1 Climate Change Regulatory Initiatives M-AGG Workshop (Market Mechanisms for Agricultural Greenhouse Gases) Davis, California June 10, 2010 Nico van Aelstyn

2 First, a Pop Quiz Multiple choice question: What is most likely to lead to comprehensive greenhouse gas regulation? A, B, C or D?

3 Answer A...

4 Answer B...

5 Answer C...

6 or Answer D?

7 Citing the Gulf Spill Disaster, Obama Vows to Push for Climate Bill In a speech at Carnegie Mellon University in Pittsburgh on June 2, Obama linked the Gulf oil spill, which he called "the worst environmental disaster of its kind in our nation's history,” to his new push for the Kerry-Lieberman climate bill. "The votes may not be there right now, but I intend to find them in the coming months." He demanded that Congress “finally put[] a price on carbon pollution” in order to transition to clean energy by getting the private sector fully invested.

8 Congressional Initiatives Cap-and-Trade (legislative – market tools) vs. command-and-control (administrative – no market tools) June 10 Senate to debate Murkowski resolution to undo EPA’s “endangerment finding” and prevent it from regulating GHGs under Clean Air Act –Needs 51 votes to clear Senate using Congressional Review Act, which establishes special procedures to undo agency rules. –40 co-sponsors, including three Democrats: Sens. Landrieu of Louisiana, Lincoln of Arkansas and Nelson of Nebraska Kerry-Lieberman’s American Power Act – a 987-page “discussion draft” unveiled May 12 –EPA analysis of Kerry-Lieberman postponed to June 14

9 Kerry-Lieberman Climate Bill 7 GHGs Covered: The “Kyoto six” –– carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) –– plus nitrogen trifluoride (NF3). EPA given authority to designate more through rulemaking. Overall Targets: Requires 4.75% reduction in GHG emissions below 2005 levels by 2013; 17% reduction by 2020 (same as Waxman-Markey, passed June 2009); 42% reduction by 2030; and 83% reduction by Coverage: Four sectors of the economy; approximately 7,500 entities expected to be regulated. Preemption: State cap-and-trade programs preempted, and EPA regulation of GHGs is largely preempted. Allowance Allocation: Much greater distribution of free allowances than Waxman-Markey or Kerry-Boxer; decreasing over time to 100% auctioning of allowances by 2030

10 KL: Sectors Covered by the Cap 1)Electric Power Sector  all generators covered regardless of size; begins 2013  Allowance distribution at split favoring historic emissions vs. retail sales (50/50 under Waxman-Markey + Kerry-Boxer) 2)Industrial Sector  Coverage varies by size (25,000 MTCO2e) and type; about 75% of emissions covered  Coverage begins 2016 (except refiners; they begin 2013)  Indirect carbon factor coverage begins 2013  Int’l Reserve Allowance Program to prevent leakage (beginning 2020) 3)Residential/Commercial Sector  Midstream coverage via natural gas distributors  Allowance distribution pro rata per retail deliveries; revenue from free allowances intended for benefit of rate payers

11 KL: Sectors Covered by the Cap 4)Transportation Fuels Sector  Coverage starts in 2013  Applies to suppliers and importers of refined products, not direct emissions from refineries  Some allowances distributed to refineries (Sec. 796)  Under the cap but no trading allowed  Instead, allowances to be purchased from EPA’s set-aside reserve at prices set quarterly  Puts a price on carbon but removes some volatility  Less liquidity and no access to cost containment mechanism of offsets; likely to drive up price of carbon

12 KL: Market Structure Price Collar –between $12 (increasing annually at 3% + CPI) and $25 MTCO2e (increasing annually at 5% + CPI) 2-year rolling compliance period, unrestricted allowance trading, unlimited banking, limited borrowing within 5 year period with 8% interest and 15% compliance limit Auction and primary cash market limited to compliance entities (i.e., those under the cap) and some market makers Short sales banned

13 KL: Cost Containment Mechanisms Offset limit 2 billion MTCO2e/yr –50-50 split between domestic and int’l (really if enough domestic offsets available) Each covered entity may use its proportional share of the offset pool Offsets could satisfy 63% of each facility’s compliance obligation from (much higher than Waxman-Markey) USDA overseeing forestry and agriculture projects, EPA in charge of the rest Very limited recognition of early action emission reductions

14 Domestic Offsets in KL Overall, closely follows Stabenow approach (S.2729) Domestic offsets credited 1:1; international offsets 1.25:1, discounting as in Waxman-Markey Requires "standardized methodologies" with priority for established protocols 2009 start date for projects, though can be retrospective to 2001 if developed under on approved program Requires third-party verification by accredited verifier Early action offsets (pre-2009) can be credited from set- aside (1% of pool each of first 3 years=140m x 1/3 = 45m, though shared with entity reductions credits); credit based on market value during

15 EPA Initiatives Under Clean Air Act (a.k.a. command-and-control) Endangerment Finding: Endangerment and Cause or Contribute Findings, Dec. 15, 2009 (74 Fed. Reg ) Background: –Petition by states and environmental groups to regulate GHG emissions from new motor vehicles and engines. –Massachusetts v. EPA, 549 U.S. 497 (2007) –Court directed EPA to make a determination under Section 202(a)(1) of the Clean Air Act: “The Administrator shall by regulation prescribe... standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.”

16 Related EPA Initiative September 22, 2009: EPA’s final Mandatory Reporting Rule for GHG Emissions (published in Fed Reg October 30, 2009)) –FY2008 Consolidated Appropriations Act (H.R. 2764; Public Law 110 – 161) required EPA to promulgate a rule requiring mandatory reporting of GHG emissions from large sources in the United States. –To collect comprehensive emissions data to inform future policy –Aimed at known major sources of GHG emissions. –Annual emissions monitoring and reporting beginning in 2009 Specific monitoring requirements vary by source type. –Does not replace state or regional reporting programs. –WCI published Harmonization Proposal May 28, 2010

17 Primary EPA Initiative Under the Clean Air Act June 3, 2010 Final Tailoring Rule published (75 Fed Reg 35,514) (“Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule”) Establishes phased implementation plan “tailoring” stationary source permitting (PSD and Title V) for GHG emissions Limits number of sources affected via new GHG permitting requirements beginning January 2, 2011 when GHG becomes a regulated pollutant under EPA interpretation Intended to reduce massive permitting burdens on previously unregulated sources

18 Overview of Tailoring Rule Implementation Structure Phased Implementation –Step One: January 2, 2011 – June 30, 2011 –Step Two: July 1, 2011 – June 30, 2013 –Step Three (and beyond): July 1, 2013 – April 30, 2016 “GHG” expressed as Carbon Dioxide Equivalent (“CO 2 e”) –Kyoto 6 covered (CO 2, CH 4, N 2 O, HFCs, PFCs, and SF 6 ) –CO 2 e translates emissions of gasses other than CO 2 into CO 2 e by using the gasses’ global warming potential (“GWP”) –Total GHG emissions are the sum of CO 2 e emissions of all six regulated GHGs

19 Step One January 2, 2011 – June 30, 2011 No source would be subject to permitting due solely to GHG emissions. PSD: Sources otherwise subject to PSD (i.e., newly constructed or modified in a way that significantly increases emissions of a regulated pollutant other than a GHG) may be subject to permitting and BACT analysis if net GHG emissions increase by 75,000 tpy CO 2 e or more. TITLE V: Sources currently subject to Title V (i.e., major sources for a pollutant other than a GHG) will be subject to Title V requirements for GHG emissions.

20 Step Two July 1, 2011 – June 30, 2013 PSD: –Modifications: PSD will apply to modifications at existing facilities if the facility emits 100,000 tpy CO2e and the modification increases net GHG emissions by at least 75,000 tpy CO 2 e. –New construction: PSD will apply to new construction if the facility will emit at least 100,000 tpy CO 2 e. TITLE V: Operating permits will apply to facilities that emit at least 100,000 tpy CO 2 e.

21 Step Three (To Be Determined) July 1, 2013 – April 30, 2016 EPA will consider streamlining options, results of Step Two, and resources of permitting agencies to determine the feasibility of additional phasing and regulation of more sources. EPA commits itself to issue a “supplemental notice of proposed rulemaking” in 2011, concluding no later than July 1, 2012, to address requirements of Step Three phasing. 40 C.F.R. § The Final Rule would take effect July 1, To the extent EPA reduces the thresholds for Step Three, permitting requirements will not apply to sources emitting less than 50,000 tpy of GHG.

22 Step Three, Cont’d Step Three rulemaking will also consider other “streamlining options” to reduce permitting burdens. –Permanent exemptions for small sources (based on “absurd results”) –Narrowing definition of “potential to emit” for various source categories (so that amount of a source’s emissions that counts toward the threshold is closer to amount of actual emissions rather than emissions that the source would emit if under continuous operation) –Establishing emission limits for various source categories that constitute presumptive BACT –Exploring general permits and permits-by-rule (large numbers of similarly situated sources covered by same permit) –“Empty permits” issue –Electronic permitting –Applying “lean techniques” to establish more efficient permitting processes

23 Beyond Step Three Step Three slated to end April 30, 2016 EPA intends to complete a study by April, 2015 assessing burdens of applying GHG permitting to smaller sources. Future will be addressed by 2016 rulemaking Possible requirements for sources emitting < 50,000 tpy CO 2 e (depending on future rulemaking)

24 Permitting Steps *Source: EPA Office of Air Quality Planning and Standards. **The reason for the “NA” next to “new source” is unclear because the Step 1 requirements apply to “existing or newly-constructed sources” that exceed the GHG thresholds. 40 C.F.R. § 52.21(b)(49). ***75,000 is only part of the Step 2 trigger – the source must first emit 100,000 tpy CO2e, then the modification must result in an emissions increase of at least 75,000 tpy CO2e. 40 C.F.R. § 52.21(b)(49). ** ***

25 Burden Reduction CAA sets threshold for PSD and BACT requirements at 100 or 250 tpy of a regulated pollutant. Regulations have lower thresholds for major modifications (e.g., 40 tpy for O 3 and SO 2, and 15 tpy for PM 10 ). Title V applies to sources that emit at least 100 tpy of a regulated pollutant. According to EPA, existing thresholds are not practicable for GHGs which are emitted at much higher levels than criteria pollutants. Without the Tailoring Rule, GHG regulation would trigger at lower emissions levels (covering a massive number of sources).

26 PSD Permitting Burden Reductions *Source: EPA Office of Air Quality Planning and Standards

27 No Exemptions At This Time EPA declined to grant exemptions for specific GHG sources, emission activities, or types of emissions: –Agricultural sources –Residential sources –Small businesses –Energy-intensive industrial processes –Lime production –Semiconductor production –Poultry production –Solid waste landfills –Biomass combustion / biogenic emissions –Fugitive emissions –Pollution control projects

28 Thanks! Nico van Aelstyn