President Obama denies Keystone XL application

Gus Lu

On January 18, 2012, the U.S. State Department recommended to President Obama that the Presidential Permit for TransCanada Corp.’s Keystone XL pipeline be denied. President Obama concurred with this recommendation, which according to a State Department spokesperson was “predicated on the fact that the Department does not have sufficient time to obtain the information necessary to assess whether the project, in its current state, is in the national interest”.

The State Department’s reference to the time constraint refers to the Temporary Payroll Tax Cut Continuation Act of 2011 (“Act“), passed by Congress and signed by President Obama on December 23, 2011.  Subsection 501(a) of the Act provided that the President had 60 days from the enactment of the Act to issue a Presidential Permit for the Keystone XL pipeline. Under Subsection 501(b), the President did not have to issue the Presidential Permit if he determined that Keystone XL was not in the national interest. 

Had the Presidential Permit been granted under Subsection 501(a), Subsection 501(d) would have required the Permit to provide for a reconsideration of the route of Keystone XL within the State of Nebraska, and to provide a review period for the new route. Keystone XL’s route through Nebraska has been a controversial issue due to its location relative to the heavily-utilized Ogallala aquifer. 

On November 14, 2011, TransCanada entered an agreement with the State of Nebraska to amend Keystone XL’s route to bypass the Sandhills region that sits atop the Ogallala aquifer. That development followed the State Department’s ruling that required TransCanada to examine new routes, and President Obama’s announcement indicating that his decision would be delayed until after the 2012 Presidential elections.

Following President Obama's announcement, TransCanada stated that it intended to re-apply for a Presidential Permit and expected the new application to be processed in an expedited manner.

Delay for Proposed Greenhouse Gas Limits on Oil Refineries

Gianfranco Matrangolo -

The U.S. Environmental Protection Agency (“EPA”) will delay proposing the country’s first-ever greenhouse gas limits on oil refineries. The EPA agreed to implement these regulations under a settlement agreement (“Settlement“) that stemmed from two multi-state lawsuits where environmental groups sought court orders to require the EPA’s action on greenhouse gas regulation.

Pursuant to the Settlement, the EPA agreed to propose standards for oil refineries by December 10, 2011, and to enact the new regulations by November 10, 2012.  According to a spokeswoman for the EPA, “the EPA expects to need more time to complete work on greenhouse gas pollution standards for oil refineries.”  The EPA did not meet the December 10 deadline for the standards but is currently working with the litigants from the Settlement to set a new date for submitting the proposed standards.  It is unclear whether the EPA will also miss the deadline to enact the regulations.

Keystone XL rerouted to bypass Sandhills region

On Monday, TransCanada Corp. announced that it reached an agreement with the Nebraska state government to amend the route of the proposed Keystone XL pipeline to bypass the Sandhills region, an environmentally sensitive area that sits atop the heavily-utilized Ogallala Aquifer. As part of the agreement, the state will fund studies to evaluate alternative routes.

Today, the Nebraska state legislature will consider the proposed law that will direct the Nebraska Department of Environmental Quality to prepare a supplemental environmental impact statement for the Nebraska Governor.

This development follows last week’s U.S. State Department ruling that required TransCanada to examine new routes, as well as an earlier announcement by President Obama indicating that the decision whether to approve Keystone XL would be delayed until after the 2012 Presidential elections. A U.S. State Department spokesman indicated that any agreement between the state of Nebraska and TransCanada will not alter the review process undertaken by the federal agency.

NEB approves Mackenzie Valley pipeline

On December 16, 2010, the National Energy Board (NEB) approved the application for the construction and operation of the Mackenzie Gas Project. The Project includes the 1,196 kilometer Mackenzie Valley Pipeline, three onshore natural gas fields and a 457 kilometer pipeline to carry natural gas liquids from near the coast of the Beaufort Sea to northwestern Alberta and onwards to southern markets. The NEB attached 264 conditions to the Project’s approval in areas such as engineering, safety and environmental protection. The NEB will monitor the Project throughout its lifespan to ensure these conditions are being met.

The NEB began hearing evidence in January 2006 on five applications filed by a number of parties, including lead partner Imperial Oil. The Board held over 58 days of hearing sessions in 15 communities throughout the Northwest Territories and northern Alberta.

To move forward, the NEB’s decision must now be approved by the Federal Cabinet. If the Project is approved, construction is expected to begin in 2014 and the pipeline is scheduled to be in operation by the end of 2018. If the Project proceeds, it will be the largest pipeline system to be constructed and operated in Canada’s north.

A news release was provided by the NEB concurrently with the reasons for their decision.
 

UN climate talks in Cancun Nov 29 - Dec 10

The latest round of United Nations climate negotiations gets underway today in Cancun, Mexico, where representatives of approximately 200 countries will discuss the future of the United Nations Framework Convention on Climate Change and the Kyoto Protocol. The negotiations in Cancun come almost a year since the summit in Copenhagen where high level negotiations fell short of producing a binding post-2012 pact on reducing greenhouse gas emissions and providing aid to developing countries.  As a result of its commitments under the Copenhagen Accord, the non-binding agreement that came out of the negotiations last December, the Government of Canada has pledged to reduce greenhouse gas emissions by 17 percent from 2005 levels by 2020, but only if the United States takes comparable action.

Carbon traders focusing on California

Following the recent abandonment of a national cap-and-trade system in the United States and the winding-down of the Chicago Climate Exchange voluntary carbon-trading program, traders and exchanges are now focusing their efforts on California. A recent Wall Street Journal article describes estimates of the potential size of California's carbon market ranging from $3 billion to $58 billion, which has exchange operators competing with each other to become the dominant trading hub. Many in the exchange industry view carbon allowances and related derivative products as a key long-term asset with global potential. California currently has several operators interested in launching exchanges, the first of which could begin trading operations as early as next year.

Chicago Climate Exchange to discontinue greenhouse gas cap-and-trade program

The Chicago Climate Exchange ("CCX") recently announced that they will discontinue the CCX emission reduction program at the conclusion of its Phase I and Phase II program at the end of this year.  Launched in 2003, the CCX emission reduction program was North America’s first voluntary greenhouse gas (“GHG”) cap-and-trade scheme. CCX Members made voluntary but legally binding commitments to reduce their annual GHG emissions by 6 per cent below their emissions baselines by the end of 2010.  Members who reduced emissions beyond their targets earned surplus allowances to sell, bank or trade with Members who did not meet their targets.

Carbon Financial Instrument (“CFI”) contracts were used to perform these trades.  The closing prices for a CFI contract fell to $0.05 in January 2010, from its all-time high of $7.40 in May 2008. Since February 2010, the CCX has had zero monthly trading volume.

In place of the emission reduction program, the CCX will create the CCX Offsets Registry Program, which will eliminate emission reduction targets in favour of a general marketplace for emission offsets.

"Fundamentally, with any program that relies on voluntary compliance for something not yet mandated into law, it makes it more difficult ultimately to have as vibrant a market as you'd want," said Bruce Braine, Vice-President of Strategic Policy at American Electric Power, one of the CCX’s founding Members.

Other CCX affiliate programs such as the European Climate Exchange and the Chicago Climate Futures Exchange will continue unchanged.

California Releases Proposed Cap-and-Trade Regulation

On October 28, 2010, the California Air Resource Board ("CARB") announced the release of its proposed greenhouse gas cap and trade regulation  as part of the state's commitment to the Western Climate Initiative ("WCI"). British Columbia, Ontario, Quebec and Manitoba plan to join California and several other states in the launch of the WCI cap and trade market in 2012.
 
A key part of CARB's AB 32 Scoping Plan, the cap-and-trade program provides an overall limit on the emissions from sources responsible for 85% of California's greenhouse gas emissions. The release begins a 45-day public comment period culminating in a December 16, 2010 public hearing at which CARB will consider adopting the proposed program.

California vote could hinder cap-and-trade efforts

The viability of a California cap-and-trade program will hinge on the outcome of the state's November elections. Voters in California will decide on a proposition to delay action on climate change until certain economic targets are met, and the Republican candidate for governor has also promised to revisit the current climate change plan.

As reported in the Calgary Herald, this could potentially have a strong ripple effect on the developing North American carbon trading industry. British Columbia, Ontario, Quebec and Manitoba plan to join California and several other states in the launch of the Western Climate Initiative cap-and-trade market in 2012. While many observers are confident that the program will proceed regardless of the outcome in California, there is concern that the loss of the group’s largest economy could hinder the market's liquidity and efficiency.

Wind power coming to the New Jersey shore

The state of New Jersey recently passed the Offshore Wind Economic Development Act (the “OWEDA”) that will require New Jersey’s electricity providers to purchase a certain minimum percentage of their total electricity supply from wind operations in the state’s coastal waters.

The New Jersey Board of Public Utilities (the “BPU“) will have the authority to determine the minimum percentage that utilities must purchase from offshore wind, and will issue offshore-wind renewable energy certificates (“OREC”s) to operators. The minimum percentage will be based on the projected total of the ORECs issued during the first twenty years of all the offshore wind projects’ commercial start dates.

If there are insufficient ORECs available in the market to meet the minimum percentage, the utilities will be required to make a “proportional offshore wind-alternative compliant payment.”

The minimum percentage determined by the BPU must support an offshore wind market of at least 1,100 megawatts, which is enough power for 300,000 homes in this state of 8.7 million people. The OWEDA also authorizes the New Jersey Economic Development Authority to provide tax credits of up to $100 million for offshore wind projects.

The BPU is developing the regulations to establish the OREC program, which will be unveiled in early 2011.

White House releases report on Minerals Management Service's offshore permitting policies

The White House Council on Environmental Quality (“CEQ”) released a report which reviewed the permitting policies of the federal agency responsible for oil and gas offshore leases.

Under the National Environmental Policy Act (“NEPA”), all federal agencies must consider the environmental impacts of their proposed actions, and follow NEPA implementation Regulations created by the CEQ.

NEPA procedures may include:

  1. An Environmental Assessment (“EA”) to determine whether an Environmental Impact Statement is necessary;
  2. An Environmental Impact Statement (“EIS”) for proposed actions that may create significant environmental impacts; or
  3. A Categorical Exclusion (“CE“) for activities that are determined through a public process not to raise environmental issues or concerns which would require analysis in an EA or an EIS.

The CEQ’s NEPA Regulations allows agencies to “tier” their analyses by “incorporating by reference” information, findings, and recommendations from existing studies into subsequent NEPA analyses and documents.

The Minerals Management Service, recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEM”), relies on “tiering” in the approval of offshore drilling Exploration Plans.

The Minerals Management Service uses the analysis performed at the leasing program level to carry the information forward to the individual lease-level. Since the Deepwater Horizon incident, the CEQ report now recommends that the BOEM refrain from tiering in a way that limits site-specific analysis, “despite the availability of major, prior environmental reviews and studies.”

The CEQ report also recommends the BOEM review the use of CEs for offshore Exploration Plans. Establishing a CE requires that a categorized action has neither individual nor cumulative significant effects on the environment, and that there are no extraordinary circumstances which would preclude the use of a CE.

Going forward, the BOEM will review its interpretation of the threshold requirement for “extraordinary circumstances,” which will likely lead to an increase in the number of leases that are subject to additional environmental reviews prior to approval.

To accommodate the increase in EAs and EISs, the CEQ also seeks to amend the Outer Continental Shield Lands Act to provide more time for the BOEM to conduct environmental reviews. Currently, the BOEM must make its decision whether to approve a submitted Exploration Plan within 30 days.

U.S. EPA's GHG regulations take effect in 2011, amidst growing legal challenges

In April, Senators John Kerry, Joseph Lieberman and Lindsay Graham announced their intention to pass legislation pre-empting the Environmental Protection Agency’s (“EPA”) regulation of greenhouse gases. 

However, since the recent abandonment of a Congress Energy Bill, the EPA’s regulations for stationary sources of greenhouse gas (“GHG”) emissions and new standards for light-duty vehicles remain scheduled to take effect on January 2, 2011.

The vehicle rules will apply to new passenger cars, light-duty trucks, and medium-duty passenger vehicles from model years 2012 to 2016, and will require these vehicles to meet an estimated combined average emissions level of 250 grams of carbon dioxide per mile in model year 2016. Automakers may meet these standards through improvements in fuel economy or air conditioning systems.

The auto industry is not expected to mount significant challenges to these rules, as it is speculated that the terms of the regulation were negotiated when loans were committed to the auto industry from funds from The Emergency Economic Stabilization Act of 2008.

On the other hand, the EPA’s regulation for stationary sources has prompted various proposed Bills in Congress seeking to restrict the EPA’s ability to regulate GHGs, as well as court challenges, most notably a lawsuit mounted by Texas Governor Rick Perry in the U.S. Circuit Court of Appeals.

The EPA’s stationary source regulation will operate under the Clean Air Act’s New Source Review Prevention of Significant Deterioration (“PSD“) and Title V Operating Permit (“Title V“) programs. Under these programs, industrial stationary source emitters who produce emissions above a set threshold are required to determine the Best Available Control Technologies (“BACT”) to limit their emissions. 

Prior to the EPA’s Endangerment Finding that determined that six established GHGs are “air pollutants” as defined by the Clean Air Act, the PSD and Title V programs applied only to criteria pollutants like lead, sulphur dioxide and nitrogen dioxide. The emissions thresholds for criteria pollutants are 100 and 250 tonnes per year, depending on the pollutant. 

For GHGs, the EPA has “tailored” the thresholds to be 75,000 and 100,000 tonnes per year of CO2 equivalent, depending on whether the facility is a new construction application or an existing facility undergoing modifications. Additional conditions apply as the EPA’s regulation will be enacted in two phases: one phase starting in January 2 to June 30, 2011; and the next phase, from July 1, 2011 to June 30, 2013.

At the heart of Governor Perry’s challenge is that the EPA does not have the authority to “tailor” the emissions thresholds set by the Clean Air Act. Governor Perry has also stated that in January, Texas will not comply with the stationary source regulations. Nevertheless, the White House Office of Management and Budget is reviewing an EPA rule that would allow the agency to install federal implementation plans if States do not comply with the regulations.

U.S. Senate Democrats abandon scaled-back energy bill

Despite narrowing the scope of their proposed Energy Bill to home energy efficiency, development of natural gas vehicles, stricter offshore drilling regulations and the removal of the $75 million offshore oil spill liability cap, U.S. Senate Democrats failed to gather the 60 Senate votes necessary to break a Republican filibuster.

Moreover, in recent weeks, several Democrat Senators have expressed concerns about the job implications of subjecting offshore operators to unlimited liability.

Senate Republicans proposed an alternative bill that would raise the cap but keep it short of unlimited liability, and would only apply the raised cap to new leases. Further, it would lift the six month offshore drilling moratorium instituted by President Obama’s administration in May, and would offer coastal States a share of offshore royalties.

Senate Majority Leader Harry Reid (D-Nev.) stated that debate for any new Energy Bill would have to resume in mid-September after Congress’s summer recess.

U.S. Senate ceases to pursue comprehensive climate change bill

Harry Reid, the U.S. Senate majority leader, announced on Thursday that the Senate Democrats would cease to pursue passing a comprehensive climate change bill.

Citing a lack of support from Republican Senators, Senator Reid stated that the majority would seek a more modest bill targeting offshore oil and gas drilling regulation, home energy-efficiency programs and incentives for natural gas vehicles.

The bill, planned for debate next week, also seeks to raise the $75 million liability cap for companies that are responsible for oil spills.

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act, also known as the Waxman-Markey bill, which mandated the cap on greenhouse gas emissions from most sectors of the economy, and would establish a national carbon market.  

Over the last year, Senate Committees discussed reducing the scope of the cap-and-trade system to the utilities industry. However, with only 59 Senators supporting the legislation, Senate Democrats lacked the 60 Senators necessary to overcome procedural hurdles that they expected would be launched by Senate Republicans. 

Senator Reid discussed the possibility reviving cap-and-trade legislation in September, or after the November Senate elections.

Derivative reform included in financial reform package approved by U.S. Congress

On July 15, 2010 the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act aimed at strengthening the U.S. financial system.

The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, and setting out obligations regarding corporate governance and executive compensation.

Of particular interest to the energy markets, the legislation provides for the regulation of certain derivatives and derivatives markets.

The legislation is expected to be signed into law by President Obama this week and, if enacted, would introduce significant direct regulation of the market for over-the-counter derivatives and the market participants that use them.

A brief summary of the legislation is provided by the House Financial Services Committee, while the New York Times' Dealbook has also provided some perspective. 

U.S. Department of Energy conditionally commits $1.85 billion to the solar industry

The U.S. Department of Energy recently made conditional commitments to provide $1.85 billion in loan guarantees to two firms in the solar industry.  

Abengoa Solar Inc., a Spanish-based company with offices in Denver, Colorado, received a conditional $1.45 billion loan guarantee to finance, construct and start-up the Solana Generating Station, a 280-megawatt concentrating solar power plant to be located seventy miles southwest of Phoenix, Arizona. 

The DOE also made a conditional commitment to Abound Solar, of Fort Collins, Colorado, for a $400 million, seven-year loan guarantee to expand Abound Solar’s capacity to manufacture thin-film cadmium telluride photovoltaic cells.

Funds for the Loan Guarantees come from the DOE’s Title 17 Innovative Technology Loan Guarantee Program, a creation of the U.S. Energy Policy Act of 2005.  Through the American Recovery and Reinvestment Act of 2009, the Loan Guarantee Program received an additional $6 billion specifically to fund renewable energy and electric power transmission projects,  

To participate in the Program, the DOE periodically issues technology-specific solicitations to the public.  Once a solicitation is issued, project sponsors have a defined amount of time to respond before the solicitation date closes.

The Loan Guarantees are structured as a series of loans distributed on a milestone-basis, whereby the sponsor must meet certain objectives to release funds during the duration of the project.  The Loan Guarantee involves a comprehensive application process that may include independent engineering reports and site visits.   

Congress to consider changes to offshore drilling regime

U.S. offshore operators may soon face expanded liabilities, more stringent rig and well design requirements, vigorous and frequent inspections, and greater civil and criminal penalties in the event of an oil spill. 

On June 30, two Senate Committees separately approved, and advanced to the full Senate, bills that would tighten offshore drilling regulations.

The Senate Energy and Natural Resources Committee’s Bill, S.3516 would separate the Bureau of Ocean Energy Management, Regulation, and Enforcement into two agencies: one responsible for offshore revenue and royalty collection, and the other for licensing, safety and environmental regulation.  

Bill, S.3516 would also include tougher civil and criminal penalties that increase over time with inflation, and would place a levy on operators to fund the hiring and improved training of federal inspectors.

The same day, the Senate Environment and Public Works Committee approved  Bill S.3305 to eliminate the $75 million cap on liability found in the Oil Pollution Act of 1990.  As well, operators would need to submit extensive spill response plans before new drilling applications are approved.

Meanwhile, three Committees in the House of Representatives are working on similar legislation.  The U.S. House Transportation and Infrastructure Committee approved Bill H.R. 5629 that would, with retroactive effect, remove the above mentioned $75 million liability cap, and raise to $1.5 billion the minimum amount of insurance that offshore facilities must hold.  Further, under federal law, operators would be liable for health-related claims associated with oil spills, claims that are currently pursued in State courts.

The U.S. House Energy and Commerce Committee’s proposed Blowout Prevention Act of 2010 would require operators who drill “high-risk wells” (wells located within 200 nautical miles of the U.S., or those onshore where a blowout “could lead to substantial harm to public health and safety or the environment”) to install blowout preventers and obtain independent technical inspection of new rigs before they begin operating.  Rigs would have to be reviewed every six months by third party inspectors, with the possibility of surprise inspections by federal authorities.

The U.S. House Natural Resources Committee will consider its own bill on July 14, written with the intent to improve the transparency and accountability in federal energy regulation. 

Congress’s focus on offshore reform may result in a broad, merged legislation by the end of the Second Session.  Despite support for increased regulation by both parties, Republican critics argue that with open-ended liability and tougher drilling requirements, only the largest offshore operators will be able to shoulder these new costs.

G-20 declaration deals with energy matters

At the recently concluded G-20 summit, world leaders confirmed their ongoing commitment to phasing out subsidies for inefficient fossil fuels.

This commitment, which originated at the 2009 Pittsburgh G-20 Summit, is designed to combat wasteful consumption and greenhouse gas emissions. 

At the request of the G-20, a special report on energy subsidies was prepared by the International Energy Agency (IEA), the OECD, OPEC and the World Bank. 

Leaders at the Summit “note[d] [the report] with appreciation” and further demonstrated their support by calling on Finance and Energy officials to develop timeframes and strategies for phasing out the subsidies. Nevertheless, the Declaration acknowledged that certain countries remain dependent on fossil fuels. Consequently, the G-20 promised that plans to phase out subsidies would be tailored to every country’s specific needs.

The Declaration also addressed the ongoing oil spill in the Gulf of Mexico. Leaders of the G-20 agreed that countries must begin sharing best practices with each other to protect the marine environment and to prevent future offshore drilling accidents. The Declaration, however, does not outline any specific steps that the G-20 will take to achieve this greater level of cooperation.

FERC wants feedback on electricity storage

The Federal Energy Regulatory Commission (“FERC”) is seeking feedback regarding recent developments in the field of electricity storage.

Electricity storage technologies like rare earth metal batteries, pumped hydro and pre-compressed gas turbines can increase the value of renewable assets, such as solar and wind, by making supply coincide with periods of peak consumer demand. For grid management purposes, electricity storage can also provide “ride-through” during outages, reduce harmonic distortions, and eliminate voltage sags and surges.

FERC is seeking stakeholder input regarding how FERC’s accounting and reporting requirements should account for the capital and operating costs associated with new electricity storage facilities.  FERC is also seeking guidance on the rate-setting treatment for facilities that serve multiple purposes, some in and some outside of FERC’s jurisdiction, as well as the regulatory implications of open-access electricity storage services.

Comments are due July 26, 2010.

PG&E finances residential solar installations

PG&E Corporation has established a $100 million tax-equity fund to finance residential solar installations by SunRun, a start-up company that leases photovoltaic arrays to homeowners.

The fund promises to support solar installations for 3500 homes.  Homeowners in various states, including California, Arizona, and New Jersey, can now sign a power purchase agreement with SunRun that fixes the cost for monthly electricity payments for as many as eighteen years; in exchange, SunRun installs, owns, and maintains the solar systems.

The infusion of tax equity has greatly encouraged the growth of the solar lease market.

Although PG&E’s fund is the largest to date, other companies like US Bancorp have also created tax-equity funds for solar installer companies.

PG&E’s fund represents another step forward for tax equity vehicles in the area of renewable energy. 

Alaska adopts renewable energy and energy efficiency measures

On June 16, 2010, Alaska adopted a new law that sets a target of generating half of the state’s electricity from renewable sources.   The new legislation – formerly known as House Bill 306 – does not contain details on how Alaska will achieve this goal.  Nevertheless, the state expects that hydroelectric projects will help the state realize its target by 2025.  The legislation marks the highest goal for renewable power amongst any of the US states, beating out California and Hawaii, which have set its targets at 33% and 40%, respectively. 

Alaska also passedSenate Bill 220 into law, which provides a $250 million financing scheme for energy efficiency projects.  The scheme, run by the Alaska Housing and Financing Corporation, will supply funds for improving public structures, such as schools, government buildings, and the University of Alaska.   State buildings will first be evaluated for energy efficiency.  Alaska will then begin improvement projects starting with the most inefficient structures.  These projects will be scheduled for completion by 2020.  Finally, the new legislation establishes an Emerging Energy Technology Fund.  This fund offers grants for technological projects that are predicted to be commercially viable within five years.

SEC issues guidance on disclosure obligations associated with climate change

Lanette Wilkinson

Securities and Exchange Commission (SEC) rules require companies to disclose impacts or risks that are material to their business. In September 2007 and again in November 2009, a coalition of leading institutional investors petitioned the SEC to issue guidance on existing SEC disclosure obligations as they relate to climate change. Following this pressure, on January 27, 2010, the SEC approved an interpretive release that addresses when legislative or business developments relating to climate change trigger disclosure obligations. Although the interpretative release has not yet been issued, the SEC has indicated that disclosure obligations may be triggered when a company evaluates, and determines to be material to its business, (1) the impact of existing (or in certain circumstances, proposed) legislation and regulation relating to climate change; (2) the risks or effects of international accords and treaties relating to climate change; (3) the potential or actual indirect consequences of regulatory or business trends associated with climate change; or (4) the effects of actual or potential physical impacts of climate change.

Further detail is available in the SEC news release.

In our December 2009 issue of the Emissions Trading and Climate Change Update we reviewed comparable efforts of the Ontario Securities Commission to establish guidance for climate change disclosure in Ontario. We will continue to follow the progress of the SEC and the OSC in establishing detailed guidance for climate change disclosure. Look for further analysis and observation in future bulletins.

Canadian Implications of U.S. Climate Change Regulation - Part II

Kerry-Boxer Bill Introduced in the Senate

Jason Kroft, Ruth Elnekave and Michael Lees

On September 30, 2009, Senators John Kerry (D-MA), Chairman of the Committee on Foreign Relations, and Barbara Boxer (D-CA), Chairman of the Committee on Environment and Public Works, introduced the Clean Energy Jobs and American Power Act ("Kerry-Boxer", or the "Bill"). The stated purpose of the Bill is to "create clean energy jobs, promote energy independence, reduce global warming pollution, and transition to a clean energy economy." The Bill, the main feature of which is an economy-wide cap-and-trade regime to reduce greenhouse gas (GHG) creation, is closely modelled on its House of Representatives predecessor, the American Clean Energy and Security Act (ACES), which was passed on June 26, 2009.1

These U.S. developments have considerable significance for Canada. While the federal Minister of the Environment, Jim Prentice, suggested several times this year that the government intended to publish comprehensive climate change regulations prior to the United Nations climate change conference in Copenhagen (December 7-18), Canada seems to have determined that domestic action in advance of an international and U.S. framework would be too risky. As Minister Prentice recently explained: "it is in our interest as Canadians to ensure that we know what the international framework is going to look like. Our continental framework needs to be consistent with that. And our domestic policies need to be consistent with that." The result (in addition to a perception that climate change momentum north of the border has stalled) is that it may be several years before Canada tables regulations aimed at cutting GHG emissions and - perhaps most significantly - that the form and content of those regulations is likely to be heavily influenced by the legislation that emerges from the U.S. Congress.

Cap-and-Trade Provisions in Kerry-Boxer and ACES:
Key Differences and Canadian Impact

GHG Cap

Both bills establish a cap-and-trade regime that would require GHG emission reductions of 83% below 2005 levels by 2050; a 42% reduction below 2005 levels by 2030; and a 3% reduction from 2005 levels by 2012. Kerry-Boxer, however, would reduce emissions 20% below 2005 levels by 2020 - three percentage points more than the corresponding ACES target.

Canada's Turning the Corner climate change plan, which was originally scheduled to take effect in 2011, is based on an intensity-based rather than an absolute emissions cap, as contained in both Kerry-Boxer and ACES. An intensity-based cap, preferred by large emitters such as Alberta oil sands producers, would be less of an impediment on economic growth than an absolute cap. However, in light of Canada's desire for cross-border harmonization of GHG reduction regimes, U.S. targets will surely set a benchmark for those under Canadian GHG regulations in any future climate change regime.

The White House recently clarified its stance, announcing that in Copenhagen, the U.S. will pledge to cut its GHG emissions by 17% below 2005 levels by 2020, in line with the reductions proposed in ACES rather than its successor Bill. Minister Prentice has stated that the White House proposal is almost identical to Canada's stated target to reduce GHG emissions by 20% below 2006 levels by 2020, considering the different base year used as a measure, and Prime Minister Harper has echoed this thought, adding that Canada may only "make some minor adjustments".

Trade

Manufacturers, unions and lawmakers in states that produce energy-intensive products such as steel, cement and glass have called for tariffs on imports from countries that the U.S. perceives as being weak on cutting GHG emissions.

Under ACES, such tariffs would be imposed on certain goods imported from countries that have not instituted sufficiently strong GHG reduction plans. This trade provision would require the purchase of "international reserve allowances" for energy intensive imports.

While Kerry-Boxer includes the title "International Trade", there are no provisions included under it at this time. The Bill does, however, include placeholder language that reads:

It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.

The section on international trade has been intentionally left blank due to divisions among the lawmakers who drafted the Bill, and the resulting potential for the issue to be used as a bargaining tool to gain consent from dissenting senators. Indeed, Senator Sherrod Brown (D-OH) and nine of his Democratic colleagues in the Senate have warned they will oppose any climate change bill that does not include such a provision. Conversely, Senator John McCain (R-AZ) has indicated that he is in opposition to any form of carbon tariff, stating that such a tariff is "protectionism and it's going to be passed on right to the consumer."

There have also been calls for the United Nations to create an international body to impose carbon tariffs. Senator Ben Cardin (D-MD), who sits on both the Senate Foreign Relations and Environment and Public Works Committees, proposed that such a body be created in order to take pressure off of U.S. trade officials, who may be wary of imposing tariffs on carbon-intensive goods for the fear of spawning a trade war.

Despite limited opposition to a carbon tariff or its equivalent, the majority of U.S. lawmakers are in support of some form of border adjustment. To be sure, some believe that the tariffs are important if the Bill is to win the votes required to pass in the Senate. While it is trade relations with developing countries that would be primarily complicated by carbon tariffs, such measure would undoubtedly serve as an additional impetus for Canada to institute GHG regulations of a similar stringency to those adopted by the U.S.

International Offsets

Both ACES and Kerry-Boxer allow two billion tons of offsets to be used by capped entities annually to meet their compliance obligations. Under ACES, those entities are allowed to source up to 50% of carbon offsets internationally, while requiring at least 50% to be sourced domestically. If domestic offsets are not available to meet the 50% domestic requirement, then another 500 million tons of international offsets will be allowed. However, Kerry-Boxer differs in that it allows a maximum of 25% to be sourced internationally. Under the Bill, an additional 750 million tons of offsets will be permitted in the event that the domestic offset supply is insufficient to meet the required threshold.

At first glance, this appears to limit the potential for a Canadian export-economy in carbon offsets. However, it should be recognized that such an export-economy may not be a potential reality at all. The Canadian government has called for a 20% reduction in GHGs below 2006 levels by 2020. While Canadian GHG emitters will necessarily have to offset their own GHG emissions in order to maintain their current levels of output without undergoing drastic changes to their current methods of production, many warn that the domestic supply will not be able to meet demand.

Gerry Ertel, manager of regulatory affairs at Royal Dutch Shell, has said that Canadian businesses will only be able to meet approximately half of the proposed target without using offsets. Ertel also noted that Canada does not have enough domestic offset production capability to meet demand, making the inclusion of an international offset regime necessary for compliance.

If Canadian emitters were forced to rely heavily on offsets sourced internationally, the majority of such offsets would arguably come from low-cost producers in developing countries. Yet, such scenario is cause for concern, as the UN's clean development mechanism, a program designed to produce carbon offsets in developing countries for industrialized nations subject to the Kyoto regime, has only produced 340 million credits in the past four years.

Accordingly, as offsets produced in the U.S. will surely be consumed domestically and the ability for Canadian emitters to rely on developing countries as a supply of offsets is limited, any cap-and-trade regime in Canada will need to facilitate the domestic production of offset credits.

Pre-emption of State-level GHG Cap-and-Trade Programs

Under Kerry-Boxer, provided that the federal cap-and-trade program holds its first auction of allowances by March 31, 2011, no state may implement or enforce a comprehensive GHG limitation program that covers any capped emissions during the years 2012 through 2017. If the initial auction is delayed, then state pre-emption would not begin for at least 9 months after the date of that auction. While ACES also has a pre-emption provision, the House bill does not provide for the postponement of pre-emption if the initial federal auction is delayed. It should be noted that these provisions do not pre-empt states from instituting command-and-control regulations such as targeted efficiency standards.

This pre-emption is significant for Canadian provinces because several (British Columbia, Quebec and Ontario) are party to the Western Climate Initiative (WCI), a regional GHG cap-and-trade regime that would be affected by the pre-emption. WCI would cover nearly 90% of GHG emissions in WCI states and provinces upon its complete proposed implementation in 2015. However, reliance on WCI by Canadian jurisdictions may be in jeopardy if the program cannot remain viable without a U.S. membership base. Consequently, pre-emption of state-level cap-and-trade programs may force Canadian legislators to accelerate the creation of a federal or provincial cap-and-trade regime in Canada, as there may not be a cross-border regional substitute available.

Going Forward

The road ahead for passage of Kerry-Boxer is not without obstacles. Senator Boxer recently announced that the Bill, which cleared a controversial Environment Committee vote in early November, will not be debated and amended in the Finance Committee (one of numerous committees that must still weigh in before the Bill goes to the Senate floor) until early 2010. Similarly, Senate Majority Leader Harry Reid announced that the full Senate may vote on climate change legislation some time in the spring, ending hopes that the U.S. would pass meaningful legislation before Copenhagen. Moreover, while similar to ACES in many respects, Kerry-Boxer will likely be more difficult to pass, as it requires a Senate supermajority of 60 votes rather than the simple majority required in the House.

If and when U.S. climate change legislation will pass is therefore still unclear. What is certain, however, is that any progress south of the border will have a very significant effect on developments in Canada. While not necessarily the final word, Kerry-Boxer is a key step in the development of a U.S. contribution to an international framework that - in the words of Minister Prentice - "all needs to knit together".


 

1 For a description of ACES, please refer to the following Stikeman Elliott Emissions Trading and Climate Change Update: "Canadian implications of U.S. climate change regulation: U.S. House passes American Clean Energy and Security Act", dated September 2009.

 

 

California continues to lead the way on facilitating renewable energy development

Glenn Zacher

As Ontario's Minister of Energy and Infrastructure, George Smitherman, moves forward with plans to develop a "green energy act", he may be looking south to California governor, Arnold Schwarzenegger, for inspiration.   On November 17, 2008, Governor Schwarzenegger signed Executive Order S 14-08, thereby giving effect to California's ambitious Renewable Portfolio Standard (RPS) goal of supplying 33% of retail load from renewable energy sources by 2020.  To facilitate the development of the substantial new wind, solar and other renewable resources that will be required to meet this threshold, S-14-08 provides for a major streamlining of California's existing regulatory approvals and permitting processes.  Building on authority earlier given to the California Energy Commission (CEC) to designate necessary transmission corridors to access and deliver new renewable energy, S-14-08 provides for enhanced coordination and collaboration between the CEC and other state and federal agencies (the California Department of Fish and Game, the US Bureau of Land Management, and the US Fish and Wildlife Service).  This coordination and collaboration is intended to create a one-stop process for approving and permitting renewable-energy projects, reduce approval and permitting timelines by 50% and create a best-management-practices manual to be used by RPS project proponents.