Webcasts

June 9, 2009

Building Assets and Minimizing Risks in a US Climate Change Program

Listen as we discuss the current state of the US legislative and regulatory climate change initiatives, draw parallels from the European structure and provide insight into the possible greenhouse gas emissions framework that we can expect to see from the Obama Administration. In addition, we will provide you with a roadmap of opportunities and discuss how you can benefit from early adaptation while minimizing potential liabilities in a carbon constrained world.

Hosted by: Latham & Watkins and Axiom Methods

Latham & Watkins' Client Alert:
American Clean Energy and Security Act of 2009: Update on the Waxman-Markey Climate Change and Clean Energy Legislation

This Alert summarizes the latest version of the climate change and clean energy legislation in the US House of Representatives, which sets forth both an economy-wide cap-and-trade program to regulate greenhouse gas emissions and a national renewable electricity standard, as well as many other clean energy-related programs. The Alert also includes a reference chart summarizing key provisions.

Latham & Watkins' Webcast:
Impacts of 'Green' Provisions in the US Economic Stimulus Package

Latham attorneys Christopher Garrett, Bob Goldman, Patrick Pohlen and George “Chip” Cannon, Jr. discuss extensive 'green' provisions in the economic stimulus package. It focuses on the implications of the Bill as they relate to, among other things, the Department of Energy loan guarantee program, tax incentives, venture capital and emerging cleantech companies, and land use provisions.

Questions & Answers

The following are the responses to the audience questions that we did not address during the Webcast. Click on a question to show/hide the answers.

[ + ] When will an offset credit expire? Is it longer than a year?

Like other emissions credits allocated under Waxman-Markey, an offset credit that is not used for compliance can be banked for use in future years. At this time, there is no proposed "expiration date" on credits.

[ + ] EPAss analysis of Waxman-Markey assumes that landfill and coalbed methane will become regulated and not be available as a future offset category. Do you agree with EPA's assumption?

The bill requires EPA to set emissions standards for "each sources category that is responsible for at least 10 percent of uncapped methane emissions" - with an exception for agricultural methane. Thus, it can be expected that EPA will issue command-and-control standards for landfill and coalbed methane shortly after passage of climate change legislation, with some period for phase-in of the regulation. As such, it is reasonable to conclude that within a few years after passage of the legislation, these sources would no longer be eligible for offsets. However, landfill and coalbed methane are currently well-established sources of offsets and are not regulated (with the exception of certain large landfills) - and therefore these sources should be eligible for offsets for a limited period after legislative passage. In addition, methane emissions from abandoned mines, ventilation air methane and degasification bore holes on the surface or through the coal face may not end up being regulated, in which case, these sources would continue to be eligible for offset credits.

[ + ] If landfill and coalbed methane ultimately will not be eligible as offset sources, is the implication that the offset market will be largely based on just forestry and agricultural (enteric) methane?

Forestry and agricultural methane are not likely to be subject to command-and-control regulation in the near-to medium-term, and thus would remain eligible for offset credits. Mega-offset projects (>1m t CO2e/year-e.g., HFC destruction) may also become less common, both within the US and also in the post-2012 Kyoto world. Nonetheless, there will be opportunities for other types of offset projects, focused either on non-CO2 gases or smaller CO2 and methane reduction projects. The winners will be those who can find ways of bringing them to market with low cost and complexity.

[ + ] What role does carbon finance play in carbon offset projects?

Carbon finance is a specific form of finance in the carbon arena. It has a niche where a potential offset host either does not see offsets as core business, and/or is unable to raise the finance to develop the project. Carbon finance companies understand the carbon world well and, more importantly have portfolios of projects which enable them to pool risk. An offset host that uses external carbon finance is unlikely to enjoy the potential upside they may get going it alone, but equally they can hedge much of the risk and potentially get a marginal project off the ground.

[ + ] What sort of monetary incentives are included in Waxman-Markey for carbon sequestration? Does the bill explain how to quantify the amount of carbon sequestered?

The bill provides for the creation of a Carbon Storage Research Corporation, which will raise up to $1 billion annually through fees on electricity customers. That money is used for grants, contracts and assistances for the commercial-scale deployment of CCS. (Note: bench-scale and pilot-scale projects are not eligible for this funding.) Free allowances will also be given to owners of projects that implement commercial-scale carbon capture and sequestration. EPA is to set by regulation the methodology for determining the amount of carbon emissions avoided through capture and sequestration.

[ + ] What are the possible corporate liability issues, and what does the SEC require, regarding reporting GHG emissions and potential liability?

The necessary level of climate change disclosure is currently in flux, with petitions have been filed with the SEC, subpoenas issued by New York state (which led to two settlements) and bills were proposed in Congress. For additional information, read "Disclosing Risks in SEC Filings," an article written by Latham attorneys and featured in the September 24, 2007, New York Law Journal. In addition, to view a recent (October 2008) Latham presentation on this topic, email Miki Hanlen to receive a log-in and password to Latham's online training library, LathamNet.

[ + ] Where a project generates RECs (say for example a utility scale solar project), can the project generate offsets in addition to RECs if the project is being counted towards an applicable state or federal RPS?

The statute is unclear on this point. In theory, therefore, a project that generates RECs could potentially generate offset credits as well. EPA, however, would have discretion to identify types of projects that are eligible for offset credits, as well as determine which specific projects are entitled to such credit - and EPA may decide that a project that is obtaining RECs is not also eligible to generate offset credits. Moreover, note that in many current REC sales agreements, the seller also transfers all "environmental attributes" of its project, which means that, to the extent that a project sells all of its environmental attributes in addition to RECs, it would presumably also be selling any offset credits to which it may in the future be entitled.

[ + ] How would the proposed federal RES work with the existing state RES programs - will entities have to meet compliance in two programs?

The federal program would not preempt state programs, so if a state has stricter standards than the federal RES, then that state's program would set the compliance targets.

[ + ] Will existing distributed generation be eligible to produce RECs under Waxman-Markey?

Waxman-Markey does not provide a placed-in-service restriction in the definition of "distributed renewable generation facility". Therefore, so long as the environmental attributes from such facilities have not already been sold to another party for the renewable electricity they would generate after December 31, 2011, then existing distributed generation would be eligible to produce Federal RECs and also qualify for the 3X REC credit multiplier per MWh.

[ + ] How would you assess the opportunities for converting waste to biomethane - a fuel rated 6 times cleaner than natural gas in terms of emissions intensity?

Such facilities could potentially be considered an "other qualifying energy resource" eligible to produce RECs if they meet certain criteria identified in Waxman-Markey. They may also be eligible for offset credits - although potentially not both. (See answer above.)

[ + ] Would facilities co-located at material recovery facilities (not landfills) be considered distributed systems?

It depends on the specific facts. Waxman-Markey defines a "distributed renewable generation facility" as a facility that generates renewable electricity, primarily serves 1 or more electricity consumers near the site, and is no larger than 2MW.

[ + ] Who sets the requirements for determining the life-cycle GHG emissions for renewable fuels?

As part of its proposed Renewable Fuel Standards, EPA has identified a methodology for calculating the life-cycle GHG emissions from renewable fuels. This provision is highly controversial and differs from the methodology developed by California for calculating life-cycle GHG emissions. The comment period on this proposed rule is open until early July.

[ + ] To what extent is command-and-control overlaid upon the EU ETS system?

In the context that regulations can prevent an offset being available, it is necessary to consider the regulations in the countries where offsets occur. Since offsets can occur in any Kyoto country, the offsets to be approved must be over and above the regulation and legislation in that country. For example, some offsets that are possible in China may not be permissible for example, in EU countries such as Bulgaria where there is typically a higher level of regulation.

[ + ] What is the Ways and Means Committee likely to do with the revenue generated under Waxman-Markey?

The use of the revenue likely will be driven by political pressures. In some previous bills, a certain percentage of revenues was to be used to reduce the National Debt. The cap and trade text books argue the revenues should be used as tax breaks/credits/other financial incentives to enable the end user to use less energy and thereby further reduce GHG emissions and also lessen the burden of more expensive energy. RGGI states have set up mechanisms to channel the revenues into incentives for low income groups, training in energy efficiency programs, etc. Any of these options (and others) would be available to the Ways and Means Committee.

About the Hosts

Robert Grainger, President, Axiom Methods
Donald Imhoff, Vice President, Business Development, Axiom Methods
Claudia O’Brien, Global Co-Chair, Climate Change Practice Group, Latham & Watkins