Reed Smith Client Alerts

The oil spill in the Gulf of Mexico has increased the chances that Congress will send energy-related legislation to the President's desk before the midterm congressional elections in November. We note that last year the House of Representatives passed and sent to the Senate H.R. 2454, the American Clean Energy and Security Act of 2009, which sets goals for reducing emissions of greenhouse gases, including carbon dioxide, by a cap-and-trade system. The Senate has now gotten involved, with Majority Leader Reid (D-NV) soliciting proposals from Senate committees with jurisdiction on energy issues by the July 4 congressional recess. In addition, Republican and Democratic Senators recently met with the President to discuss compromise measures. Given the debate, and divisions, on climate change, it is not clear whether a cap-and-trade system for greenhouse gas emissions will ultimately be included in an energy bill that reaches the President's desk. However, if Congress fails to act in this area, it remains possible that the Environmental Protection Agency ("EPA") will step in and use its authority under the Clean Air Act (42 U.S.C. 7401) to create a cap-and-trade program. EPA has already taken several steps to regulate Green House Gases ("GHGs"). However, with climate legislation uncertain challenges to EPA's ability to regulate GHG's also mount. If Congress or EPA does not create a federal cap-and-trade program, a variety of existing state initiatives may fill the void.

The following Client Alert discusses the efforts to enact energy measures and where the fault lines lie in the ongoing debate. A thorough understanding of the actions both in Congress and the Obama Administration is required to understand the interplay of both legislation and regulations, and the opportunity that exists to address their impact within both the legislative and executive branches. Reed Smith's Public Policy & Infrastructure Practice, in collaboration with its Environmental Practice, has been monitoring energy and climate change deliberations throughout the 111th Congress, and is available to discuss how to develop an immediate lobbying strategy, as well as a longer-term effort that works with both Congress and the Obama Administration.

Energy and Climate Change Measures in the 111th Congress

Waxman-Markey's Cap-and-Trade System

There have been a number of energy and climate change proposals in the House of Representatives and the Senate in the 111th Congress. The one that has gotten the most traction so far is H.R. 2454, sponsored by Congressmen Henry Waxman (D-CA-30) and Edward Markey (D-MA) ("Waxman-Markey"). Waxman-Markey sets goals for reducing emissions of greenhouse gases, including carbon dioxide, from stationary sources, including industry and electric utilities, in several increments through 2050. By 2050, emissions would have to be reduced to 17 percent of 2005 levels. The EPA would be required to set annual greenhouse gas emissions limits, or "caps," to achieve these reductions, beginning in 2012. Those that emit pollution less than allowed under the caps will be given permits that they can then trade to others who exceed the caps, also known as "emissions allowances." Waxman-Markey would set a floor on the cost of allowances at $10 per ton (in 2009 dollars) and allow it to increase by 5 percent annually with the expectation that it would reach $28 per ton by 2025.

The legislation also sets standards for the amount of energy that electric utilities must generate from renewable resources and electricity savings – 6 percent of a utilities energy "portfolio" must come from combined renewable resources and savings by 2012, 20 percent by 2020. It also provides large investments to the "green" economy, authorizing $100 billion over 10 years for hybrid cars, biofuel development, increased alternative energy use, and smart grid power.

Finally, it sets national energy efficiency requirements for residential and commercial building construction. Waxman-Markey passed the House of Representatives more than a year ago, on June 26, 2009, and was sent to the Senate, but by the slimmest of margins – only six votes.

Kerry-Lieberman's Version of Cap-and-Trade

As noted above, Senator Reid has asked committee chairs to provide energy proposals to him before the July 4 recess. His intention is to bring legislation to the Senate floor shortly thereafter. Of the proposals currently under discussion, only one has a mandatory cap-and-trade system comparable to Waxman-Markey. The American Power Act, proposed by Senators Kerry (D-MA) and Lieberman (I-CT) ("Kerry-Lieberman") proposes a comparable cap-and-trade program in place. Both have almost identical emissions targets, hoping to cap greenhouse gas emissions by 17 percent below 2005 levels by 2020 and 80 percent below 2005 levels by 2050. For those who emit less pollution, there would be a market for the trading of emissions comparable to what is established under Waxman-Markey. Kerry-Lieberman, however, does put a "price collar" on emissions allowances, specifically referring to allowance prices that start at $12 per ton and are capped at $25 per ton (but increased annually for inflation). The goal is to keep the prices for allowances affordable and thus keep them within reach for domestic industries.

Kerry-Lieberman authorizes $70 billion over 10 years for clean transportation, renewable energy, and advanced nuclear and coal technology, comparable to Waxman-Markey. Kerry-Lieberman, however, provides a number of incentives for the development of such technology; for example, it expedites the construction approval process for nuclear power facilities and gives beneficial grants and funding for plant operators.

Also different from the Waxman-Markey bill, the Kerry-Lieberman proposal includes provisions that allow for domestic offshore drilling, a provision that many believe is part of a larger effort to garnish Republican support for the bill. By allowing states to reap 37.5 percent of the revenues from drilling off of their coast, the leadership behind the American Power Act hopes to substantively initiate a reduced dependence on foreign oil. In terms of setting specific standards for renewable energy, the Waxman-Markey bill suggests 15 percent renewable electricity and 5 percent total energy efficiency by 2020, along with 75 percent new building efficiency by 2030, taking into account new lighting and appliance efficiency standards. Kerry-Lieberman, however, proposes the imposition of state-level standards, arguing that claiming to adhere to national standards will produce results that are weaker than anticipated. Kerry-Lieberman also creates transitioning programs that, if successful, will offset the projected cost of energy increase in the transition from an economy dependent on fossil fuels, to one incorporating alternative energy sources. This program, targeted toward the low-income individuals, would be funded by a portion of the auction revenues from cap-and-trade allowances. Finally, the Kerry-Lieberman proposal also seeks to curb the authority of the EPA in its ability to regulate greenhouse gases under the Clean Air Act.

Competing Senate Measures Do Not Include Cap-and-Trade

There is no indication that the Kerry-Lieberman cap-and-trade measure enjoys the support of a majority of Senators. It is not a bi-partisan measure – the one Republican who initially supported the measure and worked with Senators Kerry and Lieberman, Senator Graham (R-SC), has withdrawn as a supporter of the bill. In addition, a number of Senate Democrats either sponsor or support other measures, which do not include cap-and-trade. In a White House meeting on Tuesday with other Senators, Senators Kerry and Lieberman acknowledged this and indicated the willingness to compromise on their bill. If they do, a number of competing measures could be incorporated. For example, S. 2877, the Carbon Limits and Energy for America's Renewal Act ("CLEAR ACT"), sponsored by Senators. Cantwell (D-WA) and Collins (R-ME), would put a "cap-and-refund" plan in place for carbon emissions. Carbon and other greenhouse gases would still be capped at increasing limits (20 percent by 2020, 83 percent by 2050). However, permits to exceed the caps would not be sold on the private market but instead auctioned by the government. 75 percent of proceeds would go to consumers to offset energy cost increases, and 25 percent of proceeds would help to further reduce greenhouse gas emissions. This would, according to the bill's sponsors, remove any involvement by Wall Street in setting the price of permits. In addition, Senator Lugar's (R-IN) Practical Energy and Climate Plan, S. 3464, would cut emissions by more than 20 percent by 2030 by conservation and efficiency measures such as reducing the need for foreign oil by 40 percent by 2010, and cutting energy use by 11 percent by 2030. Senator Graham, who initially supported the Kerry-Lieberman legislation, has expressed his support for the Lugar bill. A recent proposal by Senator Bingaman (D-NM), the chair of the Senate Energy and Natural Resources Committee that would cap GHGs from just the electricity sector, may garner some Republican backing for a version of the Kerry-Lieberman bill, and it is reported that Senator Snowe (R-ME) is interested in it.

A piece of legislation that would stall any action by the EPA on reducing greenhouse emissions (EPA action discussed further below) has been introduced by Senator Rockefeller (D-WV). S. 3072, the Stationary Source Regulations Delay Act, would delay any EPA action on greenhouse gas emissions for two years. However, its fate could follow that of a Resolution by Senator Murkowski (R-AK) that would have prohibited the EPA from taking any action on greenhouse gas regulation. S.J. Res. 26. On June 10, 2010, it failed to pass the Senate by a vote of 47-53.

S. 1462, the American Clean Energy Leadership Act

S. 1462, the American Clean Energy Leadership Act, sponsored by Senator Bingaman, is likely to be the initial vehicle for Senate debate; i.e., it will be the first bill to reach the Senate floor, and any other measure, including Kerry-Lieberman, would need to be offered as an amendment to it. The bill focused on increased overall energy production and efficiency in the United States, while also addressing issues of research and development, new technology, and energy market protection. This legislation, if successfully implemented, will quicken the pace at which clean energy technologies are developed and introduced to Americans, and will greatly increase energy efficiency in homes, government and corporate buildings, appliances, and equipment so that consumers don't bear the burden on costs that come from excess energy waste. The legislation also taps into more than 20 trillion cubic feet of clean natural gas resources, as part of an attempt to reduce domestic reliance of foreign energy sources. Finally, the bill encourages domestic investment in research and development with a four-year plan to double investment in energy innovation to $6.6 billion. On June 17, 2009, the Senate Energy and Natural Resources Committee passed S.1462 by a bi-partisan vote of 15-8.

Actions Taken by the EPA

The Endangerment Finding

On December 7, 2009, in response to the decision of the Supreme Court in Massachusetts v. EPA, 549 U.S. 497 (2007) that GHGs were air contaminants, the Administrator of EPA made two distinct findings regarding GHGs. The first ("the Endangerment Finding") is applicable to stationary and mobile sources and concludes that six well-mixed GHGs – carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, perflurocarbons and sulfur hexafluorides in the atmosphere – threatened the public health and welfare of current and future generations. The second finding was that these same GHGs, when emitted from new motor vehicle engines, threaten public health and welfare. See Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202 of the Clean Air Act, final Rule, 74 Fed. Reg. 66496 (December 15, 2009). The Endangerment Findings and subsequent actions by EPA are widely seen as a message to Congress that the Obama Administration will act to curb GHG emissions from stationary sources, if Congress does not. The Endangerment Finding has the effect of triggering EPA action under the stationary source provisions of the Clean Air Act. The Endangerment Finding has come under attack both through petitions to reconsider and legal challenges. See the June 18, 2010 District of Columbia Circuit Court of Appeals decision setting aside one group of challenges to the Endangerment Finding until EPA considers pending petitions to reconsider the Endangerment Finding.

Mandatory GHG Emission Reporting Rule

Prior to the issuance of its Endangerment Finding, EPA, on September 22, 2007, and pursuant to the provisions of the FY 2008 Consolidated Appropriations Act/H.R. 2764, Public 110-161, adopted a Rule (40 C.F.R. Part 98) requiring the mandatory reporting of greenhouse gases from certain sources that emit 25,000 metric tons or more of GHGs per year. In April 2010, an amendment to this rule was proposed that requires the reporting of emissions from additional sources, including sources in the oil and natural gas industries that emit fluorinated GHGs, and from sources that inject and store carbon dioxide underground for the purposes of geologic sequestration or enhanced oil and gas recovery. Beginning June 28, 2010, the Mandatory Reporting Rule was extended to include sources using magnesium production, underground coal mines, industrial wastewater treatment facilities, and industrial waste landfills with carbon dioxide equivalent emissions above certain thresholds.

EPA's mandatory reporting regulations do not require sources to control their GHGs emissions, but it was not long after the initial rules were promulgated that EPA moved in that direction, further pressuring Congress to act.

EPA Acts to Control GHG Emissions from New or Modified Stationary Sources: The GHG 'Tailoring' Rule

On May 13, 2010, EPA issued a final rule setting thresholds for sources of GHGs that defined when permits will be required under the New Source Review Prevention of Significant Deterioration ("PSD") provisions of the Clean Air Act. This rule applies only to relatively large commercial sources of GHGs. It is to be implemented in two steps.

The first step (January 2, 2011 through June 30, 2011) will require GHG sources subject to PSD permitting because of other types of emissions to also address GHG emissions. For these projects, GHG increases of 75,000 tpy per year will, inter alia, trigger the requirement that best available contract technology (BACT) is to be used to control GHG emissions.

In the second step (July 1, 2011 to June 30, 2013), PSD permitting will cover new facilities that emit GHG emissions of at least 100,000 tpy, and modified facilities that increase emissions by at least 75,000 tpy, even if they do not exceed the permitting thresholds for any other pollutant.

Requirements for new sources that are built after June 30, 2013 have not been established by EPA, but it has said it would undertake another rulemaking in 2011 on a third step for phasing in GHG in which it will address whether certain smaller sources can be permanently excluded from permitting.

This rulemaking is known as the "tailoring rule" because it limits which facilities would otherwise be subject to PSD permitting. EPA promised to provide states with guidance related to BACT requirements for GHG sources.

EPA Cap-and-Trade Programs

EPA has a number of successful cap-and-trade programs in place. The oldest and most successful is its Acid Rain allowance trading program designed to reduce sulfur dioxide emissions for the electric utility sector of the economy. It was established under Title IV of the Clean Air Act. It could be a model for a GHG trading program, particularly if it is limited to electric utilities. So far, however, EPA has decided to proceed with technological controls perhaps, in part, because it believes that will encourage industry to support the more flexible cap-and-trade legislation. Thus, while some environmental groups have encouraged EPA to establish a cap-and-trade program, various groups have challenged EPA's actions, including challenges to EPA's endangerment finding. See Coalition for Responsible Regulation v. U.S. Environmental Protection Agency.

Cap-and-Trade in the States

A number of states have banded together to establish sub-national GHG cap-and-trade programs. They include states that are part of the Midwestern Greenhouse Gas Reduction Accord ("Midwestern Accord"), the Northwestern and Mid-Atlantic Regional Greenhouse Gas Initiative ("RGGI"), and the Western Climate Initiatives ("WCI").

Only RGGI, a cooperative effort by 10 Northeast and mid-Atlantic states, currently has in place a mandatory market-based carbon dioxide emissions reductions program. RGGI only involves the power sector, but requires a 10 percent reduction in carbon dioxide emissions from sources in that sector. Each state in RGGI has its own trading programs based on an RGGI model rule. The individual RGGI states sell nearly all emission allowances through auctions, and the proceeds are invested in energy efficiency renewable energy and clean air technologies.

The parties to the WCI, which include California and two Canadian provinces, have agreed to jointly set a regional emissions target and to establish a market-based cap-and-trade program covering multiple sectors of the economy in those states, including electric power and large industrial and commercial sources. In September 2008, the WCI released design recommendations for a GHG cap-and-trade program, which is to begin in 2012.

The Midwest Accord, which has six states and includes one Canadian province as members, includes an agreement to develop a market-based and multi-sector cap-and-trade program, but no date has been set for its implementation. However, draft recommendations on the cap-and-trade programs have been released.

EPA's Cap-and-Trade Programs Vacated

If the EPA does go ahead and regulates greenhouse gases by a cap-and-trade system, it must consider how to do so with a plan that will hold up on judicial review. Since 2005, it has seen Bush Administration cap-and-trade programs to reduce (1) mercury and (2) nitrogen oxide and sulfur dioxide emissions vacated by the D.C. Circuit Court of Appeals. The Clean Air Mercury Rule (CAMR) and the Clean Air Interstate Rule (CAIR) both would have utilized a cap-and-trade system. Both approaches were rejected by the D.C. Circuit Court of Appeals: (1) CAMR was vacated in 2007, NRDC v. EPA, 489 F.3d 1364 (D.C. Cir. 2007); and (2) CAIR was vacated in 2008, North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008). The U.S. Circuit Court of Appeals, however, reinstated CAIR – including the cap-and-trade system – until the EPA issued a new rule, 531 F.3d 896, 901 (D.C. Cir. 2008). The EPA told the court that a replacement rule could take about two years. It is obvious that if EPA decides to adopt a cap-and-trade program without the benefit of legislation, it must do so very carefully.


The next few weeks will tell whether it is Congress, or the Obama Administration, that moves forward on greenhouse gas emissions reductions. Congress is expected to wrap up major legislative action by early September, at the latest. This is the time when the fall campaign season begins for the midterm Congressional elections. However, a failure by Congress to come to a consensus on emissions reductions still leaves the very real possibility of action by the Obama Administration. Further, both Congress and the Obama Administration would want to be closely involved, through monitoring and oversight, in any action begun by the other branch. As a result, a lobbying strategy that works with both branches of government is best, and Reed Smith's Public Policy & Infrastructure Practice and Environmental Practice are available to provide counsel.


Client Alert 2010-154