Carbon and Greenhouse Gases - Methods of Regulation - ABA YLD 101 Practice Series

By Rebecca Dukes

This article is not about the science of global warming.  Irrespective of people’s beliefs in the science and causation of global warming, one thing appears certain: greenhouse gases and carbon emissions will be regulated in some fashion over the long term.  At the beginning of the Obama administration, with Democratic majorities in the House and Senate, comprehensive climate change legislation imposing a market-based approach to carbon reduction seemed imminent.  However, the economic and banking crisis, the acrimonious debate over health care, the loss of a filibuster-proof majority in the Senate, and impending mid-term elections have cast significant doubt on a national legislative program.  Despite this, regulatory and regional initiatives remain very active, and international pressure continues to drive voluntary carbon markets.

On January 28, 2010, the United States formally submitted a letter to the United Nations Framework Convention on Climate Change confirming its association with the Copenhagen Accord and outlining the U.S. commitment to an economy-wide emissions reduction target.  While the Copenhagen Accord is not a ratified treaty, if the U.S. is going to honor this commitment, some form of regulation or mechanism will have to be implemented.  Some industries and emissions are already being regulated on a state and regional level however, the schemes under which they are controlled could ultimately be federally preempted.  Politics have swirled around the creation and imposition of a mandatory system, and just when one method has appeared likely to be implemented, a new challenge has developed and delayed action.  The four potential mechanisms for monitoring and controlling emissions in the U.S. are: (1) regulation by the United States Environmental Protection Agency (“EPA”) under the Clean Air Act (“CAA”), (2) new federal legislation implementing a carbon tax or a cap and trade program, (3) regional cap and trade programs, and (4) voluntary markets.

Environmental Protection Agency Regulation Under the Clean Air Act
On April 2, 2007, the Supreme Court held that greenhouse gases could be considered air pollutants covered by the Clean Air Act in Massachusetts v. EPA, 549 U.S. 497 (2007).  The Court held that the EPA must determine whether or not emissions of greenhouse gases cause or contribute to air pollution that could endanger public health and welfare, or whether the science is too uncertain to make a reasoned decision. 

After issuing proposed findings and taking public comments, on December 15, 2009 the EPA published its final endangerment and cause or contribute findings, effective January 14, 2010. 1  The EPA found that current and projected concentrations of the six key greenhouse gases in the atmosphere threaten public health and welfare.  (These six greenhouse gases are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride, collectively referred to as “GHGs.”)  These findings themselves did not impose any requirements on industry or entities but they are a prerequisite to EPA regulation of GHGs under the CAA.

On October 30, 2009, in conjunction with the endangerment finding, the EPA published its Final Mandatory Reporting of Greenhouse Gases Rule, effective December 29, 2009.  This inventory reporting rule requires large sources of GHGs to report their emissions.  The rule requires approximately 10,000 facilities that emit about 85 percent of the nation’s GHGs to collect and report emissions data.  Suppliers of fossil fuels, motor vehicle and engine manufacturers, and other facilities that emit 25,000 metric tons or more of GHGs are subject to the requirements. According to EPA, most small businesses fall below the threshold and will not be required to report their emissions.

Additionally, the EPA issued its final “Tailoring Rule” on May 13, 2010, amending the CAA to include permitting and regulation for stationary sources of GHGs beginning January 2, 2011.  The CAA currently requires permits for the emission of 100 or 250 tons per year for conventional pollutants such as lead and sulfur dioxides, depending on the source.  The Tailoring Rule changes the applicability threshold from 100/250 tons per year to 75,000 tons per year for GHGs.  Starting January 2, 2011, sources that already have New Source Review permit requirements for other pollutants will be required to include GHGs in their permits if they increase their GHG emissions by 75,000 or more tons per year.  On July 1, 2011 Title V and New Source Review permitting requirements will extend to new sources that emit at least 100,000 tons of GHGs and existing sources that increase their GHG emissions by 75,000 or more tons per year, even if they do not exceed thresholds for other pollutants.  New and upgraded sources that are subject to the permitting requirements will be required to install the “best available control technology” to control their GHG emissions.  Sources that emit less than 50,000 tons of GHGs per year will not be subject to permitting requirements until at least April 30, 2016.  By  July 1, 2012 the EPA expects to finalize rules regarding whether permitting should be required for additional sources. 

In addition to regulating stationary sources, the EPA has been active in promulgating regulations for mobile sources.  April 1, 2010 the EPA and the National Highway Traffic Safety Administration (“NHTSA”), on behalf of the U.S. Department of Transportation (“DOT”), released a joint Final Rule establishing a national program addressing GHG emissions and fuel economy standards for passenger cars, light-duty trucks, and medium-duty passenger vehicles.  The Final Rule, which takes effect January 2, 2011, mandates a 40% reduction in GHG emissions by 2016 and covers emissions from vehicle model years 2012 through 2016.  These vehicles will be required to achieve 35.5 miles per gallon fuel economy, with compliance measured fleet-wide for each manufacturer.  Electric vehicles will be classified as zero-emissions vehicles that can, within certain limits, be used as “credits” by auto makers for the compliance calculation.  The EPA and NHTSA have indicated that they will issue a Notice of Intent by September 30, 2010 announcing plans for setting light-duty vehicle standards for model year 2017 and beyond.

The EPA and NHTSA have also begun the process of regulating GHG emissions and fuel economy for heavy-duty trucks and buses.  In August 2010 they sent draft rules to the White House that would for the first time cut GHG emissions for heavy trucks and buses covering model years 2014-2018.  The details of the rules are not publicly available yet.

EPA’s attempt to cut carbon emissions has run into challenges from both sides of the aisle in the U.S. Senate and House of Representatives.  On January 21, 2010, Senator Lisa Murkowski (R. Ak.) introduced a disapproval resolution seeking to veto retroactively the EPA’s Endangerment Finding.  This disapproval resolution had the support of six Democrats, but was ultimately defeated on June 10, 2010 by a 47-53 vote.  Meanwhile, Senator Majority Leader, Harry Reid (D. Nev.) has indicated that he plans to allow a vote in 2010 on a bill proposed by Senator Jay Rockefeller (D. W.V.) that would impose a two-year moratorium on any EPA regulation of GHGs. Senator Reid's decision to allow a vote on the Rockefeller bill was made to help dissuade senators from backing the Murkowski resolution.  Senator Rockefeller’s bill has seven Democratic co-sponsors, with most Republicans expected to support it if a floor vote takes place.

In the House of Representatives, Rep. Rick Boucher (D. Va.) and Rep Nick Rahall (D W.V.) introduced a companion to the Rockefeller bill that would force a two-year moratorium on EPA emissions rules. The House counterpart has 15 co-sponsors, including two Republicans.

Both measures are considered long shots; House Democratic leaders are unlikely to give floor time to their version, and President Obama indicated that he would have vetoed Senator Murkowski's resolution if it reached his desk. The White House has not commented publicly on the proposed two-year EPA delay.

The EPA’s actions cannot be viewed in isolation; they are best considered in the broader context of other national, regional, and state activities also aimed at reducing GHG emissions.  Additionally, the Obama administration has said repeatedly that it would prefer to address GHGs via legislation rather than regulation, and EPA’s activities have been widely viewed as a spur to force Congress to act.

Federal Legislation
National politics have commanded the spotlight over the past year with respect to whether, when, and in what form nationwide legislation may be enacted.  This legislation could take two potential forms: (1) Carbon Tax, or (2) Cap and Trade.  Under a Carbon Tax, regulated emitters would be required to pay a tax for every ton of pollution they emit.  In a Cap and Trade program, the government places restrictions on GHG emissions (the “cap”) and sells allowances that grant purchasers the right to emit a set amount.  These allowances are tradable in the open market, so those who can reduce their emissions more cheaply are able to sell extra allowances to others who would otherwise have to pay more to comply (the “trade).  The market could also include tradable offsets, which are created by unregulated entities who voluntarily reduce their emissions or find ways to capture or remove carbon from the environment.  The open commodities market creates a monetary incentive to reduce emissions, and offers the possibility of achieving the overall cap at the lowest possible cost.

These are two distinct policies, each with its own supporters.  Cap and Trade supporters say it is the only way to guarantee that an environmental objective will be achieved, has been shown to effectively protect the environment at lower-than-expected costs, and is politically more attractive.  Carbon Tax supporters say a tax is better because it is more transparent, minimizes the involvement of government, and avoids the creation of new markets subject to manipulation.
Federal action to date has been to initiate the steps toward a Cap and Trade program, in combination with other energy policies. 

The mechanisms by which a Cap and Trade program may be implemented are through the proposed federal American Clean Energy and Security Act (“ACES”), as passed by the U.S. House of Representatives in June 2009, and a U.S. Senate counterpart bill.

ACES – ACES was passed by the U.S. House of Representatives on June 26, 2009.  ACES has five main components: 

  1. A clean energy section that promotes development of renewable sources of energy, carbon capture and sequestration technologies, clean electric vehicles, and smart grid and electricity transmission;
  2. An energy efficiency section directed across many sectors of the economy, including buildings, appliances, transportation, and industry;
  3. A global warming section that implements a cap and trade program that provides an initial allocation of allowances to various industries;
  4. A consumer and industry-directed section that promotes education and green jobs during the transition to a clean energy economy; and
  5. An agricultural and forestry offsets section that plays a role in the cap and trade program established in section three. 

The U.S. Senate has not been nearly as decisive or collective in its efforts to pass climate change legislation.  On September 30, 2009 Senate Bill 1733 was introduced that would establish the Clean Energy Jobs and American Power Act (“CEJAP”).  This bill quickly lost traction, though, in the midst of the health care debate. Senators John Kerry (D. Mass.), Lindsey Graham (R. S.C.), and Joe Lieberman (I. Conn.) then began working on massively redrafting the bill to gain public support and the support of enough senators to pass the bill.  After Senator Graham withdrew his support, Senators kerry and Lieberman ultimately released the American Power Act, which was a comprehensive bill addressing the country’s environmental and energy issues.  The trio of Senators faced much turmoil in drafting the bill and getting it to the Senate floor, and recently announced that comprehensive legislation is dead for the year.  In the roller coaster of Senate actions over the past year, various possibilities were brought up, morphed, and abandoned, including a scaled-back version that addressed only the utility sector, an energy-only bill, an oil clean-up bill, and an offshore oil drilling reformation bill.  Despite the acknowledgment that comprehensive legislation is dead for the year, the Obama administration has publicly voiced its optimism and commitment to advancing the legislation.

If a bill is ultimately passed by the Senate, the House and Senate bills will need to be reconciled and approved by the House and Senate again before being presented to the President.  However, the future of the Senate bill is unknown, and recent suggestions have been made to remove the Cap and Trade portion of CEJAP in order to initially pass the clean energy portion.  If this occurs, a federal Cap and Trade program could be delayed indefinitely. 

Regional Initiatives
A third potential avenue for regulation of GHGs is through state or regional cap and trade programs.  While climate change legislation has garnered attention recently, over the past eight years there has been a lack of federal action regarding climate change.  As a result, some states, along with some Canadian provinces and Mexican states, banded together to form various regional initiatives aimed at regulating GHG emissions and implementing cap and trade programs.  Currently, 23 states either have or are developing cap and trade programs to regulate GHG emissions.

Under the regional initiatives, model rules are established, with the goal that each participating state or jurisdiction will then adopt legislation or regulations to implement those model rules within the jurisdiction.  The three regional initiatives that exist or are being developed in the U.S. are the Regional Greenhouse Gas Initiative (“RGGI”), the Western Climate Initiative (“WCI”) and the Midwestern Governors Greenhouse Gas Reduction Accord (“Midwestern Accord”).  RGGI began operation in 2009 and covers only large electric power generators.  The WCI and Midwestern Accord will cover more emitters; both are progressing toward finalization with a start date of January 1, 2012. 

While these regional initiatives are operating, or poised to begin operating, their regulations will likely be expressly or effectively preempted if a federal program is implemented.  Along those lines, many of the states would prefer a national program and have indicated that the regional programs will only be implemented if federal efforts are unsuccessful. 

 

Voluntary Markets
Carbon and GHGs are also being regulated through voluntary means.  Businesses are voluntarily reducing emissions in response to several recent court decisions that have opened the door for common law nuisance claims against entities emitting GHGs. 2  Additionally, in response to consumer demand, an in an effort to market themselves as being “green,” many businesses are making voluntary commitments to reduce their emissions or participate in a voluntary market program.  Many such programs exist both in the U.S. and elsewhere.  Under a voluntary program businesses or consumers commit to reduce their emissions or carbon footprint by implementing reduction methods or purchasing credits to offset their emissions.  Consumers are also participating in the programs to offset their overall carbon footprint or the carbon emitted during specific events.  These programs create a market for the sale, purchase, and trade of “offsets,” which are created by innovators who find ways to capture or remove carbon from the environment. 

Various methods exist for creating offsets including:

  • agricultural methane capture and destruction;
  • agricultural soil carbon capture and destruction;
  • avoided emissions from organic waste disposal;
  • coal mine methane capture and destruction;
  • energy efficiency;
  • forestry (forestation or avoided deforestation);
  • fuel switching;
  • landfill methane capture and destruction;
  • renewable energy certificates (RECs); and
  • wastewater treatment methane capture and destruction.

These projects must adhere to the standards set forth by the markets, or registries, in which the offsets are to be sold.  Standards typically require that a project be real, independently-verified, and additional.  The meaning of “real” in this context means that the carbon emissions being sequestered or reduced can be accurately measured and are calculable.  Independent third-party verification is also required for obvious reasons.  The requirement of “additionality”  carries different meanings in different markets, but typically means that a project is doing something above base-line, or in addition to what has been done historically is being done naturally. Several markets exist in the U.S., and many exist internationally.  Some of the most common markets and standards are:

  • American Carbon Registry (ACR);
  • Blue Registry;
  • California Climate Action Registry (CCAR);
  • Chicago Climate Exchange (CCX);
  • Clean Development Mechanism (CDM);
  • European Carbon Exchange (ECX);
  • European Union Emission Trading Scheme (EU ETS);
  • Globe Carbon Registry;
  • Gold Standard;
  • Voluntary Carbon Standard (VCS); and
  • Voluntary Emissions Reduction (VER).

An offset project typically begins by following a protocol set forth within one of these markets, and then is verified, registered, and sold on that market.  With potential cap and trade programs looming, which will likely allow offsets to play some role, these markets are all vying to establish themselves as the “standard.”  If Cap and Trade legislation is enacted, these offsets could then be sold on a uniform market to either the regulated entities or the voluntary participants.

Contextual Implications
Carbon regulation is a moving target at this point; when one method appears to gain traction, a new challenge appears.  It is difficult to predict what type of regulation will ultimately occur, but some sort of regulation appears imminent.  Regardless of the mechanism, opportunities and risks exist for businesses and consumers.  Risks arising out the regulations take various forms.  Noncompliance by regulated entities could result in significant penalties, and other businesses may be faced with disclosure requirements, audits, insurance considerations, and collateralization and lending issues.  Opportunities exist within a “carbon-pricing” scheme for the creation of offsets and early reduction Opportunities also abound in the investment and security sector by way of new financial products, market activity, commodities and derivative trading, insurance products, investments, and loans.  Add in government incentives such as loan guarantees, tax credits, and other tax incentives, and nearly every sector of the economy can find a way to benefit from the GHG reduction schemes and carbon markets.

In this rapidly-changing environment, it is important for lawyers to stay aware of pending “green” legislation, administrative actions and regional and state-level initiatives in order to best advise clients on how to take full advantage of the potential opportunities and minimize possible risks attendant to increased regulation. 


1 Federal Register, Vol. 74, No. 239, December 15, 2009.
2 See Connecticut v. American Electric Power Company Inc, 582 F.3d 309 (2nd Cir. 2009), petition for cert filed August 2, 2010, allowing plaintiffs to bring tort claims against emitters of GHGs that allegedly contributed to global warming. See also Comer v. Murphy Oil USA, 585 F.3d 855 (5th Cir. 2009), vacated by Comer v. Murphy Oil USA, 598 F.3d 208 (5th Cir. 2010), reinstated by Comer v Murphy Oil USA, 607 F3d 1049 (5th Cir. 2010), California v. GMC, 2007 U.S. Dist. LEXIS 68547 (N.D. Cal. Sep 17, 2007) and Native Village of Kivalina v. Exxon Mobil Corp, 663 F. Supp. 2d 863 (N.D. Cal 2009) in which courts have ruled that climate-based torts claims present non-justiciable political questions and dismissed nuisance claims. The Kivalina plaintiffs are seeking an appeal.

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About the Author

Rebecca Dukes is an attorney at Clark Hill PLC.  She focuses her practice on environmental law and litigation, and is a frequent contributor to the Clark Hill’s climate change blog found at www.igreenlaw.com .

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