President-Elect Obama´s Climate Change And Clean Energy Initiatives: The Risks And Opportunities Posed By The Greening Of The American Economy

"When I am President, any governor who's willing to promote clean energy will have a partner in the White House. Any company that's willing to invest in clean energy will have an ally in Washington. And any nation that's willing to join the cause of combating climate change will have an ally in the United States of America." – November 18, 2008

With these words in one of his first taped public addresses after the election, President-elect Barack Obama re-affirmed his campaign commitments to invest in alternative and renewable energy and address global climate change in the hope of moving toward energy independence and creating millions of jobs. Since the election, the President-elect has stated that energy security will be one of his top priorities after addressing the immediate economic crisis. This article surveys some of the more significant proposals in Presidentelect Obama's comprehensive New Energy for America plan (the "Plan"),¹ as it has evolved through the transition, and how some of these proposals may create business and investment risks as well as new opportunities.

The Plan is a comprehensive package of incentives and policies designed to tackle global climate change, foster clean energy and reduce American dependence on foreign oil. If implemented, many of the initiatives should foster investment in clean technology and renewable energy businesses. In light of the current economic turmoil, the President-elect has indicated that, in the near term, his focus will be on a green stimulus package offering incentives for renewable energy and energy efficiency and investment in infrastructure projects. The timing of the implementation of the initiatives in the Plan is uncertain. The central proposals in the Plan include:

• Cap-and-Trade: The Plan supports a mandatory, economy-wide greenhouse gas cap-and-trade program, pursuant to which all emission allowances would be auctioned (rather than freely allocated). Placing a price on carbon will create incentives for many businesses to install clean technologies to reduce carbon emissions and decrease electricity usage, thereby encouraging investment in clean technology and renewable energy sectors.

• Clean Energy Incentives: The Plan supports a number of incentives and policies designed to promote clean energy, including a federal renewable portfolio standard requiring that a certain percentage of electricity be derived from renewable energy, expansion of the federal Production Tax Credit for renewable energy, clean coal technology, nuclear energy with safe nuclear waste storage and incentives for cleaner, more fuel-efficient automobiles.

• Energy Efficiency: The Plan supports a number of initiatives designed to encourage energy efficiency, including setting an aggressive energy efficiency goal to reduce electricity demand by, for example, improving building and appliance energy efficiency standards, and investing in a smart grid, using smart metering, distributed storage and other advanced technologies to improve electric grid reliability and security.

This week, President-elect Obama named his top energy and environmental advisors, including: Steven Chu, a Berkeley scientist and Nobel laureate, as Secretary of Energy; Lisa Jackson, the Commissioner of the New Jersey Department of the Environment, as the Environmental Protection Agency ("EPA") Administrator; Nancy Sutley, the deputy mayor of Los Angeles for energy and environment, as Chair of the White House Council on Environmental Quality; and Carol Browner, a former head of the EPA, as Assistant to the President for Energy and Climate Change, who will coordinate White House climate change and energy policy. These advisors will be responsible for promoting and implementing the new administration's climate and clean energy policies set forth in the Plan.

Climate Change Initiatives: Cap-and-Trade

Unlike the outgoing Bush administration, which has generally been viewed as unaggressive on climate change issues, President-elect Obama has consistently stated that the US must be a leader on the climate change front. Towards that end, the Plan supports implementation of an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80% below 1990 levels by 2050. A cap-and-trade program sets an overall limit on emissions on covered sources and creates a system under which rights to emit ("allowances") are allocated or auctioned to individual covered sources, which can then trade the allowances among themselves. Companies do not have individual limits, but must hold sufficient allowances to cover their emissions. Under the Plan, all allowances would be auctioned (rather than freely allocated based on a facility's historic greenhouse gas emissions). By auctioning the allowances, the capand- trade program would generate significant revenue, a small portion of which ($15 billion per year) would be used to support the development of clean energy and to invest in energy efficiency, which, in turn, will help meet emission reduction targets.

In light of the deepening financial crisis, however, many commentators believe that it is unlikely that Congress will pass comprehensive cap-and-trade legislation before 2010. A key Obama energy policy aide has suggested that, in the absence of quick Congressional action, President-elect Obama may encourage the EPA to regulate greenhouse gas emissions pursuant to the federal Clean Air Act. In 2007, the US Supreme Court held in Massachusetts v. EPA that greenhouse gas emissions from motor vehicles are air pollutants within the meaning of the Clean Air Act and ordered the EPA to determine whether greenhouse gases endanger public health and are, therefore, subject to regulation under the Clean Air Act. Because federal agencies have been unable to reach a consensus regarding an endangerment finding, the EPA instead published an Advance Notice of Proposed Rulemaking in July 2008, detailing the complexities involved in any attempt to regulate greenhouse gas emissions pursuant to the Clean Air Act. Many commentators have suggested that the new administration may use the threat of Clean Air Act regulation of greenhouse gas emissions as a catalyst to Congressional action on cap-and-trade.

President-elect Obama's continuing commitment to greenhouse gas regulation – whether through a capand- trade program or through Clean Air Act regulation – represents a fundamental shift to a carbon constrained economy, which presents both risks and opportunities for many sectors of the economy. Some of the costs associated with a cap-and-trade program will be direct, particularly if all greenhouse gas emission allowances are auctioned, requiring covered facilities to purchase emissions allowances and/or invest significant amounts installing technologies to reduce their greenhouse gas emissions. Many of the costs associated with a cap-and-trade program, however, will be indirect, as the prices of electricity and natural gas are likely to rise if utilities must pay for their carbon emissions. The National Association of Manufacturers has estimated that a cap-and-trade bill would result in an increase in the price of electricity of 28% to 33% by 2020. These direct and indirect costs would be borne primarily by significant greenhouse gas emitters (e.g., coal-fired power plants) and intensive electricity users. Opponents of cap-and-trade programs argue that such costs may result in "leakage" – the movement of manufacturing operations to developing countries with little regulation of greenhouse gas emissions.

However, the implementation of a cap-and-trade program also presents opportunities. By placing a price on carbon, a market-based cap-and-trade system ultimately encourages covered industries to employ technological innovation and other methods to decrease emissions and energy usage. Thus, the clean energy sector stands to benefit significantly from any implementation of a cap-and-trade program in the US, as companies are likely to invest in renewable energy and clean technologies (such as carbon capture and storage) to decrease the direct and indirect costs associated with placing a price on carbon.

In addition to opportunities for clean tech companies, implementation of an economy-wide, US cap-andtrade presents a number of opportunities relating directly to carbon markets – both with respect to the market for emission allowances and the market for carbon offsets. A carbon offset is a measurable reduction, removal, or avoidance of greenhouse gas emissions from a source that is not covered by a capand- trade program that is used to compensate for emissions from sources subject to the program. The US voluntary carbon offset market has grown rapidly in recent years – in part, in anticipation of a mandatory US cap-and-trade program. Although President-elect Obama's stance with respect to carbon offsets is unclear, many of the federal cap-and-trade bills proposed to date have followed the example of the European Union's cap-and-trade program, pursuant to which facilities can satisfy a portion of their compliance obligations with carbon offsets. In recent years there has been growing criticism of carbon offsets, primarily on the basis that such offsets are not truly "additional" (i.e., beyond a business-as-usual scenario in which an offset project would have occurred even in the absence of revenues generated by selling offset credits) and, therefore, can undermine the environmental integrity of a cap-and-trade system as non-additional projects do not represent a net decrease in emissions. In the US, criticism of the voluntary carbon offset market has also focused on its lack of (a) transparency, (b) uniform standards to ensure the credibility of offsets, (c) a central trading platform or registry system, and (d) federal regulatory oversight.² Despite the criticism, a number of large financial institutions have purchased stakes in companies that develop, market, sell and/or verify carbon offsets to take advantage of this growing carbon offset market.

Clean Energy Initiatives

President-elect Obama has proposed a number of initiatives to promote clean energy. In the medium and long term, the proposals should be good news for the clean tech and renewable energy sector as the federal government pumps money into the sector and imposes regulatory policies and requirements to promote development of the sector. The Plan calls for the investment of $150 billion over 10 years in the clean energy economy, including investments to promote the development of commercial scale renewable energy, the generation of biofuels and infrastructure to support renewable fuels, the development of clean coal technology, the transition to a new digital electricity grid, and the acceleration of commercialization of plug-in automobile hybrids. The $150 billion for clean energy programs was initially to be generated by auctioning carbon credits pursuant to a proposed cap-and-trade program. Because a cap-and-trade scheme in the US is unlikely to be implemented for at least several years, President-elect Obama's advisors and Congressional officials working with the incoming administration recently have indicated that the new administration will not wait for the passage of climate change legislation before embarking on a green stimulus package that would include spending on clean energy and infrastructure. The green stimulus package could include tax breaks or direct government subsidies for various clean energy projects, including solar panels, wind farms, biofuels, and carbon capture and sequestration from coal-burning power plants. Below is a summary of some of the Plan's more salient proposals meant to promote the clean energy sector, as revised during the transition.

Renewable Portfolio Standard: The Plan proposes a 10% federal Renewable Portfolio Standard ("RPS") that would require 10% of electricity consumed in the US be derived from renewable energy, such as solar, wind and geothermal, by 2012, and 25% by 2025. More than half the states already have adopted RPS's with targets of varying aggressiveness. Many states have failed to meet their targeted goals, which utilities attribute to the stop-and-start federal tax incentives for renewable power and, more significantly, the difficulty in building transmission lines and obtaining permits to build solar stations and wind farms. If a national RPS is implemented, the necessity for better power transmission would become even more critical, as electricity would need to be moved from rural areas with abundant wind and sunshine to powerconsuming cities.

Production Tax Credit: The Plan also proposes the extension of the federal Production Tax Credit ("PTC") for 5 years to encourage the production of renewable energy. The PTC reduces renewable energy producers' tax burden by 1.5 to 2 cents per kilowatt hour, depending on the type of energy produced. Shorter extensions (1-2 years) of the PTC were authorized pursuant to the Energy Improvement and Extension Act of 2008, which was part of the Emergency Economic Stabilization Act of 2008 (the bailout legislation passed in October 2008). The PTC for wind and refined coal facilities was extended for 1 year (until January 1, 2010); the PTC for solar, geothermal, biomass and certain other qualified facilities was extended for 2 years (until January 1, 2012). The October bailout legislation also extended the 30% investment tax credit for solar and small wind power for 8 years. Although extending tax credits is intended to provide a boost to the renewable energy industry, the tax credits must be applied against income and, therefore, do little to foster growth in the industry if renewable energy companies are unable to remain profitable in the current recession. In order to replace tax-credit dependent financing, some commentators have suggested that in the near term renewable energy companies will need to (i) see the debt markets revive or (ii) continue to attract equity investment from venture capital and private equity funds. In recent years, venture capitalist and private equity firms have accounted for most of the booming growth in renewable energy investment, and many fund managers have indicated that the tight credit market will result in more opportunities. For example, many commentators have suggested that clean tech stocks were overvalued in 2007 and the correction in clean tech stock values in 2008 will make privately held clean tech companies more attractive M&A targets, particularly if such companies are unable to convince their investors to provide additional financing and the IPO climate remains inhospitable in 2009.

Clean Coal Technology: The Plan supports the development and deployment of clean coal technology, including the commercialization of carbon capture and storage technologies. Toward this end, Presidentelect Obama intends to provide incentives to accelerate private sector investment in commercial scale zerocarbon coal plants and instruct the Department of Energy ("DOE") to enter into public/private partnerships to develop 5 commercial scale coal-fired power plants with carbon capture and sequestration technology.

Nuclear Energy: President-elect Obama has indicated that the US is unlikely to be able to meet its climate goals if nuclear power (which currently accounts for more than 70% of non-carbon generated electricity) is eliminated as an option. However, the President-elect has expressed concerns regarding the security of nuclear fuel and waste, waste storage, and proliferation and, as a senator, introduced legislation to address these concerns. The Plan indicates that the new administration intends to lead federal efforts to find safe, long-term disposal solutions, and that Yucca Mountain – the controversial proposed storage site – is not suitable for nuclear waste storage.

Automobile Industry: The Plan emphasizes that it is imperative both for national security and environmental reasons that America's almost total dependence on oil to power its vehicles comes to an end. To promote energy independence, the Plan proposes a number of initiatives aimed at reducing consumption of oil, including:

• Increasing fuel economy standards by 4% each year;

• Investing in (i) the development of advanced vehicles, including plug-in hybrid/flexible fuel vehicles and (ii) advanced vehicle technology with a focus on R&D in advanced battery technology;

• Establishing a $7,000 tax credit for the purchase of advanced technology vehicles as well as conversion tax credits;

• Providing $4 billion in incentives, such as retooling tax credits and loan guarantees, to assist domestic auto plants and parts manufacturers in building fuel-efficient cars;

• Mandating that all new vehicles are flexible fuel vehicles;

• Investing federal resources, including tax incentives and government contracts, in developing the most promising biofuel technologies and building the infrastructure to support them; and

• Establishing a National Low Carbon Fuel Standard, requiring fuel suppliers in 2010 to begin to reduce the carbon content of their fuel by 5% within 5 years and 10% within 10 years.3

Since the election, President-elect Obama has firmly stated his intention to move ahead with an ongoing effort to shift automakers toward the production of more fuel efficient vehicles and has linked the auto industry's current financial woes to a failure to transition towards smaller, "greener" vehicles.4 The Bush administration recently provided General Motors and Chrysler with $17.4 billion in emergency loans that automakers plan to use to restructure their businesses with greater emphasis on the production of fuelefficient vehicles. Lawmakers are expected to negotiate the terms of a long-term bailout package for the auto industry next year, and the President-elect has proposed that any such bailout package be conditioned on a commitment from the automakers to manufacture vehicles with greater fuel economy.

Energy Efficiency Initiatives

Noting that the US is only the 22nd most energy efficient country among major economies, the Plan includes a number of initiatives designed to promote energy efficiency. Energy efficiency, sometimes described as the "fifth fuel" (after oil, coal, gas and nuclear), is often the most cost-effective and quickly deployable method of reducing carbon emissions and promoting energy security. Energy efficiency measures (e.g., weatherization of buildings) can also be labor-intensive and, therefore, are likely to be included as part of any green stimulus package designed to create green jobs. The Plan's energy efficiency initiatives include:

• Establishing an aggressive energy efficiency goal to reduce electricity demand 15% below DOE's projected levels for 2020 by (i) setting annual demand reduction targets that utilities must meet (thereby reducing the incentive of utilities to increase profits from increased energy usage), (ii) setting more stringent building standards, with the goal of making all new buildings carbon neutral by 2030 and improving new building efficiency by 50% and existing building efficiency by 25% over the next decade, (iii) increasing energy efficiency in federal buildings, and (iv) overhauling DOE appliance efficiency standards; and

• Investing in a smart grid – a national utility grid using smart metering, distributed storage and other advanced technologies – to improve electric grid reliability and security. Towards this end, the new administration plans to establish a Grid Modernization Commission to facilitate the adoption of smart grid practices and directing the Secretary of Energy to (i) establish a Smart Grid Investment Matching Grant Program, (ii) conduct programs designed to deploy smart grid advanced technologies, and (iii) establish demonstration projects focused on smart grid advanced technologies.

Oil and Gas Production Initiatives

The Plan indicates that US oil and gas production is critical to the domestic economy and prevention of escalation of global energy prices and recommends a number of steps to increase production, including:

• Employing a "Use it or Lose it" approach to existing oil and natural gas leases by requiring oil companies to develop existing leases diligently or turn them over to another company;

• Promoting drilling in and production of (i) Bakken Shale in Montana and North Dakota, (ii) unconventional natural gas supplies in the Barnett Shale formation in Texas and the Fayetteville Shale in Arkansas; and (iii) the National Petroleum Reserve in Alaska;

• Facilitating construction of the Alaska Natural Gas Pipeline; and

• Providing incentives for greenhouse gas emitters to send their carbon dioxide to oil fields to help enhance oil recovery.

Initiatives Targeted at Energy Costs

The Plan contains a number of initiatives targeted at short-term relief from the soaring energy costs of the first half of 2008. Since the election, the price of crude oil has dropped from its high of approximately $145 per barrel this summer to its current low of approximately $40 per barrel, and the transition team has confirmed that at least one of the initiatives (a windfall tax on oil company profits) has been dropped from the Plan. However, President-elect Obama continues to support several proposals relating to controlling current energy costs, including releasing light oil from the US Strategic Petroleum Reserve and replacing it later with heavier crude oil as a short-term fix to increase gasoline supplies and, thereby, drive down the price per gallon. In addition, President-elect Obama has put forward a plan to address speculation on the energy markets, which some commentators believe have exacerbated energy cost increases. The 4-part "Obama Plan to Crack Down on Excessive Energy Speculation" includes:

• Closing the "Enron loophole" in Commodity Futures Trading Commission regulations, which exempts some energy traders from regulations that govern other commodities, and increasing the transparency of the energy commodities market by requiring disaggregated data on index funds and other passive investments;

• Ensuring that US energy futures cannot be traded on unregulated offshore exchanges;

• Working with other countries to coordinate regulation of oil futures markets in order to avoid excessive speculation in commodities futures markets; and

• Encouraging the Federal Trade Commission and Department of Justice to investigate market manipulation of oil futures.

Conclusion

President-elect Obama has shown continuing commitment to tackle climate change issues and promote clean energy. In the short term, in light of the current economic turmoil, the Obama administration is likely to focus on a green stimulus package, offering incentives for renewable energy and energy efficiency and investment in infrastructure projects. Although comprehensive federal climate change legislation is unlikely to pass in 2009 (or perhaps even 2010) and implementation of a federal cap-and-trade program will likely take several more years, President-elect Obama has not backed off his pledge to address the global climate change crisis and his support for an economy-wide cap-and-trade program. In the meanwhile, companies and investors should prepare for the eventuality of doing business in a carbon constrained economy and position themselves both to limit the costs and to take advantage of the opportunities associated with placing a price on carbon. Many of these opportunities will revolve around renewable energy and green technologies, and businesses within these sectors may be able to monetize their investments in this sector through direct sale or the IPO market when such market reopens.

Footnotes

1 The New Energy for America plan is available at http://www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf, and a bullet summary of the plan as of the transition period is available at http://change.gov/agenda/energy_and_environment_agenda/.

2 Certain of these criticisms could be addressed by a properly structured mandatory cap-and-trade program. Concerns with respect to the credibility of the offset market are summarized in several recent reports issued by the General Accounting Office. See GAO, Carbon Offsets: The US Voluntary Market is Growing, but Quality Assurance Poses Challenges for Market Participants (August 28, 2008); GAO, Lessons Learned from the European Union's Emissions Trading Scheme and the Kyoto Protocol's Clean Development Mechanism (November 18, 2008).

3 In addition, Obama expressed support during the campaign for the efforts of more than 15 states to impose vehicle greenhouse gas emission limits that were more stringent than federal standards. Earlier this year, the EPA refused to grant California the waiver necessary to allow it to implement these more stringent standards. Many observers believe that the new administration will reverse the EPA's decision either by executive order or through a renewed decision-making process by the EPA, which will grant similar waivers sought by other states.

4 Pursuant to the Energy Independence and Security Act of 2007, Congress authorized $25 billion in federally subsidized loans to assist certain domestic automakers (General Motors, Ford and Chrysler) to retool their operations to produce advanced, fuel efficient vehicles capable of meeting new federal fuel economy regulations. Congress provided funding for the loans in September 2008.

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