Climate Change Report : Climate Change Lawyer & Attorney : K&L Gates Law Firm : Global Climate Law, Carbon Emissions

Status

To review, the House of Representatives already approved a massive climate change and clean energy bill last summer. The House legislation, dubbed the Waxman-Markey bill (HR 2454), passed by a razor-thin and mostly partisan margin of 219-212. It would establish an elaborate cap-and-trade system to reduce greenhouse gas emissions over the next 40 years, and would provide for various mandates and incentives for the production and use of carbon-free energy sources.

The Senate has drafted similar legislation in two parts: a clean energy bill and a cap-and-trade bill. Both bills have been approved by their respective committees. The energy bill sponsored by Senator Jeff Bingaman (D-NM), S. 1462, is a bipartisan bill approved last summer by the Energy & Natural Resources Committee, which includes a renewable energy standard and various incentives to promote clean technologies. The cap-and-trade bill sponsored by Senators Barbara Boxer (D-CA) and John Kerry (D-MA), S. 1733, was approved last fall by the Environment & Public Works Committee after a highly partisan and contentious process in which the Republicans refused to participate.

Both bills have been ready for Senate floor consideration for months. Yet, there’s been no action on the Boxer-Kerry cap-and-trade bill because most observers (including many Democrats) agree that there are not 60 votes in the Senate, which is usually required to move any meaningful bill. The reasons for this are many and strike at the very core of climate change politics.      

The first concern is that restrictions on greenhouse gas emissions will impose economic costs in the form of higher prices on carbon-based fuels. Many Senators are reluctant to support any legislation that has economic consequences, especially with the economy still struggling to recover and a near double-digit jobless rate.

The second concern is regional equity. Senators representing states dependent on carbon fuels, such as those that mine or burn coal, are concerned that their constituents will pay a disproportionate share of the costs stemming from climate change restrictions. These Senators need to be persuaded that a cap-and-trade system will not impose an unfair burden on their states just because of the type of energy they produce or consume. 

A third concern relates to the mechanics of cap-and-trade. With the memories of the subprime mortgage financial meltdown still fresh, some Senators fear that creating a new and complex market to trade carbon credits is fraught with potential gaming and even abuse. The House-passed cap-and-trade system has also been roundly criticized for giving away up front too many free credits to utilities and carbon producers to curry political support.     

The combination of these concerns, along with a healthy dose of partisan politics as the November midterm elections near, rendered the Boxer-Kerry bill essentially dead on arrival on the Senate floor. So, if the Senate were to proceed in the elusive goal to cobble together a coalition of 60 votes to pass climate change legislation, a new approach was needed. Such an alternative proposal was earnestly pursued for months by a trio of Senators: Kerry, Lindsey Graham (R-SC), and Joe Lieberman (I-CT). 

The Kerry-Graham-Lieberman proposal (or "KGL") married the greenhouse gas emission reduction targets with a more aggressive campaign to develop domestic energy resources, particularly nuclear power (the largest source of carbon-free energy), clean coal, and offshore oil and gas. Graham valiantly put himself at odds with most in his party by being prepared to accept a modified cap-and-trade program, provided it also featured some consumer protections and expanded energy production to reduce dependence on unreliable foreign supplies. KGL was packaged in national and energy security terms, not environmental terms, to attract Republican votes.

On the eve of the bill’s unveiling in late April, Graham pulled out, leaving the bill without a Republican sponsor. Graham expressed concerns that the political milieu in the Senate had been poisoned by the clumsy efforts to advance controversial immigration reform legislation ahead of climate change. Others speculated that Graham was feeling the political heat as it appeared that no other Senate Republicans were prepared to stand with him in support of KGL.

Undaunted, Kerry and Lieberman pushed ahead without Graham and released their 987- page bill, entitled the American Power Act, in May. The bill was faithful to the production-oriented climate change proposal that Graham helped craft, with a few provisions inserted to respond to the offshore drilling accident in the Gulf of Mexico.

Prospects

In the Senate, the climate change debate for this year now hinges on whether the Kerry-Lieberman bill (now "KL") can muster 60 votes for passage. The Environmental Protection Agency ("EPA") and the Department of Energy ("DOE") will release an economic modeling of the bill during June, which means it should be ready for Senate floor action in July. 

The unfolding oil spill in the Gulf also shines the political spotlight on energy policy, which should provide heightened impetus for Congress to act. In fact, Majority Leader Harry Reid (D-NV) has directed the committees of jurisdiction to provide their legislative proposals on oil spill liability and mitigation and response measures by the end of June so that they can proceed with Senate floor consideration after July 4.  However, despite the favorable politics and push to develop oil spill legislation and the strong and personal backing from President Obama, the Kerry-Lieberman bill still faces the same difficult obstacles as the original Boxer-Kerry bill. 

The first obstacle is the compressed calendar. The Senate has many other “must do” priorities, such as spending, tax, and jobs bills, as well as a Supreme Court nomination. With the Senate on recess during most of August and the November election fast approaching, there is not much time to debate climate change.

Second, the Kerry-Lieberman cap-and-trade proposal is complex and has not been fully vetted. In some respects, it’s even more complicated than the House-passed bill because it imposes individual caps on three sectors: utilities, industry, and transportation. 

Third, the whole climate change debate, and especially the cap-and-trade methodology, has become increasingly controversial. More Americans question the science on global warming and opponents of cap-and-trade have, for the moment, largely won the public relations battle.

Fourth, the legislation does not enjoy bipartisan support. Graham’s departure is very costly, because without him, there is no visible Republican support in the Senate for the Kerry-Lieberman bill. Given the current party composition of the Senate, a partisan proposal is not going to clear the 60-vote hurdle. 

Finally, the timing is wrong. Many members are rightfully fretting their reelection prospects, especially on the heels of tough votes taken to pass healthcare. The last thing the Senate Democratic leadership and the White House want is to ask moderate Democrats to “walk the plank” again by supporting a climate change bill.

Despite these dismal prospects for passing the Kerry-Lieberman climate change bill, there are some options. For instance, Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) have proposed an alternative “cap and dividend” proposal. This bipartisan approach, which gets credit for its simplicity (it’s only 39 pages of legislative text), would set up a pure auction with revenues generated returned mostly to the public. While the cap and dividend bill is getting some renewed interest as a bipartisan group of Senators have asked DOE to model its impact, it is simply too late to advance the bill this year, but perhaps the cap and dividend concept can become a fresh and viable option to the old cap-and-trade model next year. 

Another option is a straightforward carbon tax, which many economists argue is the best way to put a price on carbon to encourage the production and use of clean, non-carbon emitting energy. Yet, given the current political environment, any proposal featuring taxes will likely face entrenched opposition from Republicans and some moderate Democrats. 

Another legislative option is to proceed with the Bingaman clean energy bill, with its incentives and mandates to promote renewables and energy efficiency, most of which can probably pass the Senate this year. While the Bingaman bill enjoys bipartisan support, proponents of comprehensive climate change legislation may not support moving it separately for fear that without it being used as a sweetener, passage of cap-and-trade or other stand-alone restrictions on carbon dioxide (CO₂) will not be politically viable.  Others, however, have advocated using the Bingaman clean energy bill as alegislative vehicle to respond to the Gulf oil spill crisis and permit it to be amended on the Senate floor with climate change proposals, such as the Kerry-Leiberman bill.

A final option if Congress is unable to pass climate change legislation is for EPA to regulate greenhouse gas emissions. The agency has already started to review proposed rules that impose restrictions on major emitters of CO₂, such as coal-fired plants and certain energy-intensive manufacturing. EPA regulation would be extremely controversial and would likely be challenged by the Congress and in the courts. For instance, a privileged resolution offered by Senator Lisa Murkowski (R-AK), disapproving of EPA’s regulation of greenhouse gas emissions, fell just four votes short of passing the Senate on June 10. In addition, any climate change regulations finalized by EPA will likely trigger lawsuits that may be tied up in the federal courts for years. 

First, legislation will be necessary to mandate U.S. emissions reductions targets that stem from the Copenhagen conference. Second, the U.S. Environmental Protection Agency (“EPA”) recently released a finding that carbon dioxide and other GHGs threaten public health, permitting the agency to regulate fossil fuel emissions under the Clean Air Act (“CAA”). The timing of the announcement intentionally coincided with the start of the U.N. climate summit, not only to strengthen President Obama’s negotiating hand when he joins talks in Copenhagen, but also to add pressure on Congress to pass climate change legislation.

The EPA findings do not on their own impose new emission reduction requirements, but they allow the agency to move forward with regulations in the absence of congressional action. The Obama Administration and Democratic congressional leadership prefer legislative action to regulatory action because Congress has more flexibility than the EPA in establishing ways to gradually reduce emissions, including providing financial incentives and a setting up a cap-and-trade system. By contrast, the EPA is limited to technology-based approaches – many of which are not currently affordable or proven reliable in reducing emissions or capturing and storing carbon dioxide. Thus, EPA’s finding is seen by many as a political maneuver to force Congress to act swiftly.

Indeed, Congress is experiencing growing pressure to pass legislation to mitigate the risks of global warming – sooner rather than later.

The Maritime Industry Is a Target
The U.S. House of Representatives passed comprehensive legislation (“H.R. 2454”) in June that would mandate a reduction in GHG emissions – marking the first time that a chamber of Congress has voted for a bill to mitigate global warming – and the U.S. maritime industry has been targeted by its provisions.

According to the EPA, transportation sources are responsible for approximately 27 percent of the total U.S. GHG emissions – the largest single category of sources in the United States. Of this amount, about 19 percent comes from heavy-duty trucks and another three percent from vessels. These figures do not include GHGs emitted outside of U.S. ports. The International Maritime Organization (“IMO”) estimates international maritime shipping accounts for 2.7 percent of global anthropogenic GHG emissions, and when combined with domestic shipping, vessel emissions represent 3.3 percent of all GHGs emitted globally, with carbon dioxide being the most prevalent of the GHGs.

H.R. 2454 would amend the CAA to give the EPA sweeping new authority to regulate GHGs, including changes that would impact mobile sources, including marine vessels. These new mandates on marine fuel and engines would be in addition to the major changes proposed by EPA and the IMO last year to reduce vessel emission of sulfur and nitrogen oxides.

The timetable for climate change legislation in the Senate has stalled due to negotiations over health care overhaul legislation and several procedural hurdles. For example, a climate change bill sponsored by Senate Environment and Public Works Committee Chairwoman Barbara Boxer (D-CA) was passed by the committee in November, but only after Boxer used an unprecedented procedural tactic to report the legislation in the absence of Republican participation in its consideration. At this point, that bill is no longer the primary legislative vehicle that the Senate is considering.

Senate Majority Leader Harry Reid (D-NV) has stated most recently that a climate change bill will reach the Senate floor in the spring. Senators John Kerry (D-MA), Lindsey Graham (R-SC), and Joseph Lieberman (I-CT) have been working for weeks to come up with a proposal that could win the 60 votes needed to pass the Senate. Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) introduced a bill on December 11th that would set a price on carbon dioxide emissions from fossil fuels and return the revenue to customers. Additional proposals are likely to be introduced over the next few months. Senator Reid is expected to combine provisions of the various proposals into the version that will be debated on the Senate floor. The House provisions affecting the maritime industry are being considered as senators draft climate change legislation and many of them may ultimately end up in any final bill signed by the President.

Proposals Pose New Challenges
The proposals currently being considered by Congress present unprecedented and unique challenges for the maritime industry because (a) unlike other regulated sources of GHGs, the maritime industry is not exclusively located within U.S. boundaries; (b) most fuel used by the maritime industry is not purchased from U.S. sources; (c) vessels may only spend a fraction of a voyage in the United States; and (4) vessels can move from port to port and between and among areas with differing levels of compliance with air quality standards.

Below is a summary of key proposals that are being considered by lawmakers that will impact the maritime industry if they are enacted in climate change legislation.

GHG Emissions Standards
Climate change legislation may direct the EPA to set emissions standards for new marine vessels and new engines used in marine vessels.

For example, H.R. 2454 would base these new limits on “the greatest degree of emissions reduction achievable through the application of technology which the Administrator determines will be available for the model year to which such standards apply, giving appropriate consideration to cost, energy, and safety factors associated with the application of such technology.”

The concept of including technology-forcing standards as a means of achieving reductions of pollutants is not new in the environmental arena. Such standards exist under both the CAA and the Clean Water Act, but compliance with future technological performance standards that are set well beyond contemporaneously achievable levels can be costly, burdensome, or even infeasible, if not designed appropriately.

Controlling GHG emissions from marine vessels is further complicated by the fact that foreign trade has grown dramatically in recent decades, a significant portion of GHG emissions from ocean-going vessels (“OGVs”) occurs in international waters, many OGVs are not registered in the United States, and many vessel owners or operators do not purchase their fuel from U.S. producers. The maritime industry has therefore advocated an international approach to GHG reductions as more suitable for this community. The IMO is currently undertaking an analysis of GHG reduction measures for OGVs.

Restricting GHG emissions from OGVs via U.S. climate change legislation, as opposed to international treaties, also raises concerns about the economic and diplomatic impact of such domestic measures on free trade and global competition and demands careful integration with international efforts.

Cap-and-Trade Program
Climate change legislation may grant the EPA Administrator the discretion to establish a cap-and-trade program for mobile sources, including marine vessels.

A cap-and-trade program would begin by creating a limit or “cap” on the total amount of GHG emissions that will be allowed, usually expressed in tons per year. The emissions allowed by the cap would be divided into permits or credits that give the owner the right to emit certain amounts of GHGs. Over time, the overall size of the cap would be reduced as is the amount of GHGs that may be emitted from each source. In the meantime, if the owner of the right to emit certain GHGs can remain under his or her limit, he or she can sell, bank, or trade the excess GHG credits within or across classes or categories of regulated mobile sources. A source that is unable to stay within its cap can purchase excess credits from others, thus creating a market-based approach to regulating GHGs. These markets currently exist under the CAA for sulfur dioxide and certain other regulated pollutants. The concept behind a cap-and-trade program is fairly simple, but the particulars are complex and raise several important design questions: 

• At what level should the emissions cap be set?
• To which vessels would it apply? 
• How will GHG emissions be measured? Will each source have to develop and install monitoring devices on every source of a GHG?
• Would emission allowances be auctioned or allocated? (Distribution of emissions allowances is among the most controversial components in a cap-and-trade debate because of their ability to transfer billions of dollars of wealth across different sectors.)
• Would the compliance costs of such a program be unduly burdensome to the inherently mobile maritime industry? 
• How would the revenue raised by auctioning allowances be spent? Will it be returned to sources regulated under the cap to help defray the cost of compliance? Will it be used for research, development, and deployment of energy-efficient shipping equipment? Will it be used for unrelated purposes such as providing tax cuts for some? 
• How would a cap-and-trade program in the United States fit with international efforts? Would it create conflict or synergies?

Energy Performance Certification
Climate change legislation may also authorize the EPA to establish a program for shippers and carriers of goods, such as the “SmartWay Transport Program” established in H.R. 2454, that includes certifying the energy and GHG performance of participating freight carriers, including marine participants.

Under such a program, EPA would be required to publish a comprehensive energy and GHG performance index of freight modes and individual freight companies to provide shippers with the information they need to deliver their goods more efficiently. While advocates of the proposed program would encourage this certification as a way to promote energy efficiency, others contend that establishing transportation efficiency standards is sufficient.

Low Carbon Fuel Standard
Climate change legislation could establish a new low carbon fuel standard (“LCFS”) that requires the reduction of the lifecycle emissions intensity of transportation fuels used in vessels.

An LCFS was included in a climate change discussion draft that was circulated by House Energy and Commerce Committee Chairman Henry Waxman (D-CA) before he introduced H.R. 2454. Under that program, refiners, blenders, and other fuel providers would be required to ensure that the annual average lifecycle emissions from fuel sold in the United States are no greater than they were in a previous or “baseline” year. Over time, the percentage by which carbon emissions must be reduced below the amount emitted during the baseline year would increase.

The draft would have given the EPA Administrator discretion to include fuel used in OGVs in the LCFS. Given the amount of GHGs emitted by OGVs, the Administrator may ultimately decide to include such fuels in the baseline. OGVs have historically used bunker fuel but are required to transition from bunker fuel to lighter, cleaner fuels over the next decade under new requirements adopted by the IMO last year in amendments to MARPOL Annex VI. EPA has proposed even lower sulfur standards in a pending rulemaking that would establish an Emissions Control Area around the United States. An LCFS could result in the imposition of further requirements on the fuel used in OGVs.

Additionally, most GHGs are emitted as a result of fuel combustion; however, approximately 20 percent of GHGs accounted for in the lifecycle analysis of fuels can come from source-specific emissions, which may have an effect on preferred sources. For example, crude oil extraction from Nigerian or Canadian oil sands produces greater GHG emissions than crude oil extracted from Venezuela or Saudi Arabia. If importers begin shifting crude oil purchases to sources with fewer GHG emissions, trading patterns and the resulting voyage patterns could be affected.

The Role of the States
The climate change debate has once again raised the issue of whether federal legislation should preempt efforts by state and local governments to curb GHG emis¬sions and presents unique challenges for the maritime industry.

While the international approach to regulating maritime GHGs has uniformity and consistency as its hallmark, U.S. legislation often allows states to set their own standards. H.R. 2454 would preempt states from implementing their own cap-and-trade programs from years 2012 through 2017 and then retains states’ authority to do so after 2017.

While some stakeholders support allowing states to set more stringent GHG standards than what might be permitted under federal cap-and-trade legislation, such a patchwork could also significantly undermine the development of markets for trading. Opponents contend that separate state approaches would raise compliance costs and translate into a number of potentially conflicting reduction requirements.

Citizen Suits for Injury from Air Pollution
Climate change legislation could significantly expand the grounds upon which “citizen suits” may be brought.

Chairman Waxman’s initial discussion draft would have permitted any citizen who has “suffered, or reasonably expects to suffer, a harm” to bring a suit against any person who is believed to be responsible for a violation of an emission standard or limitation to which the harm can be attributed. “Any person” would have included the EPA, as well as vessel owners and operators. The term “harm” included “any effect of air pollution (including climate change), currently occurring or at risk of occurring, and the incremental exacerbation of any such effect or risk that is associated with a small incremental emission of any air pollutant . . . whether or not the risk is widely shared.” Under the draft, an “effect” or “risk” associated with any air pollutant “shall be considered attributable to the violation or failure to act at issue if the violation or failure to act slows the pace of implementation of this Act or compliance with this Act or results in any emissions of GHG or other air pollutant at a higher level than would have been emitted in the absence of the violation or failure to act.”

Authorizing suits addressing climate change represents a significant expansion of judicial claims and relaxes the historical requirement that a plaintiff must show actual injury and causation before being permitted to sue.

Going Forward
In response to increasing pressure to act swiftly to reduce domestic GHG emissions, members of Congress plan to spend the coming months crafting and negotiating climate change legislation. No matter the pace at which the legislation is considered, the maritime industry is now clearly one of the targets of congressional efforts to reduce GHG emissions, and now is the time for industry to weigh in to shape the debate.