Fueling the Future The U.S. once ran entirely on coal and oil. But - - PDF document

Winter 2007

Fueling the Future

Synthetic fuels worked in the past. They may have a place now. p. 8 The economics of ethanol can work. And we don’t need corn to make it. p. 12 Greenhouse gas is a legal issue. Thank the polar bear. p. 21 Energy demand projected to 2030. Scenarios for what might be ahead. p. 19

Also Inside:

Coal Bed Methane • Financing Alternatives • Effjcient Buildings “Alternative” Investments • Global Warming The U.S. once ran entirely on coal and oil. But that is changing. New sources of energy that can power the economy are rapidly going

• nline. The energy choices have expanded to include biodiesel, ethanol

and synfuels. And we are learning to conserve by building more efficiently and using other choices, such as wind or solar.

Winter 2007

energy 21 CLIMATE

Coping with Carbon Dioxide

Greenhouse emissions are an issue in court rooms and board rooms.

T

he year just-ended, 2006, brought significant legal developments concerning global climate change (the trends observed in the warming of the earth’s surface temperature) that affect the energy sector in the United States and worldwide. This trend of increasing legal activity and policy debate surrounding the issue of climate change is a refmection of the ever-increasing at- tention focused on the issue by scientists, economists, advocacy and independent research groups, and policy makers here and abroad. The New Year now upon us promises even more signifjcant develop- ments in this area. Emissions of carbon dioxide (CO2), the most pervasive anthropologic green- house gas (GHG) in the atmosphere, represent about 84 percent of total GHG emitted in the United States. Most CO2 (98 percent) is emitted as a result of the combustion of fossil fuels such as coal,

• il, and natural gas. Consequently, CO2

emissions and energy use are highly cor-

• related. CO2 has a lifetime or residence

time of roughly 50 to 200 years, and is mixed throughout the lower stratosphere in relatively homogeneous concentra- tions everywhere along the surface of the earth. The legal and policy debate regarding the management of GHG emissions is playing out vibrantly in boardrooms, courtrooms, and statehouses across the

• country. For example, investors have

been demanding greater disclosure of GHG emissions and analysis of the as- sociated risks and opportunities; States and environmental advocacy groups have fjled lawsuits to compel the United States Environmental Protection Agency (USEPA) to regulate the emission of carbon dioxide under the Clean Air Act (CAA); States have banded together to establish regional regulatory programs to mandate GHG reductions from the energy sector; State Attorneys General have sued energy companies claiming GHG emissions are a common law nui- sance causing millions of dollars in dam- ages; and private litigants have sought to fjx responsibility for damages caused by severe weather on GHG emitters in the energy sector. These are just a few examples of the growing trend of legal action in this area that will continue to unfold in 2007, in addition to a widely expected increase in congressional at- tention to climate change in the 110th Congress—all of which raise signifjcant legal issues for energy companies and their counsel. The Polar Bear On December 27, 2006, the U.S. Fish and Wildlife Service (FWS) proposed list- ing the polar bear as threatened under the Endangered Species Act (ESA), due to melting sea ice caused by climate

• change. Interior Secretary Dirk Kemp-

thorne, said, “we are concerned the polar bears’ habitat may literally be melting.” The listing proposal follows a petition fjled by the Natural Resources Defense Council (NRDC) and other environmental groups asserting GHG emissions must be reduced to prevent the elimination

• f polar bear habitat by the end of the

century. The proposal to list the polar bear cites receding sea ice as the only signifj- cant threat to the species, and rules out

• ther potential factors, such as oil and

gas development and subsistence hunt- ing by Native Alaskans. Most of a polar bear’s life is spent on sea ice hunting for seals and other prey, and according to scientifjc observations, sea ice has been receding since 1978 in some areas of the Arctic Sea by nearly 10 percent per decade. The potential listing is signifjcant be- cause the ESA prohibits federal actions that are likely to harm a listed species

• r its habitat. Specifjcally, Section 7 of

the ESA requires all federal agencies to consult with the FWS and insure that any action the federal agency takes, “is not likely to jeopardize the continued existence of any endangered species

• r threatened species or result in the

destruction or adverse modifjcation of By John F. Spinello, Jr., Craig P. Wilson, Sandra Y. Snyder

About the Authors

John Spinello is a Partner in the Newark, NJ office of K&L Gates. His practice focuses on regulatory counseling, environmental litigation, and legislative and regulatory advocacy for clients that include power plants and chemical

• manufacturers. He may be reached john.spinello@klgates.com.

Craig Wilson is a Partner in the Harrisburg, Pa. office of K&L Gates. His practice is concentrated in the areas of environmental compliance counseling and transactional advice, environmental permitting, zoning and land development He may be reached at craig.wilson@klgates.com. Sandra Snyder is an Associate in the Newark, NJ office of K&L Gates. Ms. Snyder concentrates her practice in environmental and natural resources law and related litigation. Prior to joining K&L Gates, Ms. Snyder worked as a chemical engineer for ExxonMobil. She may be reached at Sandra.snyder@ klgates.com.

Reprinted from the 2007 Winter issue of Energy Magazine

22 energy Winter 2007 habitat of such species…” Listing the polar bear as a threatened species be- cause of global warming could provide a platform for third parties to challenge federal agency actions that would directly

• r indirectly impact the polar bear or its

habitat. For example, decisions allowing the burning of fossil fuel and the resulting release of GHGs to the atmosphere, such as clean air permits issued by the USEPA

• r Federal Energy Regulatory Commis-

sion (FERC) decisions relating to new fossil fuel plants, could be challenged. Secretary Kempthorne suggests that climate change policy would play out in

• ther forums, but the NRDC believes that

a positive listing decision will force action to reduce GHGs. The FWS will spend most of 2007 gathering information and completing additional analysis on the status of the U.S. polar bear population, approximately 4,700 bears in Alaska, before making a fjnal listing decision. An affjrmative decision would likely prompt more litigation under Section 7 of the ESA, and the focused attention in 2007

• n the fate of the polar bear may affect

future climate law and policy, whether or not the species is listed as threatened. Supreme Court Showdown In 2003, the USEPA denied a petition by the International Center for Technol-

• gy Assessment (ICTA), seeking the regu-

lation of GHG emissions from new motor vehicle engines pursuant to the Section 202(a)(1) of the CAA. The USEPA cited several bases for its decision, including its determination that Congress had not delegated to it the authority to regulate GHG emissions under the CAA for the purpose of addressing global climate change. When the ICTA appealed the Agency’s decision, a divided panel of the D.C. Cir- cuit Court of Appeals upheld the Agency’s decision, though each of the two Judges supporting the judgment expressed vastly different reasons for their decision and

• ne judge dissented. The Supreme Court

granted certiorari and oral argument was held in November 2006. Based upon the focus of the Court’s questions during oral argument, it is possible that the Court’s decision will turn on whether the plaintiffs had standing to bring the action at all, in which case the Court may not reach the merits

• f the case (ques-

tioning at oral ar- gument by Justice Kennedy, consid- ered a key swing vote, however, suggests that he might be leaning towards recogniz- ing standing). If the Court does reach the merits

• f the argument and proceeds to defjne

the limits of USEPA’s authority to ad- dress GHG emissions and climate change under the CAA, the decision will have far reaching implications. Most directly, if the Court fjnds au- thority under the CAA for USEPA to regulate GHG emissions, the agency and states undoubtedly would be pres- sured to develop regulatory programs addressing GHG emissions from motor vehicles and other sources. Moreover, if GHG emissions are found to be subject to regulation under the CAA, many public companies might need to reconsider how they treat such emissions for purposes

• f environmental disclosure under SEC

reporting requirements, GHG emissions might need to be considered in corporate transactional due diligence investigations, and the plaintiff’s bar would be further emboldened to raise nuisance and other claims stemming from alleged damages caused by climate change. Corporate Disclosure Federal securities laws require public companies to ensure investors have ac- cess to information about their fjnancial condition, including contingent liabilities, by fjling reports with the Securities and Exchange Commission (SEC). Generally, the SEC requires disclosure of informa- tion that is material to a company’s fjnan- cial position. Materiality is determined by a “reasonable person” standard with no concrete thresholds set by the SEC. SEC Regulations S-K Item 101 and Item 303 are especially relevant to the disclosure

• f GHG emissions or risks associated

with climate change. Item 101 requires disclosure of material effects that compli- ance with environmental law may have

• n capital expenditures, earnings, and

competitive position, including contin- gent effects. Item 303 requires discussion and analysis of currently known trends, events or uncertainties that are reason- ably expected to have a material impact

• n liquidity, capital, sales, revenue or
• income. Some companies have included

a discussion of climate related risks in S-K Item 303 fjlings, sometimes at the behest

• f shareholders, though the SEC has

never expressly required this for climate related risks. Since at least as far back as the Exxon Valdez oil spill in Alaska on March 24, 1989, environmental advocacy groups have rallied institutional investors to de- mand greater attention to environmental stewardship, and advanced principles for corporate governance intended to add a measure of transparency and account- ability to the way environmental obliga- tions are managed. Following the Valdez incident, a group that became known as the Coalition for Environmentally Re- sponsible Economies (CERES) advanced the “Valdez Principles,” which over time evolved into the CERES Principles. Since the early 1990s, CERES and similar

• rganizations have grown in number

and sophistication and become deeply

Plight of the polar bear opened the way to greenhouse litigation.

Winter 2007

energy 23

involved in the public debate over the ap- propriate response to climate change. For example, the Carbon Disclosure Project (CDP) and the Investor Network

• n Climate Risk (INCR) are networks
• f institutional investors and fjnancial

institutions dedicated to promoting bet- ter understanding of the fjnancial risks and investment opportunities posed by climate change. The CDP is an interna- tional coalition of institutional investors with $31 trillion in assets under manage-

• ment. INCR, organized by CERES, is

comprised of 50 large public pension funds and fjnancial institutions with over $3 trillion in assets under management. In addition, the Interfaith Center on Cor- porate Responsibility (ICCR) focuses on climate change and wide range of social issues, and is comprised of 275 faith based institutions with collective assets

• ver $110 billion.

In October 2006, CERES, INCR, CDP, and other investor groups released the Global Framework for Climate Risk Disclosure: A Statement of Investor Ex- pectations for Comprehensive Corporate

• Disclosure. The Framework is intended

to encourage standardized disclosure of risks associated with climate change, and establish a benchmark for successful, vol- untary, corporate climate disclosure. The Framework provides for the disclosure and analysis of the following elements:

• Historic and current GHG emissions
• Strategic analysis of climate risk and

emissions management

• Assessment of physical risks from

climate change

• Analysis of risk related to the regulation
• f GHG emissions

According to the Framework, the information provided is necessary for investors to analyze companies’ business risks and opportunities resulting from climate change, as well as the compa- nies’ efforts to address those risks and

• pportunities, and should be disclosed

through SEC fjlings and/or other existing reporting mechanisms. The Framework guide favorably cites AEP’s disclosure documents as examples of reporting. CERES also issued a report this year purporting to provide the fjrst compre- hensive examination of how the world’s largest corporations in carbon-intensive sectors are positioning themselves to address the risks of climate change. The report scores and ranks ten industry sectors and the major companies within those sectors according to a point system that considers issues of board oversight, management execution, public disclo- sure, emissions accounting and emissions management and strategic opportunities in the area of climate change. The de- velopment of this report, like the CERES Principles and the Framework, highlights the ever-increasing attention being paid by investor networks to the issue of cor- porate disclosure and governance on the topic of climate change. The attention of these investor net- works, of course, is sometimes un-

• welcome. For example, in December

2006, institutional investors—fjve New York pension funds and the Connecticut State Treasurer’s Offjce - fjled two “share- holders resolutions with the TXU Corp. regarding the company’s plan to build 11 new pulverized coal-burning power plants in Texas at an estimated cost of $10 billion.” The shareholder resolu- tions note that the new coal plants cause the company’s CO2 emissions to more than double, so the resolutions “request reports on how TXU is responding to rising regulatory pressure to signifjcantly reduce carbon dioxide emissions from power plants and how enhanced en- ergy effjciency programs in Texas could impact the company’s ability to sell its new power.” The Benedictine Sisters

• f Boerne, Texas fjled a third resolution,

requesting that TXU’s board of directors “adopt specifjc goals to reduce its CO2 emissions below 2004 levels and reduce mercury emissions to levels that are achievable using best available control technologies.” A (Growing) Band of States In September 2003, the Governors

• f nine New England and Northeast

States—Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New York, New Jersey, Rhode Island, and Vermont - announced the establishment

• f the Regional Greenhouse Gas Initia-

tive (RGGI) and their plans to develop a regional “cap and trade” program to reduce CO2 emissions from power plants located in the participating States. On December 20, 2005, seven Governors signed a Memorandum of Understand- ing (MOU) setting forth in detail how RGGI is designed to work. In addition, the District of Columbia, Massachusetts, Pennsylvania, Rhode Island, the Eastern Canadian Provinces, and New Brunswick are observers in the process. Under the MOU, each state is allocated a certain number of allowances, which total just over 121 million short tons of CO2 for the region. Generally, an allow- ance equals a ton of CO2. The program applies to each fossil-fuel fjred electric generating unit with a rated capacity of 25 or more megawatts, and launches on January 1, 2009, prior to which each State is to issue allowances to power pro-

• ducers. States participating in RGGI are

discussing allocating allowances through an auction. States are also required by the MOU to allocate at least 25 percent

• f its allowances for consumer benefjt or

strategic energy purposes. The fjrst three-year compliance period would conclude on December 31, 2011, when there would be a “true-up”: power plants that do not have enough allow- ances to match the amount of CO2 emit- ted during the three-year period would need to purchase allowances from other power plants in the RGGI system; power plants that have more allowances than needed to cover CO2 emissions for the compliance period may sell them. The MOU also identifjes limited opportunities to use off-set allowances—i.e., credit for CO2 emissions reductions achieved through actions taken in States outside

• f RGGI and within the United States.

Then, beginning in 2015, each State’s CO2 emission budget would decrease by 2.5% per year, through 2018 when each State’s budget would be 10 percent below its starting budget. RGGI staff published a draft model rule for the cap and trade program in March 2006, and fjnalized the model rule in August 15, 2006. Participating States must still adopt regulations, consistent with the model rule, to implement the RGGI cap and trade program in their respective States. New York was the fjrst to issue a pre-proposal of its regulations in December 2006.

24 energy Winter 2007 On the west coast, in September 2006, the California Legislature passed Assembly Bill 32, the California Global Warming Solutions Act of 2006, which requires the California Air Resources Board (CARB) to develop regulations and market mechanisms (e.g., a cap and trade program) to reduce California’s GHG emissions by 25 percent by 2020. In 2012, mandatory caps will begin to apply for signifjcant sources, ratcheting emissions down to meet the 2020 goals. In October 2006, California Governor Schwarzenegger met in New York with then Governor Pataki and discussed California’s participation in the RGGI

• program. Governor Schwarzenegger

later signed an executive order directing CARB to link the California program with RGGI, and possibly other state and regional cap and trade programs. The creation of regulatory programs by individual states to reduce GHG emissions in their respective states raises relatively few legal issues, save for the question of whether the applicable state law permits the regulation of such emissions (CO2 may not be regarded as a pollutant or air contaminant in a traditional sense and prevention of climate change may not be an appropriate subject of regulation under some state statutes). Far more signifjcant legal issues arise, however, when states act together in support of a common regional approach. Such collec- tive actions may implicate the Compact Clause of the United States Constitution, which provides, “No State shall enter into any Treaty, Alliance or Confederation… No State shall, without the Consent of Congress, lay down any duty of Tonnage, keep Troops, or Ships of War in Peace time, enter into any Agreement or Com- pact with another State or with a Foreign power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.” Not every agreement between states is a compact requiring congressional

• consent. The United States Supreme

Court has held that the Compact Clause is limited to agreements that are “directed to the formation of any combination tending to the increase of political power in the states, which may encroach upon

• r interfere with the just supremacy of the

United States.” The Supreme Court has further held it does not matter whether an agreement is formal or informal, and it is suffjcient to require congressional con- sent if there is the potential for the agree- ment to threaten federal supremacy. The potential for RGGI to encroach upon federal supremacy may arise in several contexts, but none so clear as the President’s exclusive authority to direct foreign policy. The President’s prerogative to direct foreign policy without interference by States was under- scored in the Supreme Court’s decision in American Insurance Association v. Garamendi, holding a California statute requiring disclosure of information about Holocaust-era insurance policies to be preempted as in conflict with agree- ments negotiated by the United States and thus an impermissible interference in the President’s prerogative to conduct foreign policy. In reaching this result, the Court observed that “our thoughts

• n the effjcacy of one approach versus

the other are beside the point, since our business is not to judge the wisdom of the National Government’s policy; dis- satisfaction should be addressed to the President, or, perhaps, Congress. The question relevant to preemption in this case is confmict, and the evidence here is ‘more than suffjcient to demonstrate that the state Act stands in the way of [the President’s] diplomatic objectives.’” USEPA has noted the consistent con- centration of GHGs around the earth’s surface means reducing the emission of GHGs in one part of the world (or part

• f a country) will have no effect on cli-

mate, unless the entire world emits fewer GHGs; and the President, of course, is the only offjcial properly posititioned to represent the United States in interna- tional negotiations for a global approach to climate change. Taking It to Court Given the President’s current approach to the issue internationally, it seems likely that the growing regional regulatory ap- proaches being adopted by groups of states will be challenged as violative of the Compact Clause and in confmict with the power of the President to conduct foreign policy. In 2005, several State Attorneys Gen- eral and environmental advocacy groups sued American Electric Power (AEP) and several other power companies alleging the GHGs their plants emitted are a com- mon law nuisance, contributing to global climate change and causing millions of dollars in damages to their respective

• states. The U.S. District for the Southern

District of New York ruled that the causes and regulation of greenhouse gas emis- sions are “political questions” beyond the court’s jurisdiction. The plaintiffs’ appeal of the decision is currently pend- ing in the U.S. Court of Appeals for the Second Circuit and is likely to be decided in 2007. Similarly, in September 2005, several individuals and a putative class who sus- tained property and other damages as a result of Hurricane Katrina, have sued their insurance carriers for denial of cov- erage, and, in the same action, also sued a host of energy companies for allegedly emitting the GHGs that caused the severe weather and the damages they sustained. Companies sued include Murphy Oil, U.S.A.; Chevron/Texaco Corporation; and ExxonMobil Corporation. This mat- ter is pending in the U.S. District Court for the Southern District of Mississippi. Congressional Focus In the 109th Congress, Senators Li- eberman and McCain introduced, Senate Bill No. 139, the Climate Stewardship and Innovation Act of 2005, that would establish a national cap and trade pro- gram for GHG emissions. Efforts to move this bill were defeated last year by the Republican-controlled Senate. Sena- tors Lieberman and McCain are likely to reintroduce this bill in the 110th Con- gress, which will be led by the Democrats’ Senate Majority Leader Harry Reid and Speaker Nancy Pelosi. Senator Barbara Boxer (D-Calif.), will chair the Senate Environment and Public Works Com- mittee in the 110th Congress; Senator Jeff Bingaman of New Mexico will Chair the Energy and Natural Resources Com-

• mittee. Both of these senators plan to

introduce legislation concerning climate

• change. Senator Boxer has said she will

press for legislation like that enacted in California in September 2006. Boxer

Winter 2007

energy 25

also promises to conduct “intensive hear- ings on global warming.” In the House, Rep. Henry Waxman (D-Calif.), the incoming chairman of the House Government Reform Committee, introduced a bill in the 109th Congress to freeze total U.S. greenhouse gas emis- sions at 2009 levels beginning in 2010, followed by 2 percent annual reductions through 2020. However, Rep. John Din- gell (D-Mich.), who will chair the Energy and Commerce Committee in the 110th Congress, said the committee will “have a look at” legislation that would set manda- tory cuts in greenhouse emissions. Conclusion The year ahead will be an active and per- haps pivotal one in the evolution of climate change law and policy in the United States. Our scientifjc understanding of GHGs and

• ther infmuences on climate will further

develop with the release of assessments undertaken through the Climate Change Research Initiative, Congress will hold hearings and focus attention on national climate change policy, and the Supreme Court may defjne the outer limits of federal authority to regulate GHG emissions. In addition, States are likely to face legal chal- lenges as they launch regional regulatory programs that clash with national foreign policy, and investor networks will continue to press the SEC and individual compa- nies for greater disclosure and analysis

• f climate risks, and private litigants will

continue to target GHG intensive industries for “damages” allegedly caused by GHG emissions. At the same time, it is unlikely Congress will enact a major new regulatory regime for GHG emissions in 2007, even less likely the President will alter his position, and the Supreme Court may not decide the merits of the case before it and dismiss the matter on procedural grounds. In this respect, the year ahead may presage more signifjcant developments in 2008 and beyond. Nevertheless, even if 2007 ends without major breakthrough develop- ments, the substantial activity expected to take place in courthouses, statehouses and boardrooms across the country will inalter- ably shape and defjne future climate law and policy in the United States.

SHIPPING & HANDLING In the U.S. we ship via UPS free of charge with any paid order. Delivery is in two to five days. Requests for express delivery will be charged at

• cost. Nonpaid orders will be charged shipping. Outside the U.S., please

pay $50 to cover the cost of express delivery by courier service. ORDERS FROM OUTSIDE THE U.S. Please send a draft payable in U.S. dollars drawn on an American bank. Please see shipping and handling box for overseas shipping costs. MULTIPLE ORDER DISCOUNTS are available, please call our sales group at 1-866-285-7215 or e-mail sales@bccresearch.com. ADDITIONAL PRINT COPIES OF REPORTS (same report title) 2nd copy is $875; all other additional copies are $350, delivered to same address. ELECTRONIC COPIES OF REPORTS Single User—Offers 1 PDF and 1 printout of the report Single Site—Offers 1 PDF shared with colleagues at a single site with up to 200 employees and 5 printouts Enterprise—Provides access through company intranet, unlimited printouts of the report for the entire organization, and 1 bound report for the corporate library.

Prices Subject to Change

Name Title Company Address City State Zip Code Country Telephone No. Fax No. E-mail:

Code: SC TO ORDER NOW, CALL 1-866-285-7215 or FAX 203-229-0087. ❏ Send me additional information on

Enter my subscription to:

❏ Energy Magazine @$395/year ❏ Battery & EV Technology News @$550/year ❏ Fuel Cell Technology News @$550/year ❏ Send me a catalog of all BCC Research publications. ❏ Send me Report No.

Title Price:

Send to: BCC Research, 70 New Canaan, Avenue, Norwalk, CT 06850 U.S.A.

BCC Publications

Samples available at www.bccresearch.com

❏฀ CHECK ENCLOSED $

(CT add 6% tax). Please make check payable to BCC Research.

Overseas please add $50.00 per annual subscription for Airmail.

❏฀ CHARGE ME (please check one) ❏ American Express ❏ Optima

❏ Discover ❏ MasterCard ❏ Visa ฀ ฀฀฀฀฀ ฀ ฀฀฀฀ ฀ ฀฀฀฀฀ Expiration Date /

• Mo. Yr.

❏ BILL ME P.O. No.

Card No. Signature

Internet: www.bccresearch.com • E-mail: sales@bccresearch.com

FUEL CELL TECHNOLOGY NEWS

The advent of the fuel cell will transform the energy industry. From major automakers to huge utilities, planners are already integrating the fuel cell into their long-range strategies and some market analysts predict that fuel cells will become a billion dollar market in the next decade. This new BCC monthly newsletter covers the latest news in fuel cell development and manufacturing, major types of fuel cells (alkaline, molten carbonate, phosphoric acid, solid oxide, and proton exchange membrane), tracks new applications by industry and follows major players. The newsletter also keeps its read- ers informed about key patents, regulations, catalysts and reformers, transportation developments, utility applications, portable power and energy policies. www.bccresearch.com/letters A monthly newsletter, $550.00 per year Keeps you current on trends in materials, technology, systems, concepts: who is making, buying, testing, and using what; government and private procurements; the stiff competition encountered by U.S. companies from Europe and Japan; technical breakthroughs, recent national and international patent abstracts and all technical conferences and meetings; pertinent updates on manufacturers of batteries and EVs and the vital raw materials neces- sary in their production; product comparisons and listings of the manufacturers, suppliers and markets; and generating facilities and portable power generating systems. www.bccresearch.com/letters A monthly newsletter, $500.00 per year

BATTERY & EV TECHNOLOGY