Weekly Climate Change Policy Update - January 14, 2008

To receive the Weekly Update via email, visit our Sign Up/Subscribe page.  

Commentary

When the Senate Environment & Public Works Committee reported out the Lieberman-Warner bill on Dec. 6, one might have thought that that vote – and the Bali outcomes – would have been the last major development in U.S. climate policy for 2007.  But neither Congress nor the EPA was finished.  Tucked away in appropriations legislation passed at the end of the month was a directive to EPA to develop a mandatory emissions registry for the United States.  Then, EPA announced its intent to reject California’s petition for a Clean Air Act waiver for the state’s motor vehicle emissions standards.  With these developments, 2008 could be an unexpectedly busy year for EPA.  It will be drafting a registry rule while finalizing a low carbon fuel standard and federal vehicle standards.  At the same time, it will face legal challenges from California and the other states whose vehicle regulation plans it thwarted.  EPA will also face scrutiny from some in Congress who support the California waiver – and also from NGOs asserting that the agency is required to develop GHG standards for new power plants and other facilities.

What else will 2008 hold for U.S. climate policy?  Expect intense politicking on the Lieberman-Warner bill in advance of a Senate floor vote, which could occur in the first half of the year.  In the House of Representatives, Reps. Dingell and Boucher will be drafting their preferred alternative, which offers a blank slate to those who seek a different design than the Lieberman-Warner bill.  At the state level, the Western Climate Initiative is supposed to come forward with a market-based program design by August.  And the California Air Resources Board is required to release a “scoping plan” of measures to meet the AB 32 emissions targets on or before Jan. 1, 2009.

This drumbeat of legislative and regulatory activity is spurring increased activity in the voluntary market for verified emission reductions (VER); companies who see themselves as likely to be regulated are coming to the market to make some risk-hedging purchases.  However, public concerns about the integrity of that market have caused the Federal Trade Commission to explore possible new guidance or standards.  Market participants might welcome a modest role for the FTC if it shores up public confidence in the VER market.   

Congress

• EPA Fails to Comply with Sen. Boxer’s Request for Information; Sen. Boxer Holds Field Hearing.  Senate Environment and Public Works (EPW) Committee Chairman Barbara Boxer (D-CA) requested documents related to Environmental Protection Agency (EPA) Administrator Stephen Johnson’s December announcement that EPA intends to reject California’s petition for a Clean Air Act waiver for its motor vehicle emissions standards (for more details on EPA’s announcement of its intent to deny the waiver, see related entries below under “Administration,” “States and Cities,” and “Studies and Reports.”).  EPA responded that Chairman Boxer’s request for information placed a “significant burden” on the agency and that staff required additional time to meet the request.  Chairman Boxer said that the information was needed for a field hearing scheduled to take place in California on January 10.  The field hearing was convened without the requested information and was not attended by Administrator Johnson, who has pledged to defend his decision before the EPW Committee at a later hearing in Washington, D.C.  The EPW Committee is expected to hold a follow-up hearing in Washington on January 24.
• Sen. Feinstein Seeks EPA I.G. Investigation of California Waiver Denial.  Senator Dianne Feinstein (D-CA) asked in a January 2 letter to EPA Inspector General for an investigation into Administrator Johnson’s announcement of his intent to deny California’s waiver petition.  She also asked that the Inspector General review past waiver requests from California and the agency’s overall decision-making process.  EPA has not yet issued a response to Senator Feinstein’s letter.
• Sen. Feinstein Gains Industry Support for Emissions Trading Oversight Legislation.  A diverse coalition of utilities, state consumer advocates, and public interest groups this week publicly endorsed the “Emission Allowance Market Transparency Act of 2007” (S. 2423), which was introduced by Senator Dianne Feinstein (D-CA) in December.  The bill calls for the establishment of an oversight board that would protect against manipulation and fraud of greenhouse gas (GHG) emissions allowance markets under a national cap-and-trade program.  Supporters of the bill anticipate adding it as an amendment to the Lieberman-Warner bill (S. 2191) that may be debated on the Senate floor later this year.
• EIA Publishes Analysis of Bingaman-Specter Climate Bill.  The Energy Information Administration (EIA), an independent arm of the Department of Energy, released an analysis this week of the Low Carbon Economy Act of 2007 (S. 1766), which was introduced in July 2007 by Senators Jeff Bingaman (D-NM) and Arlen Specter (R-PA).  S. 1766 would cap U.S. GHG emissions at 2006 levels in 2020, and at 1990 levels by 2030 (by comparison, S. 2191 would cap emissions at 1990 levels in 2020).  S. 1766 also includes a “Technology Accelerator Payment” (TAP) provision.  This “safety valve” mechanism would allow regulated entities to make an annually increasing per-ton payment in lieu of submitting allowances; the intention behind the TAP is to mitigate higher-than-expected costs of meeting the emissions cap.  The EIA found that S. 1766 would reduce GHG emissions significantly compared to business-as-usual projections, but that the use of the TAP provision would result in emissions exceeding the 2030 target.  The EIA further concluded that total discounted GDP losses between 2009-2030 would range from $52 billion (-0.02%) to $163 billion (-0.07%).  According to the EIA, the TAP provision significantly mitigates costs, particularly in scenarios where carbon capture and sequestration technology does not become widely available until closer to 2030, and where nuclear power additions are slower than expected to the generation mix.
• Appropriations Legislation Directs EPA to Establish Mandatory Economy-Wide GHG Emissions Registry.  Tucked within Congress’s end-of-the-year budget package for FY 2008 was an appropriation of $3.5 million – and a mandate – for EPA to create a mandatory national registry of GHG emissions.  The provision requires EPA to issue a draft rule for creating the economy-wide registry within nine months of the enactment of the appropriations bill, and a final rule within 18 months.  The provision gives EPA authority to determine a minimum threshold below which emissions sources are exempt from the reporting requirement.  Sen. Barbara Boxer (D-CA) noted that gathering accurate data on GHG emissions is essential to creating a comprehensive and effective national cap-and-trade program. 
• House Republicans Establish Task Force on Energy Security and Climate Policy.  House Energy and Commerce Ranking Member Joe Barton (R-TX) announced the formation of a Republican Task Force on Energy Security and Climate Policy.  Membership in the Task Force is open to all House Energy and Commerce Committee Republicans.  The goal of the Task Force, according to a letter circulated by Ranking Member Barton, is to establish a coordinated set of principles on the issue of climate change that can be used to form the basis of a broader national Republican policy. 
• Rep. Markey Seeks Emissions Regulation of U.S. Aviation Industry GHG Emissions.  This week, Rep. Ed Markey (D-MA), Chairman of the House Select Committee on Energy Independence and Global Warming, sent a letter to EPA Administrator Stephen Johnson requesting that the agency regulate GHG emissions from the aviation industry.  Rep. Markey noted in the letter that the aviation industry was responsible for approximately 3 percent of all GHG emissions in the U.S. in 2005.  He also said that the European Union recently included aviation in its CO₂ cap-and-trade program.  The Chairman sent a similar letter to the Federal Aviation Administration (FAA) in the fall of 2007.  In its response, the FAA said that it was looking to EPA for guidance.  EPA has not yet issued a response to Rep. Markey’s letter. 
• New Energy Law Requires DOT to Establish Transportation Climate Office.  As required under the recently-enacted energy bill, the Department of Transportation (DOT) must establish a new Office of Climate Change and the Environment.  A first priority of the office will be to conduct a study of policy options to reduce greenhouse gas emissions from the transportation sector.  The office is also required to identify solutions to reduce transportation-related energy use to mitigate the effects of climate change. 

Administration

• EPA Announces Intent to Deny California Waiver Request for Vehicle GHG Emissions Regulations.  On December 19, 2007, EPA Administrator Stephen Johnson announced that the agency intends to deny California’s request for a waiver under the Clean Air Act for its 2002 law regulating CO₂ emissions from new motor vehicles.  The Clean Air Act authorizes California to set its own vehicle emission standards, but the state must request a waiver from EPA before the standards can be implemented and enforced.  If EPA grants such a waiver, then other states can elect to adopt the California standards instead of Federal standards.  Sixteen states have taken steps to adopt the California standards, conditioned on EPA approval of the waiver.  In announcing his intent to deny the request, Administrator Johnson stated that the state had failed to demonstrate the “compelling and extraordinary circumstances” required for the agency to grant a waiver.  Administrator Johnson also noted that the recently passed Federal energy bill, which raised the national Corporate Average Fuel Economy (CAFE) standards to 35 miles per gallon by 2020, would result in nearly equivalent GHG emission reductions as the California standards and would also avoid a confusing patchwork of regulations.  Administrator Johnson stated that the national approach also was preferable given the global nature of climate change.  EPA has not yet issued the formal decision document explaining the agency’s rationale for denying the waiver.  Immediately following the announcement, several members of the U.S. Congress, along with California and other states, announced their intention to challenge EPA’s decision.  (For details on state plans to sue EPA, see the discussion under “States and Cities” below).
• FTC Considers Development of Guidelines for Claims Regarding Voluntary Emissions Offsets.  On January 8, 2008, the Federal Trade Commission (FTC) held a public workshop examining whether the agency should modify its environmental marketing guidelines to regulate claims made by companies about the voluntary GHG offset and renewable energy credit (REC) markets.  The “Green Guides”, which were last updated in 1998, do not address these markets.  As of 2006, the global voluntary offsets market had grown to $91 million with over two-thirds of offset purchasers located in the United States.  Groups pushing for FTC standards argued that revisions to guidelines are necessary to verify green claims made offset and REC marketers and buyers.  A number of groups have taken steps to develop voluntary standards and registries verifying offsets and RECs and to address such issues as reliable certification, additionality, prohibitions on double-counting, and permanence.

States and Cities

• California, Other States Announce Plans to Sue EPA Over Waiver Denial.  Immediately following EPA Administrator Stephen Johnson’s announcement of the agency’s intent to deny California’s request for a Clean Air Act waiver for its motor vehicle emission standards, California announced that it would challenge the decision in the United States Circuit Court of Appeals for the District of Columbia.  California Attorney General Jerry Brown and Governor Arnold Schwarzenegger stated that the suit would be filed “at the earliest possible moment.”  At least 12 of the 16 states that adopted the California regulations have announced their intention to join the suit.  States that have announced their intent to fight the decision include, among others, Maryland, Oregon, New Jersey, Pennsylvania, and Rhode Island.
• Western Climate Initiative Stakeholders Meeting Reviews Options for Distributing Allowances.  The Western Climate Initiative (WCI) held a stakeholders meeting on January 10 to analyze options for distributing emissions allowances.  The WCI is a collaborative effort among the states of Arizona, California, New Mexico, Oregon, Utah, Washington, and the provinces of British Columbia and Manitoba to develop a regional cap-and-trade program.  The WCI has set a goal of completing the design of a market-based program by August 2008.  At the January 10 meeting, state and provincial representatives analyzed two primary approaches to allowance distribution: free distribution and public auction.  Some stakeholders noted that the free distribution approach can result in low allowances prices and reduce the overall environmental effectiveness of the cap.  Others said that auctioning off all the allowances could permit larger companies to stockpile allowances, which would result in significantly higher prices.  Recognizing the limitations of each approach, Steve Owens, director of the Arizona Department of Environmental Quality and head of the WCI subcommittee looking into the design of the system for distributing credits, stated that the final WCI distribution plan likely would rely on a combination of the two distribution methods.
• New Jersey Legislature Sends Power Sector Cap-and-Trade Bill to Governor.  On January 7, 2008, both chambers of the New Jersey State Legislature passed a bill authorizing the state Department of Environmental Protection to establish a cap-and-trade program for electric power plants.  The bill is intended to help the state meet its GHG reduction targets under the Regional Greenhouse Gas Initiative (RGGI) and the state’s Global Warming Response Act (Response Act).  Under RGGI, New Jersey must cap CO₂ emissions from power plants by 2009 and achieve a 10 percent reduction from those levels by 2019.  The Response Act contains a separate requirement that the state reduce emissions to 20 percent below 2006 levels by 2020 and 80 percent by 2050.  The bill would allocate the 23 million tons allowed under the cap by auction, with revenues placed in a Global Warming Solutions Fund to cover state agencies’ cost of implementing the cap and to fund programs to reduce GHG emissions and energy demand, and increase energy efficiency.  The bill includes provisions requiring the state Board of Public Utilities to limit leakage of electricity generation to surrounding states under the program and to allow regulated utilities to recover their compliance costs. 
• Connecticut Issues Draft RGGI Implementation Rule.  On December 31, 2007, Connecticut, one of 10 states participating in RGGI, issued draft rules for implementing the regional cap-and-trade program.  The state’s commitment under RGGI caps state CO₂ emissions at 10.7 million tons.  The draft rule would auction 91 percent of the allowances allowed under the cap.  Funds generated by the auction would be distributed to the state’s main power distribution companies to develop energy efficiency measures.  The draft rule places the remaining 9 percent of allowances in set-aside accounts to benefit clean and renewable energy sources. 
• Limits on State Offsets Force Massachusetts to Create Compliance Trust.  Due to limits on the types of offsets allowed by state regulations, the Massachusetts Department of Environmental Protection proposed a rule allowing the six power plants subject to the state’s CO₂ limits to comply with these requirements by paying into a GHG Expendable Trust.  The regulations currently impose multi-pollutant (CO₂, mercury, SO₂, and NO_x) standards on the state’s highest emitting electric generating facilities and will be in place until January 2009, when RGGI comes into force for the state.  In issuing the December 24, 2007 proposal, the DEP noted that the narrow definition of offsets, which is limited to projects located in Massachusetts, created a shortage of available offsets.  The DEP has stated that it intends to remedy deficiencies in the offset program by “clarify[ing] the process and requirements” through which offset credits are earned, including expanding the scope of the offset program to allow credit for offset projects located in other states and abroad.

Industry

• Chamber of Commerce President Announces Support for Carbon Tax.  Thomas Donohue, the President of the U.S. Chamber of Commerce, said this week that he supports establishing transportation user fees and a carbon tax to generate revenue that would be dedicated to the modernization of the nation’s energy and transportation infrastructure.  The announcement was made during a press briefing on the Chamber’s 2008 agenda and business outlook.
• Large-Scale Carbon Sequestration Project Launched for Illinois Basin.  The Department of Energy (DOE) announced last week that it will work with the Midwest Geological Sequestration Consortium, the Illinois State Geological Survey, and Archer Daniels Midland Co. on a CO₂ sequestration project that will inject over 1 million metric tons of CO₂ underground.  The injections will occur in the Mount Simon Sandstone Formation, a major saline formation in Illinois, Kentucky, Indiana, and Ohio.  The project anticipates receiving $66.7 million of the estimated cost of $84.3 million through DOE’s Regional Carbon Sequestration Partnership Program.  The injection will occur with CO₂ obtained from an Archer Daniels Midland Co. ethanol facility in Decatur, Illinois.  CO₂ injection is scheduled to begin in October 2009, at a rate of 1,000 metric tons of CO₂ injected per day.  The site will be closed in 2012 and monitored to evaluate the storage effectiveness of the geologic formation.
• Washington State Utility Removes CCS Plans From Proposed New Coal Plant.  After state regulators denied its proposed rate recovery for a new coal-fired power plant incorporating carbon capture and storage (CCS) technology, Energy Northwest said that its adjusted proposal will not include CCS.  The regulators rejected the proposal, which indicated that the plant would use CCS technology without providing specific details, as overly vague.  A recent Washington law prohibits new power plants from emitting more than 1,100 lbs of CO₂ per mWh of electricity generated.  The company said that it is analyzing its options for meeting the law’s requirement, including switching to natural gas, and will make a decision on how to proceed in mid-January.

Studies and Reports

• Ceres Report Analyzes Response of Global Banking Sector to Climate Change.  On January 10, Ceres issued a report, titled “Corporate Governance and Climate Change: The Banking Sector,” which evaluates 40 banks from around the world on their response to climate change.  Ceres is a Boston-based coalition of large-scale investors, environmental and public interest groups.  The Ceres report found that European banks lead both American and Asian banks in adapting to climate change, and recognized UK-based HSBC Holdings and Dutch-based ABN AMRO as having the best governance structures in place to address climate change and the associated risks and opportunities.  Ceres evaluated the banks in five governance areas: board oversight, management execution, public disclosure, GHG emissions accounting, and strategic planning. 
• World Economic Forum Reports that Increased Production of Biofuels Will Harm the Poor.  The World Economic Forum released its annual Global Risks report this week, which concentrated on the following four areas:  food security, financial risk, supply chains and the role of energy.  The report indicates that policies to reduce CO₂ emissions and improve energy security - such as increasing production of biofuels - could cause food prices to rise and harm the world’s poor.

International

• Canadian Advisory Group Recommends Carbon Tax to Reduce Emissions.  The National Round Table on the Environment and the Economy, a group whose members include business leaders, universities, research institutions, and environmental organizations, this week said that a key element of Canada’s long-term solution for reducing its carbon emissions is a pricing mechanism for carbon emissions.  The group published this and other recommendations in a report, “Getting to 2050: Canada's Transition to a Low-Emission Future,” which was released on January 7.  Canadian leadership welcomed the report, but remained un-supportive of a carbon tax scheme.
• U.S. Embarks on Clean-Energy Trade Mission to China and India.  Building upon the first U.S. Clean Energy Technologies Trade Mission, which took place in April 2007, the Chamber of Commerce this week commenced a second mission that will bring over 17 U.S. clean technology firms to China and India.  The mission, led by U.S. Commerce Assistant Secretary David Bohigian, seeks to link U.S. companies with environmentally-friendly opportunities in Chinese and Indian energy markets.  The trade mission targets a broad range of clean energy technologies such as renewable energy, biofuels, energy efficiency, clean coal, and distributed generation.