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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 2 Regulation of “covered entities” • Lieberman-Warner Climate Security Act of 2008 (S. 3036) – 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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 Emission credits • Destruction credit – Credits to entities that destroy greenhouse gases (does not apply to methane) • Sequestration credit – 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 11 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 12 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 13 Eligible international offset projects • International offsets: – – – 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 14 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 15 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 © 2008 Vinson & Elkins LLP 16 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 17 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: – – – – 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 18 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: – – – – 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 19 Geological Storage Study • Secretary of the Interior assessment of the geological extent of all potential storage formations in the United States, including: – – – – 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 20 Economic impacts of L-W at 2030 EIA EPA Duke Univ. Allowance Cost $61-91 $61 $38 Gasoline +14.4 to 16.5% +33% No est. Natural gas +20.7 to 28.9% +21% +21.3% Electricity +9.9 to 25.2% +44% +29.6% GDP -0.3 to -0.7% -0.9% -0.93% Source: Energy Information Administration, Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008); Brian Murray & Martin Ross, The Lieberman-Warner America’s Climate Security Act: A Preliminary Assessment of Potential Economic Impacts; Nichols Institute for © 2008 Vinson &Security ElkinsActLLP Environmental Policy Solutions; Duke University (Oct. 2007); Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate of 2008 (March, 2008). 21 Economic projection • Most economic models assume that nuclear power will play a much larger role in providing electricity generation in light of GHG regulation • Some studies also suggest a preliminary move toward natural gas for electricity generation in the near term, with a move back to coal once CCS becomes viable. – The Duke University studies suggests a substantial drop in coal use (40% below baseline in 2020), but a recovery in 2030-2050 because of CCS © 2008 Vinson & Elkins LLP Source: Brian Murray & Martin Ross, The Lieberman-Warner America’s Climate Security Act: A Preliminary Assessment of Potential Economic Impacts; Nichols Institute for Environmental Policy Solutions; Duke University (2007). 22 7000 160 6000 140 5000 120 100 4000 80 3000 60 2000 40 1000 Cost of allowance ($) # 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 23 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 24 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 25 Emergency off-ramps • Carbon Market Efficiency Board – – – 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 26 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: – – – – – – 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 27 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 © 2008 Vinson & Elkins LLP 29 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 30 Responding to an Incident • The order of priority in responding to an emergency: – – – – 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 31 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 32 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 33