2.5 bids for every one allowance, compared with approximately one bid for each allowance during the November 2012 auction. Not surprisingly, auction participation is up, with covered entities facing compliance obligations this year.

 

The settlement prices for this auction were slightly higher than those of the first auction, held November 14, 2012. The settlement price for 2013 vintage allowances in November 2012 was $10.09. Advance sales of 2015 vintage allowances were settled at $10, the minimum price, in the November 2012 auction. The Air Resources Board will hold an allowance price containment reserve sale on March 8, 2013, offering allowances at a three tiers of fixed prices.