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Regulation of Greenhouse Gases Heating Up in Washington

North Carolina Chamber Environmental Summit

November 2, 2009

PRESENTED BY

Margaret Claiborne CampbellTroutman Sanders LLP600 Peachtree Street, NE, Suite 5200Atlanta, GA 30308404.885.3410

www.troutmansanders.com

CURRENT STATE OF PLAY

• Congress

• EPA

• Copenhagen

• Courts

• Determined Administration

Congress vs. EPAThe Go Ahead, Make My Day

Theory of Governance

Rep. Markey: "Do you want the EPA to make the decision or would you like your Congressman or Senator to be in the room and drafting legislation?... Industries across the country will just have to gauge for themselves how lucky they feel if they kill legislation in terms of how the EPA process will include them.”

Supreme CourtMassachusetts v. EPA Decision

April 2007

EPA can regulate under existing Clean Air Act (“CAA”) authority

GHGs are CAA “air pollutants” which EPA must regulate if it finds endangerment to public health or welfare

Case was in the context of GHG emissions from new motor vehicles, but precedent applies to sources across the economy

EPA’s Proposed Endangerment Finding - April 2009

• Elevated concentration of six GHGs in atmosphere constitute “air pollution” under the CAA endangering both public health and welfare from climate change impacts

• Four of these GHGs, including CO2, emitted by new motor vehicles cause or contribute to this air pollution

• Once finding is final, EPA must regulate

Path To EPA Regulation Under CAA

April 17, 2009:Proposed Endangerment Finding

May 19, 2009: Agreement with automakers on motor vehicle fuel economy standards that will include GHG regulations under the CAA

September 15, 2009: Proposed motor vehicle regulations

By Spring 2010:Final Endangerment Finding

By Spring 2010 (March 31?):Final motor vehicle regulations

Broad Implications of EPA Regulation Under CAA

Once GHGs are “regulated” under the CAA, all major stationary sources of GHGs become potentially subject to GHG permitting and regulation.

CAA permitting requirements: • Federal preconstruction permitting for green-

field developments and major modifications to existing major sources

• Operating permits for all “major sources”

Who Will Be Affected?

Once final auto regulations become effective,all “major” stationary sources:

• Large industrial sources, including power plants, refineries, industrial boilers, etc.

• But also any previously unregulated sources: office buildings, warehouses, health care facilities, hotels/ motels, food service facilities, churches and other places of worship, farms.

• Why? CO2 is emitted in much larger quantities than traditionally regulated pollutants

Must EPA Regulate Relatively Small Sources?

Statutory definition of “major source” for federal preconstruction permitting is 250 tons per year. 1.2 million new regulated sources (!)

Statutory threshold for Title V Operating Permits is 100 tons per year.

EPA’s Proposed “Tailoring” Rules

EPA recognizes that requiring permits for relatively small sources would create gridlock.

In October, proposed “tailoring” rules to limit permitting to sources > 25,000 tons per year CO2e.

Significant legal issues. Will anyone sue?

Other Important Regulatory Implications

• New Source Performance Standards• EPA has been petitioned to set emission limits for

defined categories of industrial sources. º New Sourcesº Existing Sources

• National Ambient Air Quality Standards • Attainment vs. Nonattainment areas for GHGs?

• Can EPA limit the impacts of its findings?

• Will Congress limit impacts?• Preemption debate

Waxman-Markey

• First bill to pass mandating GHG reductions

• Passed House June 26, 2009 • 219-212 vote – 8 Rs for, 44 Ds against

• Floor debate limited to one afternoon• 1427 pages • 300+ page manager’s amendment filed

at 3:00 am on day of vote

Cap-and-Trade

• Covers 85% of U.S. GHG emissions• principally large industrial sources emitting ≥

25,000 tpy CO2e

• Reduction Targets and Timetables• All reductions are from 2005 levels

- 3% by 2012 - 17% by 2020 - 42% by 2030 - 83% by 2050

• Compliance: Allowances + Offsets

Dividing the Pie: Allocations

• Electric utilities 35%• Natural gas distribution 9%• Auto industry 3%• Energy-intensive industries 15% (begins 2014)• Oil refiners 2+% (begins 2014)• Auction 15%

• proceeds to low-/moderate-income families (tax credits, direct payments)

• States • 10% for renewables / energy efficiency• 1.5% to benefit users of home heating oil / propane

• Various incentives, programs (CCS, worker training)• Remainder: auction with proceeds to Treasury

• Initially 13% in 2012-13, dropping to 1% 2014 with sunset in 2023.

Preemption

• Preempts worst of CAA regulation • Preconstruction permitting• NAAQS

• Limited preemption of state programs, and states can drain allowances “out of bottom of allowance bucket”

Renewable Energy Standards

• 20% by 2020• Federal Energy Regulatory Commission• 15% renewables / 5% efficiency from utilities

with sales > 4000 MW• Alternative compliance payments

• “Renewable” includes wind, solar, geothermal, biomass and other biofuels, landfill gas, wave/tidal power, incremental hydro

• Excluded from baseline: new nuclear, existing hydro, fossil with CCS

Waxman-Markey Climate Bill Would Increase Energy Costs

Projected U.S. household increases in costs inclusive of carbon costs for natural gas, motor fuels and electricity, relative to business as usual*

Projected impact on household purchasing power, stated in terms of 2010 income levels*

*Based on CRA reference case resultsData source: CRA prepared for the National Black Chamber of Commerce, “ Impact on the Economy of the American Clean Energy and Security Act of 2009 (H.R. 2454),” August 2009.

U.S. Economic Impact of Waxman-Markey*

• Waxman-Markey would cause the loss of millions of jobs relative to business as usual

• Waxman-Markey would cause GDP losses of $150 billion in 2020, $250 billion in 2030 and $630 billion in 2050, relative to business as usual

*Based on CRA reference case resultsData source: CRA prepared for the National Black Chamber of Commerce, “ Impact on the Economy of the American Clean Energy and Security Act of 2009 (H.R. 2454),” August 2009

• A region’s industrial impact, and hence employment effects, strongly correlate with the region’s composition of industries and the energy-intensity of these industries

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The Senate

• 6 Committees have jurisdiction over bill, leading committee is Boxer’s Environment & Public Works

• Majority Leader Reid had asked for all Committees to complete work by late-September but health care debate intervened

• Kerry-Boxer Bill:• Introduced September 30th (as work in progress)• EPW Committee hearings held last week• Scheduled for Committee markup this week• Republican members may boycott

Kerry-Boxer

• Cap-and-Trade • Modeled after Waxman-Markey• Allowances + offsets• Important distinctions

• Overall Targets and Timetable• Similar to W-M except:• 20% by 2020 vs. 17% in W-M

• Allocations – Smaller Pie• CBO “Haircut”: increasing percentage of allowances

auctioned for Treasury (10%, 22%, 25%)• One estimate: 1.46 Billion fewer allowances overall

• Preemption – none (yet)

Renewable Energy Standard

• Not Addressed in Kerry-Boxer

• Separate Bill - S.1462 approved by Energy & Natural Resources Committee in June• Renewable energy / energy efficiency• 15% by 2021 vs. 20% by 2020 in W-M

• May be combined into broader Senate bill to parallel W-M

Key Political Considerations

• Northeast/West Coast vs. Heartland• Overwhelming complexity of bills and

of harmonizing work of different committees in Senate, plus between House and Senate

• Health Care• Unemployment Rate• Copenhagen in December• A determined President

Strategic Considerations: EPA vs. Congress

• EPA and Congressional leadership are trying to use threat of CAA regulation as sword to soften up industry on cap-and-trade

• National legislation is preferable to CAA regulation, but not at any cost

• Two-front battle to get a sensible climate change program

GHG REGULATION: HOW MUCH PAIN?

Margaret Claiborne CampbellTroutman Sanders LLP600 Peachtree Street, NE, Ste 5200Atlanta, GA 30308404.885.3410margaret.campbell@troutmansanders.com