Global Warming Implications and Opportunities for Your Practice

1. Global Warming Implications and Opportunities for Your Practice Meritas Annual Meeting April 23, 2009 Orlando, FL Barry S. Neuman Merrill J. Baumann, Jr.

2. 2008 2

3. 2030? 3

4. The International Context • United Nations Framework Convention On Climate Change • 1992 UN Rio De Janeiro Conference On Environment And Development • Developed And Developing Countries Have “Common But Differentiated” Responsibilities • Established Annual Conference of Parties (COP) • Legislative-Type Body to Implement Goals • Negotiated Kyoto Protocol At 1997 COP Meeting 4

5. Kyoto Protocol • Became Effective In 2005 • 183 Countries Have Ratified • U.S. Is Only Major Industrialized Country Not to Sign • Sets Binding Emissions Limits On Developed Countries • Must Be Met By 2012 • Different Countries Must Reduce Emissions By Different Percentages Below 1990 Emissions(U.S. Figure Was to Be 7% Below 1990) • Overall Goal: to Reduce Emissions By 30% Below “Business As Usual” 5

6. Flexibility • Each Country Decides How to Meet Its Limits • International Emissions Trading System • Clean Development Mechanism (CDM) • Developed Country Invests in Project In Developing Country • Countries Can Band Together As One Unit • European Union 6

7. Looking Towards Post-2012 Commitment Period • Bali Conference (December 2007) • First Comprehensive Negotiations For Post - 2012 • U.S. Declines to Agree to Binding Emissions Reductions • Discussions Continued In Poznan, Poland In December 2008 • Next Conference -- Denmark (December 2009) 7

8. E.U. Trading Scheme • Opened for business January 1, 2005 • One of the policy measures to enable E.U. to meet Kyoto Protocol targets • In effect in 25 E.U. member states 8

9. E.U. Trading Scheme Sectors Covered: • Electric Power (20 MW capacity plants) • Oil Refineries • Coke Ovens • Metal Ore and Steel • Cement Kilns • Glass • Ceramics • Paper and Pulp 9

10. E.U. Trading Scheme Timetable: Phase I: 2005 – 2007 • Implement National Allocation Plans • Assess Reliability of Emissions Data • 362 Metric Tons Traded 1st Year Phase II: 2008 – 2012 • Coincides with Kyoto Renegotiation • Aviation Sector Included • Norway, Iceland, Liechtenstein Join • Litigation against Austria, Czech Republic, Denmark, Hungary, Italy and Spain (late NAPs) • Target Reductions: 7% 10

11. E.U. Trading Scheme Distribution of Allowances • Phase I: Most Given Away Free • Auctioning of Allowances Later • Banking and Borrowing Allowed 11

12. E.U. Trading Scheme Criticisms: First Year: • Data Collection Problems • Overallocation of Allowances • Cap Too High • No Incentives to Reduce • Phase I Allowances – Worthless Claims of Allowance Double-Counting 12

13. Possible U.S. Legislation • Waxman-Markey Draft (March 31, 2009) • Subcommittee Mark-Up This Month • Committee Mark-Up In May • Title I and II: Clean Energy & Energy Efficiency • Incentives/Requirements for Carbon Capture And Sequestration (CCS) • Promote Smart Grid • Grants/Loans to States, Munis And Private Companies For Large-Scale Demonstration of Electric Vehicles • Funding to Retrofit Existing Buildings 13

14. Title III: Climate Change • Cap-And-Trade Program • Silent On Free Allocation vs. Auctioning of Allowances • Covers 85% of U.S. GHG Emissions • By 2050, 83% Reduction In Emissions Below 2000 Levels • Preempts State Cap-And Trade Programs For 5 Years • Prohibit EPA From Regulating Carbon Emissions From Stationary Sources 14

15. International Trade Implications • Various Proposals to Protect U.S. Industry • Border Adjustments On Imports From Countries Lacking “Comparable” Controls • Internal Subsidies For Disadvantaged U.S. Companies • H.R. 1759 (Reps. Inslee And Doyle) 15

16. International Trade Implications • May Be Necessary to Enact Legislation • But: • Are Vulnerable Under WTO/GATT • Ignite Trade Wars? • Recent Threat of E.U. vs. U.S.. 16

17. Prospects For Passage • On One Hand: • Complex Effort/Broad Impacts on U.S. Economy • Never Been Subject to Full Debate • Republican Committee Members Oppose Cap and Trade • Moderate Democrats Reluctant • Obama Stepping Back? 17

18. Prospects For Passage • On Other Hand: • Bill Goes Far to Accommodate Moderate Concerns • Reflects Many Recommendations of Climate Action Partnership • The Alternative -- Direct Regulation by EPA 18

19. EPA Regulatory Initiatives • Massachusetts v. EPA (2007) • 5-4 Decision • EPA Has Authority to Regulate GHG Emissions From Motor Vehicles Under The Clean Air Act • EPA Must Determine Whether GHG Emissions From Motor Vehicles Pose A Danger, And, If So, It Must Regulate • Endangerment Finding Is Imminent • The Real Kicker: • Logic of Decision Applies to “Stationary Sources” -- Factories, Industrial Plants, Any Source of GHG That Doesn’t Move 19

20. GHG Emissions Inventory • EPA Proposed Rule • Would Require Annual GHG Emission Reporting • Purpose: “To Support A Range of Future Climate Change Policies And Regulations • Applies To: • Suppliers of Fossil Fuels And Industrial Chemicals, • Manufacturers of Motor Vehicles And Engines • Facilities That Emit 25,000 Metric Tons Per Year of CO2 Equivalents 20

21. GHG Emissions Inventory • Would Cover About 13,000 Entities Emitting About 85% of GHG Emissions In The U.S. • Cement Production • Electricity Generation • Ethanol Production • Electronics Manufacturing • Pulp And Paper Manufacturing • Petroleum Refining • Petrochemical Production • Reporting Would Be Required At The Facility Level 21

22. Regional Greenhouse Gas Initiative (RGGI) • The First Mandatory Cap-And-Trade Program In U.S. For C02 • Ten States • CT; DE; MA; MD; ME; NH; NJ; NY; RI;VT • Applies to Electric Power Generation • Account For 25% of C02 Emissions In The Region • ≥ 25 Mw • 225 Facilities 22

23. Regional Greenhouse Gas Initiative (RGGI) • Aggregate Regional Cap of 188 Million Tons • Each State Is Allocated A Share of The Cap • Each State Then Issues C02 Allowances In A Number That Is Proportional to Its Share • Each Allowance Equals A Permit to Emit One Ton of C02 • Cap On C0 Emissions Will Be 10% Lower In 2018 Than 2009 • Revenues From Auctions Allowances Invested In Energy Efficiency And Renewable Energy 23

24. Regional Greenhouse Gas Initiative (RGGI) • Allowance Market • States Distributes Allowances Through Regional Auctions • Allowances Can Also Be Traded On Secondary Market • Power Plants That Obtain More Allowances Than They Need Can Sell Excess Allowances; Those Needing More Allowances Can Buy Them 24

25. Regional Greenhouse Gas Initiative (RGGI) • Emission Offsets Allowed • Can Be Used to Meet 3.3% of Compliance • Limited GHG Reduction Projects Outside The Electricity Generation Sector 25

26. Regional Greenhouse Gas Initiative (RGGI) • Allowance Auctions • Quarterly Auctions • Minimum Clearing Price $1.86/Ton • Independently Monitored • Three Auctions Thus Far 26

27. Regional Greenhouse Gas Initiative (RGGI) • December ’08 Auction: • Demand Was 3.5 X Supply • Low Concentration of Bids • Distribution of Bid Prices Indicates That Prices Were Elastic And The Results Were Competitive • 76% of Bids From Regulated Entities • 24% of Bids From Env. Groups And Financial Institutions • Clearing Price of $3.38 • Raised $106.5 million 27

28. Western Climate Initiativewww.westernclimateinitiativbe.org • Signed on February 26, 2007 by Washington, Oregon, California, Arizona and New Mexico • Allows other U.S. states, tribes, Canadian Provinces and Mexican states to observe and join • WCI goal set August 2007: reduce region-wide GHG emissions to 15% below 2005 levels by 2020 28

29. WCI Participants U.S. Partners: • Arizona, California, Montana, New Mexico, Oregon, Utah, Washington Canadian Partners: • British Columbia, Manitoba, Ontario, Quebec Observers: • Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Saskatchewan, Baja California, Chihuahua, Coahuila, Sonora, Nuevo Leon, Tamaulipas 29

30. WCI Significance • Together the WCI Partners represent over 70 percent of the Canadian economy and 20 percent of the U.S. economy • Collectively would be the 3rd largest economy in the world • Will influence U.S. and Canadian national GHG reduction programs 30

31. WCI Design Recommendations • Released September 23, 2008 • Broader Scope than RGGI: when fully implemented, the WCI cap & trade program will cover nearly 90% of the GHG emissions in the WCI region • The cap & trade program will work with other “complementary” policies to reach the WCU regional goal 31

32. Scope of the WCI Cap & Trade Program • By January 1, 2012: • Electricity • Combustion at industrial and commercial facilities • Industrial process emission sources • By January 1, 2015: • Emissions to be covered upstream • Transportation fuel combustion • Residential and commercial fuel combustion • Threshold coverage level: 25,000 MT CO2e or more per year 32

33. Offsets & Other Allowances • Program will include a rigorous offsets system to reduce compliance costs • Will also recognize allowances from other GHG trading systems • WCI will develop criteria for offsets and other system allowances • WCI will limit offsets and allowances from other trading systems to no more than 49% of the total emissions reductions from 2012 – 2020 • Purpose to ensure that a majority of emissions reductions occur at WCI covered entities and facilities 33

34. Reporting • Mandatory measurement and monitoring of GHG emissions to start in January 2010 • Mandatory reporting to start in January 2011 • Threshold coverage level: entities and facilities with annual emissions equal to or greater than 10,000 MT CO2e 34

35. Other State Initiatives • Many states developing or implementing cap & trade • California Global Warming Solutions Act of 2006 • Enacted September 2006 • Requires GHG emissions reduced to 1990 levels by 2020 • Early Action measures (low carbon fuel standard, mobile air conditioning, tire pressure program, shore power for ocean-going vessels) • Governor has “safety valve” in the event of extraordinary circumstances 35

36. Other State Initiatives The Oregon Standard • Enacted 1997 • All new power plants required to offset part of their CO2 emissions • Payment of Mitigating Funds allowed 36

37. The Oregon Standard • Early trading in U.S. of carbon dioxide offsets • Quantification of emission reductions (usually in metric tons) achieved by new actions 37

38. Offset Criteria • Real Reductions – Activity must be lower aggregate emissions from an agreed-upon baseline emissions level in the past • Permanence – Activity cannot be easily undone (efficiency upgrades, reforestation projects) • Quantifiability and Verifiability – Detailed monitoring and verification plan specific to that particular project that defines how, when and by whom the quantification and verification will be done • Additionality –Offset producer must prove that the emission reductions reflected in the offset would not otherwise have been realized under a “business as usual” scenario. In many cases, additionality is established by confirming that the emission reduction project would not get off the ground but for receipt of offset funding • Registration – to ensure they are not sold multiple times and double-counted 38

39. Examples of Offset/Emission Reduction Projects • Traffic signal optimization • Energy efficiency • Reforestation • Truck Stop Electrification • Biodigesters 39

40. Climate Change Litigation • National Environmental Policy Act (NEPA) • Requires Preparation of Environmental Impact Statement For Every “Major Federal Action” That “Significantly Affects The Quality of The Human Environment” • Permitting, Licensing, Proposals For Action, Funding of Projects 40

41. Climate Change Litigation • NEPA • Impacts of Global Warming Must Be Addressed • Border Power Plant Working Group v. DOE, 260 F.Supp. 2nd 997 (S.D. Cal. 2003)(Transmission Line) • Mid States Coalition For Progress v. STB, 345 F.3d 520 (8th Cir. 2003) (Rail Line For Transportation of Coal) • Friends of The Earth v. Mosbacher, 488 F.Supp.2d 889 (N.D. Cal. March 20, 2007) (Financing of Overseas Project By OPIC And Export-Import Bank) • Bravos v. Bureau of Land Management (D.N.M. Filed Jan. 2009 (Oil And Gas Leases) • But: Analysis Can Be Cursory 41

42. State “Mini-NEPA Laws” • California Environmental Quality Act (CEQA) • State of Cal. v. San Bernadino • State A.G. Sues County • Settlement: County to Develop GHG Emissions Inventory Re Land-Use Decisions And County Operations, Set Emissions Reduction Goals And Adopt Mitigation Measures 42

43. State “Mini-NEPA Laws” • Massachusetts Environmental Policy Act (MEPA) • Exec. Office of Energy And Environmental Affairs -- GHG Policy (April 23, 2007) • Applies to Many Projects Subject to Review Under MEPA • Requires Quantification of Project-Related GHG Emissions • Requires Consideration of Mitigation Measures And Alternatives • Harvard University Expansion of Alston Campus • First Project In Nation to Legally Bind A Developer to Reducing GHGs Beyond Current Standards • Voluntary Commitment to Cap GHGs Below Existing Standards In Implementing 20-Year Master Plan 43

44. State “Mini-NEPA Laws” • New York State Environmental Quality Review Act (SEQRA) • March 2009 Proposed Guidelines Issued By State DEC • Protocols For Analysis Vary • Direct Operational Impacts • Purchased Electricity • Induced Vehicle Trips • Construction Impacts 44

45. Common Law Litigation • Public Nuisance: Unreasonable Interference With Public Safety or Health • Connecticut v. American Electric Power Co., 2005 U.S. Dist. Lexis 19964 (S.D.N.Y. Sept.. 22, 2005) (Appeal Pending) • Eight States Sue Five Biggest Power Companies • Allege GHG Emissions Constitute Public Nuisance By Contributing to Global Warming • District Court Dismisses Based On Political Question Doctrine • Appeal Argued In 2d Cir. In June 2006 45

46. Common Law Litigation • California v. General Motors Corp., 2007 U.S. Dist. Lexis 68547 (N.D. Cal. Sept. 17, 2007) • Same Result • Native Village of Kivalina v. ExxonMobil Corp., Cv 08-1138 (N.D. Cal., Filed 2/26/08) • Alleges GHG’s From Oil, Electric Utility And Coal Companies Are Nuisance • Village Sits 10 Feet Above Sea Level And Is Threatened By Flooding • Seeks $400 Million In Damages As Cost of Relocating The Entire Village • Motions to Dismiss Pending 46

47. The Far Reach of Climate Change • Securities Laws:  When and how to disclose climate risk? • Contracts, Property, Energy:  Get used to it • Insurance:  Unpredictability of climate events creating pricing challenges; potential new products • Stimulus Funds:  Opportunities 47

48. Thank you. Merrill J. Baumann, Jr. mjb@dunn-carney.com 503-242-9620 Barry S. Neuman neuman@clm.com 202-623-5705