Issues related to climate change are making headlines as hot topics in the news around the world. Below we have summarized some of the significant events that occurred over the past week:

Prices and Markets:

• The Chicago Climate Futures Exchange has completed the first exchange-traded Regional Greenhouse Gas Initiative (RGGI) contracts in permits to emit carbon dioxide under a U.S. cap and trade scheme. But the RGGI scheme, which formally launches on Jan. 1 2009, caps carbon emissions by power generators at higher than historical levels, and as a result will not drive serious emissions cuts, said analysts.
• European emissions prices have climbed over 15 percent in the past two weeks on firmer energy prices and renewed confidence in the carbon markets after bottoming out at a 5-month low in early August, traders said. Benchmark European Union emissions allowances (EUAs) have added back some 3.50 euros since hitting 20.41 euros a tonne on August 5, the lowest level seen since March 5. The EUA-CER spread widened this week as a result.
• Effective immediately, the Chicago Climate Exchange will halt all trading of the emissions permits (EUAs) issued under the European Union’s Emissions Trading Scheme, it said in a statement. There is currently no open interest on the contracts and volume has been minimal since their launch last September.

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India’s Ministry of New and Renewable Energy recently implemented a Generation Based Incentive (GBI) program for grid-interactive wind power projects, which will be implemented by the Indian Renewable Energy Development Agency (IREDA). The program encourages investments in wind power projects by participants unable to claim accelerated depreciation under the Income Tax Act, including financial institutions, trusts, public/private-sector project developers, and foreign players lacking a balance sheet in India. The GBI scheme also encourages a new brand of investors by excluding from the program all those who self-consume the electricity produced by their wind projects, thereby ruling out applicability of the program to leading domestic power utilities.

The new GBIs provide significant incentives to grid-interactive wind power generation plants of certain minimum capacity that have obtained the requisite certifications/validations, and will be in addition to the tariffs provided by various State Electricity Regulatory Commissions. Estimates predict an increased internal rate of return (IRR) of 1.5-2% on wind power projects in India as a result of the new incentive scheme.

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This is the second in a series of three posts outlining some of the major issues relevant to the negotiation of wind project leases or easements and providing general recommendations for developers.

Use of the Property by Developer

As mentioned in our previous post, an easement must provide the specific purposes for which it is granted.  Typical developer rights specified in the easement relate to the developer’s determination of the feasibility of the project (including meteorological and soil testing) and to the construction, maintenance and operation of project infrastructure (including turbines, overhead and underground transmission lines, power generation facilities, meteorological towers and roads).  The easement should also include a catchall provision granting the developer any non-enumerated rights that are reasonably necessary, useful or appropriate to give effect to any of the specified rights.   

An important obligation relating to the developer’s use of the property is its duty to remove project infrastructure upon the termination of the easement and to restore the property to its original condition.  Although this provision may appear to burden the developer, it is essential in securing tax credits for the project.  The IRS has taken the position that such credits will not be available if the developer and the landowner form a partnership or if the landowner owns an interest in the project.  The developer’s dismantling obligation helps establish that no such impermissible relationship exists.

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Last week, the Riverside County Superior Court invalidated an environmental impact report (EIR) for a 1,766-acre residential and commercial project that had been proposed for development in the northwest open space areas of Coachella Valley near Joshua Tree National Park in Southern California. The Court cited the EIR’s failure to analyze the project’s greenhouse gas (GHG) emissions and other climate change impacts. [Center for Biological Diversity, et al. v. City of Desert Hot Springs, et al. (Riverside County Superior Court - Case No. RIC 464585) (August 6, 2008)].

The Palmwood Project proposed nearly 2,700 homes, 1 million square feet of commercial space, a 400-unit hotel, a commercial amphitheater, and golf courses comprising 45 holes. Environmental groups Center for Biological Diversity and Sierra Club challenged the Project, arguing, inter alia, that respondent City of Desert Hot Springs’ failure to make a meaningful attempt to analyze the Project’s climate change impacts violated the California Environmental Quality Act (CEQA), the state version of the National Environmental Policy Act.

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California Senate Bill 375, a landmark bill linking greenhouse gas reduction goals to regional planning for transportation and housing, cleared the state Assembly Appropriations Committee late last week.  Under the proposed legislation, each metropolitan region in the state would have to adopt a “sustainable community strategy” to reduce greenhouse gas emissions in the region.  The bill includes several incentives for regions to achieve their emission reductions targets, including provisions that would award transportation funding only to projects consistent with sustainable communities strategies.  SB 375 would also reform the California Environmental Quality Act to provide limited relief from environmental review for qualified projects.

The bill recognizes that, in order for California to achieve its goals under AB 32 (to reduce greenhouse gas emission to 1990 levels by the year 2020), it will be necessary to achieve significant greenhouse gas reductions from changed land use patterns and improved transportation.  According to the bill’s sponsor, Senator Darrell Steinberg, “Because cars and light trucks emit about 30 percent of greenhouse gases in California, reducing the time that commuters spend in their cars through smart, coordinated transportation and housing planning is essential to meeting the requirements of AB 32.”

While SB 375 still has a long road to travel before it becomes law, the measure appears to be gaining momentum.  Within the last week, SB 375 gained the support of major environmental organizations, local governments, and homebuilders.  It is now headed to the Assembly floor for debate.

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After significant delay and controversy, the European Commission (“EC”) once again has promised to connect the EU’s Community International Transaction Log (“CITL”) to the United Nation’s International Transaction Log (“ITL”) in the first half of October. The ITL will track the trade and transfer of all Kyoto Protocol units, including European Union Allowances (”EUAs”), which effectively become Kyoto Protocol Assigned Amount Units (“AAUs”) from 2008 to 2012. Until now, there has been no software link between the EU and UN schemes allowing delivery of the cheaper Certified Emission Reductions (”CERs”), a link expected nearly 18 months ago.

Market participants have criticized this failure widely, sparking major jitters, as December 2008 is a key delivery date for the 2008 vintage CER contract. The contract cannot be delivered without the connection, although most contracts allow settlement to roll over until the link is complete. The delay is also considered to have contributed to the volatile EUA and CER price spread, and more generally, reduced liquidity, transparency and confidence in the market.

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EPA Administrator Stephen Johnson has denied Texas Governor Rick Perry’s petition for relief from the Renewable Fuel Standard (RFS). The RFS mandates production of 9 billion gallons of biofuels for 2008. Governor Perry sought to have that amount reduced by 50%.

After considerable study by the agency, and review of over 15,000 public comments, they determined that the RFS does not pose the substantial hardships claimed by the petitioners. According to the agency, the petitioners would have to prove that the mandate itself would cause the harm, not merely that it contributes to the economic harm at issue. “EPA determined that the weight of all of the evidence indicates that implementation of the RFS would have no significant impact in the relevant time frame (the 2008/2009 corn season), and the most likely result is that a waiver would have no impact on ethanol production volumes in the relevant time frame, and therefore no impact on corn, food, or fuel prices.”

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The U.S. Department of Agriculture (”USDA”) is seeking comment on a set of proposed strategic goals and planning priorities for climate change research, education, and extension activities.  USDA is developing this strategy to build on its previous work in analyzing the impacts of climate change on agriculture, land resources, water resources, and biodiversity in the United States.  That earlier report concluded that climate change is already affecting U.S. water resources, agriculture, land resources, and biodiversity, and will continue to do so. USDA’s proposed new strategy document will identify policy goals related to climate change along with detailed planning priorities and emphasis areas related to each one.  Goals identified in the August 6, 2008 Federal Register Notice included:

Goal 1: Understand the effects of climate change on natural and managed ecosystems.

Goal 2: Develop knowledge and tools to enable adaptation to climate change and improve the resilience of natural and managed ecosystems. 

Goal 3: Develop knowledge and tools to reduce the contributions of agriculture, forestry, and other land management practices to the build up of greenhouse gases in the atmosphere. 

Goal 4: Deliver climate change science and technology to USDA agencies, stakeholders and collaborators for improved decision making.

USDA is one of several federal agencies involved in assessing the impacts of climate change on the US agricultural sector (and vice versa).  In May 2008, the Environmental Protection Agency released a report concluding that the US agricultural sector accounted for 6 percent of US emissions in 2006. 

Comments on USDA’s proposed goals (and the various priorities discussed thereunder) are due by Sept. 19, 2008. USDA will publish the final version of the Strategic Plan on USDA’s Web site.

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The Australian Securities Exchange (ASX), Australia’s primary stock exchange which was formed when the Australian Stock Exchange and Sydney Futures Exchange merged in late 2006, has today announced a plan to start trading carbon futures in the third quarter of 2009. The futures contracts for renewable energy credits, natural gas, and coal would complement the ASX’s existing electricity futures market.It is expected that futures contracts for renewables will be offered by the end of the year, while contracts for gas in Victoria, electricity in New Zealand, and power station coal exports from Newcastle in New South Wales will commence in March or April 2009.

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Over the past five years, the U.S. wind power industry has grown at an annual pace of 30%.  According to a recent report by the U.S. Department of Energy, wind power could account for up to 20% of the nation’s electricity supply by 2030. As business grows and competition intensifies, wind project developers are facing increasingly complex legal issues and their need for experienced counsel from the very first to the very last stages of the project cannot be overstated.  One of the first steps in starting a wind project is securing the necessary real estate.  In a series of three posts, of which this is the first, we will outline some of the major issues relevant to the negotiation of wind project leases or easements and will provide general recommendations for developers.

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