As negotiations at Copenhagen near conclusion, it is increasingly unlikely that a global deal can be made.  On Tuesday, the United Nations released the latest official draft agreements that will be presented to world leaders (including President Obama) in the final two days of the climate conference.  The recent drafts acknowledge that industrialized nations have historically been responsible for global greenhouse gas emissions and, thus, must lead efforts to combat climate change by providing funding and technology to poorer nations.  Both the text from the Long Term Cooperative Action working group and the document from the Kyoto Protocol working group, however, leave many critical issues unresolved.  Most notably, the international community has not agreed upon targets for emission cuts and adaptation funding.

Emission reduction targets

Developed countries and developing countries disagree on which countries should be obligated to reduce their emissions and what the level of these commitments should be. Leading developing countries insist on an extension of the Kyoto Protocol, which imposes obligations to reduce greenhouse gas emissions only on industrialized nations.  A rift within developing countries emerged when small island states and several African states insisted on a new protocol that would not only impose more stringent emission cuts for developed nations, but also expose developing countries to the risk of mandatory cuts. The European Union and the U.S., on the other hand, are calling for a more comprehensive document that would impose mandatory emission cuts on large emerging economies like China.  Developed countries also seek to delay the implementation of legally binding emission reductions.

The size of emission cuts and the benchmark for measuring these reductions is also a point of contention between developed countries. The EU has committed to cutting its emissions by 20% by 2020, and by 30% if a strong global agreement is reached. The EU’s proposed emission reductions are measured against 1990, as called for in earlier international agreements.  By contrast, the U. S. wants to use 2005 as the baseline year for cutting emissions because (i) the U.S. never joined Kyoto and (ii) this benchmark is more relevant to the Obama administration.  The U.S. has committed to cutting emissions by 17% of 2005 levels by 2020.  This corresponds to a cut of 3-4% beneath 1990 levels by 2020.  Senator John Kerry reinforced the legitimacy of the U.S. commitment to an international agreement by guaranteeing that this commitment would be enforced domestically, provided that China and other developing countries meet the U.S. demand for transparency and accountability on their emission reductions. 

Other issues, such as the “peaking year” concept, are also creating roadblocks.  India has taken the lead in opposing the imposition of a “peaking year” on the emissions of countries like India, China, Brazil and South Africa, which would demand that developing countries “peak” their emissions by 2025.  Instead, India proposes limiting the increase in global temperatures to within 2 degrees Celsius of pre-industrial times.  A smaller group of 43 of the smallest and most vulnerable developing countries has stated they will not accept any rise of more than 1.5 degrees Celsius since, they contend, anything higher would lead to disastrous consequences (e.g., a rise in sea levels as a result of climate change).

Another issue is the “hot air” concern.  With the collapse of the heavy industrial base of the Soviet Bloc countries in the 1990s, a large number of the carbon rights, or Assigned Amount Units (AAU), held by Russia, Ukraine and other Eastern European countries were never used.  If, under the new deal, the former Soviet Bloc countries are allowed to sell these surplus AAUs, or “hot air”, to nations that fail to meet post-2012 emission targets, this could impair all emission reduction commitments under the new deal by up to one-third.

Funding commitments and transparency

The G77 group of countries, backed by the least developed countries and small island states, are seeking $400 billion per year (1% of the GDP of industrialized nations) to help developing countries grow without increasing their greenhouse gas emissions.  Developed nations have not made offers anywhere near that level, nor do the latest draft agreements provide for funding beyond 2012.  As a compromise, the African Union chief negotiator Meles Zenawi has called for a significantly scaled-back finance deal, calling for $50 billion per year for developing countries by 2015 and $100 billion per year by 2020, with half of these funds allocated to vulnerable and poor countries, regions such as Africa and small island states.

China has acknowledged the needs of poorer developing nations in conceding that these nations should take priority in receiving aid to combat climate change.  China maintains its position, however, that industrialized nations should provide 0.5-1% of their annual GDP as funding to subsidize the efforts of developing nations to curb greenhouse gas emissions.  Further, China strongly opposes carbon tariffs proposed by other countries to protect their domestic industries. China has also refused to submit to international verification of whether it is actually implementing its reduction commitments.

The U.S. has rejected the proposal that industrialized nations contribute up to 1% of their GDP. The U.S. and other developed countries also seek to monitor developing countries on their compliance with whatever commitments are ultimately made, or at a minimum, to subject countries’ emission reports to international consultation and review.  The concern is that, without such compliance checks, some developing countries may have an incentive to “pad” the amount of their greenhouse reductions or otherwise game the system and that other countries may not sign on to the international agreement due to its lack of transparency.

With less than two days remaining for the climate change negotiations at Copenhagen, it is critical that the international community reach some sort of workable consensus on the key issues of emission reduction targets, funding commitments and transparency of the global system.

For further information about this topic, please contact Akin Gump.

The two-week Copenhagen climate change conference (COP15), part of the ongoing effort to negotiate a successor to the 2007 Kyoto Protocol, commenced this week.  Only a few days into COP15 the mood is less than optimistic and parties are not overly ambitious, leaving many to wonder whether a new agreement can be reached or whether COP15 will produce only another roadmap for a potential agreement. 

Delegates have been staking out their positions amidst discussions on long-term cooperative action, a shared vision, finance, mitigation and technology under the Ad Hoc Working Group on  Long-term Cooperative Action under the Convention (AWG-LCA); Annex I emission reductions; and the potential consequences under the Ad Hoc Working Group - Kyoto Protocol (AWG-KP) and Reduced Emissions from Deforestation and Degradation (REDD) under the Subsidiary Body for Scientific and Technological Advice (SBSTA). Talks about the leaked “climate gate” e-mails abound and the leak of Danish text, that gives wealthier, industrialized nations more power, has already created a rift between industrialized and developing countries.  U.S., China, Brazil, India, etc., who have pledged new reduction targets, have been criticized for their lack of aggression in reducing greenhouse gas (GHG) emissions. 

At the helm, UN Climate Chief Yvo de Boer believes failure is not an option and an agreement is a must.  At a minimum, his focus includes the following:

1. How and to what extent industrialized countries will reduce their GHG emissions?
2. How China and India, and other major developing countries, will limit the growth of their emissions?
3. The origination of financing for developing countries that need assistance monetary assistance for GHG emission reduction and adaptation.
4. The management of money.

President Obama, Secretary of Energy Stephen Chu and EPA Administrator Lisa Jackson are scheduled to attend the final week of COP15.  The U.S. will likely discuss its new emission reduction target of 17% below 2005 levels by 2020, with a trajectory to 42% reduction by 2030 to meet the goal of 83% by 2050, as well as actions taken by EPA to address GHG emissions.  While China has found the U.S.’s position to be underwhelming, State Department envoy Todd Stern fired a shot across China’s bow, declaring that the more advanced developing countries must reduce their GHG emissions and that the U.S. would not provide funds to China for development of greener industry.

COP15 concludes on Friday, December 18 and a final agreement appears highly unlikely.  With the U.S. and China seemingly drawing lines in the sand, the final week would seem to portend much in the way of atmospherics.

For further information about this topic, please contact Akin Gump.

At 1:15 PM EST today, EPA Administrator Lisa Jackson will hold a press briefing at which it is expected she will release EPA’s finding that emissions of greenhouse gases (GHGs) constitute a danger to human health and the environment pursuant to Section 202(a) of the Clean Air Act (CAA).

 On April 24, 2009, Administrator Jackson proposed to find that:

• The current and projected concentrations of the mix of six key greenhouse gases-carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF₆)-in the atmosphere threaten the public health and welfare of current and future generations; and
• The combined emissions of CO₂, CH₄, N₂O and HFCs from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change.

The former is referred to as the “endangerment” finding and the latter is referred to “cause or contribute” finding.  74 Fed. Reg. 18886 (April 24, 2009).

These findings are prerequisite to certain additional regulatory action under the CAA, including EPA’s proposed GHG emission standards for passenger cars, light-duty trucks and medium-duty passenger vehicles, covering model years 2012 through 2016 .  74 Fed. Reg. 49454 (Sept. 28. 2009).

For further information about this topic, please contact Akin Gump.

After international negotiators met in Barcelona at the beginning of November, predictions on the likely outcomes-or lack thereof-from December’s Copenhagen conference have popped up everywhere. In the immediate aftermath of the Barcelona meetings, the consensus amongst those in the United States and the West more broadly was that Copenhagen was headed for failure-at least insomuch as a legally binding treaty with emission reduction targets like Kyoto Protocol is off the table.

Since then, the situation has become more muddled. Evidence abounds for those looking either to take a more optimistic view of the upcoming meeting, or those looking to bolster the more pessimistic outlook.  In recent days, the optimists may be gaining more evidence. President Obama’s recent trip to China gave rise to several positive announcements with regard to the two country’s climate action, including from a joint statement released at the end of these bilateral meetings, which noted that-

The United States and China, consistent with their national circumstances, resolve to take significant mitigation actions and recognize the important role that their countries play in promoting a sustainable outcome that will strengthen the world’s ability to combat climate change.  The two sides resolve to stand behind these commitments.

In the past few days, both countries have backed up that statement by announcing that they will come to Copenhagen with hard commitments to emissions reductions; the U.S. “in the range of 17%” while Chinese have pledged to reduce the carbon intensity of their economy by 40-45%. Just pledging commitments of any kind is a significant step for Copenhagen; it was disputes over commitments like these that derailed the Barcelona talks.

The nature of these commitments, however, may give the pessimists some ammunition-President Obama’s commitment is still tied to action in the Congress, where any outcome is far from certain. In any case, a reduction of 17% is much less than many developing countries were calling for and much less than the IPCC suggested cuts of 25-40% by 2020. For China, some experts have noted that currently enacted policies seem designed to cover fully China’s commitment, meaning that the Chinese have essentially pledged themselves to “business as usual” emissions.

The pessimists can also point to the outcome of a hastily convened meeting between Danish Prime Minister Lars Lokke Rasmussen and leaders of Pacific Rim nations. Describing that meeting, US Deputy National Security Adviser Mike Froman said, “There was an assessment by the leaders that it was unrealistic to expect a full, internationally legally-binding agreement to be negotiated between now and when Copenhagen starts in 22 days.” Should an agreement like this actually come out of Copenhagen, it might give the U.S. Congress a chance to pass binding climate legislation; it might be possible that a 2010 meeting in Mexico City would become the new goal date for a binding international treaty.

For some, any lowering of expectations for December undermines any hope of success because it takes the pressure off of international negotiators; the Kyoto Protocol, after all, came about as the result of 11^th hour actions, similar to the commitments now coming from the U.S. and China. It is possible that the situation is not as dire as it seemed the first week of November, and that the two negotiators with the most power might be committed to an ambitious meeting after all. And so, it remains possible that December could still hold some surprises for all prognosticators of international climate policy.

For further information about this topic, please contact Akin Gump.

The International Air Transport Association (IATA) called on the UN Summit on Climate Change to support a “sectoral” approach to reducing aviation emissions under the leadership of the International Civil Aviation Organization (ICAO).  IATA, which represents some 230 airlines responsible for more than 90% of scheduled international air traffic, outlined the industry’s commitment to three sequential targets:

• Improving CO₂ efficiency by an average of 1.5% per year through 2020;
• Stabilizing net CO₂ emissions from 2020 onward; and
• Achieving a “long-term aspirational goal” of a 50% cut in CO₂ emissions by 2050 compared to 2005.

The aviation industry is currently responsible for approximately 3% of the man-made global climate change impact.

IATA and other aviation trade groups have emphasized the need for a sectoral approach.  Rather than regulating specific airlines or countries, the proposed sectoral approach would regulate the industry as a whole, thereby promoting effective cross-border regulation and level competition.  IATA’s Director General warned that “uncoordinated national and regional schemes are creating a patchwork of punitive taxes that fill government coffers, but do little or nothing to effectively manage aviation’s emissions.”  While IATA has enumerated certain guiding principles for the sectoral approach, including open access to carbon markets, the specific policy proposals will be developed in coordination with ICAO for potential inclusion in a post-Kyoto climate framework.  Aviation industry members will gather next in Montreal to formalize a proposal to take to the climate talks in Copenhagen.

For further information about this topic, please contact Akin Gump.

The Environmental Protection Agency (EPA) released today a final rule that will require greenhouse gases (GHG) to be monitored under a new reporting system beginning in 2010.  The rule, known as the Final Mandatory Reporting of Greenhouse Gas Rule, is in response to the FY 2008 Consolidated Appropriations Act, which allocated $3,5000,000 for activities related to finalizing the rule within 18 months.  According to EPA, the rule is intended to provide a better understanding of the sources of GHG emissions, so as to help EPA develop policies and programs to reduce emissions.  Businesses may also use the data to track their own emissions, compare them to similar facilities and identify mechanisms to reduce emissions.

EPA estimates that the reporting rule will capture the data of 85 percent of the nation’s emissions from approximately 10,000 facilities.  The 10,000 facilities include sites that emit 25,000 metric tons of more of CO₂ per year.  Under the new rule, EPA will review 2010 reports starting in 2011.  Thereafter, facilities must submit annual reports to EPA.

EPA’s promulgation of this rule is another indication that the agency will continue to implement that authority it believes is provided under the Clean Air Act, irrespective of congressional consideration of comprehensive climate legislation.  Also in line for promulgation is a final rule with respect to the endangerment finding proposed in April 2009 and a proposal to establish a “significance level” for CO₂ emissions from stationary sources.

For further information about this topic, please contact Akin Gump.

Late last month, EPA released a Notice of Data Availability and Request for Comment related to its 2008 proposed regulatory framework for underground injection and storage of carbon dioxide.  The Notice discusses three DOE-sponsored Regional Carbon Sequestration Partnership projects, reviews the results of recent studies evaluating the potential impacts of geological storage to groundwater integrity and proposes a waiver process that would provide regulators with more flexibility in setting the minimum injection depth for carbon sequestration projects.  The 12-page notice is an important opportunity for stakeholders seeking to supplement the administrative record or position themselves for post-promulgation litigation.  Issues addressed in the Notice include:

• EPA May Widen the Scope of the Rule. The agency received comments regarding the need to consider environmental and regulatory issues outside the scope of the Safe Drinking Water Act (SDWA) and “is currently evaluating the need for a more comprehensive regulatory framework.” EPA has indicated that any effort to expand the rulemaking beyond its SDWA authority will involve an additional notice and comment opportunity, structured within the current regulatory development schedule.

• EPA Considers Granting Local Siting Authorities More Discretion.  EPA is proposing to modify the July 2008 proposed rule, which restricts Class VI Injection Wells (the new class for carbon sequestration projects) to below the lowermost geological formation containing an underground source of drinking water.  The proposed modification would allow project applicants to seek a waiver of the injection depth restriction by demonstrating that a shallower depth would not pose contamination risks.  The state regulatory officials with primary permitting responsibility would make the final waiver determination.

• Update from DOE’s National Energy Technology Laboratory (NETL).  NETL is developing or operating approximately 30 geological sequestration projects to develop working geological sequestration approaches and to identify “the most suitable technologies, regulations and infrastructure needs for carbon capture sequestration and storage.”  The Notice provides examples from several of these projects.

• Update from DOE’s Lawrence Berkeley National Laboratory (LBNL).  LBNL is studying the potential risk to underground drinking water sources from improperly-sited geological sequestration projects.  Areas of study include the potential for changes in ground water quality as a result of CO₂ leakage, the risk that CO₂ will mobilize trace elements and the potential basin-scale hydrological impacts that large-volume underground injection and resulting pressure changes may have on aquifers. 

• CO₂ Transport Modeling will play Critical Role.  EPA researchers see a need for improved CO₂ sequestration modeling tools that can characterize CO₂ transport properties across a large range of temperatures and pressures and couple multiphase flow, reactive transport and geomechanical processes. 

The notice offers several insights into EPA’s ongoing rulemaking process.  First, the likely driver for EPA’s decision to reopen the comment period in this proceeding was EPA’s decision to propose an injection-depth waiver mechanism.  Without the additional notice and comment, a final rule that included a waiver option would have been vulnerable on judicial review.  Second, EPA’s lengthy discussion of the waiver proposal, combined with the mixed results of its ongoing LBNL research into the impacts of carbon sequestration on drinking water quality and basin integrity, illustrates EPA’ difficult balancing act in developing uniform nationwide CCS standards.  While deeper CO₂ sequestration depths may offer greater protection to some local underground drinking water sources, establishing a rigid depth requirement could prevent the adoption of any carbon sequestration project in regions of the country that lack the requisite hydrogeological characteristics to meet the standard.  If CCS is going to be one of the pillars of EPA’s climate change mitigation strategy, EPA will need to find ways to balance the goals of climate policy, energy policy and water policy.  Third, EPA finally acknowledged that it may need to expand the legal basis of its carbon sequestration rulemaking program beyond the SWDA.  If EPA intends to propose any such expansion within the current rulemaking schedule, it must act quickly. 

EPA will hold a public hearing on the Notice of Data Availability on September 17, 2009 in Chicago, Illinois.  Written comments on the Notice are due to EPA by October 15, 2009.  For stakeholders with an interest in shaping federal policy on carbon capture and sequestration, this open comment period provides an important opportunity to supplement the record that EPA (and the courts) will rely upon in the future. 

For further information about this topic, please contact Akin Gump.

A key political compromise addressing the concerns of farm-state Democrats facilitated passage in the House of Representative passage of the American Clean Energy and Security Act, H.R. 2454 (ACES).  The so-called Peterson Amendment would make substantial revisions impacting the Environmental Protection Agency’s (EPA’s) Renewable Fuels Standard (RFS) program. The Energy Policy Act of 2005 established the RFS and the Energy Independence and Security Act of 2007 (EISA) expanded the program.  EISA established new renewable fuel categories and eligibility requirements, including mandatory greenhouse gas reduction thresholds for the various categories of renewable fuels.  EPA issued a notice of proposed rulemaking in May 2009 to implement the legislative changes required by EISA (RFS-2), and is currently soliciting comments on such issues as specifying the volumes of cellulosic biofuel, biomass-based diesel, advanced biofuel and total renewable fuel that must be used in transportation fuel each year.

If enacted into law, ACES would impact the RFS-2 proceeding in two major ways, (1) delaying and potentially eliminating the calculation of emissions related to indirect land use changes resulting from renewable fuels and occurring outside the feedstock’s country of origin (generally, these emissions are considered indirect international land use changes); and (2) exempting certain biomass-based biodiesel plants from compliance with the RFS-2 lifecycle greenhouse gas (GHG) requirement. 

EISA directed the EPA to calculate, for renewable fuel pathway, GHG emissions over the full lifecycle of the renewable fuel, including indirect international land use changes.  Examples of these lifecycle emissions include, for example, the clearing of international forest land to grow crops for food to compensate for the conversion of US-acreage toward the production of renewable fuels.  EPA would then compare the renewable fuel GHG emissions to the lifecycle emissions of 2005 petroleum baseline fuels displaced by the renewable fuel, such as gasoline or diesel. The lifecycle GHG emissions performance reduction thresholds established by EISA range from 20 to 60 percent reduction, compared to the baseline fuel, which varies upon the renewable fuel category.  GHG emissions from international indirect land use changes is a hotly contested issue between the renewable fuels industry and environmentalists and, as even EPA notes in its Notice of Proposed Rulemaking, there is considerable uncertainty in the estimation of emissions resulting from land use changes.

ACES would temporarily prohibit consideration of indirect international land use emissions, defined as land use changes outside of the feedstock’s country of origin. The legislation would establish a period of up to six years to study whether there are valid economic and environmental models to calculate indirect land use changes that are related to production outside of the country of origin in which feedstocks are grown.   The provision directs National Academies of Science to review and report on the issue within three years of enactment.  Based on this report, EPA and USDA would have a three-year period to promulgate a final determination of how to calculate indirect land use changes attributable to the production of renewable fuels.  If EPA and USDA were to conclude that indirect land use changes should not be considered, they would be required to include a statement of the basis for that determination.

EISA exempted a category of “renewable fuels,” largely defined as corn ethanol, from lifecycle GHG emission performance standards if facilities manufacturing the fuel commenced construction before December 17, 2007, the date of EISA’s enactment.  The length and scope of the exemption is among various issues under examination by EPA in the proposed RFS-2 rulemaking. ACES would provide a further exemption from the lifecycle GHG emission performance standards of up to 1 billion gallons of renewable fuel from biomass-based diesel plants that commenced construction before the date of enactment of EISA from the lifecycle greenhouse gas performance standards at issue in RFS-2.

The Senate Energy Bill, S. 1462, the American Clean Energy Leadership Act of 2009, reported to the floor by the Committee on Energy and Natural Resources did not include similar revisions to the RFS.  It appears likely, however, that revisions to the RFS will be a part of comprehensive energy and climate legislation.  In a recent op-ed, Senator Bingaman addressed support for revision of the RFS, as the Senate refines its energy bill, highlighting the definition of renewable biomass, the study of international land use change and the re-evaluation of technology- and feedstock-specific mandates within the program as areas for improvement.  A separate House Proposal, HR 3460, would expand the RFS to specifically include algae-based biofuels.  The Committee on Environment and Public Works Chair, Senator Boxer, has not indicated support of ACES’ revisions to the program, but recently noted that all options are on the table with respect to RFS revisions as her Committee takes up climate legislation.

For further information about this topic, please contact Akin Gump.

Last year, Swedish Company Vattenfall announced its plans to go on-line with a major pilot program to test carbon capture and sequestration at a coal-fired power plant.  The company recently acknowledged that permitting snags fueled by local opposition render it unable to commence geologic sequestration of captured CO2.  Vattenfall intended to begin capturing CO2 at its 30-megawatt Schwarze Pumpe facility, located in Spremberg, Germany, and sequestering it in the nearby Altmark depleted gas field by March or April 2009. Residents of the host-city, however, have expressed concerns about the safety of geological sequestration, preventing the final permitting approval for the site and creating questions about when - or if - the site could be available for any CCS operations. 

Vattenfall’s experience at this project is not an isolated incident.  Vattenfall reported delays in obtaining approvals for one of its Danish storage projects pointing, in part, to public opposition by local stakeholders.  In June, German news sources reported that activists were protesting plans by electric utility RWE to transport captured CO2 by pipeline from a powerplant near Cologne to a sequestration site on Germany’s North Sea Coast.  The Wall Street Journal also reported in April that Royal Dutch Shell had run into challenges siting a sequestration facility in Barendrecht, Netherlands, due to grass roots opposition from local residents. 

Public opposition is likely to be a critical strategic and legal consideration for US projects.  On Friday, August 21, Battelle, the lead partner in a Midwest Regional Carbon Sequestration Partnership project announced that it was abandoning plans to participate in a $92 million public-private demonstration project to site a geological sequestration project in Western Ohio.  While the partner cited only “business reasons” for its decision, the reported public opposition to the project could not have helped. 

These setbacks illustrate the significant challenges that the siting and permit-approval process can pose, particularly in the face of public opposition, to an otherwise promising project.  This will be particularly true during the early stages of a CCS deployment.  US policymakers and investors would do well to watch and learn from these early case studies, and to ensure that they devote the legal, political and community relations resources needed to ensure that proposed projects move forward in a realistic and timely fashion.

For further information about this topic, please contact Akin Gump.

A key aspect of the political balance that allowed H.R. 2454-the American Clean Energy and Security Act of 2009 (ACESA)-to pass in the U.S. House of Representatives was its “border adjustment” provisions designed to safeguard the competitiveness of U.S. manufacturing industries facing foreign competitors not subject to comparable emissions regulation.  Now that the Senate has begun deliberations on a companion bill, the debate about the optimal form of border adjustment measures, as well as their legality under international trade rules, has begun anew against a backdrop of heightened criticism from U.S. trading partners. 

H.R. 2454 sets forth a two-phased approach.  First, under Title IV, Part F, subpart 1, the bill would establish an “Emission Allowance Rebate Program” under which domestic industrial sectors shown to be vulnerable to “carbon leakage” (the transfer of emissions-intensive manufacturing to jurisdictions with lesser emissions restrictions) would recover a specified level of the costs of compliance with ACESA’s emissions caps.  Eligibility would be determined on a sector-specific basis through formulae measuring each sector’s energy-, greenhouse gas-, and trade-intensity.

In the second phase, under subpart 2, entitled “Promoting International Reductions in Industrial Emissions,” the President could, as of 2020, impose on importers a requirement to submit emissions allowances.  The President would be required to do so if, by 2018, there is no international agreement to ensure globally coordinated reduction of greenhouse gas emissions.  In the absence of an international agreement, the importer allowance requirement could be waived only if the President determines that the requirement would not be in the national economic or environmental interest and if Congress passes a joint resolution approving the President’s determination.  No importer allowance requirement would be imposed, however, for any sector for which the President determines that over 85% of global production meets specified emissions reduction criteria.  Further, imports from individual countries that have met the same emissions reduction criteria, or other specified de minimis criteria, would be exempted from the importer allowance requirement.

Key Senators have stated, however, that they cannot accept the balance struck in the House bill on border adjustment measures.  According to Sen. Barbara Boxer (D-CA), who chairs the Environment and Public Works Committee, H.R. 2454 would irritate U.S. trading partners and undermine U.S. efforts to negotiate a comprehensive U.N. climate accord to replace the Kyoto Protocol, which expires in 2012.  Sen. Max Baucus (D-MT), Chair of the Finance Committee, reportedly shares Sen. Boxer’s concerns.  So too does Sen. John Kerry (D-MA), who stated at a recent Finance Committee hearing that the President must be afforded more discretion than exists in H.R. 2454 to determine when border adjustment measures may be warranted.  At the same time, another group of Democratic Senators representing Midwest states where emissions-intensive manufacturing is concentrated, such as Sherrod Brown (D-OH), are conditioning their support for the bill on tough border adjustment measures.

As Congress continues its work to strike the right balance between the interests of domestic manufacturing industries and harmony with U.S. trading partners, the Obama Administration faces its own challenges to sell U.S. climate change legislation on the international stage.  Shortly after the passage of H.R. 2454, President Obama told the press that, in light of the continuing global recession and a drop in international trade flows, the United States should be “very careful about sending any protectionist signals.”  The President made his comments amid mounting global concerns about new protectionist tendencies, including repeated warnings by the Director-General of the WTO, Pascal Lamy, that border measures designed to stem carbon leakage could trigger retaliatory actions among trading partners and burden the WTO’s dispute settlement system.

Such warnings find support in a recent joint report of the WTO and the U.N. Environment Program describing the technical challenge of devising border measures that impose a fair cost for the greenhouse gas emissions associated with the production of an imported product and the potential difficulties of sustaining such measures under the WTO’s trade rules if challenged.  The recent comments of India’s Environment Minister Jairam Ramesh to visiting U.S. Secretary of State Hillary Clinton, who stated that India faces “the threat of carbon tariffs on our exports to countries such as yours,” underscore the diplomatic challenges triggered by ACESA’s border adjustment measures.

ClimateIntel has previously discussed the WTO rules implicated by border adjustment measures.  As discussed in relation to earlier U.S. bills, the outcome of a WTO challenge to any final U.S. climate change law would likely depend in large part on the application of GATT Article XX, which can excuse discriminatory trade practices that are “necessary to protect human, animal or plant life or health,” or that relate to “the conservation of exhaustible natural resources.”   Article XX requires and WTO jurisprudence clarifies, however, that trade restrictions for ostensible environmental purposes may not be used to shield arbitrary discrimination.

The more immediate challenge under WTO rules may focus on the first phase of ACESA’s border adjustment construct-rebates to domestic industries found to be vulnerable to carbon leakage.  Article 3 of the WTO Agreement on Subsidies and Countervailing Measures prohibits subsidies contingent upon export performance.  Under WTO subsidy rules, subsidies intended to spur exports are subject to the tightest disciplines.  Experts on WTO subsidy rules do not agree on whether ACESA’s rebate provisions run afoul of the Article 3 prohibition.  Because ACESA determines eligibility for rebates in part on a formula taking into account the applicable sector’s exports, however, such a challenge cannot be ruled out.

ACESA’s many complexities, combined with a clogged legislative calendar, suggest that it will not be easy for the House and Senate to find common ground on border adjustment measures.

For further information about this topic, please contact Akin Gump.