CALIFORNIA CAP-AND-TRADE WORKSHOP LITIGATION UPDATE June 21, 2011

1. CALIFORNIA CAP-AND-TRADE WORKSHOPLITIGATION UPDATEJune 21, 2011 Thomas J.P. McHenry 333 South Grand Avenue Los Angeles, California 90071 TMcHenry@gibsondunn.com (213) 229-7135

2. American Electric Power v. Connecticut • Decided June 20, 2011 (Case No. 10-174) • Clean Air Act and EPA authority displace federal common law nuisance claims (Massachusetts v. EPA) • Reversed 2d Circuit decision from 2009 in favor of states and land trusts • 8-0 decision, with Sotomayor recusing herself • “The act itself thus provides a means to seek limits on emissions of carbon dioxide from domestic power plants — the same relief the plaintiffs seek by invoking federal common law. We see no room for a parallel track.” Justice Ginsburg in her 21-page opinion • Leaves open question of whether claims may be brought under state law (Kivalina, AK case pending in 9th Circuit)

3. Introduction and Overview • Ongoing legal challenge to ARB’s cap-and-trade program – AIR v. ARB • What the Plaintiffs wanted, how the ARB responded and what the Court said • Potential impacts on implementation schedule and viability of program • Moving target – appeal court briefing due yesterday (June 20) • Is it a bump in road or a roadblock?

4. California cap-and-trade program approved by ARB in October 2010, finalized in December 2010 Cap-and-trade provides 20% of greenhouse gas reduction needed to reach 1990 levels by 2020 1st statewide cap-and-trade program in U.S. Framework for linking with Western Climate Initiative Background on AB32 Cap-and-Trade Program

5. AIR v. ARB – Procedural Background • Association of Irritated Residents (AIR) v. Air Resources Board (ARB)San Francisco Superior Court (Judge Goldsmith) (CPF-09-509562) • June 10, 2009 – Petition filed • January 24, 2011 – Original decision • May 18, 2011 – Statement of Decision • June 1, 2011 – Appeal filed by ARB • June 3, 2011 – Enforcement stayed by California Court of Appeal • June 13, 2011 – ARB posted Supplement to Scoping Plan with revised environmental impact analysis • June 20, 2011 – Briefing due on effect of stay • August 24, 2011 – ARB Board Meeting to approve Supplement

6. Plaintiffs in AIR v. ARB • Plaintiffs are environmental justice advocates: • Center on Race, Poverty and Environment (CRPE) • Communities for a Better Environment (CBE) • Main concern is that cap-and-trade program will have significant negative health and environmental impacts on disadvantaged communities • CRPE and CBE challenged numerous regulatory provisions of the cap-and-trade program • Also challenged the Functional Equivalency Document (FED) under CEQA for failure to adequately analyze alternatives

7. AIR Position – What They Are Saying • Overall -- Scoping Plan a post hoc rationalization for already chosen policy approaches • “Cap-and-trade is a type of pollution trading that threatens to replace policies [command and control] requiring all polluters clean up.” CBE Press Release, January 24, 2011 • “It allows some polluters – typically the oldest facilities located in low income communities of color – to continue or increase their pollutant emissions while other polluters further decrease emissions.” Id. • “Cap-and-trade has the worst impact on health in low income communities and communities of color” CBE Press Release, May 20, 2011 • “We wanted the good parts of AB 32 to proceed and the court to only enjoin the cap-and-trade component, and that’s exactly what the court did.” CRPE Attorney, New York Times, May 23, 2011

8. ARB Position • Cap-and-trade regulatory program being developed consistent with statute (AB 32) and CEQA • Need to move ahead aggressively with timetable to meet ambitious GHG emission reduction goals • By January 1, 2012, ARB calendar states: “All greenhouse gas rules take effect”

9. Standard of Review In reviewing the AB 32 regulatory program: • ARB’s duty to develop the Scoping Plan is “quasi-legislative” • Reviewed under an arbitrary and capricious standard • “[A]ffording the agency wide latitude in statutory interpretation” In reviewing CEQA compliance: • Administrative record reviewed to determine whether agency abused its discretion • Shown by determination that agency’s determination: (1) not supported by substantial evidence or (2) agency has not proceeded in a manner required by law

10. What AIR Court Did Not Do… AIR Court did not do any of the following: • Allow a challenge to the “fundamental legitimacy” of ARB’s Scoping Plan • Prohibit use of a statewide emission limit as target • Prevent use of the “Cost of a Bundle of Strategies” approach to determine cost-effectiveness • Disallow exclusion of agricultural sector • Invalidate regulation of the industrial sector through cap-and-trade

11. Overall Approval of ARB Regulatory Approach • Control Measures – ARB has substantial discretion and flexibility to determine the mix of measures needed to facilitate the achievement of GHG reductions • Comparison to Direct Regulation – AB 32 does not require that ARB must demonstrate that cap-and-trade will result in same reductions as direct regulation • Choice of Cap-and Trade – ARB may “choose” cap-and-trade as the primary methodology • Public Health – “While there may be flaws in the analyses, Petitioners fall short of demonstrating that ARB was arbitrary and capricious…” • Other GHG Reduction Programs – Determination of “relevance” may be overbroad, but sufficient evidence that ARB met its responsibilities

12. CEQA Review • LCFS – Scoping Plan properly describes the environmental consequences of the LCFS program but defers site-specific impacts to LCFS rulemaking • Localized Impacts (Hot Spots) – Scoping Plan properly deferred consideration of localized and site-specific impacts of cap-and-trade to rulemaking stage

13. Outstanding CEQA Issue • Alternatives Analysis – “Little or no facts or data” to support conclusion that alternatives would have similar impacts to Scoping Plan • Must provide “some indication based on factual analysis” of why it chose Scoping Plan over alternatives • ARB “seeks to create a ‘fait accompli’ by premature establishment of a cap-and-trade program before alternative can be exposed to public comment”

14. ARB CEQA Response • Issued revised environmental impact analysis on June 13 “supplement to the AB 32 Scoping Plan Functional Equivalent Document” • Four options: no project, carbon feel tax, direct source-specific regulation and “combined” strategy • Concern about shifting GHG emissions to other states

15. ARB Workshops • Announced workshops on key cap-and-trade program policies • Offset protocols • Compliance • Electricity • Allocation • Program management

16. Lessons Learned/Questions Remaining • Easier to sue under CEQA • ARB regulatory program upheld in first court challenge • ARB eager to move program ahead – impact on rulemaking schedule • Much for ARB to do before January 2012 – will carbon trading begin then? • “ARB is clueless and uninterested in doing anything other than full-steam ahead and seems to think Arnold is still governor.” • “The sun will come up tomorrow. There will be a cap-and-trade program. We will be trading in 2010.”

17. Timing

18. http://www.arb.ca.gov/climatechange

19. Contact: 333 South Grand Avenue Los Angeles, CA 90071-3197 Tel: 213.229.7135 tmchenry@gibsondunn.com Thomas McHenry Tom is a partner in Gibson Dunn’s Los Angeles office and a member of the firm's Environment and Natural Resources practice. He practices general environmental law with an emphasis on air quality, hazardous waste, environmental diligence, land use and energy issues. Tom has broad experience with air quality compliance and permitting. He has advised companies on new source review, emission reduction credits and rulemaking issues and has handled enforcement and compliance issues before all the major air districts in California and the California Air Resources Board.