• Climate Change Back on the Front Burner: Beijing & Washington DC - A Tale of Two Cities
  • February 25, 2013 | Author: Elisabeth (Lisa) DeMarco
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • This client briefing is a collaboration with US Law Firm Fulbright & Jaworski L.L.P1

    1. On June 3, 2013 Norton Rose will join forces with leading US firm Fulbright & Jaworski L.L.P. to create Norton Rose Fulbright. With 3800 lawyers and 54 offices, including 11 in the USA, Norton Rose Fulbright will be one of the largest legal practices, with significant depth of expertise in the world’s leading business and financial centres.

    Introduction: The Power of Speech

    President Obama’s Inaugural and State of the Union speeches put the issue of the United States Government’s approach to addressing climate change back on the political front burner. In his most recent speech, the President challenged Congress to take action on climate change, and issued an ultimatum that his administration would act if Congress did not. There appears to be a significant tailwind supporting administration action, according to two recently released surveys showing a substantial majority of Americans favoring further action on climate change, which may be attributable to the severe weather events of recent years, including “Superstorm” Sandy. Since prospects for legislation are slim, particularly in the Republican-controlled House of Representatives, it seems inevitable that the Obama administration will press forward with regulatory action on greenhouse gas (GHG) emissions.

    Regulatory Options Open to Obama to Bypass Congress

    Acting through the authority of the Clean Air Act, the US Environmental Protection Agency (EPA) has already adopted regulations requiring reduction in carbon emissions, including New Source Performance Standards (NSPS) for new and modified large emitters, as well as for tailpipe emissions from cars, light trucks, and heavy-duty vehicles, and has proposed emissions controls for new power plants larger than 25MW. Currently, most new coal-fired power plant construction has been discontinued and oil and gas development on public lands has been significantly curtailed.

    The administration has several options open to it using executive powers under existing legislation for additional GHG emissions regulations:

    • Expand the proposed power plant rule to modifications of existing coal-fired plants, as well as new and existing natural gas-fired plants

    • Develop an NSPS for other large emitters, such as refineries, cement plants, industrial boilers

    • Require and/or finance more stringent energy efficiency from buildings and appliances

    • Phase out subsidies for fossil fuel projects, increase support for renewable energy and energy efficiency, encourage new financing and investment avenues for energy efficiency and renewable energy, and facilitate the leasing and deployment of clean energy generation and technologies on public lands and waters and within federal agencies

    • Limit approval of new LNG import/export facilities, new coal export terminals and increased oil exports

    What is Obama’s Strategy on Climate Change?

    One could speculate that the President’s ultimatum was a challenge to Congress to take action by adopting a market-based mechanism so as to avoid more stringent and intrusive command-and-control regulation of GHG emissions. Indeed, on February 14, Senators Boxer and Sanders introduced a bill that would impose a carbon tax $20 per ton of CO2 on manufacturers, producers, or importers of coal, petroleum, or natural gas, and on importers of designated “carbon pollution-intensive goods,” with 60 per cent of the revenue returned to citizens under a “residential environmental rebate program”. At the time being, it seems however that the passage of legislative action in this Congress is minimal, particularly given the susceptibility of many in the House of Representatives to primary election challenges from the right if they vote in favor of a federal bill. If that remains the case, and if it is not prevented by Congress from doing so,2 action by the administration seems the safer bet for the next four years.

    2. In fact, on February 13, a representative from Texas introduced H.R. 621, seeking to prohibit any executive action to prevent climate change. That bill, even if passed by the House, would appear to have virtually no chance of success in the Senate.

    Global Influence?

    The implications of any President or EPA lead climate change policy and regulatory initiatives are likely to be felt well beyond territorial boundaries and impact key State Department decisions including the approval of TransCanada's cross-border Keystone XL pipeline and the US approach to oil and gas exploration in and around the continental shelf. We anticipate that elements of Senator Kerry's prior climate change legislative initiatives, including proposed GHG related border tax adjustments, may find their way back into any comprehensive Obama climate change strategy. The possibility of border tax adjustments raising the specter of a trade war may grab attention particularly in capitals such as Beijing.

    While the President's inaugural address re-ignited interest in the potential for federal climate change developments, steady and significant development has occurred at the State and provincial levels. On November 14, 2012, California held its first Allowance Auction selling just over 23 million allowances at just over the 2012 reserve price of $10 per allowance. The 2013 reserve price will be $10.71 USD per allowance, applying to each quarterly auction. During 2012, California amended its Cap and Trade Regulation and the California Air Resources Board (ARB) completed further study to facilitate its linkage with the Province of Quebec and further clarifications and developments occurred to facilitate the ARB approval of Registry Offsets for compliance usage. Similarly, on December 14, 2012, Quebec finalized proposed amendments to its Cap and Trade Regulation in attempt to harmonize with and link to the California system, delegating key offset functions to WCI Inc. The first allowance allocations in Quebec will not occur until May 1, 2013. Although further approval of the California Legislature is required, both sub-national governments have indicated that they anticipate linking of the markets in the Spring of 2013 and the first joint allowance auction in August of 2013. On January 21, 2013, the Province of Ontario followed suit and released a Discussion Paper to further its cap and trade efforts with sectoral regulations anticipated by the end of 2013. Regulated emitters operating in several states and provinces are attempting to adapt to what may be a patchwork of regulatory systems and to encourage the harmonization of such regulatory efforts.

    Does it Matter what China Does?

    In January, Senators introduced two bills into Congress prohibiting action until major emerging economies such as China take action on those pollutants leading to climate change. There have been a lot of mixed reports on what is happening in China in response to climate change3. Whilst it is clear that China’s economy is growing and along with that economic growth emissions are rising, there are also moves to address emissions. China has made firm commitments to reducing its energy intensity and in turn, its CO2 emissions intensity. Indeed many in China see it as key to decouple China’s economic growth from its energy use and dependence on fossil fuels.

    China's response to climate change related pollution continues to push ahead on a number of fronts. However, as in the US, it is not plain sailing and there are clear difficulties.

    On the policy front there are currently three competing drafts of a new Climate Change Law in circulation which set out in broad policy terms a range of aims including support for trading schemes and a carbon tax. The Climate Change Law comes on the back of a range of renewables, energy efficiency, demand side management and trading scheme regulations. At most, this new law could serve to integrate and consolidate the various laws. At the least, it is another sign of the growing importance of climate change within the Chinese government as various ministries and departments battle for an increasingly important portfolio.

    In developing national policies (especially in relation to regulating the environment), China often takes a similar approach to that of the US. Such policies are first developed and implemented at the State or (as in China) at the Provincial or City level. Currently this is happening with emissions trading; there are presently 7 official emissions trading schemes covering climate pollution under development in two provinces and five cities. These schemes will be based upon carbon intensity targets rather than absolute reductions against a cap (as has been adopted by the EU and Australia). While the details remain in discussion and each scheme will be different, ultimately, it is likely that the schemes will be limited to the steel and cement sectors, the reduction targets will not be ambitious, there will be overlap with the Clean Development Mechanism (so the same activity will generate both Certified Emission Reductions and carbon intensity units) and there will not be any link to the EU Emissions Trading System (ETS). At the same time, as in the US, the schemes face home grown complexities, such as difficulties transplanting a floating carbon intensity price into a Chinese framework of fixed input (coal and fuel) and output (electricity) prices. This means that carbon prices cannot be easily passed on to end consumers.

    On the Chinese renewables front, wind investment probably peaked last year bringing installed capacity to around 43GW, but solar should continue to expand. New projects face approval delays and the continued problems around grid connection delays and grid curtailment issues in Inner Mongolia remain. On top of this, mounting tariff receivables are causing growing concern, with the grid paying the feed-in component of the renewables tariff between six to eighteen months late. Project companies face cash flow problems, a large number of projects are in default and this is having a flow-on effect on the turbine manufacturers who are reporting receivables periods four times longer than in 2009.

    Closely related to these developments is China’s commitment to grow its green economy such that it will account for 15% of the total economy and dominate the global green economy. Currently, in terms of green economy exports, the Chinese turbine manufacturers backed by China Development Bank are starting to find their niche in developing and more difficult markets where there is less competition from existing renewables manufacturers such as Vestas, Siemens, Gamesa and GE. 2012 saw Gold Wind and CDB close a fully non-recourse, merchant risk project in Chile and other manufacturers have closed limited recourse projects in Brazil, Cyprus, Bulgaria, Greece and the US. Global expansion by the PV manufacturers has pulled back marginally, with Hanergy being the exception. Generally, they remain focused on survival, and China aims to use its domestic market to sop up excess PV supply and carry the manufacturers through until the global markets bounce back.

    3. Bloomberg report 21/02/13 that China’s state media announeced that China will introduce a tax on carbon dioxide emissions, “The government intends to introduce the carbon tax along with an environmental protection tax, as a package of measures designed to protect the environment. Reports suggest that local tax authorities will be charged with collecting the taxes, as opposed to the environmental protection department. The government also intends to introduce reforms to resource taxes on coal and water.

    Implications for Business

    So what does all this mean for the present day climate policy and business outlook outside the US?

    In a post-Copenhagen world it probably does not mean we are likely to see a top-down and legally binding agreement like the Kyoto Protocol anytime soon, or at least one the US Congress will ratify. But it offers hope that the US is re-engaging with the outside world on this issue and will take action.

    Critically, a best case scenario is that this may just give the political impetus needed for structural reforms to an ailing EU ETS and increased enthusiasm for emerging ETS schemes across the globe. Worse case if the EU ETS continues to be seen as failing and even broken it may embolden those MEPs and NGOs calling for it to be scrapped and replaced with a command and control approach. One can see the argument that if emissions trading has failed to be adopted in the country that invented it and failed to work in Europe lets revert to old style command and control. Such an approach is likely to be more expensive and certainly less flexible than a market approach. What is not widely appreciated is that the EU has its own version of the Clean Air Act, The Directive on Industrial Emissions4 which would apply to CO2 and GHG emissions if the EU ETS were to be repealed. Like the US Clean Air Act it would require industrial emissions limit standards for GHG emissions to be imposed on those facilities it covers.

    Any international agreement in 2015 will have to reflect the US political reality; this means a political agreement that does not require ratification by Congress. This could perhaps take the form of an umbrella framework for a “bottom-up” global market. This is the essence of the New Market Mechanisms and the Framework for Various Approaches that were included in the Doha Decisions. These offer an idea of how schemes in the EU, Australia, Canada, Chile, China, Japan, Kazakhstan and South Korea could get welded together into a global market.

    For business it reinforces the signals that climate change regulation will not go away and will likely be strengthened in the US and elsewhere. However, real difficulties for business and investors remain because they still do not know when and how these regulations will be introduced, or how stringent they will be. In the extreme, it opens up the risk of stranded assets developed and invested in, which may not now be resilient in the period required to make good on the investment either because of financial or regulatory constraints.

    It also raises the risk for business that regulation in the US and perhaps elsewhere will come in the form of more intrusive and expensive command and control regulations, rather than more cost effective market based approaches which, ironically, were pioneered in the US.

    This client briefing is a collaboration with US Law Firm Fulbright & Jaworski L.L.P.5

    4. Directive on industrial emissions 2010/75/EU (IED) was adopted on 24 November 2010 and published in the Official Journal on 17 December 2010. It entered into force on 6 January 2011 and has to be transposed into national legislation by Member States by 7 January 2013. The IED replaces the IPPC Directive and the sectoral directives as of 7 January 2014, with the exemption of the LCP Directive, which will be repealed with effect from 1 January 2016.

    5. On June 3, 2013 Norton Rose will join forces with leading US firm Fulbright & Jaworski L.L.P. to create Norton Rose Fulbright. With 3800 lawyers and 54 offices, including 11 in the USA, Norton Rose Fulbright will be one of the largest legal practices, with significant depth of expertise in the world’s leading business and financial centres.