Worldwide: Environment 2013: Climate Issues

Last Updated: February 14 2013
Article by D. Cameron Prell, Neal J. Cabral and Dana P. Palmer

Despite uncertainty over what additional action the United States might take regarding climate change, many businesses, financial institutions, U.S. states and other countries are moving forward to address climate issues in various ways. Nations around the world (including the United States) have previously agreed to negotiate a new legally binding international climate agreement by 2015 for the post-2020 period. Ahead of that timetable, several nations, including China, are setting up market-based emissions reduction programs to address carbon. Other new climate policies, markets, public- and private-finance mechanisms and programs to invest in low carbon technologies are launching, set for reform or expected to undergo major development in 2013. Businesses will also continue to integrate climate risk and reporting into their core business operations. The following is an overview of some key developments.

United States (Federal)

  • President Obama is likely to discuss potential climate change actions in his upcoming State of the Union address, particularly EPA's forthcoming proposal to regulate emissions from existing fossil fuel power plants under Sec. 111(d) of the Clean Air Act (CAA). Regardless of how aggressive the standard(s) are, or how flexible the compliance options may be for states, the proposed rule will stoke intense debate on the efficacy of employing existing regulatory authority under the Clean Air Act. For more information see our previous update Environment 2013: Clean Air Act Issues.
  • The Obama administration is expected to continue clean fuels and energy technology procurement programs for the Department of Defense (DOD) and General Services Administration (GSA), as well as low carbon investment support internationally through the Export-Import Bank of the United States and the Overseas Private Investment Corporation (OPIC). The administration also continues efforts to implement sustainability and climate adaptation plans for federal agencies.
  • The Obama administration will continue to pursue trade disputes with China and other countries over renewable energy technology imports, and may seek to negotiate bilateral investment treaties with one or more countries that focus on clean energy and low carbon technologies.
  • New climate legislation may be drafted and debated through the Senate Environment and Public Works (EPW) Committee, although there is little chance such legislation will come up for a vote before the full Senate. Committee Chairwoman Barbara Boxer (D-Calif.) plans to hold multiple hearings on climate, and a group of senators and members of Congress has set up a new climate task force. Apart from a new climate bill, energy legislation – which may include measures such as energy efficiency, transmission for renewables and other low carbon provisions – is expected to emerge in some form in the Senate. Issues such as energy efficiency development and financing, establishment of a federal clean energy trust fund or other federal green bank, developing climate risks standards for insurance companies and public companies, additional clean technology research and development, and energy tax reform may all be added to energy bills in 2013. While potential passage is unlikely, creation of a clean energy standard or development of a sector-based carbon tax may also be discussed on some level.
  • At the state level, issues associated with state public utility commissions' development of new rules and programs for demand-side management, distributed generation ratemaking and additional infrastructure development will be debated.

California

  • In January 2013 the state of California launched the first economy-wide GHG cap-and-trade program in the United States that will ultimately cover 85 percent of the state's emissions and affect every business operating in the state. The program, implemented pursuant to the California Global Warming Solutions Act of 2006 (AB32) is second in size only to the European Union Emissions Trading Scheme (EU-ETS), and thus far the market prices in California far exceed the current EU-ETS price.
  • California's implementation of AB32 has withstood several direct litigation challenges, but aspects of the legislation may face additional new challenges in 2013.
    • In late January 2013, a superior court judge rejected a challenge to the California Air Resources Board's (ARB) authority to establish a performance-based offsets regime.
    • In November 2012, just prior to the first market auction held by ARB, a suit was filed by the California Chamber of Commerce arguing that the allowance auction constituted an unauthorized tax.
    • A successful challenge to the California Low Carbon Fuel Standard (LCFS) – another program under AB32 and a key component, along with a renewable mandate, for meeting the state's overall GHG reduction goals – is currently on appeal before the U.S. Court of Appeals for the 9th Circuit. The lower court found, among other things, that the LCFS violated the dormant Commerce Clause of the U.S. Constitution because of the way that lifecycle GHG impact accounting treated out-of-state LCFS producers. A decision is expected in early 2013.
    • If the lower court LCFS decision is affirmed by the 9th Circuit, many suggest there is a risk that a similar commerce clause or other challenge will be brought against the provisions of the cap-and-trade program that govern imported electricity.
    • Moreover, some are forecasting potential litigation before the Federal Energy Regulatory Commission (FERC) or in court over Federal Power Act issues and aspects of the California cap-and-trade program that impact the deregulated energy market or the larger Western Electricity Coordinating Council (WECC) region, including jurisdictional authority of ARB to administer the imported electricity program and bundled energy rate impacts.
  • ARB will continue to revise the final program regulations in 2013 to supplement rules relating to emission reduction offsets, as well as likely approving new offset types. Offsets play a crucial cost-containment role as the market price for allowances arguably increases during the second compliance phase when transportation fuels become covered. ARB has also re-proposed rules to "link" the California program to a similar cap-and-trade program being developed by the Canadian province of Quebec.

Regional Greenhouse Gas Initiative (RGGI)

  • On Jan. 7, 2013, the nine northeastern U.S. states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont) participating in the Regional Greenhouse Gas Initiative (RGGI) GHG cap-and-trade program for the electric utility sector announced an Updated Model Rule.
  • The Model Rule intends to reduce the 2014 "cap" by 45 percent from 165 million to 91 million tons. The reduction will significantly tighten the compliance obligations for RGGI, but will also certainly generate a more robust carbon market that will compliment state energy and energy efficiency activities. Of note, the Connecticut Clean Energy and Investment Authority intends to take several actions in 2013 to act as a model for state "green banks" in the United States, focusing on loan guarantees and support for energy efficiency financing, and potentially using RGGI carbon market auction proceeds for additional funding.

Overseas Carbon Markets

In 2012, it was the best of times and the worst of times for carbon markets. Carbon pricing mechanisms (cap-and-trade or tax) have been enacted, launched or are in process of being designed in at least 35 countries around the world. The European Emissions Trading Scheme (EU-ETS) – the largest and, until 2013, flagship carbon program in the world – fell victim to several program design flaws and the reduction in carbon emissions as a result of the economic crises. Carbon prices for the EU-ETS have as a result gone through protracted meltdown. Measures are currently being considered by the European Commission to try and address the structural reforms need to reinvigorate the program, which the EU has extended until 2020. In part because of the collapse of the EU-ETS, the international offsets regime created by U.N.-led Clean Development Mechanism (Kyoto Protocol) also continued to suffer due to falling market demand through the linkage to the EU-ETS.

In contrast to problems in the European market, the volume and growth of carbon markets globally has never been higher. In addition to existing programs in Japan and New Zealand, several new carbon market launch plans are underway in a number of countries, including several key emerging economics. Most notably, plans were announced by China to develop pilot regional carbon cap-and-trade programs in key provinces, including Hubei, Guangdong and the city of Beijing.

Australia also joined those countries establishing market-based systems to limit carbon emissions by launching a sweeping climate and clean energy program. This effort has become a key flashpoint in upcoming national elections, and those results bear watching.

Europe

  • The EU-ETS was established in 2003 by Directive 2003/87/EC and started operation in 2005. As noted, the allowance and offset prices in the EU-ETS have suffered in 2012 and into 2013 because of the economic downturn as well as the financial crises rocking countries throughout the EU, but also because of an over-supply of emission permits available in the market due to program design flaws. To address this situation, a proposal to "backload" emission permits and improve the function of the market is currently before the European Commission for approval.
  • In October 2012, the European Commission approved the United Kingdom's launch of the world's first Green Investment Bank. The bank began operations shortly thereafter, and intends to provide funding to energy and energy efficiency projects around the world.
  • In December 2012, the European Commission rescinded plans to add the aviation sector as regulated under the EU-ETS, which would have obligated international carriers to cover the emissions associated with travel into the EU. The plan was withdrawn because the International Civil Aviation Organization (ICAO) pledged to design and implement a global market-based regime to regulate GHGs from air carriers. A similar effort is underway for the shipping industry through the International Maritime Organization (IMO).

China

  • In June 2011, China announced it would seek to implement pilot carbon trading systems in several regions throughout the country and use the experience to establish a national system between 2015 and 2020. In January 2013, officials announced that the province of Hubei would implement its carbon market by June 2013.

Australia

  • On Nov. 8, 2011, Australia gave final approval to the government's Clean Energy Future climate change plan, which provided for an array of measures to reduce GHG emissions and drive clean energy investment. The program initially launched in 2012 as a fixed-price carbon tax that, if continued, would transition into a market-based cap-and-trade system.
  • On Aug. 28, 2012, the Australian government and the European Commission announced plans to "link" their respective carbon markets beginning in 2015.

Mexico

  • On June 5, 2012, Mexico enacted its General Climate Change Law, which sets up numerous agencies to develop and drive national climate policy. The program includes the establishment of a climate fund to leverage private capital.

South Korea

  • In May 2012, the South Korean parliament approved legislation to create an emissions trading system that would regulate specific companies and commence in 2015. The program legislation is part of South Korea's "Green Growth Strategy."

Brazil

  • Brazil passed climate change legislation in 2009. The legislation set a range of policies in motion to reduce GHG emissions by up to 39 percent below business-as-usual projected emissions in 2020. In 2012, the state of Rio de Janeiro announced plans to launch a cap-and-trade program in 2013. Regulated entities may be able to comply through the purchase of forestry carbon credits generated by the state of Acre in Brazil or otherwise linked to the international effort to develop a forestry sector regime known as the Reducing Emissions from Deforestation and Degradation (REDD+).

India

  • Effective April 1, 2012, the government of India launched the first phase of its energy efficiency trading program (known as the Perform, Achieve and Trade program, or PAT). The program sets target energy consumption caps for regulated companies/facilities. Over-complying entities can trade excess efficiency credits to other entities. The first phase runs through 2015. The PAT program is in addition to the national renewable energy credit mechanism and electricity feed-in tariff.

Multilateral Climate Negotiation

  • Expectations were low for the annual climate negotiations taking place in Doha, Qatar, in December 2012, expectations that were just barely exceeded.
  • The major notable agreement to come from the meetings was the extension of the Kyoto Protocol for a second compliance period (2013-2020) and continuation of the Clean Development Mechanism.
  • The second highlight was the progression of the Durban Platform, a negotiating track to develop a new "bottoms-up" agreement by 2015 for the period after 2020 that would contain broad-based commitments from participating countries.
  • Doha also helped move the ball forward with the development of common climate risk reporting standards and technical guidelines for country-by-country National Adaptation Plans (NAPs).
  • One of the major disappointments in Doha was the lack of progress to resolve several structural issues relating to launching the REDD+ regime for forest conservation.

Climate Finance

  • A few years prior to the Doha meetings, the parties agreed to develop the Green Climate Fund (GCF), which would seek to provide billions to developing countries for climate mitigation and adaptation efforts.
  • The GCF board was established and met twice in 2012 to discuss preliminary issues. In 2013, GCF governance and design issues will be negotiated by the board over a series of meetings starting in March in Berlin. An issue of particular note at these GCF board meetings will be enabling the GCF to leverage available funds and attract sizeable amounts of private capital for low carbon investments. The Private Sector Facility (PSF), as it is known in part, would be a part of the GCF governance structure and could develop dedicated financial instruments to help mitigate financial risk and streamline private investment in energy, infrastructure and efficiency projects around the world.
  • The Doha meetings saw little additional progress on other climate finance initiatives, although several European countries pledged additional funding for projects in the post-2012 period.
  • Several international finance institutions (IFIs) moved ahead with separate climate funds, including the Climate Investment Funds (CIFs), which are comprised of two trust funds – the Clean Technology Fund and the Strategic Climate Fund. The CIFs deployed modest amounts to projects in 2012. IFIs are also pioneering integration of climate risk metrics and performance standards for funded projects.
  • The process to develop the third revision to the Equator Principles (known as EP3) began in 2012 with the final release slated for early 2013. EP3 is a set of principles based on International Finance Corporation performance standards. Private sector banks voluntarily agree not to provide "project related loans and project finance advisory services to projects where the borrower will not, or is unable to comply with" the EP3 guidelines. Nearly 80 private banking institutions around the world have adopted the Equator Principles. EP3 extends the principles to corporate loans and bridge loans and strengthens sustainability reporting obligations for projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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