Environmental Reform Climate Change Update VCEDA Annual Business Outlook Conference October 15, 2010 Sharon Rubalcava Alston + Bird

Are you concerned about your company’s ability to comply with AB 32? 1.Yes 2.No 3.Not Sure 4.Does Not Apply

Are you delaying decisions about whether to expand your business in California due to uncertainty over AB 32 and its future effects? 1.Yes 2.No 3.Not Sure 4.Does Not Apply

Overview Greenhouse gases and their sources AB 32 and ARB regulations Proposition 23 Federal regulation of greenhouse gases

What are Greenhouse Gases? Carbon dioxide (CO2) Methane Nitrous oxide Hydrofluorocarbons Perfluorocarbons Sulfur hexafluoride

Sources of GHG Emissions (CA) 2004

AB 32 and ARB Regulations

Global Warming Solutions Act of 2006 (AB 32) Reduce GHG to 1990 levels by 2020 California Air Resources Board (CARB) to promulgate regulations

The Baseline/Target (MMTCO2e/year) Estimated 1990 inventory: average emissions:469 Projected 2020 emissions from “business as usual”:596 Reductions required:169 30% reduction below “business as usual”

Early Action Measures 44 measures Projected reductions of 43MMTCO2e/yr Adopted regulations to be enforceable by January 2010

ARB Scoping Plan Energy efficiency programs Renewables portfolio standard California cap-and-trade program (linked to Western Climate Initiative)

Cap and Trade Electricity generation Large industrial sources Transportation fuels (by 2020) Commercial and residential NG (by 2020)

Cap and Trade Program Enforceable cap beginning 2012 Cap declines to 2020 State distributes “allowances” Limited use of offsets Proposed for adoption by end of 2010

Proposition 23

Add H&SC §38600 (a) From and after the effective date of this measure, Division 25.5(commencing with section 38500) of the Health and Safety Code is suspended until such time as the unemployment rate in California is 5.5% or less for four consecutive calendar quarters. (b) While suspended, no state agency shall propose, promulgate, or adopt any regulation implementing Division 25.5(commencing with section 38500) and any regulation adopted prior to the effective date of this measure shall be void and unenforceable until such time as the suspension is lifted.

Effect of Prop. 23* Would suspend AB 32 for years –Since 1970, only 3 periods when unemployment less than 5.5% for 4 quarters Would “likely suspend” cap and trade, LCFS, renewable energy goals, and AB 32 fees Would “probably not” suspend new vehicle standards, solar roof programs, SB 375, or energy efficiency standards * Legislative Analyst Analysis

Issues with CA AB 32 Program Can CA businesses comply and remain in business? –CA businesses already most energy efficient –Energy costs substantially higher –Added costs of production may not be able to be passed on to consumers –Loss of jobs at crucial time

Issues with CA AB 32 Program Will only CA businesses be required to reduce GHG? –Federal legislation uncertain –Other state programs being delayed Cap and trade –Allocation or auction of credits? –If businesses must buy credits, will they have any money for projects to reduce GHG? How will CA spend the money if credits are auctioned? Will it be used to reduce GHG or go to the general fund?

Issues with CA AB 32 Program If you can’t reduce your GHG emissions should you be able to buy offsets (reductions created elsewhere)? –Should there be any limit on amount of offsets? –Should there be geographical limits? –Are offset creation procedures too onerous/time consuming? –Can offsets from other programs be used?

Issues with CA AB 32 Program Leakage -- If CA businesses fail, will GHG emissions increase as demand is met by production at less efficient facilities elsewhere? Will there be sufficient tools in place to monitor the effect of the program on our economy so that corrections can be made if necessary? –Energy/fuel costs and availability –Employment data

Federal Regulation of GHG

Federal Climate Change Legislation House -- Waxman-Markey (American Clean Energy and Security Act) passed June 26, 2009 Senate -- Kerry-Lieberman (American Power Act) Legislation highly unlikely this year Long term prospects unclear

Federal Regulation of GHG Reporting of GHG emissions Vehicle emission standards Permits for stationary sources

GHG Reporting Requirements Fossil fuel burning facilities with GHG > 25,000 tpy Reporting begins in 2011 Also, upstream fuel suppliers and GHG other than CO2

Regulation of Vehicle GHG Emissions EPA and DOT National Highway Traffic Safety Administration adopt Light-Duty Vehicle Rule –Cars and light duty trucks –Tailpipe standards/fuel efficiency –Model years EPA beginning rulemaking for model years (heavy duty trucks and light-duty vehicles)

Permits for Stationary Sources Existing Clean Air Act PSD program for new “major” sources and modifications to existing sources will be applied to GHG-emitting sources PSD permits must consider GHG beginning January 2, 2011 (BACT = energy efficiency)

Title V Permits Jan. 2, 2011 – Sources requiring permits for non- GHG emissions must include GHG regulations July 1, GHG >100,000 tpy must get permit (~550 sources not otherwise required to have a Title V permit) Phase 3 – Rulemaking to consider permits for sources > 50,000 tpy

Environmental Review of New Projects Many new projects being challenged for failure to analyze GHG emissions and effect of climate change on the project (e.g. effect of sea rise, severe climate) NEPA – CEQ Guidance (projects with “meaningful emissions” must do a climate change analysis) CEQA –Numerous challenges to EIRs –Court decisions require review, including quantification –Guidance documents by state and local agencies

What does it all mean? California and other states are leading the nation in the absence of federal legislation All sectors of the CA economy will be affected Energy efficiency will be key – costs of energy will increase Planning will be crucial to identify and reduce your company’s carbon emissions

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