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The Devil in the Details: Climate Change Regulation under Obama and How to Survive

in the New Carbon-Constrained Economy

The Devil in the Details: Climate Change The Devil in the Details: Climate Change Regulation under Obama and How to Survive Regulation under Obama and How to Survive

in the New Carbonin the New Carbon--Constrained EconomyConstrained Economy

DRI WebcastDRI WebcastDecember 15, 2008December 15, 2008Scott D. DeatherageScott D. Deatherage

Thompson & Knight LLPThompson & Knight LLPDallas, TexasDallas, Texas

Scott.Deatherage@tklaw.comScott.Deatherage@tklaw.com214214--969969--12061206

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Outline of PresentationOutline of Presentation

What climate change regulatory developments will What climate change regulatory developments will serve as a foundation of an Obama climate change serve as a foundation of an Obama climate change regulatory push?regulatory push?

What is climate change regulation likely to look like What is climate change regulation likely to look like under an Obama administration?under an Obama administration?

How can companies survive and seek competitive How can companies survive and seek competitive advantage under a new climate change regulatory advantage under a new climate change regulatory system?system?

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Part I: Before ObamaPart I: Before ObamaPart I: Before Obama

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Climate Change Regulation TimelineClimate Change Regulation Timeline

1992UNFCCC

1997Kyoto Protocol

2005EUETS

2007--Mass v. EPA--Lieberman-WarnerVoted Outof Sen.Comm.--GreenhouseGas ReportingLegislation--MidwesternGreenhouse Gas Reduction Accord

2008U.S. Pres.Election

2009-2010--U.S. Climate Change Legislation--Post-KyotoClimate ChangeTreaty

2006 --California Bill--WesternClimate Initiative

2003RegionalGreenhouseGasInitiative 2009

U.S. GHGReportingRegulation

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New Federal Greenhouse Gas New Federal Greenhouse Gas Reporting Requirement Reporting Requirement

December 21, 2007, Omnibus Spending bill requires December 21, 2007, Omnibus Spending bill requires EPA to promulgate GHG reporting rules above EPA to promulgate GHG reporting rules above appropriate threshold levels in all sectors of appropriate threshold levels in all sectors of economy. economy.

Proposed regulation was due in September of 2008, Proposed regulation was due in September of 2008, and a final regulation in June 2009. and a final regulation in June 2009.

The Bush Administration would not let EPA issue a The Bush Administration would not let EPA issue a draft regulation, even though the Agency was draft regulation, even though the Agency was prepared to do so.prepared to do so.

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EPA Advance Notice of Rulemaking under the EPA Advance Notice of Rulemaking under the Clean Air Act in response to Clean Air Act in response to Mass v. EPAMass v. EPA

““Future projections show that, for most scenarios assuming no Future projections show that, for most scenarios assuming no additional GHG emission reduction policies, atmospheric additional GHG emission reduction policies, atmospheric concentrations of concentrations of GHGsGHGs are expected to continue climbing for are expected to continue climbing for most if not all of the remainder of this century, with associatemost if not all of the remainder of this century, with associated d increases in average temperature.” increases in average temperature.”

EPA Administrator Johnson:EPA Administrator Johnson:

“[“[T]heT]he potential regulation of greenhouse gases under any potential regulation of greenhouse gases under any portion of the Clean Air Act could result in an unprecedented portion of the Clean Air Act could result in an unprecedented expansion of EPA authority that would have a profound effect expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every on virtually every sector of the economy and touch every household in the land.”household in the land.”

“I believe the ANPR demonstrates the Clean Air Act, an “I believe the ANPR demonstrates the Clean Air Act, an outdated law originally enacted to control regional pollutants outdated law originally enacted to control regional pollutants that cause direct health effects, is illthat cause direct health effects, is ill--suited for the task of suited for the task of regulating global greenhouse gases.”regulating global greenhouse gases.”

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Part II: Climate Change Regulation under Obama

Part II: Climate Change Regulation under Part II: Climate Change Regulation under ObamaObama

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ObamaObama--Driven LegislationDriven LegislationWhere will the new Administration start?Where will the new Administration start?

Ground already plowed: Numerous bills already have been Ground already plowed: Numerous bills already have been introduced in Congress, much analysis and debate has occurred introduced in Congress, much analysis and debate has occurred in committeesin committees

State laws being enacted and regulations being developedState laws being enacted and regulations being developed

These bills will serve as the starting point for developing a These bills will serve as the starting point for developing a federal climate change billfederal climate change bill

Massachusetts v. EPAMassachusetts v. EPA and EPA Advanced Notice of Rulemakingand EPA Advanced Notice of Rulemaking

“Climate Change Mavericks”?: Former opponents and almost “Climate Change Mavericks”?: Former opponents and almost running mates Sens. McCain and Lieberman may be Obama running mates Sens. McCain and Lieberman may be Obama allies in passing climate change legislationallies in passing climate change legislation

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Greenhouse Gas ReportingGreenhouse Gas ReportingLegislation Already PassedLegislation Already Passed

Obama EPA will use Bush EPA work on greenhouse Obama EPA will use Bush EPA work on greenhouse gas reporting rules to develop reporting system in gas reporting rules to develop reporting system in 20092009

The GHG reporting requirements will identify many of The GHG reporting requirements will identify many of the industries and facilities that likely will be regulated the industries and facilities that likely will be regulated under federal legislationunder federal legislation

The language in the Omnibus Spending bill requiring The language in the Omnibus Spending bill requiring EPA rules on GHG reporting is very broad, giving EPA EPA rules on GHG reporting is very broad, giving EPA great latitude in establishing the regulatory landscapegreat latitude in establishing the regulatory landscape

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New Federal Greenhouse Gas New Federal Greenhouse Gas Reporting RequirementReporting Requirement

What industries and sources will be required to report?What industries and sources will be required to report?

What gases will be included? CO2 or all six greenhouse gases?What gases will be included? CO2 or all six greenhouse gases?

What threshold levels of emissions will be required to report? What threshold levels of emissions will be required to report? What de What de minimisminimis level of emissions will be excluded? 10,000 level of emissions will be excluded? 10,000 metric tons of CO2 equivalents?metric tons of CO2 equivalents?

Will transportation emissions be measured and reported? If so, Will transportation emissions be measured and reported? If so, will suppliers of natural gas and refined petroleum products be will suppliers of natural gas and refined petroleum products be required to estimate emissions of downstream users or will this required to estimate emissions of downstream users or will this be measured by the transportation industry?be measured by the transportation industry?

What about buildings and other indirect emitters?What about buildings and other indirect emitters?

Reported emissions will be available on the Internet for review Reported emissions will be available on the Internet for review by by NGOs, shareholders, plaintiffs’ attorneys, etc.NGOs, shareholders, plaintiffs’ attorneys, etc.

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Cap and TradeCap and TradeIn the U.S. in the early 1980s, In the U.S. in the early 1980s, economic and legal experts economic and legal experts began developing theory of began developing theory of emissions marketsemissions markets“Cap”=limit on emissions “Cap”=limit on emissions decreasing over time, results in decreasing over time, results in lower emissionslower emissions“Trade”=parties can trade “Trade”=parties can trade pollution allowances granted by pollution allowances granted by the government to each facilitythe government to each facilityThe Clean Air Act of 1990 The Clean Air Act of 1990 established an emissions trading established an emissions trading market for sulfur dioxide market for sulfur dioxide emissions from coalemissions from coal--fired power fired power plantsplantsResultResult——Emissions reduced at Emissions reduced at significantly less cost to industrysignificantly less cost to industry

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GHGs and Relative GHGs and Relative Global Warming ImpactGlobal Warming Impact

carbon dioxide, COcarbon dioxide, CO22

methane, CHmethane, CH44

nitrous oxide, Nnitrous oxide, N22OO

hydrofluorocarbons, HFCshydrofluorocarbons, HFCs

perfluorocarbons, PFCsperfluorocarbons, PFCs

sulphur hexafluoride, SFsulphur hexafluoride, SF66

* Reflects the global warming capacity of each GHG relative to C* Reflects the global warming capacity of each GHG relative to COO22

GHGGHG GWP*GWP*

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2121

310310

140 140 –– 11,70011,700

6,500 6,500 –– 9,2009,200

23,90023,900

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What Will the Cap Be?What Will the Cap Be?

LierbermanLierberman--Warner: 4% below 2005 levels by 2012; Warner: 4% below 2005 levels by 2012; 19% below 2005 by 2020; 71% below 2005 by 205019% below 2005 by 2020; 71% below 2005 by 2050

DingellDingell--Boucher: 6% reduction by 2020; 80% by 2050Boucher: 6% reduction by 2020; 80% by 2050

Obama: EconomyObama: Economy--wide capwide cap--andand--trade system; trade system; Reduce to 1990 levels by 2020; 80% below 1990 levels Reduce to 1990 levels by 2020; 80% below 1990 levels by 2050by 2050

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The Emissions ThresholdThe Emissions Threshold

What threshold of emissions of greenhouse gases will What threshold of emissions of greenhouse gases will be regulated?be regulated?

In some bills filed in Congress, 10,000 tons per year of In some bills filed in Congress, 10,000 tons per year of carbon dioxide equivalent (CO2e) would be the carbon dioxide equivalent (CO2e) would be the thresholdthreshold

Setting the threshold will determine the number of Setting the threshold will determine the number of facilities regulated and the economic impact of the facilities regulated and the economic impact of the regulationsregulations

Obama position not yet knownObama position not yet known

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Some of the Potentially Regulated FacilitiesSome of the Potentially Regulated Facilities

Power plantsPower plants

Refineries producing liquid Refineries producing liquid fuelsfuels

Natural gas processing Natural gas processing plantsplants

Importers of fossil fuels Importers of fossil fuels and natural gasand natural gas

ManufacturingManufacturing——chemical, chemical, cement, aluminum, etc.cement, aluminum, etc.

TransportationTransportation

PipelinesPipelines

CementCement

SteelSteel

Producers or importers of Producers or importers of fluorocarbons, fluorocarbons, perfluorocarbonsperfluorocarbons, and , and sulfur sulfur hexafloridehexafloride

Emitters, refiners, or Emitters, refiners, or importers of more than importers of more than 10,000 tons of CO2 10,000 tons of CO2 equivalentsequivalents

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Distribution of Emission AllowancesDistribution of Emission AllowancesEmission allowances are the “pollution rights” distributed to Emission allowances are the “pollution rights” distributed to individual facilities that have to be turned into the governmentindividual facilities that have to be turned into the government at at year end to cover each ton of emissionsyear end to cover each ton of emissions

Options for distribution:Options for distribution:

Free distribution to each facility;Free distribution to each facility;

Auction of allowances to an open market; orAuction of allowances to an open market; or

Some combination of bothSome combination of both

Many northeastern states are auctioning 100 percent of Many northeastern states are auctioning 100 percent of allowances. EU Emissions Trading system distributed for free, allowances. EU Emissions Trading system distributed for free, but looking a auction. Liebermanbut looking a auction. Lieberman--Warner mixed approach Warner mixed approach starting with small auctioned amount that rises over two decadesstarting with small auctioned amount that rises over two decades

Obama’s current position: auction 100 percent of allowancesObama’s current position: auction 100 percent of allowances

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Banking of Allowances Banking of Allowances

Allowances can either expire or have no expiration dateAllowances can either expire or have no expiration date

Banking means the allowances have no expiration date and can Banking means the allowances have no expiration date and can be carried forward and used in future emission yearsbe carried forward and used in future emission years

Banking allows greater flexibility to facilities and reduces theBanking allows greater flexibility to facilities and reduces thefinancial impact of the regulationsfinancial impact of the regulations

It also may increase the market value of the allowancesIt also may increase the market value of the allowances

No indication on Obama position on banking; LiebermanNo indication on Obama position on banking; Lieberman--Warner Warner allowed bankingallowed banking

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Safety ValveSafety Valve

The term “safety valve” refers to a price cap or other means of The term “safety valve” refers to a price cap or other means of preventing price of allowances from rising beyond a certain poinpreventing price of allowances from rising beyond a certain pointt

Industry supports a safety valveIndustry supports a safety valve

Financial community and offset developers oppose a safety Financial community and offset developers oppose a safety valve and want to allow the market to determine the price for valve and want to allow the market to determine the price for carboncarbon

LiebermanLieberman--Warner did not have a specific safety valve, but would Warner did not have a specific safety valve, but would have created a sort of “Carbon Fed” that would have stepped in have created a sort of “Carbon Fed” that would have stepped in under certain circumstancesunder certain circumstances

No indication on the Obama position on a safety valveNo indication on the Obama position on a safety valve

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OffsetsOffsets

““Offsets” refer to the use of emission reductions from Offsets” refer to the use of emission reductions from activities or facilities that are not required to reduce activities or facilities that are not required to reduce their emissions under a greenhouse gas regulatory their emissions under a greenhouse gas regulatory regime; they can be domestic or internationalregime; they can be domestic or international

Offsets provide a means of lowering of the cost of Offsets provide a means of lowering of the cost of emission reductionsemission reductions

International offsets are generally the least expensive International offsets are generally the least expensive offsetsoffsets

Key Issue: Key Issue: Percentage of domestic and international Percentage of domestic and international offsets allowed; Liebermanoffsets allowed; Lieberman--Warner 30% limit, allowing Warner 30% limit, allowing up to 15% international offsetsup to 15% international offsets

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What If Congress Does Not Pass LegislationWhat If Congress Does Not Pass Legislation

Does Obama have an Ace in the hole?Does Obama have an Ace in the hole?

Under Under Mass v. EPAMass v. EPA, the U.S. Supreme Court opened , the U.S. Supreme Court opened the door for greenhouse gas regulation under the the door for greenhouse gas regulation under the federal Clean Air Actfederal Clean Air Act

Obama EPA could take regulatory action under the Obama EPA could take regulatory action under the Clean Air Act, even if Congress does not pass Clean Air Act, even if Congress does not pass legislationlegislation

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Action on Advanced Notice of RulemakingAction on Advanced Notice of Rulemaking

The Bush EPA has already laid out the groundwork for The Bush EPA has already laid out the groundwork for greenhouse gas regulation under the Clean Air Act, even though greenhouse gas regulation under the Clean Air Act, even though concluding that it would not be a wise ideaconcluding that it would not be a wise idea

The Obama EPA could decide on a regulatory approach and The Obama EPA could decide on a regulatory approach and develop rules under the CAAdevelop rules under the CAA

Could be a means of putting pressure on Congress and industry Could be a means of putting pressure on Congress and industry to formulate and pass climate change legislation, lest regulatioto formulate and pass climate change legislation, lest regulation n be developed under the CAAbe developed under the CAA

The Obama administration will likely work with the states that aThe Obama administration will likely work with the states that are re developing greenhouse gas regulations: RGGI, California and the developing greenhouse gas regulations: RGGI, California and the WCI, and the Midwestern StatesWCI, and the Midwestern States

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Mobile Sources: Fuel Efficiency Requirements Mobile Sources: Fuel Efficiency Requirements for Automobilesfor Automobiles

With auto industry in the tank, little resistance will likely arWith auto industry in the tank, little resistance will likely arise ise from the big three auto companiesfrom the big three auto companies

Waxman replaced Dingell on the House Energy Committee, Waxman replaced Dingell on the House Energy Committee, ending roadblock for fuel efficiency standards for the auto ending roadblock for fuel efficiency standards for the auto industryindustry

It appears highly likely that fuel economy standards will be It appears highly likely that fuel economy standards will be raised significantly over timeraised significantly over time

Thus, the auto industry regulation issue in Thus, the auto industry regulation issue in Mass v. EPAMass v. EPA very very likely will be resolvedlikely will be resolved

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Regulation of Stationary Sources of Regulation of Stationary Sources of GHGsGHGs as as Hazardous Air PollutantsHazardous Air Pollutants

The implications of The implications of Mass v. EPAMass v. EPA are that once are that once GHGsGHGsare determined to be air pollutants, and an are determined to be air pollutants, and an endangerment finding will be issued by Obama EPAendangerment finding will be issued by Obama EPA

Section 112 of the CAA permits EPA to regulate Section 112 of the CAA permits EPA to regulate hazardous air pollutants (hazardous air pollutants (HAPsHAPs))

Question of whether Question of whether GHGsGHGs meet the definition of meet the definition of HAPsHAPs

Litigation over these issues already occurring over Litigation over these issues already occurring over state and federal air emissions permit applicationsstate and federal air emissions permit applications

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BACT for GHG Emission SourcesBACT for GHG Emission SourcesSections 165 of the CAA: Prevention of Significant Sections 165 of the CAA: Prevention of Significant Deterioration of areas where air quality standards are Deterioration of areas where air quality standards are being metbeing met

“Best Available Control Technology” for controlling “Best Available Control Technology” for controlling GHGsGHGs

State regulation and state and federal litigation over State regulation and state and federal litigation over coalcoal--fired power plantsfired power plants

Current litigation and administrative appeals to the Current litigation and administrative appeals to the EPA Environmental Appeals Board EPA Environmental Appeals Board

EPA could begin EPA could begin requiring GHG emission limits in federal requiring GHG emission limits in federal PSD permitsPSD permits

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EPA Environmental Appeals BoardEPA Environmental Appeals Board

In re Deseret Power Electric Cooperative, PSD Appeal No. 07In re Deseret Power Electric Cooperative, PSD Appeal No. 07--03 (Nov. 03 (Nov. 13, 2008)13, 2008)

Review of challenge of EPA issuance of PSD permit for a waste coReview of challenge of EPA issuance of PSD permit for a waste coalal--fired power plant in Bonanza, Utahfired power plant in Bonanza, Utah

Sierra Club argued EPA failed to meet CAA sections 165(a)(4) andSierra Club argued EPA failed to meet CAA sections 165(a)(4) and169(3) by not applying BACT to limit CO2 emissions from the faci169(3) by not applying BACT to limit CO2 emissions from the facility lity

Remanded permit to EPA Region 8 to “reconsider whether or not toRemanded permit to EPA Region 8 to “reconsider whether or not toimpose a CO2 BACT limit in light of the agency’s discretion to impose a CO2 BACT limit in light of the agency’s discretion to interpret, consistent with the CAA, what constitutes a 'pollutaninterpret, consistent with the CAA, what constitutes a 'pollutant t subject to regulation under this Act.’”subject to regulation under this Act.’”

Stated cognizance of the national scope of issue, and asked whetStated cognizance of the national scope of issue, and asked whether her all parties would be “better served by the agency addressing theall parties would be “better served by the agency addressing theinterpretation of the phrase ‘subject to regulation under this Ainterpretation of the phrase ‘subject to regulation under this Act’ in ct’ in the context of an action of nationwide scope.”the context of an action of nationwide scope.”

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All of This Regulatory Pressure Will Bring All of This Regulatory Pressure Will Bring Industry into the DebateIndustry into the Debate

We may see more industry pushing for a We may see more industry pushing for a Congressional solutionCongressional solution

Industry does not favor regulation under the CAA or Industry does not favor regulation under the CAA or multiple state systemsmultiple state systems

Industry may be looking for better deal from the Industry may be looking for better deal from the “sausage grinder” of Congress“sausage grinder” of Congress

United States Climate Action PartnershipUnited States Climate Action Partnership——a group of a group of major corporations proposing climate change major corporations proposing climate change legislation be adopted legislation be adopted http://www.ushttp://www.us--cap.orgcap.org//

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Part III: Surviving in the Carbon-Constrained Economy

Part III: Surviving in the CarbonPart III: Surviving in the Carbon--Constrained Constrained EconomyEconomy

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How to Survive in the Land of Obama’s How to Survive in the Land of Obama’s CarbonCarbon--Constrained EconomyConstrained Economy

1. Understand we are in the midst of a conversion to a carbon1. Understand we are in the midst of a conversion to a carbon--constrained economyconstrained economy——a change as enormous as the Industrial a change as enormous as the Industrial RevolutionRevolution2. Understand new regulatory paradigm in the twenty2. Understand new regulatory paradigm in the twenty--first first centurycentury3. Develop a corporate climate strategy3. Develop a corporate climate strategy4. Measure and monitor your carbon footprint4. Measure and monitor your carbon footprint5. Develop a strategy for climate risk disclosure5. Develop a strategy for climate risk disclosure6. Conduct climate change due diligence6. Conduct climate change due diligence7. Develop a carbon offset strategy and portfolio7. Develop a carbon offset strategy and portfolio

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Step 1: Understand That We Are in the Midst of the Step 1: Understand That We Are in the Midst of the Emergence of a CarbonEmergence of a Carbon--Constrained EconomyConstrained Economy

Climate change regulation is and will drive us toward Climate change regulation is and will drive us toward a carbona carbon--constrained economyconstrained economy

The investment required over the next twenty years to The investment required over the next twenty years to achieve this transition will rise to trillions of dollars achieve this transition will rise to trillions of dollars

The changes required compare to the Industrial The changes required compare to the Industrial RevolutionRevolution

Companies must adapt to survive and gain Companies must adapt to survive and gain competitive advantagecompetitive advantage

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Step 2: Understand the TwentyStep 2: Understand the Twenty--First Century Regulatory First Century Regulatory Paradigm: Stakeholder EcosystemParadigm: Stakeholder Ecosystem

Company

Government RegulatorsPublic/

CommunityLenders

Employees

ConsumersPartners

InvestorsNon-governmental

Organizations

Competitors

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Step 3: Develop a Corporate Step 3: Develop a Corporate Climate StrategyClimate Strategy

Management and board of directors need to develop a Management and board of directors need to develop a strategy for dealing with a carbonstrategy for dealing with a carbon--constrained constrained economyeconomy

The following steps will provide the major elements of The following steps will provide the major elements of a corporate strategya corporate strategy

How do your business units reduce costs and find How do your business units reduce costs and find new revenue streams?new revenue streams?

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McKinsey Analysis of U.S. Greenhouse Gas McKinsey Analysis of U.S. Greenhouse Gas Abatement PotentialAbatement Potential

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Step 4: Measure Your Carbon FootprintStep 4: Measure Your Carbon Footprint

A corporate climate change strategy cannot begin A corporate climate change strategy cannot begin without understanding the type and volumes of without understanding the type and volumes of emissions from the various aspects of the enterpriseemissions from the various aspects of the enterprise

The World Resources Institute The World Resources Institute ((http://www.ghgprotocol.org/http://www.ghgprotocol.org/) provides protocols for ) provides protocols for measuring direct and indirect emissionsmeasuring direct and indirect emissions

Federal GHG reporting rules will provide the Federal GHG reporting rules will provide the mandatory system in 2009mandatory system in 2009

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Step 5: Develop a Strategy for Step 5: Develop a Strategy for Climate Risk DisclosureClimate Risk Disclosure

Current SEC regulations require environmental disclosure: Current SEC regulations require environmental disclosure: Management Discussion and Analysis, capital expenditures for Management Discussion and Analysis, capital expenditures for any environmental controls, and litigationany environmental controls, and litigation——all with materiality all with materiality thresholdthreshold

Development of a strategy for climate risk disclosure is Development of a strategy for climate risk disclosure is becoming an important corporate issue for directors and becoming an important corporate issue for directors and managmentmanagment

Proposed legislation to require SEC guidance and rules on Proposed legislation to require SEC guidance and rules on climate risk disclosureclimate risk disclosure

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Xcel and Dynegy Settlements with New York Attorney Xcel and Dynegy Settlements with New York Attorney General Require Climate Risk DisclosureGeneral Require Climate Risk Disclosure

The potential impact of present and probable future climate chanThe potential impact of present and probable future climate change ge regulation and legislation; regulation and legislation; ClimateClimate--change related litigation; change related litigation; Physical impacts of climate change; Physical impacts of climate change; Current carbon emissions; Current carbon emissions; Projected increases in carbon emissions from planned coalProjected increases in carbon emissions from planned coal--fired power fired power plants; plants; Company strategies for reducing, offsetting, limiting, or otherwCompany strategies for reducing, offsetting, limiting, or otherwise ise managing its global warming pollution emissions and expected glomanaging its global warming pollution emissions and expected global bal warming emissions reductions from these actions; and warming emissions reductions from these actions; and Corporate governance actions related to climate change, includinCorporate governance actions related to climate change, including g whether environmental performance is incorporated into officer whether environmental performance is incorporated into officer compensationcompensation

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Step 6: Conduct Climate Change Due DiligenceStep 6: Conduct Climate Change Due Diligence

Although uncertainty exists as to the details of climate change Although uncertainty exists as to the details of climate change legislation and greenhouse gas emission regulation, it appears legislation and greenhouse gas emission regulation, it appears likely they will come into effectlikely they will come into effect

Future climate change costs could be substantial for certain Future climate change costs could be substantial for certain types of companies and facilitiestypes of companies and facilities

Purchasers, lenders, and investors should begin conducting due Purchasers, lenders, and investors should begin conducting due diligence into the carbon footprint of all future mergers and diligence into the carbon footprint of all future mergers and acquisitions where greenhouse gas emissions could be acquisitions where greenhouse gas emissions could be significantsignificant

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Step 7: Develop a carbon offset Step 7: Develop a carbon offset strategy and portfoliostrategy and portfolio

As capAs cap--inin--trade goes into effect at the state and trade goes into effect at the state and national levels in the United States, cost reductions national levels in the United States, cost reductions will be essentialwill be essential

Purchasing carbon allowances and offsets may be Purchasing carbon allowances and offsets may be significantly less expensive than installing equipment significantly less expensive than installing equipment to reduce emissionsto reduce emissions

Carbon purchasing, trading, and hedging will become Carbon purchasing, trading, and hedging will become an essential process for major emitters, requiring a an essential process for major emitters, requiring a carbon trading deskcarbon trading desk

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Carbon Market Volumes & Values 2006Carbon Market Volumes & Values 2006--20072007

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Carbon Credit ProjectsCarbon Credit Projects

Fuel switching, e.g., coal to Fuel switching, e.g., coal to natural gas, or biomass for fossil natural gas, or biomass for fossil fuels;fuels;

Capture and flaring or other use Capture and flaring or other use of coalof coal--bed methane;bed methane;

Biofuels from waste oils (no Biofuels from waste oils (no approval yet for a biofuel from approval yet for a biofuel from agricultural crops);agricultural crops);

Projects related to biofuel Projects related to biofuel production (e.g., burning of production (e.g., burning of bagasse to produce electricity);bagasse to produce electricity);

Landfill gas to produce electricity Landfill gas to produce electricity or to put in natural gas pipeline; or to put in natural gas pipeline;

Energy efficiency, such as Energy efficiency, such as replacing boilers at refinery;replacing boilers at refinery;

Renewable EnergyRenewable Energy——wind, solar wind, solar energy, geothermal, and energy, geothermal, and hydropower;hydropower;

Cogeneration;Cogeneration;

Capture of CO2 from LNG, gas Capture of CO2 from LNG, gas processing plants, coalprocessing plants, coal--fired fired power plants and injection for power plants and injection for enhanced oil and gas recovery or enhanced oil and gas recovery or into saline aquifers; andinto saline aquifers; and

Avoided deforestation and Avoided deforestation and reforestationreforestation

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US Carbon MarketUS Carbon Market——Transitioning from Transitioning from Voluntary to Compliance MarketVoluntary to Compliance Market

Currently, only the Northeastern States under RGGI have started Currently, only the Northeastern States under RGGI have started a compliance marketa compliance market——first trades just recently occurredfirst trades just recently occurred

Current U.S. market primarily a “voluntary” marketCurrent U.S. market primarily a “voluntary” market——entities and entities and individuals voluntarily offsetting their carbon footprintindividuals voluntarily offsetting their carbon footprint

20 or more states developing cap20 or more states developing cap--andand--trade system and the trade system and the potential for a national cappotential for a national cap--andand--trade system is increasingtrade system is increasing

A significant portion of the U.S. voluntary market will quickly A significant portion of the U.S. voluntary market will quickly transcend into a compliance market for energy, chemical, transcend into a compliance market for energy, chemical, manufacturing, and transportation industriesmanufacturing, and transportation industries

Future U.S. mandatory or compliance market predicted to be Future U.S. mandatory or compliance market predicted to be anywhere from $100 billion to $300 billion per year by 2012anywhere from $100 billion to $300 billion per year by 2012--20142014

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ConclusionConclusionThe Obama Administration will The Obama Administration will

issue greenhouse gas reporting rules in 2009;issue greenhouse gas reporting rules in 2009;

push for cappush for cap--andand--trade climate change legislation in trade climate change legislation in 2009 or 2010;2009 or 2010;

move forward with capmove forward with cap--andand--trade regulation under the trade regulation under the CAA, if Congress does not pass legislation; andCAA, if Congress does not pass legislation; and

move forward with Postmove forward with Post--Kyoto negotiations.Kyoto negotiations.

The result will be a carbonThe result will be a carbon--constrained economy over constrained economy over the coming decadesthe coming decades

Companies should begin developing a climate change Companies should begin developing a climate change strategy to survive and seek competitive advantage in strategy to survive and seek competitive advantage in this new carbonthis new carbon--constrained economyconstrained economy

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Scott D. DeatheragePartner1722 Routh StreetSuite 1500Dallas, Texas 75201214-969-1206Scott.Deatherage@tklaw.com

Blog Sites:

“The New Carbon Cycle” http://lawandenvironment.typepad.com/newcarboncycle/

and

“Law and the Environment” http://lawandenvironment.typepad.com/