Weekly Climate Change Policy Update - January 28, 2008

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Commentary

In the United States, climate change news mostly concerned the states.  The Regional Greenhouse Gas Initiative member states prepared for their first allowance auctions, and the California Air Resources Board continued to develop its comprehensive regulatory plan for the state.  The states also gave every indication of digging in for a fight with EPA over its rejection of the waiver for the California vehicle emissions standards; in this fight, the states have some significant allies in Congress.  Internationally, the big news was the European Commission’s proposal for a post-2012 phase of the European Union Emission Trading Scheme.  It is worth noting how the Commission came out on some of the key design issues that are the subject of contention here in the United States, including the level of the emissions cap (21 percent below 2005 levels by 2020); the extent of free allowance allocations (none for electricity, and little for other sectors); the coverage of sectors (downstream only, no coverage of transportation); and the ability to use offsets for compliance (limited and no use of forestry projects).  According to the analysis of one financial house, the Commission’s proposal would correspond to an allowance price of upwards of $59/tonCO₂e in 2020. 

Congress

• EPA Administrator Grilled by Senate EPW Committee Over CA Waiver Decision.  The Senate Environment and Public Works (EPW) Committee held an oversight hearing in which Environmental Protection Agency (EPA) Administrator Stephen Johnson testified regarding his plans to deny California’s request for a waiver under the Clean Air Act to regulate greenhouse gas emissions from new motor vehicles.  Administrator Johnson, who announced the agency’s intent to deny the waiver on December 19, 2007, faced a series of challenging questions from Democratic committee members.  In particular, Committee Chair Barbara Boxer (D-CA) voiced her displeasure with the lack of documentation provided by EPA to support its decision.  Chairwoman Boxer also suggested that the Administrator was influenced by the White House, rather than the advice of his technical staff, in his decision-making process.  Administrator Johnson told the committee that his staff was collecting additional documents, which will be made available by February 15, and that that a formal notice explaining the decision will be published in the Federal Register by the end of February.  House Oversight and Government Reform Chairman Henry Waxman (D-CA) is planning his own investigation and has said that he will conduct individual interviews with EPA staff.  Rep. Edward Markey (D-MA), Chairman of the House Select Committee on Energy Independence and Global Warming, also has requested that the EPA Administrator appear before his committee in early February. 
• Witnesses Before House Select Committee Call for Auctioning of Emissions Allowances.  The House Select Committee on Energy Independence and Global Warming held a hearing in which a panel of witnesses unanimously agreed that auctioning most or all GHG allowances within a cap-and-trade program is the best economic and environmental model for such a program.  Witnesses differed, however, on how the revenues generated from an allowance auction should be used.  Witnesses included:  Peter Zapfel, EU Coordinator for Carbon Markets and Energy Policy; Ian Bowles, Massachusetts Secretary of Energy and Environmental Affairs; John Podesta, President and CEO, Center for American Progress; Dan Burtaw, Senior Fellow, Resources for the Future; and Robert Greenstein, Executive Director, Center of Budget and Policy Priorities.
• Senate Committee Examines Bali Negotiations; CEQ Chief Remains Opposed to Cap-and-Trade.  The Senate Foreign Relations Committee held a hearing this week to discuss the outcome of the December 2007 U.N. climate negotiations in Bali.  The negotiations ended with an agreement on the need to take action to reduce the global concentration of GHGs and a commitment to a two-year process to negotiate a new international program.  James Connaughton, Chairman of the White House Council on Environmental Quality, testified that the U.S. should avoid a cap-and-trade program because it will cause U.S. manufacturers to transfer their operations to countries that have less-stringent environmental controls. 

Administration

• 17 State Attorneys General Threaten to Sue EPA Over Rulemaking Delay.  In a letter to EPA Administrator Stephen Johnson, 17 state attorneys general threatened to sue the agency if it fails to develop federal GHG emissions standards for motor vehicles.  Previously, the agency had announced its intention to propose new GHG standards for both vehicles and fuels by the end of 2007.  However, Congress approved an energy bill in December 2007 that contained provisions on fuel economy and renewable fuels that must be taken into consideration in the EPA rulemaking.  Thus, the proposal has been delayed.  The 17 state attorneys general requested that Administrator Johnson provide a response by February 28, 2008 regarding the agency’s intentions. 

States and Cities

• Montana Agency Denies Request to Regulate CO₂ Emissions from Proposed Coal-Fired Power Plant.  The Montana Board of Environmental Review denied a petition by the environmental group Montana Environmental Information Center (MEIC) requesting that the agency regulate CO₂ emissions from the proposed Highwood Generating Station.  The MEIC petition argued that CO₂ is a regulated pollutant under the Clean Air Act, and, as a result, the Board’s permit for the Highwood coal-fired power plant should require the use of best available control technology (BACT) for CO₂.  In denying the request, the Board found that CO₂ is not a regulated pollutant because no state or federal laws limit carbon dioxide emissions.  Thus, the Board concluded that the permit for the facility does not have to contain limits on CO₂.  MEIC plans to appeal the Board’s decision in the Montana District Court.  Environmental NGO’s around the country have brought similar challenges against other proposed coal-fired power plants.
• Five RGGI States Prepare For Early Emissions Allowance Auction.  Five member states of the Regional Greenhouse Gas Initiative (RGGI) are preparing to hold the first multi-state auction of emissions allowances under the regional cap-and-trade program on June 2.  The participating RGGI states are Connecticut, Maine, Massachusetts, New York, and New Jersey.  The auction will be open to power generators subject to RGGI regulation in those states, and also to generators subject to regulation in the five other RGGI states.  Under RGGI’s 2007 model rule, auction proceeds will fund renewable energy and other public benefit programs.  The auction will be the first auction of allowances in a mandatory GHG emissions market in the United States.  RGGI gives member states until January 2009 to finalize their regulatory programs.
• CARB Analyzes Enforcement, Funding Issues For California Emissions Market.  The California Air Resources Board is in the process of drafting a scoping plan on a regulatory framework for meeting the state’s obligations under the AB 32 legislation, which requires reducing the state’s GHG emissions to 1990 levels by 2020 and to 80 percent below 1990 levels by 2050.  In preparing the plan, the state agency is reviewing its enforcement and funding options for the program.  A key issue in the review is whether the enforcement of the program will be funded with a “user fee,” which would essentially operate like a tax.  Early indications are that the market design will combine market mechanisms for some sectors of the economy with “command and control” regulation for others.  The plan is expected to be finalized by early next summer.

Industry

• United States Climate Action Partnership Reaffirms Call for Federal Action on Climate Change Legislation.  Members of the United States Climate Action Partnership (USCAP), a group of over 30 business and environmental groups, spoke at a conference this week sponsored by the National Council for Science and Environment.  Several USCAP members reaffirmed the principles for federal cap-and-trade legislation contained in the USCAP “Call for Action” released one year ago.  Members reiterated their view that swift Congressional action is needed on a cap-and-trade bill, and asked that certain elements of any legislation be fast-tracked, such as increased clean technology investment, early action credits, and incentives for energy efficiency.   

Studies and Reports

• Congressional Research Service Report Identifies Cost Issues Related to CO₂ Transportation for CCS.  The Congressional Research Service (CRS) released a report earlier this month titled, “Pipelines for Carbon Dioxide (CO₂) Control: Network Needs and Cost Uncertainties,” which examines the impact of planning decisions on the cost of the CO₂ transportation network that will be necessary for widespread carbon capture and storage (CCS) from power plants.  The report compares hypothetical pipeline scenarios for several power plants in the Midwest and finds that different assumptions about sequestration site suitability can result in dramatically different pipeline lengths, which would alter the needed pipeline infrastructure.  The report concludes that “[g]iven the potential size of a national CO₂ pipeline network, many billions of dollars of capital investment may be affected by policy decisions made today.”
• Environmental Activists Release Report Stating that 59 Coal-Fired Power Plants were Delayed, Canceled, or Abandoned in 2007.  Two environmental groups, the Rainforest Action Network and Coal Moratorium NOW, released a report, “Coal Plants Cancelled in 2007,” which asserts that 59 coal-fired power plants were cancelled, abandoned, or put on hold in 2007.  The report notes that “15 were rejected outright by regulators, courts, or local authorities” while the utilities themselves made the decisions on the other plants.  A press release and a list of the 59 plants are available at http://cmnow.org/59plants.pdf.
• Preliminary Report Questions the Ability of Biofuels to Help Meet California’s Low-Carbon Fuel Standard.  While emphasizing that the results of the study are “crude upper limit estimates,” a draft report of the total GHG emissions from biofuel production estimates that the GHG emissions could be much higher than the GHG emissions of conventional fuels that biofuels could replace.  A memorandum and accompanying presentation by researchers at the University of California-Berkeley, delivered to the Low-Carbon Fuel Standard (LCFS) Working Group of the California Air Resources Board (CARB), outlined a preliminary analysis of total GHG emissions from biofuels made using corn, sugar-cane, and palm oil.  The results take into account direct and indirect land use change, which are “a very large contributor to the global warming impact of the biofuels evaluated.”  Direct land use changes are those associated with the one-time change in land use for crop production, and were found to be “much larger than the fuel production itself.”  Indirect land use changes were much harder to estimate, and attempt to account for the amount of land that will be cleared to increase food production that is otherwise going to biofuels.  The findings of the study, set to be finalized later this year, could have implications on California’s development of a LCFS.

International

• European Commission Unveils Proposal for Phase 3 of ETS.  The European Commission this week proposed an emission reduction package for the third phase of the EU Emission Trading Scheme (ETS).  The European Parliament and EU Council will debate and negotiate the details of the climate package over the next year, with final approval expected during the spring of 2009.  The EU has agreed to reduce emissions by 20 percent below 1990 levels by 2020 if an international agreement on climate change is not reached, but will reduce emissions by 30 percent below 1990 levels if a mandatory global emission reduction program is approved.  To reach this goal, the proposal would cap emissions covered by the ETS at 21 percent below 2005 levels by 2020.  The Commission estimates that the plan would increase electricity prices in the EU by 10-15 percent above business-as-usual in 2020; according to JPMorgan, this price increase corresponds to an allowance price of €40/tCO₂e ($59/tCO₂e).  Other highlights of the proposal are:
  • Single EU cap and allocation rules.  There would be a single cap for the entire system and a set of harmonized allocation procedures.  This approach would replace the current system of “National Allocation Plans” under which each member state determines its own cap and its own internal allocation of allowances.
  • No free allocations for electric power.  The power sector would no longer receive free allocations of allowances, and would instead have to purchase its allowances at auction or from other allowance holders.  Other industrial sectors would continue to receive free allocations, but the amount would be phased out from 2012-2020.  The amount of allowances auctioned would start at around 60 percent and rise to 100 percent during that time period.     
  • Regulation of additional sectors.  Installations in the petrochemical, ammonia, and aluminum sectors would become subject to regulation.  The proposal would allow installations in these sectors to continue to receive free allowance allocations after the phase-out if the Commission determines that regulatory costs make them likely to relocate out of the EU. 
  • Regulation of additional GHGs.  The proposal would extend regulation to perfluorocarbons and nitrous oxide (currently only CO₂ emissions are subject to regulation.)
  • Credit back for CCS.  The EC proposal includes a provision that is intended to encourage fossil fuel-fired power plants to sequester their CO₂ emissions by considering stored emissions to be “not emitted” and therefore not subject to allowance submission requirements. 
  • Use of CDM and JI Credits.  Under the proposal, regulated companies could continue to use credits from emission reduction projects outside the European Union for compliance, i.e., Clean Development Mechanism (CDM) and Joint Implementation (JI) credits.  In the absence of a post-2012 international agreement, companies could use the amount of CDM/JI credits that remained from the second phase of the ETS program, which covers 2008-2012.  According to the Commission, the expected spare capacity would correspond to almost one-third of the reductions that would be required between 2013 and 2020, the third phase of the ETS.  If an international agreement were enacted, the limit on CDM and JI credits automatically would increase to up to half of the additional reduction effort.  In other words, if the EU ETS cap were reduced by 200 million tons, the limit on use of CDM and JI credits would be raised by 100 million credits.  Notably, the Commission rejected any use of credits from land use, land use change, or forestry projects.  
• Deutsche Bank Begins Financial Services for EU, Kyoto Carbon Credits.  On January 22, the investment bank Deutsche Bank began offering a variety of financial services for GHG emissions credits, including custody, clearing and settlement services.  The services will be offered for European Union Allowances traded under the European Union Emission Trading Scheme and Kyoto Protocol Certified Emission Reductions.  The objective of the new platform is to promote liquidity in the carbon markets by reducing delivery and credit risks.
• Japan Proposes Global Industrial GHG Emissions Targets.  At the World Economic Forum in Davos, Switzerland, Japanese Prime Minister Yasuo Fukuda proposed that world leaders set global medium-term GHG emissions targets.  The proposed targets would apply to industrial sectors.  The proposal is based on the Japan’s domestic GHG reduction model of consolidating individual industry targets to create a national target.  The Prime Minister’s speech at Davos also included an announcement that Japan will introduce mandatory emissions targets for its industrial, household and entertainment sectors.