Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Two federal appeal courts (Fifth and Second Circuits) have issued decisions that will allow lawsuits to proceed that assert common law tort claims based on business contribution to climate change.  Comer v. Murphy Oil USA Inc. is the second decision in the last two months to allow claims to proceed.  Earlier in October, the Second Circuit allows a federal common law tort claim to proceed in Connecticut v. American Electric Power.

In Comer, Mississippi coastal residents, following hurricane Katrina, sued a number of energy, oil refining and chemical manufacturing companies claiming their greenhouse gas emissions contributed to climate change.  The residents argue, that climate change increased the intensity of hurricane Katrina which led to massive damages along the cost.

A key distinguishing factor between the Comer and Connecticut is that the plaintiffs rely upon different legal theories to present their cases.  In Connecticut it was based purely on federal common law tort claims.  In Comer, the Mississippi residents grounded their claims in state common law theories of nuisance, trespass and negligence.  After these decisions, it appears either federal or state law claims can proceed.

It is important to note that another federal district court (Northern District of California) in the case of Native Village of Kivalina v Exxon Mobil Corp.  dismissed a common law tort claim because the Court determined Plaintiffs failed to establish standing.  However, district courts had dismissed similar claims that were later overturned by the appellate court decisions cited above.  Certainly this decision will be appealed to the Ninth Circuit which means we will have three federal district courts weigh in on this question. 

What are the implications of these decisions?

We are a long way from plaintiffs successfully collecting millions or even billions in damages from businesses for their greenhouse gas contribution to climate change.  The two federal appeal courts have only determined that there is enough of an argument for plaintiffs to be allowed to proceed to trial or in other words, the plaintiffs have standing. 

The legal standards for standing are much lower than what is required to be successful in winning a judgment.  For example, tort claims must meet more stringent causation standards than are required to demonstrate standing.  The Comer court found that plaintiffs had demonstrated sufficient causation.  The Court said plaintiffs did not have to show that the defendants greenhouse gas emissions alone caused the damages suffered by plaintiffs.  Rather, it is sufficient for standing that defendant's emissions contributes to the injuries suffered. 

While plaintiffs can now proceed to trial, there is certainly no guarantee of success.  However, these two appellate decisions will certainly embolden many more to file suits against utilities, chemical manufacturers, refiners, etc.  A flood of litigation is certainly on its way.

All this litigation creates significant uncertainty for the business community.  If just one plaintiff is successful in securing damages, the risk of liability will be massive for businesses.  All of this should be considered as the Senate continues to debate Climate Change legislation. 

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The past two days I have been in Houston at the Environmental Markets Association (EMA) fall conference.  If you are not familiar with the EMA, it is an organization that supports the use of market-based solutions to environmental issues.  The members are largely made up of consultants, traders of environmental credits and project developers. 

Many of the members were on the ground floor when the first cap and trade programs were implemented in the 90's regarding acid rain.  The also participated in the two cap and trade programs on utilities that followed acid rain- NOx SIP call and CAIR. 

Finally, there is also expertise in the burgeoning carbon markets.  Whether that involves the "voluntary markets" in the U.S., state mandatory programs like RGGI in the east, or the international cap and trade program in the European Union.

Bottom line, these folks have the expertise in trading various environmental credits under a wide range of programs.  They have seen what has worked (acid rain) and what hasn't worked (collapse of the CAIR program). 

The big topic of course is the Waxman-Markey and Kerry-Boxer bills pending in Congress.  There was a lot of discussion regarding the various elements of these bills.  From the various perspectives offered over the last few days I draw the following perspectives regarding the drive for a federal CO2 cap and trade program in the U.S.:

• Complexity- Many expressed concern that the Waxman-Markey Bill is overly complex.  That instead of focusing on setting up a core program- namely putting a price on carbon-the bill tries to dictate the minutia around the program.  The more complex the program the more difficult it is to operate.
• Offsets- Many concentrated on the debate over the domestic and international offset programs.  There appeared to be consensus that an offset program was absolutely key to bringing down the cost of compliance.  The concern expressed was that both Waxman-Markey and Boxer-Kerry put too many conditions on the offset program.  These include limiting how many offsets each company can use for compliance.  What types of offsets will qualify.  How quickly EPA can certify the verification procedures for creating offsets. 
• Stabenow-Baucus Offsets Bill- This bill is seen as a mechanism to clean up what is wrong with the offset programs established in the other bills.  A lot of hope was being placed on this being the vehicle to correct the problems.
• EPA Preclusion-  While not receiving a lot of attention, a huge difference between the House and Senate bills is whether EPA is precluded from regulating greenhouse gases under the Clean Air Act.  House says EPA is precluded, Senate does not.  As I have discussed on in prior posts, this is a huge issue.  In fact, one of the main reasons to set up a cap and trade program is to pre-empt EPA from establishing an unworkable command and control program under the Clean Air Act.
• Stability Reserve-  This is the concept of trying to address carbon prices getting to high after the program is established.  Rather than simply placing a cap on prices, both bills create the concept of a reserve of allowances that could be released if prices get to high.  This is not a cap, if the trigger is met it allows future allowances to be auctioned off.   EPA is supposed to take the proceeds from the auctions and purchase offsets to make the impact of releasing more allowance neutral.  The concern on the stability reserves were: 1) the triggers to tap into the reserve and whether it really can control prices from getting too high; and 2)  what happens if not enough offsets are available for EPA to purchase because all the limitations placed on which types of offset qualify.
• Verification Procedures for Offsets-  The Senate would require notice and comment on every offset project which was seen as overly cumbersome.  The House allows pre-compliance offset credits to qualify for only 2009-2012. Also, projects must meet either a state verification procedure or one deemed by EPA as stringent as a state verification procedure.  The short duration of pre-compliance offset projects was concerning because it may severely limit available offset credits after 2012.  The limitations on verification procedures could disqualify many projects that went through non-state certified verification procedures. 

Many more observations and comments were made.  I certainly learned a lot from the experts who work have been working in environmental markets since the 1990's.  Their expertise certainly should carry a lot of weight with Congress.  Otherwise, we risk have politicians set up a program that is doomed to failure from the start.

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Ohio faces a two headed hydra when it comes to the impact of the proposed cap-and-trade bill in Congress- the American Clean Energy and Security Act of 2009 (ACES):

1. Ohio generates almost 90% of its energy from coal;
2. Manufacturing represents one the largest employment sectors in Ohio (ranking 3rd nationally with 1.1 million workers as of 2006)

These two factors combine to raise the stakes significantly if a price is placed on carbon as a result of the cap-and-trade ACES proposal.  Coal-fired power plants are the largest source of greenhouse gases (GHGs).  Any regulatory approach that puts a price on GHGs will result in higher energy prices. 

Most manufacturers are not even covered under ACES because only the largest industrial sources are capped (25,000 metric tons or more).  However, the secondary effect of ACES- rising energy prices-could mean significant job losses in the manufacturing sector which is heavy user of power 

Potential Job Loses from Cap-and-Trade

A report released last week by the National Association of Manufacturers (NAM) projected that Ohio could lose from 80,000 to 108,000 jobs by 2030 if ACES passes. The job losses are directly attributable to rising energy prices. The NAM cap-and-trade report projects the following increases in commodities or electricity:

• 26% increase in gasoline prices
• 60% increase in electricity prices
• 79% increase in natural gas prices

The 60% increase is actually conservative when compared to other studies.  Some have said total increases could be as high as 112% by 2030.  Such large price increases raise operating costs for many small and medium manufacturers.  Those cost increases will make many business unprofitable forcing them to close their doors, so the argument goes.

Is this really a complete analysis? Also, is opposition to ACES really the correct strategy?

A Call to Action- Diversity in Generation Key for Coal Dependent States

Based on my last two posts you may be expecting me argue that growth in green jobs attributable renewable energy development will significantly offset the manufacturing job loses.  For example, in 2008 there was a 70% increase in wind turbine related jobs nationally. 

While green jobs are important, a more fundamental issue presents itself- When it comes to preserving manufacturing jobs, reliance on coal power is unsustainable. 

The cost of energy produced from coal is going to dramatically increase regardless of whether climate change legislation passes.  A complex web of regulatory forces are at work driving coal energy prices higher over the next decade and into the future.  A honest assessment of these factors should serve as call to action- diversification.

An honest assessment of the forces at play demonstrates that coal reliant states are fighting a losing battle against energy price increases.  States must diversify their generation portfolios in order to become less sensitive to these forthcoming price shocks.  This means development of biomass, nuclear, wind, solar and other forms of electric generation.   

Analysis of Five Factors Driving Future Coal Power Energy Prices Higher

1. New Source Review Enforcement Cases
2. The fix for the Clean Air Interstate Rule or Multi-Pollutant Legislation 
3. Mercury controls
4. Ever tightening ozone and fine particle federal air standards (NAAQS)
5. Massachusetts v. U.S. = regulation of greenhouse gases in some fashion

New Source Review (NSR) Enforcement Cases

Manufacturers and other businesses in the Ohio and throughout the Midwest have yet to see the full impact of the NSR enforcement cases on the price of energy.  The settlement with American Electric Power impacts sixteen (16) coal plants and is estimated to cost $4.6 billion.  Ohio Edison, subsidiary of FirstEnergy Corp., settled its NSR case in 2005.   The settlement is projected to cost $1.1 billion to retrofit the Sammis Station.  The litigation has yet to fully conclude in the Duke Energy case and while the verdict was mixed, the case will still result in significant compliance costs. 

Also, a New Source Review regulatory fix seems unrealistic in the near term.  Therefore, future projects that could improve plant efficiency may be avoided out of fear of triggering NSR.

Bottom line:  Billions in new compliance costs for coal fired power plants over the next several years and an uncertain regulatory structure.

CAIR or Multi-Pollutant Legislation

The Clean Air Interstate Rule (CAIR) was a cap-and-trade regulation directed at coal-fired power plant emission of SO2 and NOx.  On July 11, 2008, a federal court found CAIR to be inconsistent with the Clean Air Act.  While the rule remains in place while U.S. EPA develops a fix, U.S. EPA has put a CAIR-fix on the fast track.   It is uncertain what the "new-CAIR" program will look like, but there is little doubt it will result in a more expensive regulation. 

As an alternative to CAIR,  members of Congress have proposed multi-pollutant cap-and-trade legislation for coal fired power plants.  Regardless of whether CAIR remains as regulatory based or converts to legislation the consensus among Democrats was the Bush Administration rule did not require steep enough cuts from coal-fired power plants. 

Bottom line:  Either the CAIR fix or multi-pollutant legislation will raise compliance costs for coal-fired utilities

Mercury Controls

Based upon cost concerns, the Bush Administration rejected facility specific regulation of mercury emissions from coal-fired power plants.  Instead, the Administration proposed a new cap-and-trade program called the Clean Air Mercury Rule (CAMR).  A federal court ruled that mercury as a pollutant could not be regulated through a cap-and-trade mechanism.  On February 6, 2009, the Department of Justice (on behalf of the Obama Administration) dismissed its appeal to the U.S. Supreme Court.  U.S. EPA is currently developing regulations under Section 112 of the Clean Air Act that will require every coal-fired power plant to control mercury emissions.  

Bottom line:  All facilities may be required to reduce mercury emissions through carbon absorption or implementation of other technologies.  Under CAMR, utilities were hoping to avoid controls on some of the older less efficient plants.  The rejection of CAMR will drive compliance costs higher.

Ozone and Fine Particle Air Quality Standards

Coal-fired power plant contribute roughly one-third (1/3) of ozone causing pollutants and particulate matter pollution.  As U.S. EPA tightens the ozone and fine particle National Ambient Air Quality Standards (NAAQS), coal-fired power plants will remain a major target of tighter regulation. 

Bottom line:  States pass new regulations to meet tighter federal air quality standards.  There is lag time between development of new federal standards and implementation of these new state regulations.  States will be forced to contemplate even stricter regulation of coal-fired power plants as a result of tighter federal standards.

Massachusetts v. EPA-  Greenhouse Regulation is Inevitable

In 2007, the U.S. Supreme Court declared CO2 and other greenhouse gases a "pollutant" under the Clean Air Act.  This landmark decision has set in motion a series of proposed actions by U.S. EPA to regulate greenhouse gases under the existing framework of the Clean Air Act. Regulation under the Act will be much more costly than the proposed cap-and-trade legislation. 

Bottom line:  The debate cannot be framed as pass cap-and-trade or have no climate change regulations.  Regulation is inevitable and most agree cap-and-trade is much more cost effective than regulation under the Clean Air Act.

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The American Clean Energy and Security (ACES) Act of 2009 has cleared one hurdle through passage by the House Energy and Commerce Committee.  The bill now makes its way through at least two more House Committees before a floor vote will occur.  The House leadership has set an aggressive time frame for passage, Speaker Pelosi has said the remaining Committees must finish their work by June 19th.  This leads to the possibility of a  floor vote no later than the end of the month or early July. 

(World Resources Institute- Graph on anticipated reductions from ACES- click on chart to enlarge)

While the ACES legislation appears to be moving quickly, major issues remain with the structure of the legislation as well as its timing.  The Senate does not have a companion bill and many speculate the Senate will be unwilling to simply take of the Waxman-Markey Bill.  Therefore, a tremendous amount of uncertainty remains as to the approach the Senate will use to take up climate change legislation.

What are the possible issues that will be debated in House Committee hearings and in the Senate?  Some will include the following:

1. 5 year Phase Out of Allocations-  The mark up version of the ACES legislation saw a significant compromise  on the auction v. allocation debate.  Whereas, the President had proposed a 100% auction, ACES only calls for a 35% auction in the early years.  However, the bill still proposes an aggressive phase out of allocations for the energy sector. (See Pew Chart to Left that show dramatic shift downward in allocations during 2025-2030 - click on chart to enlarge) While it may seem like a long way off, in a five year period stretching from 2025-2030 the legislation phases out allocations moving to 90% auction of allowances.  Industry is concerned that this aggressive phase out period will lead to price spikes in utility costs.
2. 2020 Emission CAP- Emission reductions called for in the initial years was reduced.  The first major milestone of the cap is seen as 2020.  The original bill called for a 20% reduction below 2005 levels.  The mark up reduced that to a 17% reduction by 2020.  However, some forget that President Obama had called for a 14% reduction by 2020.  There are many industry representatives who believe the early reductions still need to be softened to make the bill workable.  There may be a renewed push to bring the 2020 cap down to the 14% reduction.
3. 2012 Start Date-  The Legislation calls for a modest 3% reduction in 2012.  However, some in industry believe 2012 is too early and does not give adequate lead time to prepare for the cap.  During an EMA presentation, Bruce Braine, Vice President of AEP, commented that the 2012 time frame may force switching to natural gas that will result in price spikes in the first year the cap is effective.
4. International Offsets-  In the face of widespread controversy regarding the European Trading Scheme (ETS) use of offsets, the bill includes many limitations on use of international offsets.  Beginning in 2018, there is an automatic 20% discount in the value of international offsets.  The bill limits use of international offsets to those categories of projects that have received approval by U.S. EPA.  In addition, there is a sector limitation on use.  Sectors in various countries will be identified where offsets are deemed appropriate (factors includes GDP and receiving equal treatment in project host country).  Finally, there must a an applicable bi-national or multi-national treaty in effect with the Country. Industry is concerned that these requirements will reduce the availability of international offsets thereby driving up the cost of compliance.
5. Environmentalist Perspective-  The consensus among the environmental community appears to be that the "watering down" of the ACES legislation was necessary to secure passage.  Therefore, even with the dramatic shift away from auction of allowances, most groups still support the Legislation.  The key issue from an environmentalist perspective is the proverbial "line in the sand" to prevent additional changes, including concessions to industry on the issues mentioned above in the Senate.
6. Ideology v. Realism-  Republicans who have uniformly opposed the carbon cap and trade legislation.  Even though industry support for the Legislation has grown, many Republicans have had success describing the Legislation as a large tax increase during a down economy.  This message plays well even with some Democrats from the Midwest and Southern States that face the greatest impacts from climate change legislation.  The "realism" aspect is that regulation of greenhouse gases appears inevitable.  A market based solution is clearly a better alternative to command and control regulation under the Clean Air Act.  However, are some members of Congress in denial that regulation is inevitable?

Obviously, ACES went through a dramatic transformation to gain passage from the House Energy and Commerce Committee.  The overwhelming majority of changes were to address industry concerns with the Legislation.  The most important changes were the shift away from auction of allowances and reduced reduction targets in the early years of the cap. 

Additional battles may be looming in the House over the issues identified above and others.  However, the most important battle ground remains the U.S. Senate where the future is less certain.

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Representatives Waxman and Markey released their much anticipated re-write of their proposed cap and trade climate legislation earlier this week. Much speculation has been offered in the media that the bill had no chance of passing as it was originally structured, if it had any chance at all. 

Well, there has apparently been a lot of horse trading going on to shore up Democratic support for the bill.  Most notably, President Obama's proposal to have 100% auction of allowances (pollution permits) has been completely tossed out.   The revised legislation allocates that majority of allowances to industry. 

The majority staff provided a summary of the American Clean Energy and Security Act of 2009 (ACES Act) to the Committee.  While the summary is helpful to get an overview of this complex bill, I thought one of the most interesting statements appears in the introduction to the summary appearing on the first page:

In the past two and half years, the Committee has held dozens of hearings on energy and climate change policy and has built a detailed factual record on the need for legislation in this area.  The nation's dependence on foreign oil has significantly increased over the last decade.  Consumers have faced increasing and volatile energy prices.  Other countries have overtaken us in the manufacture of wind and solar energy.  Energy company investments are paralyzed because of uncertainty about what policies the Congress will establish.  Meanwhile, global warming has increased unchecked.

Let's rank the staff's reasons for passing climate change legislation:

1. Reduce dependence on foreign oil
2. Volatile energy prices
3. Increase production of renewable energy
4. Regulatory certainty
5. Global warming

Isn't iit a little odd that global warming is not emphasized as the main reason for the legislation.  There is no discussion at all of the increased threat of climate change and the need to act.  Rather, its about foriegn oil and renewable power.  That seems strange to me, after all it is a multi-billion dollar cap and trade program to reduce greenhouse gases.

It is clear the choice in messaging is in reaction to the headway Republicans and conservative Democrats have made in raising concerns about the timing and cost of the legislation.  In a very difficult economy its hard to gain support for costly new programs, especially programs on the scale called for in this legislation. 

In reaction to this strong criticism we find a re-worked bill that provides the lion share of allowances to industry as well as other hedges against the potential cost of the program.  I am not criticizing the approach, rather I am commenting on the unrealistic nature of the President's 100% auction proposal.  This is a massive new environmental regulatory program, one that is greater in scope than any previous programs.  It makes sense to transition toward a carbon regulated economy.

Here are some of the more notable provisions in the legislation:

1. Reduction Targets- Reductions from covered sources to 97% of 2005 levels by 2012, 83% by 2020, 58% by 17% by 2050.  Here is one of the changes that is meant to ease into a carbon constrained world.  The reductions have been diminished in the early years to ease the transition.  While it helps out in the early years, at some point we face a major spike in needed reductions.  That may be a difficult issue to overcome.
2. Who is covered by the Cap?- By year the cap kicks in--- Group 2012: Electricity generators, liquid fuel refiners, and fluorinated gas manufacturers. Group 2014: Industrial sources that emit more than 25,000 tons of carbon dioxide equivalent per year. Group 2016: Natural gas local distribution companies.
3. Allowance allocation- Coal related: 30% to local electric distribution companies regulated by the states. 5% to merchant coal generators. Natural gas related: 9% of allowances to local distribution companies.  Home heating oil and propane: 1.5% to state programs for users of home heating oil or propane.
4. Auction- approximately 15% of allowances will be auctioned beginning 2011 and proceeds directed to low and moderate income families to address increases in energy prices. This is a far cry from the President's proposal of 100% auction.
5. Offsets- Covered entities are able to offset up to 2 billion tons of emissions by using EPA-approved domestic and international offset credits.  The ability to use the credits is divided according to the legislation's allocation formula.  By 2017, the price to use international offsets is increased.  Covered entities must use five tons of international offset credits for every four tons of emissions being offset.  Offsets are designed to reduce the cost of compliance.  Industries covered by the cap can purchase credits generated by projects outside of the cap.  Offset credits would be cheaper than allowances thereby reducing the cost of compliance.  It also creates a whole new business for companies that specialize in carbon offset credit projects.
6. Offset Integrity Advisory Board-  Board provides recommendations to EPA as to type of offset projects that should be listed by EPA as eligible; appropriate quantification methodologies, etc...  The bill contains multiple safeguards to try and improve the integrity of offsets.  These provisions have been included to address the criticism the European Trading Scheme has received regarding the lack of creditability of offsets used in Europe's Cap and Trade program.
7. National Renewable Portfolio Standard- Includes a requirement that retail electric suppliers provide 6% from renewable energy sources by 2010.  The standard rises to 20% by 2020.  Up to one quarter of the 20% requirement can be met through energy efficiency projects.
8. Clean Air Act Exemptions-  The bill would specifically exempt greenhouse gases from coverage under the Title V program, New Source Review Program, NAAQS, and HAPs. 

Number 8-  is a huge positive factor arguing in favor of the cap and trade approach. As detailed on this blog many times, regulation of greenhouse gases under the Clean Air Act would be a disaster. It would result in over regulation of small sources, inefficient permitting which would slow projects and significant amounts of litigation.

Dspite the recent media coverage, I don't see how EPA backs away from the cliff at this point.  Three are too many things set in motion for EPA to move away from regulation under the Clean Air Act unless legislation is passed. Cap and trade legislation, especially a bill that calls for a smooth transition to a carbon regulated world is just a far better alternative.

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Democratic leaders of the US House Energy and Commerce Committee agreed to hold another hearing on climate change legislation on May 1.  As discussed by commentators with the Environmental Markets Association, some Washington Insiders believe this announcement is a clear indication the Waxman-Markey Climate Legislation won't make it.

Republican have hammered home the unknown costs of the proposal and seem to be getting traction during this tough economic time.  As reported in the Oil and Gas Journal, the minority party is still flexing its muscles:

"It is our intention to use the opportunity you are providing us this Friday to carefully examine the one element of the legislation that has so far escaped examination in 38 hearings stretching over 40 days, its cost," the two GOP committee members said.

Republicans have found a sympathetic group among Democrats from states that rely on coal and manufacturing to drive their economies.  As reported in Politico, while Rep. Dingell may have lost his leadership position he is still finding sympathetic fellow Democrats willing to support further concessions to protect industry in their states:

But dethroning Dingell didn’t change the membership of the committee, and there are plenty of Dingell Democrats left on the panel — Rust Belt, coal state and Southern Democrats who want to protect native industries as they negotiate the final terms of a sweeping climate change bill.  And that’s why Waxman has his hands full winning votes in the committee, and it’s one of the reasons he moved Monday to postpone a bill markup scheduled for this week.
 

Meanwhile the "fuse has been lit" by EPA on moving forward with regulation of greenhouse gases under the existing authority in the Clean Air Act.  Many commentators speculate that EPA and the Obama Administration are using this as a tactic to push the climate change legislation through Congress, even if they are correct that may be a tactic that back fires. 

If Congress does not act, I see no way EPA reverses course on its Endangerment Finding or California's Waiver request to set GHGs limits for vehicles.  Furthermore, EPA is reconsidering the Bush Administration decision to not require CO2 controls for coal plants. 

Even if EPA does not move forward with a full blow set of regulations to regulate GHGs, these actions will lay the ground work for Environmental groups to assert no new permits can be issued without CO2 controls. If there are concerns about the costs of climate legislation, everyone should be asking what the implications of these EPA actions will be on permitting and associated economic development. 

(Photo: Flickr Amy Manuel)

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