A federal judge has authorized a settlement agreement between the South Coast Air Quality Management District (AQMD) and diesel engine makers after seven years of litigation. The agreement allows the regional air district to continue enforcing its clean fleet rules. AQMD’s clean fleet rules, adopted in 2000 and 2001, require fleet operators of 15 or more vehicles to purchase clean-fueled vehicles, such as ones operating on natural gas, when they replace or add vehicles to their fleet. The Engine Manufacturers Association and the Western States Petroleum Association had challenged the rules claiming that they were preempted by the federal Clean Air Act.

The effect of the parties’ agreement is that AQMD’s clean fleet rules will continue to apply to all fleets owned by state and local governments, as well as private companies that are under contract to, or operating under, an exclusive license or a franchise with state or local governments. The rules will not apply to fleets owned by the federal government or to fleets owned by private companies not under contract to state and local governments.

AQMD has been enforcing the rules since 2005. In 2007, AQMD reported that the rules had resulted in the purchase of more than 6,000 low-emitting vehicles.

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In October 2007, the California Air Resources Board adopted the Forest Sector Protocols. The Protocols, which originally were created by the California Climate Action Registry, detail how to measure the amount of carbon that can be stored in a forest. This measurement process is necessary in order to properly certify and verify that emissions reductions actually occur.

Once verified, the credits can be sold in either voluntary markets to individuals or businesses, or in compliance markets, as part of a comprehensive cap-and-trade system designed to reduce greenhouse gas emissions. California is in the process of establishing a cap-and-trade system within the State, as required by the Global Warming Solutions Act of 2006 (also known as AB32).

Last week saw the first sale of emission reduction credits under the Forest Sector Protocols. Natsource Asset Management purchased 60,000 tons of carbon dioxide emissions reductions for an undisclosed price. The theory behind the investment is that the credits will increase in value once the cap-and-trade system begins operating, providing a return for the project’s investors.

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Wednesday, February 13

1:00 PM - House Energy and Commerce Committee Hearing on Authorizing Supplemental Environmental Projects to Incentivize Reductions of Diesel Emissions; 2322 Rayburn. (Simultaneous webcast)

Thursday, February 14

10:00 AM - Senate Finance Committee Hearing on international competition and climate legislation; 215 Dirksen.

10:00 AM - House Appropriations Committee Hearing on vehicle technology and gas prices; 2362 Rayburn.
Statements will be presented by Bob Dinneen, President and CEO, Renewable Fuels Association; Dr. Mary Beth Stanek, Director of Environment and Energy Policy and Commercialization, General Motors; and other experts.

2:00 PM - House Select Committee on Energy Independence and Global Warming Hearing on deforestation and climate change; location TBA. (Simultaneous webcast).

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A ruling this morning invalidating the U.S. mercury emissions cap and trade program should not impact the Environmental Protection Agency’s authority to establish trading programs for other emissions, including carbon dioxide.

The United States Court of Appeals for the District of Columbia Circuit today struck down two rules promulgated by the U.S. Environmental Protection Agency (EPA) addressing mercury emissions from coal-fired power plants. State of New Jersey v. EPA, No. 05-1097 (D.C. Cir. Feb. 8, 2008). The court ruled that EPA deleted power plants from the list of emission sources subject to hazardous air pollutants requirements of the Clean Air Act (CAA) without following the statutory requirements for delisting. This conclusion, the court reasoned, required it also to invalidate EPA’s Clean Air Mercury Rule (CAMR) that had established numerical limitations for the emission of mercury from power plants and a cap and trade system for compliance with those limits.

The Bush Administration developed and promulgated CAMR in an effort to back away from an 11^th hour finding issued by EPA Administrator Browner in December 2000 that regulation of mercury emissions from coal-fired power plants under the hazardous air pollutant program was “appropriate and necessary.” This finding by the Clinton Administration was not subject to judicial review, but served as the linchpin for the court’s invalidation of CAMR. Once EPA made that finding and included power lists on the “list” of emission sources subject to regulation, the court ruled EPA could change course only by following the procedures set forth in the CAA.

To promulgate the CAMR, and its cap and trade system, EPA tried to short-circuit the statutory procedures. The court ruled that EPA did not have the discretion to proceed in that manner. While this decision prevents EPA from proceeding with a cap and trade system for mercury emissions, it does not provide opponents of cap and trade systems comfort. The court expressly declined to consider arguments concerning EPA’s authority to establish a cap and trade system for pollutants and sources outside the hazardous air pollutant regime.

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This post is the second part of a two part series analyzing challenges to coal-fired power plant permits under federal statutes.

Challenges to coal-fired power plants under the National Environmental Policy Act (NEPA) may not be as standard as those under the Clean Air Act, but their impact will be no less substantial. Lawsuits challenging permitting of coal-fired power plants under NEPA will, by their very nature, be limited because NEPA challenges require a “major” federal action that significantly affects the quality of the human environment – for example, a funding decision or a permit approval. While the cases may impact a small number of coal-fired power plants, the outcomes will have far-reaching consequences on any private project with greenhouse gas (GHG) emissions that requires federal approvals.

To date, there have been only two lawsuits filed challenging coal-fired power plant approvals under NEPA. Both cases involve loans and other approvals provided by the Rural Utilities Service (RUS), a Depression-era agency created to bring electricity to farming communities. The Sierra Club and local environmental groups argue that RUS’ Environmental Impact Statement (EIS) for the Highwood generating plant near Great Falls, Montana, failed to disclose the project’s carbon emissions and discuss the impacts of those emissions on climate change.

The second case, which involves the Sunflower Electric Corporation’s proposed expansion of its facility in Holcomb, Kansas, alleges failure to undertake an EIS to analyze global warming impacts (among other things), prior to approving alleged construction loans and other financing at the site. The Sunflower case – which also is in litigation over the Kansas Department of Health and Environment’s rejection of its permit on global warming grounds – involves a limited federal handle and defendants certainly will raise objections to Sierra Club’s characterization of RUS’ approvals as a “major” federal action.

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Speaking at Resources for the Future this afternoon, Kathleen McGinty, Secretary of the Pennsylvania Department of Environmental Protection, outlined an “all things in moderation” approach to managing carbon, looking at the relative benefits and challenges of (1) a carbon tax, (2) cap-and-trade programs, and (3) corn-based ethanol.

Secretary McGinty began by underlining the “essential role” for a carbon tax in driving interest and investment from Wall Street, but noted that, unless the tax is set high enough to overcome the inherent advantages of the wholesale electricity providers, that it will be ineffective. McGinty described the equally “essential” need for a cap-and-trade program, which is a “fundamental building block” for carbon management, but expressed concerns about these programs’ capacity to resolve the climate crisis, as the world’s carbon demand quickly escalates in the U.S., China, and elsewhere.

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While coal remains essential for U.S. electricity generation in the foreseeable future, any climate change regulatory scenario will mandate coal-fired power plants to make meaningful carbon emissions reductions. To properly protect their business interests, electric power generators and the banking community must analyze and evaluate the environmental and economic risk profile of existing generation portfolios and new construction projects, including during pre-financing diligence.

Toward that end, Citi, JPMorgan Chase, and Morgan Stanley announced yesterday the formation of “Carbon Principles,” climate change guidelines for advisers and lenders to power companies in the United States to strengthen environmental and economic risk management in the financing and construction of electricity generation facilities. The banks developed the Principles in conjunction with several power companies, many of which are heavily dependent on coal as a fuel, and two environmental organizations, Environmental Defense and Natural Resources Defense Council.

The Carbon Principles outline an approach to evaluating and managing carbon risks in the financing of electric power projects. As part of this effort, the banks developed an Enhanced Diligence framework to help lenders understand and evaluate the potential carbon risks associated with coal plant investments. Among the tenets of the Enhanced Diligence Process are consideration of: (i) demand reduction caused by increased energy efficiency; (ii) production increases from renewable and low carbon generation; and (iii) uncertain financial, regulatory and environmental liability risks for fossil fuel generation.

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Thursday, February 7, 9:30 AM - Energy & Natural Resources Committee Hearing on the Renewable Fuel Standard
The purpose of the oversight hearing is to receive testimony on the effects of the recently-passed renewable fuel standard on energy markets; Energy Committee Hearing Room - SD-366.

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The Environmental Protection Agency’s Environmental Appeals Board (EAB) declined to hear a Clean Air Act (CAA) challenge to a permit issued for construction of a coal-fired electric generating plant near Springfield, Illinois, on grounds the petitioners failed to properly raise their climate change arguments during public comment on the draft permit. Although the EAB did not reach the merits of the petitioners’ argument that the failure to include Best Available Control Technology (BACT) for CO2 violates the CAA, the Board did note that the issue “remains a matter of considerable dispute.”

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