Adding to the evolving debate on how and whether the US should regulate greenhouse gas (GHG) emissions from aircraft, the Environmental Protection Agency (EPA) announced plans to seek public comment on two petitions urging the Agency to curb aviation emissions, during recent testimony to the House Select Committee on Energy Independence and Global Warming.

The two petitions - one by a group of states including California and the other by a coalition of environmental groups - urge EPA to (1) determine that aircraft emissions cause or contribute to air pollution and endanger public health and (2) adopt regulations to control such emissions.

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In California, project sponsors and government agencies are facing increased pressure to analyze the impact of proposed projects on climate change. The California Environmental Quality Act (CEQA) requires a lead agency, before approving a project, to evaluate the potentially significant environmental impacts of that project and to adopt feasible measures to mitigate those impacts.

These requirements place project sponsors and California agencies in a difficult position because there is currently no regulatory guidance on how to evaluate an individual project’s contribution to climate change, much less how to determine whether a project’s potential contribution to climate change is “significant.” To address this difficulty, the Governor’s Office of Planning and Research (OPR) has been instructed to develop CEQA guidelines “for the mitigation of greenhouse gas emissions or the effects of greenhouse gas emissions.” OPR must complete its draft guidelines by July 1, 2009.

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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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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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Project sponsors in California increasingly have become concerned about how to evaluate the potential climate impacts of their proposed projects under the California Environmental Quality Act (CEQA). AB 32, which seeks to reduce greenhouse gas emissions in California by an estimated 30% by the year 2020, has led some parties to contend that government agencies must take into account the potential climate impacts of the projects they approve, even if the projects contribute as little as “one molecule” of greenhouse gas.

Under CEQA, state and local agencies must evaluate and disclose the significant environmental impacts of proposed projects, and must adopt feasible measures to mitigate those impacts. These requirements place project sponsors and California agencies in a difficult position, because there is no regulatory guidance on how to evaluate an individual project’s contribution to climate change, much less how to determine whether a project’s potential contribution to climate change is “significant.” Until such guidance is developed (see recent efforts by Office of Planning and Research), agencies are faced with the dilemma of either (a) concluding that climate change is too speculative for evaluation and facing potential litigation from environmental advocacy groups and the California Attorney General, or (b) developing an ad hoc methodology for evaluating a project’s contribution to climate change, which may lead to unnecessary and costly environmental impact analysis and mitigation requirements.

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Regulated industries are facing increasing pressure to craft practical strategies to decrease emissions of greenhouse gases. Through a series of “sector spotlights,” ClimateIntel.com assesses the challenges and opportunities a carbon-limited economy will bring to specific sectors. This spotlight explores four reasons why the chemical industry should position itself as an active player in the climate change debate. Read the rest of this entry »

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The Congress seems poised to pass the first increase in fuel efficiency mandates in a generation. The Democratic leadership has been meeting behind closed doors to hash out the remaining issues surrounding their energy plan. Among the most contentious of these is what to do about automobile mileage. The Senate passed language that would raise standards for all vehicles to 35 miles per gallon by 2020. The House-passed bill did not establish a new standard, but two competing pieces of legislation – one raising standards to 35mpg by 2018, the other raising them to 32mpg by 2022 – each had more than 150 co-sponsors. Any of the three plans would mean drastic changes for American automakers.

No single automaker seems as poorly positioned for a changed environment, however, as Chrysler. This is due primarily to how these standards actually operate. Most people, Members of Congress included, do not realize that efficiency standards do not apply to vehicles made, but rather to vehicles sold. Each manufacturer must adjust their vehicle mix to ensure that the average fuel economy of the vehicles they sell meets the standard set by the government. If, for example, General Motors sells more Chevy TrailBlazer SUVs than Chevy Aveo subcompacts, they have to ensure that their pick-ups are relatively efficient. If, by contrast, Toyota sells more Priuses than Tundras, they can afford to have less efficient Tundras.

Chrysler has a vehicle mix heavily weighted toward relatively lower gas mileage “muscle cars” (the Dodge Viper, the Chrysler 300) and trucks (the entire Jeep line, Dodge Ram). The Senate language makes no room for vehicle type – 35mpg for a vehicle fleet will hit trucks and SUVs hard. Chrysler likely will have more difficulty adjusting to higher standards than its competitors. Chrysler has already announced, seemingly in anticipation of these new rules, that it intends to cancel the Crossfire, Magnum, and Pacifica models; announced the sale of Smart cars; and announced the eventual importation of China’s Chery subcompact cars to be sold under the Dodge label.

The future business decisions of Chrysler might be pushed in one direction or another based largely on whether cars and light trucks are separated in any new fuel efficiency arrangement.

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