Climate Change and Clean Technology Blog

California Adopts Revolutionary New Clean Car Standards

Sheppard Mullin — Fri, 10 Feb 2012 16:30:50 -0800

On January 27, 2012, the California Air Resources Board (“ARB”) notched a potential victory in the battle against greenhouse gas (“GhG”) emissions. In a unanimous vote, ARB adopted the Advanced Clean Cars (“ACC”) regulatory package, which is a program designed to deliver cleaner air, reduce GhG emissions, and help build the market for fuel cell and battery-electric vehicles. At the opening of the ARB hearing on this historic vote, Mary Nichols, ARB Chairman, predicted:

This program will make the cleanest cars and the new technologies commonplace. The Advance Clean Cars package will help clean our air, help us fight climate change, and perhaps most important for the average citizen, save thousands of dollars over the life of the vehicles. It also gives us the ability to brag that we are the clean car capital of the world.

The robust ACC program combines various automotive regulations into a package of standards and initiatives applicable to model years 2015-2025. The ACC program is designed to address two important environmental and public health threats – climate change and unhealthy levels of smog and particulate pollution – by substantially reducing, and potentially eliminating, heat-trapping emissions. The program is composed of three separate, yet equally important prongs: Zero Emission Vehicle Program, LEV III Standards, and Clean Fuel Outlet Program.

Zero Emission Vehicles Program

First, the ACC program touts the Zero Emissions Vehicle (“ZEV”) regulation as the “technology forcing piece” of the package. This regulation requires a minimum number of battery electric, fuel cell electric, and plug-in hybrid vehicles to be sold in California. The anticipated target for this regulation is 1.4 million ZEV by 2025, accounting for 15% of the new vehicles sold. Future emissions-reduction efforts will need to be even more ambitious, as ARB predicts that 87% of the cars on the road will need to be ZEV to achieve the goal of reducing GhG emissions to 80% below 1990 levels by 2050. The plug-in hybrid car is the presumed transitional model for the next twenty years.

The new ZEV regulation simplifies the method for credit allocation based on zero emission ranges. Automobile manufactures will receive 1.5 credits for 100-mile battery electric vehicles and 3.5 credits for 300-mile fuel-cell electric vehicles. The credit allocation method also allows automobile makers to bank ZEV credits indefinitely for use in later years.

Additionally, a special provision has been adopted that will allow automobile manufacturers to overcomply with GhG fleet standards (as discussed below) to offset ZEV requirements for 2018-2022. However, in order to be eligible, manufacturers must buy a certain percentage each of the four years.

"These robust, zero-emission vehicle standards will provide the market assurance automakers and the energy industry need to transform the electric vehicle in to a mass-market success," said Don Anair, senior engineer with the Union of Concerned Scientists' Clean Vehicles program. "This landmark initiative will strengthen California's emerging electric vehicles industry, creating jobs and making zero-emission vehicles more affordable for consumers."

LEV III Standards

The second piece of the package is ACC’s LEV III regulations that control soot, smog-causing pollutants and GhG emission. LEV III aims to reduce fleet average emissions of new passenger cars, light-duty trucks, and medium duty passenger vehicles to super ultra-low-emission vehicle levels by 2025. In addition, the life durability requirements for vehicles have been increased from 120,000 to 150,000 miles. LEV III regulations also implement zero fuel evaporative emission standards for passenger cars and light-duty trucks, and more stringent evaporative standards for model year 2017-2025 medium-duty vehicles. Furthermore, GhG emissions will be reduced to 166 grams per mile – a 34% reduction from 2016 levels – and the standard will be achieved through more efficient drive trains and engines, the use of stronger and lighter materials, and other, already existing technologies.

These regulations were developed over the past three years through extensive coordination with the federal government and the automobile industry itself. This cooperative effort included a joint fact-finding process with shared technical and engineering studies. The program has been designed to harmonize with and parallel the federal rules proposed by the Obama administration in the summer of 2011.

Clean Fuels Outlet Program

Finally, the third prong of the program is the Clean Fuels Outlet (“CFO”) regulation, which is intended to ensure that ultra-clean fuels, like hydrogen, are available to meet vehicle demands associated with the special ZEV "overcompliance" provision. The CFO regulation ensures that adequate fueling infrastructure will be available by requiring construction of alternative fuel stations. This requirement is triggered when there are 20,000 alternative fuel vehicles using a particular fuel. The regulation also includes a modification that lowers the activation trigger to 10,000 vehicles for air basins. This is intended to complement auto manufacturers’ early commercialization plans to market fuel cell vehicles. The regulation does include a penalty provision for manufacturers’ noncompliance, if ARB is able to substantiate a claim that the manufacturer(s) knowingly falsified a report.

Currently automobile manufacturers, industrial gas suppliers, non-government organizations and the State of California are negotiating a Memorandum of Agreement (“MoA”) to support up to 100 clean fuel stations as an alternative to the CFO. If the MoA process is successful, then the requirement to build clean fuel stations will end. However, if the MoA process does not succeed, then the CFO requirements remain in force.

End Results

In hard numbers, by 2025, the ACC program is designed to deliver:

34% decrease in GhG emissions from cars including a 52 million-ton reduction of GhG emissions by 2025 and a cumulative 870 million-ton reduction of GhG through 2050;
1.4 million ZEV and plug-in hybrid vehicles on Californian roads by 2025;
1 in every 7 new cars sold in California will be a ZEV or plug-in hybrid (roughly 15.4%);
$5 billion savings for California drivers in operating costs; and
75% reduction in smog-forming emissions.

Other ACC Program Benefits

Not only is the ACC program expected to benefit California air quality, the program is also designed to increase State revenue. ARB analysts estimate that the program will save Californians $22 billion through 2025. Even after paying for the clean car technology, individual consumers are projected to save $4,000-$6,000 over the average life of a car sold in 2025. Specifically, the added cost of the technological improvements will be fully recovered from fuel savings in approximately the first three years of the car’s ownership. In addition, by 2025, the program is projected to create 21,000 new jobs across the State as consumers spend less on gas and more on other consumer goods. It remains to be seen whether these projections will materialize.

ARB Passes Final Regulations for Cap-And-Trade Program

Sheppard Mullin — Thu, 03 Nov 2011 15:03:31 -0800

After months of CEQA litigation and political lobbying, including an appeal to the California Supreme Court (previous article can be found here), California's landmark climate change bill, the Global Warming Solutions Act of 2006 ("AB 32"), has been modified and appears ready to be implemented starting in January 2012.

As reported in prior blogs (which describe the mechanics of cap-and-trade in more detail), on July 25, 2011 the California Air Resources Board ("ARB") issued modifications to the cap-and-trade program, the primary greenhouse gas ("GHG") emission reduction strategy for achieving AB 32's mandate of cutting emissions to 1990 levels by 2020. The public comment period for these modifications ended August 11, 2011. On September 12, 2011, ARB staff proposed additional modifications addressing public comments and reflecting as additional staff analysis and stakeholder engagement. The public comment period for the second round of modifications ended September 27, 2011.

ARB unanimously adopted the final cap-and-trade regulation in an eight hour meeting on October 20, 2011. This made California's cap-and-trade program the nation's first state-administered cap-and-trade regulation and a landmark moment in the history of air pollution regulation. This final regulation was filed with the California Office of Administrative Law prior to the October 28, 2011 deadline for review and approval. Once the final regulations are approved by the California Office of Administrative Law, the regulation will go into effect on January 1, 2012.

The final regulation includes changes to the applicability of the cap-and-trade program relating to imported electricity and inclusion of a formula, and the resulting allocations, for state electricity providers. Changes also include modifications, such as auction purchases and holding limits, that are designed to prevent market manipulation. Most notably, the modified language in the final regulation postponed the compliance obligation to January 1, 2013, while maintaining the January 1, 2012 start date for allocation, auction, and trading. The first allowance auctions will be held in August and November of 2012. Starting in 2013, auctions will be scheduled on a quarterly basis.

Beginning in 2013, the start of the first compliance period, the state's largest emitters will be required to meet the assigned cap on carbon emissions or buy carbon credits to cover the difference. The delayed start means that retirement allowances will not be required for 2012, but the compliance date will have the same end period as previously written - December 31, 2014. Under this modification, covered entities will still be required to retire allowances covering 30% of their 2013 verified emissions by November 1, 2014. The remainder of allowances for the two year compliance period will be due November 1, 2015.

The second phase of compliance will begin in 2015 and is estimated to cover 85% of California's emission sources.

The final vote, which was applauded by former Governor Arnold Schwarzenegger as a "major milestone for California's continued leadership in reducing the world's greenhouse gas," is being closely watched by other states and is expected to act as a model for future legislation. In fact, California is currently working closely with six other western states and four Canadian providences through the Western Climate Initiative to design a regional program that can deliver GHG emission reductions within the region at a lower cost than could be realized through a California-only initiative alone.

Some business and industry leaders criticize this most recent action as onerous and an incentive for businesses to leave the state, resulting in lost jobs for California citizens. Again, only time will tell what the ultimate outcome in this environmental debate will be. Stay tuned...

Authored By:

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

and

Olivier Theard
(213) 617-5427
otheard@sheppardmullin.com

California AB 32's Cap-And-Trade Program Developments

Sheppard Mullin — Wed, 05 Oct 2011 10:26:17 -0800

By Randolph Visser, Olivier Theard and Whitney Hodges

This article is the latest in a series chronicling the first litigation challenge to AB 32 (the Global Warming Solutions Act) and the cap-and-trade program in Association of Irritated Residents, et al. v. California Air Resources Board, Case No. CPF-09-509562, ("Ass'n of Irritated Residents v. CARB "). Though environmental justice groups continue to object to cap-and-trade as the primary vehicle to reduce greenhouse ("GHG") emissions to 1990 levels by 2020, the California Supreme Court recently allowed California Air Resources Board's ("ARB") cap-and-trade implementation to move forward, and agency rule development continues.

Agency Development

On August 24, 2011, the ARB Board ("Board") unanimously approved both ARB's new supplemental assessment ("Supplement") and re-approved its Scoping Plan, which provides the overall roadmap and rule measures to carry out AB 32. The Board also approved a more robust California Environmental Quality Act equivalent document supporting the supplemental analysis of the cap-and-trade program.[1] The Board's determination was made at the conclusion of a presentation by ARB staff and arguments proffered by environmental justice groups. Environmental justice groups' arguments centered around the contention that a cap-and-trade program would allow large industrial emitters of GHG to meet their obligations through the purchase of offsets and emissions from other locations, which would discriminately impact low-income and minority areas. Ultimately, the ARB Board approved cap-and-trade in spite of concerns raised by environmental justice groups. The Board also considered the written public comments to the supplemental analysis, and ARB staff's prepared responses to those comments.[2]

While ARB declined to comment on the Board's vote, this development ultimately reaffirms the organization's support for the controversial cap-and-trade program. The vote also validated the belief amongst its supporters that cap-and-trade is the most effective tool in reducing GHG emissions. As currently written, the cap-and-trade program would cover eighty percent (80%) of the state's emissions, including 360 business representing 600 facilities across the state.

According to a source close to ARB, the newly approved Supplement may not contain the only revisions and additions to AB 32, the Scoping Plan, and the cap-and-trade program. Amendments to be considered in future ARB meetings include expansion of the supply of GHG offsets, protection for in-state companies from trade exposure to out-of-state companies, linkage to other trade programs, and design of a market-trade system.

Additional revisions prior to the 2013 launch of the cap-and-trade program would stem from legally sensitive, complex issues facing California officials regarding cost containment and impacts on out-of-state activities. As with the revisions adopted by the Board in August, any further change would probably renew opposition to the already highly controversial program.

Currently, ARB is scheduled to approve dozens of revised implementation regulations for the cap-and-trade program at its October 20-21, 2011 meeting. On September 12, ARB staff released a set of final revisions to be discussed at this October meeting. The fifteen-day public comment period for these revisions ended September 27. Comments have been received by environmental groups, major industry organizations, carbon-offset traders and other stakeholders.

Litigation Development

As explained in prior blogs, a California Superior Court decision from earlier this year halted implementation of cap-and-trade. On June 24, the First District Court of Appeal issued an order granting ARB's petition for a writ of supersedeas.[3] This stayed the Superior Court's ruling[4] against the program and allowed ARB to continue to advance and finalize plans for the cap-and-trade program while the Appellate Court determined the merits of ARB's appeal. The Center for Race, Poverty, and the Environment filed a petition for review with a request for stay with the California Supreme Court on July 26.[5] In its petition, the Center asked the Supreme Court to lift the stay on the injunction to again stop ARB from continuing to work on the cap-and-trade program. The petitioners also requested that the Supreme Court hear ARB's appellate petition.

The petitioning environmental groups argued that the Appellate Court should not have granted a stay on the lower court's injunction. The groups also insisted that ARB should have to complete a "meaningful environmental review of alternatives to cap-and-trade program before the rules can be finalized, and that the new review approved last month is deficient." ARB's attorneys countered that the petitioners failed to raise an "important question of law justifying review." Instead, ARB contends that petitioners mischaracterized the cap-and-trade proceeding as "premature implementation," rather than the non-final administrative proceeding it was. ARB also argued that the trial court's injunction was mandatory in effect, rather than prohibitory as alleged by the petitioners.

On September 28, 2011, after review of the advocates' petition and ARB's answer, the California Supreme Court declined to immediately halt implementation of the cap-and-trade program. The Supreme Court's decision was limited only to the stay application instituted by the Appellate Court, and was not a ruling on the merits. The Court of Appeal will continue to hear ARB's appeal on the merits of the Superior Court's final order.

In addition to the pending Ass'n of Irritated Residents appeal, ARB may soon be facing other suits against its cap-trade-program. Brent Newell, the attorney representing the Center for Race, Poverty, and the Environment in the above-mentioned Supreme Court ruling, recently noted that it is likely there will be a direct legal challenge to the revised analysis and Scoping Plan Supplement approved by the Board in August. A lawsuit could be filed as early as January 2012, after state administrative officials finalize regulations to implement the cap-and-trade program.

On other fronts portending additional litigation, the California Chamber of Commerce, and other state industry groups have alleged, and continue to allege, that the state's plan to sell GHG allowances under its cap-and-trade program amounts to a tax requiring two-thirds (2/3) approval of the California Legislature. These groups claim the allowance payments to the states are, in reality, taxes that do not provide a direct benefit or service to the fee payer, in violation of California law. State officials have publically denounced these legal claims to be misguided. Specifically, ARB maintains the auction sales are not subject to a two-thirds (2/3) vote.

Further, California utilities have raised various legal objections regarding ARB's regulation of interstate electricity transactions under the cap-and-trade program. Specifically, state utilities are worried their compliance with the program will subject them to complex ramifications if they purchase electricity from the United States Department of Energy Bonneville Power Association ("BPA"), a major electricity-supply agency in the Pacific Northwest. Adding fuel to these fears, BPA has signaled it may bring suit against ARB for regulating activities under the cap-and-trade program.

In a letters dated September 20 and August 1, 2011, BPA attorney J. Courtney Olive, contends that ARB has no authority to regulate BPA since BPA operates as a sovereign entity. Olive charges that, despite ARB's contention that the Clean Air Act waives sovereign immunity, it is questionable whether that waiver would be applicable to BPA due to the fact BPA is "purely a marketer that is not engaged in an activity that discharges pollutants." At this point, BPA is participating in the cap-and-trade program in a voluntary basis, but is concerned that mandatory regulations could interfere with "existing contracts and conflict with the marketing scheme established by Congress in BPA's governing statutes."

Only time will tell what the final determination of Ass'n of Irritated Residents v. CARB and the future of the cap-and-trade program as proposed by AB 32 will be. More updates to come...

Authored By:

Randolph Visser
(213) 617-4144
rvisser@sheppardmullin.com

and

Olivier Theard
(213) 617-5427
otheard@sheppardmullin.com

and

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

[1] Discussion of the supplemental analysis can be found here. As explained in prior blogs on this website, ARB was compelled to present a more detailed assessment of cap-and-trade in order to overcome legal challenges.

[2] The final version of the supplemental analysis approved by the Board, the ARB staff's presentation, and its response to written comments on the analysis can be found here.

[3] Ass'n of Irritated Residents v. CARB, Case No. A132165, in the California First District Court of Appeal can be found here.

[4] Discussion of the Superior Court ruling can be found here.

[5] Ass'n of Irritated Residents v. CARB, Case No. S195112, in the California Supreme Court can be found here.

Environmental Justice Groups Intensify Judicial and Legislative Campaign Against California's Proposed Cap-and-Trade Program

Sheppard Mullin — Mon, 01 Aug 2011 10:17:51 -0800

By Olivier Theard

Environmental Justice groups have redoubled their efforts to terminate the California Air Resources Board’s (CARB) proposed cap-and-trade program to reduce greenhouse gas (GHG) emissions to 1990 levels by 2020 under the Global Warming Solutions Act (AB 32). As opposed to a traditional regulatory approach whereby a GHG source would be forced to reduce its on-site emissions, cap-and-trade is a market based approach that allows a GHG source the option to either reduce on-site emissions, or to offset its emissions or pay another source to reduce GHG emissions. Environmental Justice groups have long argued that a market based cap-and-trade program would allow GHG sources to buy their way to compliance and result in disproportionately higher emissions in lower-income communities where large GHG sources reside. These groups have now increased their opposition to cap-and-trade on both the judicial and legislative fronts.

Litigation Update

As set forth in our prior blog articles (found here, here and here), in Ass'n of Irritated Residents v. CARB the Superior Court sided with the Environmental Justice groups suing CARB, ruling that in adopting cap-and-trade, CARB did not perform the rigorous analysis required by the California Environmental Quality Act (CEQA). The Superior Court enjoined cap-and-trade implementation. After a series of legal maneuvers, the California Court of Appeal stayed the injunction, thereby allowing CARB to proceed with rulemaking even as the legal case against it continued.

Conceding nothing, on July 28, 2011 these Environmental Justice groups petitioned the California Supreme Court to overturn the stay and enforce the injunction against cap-and-trade implementation until the legal case is decided on the merits. The Petition for Review can be found here. The groups argue that CARB, which has violated CEQA, should not be permitted to implement an unlawfully adopted cap-and-trade program. In part, the groups argue that CARB’s decision to effectively delay cap-and-trade by one year (beginning implementation in 2013) means that CARB will not be irreparably harmed by continuing the stay on implementation. The Supreme Court has not yet decided whether to grant review.

Legislative Update

While the judicial battle continues, a coalition of over 40 environmental groups not involved in the lawsuit are stepping up efforts to convince lawmakers, including Governor Jerry Brown, that cap-and-trade is poor public policy and technically flawed. These groups sent a letter to the Governor requesting that he “rescue AB 32 from uncritical trust in the markets . . . that threatens to undermine an otherwise groundbreaking effort.” (the letter can be found here). In addition to making arguments about impacts on low-income populations, these groups argue that “different GHGs have vastly different profiles in terms of the length of time they remain in the atmosphere,” thereby rebutting the assumption behind cap-and-trade, which is that the nature and location of GHG emissions do not matter so long as emissions are reduced overall.

While cap-and-trade still appears to be the favored approach, the Governor has indicated that “these complex, expensive systems require continuous evaluation and modification.” Other lawmakers may be considering cap-and-trade alternatives, as the Legislative Analysts’ Office (LAO) has recently issued several letters expressing concern over “gaming” the market based system, and the LAO proposed several regulatory options that could achieve the same or more GHG reductions than cap-and-trade.

This blog will continue to update on any significant developments in the world of AB 32 and cap-and-trade.

Authored By:

Olivier F. Theard
(213) 617-5427
OTheard@sheppardmullin.com

June Proves To Be A Busy Month For ARB And Its Proposed Cap-and-Trade Program

Sheppard Mullin — Wed, 06 Jul 2011 08:28:10 -0800

By Whitney Hodges

June was certainly an interesting month for those following the progression of California’s Global Warming Solutions Act ("AB 32"), which requires that California cut greenhouse gas ("GHG") emissions to 1990 levels by 2020. The "linchpin" of AB 32 is a proposed cap-and-trade program, a market-based approach to reducing GHG emissions in which the California Air Resources Board ("ARB") sets a collective cap on GHG emissions and then allows under- and over-polluters to buy and sell credits among themselves. However, recent judicial and agency developments have altered the cap-and-trade landscape. At the very least, the cap-and-trade program, if it survives judicial review, will not begin in earnest until 2013 (instead of the planned January 1, 2012 start date).

LITIGATION DEVELOPMENTS

(1) Association of Irritated Residents v. California Air Resources Board

In 2009, a citizen’s group, Association of Irritated Residents ("AIR"), challenged ARB’s adoption of the cap-and-trade program found in the AB 32 Scoping Plan (the Plan for compliance with AB 32), alleging that ARB failed to adequately analyze alternatives to the cap-and-trade program, thereby violating the California Environmental Quality Act ("CEQA").

On March 18, 2011, Judge Ernest H. Goldsmith of the San Francisco County Superior Court agreed with AIR's contention that ARB was in violation of CEQA. Judge Goldsmith found ARB had not adequately weighed or analyzed the alternatives to the cap-and-trade program when it adopted an implementation strategy for AB 32. Judge Goldsmith's final order, including a writ issued on May 20, halted all rule-making activities related to the cap-and trade program until ARB complies with the requirements proscribed under CEQA. (For further discussion on this, please see prior article here.)

(2) District Court of Appeal Grants ARB's Petition for a Writ of Supersedeas

On June 1, ARB appealed Judge Goldsmith's final order to the First District Court of Appeal. ARB then filed a petition for a writ of supersedeas, which requested the Court confirm that Judge Goldsmith's injunction on the implementation of the cap-and-trade program was automatically stayed pending the determination of the underlying appeal. On June 3, the Court of Appeal issued a temporary stay while it considered whether the lower court's injunction was "mandatory" or "prohibitory." (For further discussion on this, please see prior article here.)

AIR argued that Judge Goldsmith's final order was both mandatory and prohibitory. The mandatory element, according to AIR, requires ARB to conduct an appropriate alternative analysis for the Scoping Plan. AIR argued that this part of the injunction may be automatically stayed pending the appeal. However, AIR argued the prohibitory element – the instruction in Judge Goldsmith's order preventing ARB from continuing to implement and develop its cap-and-trade program – is not automatically stayed once an appeal is filed.

ARB argued that the lower court's final order would force ARB to miss the first year deadline for completing the necessary rulemaking procedures as directed under the state's Administrative Procedures Act, thereby eliminating its ability to timely implement AB 32 in accordance with statutory requirements. This injunction, according to ARB, results in improper interference. In the alterative, ARB argued, under a balancing of the harms test, the Court should grant a "discretionary" stay if an automatic stay is determined to be inappropriate.

On June 24, the First District Court of Appeal issued an order granting ARB's petition for a writ of supersedeas. Pending the Appellate Court's consideration of ARB's appeal, the San Francisco County Superior Court order requiring ARB to halt all development and implementation of the cap-and-trade program is stayed. This means ARB is permitted to continue to advance and finalize plans for the cap-and-trade program while the Appellate Court determines the merits of ARB's appeal.

Ass'n of Irritated Residents v. CARB, Case No. A132165, in the California First District Court of Appeal can be found here.

AGENCY DEVELOPMENTS

(1) ARB Releases Supplemental Analysis of Scoping Plan Alternatives

While the Court of Appeal took into consideration the arguments regarding ARB's petition for the stay, ARB pursued another course of action. On June 13, ARB released a revised and supplemental analysis of alternatives to the Scoping Plan (the "Supplement"). (The Supplement can be found here.) The release began a forty-five (45) day public review and comment period. In addition, ARB has scheduled two public hearings for July 8 and July 15 to discuss the Scoping Plan. ARB also formally noticed a hearing before the full Board for August 24, 2011.

The Supplement presents a revised analysis for five (5) proposed alternative measures to be potentially utilized in implementing AB 32's Scoping Plan and is much more detailed than the original environmental analysis. The Supplement reassesses the following alternatives, which were included in the original analysis:

a. A "no project" alternative (or taking no action at all);[1]

b. A plan relying on a cap-and-trade program for sectors included in a cap;[2]

c. A plan relying more on source-specific regulatory requirements with no cap-and-trade component;[3]

d. A plan relying on a carbon fee or tax;[4] and

e. A plan relying on a variety of proposed strategies and measures.[5]

This new analysis incorporates emissions projections that take into account current economic forecasts and already implemented reduction measures. All the alternatives discussed, excepting the no project alternative, would achieve 2020 target levels. According to the Supplement, ARB believes that the cap-and-trade program and the mixed strategy approach would have the best chance of success. Importantly, the Supplement not only includes a revised alternatives analysis, it also includes significant revisions to the amount of GHG emissions needed to reach 1990 levels by the target date.[6]

After the forty-five (45) day review period, ARB will consider and prepare written responses to the public comments received. This should discharge Judge Goldsmith's determination that ARB violated CEQA by commencing the implementation of the Scoping Plan prior to adequately responding to comments.

At the August 24 hearing, which will be at the Cal/EPA headquarters in Sacramento at 9:00 a.m., the Board will then determine, in light of the comments, responses and revised environmental analysis, whether the selection of the cap-and-trade program was appropriate. Thus, the Supplement offers a shield to protect ARB regardless of the determination of the appeal. With the Supplement and the subsequent review process, ARB retains the ability to request Judge Goldsmith dissolve his final order and injunction as the agency would have remedied the violations noted in the final order and would now be in compliance with CEQA.

(2) ARB Delays Required Compliance with Cap-and-Trade Program Until 2013

On June 29, ARB Chairwoman Mary Nichols told lawmakers at the California Senate Select Committee on the Environment, the Economy and Climate Change that ARB is planning to "initiate" the cap-and-trade program on January 1, 2012 but not "start the requirements for compliance" until January 1, 2013. Nichols stated the decision came "in light of the importance of this regulation to the success of California's climate change program and the need for all necessary elements to be in place and fully functional." (Nichols' full transcript can be read here.) In conjunction with news of this delay, ARB will release a draft of regulations regarding offset protocols and allowance distribution within the next two (2) weeks.

In her testimony, Nichols stated that the postponement of the compliance date would not affect the stringency of the program or the total amount of GHG emissions that industries would be mandated to reduce by 2020. Specifically, Nichols believes, "It gives [ARB] 2012 to work our stress tests, go through any issues anyone might raise…and come up with answers." In short, the delay will not extend the 2020 target date required by AB 32.

Under the delay, the quarterly auctions of emissions allowances that each large emitter in California must turn in would commence in the second half of 2012, and not in February 2012 as originally planned. Entities that emit more than 25,000 metric tons of carbon dioxide per year will begin trading credits at the end of 2012 to cover emission reduction obligations for 2013 and later.

The cap-and-trade program requires covered facilities to surrender allowances and offsets once every three (3) years. Under this newly announced delay, the original first three (3) year compliance period (2012-2014) will be shortened to two (2) years.

According to Nichols' testimony, the decision to delay the compliance requirements came after Nichols conferred with the State Attorney General's Office and experts on California's disastrous attempt to participate in deregulated electricity sales, which lead to widespread fraud and rolling black-outs experienced by much of the State in 2000-2001. Despite Nichols assertion that the pending litigation was not a deciding factor, many commentators believe that a principal reason for the delay is to ensure compliance with CEQA.

In an emailed statement issued by ARB clarifying Nichols' testimony, ARB spokesperson Stanley Young, stated: "ARB will be initiating all elements of the cap-and-trade program throughout 2012, including establishing a market infrastructure, developing market oversight mechanisms, conducting trainings, holding auctions and developing linkages with partners in the Western Climate Initiative. This will ensure that we have tested the program prior to moving into the first year of compliance. The only change is shifting the first compliance obligation to 2013."

Josh Margolis, CEO of CantorCO2e, a Cantor Fitzgerald LP subsidiary that provides financial services to the environmental and energy markets, offers the following take-aways from Nichols' statement, as determined through CantorCO2e's interactions with ARB staff:

a. The most significant change is excusing sources from the need to secure and retire allowances or offsets to account for 2012 emissions;

b. There will be no 2012 allowances issued;

c. There will be the same reduction obligation by 2014 as under the original schedule, but "[t]he reduction forced by the declining cap that was originally scheduled to occur over a three (3) year period will now occur over a two (2) year period;"

d. An underdetermined number of auctions will happen in 2012;

e. In the 2012 auctions, 2013 and future vintage allowances will be auctioned; and

f. ARB will issue a statement this week that clarifies and answers many of the above items, and addresses other issues as well.

Some commentators see this delay as a potentially detrimental roadblock for the future of the cap-and-trade program. Peter Asmus, a senior analyst at Pike Research, stated: "I think it's a sign of a lack of faith in the whole cap-and-trade concept, which was also shot down at the federal level…[It] shows the push back on the environmental regulations is even occurring in California."

However, not all are pessimistic. State Senator Fran Pavely (D), author of AB 32, had originally called this meeting to discuss the implications and consequences of Ass'n of Irritated Residents v. CARB. After the meeting, Pavely stated: "This modest delay in implementation is prudent. The one-year period will provide flexibility; allowing us to road-test market mechanisms to see how they will work, while ensuring that the greenhouse gas pollution reductions required by the program remain intact."

Margolis is equally optimistic about the delay, as he believes it might have the effect of keeping more businesses in the California. According to Margolis, "Chairman Nichols has delivered an elegant solution that will keep the environment whole and have a minimal impact on sources."

Again, only time will tell what the final determination of Ass'n of Irritated Residents v. CARB and the future of the cap-and-trade program as proposed by AB 32 will be. More updates to come...

Authored By:

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

[1] This alternative is based on "existing conditions." In establishing this baseline, the Supplement reflects the current status of other Scoping Plan measures. This includes those already adopted by ARB under AB 32 or enacted independently by State Legislature. The Supplement estimates the no-project approach would fall 22 million metric tons of CO₂-equivalent emissions short of the 2020 target reduction levels.

[2] This alternative looks at several examples of cap-and-trade programs enacted throughout the country and internationally. The Supplement identifies problems associated with these existing programs and offers ways California can avoid similar concerns. The Supplement also proposes an "adaptive management program" that would require ARB to monitor local air quality impacts and provide adjustments in order to deal with such impacts. This provision is probably included in response to AIR's original challenge that the use of cap-and-trade could result in the concentration of emissions in low-income and minority neighborhoods.

[3] This alternative uses remediation measures that target specific sources of GHG emissions – including, but not limited to, oil and gas extraction plants, refineries, transportation sources, and cement plants. ARB states there is significant concern in implementing this alternative as it poses a substantial risk of emissions "leakage" or the relocation of these sources to other states.

[4] This alternative discusses examples of currently enacted fee programs and design considerations. ARB believes enacting a carbon fee or tax would be inefficient and potentially impossible. (In California, any tax must obtain a two-thirds (2/3) vote of the State Legislature and that any fee must be placed within the boundaries of California Supreme Court's Sinclair decision and Proposition 26.) ARB has leakage concerns in regards to this alternative as well.

[5] This alternative proposes a mix of the three previous alternatives, not including the no project alternative.

[6] The original Scoping Plan estimated that the 2020 target level was 427 million metric tons of CO₂-equivalent emissions (the 1990 level). Under a "business-as-usual" approach, which was assumed to result in 596 million metric tons of CO₂-equivalent emissions, the Scoping Plan estimated a reduction of 169 million metric tons. However, with the economic recession and the reduction measures currently implemented, the Supplement states the current reduction needed to attain 2020 target level is now 80 million metric tons. The 2020 level under the same "business-as-usual" approach is estimated to be 507 million metric tons.

Global Warming and Droughts Not New Information; Project Opponents Must Fairly Present Claims Before Filing CEQA Lawsuit

Sheppard Mullin — Tue, 21 Jun 2011 15:18:17 -0800

Citizens for Responsible Equitable Environmental Development v. City of San Diego (May 19, 2011, D057524) __ Cal.App.4th __

By Jeffrey Forrest & Robyn Christo

On May 19, 2011, the California Court of Appeal for the Fourth Appellate District upheld an Addendum to an Environmental Impact Report (“EIR Addendum”) over claims that the lead agency failed to follow statutory procedures for adopting a Water Supply Assessment (“WSA”) and that a supplemental EIR (“SEIR”) was required to analyze “new” environmental impacts related to drought and global warming.

Citizens for Responsible Equitable Environmental Development v. City of San Diego involved an Addendum to an EIR initially prepared for a 664-acre master planned community in the City of San Diego in 1994. The EIR Addendum addressed environmental impacts from the last phase of the master planned community -- a 1,500-unit multi-family project (“Project”).

WSA Approval Procedure

Before the lead agency approved the Project, the City’s water department prepared a WSA, which was then approved by the City Council at the Project’s public hearing through a resolution certifying the EIR Addendum. The resolution did not specifically reference the WSA. The Citizens for Responsible Equitable Environmental Development (“CREED”) argued the California Water Code[1] required the City Council, acting as the water department’s legislative body, to approve the WSA in advance at a separate hearing because the Legislature deemed the coordination of water supply planning and land use planning too important to adopt as just an ordinary technical report supporting the EIR Addendum’s water supply analysis.

The Court of Appeal disagreed. Unlike many other jurisdictions that have a separate water agency governing board, the City’s water department is governed by the same entity (the City Council) as the lead agency; thus no separate hearing or resolution was required. The court held that requiring the same legislative body to hold two different hearings on the matter, or approve a WSA and CEQA document in different motions, would not enhance public review or local agency decision-making. Instead, it affirmed that the “purpose of CEQA is to inform government decision-makers and their constituency of the consequences of a given project, not to derail it in a sea of administrative hearings and paperwork.” (Long Beach Sav. & Loan Assn. v. Long Beach Redevelopment Agency (1986) 188 Cal. App. 3d 249, 263.)

Drought Not New Information

The City Council adopted the project despite then Governor Schwarzenegger’s drought declaration and a notice from the Department of Water Resources that it would be reducing water deliveries to the City due to the statewide drought and a separate court order to reduce water pumping from the Bay/Delta area to protect endangered Delta Smelt. CREED argued that the drought declaration and notice of reduced water deliveries occurred after the WSA was completed and therefore was the type of “new” information that required the City to process a SEIR, instead of an EIR Addendum.

The court dismissed CREED’s claim finding that CREED failed to satisfy its burden of proof to address all the information regarding available water supply, including the WSA’s references to water supply during multiple dry years. The court affirmed that it was proper for the City to rely on testimony from the City’s planning staff during the public hearings that the drought was only temporary and the City had adequate water supply to serve the project in the long term.

Global Warming Not New Information

CREED argued that the 1994 EIR contained no references to global warming and that the passage of state global warming laws, such as AB 32 and SB 97, revealed new information about the scientific link between global warming and human development activities. The court dismissed this claim because lead agencies may not require preparation of a SEIR unless “[n]ew information, which was not known and could not have been known at the time of [EIR] was certified as complete, becomes available.” (Cal. Pub. Res. Code § 21167(c).) The court found that by the time the EIR was certified in 1994, there was enough information available from various executive orders, international scientific panels, and the National Academy of Sciences demonstrating the link between global warming and human activities that an impact analysis could have been included in the 1994 EIR. Because the statute of limitations on the 1994 EIR had long since passed, CREED was time-barred from raising those issues in a legal challenge against the 2009 EIR Addendum, where public policy favors finality. The evidence that there was sufficient information about global warming in 1994 came from the City of Los Angeles’ 1990 lawsuit against the National Highway Safety Administration[2] and the U.S. Supreme Court opinion in Massachusetts v. EPA (2007) 549 U.S. 497, where the high court summarized the history of official government actions related to global warming from the 1970s to 2007.

Failure to Exhaust Administrative Remedies

During the six years the City reviewed the Project, CREED did not submit a comment opposing the Project when the Notice of Preparation was issued, the Draft EIR Addendum was circulated, community outreach hearings were held, the Planning Commission’s hearing was held or participate in the City Council hearings for the Project. Instead, hours before the City Council was scheduled to review the Project in a January 20, 2009 public hearing, CREED attempted to preserve its right to sue the Project approval in court by filing with the City Clerk’s office a two page letter with general allegations that the Project violated CEQA and referring to an attached DVD with 5,000 pages of general information about water supply, drought, global warming, and copies of previous EIRs around the state discussing water supply and global warming issues. The City Council postponed the hearing until February 17, 2009 for other reasons and only later discovered CREED had submitted the letter. During the month between the two letters, the Project’s air quality consultant provided a letter analyzing the Project’s greenhouse gas impacts.

Then, on the morning of the February 17, 2009 hearing, CREED filed a second two-page letter with an attached DVD with several thousand more general documents about global warming and droughts. CREED did not participate in the City Council’s hearing to elaborate on its comments. When the City refused to include the second DVD in the administrative record, the trial court judge denied CREED’s Motion to Augment the Record, finding that under the totality of the circumstances, CREED failed to fairly present its arguments to the City Council in a manner that the City could reasonably be expected to respond. CREED did not appeal the motion.

The CEQA statute prohibits judicial review “unless, the alleged grounds for noncompliance with [CEQA] were presented to the public agency orally or in writing by any person during the public comment period provided by this division or prior to the close of the public hearing…” (Cal. Pub. Res. Code § 21177(a).) Nevertheless, the Court of Appeals took the next step and found that CREED’s January 20, 2009 letter with 5,000 pages of exhibits was insufficient to exhaust the administrative remedies available to CREED even though it was submitted a month in advance of the City Council’s final hearing on the Project.

The court noted that “To advance the exhaustion doctrine’s purpose ‘[t]he “exact issue” must have been presented to the administrative agency….’ [Citation omitted] and “[T]he objections must be sufficiently specific so that the agency has the opportunity to evaluate and respond to them.” (Sierra Club v. City of Orange (2008) 163 Cal.App.4th, 523, 535-536.) The court held that CREED failed to satisfy the exhaustion doctrine because its letters only contain general, unelaborated objections. The letters did not contain the term “drought” or object to the content of the WSA. The letters made only general, unelaborated objections such as, “global climate change has been raised as a significant environmental issue that has been frequently analyzed in current environmental documents” and the “project will cause direct and indirect greenhouse-gas emissions that, when considered cumulatively, are significant.”

The court affirmed that “The City cannot be expected to pore through thousands of documents to find something that arguably supports CREED’s belief the project should not go forward. Additionally, CREED did not appear at either CEQA hearing to elaborate its position. It appears from CREED’s haphazard approach that its sole intent was to preserve an appeal.” The court noted that if Petitioners were not required to give specific objections so the agency has the opportunity to evaluate and respond to them, every project approval would be subject to litigation on new or expanded issues.

Significant Conclusions from the Case

The case is significant for a number of reasons.

First, for a developer or lead agency that wants to amend entitlements to respond to market changes, but is concerned that the state’s new global warming laws will automatically require an exhaustive SEIR, this case affirms that holders of post-1994 entitlements can likely amend their entitlements without an SEIR. The expedited EIR Addendum procedure is available where development project changes do not otherwise trigger new or more severe unmitigated environmental impacts compared to those disclosed in the original EIR, even where the original EIR contains no information on the project’s global warming impacts. With the passage of state and local legislation (SB 1185, AB 333, and possibly SB 208 later this year), the “life” of projects with vesting tentative maps, tentative maps, and parcel maps has been extended due to the economic downturn. There are likely more older, unfinished development projects whose build-out can be facilitated with an EIR Addendum.

Second, the opinion may improve the quality of the debate at public hearings on development projects because it discourages “stealth” legal attacks and encourages a clear discussion of the merits of a project. Project opponents who wait to the last day to submit a long list of CEQA based project objections risk losing their right to appeal on those grounds if the information is not presented in an organized manner that gives the lead agency a fair opportunity to respond. Even project opponents who submit documents a month in advance of a public hearing must be cautious to present the information in an organized manner that identifies the exact issue so the lead agency has a fair opportunity to respond to the specific issues raised. Furthermore, the risk of courts finding that a project opponent failed to exhaust remedies is likely greater where the project opponent is represented by legal counsel and fails to indentify the specific issues that are the basis for its claims. CEQA attorneys will therefore now need to identify carefully what specific evidence support their legal claims against a project.

Third, it may improve the quality of the response from lead agencies, resulting in better development projects. When specific objections to a project are made, the lead agency can better decide whether those objections have merit and either make necessary changes in the project or determine if there is other substantial evidence to rebut the claim. Where the objections do not have merit, the lead agency is assured it can rely on expert opinion from its planning staff during a public hearing.

Fourth, WSA findings that address the availability of water during multiple dry years can be used to reject claims that drought conditions trigger the need to prepare an SEIR.

Fifth, cities and counties that govern water supply departments without a separate governing board can approve a project’s WSA without conducting duplicative hearings or special approvals for the WSA. The WSA can be treated like any other technical report supporting a CEQA document.

Finally, the case affirms that CEQA petitioners who repeat the evidence in opposition to a project fail to satisfy their legal burden of proof when they do not address all the evidence in the record supporting the lead agency’s decisions. The court is not a forum to revisit debate over a project’s public policy merits, but instead is a forum to determine if the lead agency had any substantial evidence to support its findings.

This article was originally posted on Sheppard Mullin's Real Estate, Land Use & Environmental Law blog, which can be found at www.realestatelanduseandenvironmentallaw.com.

Authored By:

Jeffrey W. Forrest
(619) 338-6502
JForrest@sheppardmullin.com

Robyn B. Christo
(415) 774-3115
RChristo@sheppardmullin.com

[1] Water Code section 10910(g)(1) provides, “[T]he governing body of each public water system submit the assessment to the city or county not later than 90 days from the date on which the request was received. The governing body of each public water system … shall approve the assessment prepared pursuant to this section at a regulator or special meeting.”

[2] City of Los Angeles v. National Highway Traffic Safety Admin. (D.C. Cir. 1990) 912 F.2d 478, 483)

Superior Court's Injunction Preventing California's Cap and Trade Program Has Been Stayed...Right?

Sheppard Mullin — Fri, 10 Jun 2011 04:04:23 -0800

By Randolph Visser and Whitney Hodges

Until recently, Association of Irritated Residents v. California Air Resources Board proceeded along the litigation path as smoothly as any environmental challenge might. However, things took an unexpected twist last week that has left unanswered questions and many spectators baffled.

On March 18, 2011, Judge Ernest Goldsmith of the San Francisco County Superior Court suspended implementation of AB 32, California's landmark law to reduce greenhouse gas emissions. In Association of Irritated Residents v. California Air Resources Board, Judge Goldsmith determined that the California Air Resources Board (“ARB”) failed to properly consider alternatives to the highly touted, yet controversial, cap and trade program. (Previous article here.)

On May 20, Judge Goldsmith issued his final ruling (the “final order”), which is significantly narrower in scope than the March 18 statement of decision. The final order set aside ARB’s approval of the Climate Change Scoping Plan only “as it relates to the cap and trade” program and enjoined “any further rulemaking and implementation of cap and trade” until ARB is in compliance with the California Environmental Quality Act. While this mandate blocked any activity related to the cap and trade program, it left the other measures of AB 32 unaffected. (Previous article here.)

As of June 2, ARB had filed an appeal with the First Appellate District of the California Court of Appeal and petitioned for a writ of supersedeas, or a stay, of the trial court's AB 32 injunction. At this point, the litigation became much more convoluted and opinions regarding the injunction began to diverge. ARB interpreted Judge Goldsmith's writ of mandate to be mandatory, which meant the injunction would be automatically stayed on appeal. Judge Goldsmith intended his writ of mandate to be prohibitory, which meant the injunction would remain in effect until a court of appeal determines otherwise. When ARB voiced its intention to continue with development of the cap and trade program based on its belief the writ was mandatory, the Association of Irritated Residents ("AIR") motioned for a hearing on ARB's apparent violation of the final order.

On Friday, June 3, the Appellate Court quietly issued a temporary stay of the final order's injunction.[1] This ruling has important consequences as it will allow ARB to proceed with further rulemaking and implementation of cap and the trade program pending the Appellate Court’s consideration of Judge Goldsmith’s underlying order.

As demonstrated during a hearing on Monday, June 6, neither Judge Goldsmith, nor ARB's lead attorneys, appeared to have been notified of the Appellate Court’s important recent determination. At this hearing, the AIR petitioned Judge Goldsmith to hold ARB in violation of the final order. Judge Goldsmith agreed with AIR, chastising ARB for “refusing to halt any implementation and development of the cap and trade program” and ordering sanctions against ARB for the alleged violation. In addition, Judge Goldsmith scheduled another hearing for Monday, June 13, and ordered the Chair and Executive Director of ARB to appear before him for questioning. The Judge even went so far as to command ARB to obey his final order “until a higher court tells [him] differently.”

As it stands, a higher court had already told Judge Goldsmith differently! In this battle of the dueling orders, the Appellate Court’s stay order trumps the final order's injunction. Presently, it is not clear whether Judge Goldsmith will require next week's hearing to remain on calendar or whether he will continue to impose sanctions against ARB.

The cap and trade program is slated to take effect on January 1, 2012, and the Appellate Court’s stay, if it stands, increases the likelihood of this occurring.

In its June 3 order, the Appellate Court directed AIR to serve its opposition to the temporary stay on or before June 20.

Stay tune, more alerts to come…

Authored By:

Randolph Visser
(213) 617-4144
rvisser@sheppardmullin.com

and

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

[1] STAY ORDER: "Pending this court's consideration of appellants' Petition for Writ of Supersedeas, enforcement of the superior court's Peremptory Writ of Mandate, dated May 20, 2011 issued in Association of Irritated Residents et al. v. California Air Resources Board et al., San Francisco County Superior Court Case No. CPF-09-509562, is temporarily stayed. Appellees are directed to serve and file points and authorities in opposition to the petition for writ of supersedeas on or before June 20, 2011. (California Rules of Court, rule. 8.112(b).) In addition to addressing all the issues raised in the petition, appellees shall inform the court of any further orders issued by the San Francisco Superior Court at or after its June 3, 2011 hearing in this matter. Appellees shall also serve and file a copy of any such orders."

Final Decision Suspends California's AB 32 GHG Regulations: What Now?

Sheppard Mullin — Fri, 08 Apr 2011 09:41:40 -0800

By Whitney Hodges

On March 18, 2011, Judge Ernest Goldsmith of the San Francisco County Superior Court suspended implementation of AB 32, California's landmark law to reduce greenhouse gas ("GHG") emissions. In Association of Irritated Residents v. California Air Resource Board, [Statement of Decision] the Court found the California Air Resource Board (the "ARB")'s adoption of AB 32's Climate Change Scoping Plan (the "Scoping Plan") to be in violation of the California Environmental Quality Act ("CEQA"). The ruling determined that the ARB abused its authority by not adequately analyzing potential alternatives to a carbon "cap-and-trade" program aimed at limiting GHG emissions.

Background & Ruling

AB 32, also known as the Global Warming Solutions Act of 2006, requires California to reduce its GHG emissions to 1990 levels by 2020. As part of this emissions reduction program, the law necessitates the development of a Scoping Plan "for achieving the maximum technologically feasible and cost-effective reductions in [GHG] emissions from sources or categories of sources of [GHGs]." In theory, the Scoping Plan is intended to be a roadmap for achieving the required reductions. Its focal point is a proposal for a cap-and-trade program, which is now the focus of contentious litigation. In adopting the Scoping Plan, the ARB, a CEQA-certified regulatory agency, published a Functionally Equivalent Document ("FED"); effectively, the Environmental Impact Report ("EIR") for the Scoping Plan.

The petitioner, the Association of Irritated Residents (the "AIR"), challenged the Scoping Plan, grounding their suit on CEQA and the ARB's CEQA regulations requiring review of environmental impacts for certified regulatory programs. The AIR claimed that the ARB's FED was deficient; thus, a violation of CEQA invalidating the AB 32 Scoping Plan itself.

The crux of the AIR's argument was the ARB's conclusory analysis of the environmental impacts of the various Scoping Plan alternatives. The Court agreed, concluding that the ARB "provided little to no facts or data to support the conclusion." Specifically, the ARB did not sufficiently analyze the possibility of adopting a carbon tax in lieu of a cap-and-trade program. The Court highlighted the ARB's "extensive evaluation" of the cap-and-trade program, and opined that CEQA requires the ARB to "undertake [a] similar analysis of the impacts of each alternative so that the public may know not only why the cap-and-trade was chosen, but why the alternatives were not." The Court's decision does not require the ARB to adopt a tax-based program, only that it must appropriately analyze and evaluate the environmental impacts of a carbon tax as a potentially viable alternative to cap-and-trade in compliance with CEQA guidelines.

Judge Goldsmith also found that the ARB had "jumped the gun" by implementing the Scoping Plan prior to adequately complying with CEQA. Specifically, the ARB adopted the Scoping Plan and held public workshops discussing future planned implementation actions prior to reviewing and responding to public comments. The Court ruled that taking such actions prior to completing the CEQA process "undermine[d] CEQA's goal of informed decision-making."

The Court ultimately enjoined the ARB from "any further implementation of the measures contained in the Scoping Plan until after [ARB] has come into complete compliance with its obligations under its certified regulatory program and CEQA."

AB 32 encompasses sixty-eight (68) regulatory policies in addition to the cap-and-trade program, and the Court's recent decision carries the potential to block the ARB from moving forward with these programs as well. In this vein, ARB spokesman, Stanley Young, succinctly stated, "a broadly worded writ puts at risk a range of efforts to move California to a clean energy economy and improve the environment and public health." Following is a brief discussion of the options possibly open to the ARB to prevent the Court's decision from indefinitely derailing AB 32.

Redo the Environmental Analysis

CEQA imposes both procedural and substantive requirements on any project that has the potential to affect the environment. At a minimum, an initial review of the project and its environmental effects must be conducted. Depending on the potential effects, a further, and more substantial, review may be required in the form of an EIR or its environmental regulatory agency counterpart, a FED. Under CEQA, a project may not be approved as submitted unless feasible alternatives are considered and viable mitigation measures adopted to substantially lessen the significant environmental effects of the project.

In the Court decision, Judge Goldsmith found flawed the ARB's contention that the FED's analysis was adequate because it was only meant to be programmatic (general) and not a project-specific EIR. The Court determined that "[w]hile a program-level EIR need not be as detailed as a project-level EIR, [ARB] must still provide the public with a clear indication based on factual analysis as to why it chose the Scoping Plan over the alternatives" and CEQA's "demand for meaningful information is not satisfied by simply stating that it will be provided in the future." Therefore, the ruling compels the ARB to revise and reissue the FED in conformity with Judge Goldsmith's mandates. If the ARB redoes the FED and then proceeds to re-adopt the Scoping Plan, it could mean an implementation delay of a year or more.

The South Coast Air Quality Management District ("SCAQMD") faced a similar situation in 2009. The Court invalidated an SCAQMD rule specifying how the agency accounts for and calculates the amount of emission reductions available to fund District offsets and offset exemptions, thereby effectively placing a moratorium on the issuance of certain essential facility and other air permits. The Court enjoined further issuance of permits under this invalidated rule until the SCAQMD prepared an adequate CEQA document and adopted a new or revised rule that addressed the Court's decision. The SCAQMD planned to redo the documentation so it could re-adopt the rule as soon as possible. The SCAQMD estimated this process would take at least nine to twelve months; it, in fact, took much longer. However, in the interim, the SCAQMD was able to obtain legislation overriding the Court's decision, allowing the SCAQMD to proceed with its issuance of permits.

However, here, even if the ARB re-does the CEQA analysis and readopts the Scoping Plan with its cap-and-trade program intact, uncertainties still loom. The ARB must return with the revised FED to Judge Goldsmith to ensure compliance with the Court's writ of mandate. Additionally, the ARB will have to reissue the FED for public comment and respond to any comments prior to re-adoption of the Scoping Plan. Finally, the AIR, or another environmental justice group, will still retain the ability to again challenge the Scoping Plan on similar or different grounds. In the interim, if the ARB continues to take the requisite actions needed to implement the cap-and-trade program by January 2012, challengers will undoubtedly use this as further evidence the ARB again just "rubberstamped" the cap-and-trade program as a "fait accompli," without providing the meaningful evaluation of alternatives required by CEQA before the ARB takes final action. In short, even further delays could ensue.

Appeal the Decision and Seek a Stay of the Injunction

Following a dual pathway approach, the ARB intends to appeal the ruling while concurrently revising its CEQA analysis in accordance with Judge Goldsmith's decision. The appeal process should take twelve to eighteen months[1] while reprocessing the CEQA approval should take about a year. Either pathway results in a prolonged delay which puts at risk achieving the required GHG reductions in the AB 32 prescribed time-frame. Under AB 32's timing provisions, the controversial final cap-and-trade regulations have to be finalized by October 2011 to become effective on January 1, 2012.

The ARB is hoping to obtain a stay of the injunction while it appeals. This would allow it to finalize regulations implementing the Scoping Plan and the cap-and-trade program as it intended to do this spring and summer. Kevin Kennedy, ARB's former Assistant Executive Officer, articulates this desire by saying, "We could complete the rulemaking while the appeal is being heard." Should the ARB successfully obtain a stay, the ARB hopes to have prepared the necessary revised (and, this time, adequate) CEQA FED to remedy the earlier violation so, even if the ARB lost on appeal, it will lose no further implementation time. If the ARB loses the motion for a stay, then AB 32's implementation would face a lengthy delay by the appeal process. This could seriously jeopardize the likelihood of attaining AB 32's ambitious 1990 emissions reductions goals by 2020.

ARB-AIR Settlement

Could the ARB and the AIR now settle the legal action? In reality, many CEQA cases are resolved through settlement.[2] When a case is amenable to settlement, a CEQA-mandated settlement meeting can jump-start effective settlement discussions. Precedent has shown fruitful settlement discussions occur even during late stages of the litigation.

An example of a successful settlement agreement occurred in Los Angeles about a decade ago, and has been an exemplar for CEQA settlements ever since. During environmental review of the Staples Center, the developer was flooded with hundreds of critical comment letters from the Figueroa Corridor Economic Justice Coalition during the Draft Environmental Report review process. The group was concerned about the impact to the surrounding community, which has been traditionally low income minorities. The Economic Justice Coalition crystal-clear message they would challenge the project, coupled with time constraints facing the project (Staples had to be ready in time for the 1999-2000 season), created the ideal atmosphere for settlement negotiations. The parties ultimately created a Community Benefits Agreement, that stands as a model for similar agreements around the country.

Unfortunately, here, since Ass'n of Irritated Residents v. CARB has, in fact, already been adjudicated to a final trial court decision, settlement options to resolve the AIR's current challenge to AB 32's Scoping Plan are slim. However, the Court's decision does not preclude the potential to avoid continued future AB 32 CEQA litigation. Specifically, the AIR opposed the cap-and-trade program because they believe the program allows heavy industries, which are disproportionally located in or near low income communities, to purchase their way to air quality compliance rather than reducing their own emissions. Despite the inability to reach a settlement agreement on the current litigation, the ARB and the AIR could still parlay the standard established in the Staples Center Community Benefits Agreement to obtain the AIR's agreement not to challenge the ARB's re-drafted FED and re-adopted Scoping Plan in exchange for provisions benefitting low-income communities of color around heavy pollution emission sites, e.g., dedicated use of carbon allowance sale proceeds to reduce emissions in these communities. However, it is decidedly unclear at this point whether the AIR is even willing to consider a compromise allowing cap-and-trade program to proceed under any circumstances.

Legislative Action

As mentioned above, the SCAQMD successfully obtained curative legislation allowing it to resume its system of distributing emissions credits, which had been previously blocked by the Court. Is such a strategy viable here? Although theoretically possible, chances of the approach being successful here are extremely remote.

The ARB would not only have to author a bill, but would also have to mount an intensive lobbying and communications effort conveying the allegedly disastrous effects which would occur if implementation of AB 32's Scoping Plan was enjoined. Should such an ARB bill make it to the California Legislature, it will have to undergo bargaining sessions and committee meetings, all against the backdrop of a Legislature presently devoted to all-consuming and contentious budgetary negotiations. Even if, against all odds, legislation overriding the Court decision could be passed, significant delay would still have resulted, again undermining achieving AB 32's ambitious GHG emissions reduction goals by 2020.

Current Status

Presently, the ARB staff is attempting to clarify the scope of Judge Goldsmith's ruling terms of the implementation and writ to be issued, so that it will apply solely to the cap-and-trade program, allowing the other Scoping Plan policies to continue as scheduled. Kennedy stated, "[W]e are in discussion with the petitioners to narrow the final risk so not all the measures in the Scoping Plan are put at risk…we do think there is room to make sure whatever the final decision is is written in a way that is more narrow than some of the readings might be at this point." ARB spokesman Young echoed those hopes stating: "we believe the plaintiffs did not intend to put on hold efforts to improve energy efficiency, establish clean car standards, and develop low carbon fuel regulators." However, the ARB may have a tougher road than anticipated. Jesse Marquez, executive director of Coalition for a Safe Environment, a plaintiff in the case, insists the plaintiffs will not be satisfied until cap-and-trade is completely eliminated from the ARB's plan and is, instead, replaced with direct regulation. When asked if there were any concession his group would make on a carbon market, Marquez replied, "Absolutely no…Even if you put in a tax, a tax still allows refiners to continue polluting…They'll just spend millions to offset their pollution. The only way to offset refiner pollution is to eliminate refiner pollution."

Taken at its word, any glimmer of hope to expedite a resolution to quickly advance the ARB's cap-and-trade program fades and significant delay, though not defeat , is inevitable.

Link to prior article: California Court Issues Tentative Ruling Enjoining AB 32 Implementation

Authored By:

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

[1] In CEQA cases, the court of appeal manages the briefing schedule so that, to the extent feasible, the court must commence hearings on appeal within one (1) year of the date of the filing of the appeal. Pub Res Code § 21167.1(a).

[2] CEQA prescribes a unique settlement meeting procedure designed to promote settlement of litigation. Pub. Res. Code § 21167.8. The procedure is extrajudicial, but it provides for sanctions against a party who does not participate. The prescribed procedure is comprehensive and detailed. See Pub. Res. Code §§ 23.78-23.81. I

California Court Issues Tentative Ruling Enjoining AB 32 Implementation

Sheppard Mullin — Fri, 04 Feb 2011 04:43:46 -0800

By Whitney Hodges

On January 21, a San Francisco Superior Court issued a proposed decision that could significantly delay the implementation of the Global Warming Solutions Act of 2006 ("AB 32"). In Association of Irritated Residents, et al. v. California Air Resources Board, Case No. CPF-09-509562, the Court held that the California Air Resources Board (CARB) failed to comply with the California Environmental Quality Act (CEQA). The Court found the CARB to have neglected to conduct a sufficient environmental impact review prior to adopting the State's AB 32 Scoping Plan (Plan). Specifically, CARB failed to adequately analyze all potential alternatives and prematurely adopted the Plan prior to fully responding to public comment.

ARB's Plan is the foundational road map charting ARB's main strategies to reduce the greenhouse gases (GHG) that cause climate change. It includes GHG reduction actions such as direct regulations, alternative compliance mechanisms, monetary and non-monetary incentives, voluntary actions, a market-based mechanism cap-and-trade system, and an AB 32 program implementation regulation to fund the program.

In Association of Irritated Residents, the Court looks to issue a "peremptory writ of mandate" ordering CARB to set aside its certification of the Plan document and enjoin implementation of Plan climate change regulations until CARB is in "complete compliance with its obligations under its certified regulatory program and CEQA." Under this tentative ruling, CARB is ordered to halt implementation of the landmark climate change law in order to conduct further analysis of potentially less harmful alternatives.

Should this proposed decision remain unchanged, it would almost certainly delay the January 2012 commencement of California's landmark carbon cap-and-trade program aimed at reducing GHG emissions, as well as threaten numerous other earlier adopted climate change regulations. Since Congress deserted their endeavors to establish a national program, California is the lone state that has adopted an economy-wide cap-and-trade program.

Association of Irritated Residents was filed in 2009 by a group of environmental justice groups opposing CARB's Plan and, specifically, the cap-and-trade program. The Court agreed with the plaintiffs' charge that CARB did not comply with CEQA requirements in its review and approval of the Plan. As a "certified regulatory program," CARB prepares a CEQA environmental review document functionally equivalent to the traditional Environmental Impact Report (FED). As in an EIR, the FED must include an adequate analysis of project alternatives.

The plaintiffs successfully argued that CARB's CEQA alternatives analysis did not include an adequate justification for the Plan's adoption in lieu of several other alternatives including a carbon tax. Additionally, the Court found CARB had adopted the Plan in 2008 prior to fully finalizing responses to public comments on the document. Specifically, Superior Court Judge Ernest Goldsmith stated that CARB "seeks to create a fait accompli by premature establishment of the cap-and-trade program before alternative [sic] can be exposed to public comment and properly evaluated by the [CARB] itself." However, the Court also rejected the plaintiffs' argument that CARB's overall environmental impact analysis was too generalized in reliance on cases that upheld such analysis when an agency adopts a program-level document.

In another small victory for CARB, the Court rejected the substantive legal challenges to AB 32's Plan. The Court found that CARB did not act arbitrarily or capriciously in adopting the Plan and dismissed plaintiff's request to find the Plan inconsistent with AB 32.

If the tentative ruling stands, the CARB is left with few options for moving forward. CARB could (1) file an expedited appeal, requesting an interim stay pending the appeal; (2) revise and re-issue the FED to cure the Court-determined defects, through CARB's re-approval of earlier adopted regulations based on the amended FED would then also be necessary; or, ( 3) lobby for a legislative exemption effectively over-turning the Court's decision as the SCAQMD recently accomplished in a similar case.

The Court's ruling triggers a fifteen day period in which the parties in the case can file objections to be considered by the Court prior to issuance of the final order. Cal. Rule of Court 3.1590(g). The California Attorney General's Office, which is defending CARB in this matter, is considering filing an objection but has not commented further.

Updates to follow after the final order and opinion have been issued.

Link to Opinion:

Association of Irritated Residents v. CARB

Authored By:

Whitney Hodges
(714) 424-8257
whodges@sheppardmullin.com

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 and its effect on the Energy Sector

Sheppard Mullin — Wed, 02 Feb 2011 05:42:13 -0800

By Matthew Richardson and Raphaela Taylor

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Act"). The Act contains a myriad of provisions, including extending the Bush-era tax rates, and is expected to have an $858 billion impact. It passed 81-19 in the Senate and 277-148 in the House.

The Act extends several key tax incentives which help to promote the clean technology sector. Many of the energy incentives extended by the Act were first put into action by the American Recovery and Reinvestment Act of 2009, more widely known as the "Stimulus Package." However, some date back further, like the tax incentive for use of ethanol in fuel, which dates back to the American Jobs Creation Act of 2004. The tax incentives offered in the Act serve to create jobs in clean technology, reduce U.S. dependence on foreign oil, incentivize the move towards efficient and clean production of energy and alternative fuel sources, and incentivize the use of energy-efficient products.

Summary of the Sections affecting Energy

Section 701 – Biodiesel Fuel. This section extends through 2011 the $1.00 per gallon production tax credit for biodiesel fuel. It additionally extends the small agri-biodiesel producer credit of 10 cents per gallon and the $1.00 per gallon production tax credit for diesel fuel created from biomass. Biodiesel fuel is a renewable, low carbon diesel replacement fuel, and is the only domestically produced, commercial scale fuel that qualifies as an Advanced Biofuel under the Renewable Fuel Standards. This credit has led to an increase in the production and use of biodiesel in the U.S., which went from producing approximately 25 million gallons of biodiesel fuel in 2004 to 545 million gallons in 2009. This increase in production has helped spur the creation of green jobs, helped to reduce pollution (the EPA estimates that biodiesel fuel can reduce carbon pollution by up to 85%), and is helping to reduce our dependence on foreign oil.

Section 702 – Coal Refineries. This section extends for two years (through 2011) the credit for new refined coal facilities under Section 45 of the Internal Revenue Code. This extension applies to facilities placed in service after December 31, 2009, and before January 1, 2012, and grants a credit of 1.5 cents multiplied by the kilowatt hours of electricity produced by the taxpayer from qualified energy resources, for a ten year period after the facility was placed in service. To qualify, the refined coal must achieve a reduction of at least 20% of the emissions of nitrogen oxide and at least 40% of the emissions of either sulfur dioxide or mercury when burned. This credit will help to spur the commercial generation and use of cleaner coal technology, thus reducing pollution and helping to obtain better energy security for the U.S..

Section 703 – New Energy-Efficient Homes. This section extends through 2011 the new energy efficient home credit. This credit grants up to $2,000 for builders of all new energy-efficient homes, including certain manufactured homes. To qualify, the home must be located in the U.S., have been substantially completed after August 8, 2005, and have been acquired from an eligible contractor after December 31, 2009, and before January 1, 2012. Site built homes must reduce heating and cooling energy consumption by 50% relative to the International Energy Conservation Code standard in order to be eligible for the credit. This credit incentivizes builders to ensure that the homes they build are energy-efficient.

Section 704 – Alternative Fuels. This section extends through 2011 the 50 cent per gallon tax credits for alternative fuel and alternative fuel mixtures, excluding biodiesel fuel and fuel derived from the production of paper or pulp. This credit is designed to incentivize production of alternative fuels in the U.S., and doesn’t apply to fuel produced outside the U.S.. Included as alternative fuels are liquefied petroleum gas, P Series Fuels, compressed or liquefied natural gas, and liquefied hydrogen, among others. This extension promotes the effort to increase the number of natural gas vehicles (NGVs) used in the United States. NGVs, particularly heavy-duty vehicles for waste hauling, transit and trucking, help to reduce dependence on foreign oil, because roughly 98% of the natural gas consumed in the U.S. is sourced in the U.S. or Canada. Natural gas costs less than diesel or gasoline, and it produces up to 30% lower greenhouse gas emissions in light-duty vehicles, and up to 23% lower greenhouse gas emissions in medium- to heavy-duty vehicles.

Section 705 – Electric Utilities. This section of the Act extends a rule providing deferred gain recognition on the sale or other disposition of property used by a qualified electric utility to an independent transmission company. This rule now applies to dispositions made before January 1, 2012. “Qualifying electric transmission transaction” means any sale or other disposition of property used in the business of providing electric transmission services, provided the sale is to an independent transmission company. "Independent transmission company" means an independent transmission provider approved by the Federal Energy Regulatory Commission, or a person who the Federal Energy Regulatory Commission determines in its authorization of the transaction is not a market participant, and whose transmission facilities are under the operational control of a Federal Energy Regulatory Commission-approved independent transmission provider.

Section 706 – Marginal Wells Depletion Deduction. This section further suspends the limitation on the percentage depletion deduction for oil and gas from marginal wells. A marginal well is one that is nearing the end of its economically useful life. Taxpayers are permitted to recover their investments in marginal oil and gas wells through depletion deductions. This deduction is usually limited to 100% of the net income from the property, but Congress suspended that limitation through 2009. This provision further extends this suspension on the 100% limitation to apply to tax years beginning before January 1, 2012, and retroactively applies the extension for tax year 2010. Thus, taxpayers may use this depletion deduction for an amount greater than 100% of the net income of the property. This deduction is crucial to the economic viability of marginal wells, because marginal wells may produce up to nine barrels of water for every barrel of oil produced, making operating and maintenance costs prohibitive without this deduction, yet marginal wells are still important because they account for about 20% of domestically produced oil and 12% of domestically produced natural gas. Further, marginal wells account for 80% of all oil wells and 66% of all gas wells in the U.S..

Section 707 – Cash Grant in Lieu of Credit. This section extends for one year (through 2011) the start of construction deadline for the cash grant in lieu of tax credit, which was established in Section 1603 of the American Recovery and Reinvestment Act. This program allows existing tax credits for renewable energy to be converted into an up-front payment from the Treasury Department. This program benefits renewable energy developers who face large up-front capital costs, and who were struggling to find financial institutions willing to monetize their tax credits in this strained economy. This cash grant program has significantly increased renewable energy installations. For example, 2009 saw an increase of 20% over 2008 for new wind power installations. Under this extension, eligible renewable projects must begin construction by December 31, 2011. However, a number of in-service deadlines still apply.

Section 708 – Alcohol as Fuel. This section extends through 2011 certain income tax credits for alcohol used as fuel. It extends the per-gallon tax credits and outlay payments for ethanol, the existing tariff on imported ethanol, and the related tariff on ethyl tertiary-butyl ether. These tax credits allow ethanol to be cost-competitive with gasoline, and provides protection against the volatility of the petroleum fuel market. This incentive helps to ensure job creation while providing a domestically produced alternative to foreign oil. Additionally, because the tax benefit is available for all types of ethanol, not just corn and sugar-based ethanols, it allows for new and innovative types of ethanol to be developed more economically.

Section 709 – Energy-Efficient Appliances. This section extends through 2011 and modifies standards for the Internal Revenue Code Section 45M credit for U.S.-based manufacture of energy-efficient appliances, specifically dishwashers, clothes washers and refrigerators. As to dishwashers, it adds to the credit certain dishwashers produced in 2011, ranging from a $25 credit to a $75 credit depending on the amount of energy and water used per cycle. As to clothes washers, it adds to the credit those manufactured in 2011, with a credit ranging from $175 to $225, again depending on the amount of water and energy consumed by the machine. It further extends the credit to certain refrigerators manufactured in 2011, which, depending on the percentage reduction in energy use from the 2001 energy conservation standards, can be eligible for either a $150 or $200 tax credit. Prior to this extension, the credit was limited to 2% of the taxpayer's average annual gross receipts for the three years prior to claiming this credit, but this has been increased to 4%. This credit incentivizes consumers to choose energy-efficient appliances when replacing their old appliances.

Section 710 – Energy-Efficient Home Improvements. This section extends for one year the credit under Section 25C of the Internal Revenue Code for energy efficient improvements to existing homes, but utilizes the credit structure and credit rates that existed prior to the enactment of the American Recovery and Reinvestment Act of 2009. Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels. Lastly, the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements. This credit is only available for energy efficient improvements made to the taxpayer's principal residence located within the U.S.. The improvements must be placed into service after December 31, 2008, and before January 1, 2012. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems; however, labor costs cannot be included in calculating the credit. Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer evidencing the same. This credit makes it more economically feasible for taxpayer's to update their homes to be more energy-efficient, and incentivizes them to do so.

Section 711 – Alternative Fuels Refueling Property. This section extends through 2011 the tax credit for qualified alternative fuel vehicle (QAFV) refueling property. QAFV refueling property is property used for the storage or dispensing of a clean burning vehicle fuel such as propane, natural gas, or even electricity, but only if the storage or dispensing of the fuel is at the point where such fuel is delivered in the fuel tank of the motor vehicle. Qualifying fuels are defined as any fuel with at least 85% volume consisting of ethanol, natural gas, CNG, LNG, LPG, hydrogen and any mixture of diesel fuel and biodiesel containing at least 20% biodiesel. For personal use property, the credit is generally the smaller of 30 percent of the property’s cost or $1,000. For business use property, the credit is generally the smaller of 30 percent of the property’s cost or $30,000. This credit allows consumers to receive the benefit of the tax credit on alternative fuels even where they provide their own fueling station, rather than forcing them to wait until fueling facilities are being built to offer them places to buy their fuel. It further incentivizes the building of commercial alternative fuels refueling stations.

Authored by:

Matthew Richardson
(213) 617-4222
mrichardson@sheppardmullin.com

and

Raphaela Taylor
(714) 424-8276
rtaylor@sheppardmullin.com

New Defense Authorization Act Imposes Buy American Act Mandate for Photovoltaics

Sheppard Mullin — Thu, 13 Jan 2011 04:53:15 -0800

By Curtis M. Dombek

The 2011 Defense Authorization Act signed by the President this week contains a requirement in Section 846 for the Department of Defense to incorporate a clause in specified solar energy contracts requiring photovoltaic devices provided under the contract to comply with the Buy American Act, 41 U.S.C. 10a et seq., subject to the exceptions recognized under the Trade Agreements Act of 1979, 19 U.S.C. 2501 et seq. or otherwise provided by law. Photovoltaic devices are defined for purposes of the legislation as “devices that convert light directly into electricity through a solid-state, semiconductor process.

The contracts to which this new requirement applies include “energy savings performance contracts, utility service contracts, land leases, and private housing contracts, to the extent that such contracts result in ownership of photovoltaic devices by the Department of Defense.”

Although on the surface one might expect this to limit the impact of the requirement to contracts that actually transfer legal title to the devices to DoD, the new requirement actually extends further because of a special definition of “ownership.” “Ownership” of a device by DoD is deemed to exist under the legislation if the device is “(1) installed on Department of Defense property or in a facility owned by the Department of Defense; and (2) reserved for the exclusive use of the Department of Defense for the full economic life of the device.”

The Buy American requirement applies, therefore, not only when photovoltaic devices or articles containing them are sold to DoD, but also when such devices are installed on DoD property or in a DoD owned facility for the exclusive use of DoD for their “full economic life,” even if legal title to the equipment remains in a third party.

In addition to the Trade Agreement Act exception, the Buy American Act contains special exceptions for certain procurements based upon reasonable availability, relative cost and the public interest. See, e.g., Defense Federal Acquisition Regulation Supplement, Subpart 225.1 (revised Oct. 1, 2010). These other exceptions, however, are unlikely to play a role given the current market conditions in the solar equipment industry. The Buy American Act and Trade Agreements Act also have specific procurement dollar thresholds, and these vary for different countries qualifying under the Trade Agreements Act.

The exception under the Trade Agreements Act will permit the use of photovoltaic devices manufactured in a country that is a party to the WTO Government Procurement Agreement or that has a Free Trade Agreement with the United States. This will have an obvious impact on procurement from China, which is a large exporter of photovoltaic devices but is not yet a party to the WTO Government Procurement Agreement.

Under prior law, it was generally permissible to deliver to DoD photovoltaic cells of foreign origin that were incorporated into equipment that was the subject of a substantial transformation in the United States or in a qualifying country prior to delivery. If this new provision is applied by looking through any end item substantially transformed in the United States to require individual photovoltaic components to qualify, this will mean that DoD contractors who manufacture equipment in the United States incorporating photovoltaic components can no longer rely upon substantial transformation in the United States and will need to begin procuring the photovoltaic components in the United States or from countries that qualify under the Trade Agreements Act. It will be very interesting to see how the implementing regulations deal with this and the other issues raised by the new legislation.

For further discussion generally of the Buy American Act and the Trade Agreements Act, click here to visit the "BAA and TAA" section of our Government Contracts blog.

Authored by:

Curt Dombek
213-617-5595
cdombek@sheppardmullin.com

Landmark Greenhouse Gas Cap-and-Trade Program Adopted in California

Sheppard Mullin — Wed, 05 Jan 2011 05:29:56 -0800

By Jessica A. Johnson

California's Global Warming Solutions Act of 2006 (AB 32) directed the California Air Resources Board (CARB) to adopt regulations that would reduce the state's greenhouse gas emissions (GHGs) to 1990 levels by the year 2020. AB 32 authorized CARB to adopt regulations that use "market-based compliance mechanisms," among other means, to achieve that goal. Accordingly, on December 17, 2010, CARB adopted the Cap-and-Trade Program (Program) aimed at reducing the GHG emissions of electricity providers, large industrial sources, carbon dioxide suppliers, and fuel suppliers and distributors. The landmark Program will take effect on January 1, 2012, and promises to dramatically change "business as usual" in California.

The Program is intended to reduce emissions at the same time as driving down costs by establishing a declining cap on emissions from covered sources, allocating emissions allowances, and providing for the auction, trading, sale, and banking of allowances. This system encourages long-term investment in cleaner fuels, rewards companies for energy efficiency, and provides companies with flexibility in determining how they will operate within their emissions budget.

Sources Regulated

The Program is divided into three compliance periods, with the introduction of regulated sources split between the first two compliance periods, as follows:

From January 1, 2012 through December 21, 2014, the following sources will be regulated:
- Generators of electricity and the first in-state distributors of imported electricity;
- Industrial facilities subject to CARB's Mandatory Reporting Regulation (MMR) for GHGs, such as refineries, cement manufacturers, and producers of paper, aluminum, glass, and iron and steel; and
- Suppliers of carbon dioxide gas for industrial purposes.
From January 1, 2015 through December 31, 2017, in addition to the above, fuel suppliers and distributors will be regulated, including:
- Suppliers of natural gas delivered in-state;
- Suppliers of transportation fuel (e.g. gasoline, diesel, ethanol) sold or distributed for consumption in-state; and
- Producers of liquefied petroleum gas sold or distributed in-state
From January 1, 2018 through December 31, 2020, all of the above continue to be regulated.

Carbon dioxide emissions from the stationary combustion of biomass fuels (e.g. from solid waste management and wastewater treatment, and waste-to-energy electric generating) are excluded from compliance obligations if emissions are verified through the MMR.

GHGs sought to be reduced by AB 32 include carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydroflurocarbons, perfluorocarbons, and nitrogen trifluoride, and other fluorinated GHGs. A carbon dioxide equivalence (CO₂e) factor was calculated for each of these GHGs. A threshold of 25,000 tons per year of CO₂e is used to determine whether compliance is mandatory for industrial and electricity sources.

If the emissions generated by an industrial or electricity generation facility or the emissions resulting from the electricity imported by first distributors total more than the threshold, the entity is a "covered entity" with a compliance obligation. The appropriate point of regulation for fuel deliverers has yet to be determined, but it will be based on the emissions expected to occur when the fuel is combusted. An entity falling within any of the regulated categories of sources but emitting less than the threshold can "opt-in" to the Program.

Entities participating in the Program must register with CARB. Approximately 360 businesses, representing 600 facilities, will be required to participate. Emissions from the covered entities are responsible for 80 percent of California's GHG emissions.

The Cap

Each year, CARB determines the total cap on GHG emissions from all covered sources and divides the cap into "allowances" equal to one metric ton of CO₂e (MTCO₂e). The cap, and corresponding number of allowances, is reduced each year to reach a 15% reduction of GHGs by 2020. The reducing cap is intended to allow companies to find more energy-efficient means of operating over time.

When the Program begins on January 1, 2012, the cap starts at 165.8 million MTCO₂e, which is equal to the total emissions forecast from the covered sources initially subject to the Program. The cap declines by about 2% in 2013 and 2014, but increases to 394.5 million MTCO₂e in 2015 to account for the addition of fuel suppliers and distributors to the Program. The cap then decreases by about 3% annually between 2015 and 2020, reaching the final 2020 cap of 334.2 million MTCO₂e. By year 2020, the cap is expected to result in a total reduction of 18 to 27 million MTCO₂e.

Allowances

Allowances will effectively serve as a permit to emit GHGs, as companies must obtain sufficient allowances to cover their GHG emissions. Allowances are distributed directly to some sources, while others must obtain them through the auction system discussed below. Allowances are allocated to the opt-in sources on the same basis as the covered entities.

The Program is projected to increase the cost of doing business. Recognizing this, CARB will initially allocate most allowances for free as transition assistance and to protect against "leakage." The transition assistance is intended to allow businesses time to obtain new equipment and/or create new processes that reduce their GHG emissions. "Leakage" is the risk that businesses will leave California because they cannot compete against the lower-priced goods available from non-California entities not subject to the Program. The amount of free allowances for transition assistance will decline each year, but some industrial sources will continue to receive free allocations through the life of the Program to keep them in the State. Allocations will also differ between individual facilities based on their performance in comparison to an emissions benchmark for each industrial sector. Facilities will be rewarded in allocations for exceeding their benchmark.

Benchmarks have not yet been established for industrial sources but are expected to be determined based primarily on best management practices. Industrial businesses have criticized CARB for the delay in establishing the benchmarks because they cannot anticipate their allowances. Businesses are worried they will not have enough time to plan future operations and budgets and prepare to meet their compliance obligations for 2012. Mindful of this concern, CARB anticipates setting those benchmark figures in the very near term. Environmentalists are urging stringent benchmarks based on best available technologies and practices worldwide to prevent free allocations and maintaining the status quo.

Retail electricity distributors will also receive free allowances through the life of the Program to protect consumers from high rates. Investor Owned Utilities (IOUs) will be given free allowances that they must auction and use the proceeds to benefit their ratepayers. Publicly Owned Utilities (POUs) will also receive allowances that may be similarly auctioned, or they have the option to use the allowances directly to meet their compliance obligations for any generating facility they own. Despite the free allowances to retail electricity distributors, utilities are concerned that the system is not sufficient to protect consumers if allowance prices are higher than expected.

The allowance budget does not absolutely limit entities in their emissions. If they will exceed their budget, entities may obtain offsets or more allowances by auction or by purchase on secondary markets.

Offsets

An offset represents one MTCO₂e and, upon approval by CARB, can be used in lieu of allowances in complying with the Program. Offset programs must demonstrate "that the emissions reductions are real, permanent, verifiable, enforceable, and quantifiable," as well as surplus or additional. Only offsets for projects that reduce or remove GHGs outside the Program that otherwise would not have occurred or been required by federal, state, or local laws, regulations, or air quality requirements are deemed "additional" or "surplus." Four protocols have been approved by CARB for recognition of offset credits: (1) the U.S. Forests Protocol (forest preservation), (2) the Livestock Manure Digester Projects Protocol (manure biogas control), (3) the Urban Forests Projects Protocol (planting trees in urban areas), and (4) the Ozone Depleting Substances Projects Protocol (destruction of ozone depleting substances). The Program also establishes a mechanism for CARB's approval of additional offset programs, including international protocols.

Since the offsets are generated outside the covered sources, the use of offsets would allow the covered sources to exceed the allowances issued. To ensure overall reduction of GHGs, a limit of 8% of an entity's emissions can be accounted for by offset credits.

Concerns have been raised that offset credits might be awarded for projects that do not create additional GHG reductions because the definition of "additional" used by the approved offset protocols is not the same as CARB's definition in the Program. Projects that began before 2007 may not reduce additional GHGs as compared to the Program baseline, and offset credits for those projects would compromise the emissions cap. Others, however, argue that CARB committed to issuing credits to reward companies for voluntary early action to reduce GHGs.

Some environmentalists also opposed offset credits for forest management on the belief that such credits would encourage clear-cutting. Other environmentalists, however, argued the protocol does not encourage clear-cutting. CARB responded that clear-cutting would occur regardless of whether offset credits are allowed, and that the agency's interest is the reduction of GHG emissions under the protocol. The exemption for biomass plants also generated concern that additional trees would be felled for fuel. Representatives of the biomass industry, though, responded that California facilities only use wood waste from forest projects.

The Trade

The trading of allowances and offsets establishes a market price for GHG emissions that reflects the carbon cost of doing business. Allowances can be purchased by auction or on the secondary market. In addition to covered and opt-in entities, other entities such as traders, brokers, and offset providers can voluntarily participate in auctions and secondary markets. Non-governmental organizations may also participate in order to purchase allowances and retire them from use to further reduce emissions.

Auctions of Allowances

Beginning in February 2012, CARB (or a hired third party) will conduct auctions for the purchase of allowances every quarter of the year. Allowances to be auctioned can include: (1) allowances held by entities; (2) remaining allowances not allocated by CARB; and (3) allowances budgeted for future compliance periods. Allowances held by entities would be consigned to CARB to be auctioned. Allowances budgeted for future compliance periods can be purchased to be banked for future use. The advantage of doing so is to lock in the current trading price in anticipation that prices will rise in the future. 2% of allowances budgeted for the second compliance period will be auctioned in 2012, and 2% of the allowanced budgeted for the third compliance period will be auctioned in 2015. A covered entity can purchase up to 10% of the available allowances at each auction, while the maximum an opt-in entity may purchase is limited to 4%.

Entities wishing to participate must register at least 30 days prior to the auction, provide a guarantee that the entity has the ability to pay upon its winning bid, and submit sealed (blind) bids. Allowances will be awarded starting with the highest bidder and proceeding consecutively downward until all bids are exhausted or available allowances are sold. However, no bids will be accepted below a reserve price. CARB has set the reserve price for 2012 at $10 per allowance (one MTCO₂e). The reserve price will increase annually by 5% plus an amount equal to the consumer price index, which is expected to result in approximately $15-$30 per allowance by 2020.

To protect against a short supply of allowances on the market and to keep allowance prices within a reasonable range, CARB will maintain a reserve of allowances to be sold three weeks after each auction (the Reserve). During the first compliance period, 1% of the total allowances will be set aside in the Reserve annually; during the second compliance period, the set aside rises to 4%; and during the third compliance period, the set aside reaches 7%. If any additional allowances are unsold at action, they will be placed into the Reserve (except that those allocated to utilities will be returned). Sales from the Reserve are conducted in three tiers: at $40, $45, and $50 per allowance. Entities required to participate in the Program can purchase Reserve allowances by specifying the number of allowances they want in each tier. Allowances are sold until each tier is empty, or, if more reserve bids are submitted than allowances available, the allowances are prorated among bidders.

Secondary Markets & Banking

Allowances may be sold in the secondary market between entities registered and holding accounts with CARB. Allowances can also be banked for future use. The ability to bank allowances creates incentive for entities to make early reductions in emissions so they use current allowances in later compliance periods when there are fewer allowances available and prices to obtain them are higher. However, to prevent hoarding and driving up prices, entities will be limited in the amount of compliance instruments that they can hold at any one time (the amount of the holding limit will be calculated by the Executive Officer).

Linkage to Other Programs

Although not yet established, the Program allows for the potential linkage to other national and sub-national governments for trade. Although federal government efforts to implement a cap and trade program have stalled, New Mexico recently approved a cap-and-trade program, and several Canadian provinces are expected to implement programs soon as part of the Western Climate Initiative ("WCI"), of which California is a member.

Compliance

The annual emissions of all covered and opt-in entities will be verified by an accredited third party. Local air districts will also provide information to CARB on facility emissions, new and modified permits, and industrial process improvements. CARB will issue each participating entity "compliance instruments" that represent an allowance or an offset. Compliance is demonstrated at the end of each year. During the first two years of a compliance period, the entity must surrender compliance instruments covering 30% of its emissions for that year. At the end of the third year in a compliance period, the entity must surrender the balance of compliance instruments equal to the remainder of its actual GHG emissions for the full compliance period.

CARB will notify the entity if it fails to surrender a sufficient number of valid compliance instruments, and the entity will have 30 days from notification to correct the deficiency. Each day after the 30-day deadline that a deficiency remains will constitute a separate violation. Any violation of the Program is considered an emissions violation under Health and Safety Code section 42400 et seq., which provides for the issuance of injunctions (section 41513) or assessment of penalties of up to $40,000 for each violation (section 38580).

The Program also prohibits trades to undisclosed parties, trades that manipulate the value of a published market index, misreporting trade information, and trades that are fraudulent, false, misleading, or deceptive.

Air districts argue that some violations could go unpunished or penalties are weak. The districts oppose allowing entities more time to submit compliance instruments if its offsets were determined to be invalid. They also point to the lack of a triggering date for when compliance instruments for excess emissions are due. Those flaws allow an entity to delay penalties from being incurred. The districts also say that the penalties for trading violations are unclear. Further, they are concerned that the provision that proceeds from the sale of electricity allowances be used to benefit ratepayers is vague and unenforceable, and that there are no consequences for failure to benefit ratepayers. The regulated entities, on the other hand, argue that the potential fines are excessive because the penalties overlap by providing for separate violations for each day and each compliance instrument. They urge penalties to be commensurate with the scope and severity of the violation.

Changes & Amendments Expected

Although the Program has been adopted, the regulations will not be final until further changes and amendments are made. Most of the concerns set forth above that were raised by interested parties will be resolved by these changes and amendments.

The resolution adopting the proposed regulations includes a list of modifications proposed to be made after a 15-day public comment period (these modifications are referred to as "the 15-day changes"). The 15-day changes include:

Setting the benchmarks for industrial sources;
Determining and finalizing allowance allocation methods for industrial sources, petroleum refining, and electric distribution utilities;
Determining whether additional sources need transition assistance (free allocations);
Setting aside allowances each year to incentivize the in-state production of renewable electricity, and providing for the disposition and retirement of those set-aside allowances;
Implementing a border adjustment for cement importers if necessary to avoid leakage of cement manufacturers;
Revising the offset compliance program to ensure consistency;
Reviewing the treatment of electricity generators and combined heat and power facilities with long-term supply contracts; and
Reviewing the point of regulation of transportation fuels imported/delivered into California to ensure they are covered by the Program only once.

Thereafter, additional issues will continue to be considered to be adopted as amendments prior to the implementation of the Program in 2012. Those amendments are anticipated to address:

The consideration of additional offset protocols;
The creation of systems to track the trading of allowances and offsets;
Whether allowances should be allocated directly to natural gas utilities and, if so, the allocation method;
How to ensure that proceeds from the sale of electricity allowances are used to benefit ratepayers;
How to prevent the regulation of imported electricity from shifting GHGs to other states rather than reducing them overall; and
Modifications to enforcement provisions.

CARB will issue a status report no later than July 31, 2011, regarding the finalization of the allowance allocation system, implementation of market-tracking, offset-tracking, and auction systems, linkage with other WCI programs, status of additional offset protocols and estimates of expected offset supply, and other issues. Final action to adopt all regulations and modifications must be completed by October 28, 2011. Annual status reports are required, and amendments may be made prior to the start of each new compliance period if adjustments to the Program are needed.

For further information, see:

CARB, Draft Resolution 10-42, Dec. 16, 2010

CARB, Proposed Regulation Order, Nov. 24, 2009

CARB, Staff's Suggested Modifications to Proposed Regulation, Dec. 16, 2010

CARB Press Release # 10-63, Dec. 16, 2010

CARB, Staff Report: Initial Statement of Reasons, Oct. 28, 2010

CARB, "Cap-and-Trade Program" Powerpoint, Dec. 16, 2010

CARB, "The Role of Offsets in Cap-and-Trade" Powerpoint, Feb. 25, 2010

Authored By:

Jessica A. Johnson
(714) 424-8230
jjohnson@sheppardmullin.com

Supreme Court To Decide Fate Of Global Warming Litigation In American Electric Power Co. v. Connecticut

Sheppard Mullin — Wed, 22 Dec 2010 04:57:43 -0800

By Alona G. Metz and Taraneh Fard

On December 6, 2010, the Supreme Court granted certiorari in American Electric Power Co. v. Connecticut, a federal nuisance case on appeal from the Second Circuit. Plaintiffs -- eight states, the City of New York and three non-profit land trusts -- seek abatement and reduction of greenhouse gas emissions from defendants, who include some of the United States’ largest electric utility companies. The Second Circuit ruled that: (1) the case did not present a non-justiciable political question, (2) the plaintiffs have standing, (3) the plaintiffs stated claims under the federal common law of nuisance, (4) the plaintiffs' claims are not displaced by the Clean Air Act ("CAA"), and, finally, (5) the Tennessee Valley Authority (“TVA”), a quasi-governmental defendant, is not immune from the suit. See Connecticut v. American Electric Power Co., 582 F.3d 309 (2nd Cir. 2009). This article summarizes the Second Circuit's lengthy decision, the implications of such, and the impending Supreme Court review.

A.                Background

The Plaintiffs in the case consist of eight States, the City of New York, and three non-profit land trusts that "acquire and maintain ecologically significant and sensitive properties for scientific and educational purpose, and for human use and enjoyment" (the "Trusts"). Plaintiffs sued multiple electric power corporations that own and operate fossil-fuel-fired power plants in twenty states (the "Defendants"), under the federal common law of nuisance, and under state nuisance law in the alternative. Specifically, the complaints allege that Defendants are contributing significantly to the global warming crisis which, in turn, is causing Plaintiffs extensive current and future injuries. Plaintiffs seek to force Defendants to cap and then reduce their carbon dioxide emissions.

B.                 Political Question Doctrine

The District Court held that the case presented a non-justiciable political question, based on the third factor enumerated by the Supreme Court in Baker v. Carr, 369 U.S. 186 (1962). Specifically, the District Court determined that Plaintiffs' causes of action were impossible to decide without an initial policy determination regarding global warming, which should be made by the elected branches of the government.

The Second Circuit reversed. First, the Court reviewed the Baker factors, which set "a high bar for nonjusticiability." Then, the Court went through each of the six factors and discussed how they are inapplicable to the case at hand. The Court repeatedly asserted that "simply because an issue may have political implications does not make it non-justiciable." Also, the Court rejected Defendants’ arguments that the case would interfere with the President's authority to manage foreign relations by undermining the President’s bargaining leverage with other nations when negotiating to reduce their greenhouse gas emissions. Instead, the Court held that this was a domestic case, with domestic parties regarding domestic conduct, the resolution of which would not establish a national or international emission policy. Hence, the Court held that the case does not present a political question.

C.                Standing

The Court then discussed the issue of whether the Plaintiffs have standing to bring the suit. First, the Court determined that the States are suing in both their parens patriae capacity, protecting “quasi sovereign” rights such as the health and well-being of its residents, and their proprietary capacity. The Second Circuit held that the City and the Trusts are suing solely in their proprietary capacity. The Court analyzed each capacity separately. First, it set forth the “Snapp test" for parens patriae standing: A state (1) must articulate an interest apart from the interests of particular private parties, (2) must express a quasi-sovereign interest and (3) must have alleged injury to a sufficiently substantial segment of its population. Additionally, the Court added a fourth prong to the test, that the individuals upon whose behalf the State is suing could not obtain complete relief through a private suit. The Court then held that the States met the Snapp test because they have an interest in safeguarding the public health and resources (a quasi-sovereign interest) apart from any interest held by individual parties, the injuries will affect virtually their entire populations, and it is doubtful that private plaintiffs could achieve complete relief. Thus, the Court held that the States have parens patriae standing.

Second, the Court held that all of the Plaintiffs meet the familiar Lujan test for proprietary standing, which requires a showing of injury, causation, and redressability. The Court found that Plaintiffs alleged both current and future injury, which was certainly impending and not in any way contingent on their actions. Plaintiffs also sufficiently alleged that these injuries are fairly traceable to Defendant’s conduct, a showing which does not require proof that particular Defendants caused particular harms or that it was solely Defendants’ emissions that caused the injuries. Finally, the redressability analysis was analogous to that in Massachusetts v. EPA, 549 U.S. 497 (2007), in which the Supreme Court found that “the proposed remedy need not address or prevent all harm from a variety of other sources.” Thus, the Court held that all Plaintiffs have Article III standing.

D.                Federal Common Law of Nuisance Claims

Next, the Court addressed whether Plaintiffs stated a claim under the federal common law of nuisance. First, the Court adopted the Restatement (Second) of Torts' definition of public nuisance, which is "an unreasonable interference with a right common to the general public." The Restatement § 821(b)(2) explains that there are 3 circumstances that tend to show that an interference with a public right is unreasonable: (a) when the conduct involves a significant interference with the public health, the public safety, the public peace, the public comfort or the public convenience; (b) when the conduct is proscribed by a statute, ordinance, or administrative regulation; or (c) when the conduct is of a continuing nature of has produced a permanent and long lasting effect, and, as the actor knows or has reason to know, has a significant effect upon the public right. The Court then determined that grievances in the complaints suffice to allege an unreasonable interference with public rights under circumstances (a) and (c).

The Court also rejected Defendants' arguments that principles of constitutional necessity limit the scope of federal nuisance claims and that federal nuisance claims are only available to abate nuisances of a "simple type" that are immediately and severely harmful and readily traced to an out of state source. Last, the Court rejected Defendants' argument that "the federal common law of nuisance cause of action is reserved only for states" and held that both the City of New York and the Trusts had stated claims for federal nuisance. In addition to caselaw, the Court again looked to the Restatement for guidance on who may bring a claim for public nuisance. § 821 C provides, in relevant part, that a plaintiff may seek to enjoin a public nuisance where it (a) has the right to recover damages or (b) has the authority as a public official or agency representing the state or a political subdivision in the matter. The Court stated that the City of New York, a political subdivision of the State of New York, clearly meets the criteria under (b), while the Trusts met the criteria under (a) as they would have been able to sue for damages as private parties because they suffered a harm different in kind than the harm suffered by the general public.

E.                 Displacement

Next, the Court held that Plaintiffs' federal nuisance claims were not displaced by the Clean Air Act ("CAA") or by any other environmental legislation. First, the Court set out the test for when a common law cause of action is displaced by federal legislation. In Matter of Oswego Barge Corp., 664 F.2d 327, 335 (2d Cir. 1981), the court found a presumption in favor of displacement where Congress has "legislated on the subject." However, the Supreme Court clarified in Illinois v. City of Milwaukee, 406 U.S. 91 (1972), that the relevant inquiry is whether the statute speaks directly to the particular issue at hand. If not, "the federal courts may apply federal common law."

The Court then determined that the particular issue here is whether Congress had regulated emissions of greenhouse gases and whether it had provided a remedy for those injured by greenhouse gas emissions. While the EPA had proposed to render findings pursuant to the CAA, it had not, as of the time of the Second Circuit's opinion, completed the rulemaking process regarding greenhouse gas emissions. Therefore, the Court refused to speculate whether this hypothetical regulation of greenhouse gases under the CAA would actually speak directly to the particular issue raised by the Plaintiffs.

Defendants cited five other federal statutes that touch on global warming, however, all of them require only research, planning and strategizing, technology development, assessments and monitoring, as opposed to "real action to abate emissions." In other words, these laws are meant to assist Congress in the global warming debate by giving it more information to make choices with regard to actually regulating emissions, but they do not actually regulate anything. Indeed, one of the Acts, the Global Climate Change Act of 1990 recognizes this limitation by providing that the act should not be interpreted to preclude other federal action designed to address the threat of global warming.

In sum, the Court stated, "in a federal nuisance cause of action, unless the statute regulates the nuisance itself, the federal common law that would otherwise by invoked to abate the particular nuisance applies. A collection of non-regulatory statutes focused on studying the issue is insufficient to displace the common law."

F.                 TVA's Separate Arguments

Finally, the Court rejected Defendant TVA's separate arguments that the case against it presents a political question and that the discretionary function exception mandates dismissal of the actions against it. The TVA was created by Congress, but all of its power related activities are self-financed and thus, it operates much like a private corporation. Additionally, the Act establishing the TVA contains a sue-and-be-sued clause, which denies the TVA sovereign immunity.

First, the Court rejected the TVA's argument that the Property Clause of the United States Constitution serves to satisfy the first Baker factor because "TVA is not the United States or Congress" but rather, is a separate corporate entity. Second, the Court explained that "[t]he discretionary function exception 'insulates the Government from liability if the action challenged . . . . involves the permissible exercise of policy judgment." However, the broad sue-and-be-sued clause in the TVA Act indicates that Congress did not wish to preserve the discretionary function exception for the TVA. The Court then discussed whether the TVA had implied immunity by applying the Supreme Court's three pronged test from Loeffler v. Frank, 486 U.S. 549 (1988). The Court found that the test was not met because there were no inconsistencies between a nuisance suit against the TVA and the statutory or constitutional scheme, the TVA had not established that its greenhouse gas emissions were "governmental functions," it did not show any "grave interference" with the performance of a governmental function, and Congress placed no limitations on the sue-and-be-sued clause. Thus, the Court held that neither the political question doctrine nor the discretionary function exception applies to warrant dismissal of Plaintiffs' claims against the TVA.

G.                Implications

The Second Circuit’s holding with regard to parens patriae standing is notable as it extends and reiterates the special treatment of States as litigants discussed by the Supreme Court in Massachusetts v. EPA. There , the decision to recognize Massachusetts’ standing was not grounded solely in Massachusetts’ sovereignty as a state, but also on the fact that Massachusetts was seeking to protect a procedural right guaranteed by the CAA. Here, no such procedural right exists because the Plaintiffs are suing under the federal common law as opposed to a federal statute.

In Massachusetts v. EPA, the Court explained that the existence of a procedural right lowered the standards of causation and redressability. However, as the Second Circuit pointed out here, it is unclear whether States need to show causation and redressability, which are part of the Lujan test for proprietary standing, or if a showing of parens patriae standing under the Snapp test is sufficient on its own. The Second Circuit declined to answer this question because it believed that the State Plaintiffs had met the Lujan test for standing regardless.

Furthermore, the Second Circuit insinuated more than once that the legislative branch could amend the CAA or the EPA and could regulate emissions, both of which would override any decision made by a federal court under the federal common law. Since the Second Circuit’s decision, the EPA has promulgated regulations for motor vehicles and stationary sources under the CAA. The Department of Justice, on behalf of TVA, argues, inter alia, that this renders the case moot.

There is also an interesting procedural consequence of Supreme Court review, as Justice Sonia Sotomayor will most likely recuse herself from the case because she sat on the original Second Circuit panel. This means that there is a possibility for a tie, in which case the Second Circuit’s decision will automatically be affirmed. Most likely, the four conservative justices will vote to reverse, while Kagan (a strong proponent of executive power) and Kennedy (the deciding vote in Massachusetts v. EPA) will cast the deciding votes.

Finally, this decision has the power to make or break climate change litigation. Currently, at least three other climate change public nuisance cases are ongoing around the country. The Supreme Court’s ruling in this case will directly affect those lawsuits, as well as any interest in filing new lawsuits. If the Court determines that the CAA displaces federal nuisance law, global warming litigation based on common law claims in this country will cease to exist.

Authored by:

Alona Metz
(213) 620-1780
ametz@sheppardmullin.com

and

Taraneh Fard
(213) 617-5492
tfard@sheppardmullin.com

Will The Revised "Green Guides" Do More Harm Than Good?

Sheppard Mullin — Fri, 15 Oct 2010 04:13:08 -0800

By Robert L. Magielnicki, Benjamin R. Mulcahy and Gina Reif Ilardi

Last week Sun Chips pulled its biodegradable snack bag off the market around the same time that the FTC announced that it wanted to change its so-called "Green Guides." Coincidence? Maybe. Sun Chips explained that the more environmentally-friendly bag that it launched with a nice spot on Earth Day - was "noisier" than its regular bag, raising complaints from consumers who were more interested in having a quiet snack bag than doing something to help save the planet. But complaints about "noisy" bags aside, the changes that the FTC has proposed to the Green Guides will make it harder for marketers like Sun Chips to tout the things that they're doing to help reduce the negative effect that their product manufacturing and distribution pipelines are having on the environment. If the FTC takes away a brand's ability to tout those attributes, then it also takes away a brand's ability to leverage those attributes to increase sales. And if that's taken away, we run the risk that brands will make green initiatives less of a priority, which will hurt us all.

The FTC's proposed changes to the "Green Guides" were developed using information collected from public workshops, public comments and a study of how consumers understand certain environmental claims. The proposed changes can be divided into two parts: (i) revisions designed to strengthen and clarify the FTC's previous guidance on marketing claims addressed in the Green Guides that currently exist and (ii) new guidance addressing claims not addressed by the current Green Guides, such as "carbon offset" claims, "renewable energy" claims and "renewable materials" claims:

Proposed Revisions to Claims Addressed by the Current Green Guides

General Claims. Marketers should not make general environmental claims such as "earth friendly" without qualifying what attributes make the product "green". Qualifications must be clear and prominent and should limit the claim to a specific benefit.
Certification/Seals of Approval. Marketers should not use unqualified certifications or seals of approval, or certifications that do not specify the basis for the certification through specific criteria. The proposed revisions emphasize that certifications/seals are endorsements covered by the FTC Endorsement Guidelines and provide examples illustrating how those guidelines apply to environmental claims (e.g., marketers should disclose materials connections to the certifier). In addition, marketers are obligated to substantiate all conveyed claims, even when the marketer has obtained a third party certification.
Degradable, Recyclable, Ozone-friendly and "Free of" Claims. The revised Green Guides advise marketer that if a marketer claims that a product thrown in the trash is "degradable," it should compose in a "reasonably short period of time", which has been defined as no more than one year, even in a landfill. The revised Green Guides also include changes to use of claims that a product is "ozone friendly", recyclable, and non-toxic. For example, the revised Green Guides warn against broad environmentally friendly claims from removal/substitution of ozone depleting ingredients in products where the substitute ingredients still produce greenhouse gases or consume substantial energy.

Proposed Guidance for Claims Not Addressed by the Current Green Guides

Carbon Offset Claims. Marketers are advised that they should have competent and reliable scientific evidence to support any carbon offset claims, including appropriate accounting methods to ensure they are properly quantifying emission reductions and are not selling those reductions more than once. The revised Green Guides also advise marketers to disclose if the emission reductions that are being offset by a consumers purchase will not occur within two years, and to avoid advertising an offset if the activity that produces the offset is already required by law.
Renewable Materials and Renewable Energy Claims. When making claims about the use of renewable materials and energy, the revised Green Guides require that marketers provide specific information about the materials and energy used (e.g., "renewable – made with fast growing bamboo" or "renewable – manufactured with solar power"). Marketers should not make renewable energy claims if the power used to manufacture any part of the product, no matter how insignificant, was derived from fossil fuels. The revised Green Guides also prohibit "double counting", meaning if a marketer generates renewable energy (e.g. using wind power) but sells RECs for all of the renewable energy it generates, then it cannot represent that it uses renewable energy.

A copy of the proposed revised Green Guides can be found here. The FTC is seeking public comments on the proposed changes until December 10, 2010, after which it will decide which changes to make final.

Authored by:

Robert L. Magielnicki
(202) 218-0002
RMagielnicki@sheppardmullin.com

and

Benjamin R. Mulcahy
(212) 634-3030
bmulcahy@sheppardmullin.com

and

Gina Reif Ilardi
(212) 634-3031
gilardi@sheppardmullin.com

California Adopts Two New Greenhouse Gas Reduction Rules: Renewable Electricity Standard and Regional Emissions Targets

Sheppard Mullin — Thu, 07 Oct 2010 12:26:06 -0800

By Jessica A. Johnson

Last week, the California Air Resources Board (CARB), a department of the California Environmental Protection Agency, adopted two significant rules to aid in the reduction of greenhouse gas (GHG) emissions. CARB established a standard that 33% of the electricity sold in the state by 2020 come from renewable energy sources, and approved final emission reduction targets for each metropolitan planning region pursuant to SB 375. However, there is some risk that these rules could be suspended if Proposition 23 passes.

Renewable Electricity Standard

History of the Standard

In 2002, SB 1078 established a Renewable Portfolio Standard (RPS) that required the retail sales of electricity in the state consist of 20% energy from renewable sources (e.g. wind, solar, and geothermal sources) by 2017. In September 2006, Governor Schwarzenegger signed AB 32 and SB 107 into law. The landmark goal of AB 32 is to reduce GHG emissions to 1990 levels by the year 2020. To help achieve that goal, SB 107 accelerated the deadline for meeting the 20% RPS to 2010.

In 2008, the Governor signed Executive Order S-14-08 to set a further RPS standard of 33% by 2020. The Executive Order directed state agencies to take appropriate actions to implement that target. AB 32 also directed CARB to create rules and regulations to reduce GHGs. Pursuant to this directive, on November 23, 2010, CARB adopted the new Renewable Electricity Standard (RES).

Summary of the Regulation

The purpose of the regulation is to reduce GHG emissions associated with the generation of energy. (Order § 97000.)
The regulation does not affect the existing authorities of the energy agencies and grid operator (CARB, California Public Utilities Commission, California Energy Commission, and California Independent System Operator). (Order § 97001.)
The regulation applies to entities that deliver electricity in state, including: local publically-owned utilities, electrical corporations, electric service providers, aggregators, cooperatives, the California Department of Water Resources, and the Western Area Power Administration. (Order §§ 97001(b), 97002(a)(15).)
A partial exemption applies to entities formed prior to September 15, 2009, with average electricity sales of less than 200,000 MWh per year during 2007-2009. These small entities are only subject only to the recordkeeping and reporting requirements of the regulation. (Order § 97003.)
RES compliance is phased-in over the following intervals:
- 20% for 2012-2014;
- 24% for 2015-2017;
- 28% for 2018-2019;
- 33% for 2020 and beyond. (Order § 97004, Table 1.)
Compliance is calculated for each entity by multiplying the sum of the entity's retail sales to end users in each compliance interval by the RES percentage compliance required for that interval. (Order § 97004(a).)
Renewable Energy Credits ("RECs") may be banked and traded. (Order §§ 97005, 97002(a)(16).)
The regulation contains recordkeeping and reporting requirements to monitor compliance, including the submission of a plan to achieve the 33% RES target by 2020, annual progress reports, and compliance interval reports. (Order § 97006.)
Violation of the regulation is deemed to result in the emission of an air contaminant. Penalties may be assessed for a violation pursuant to Health and Safety Code section 38580. (Order § 97009.)

Goals and Benefits

The RES is a major step toward fulfilling AB 32's goals. By increasing the use of renewable energy sources, electrical companies will be forced to decrease the use of fossil fuel sources, thereby reducing air pollution. It is estimated that by 2020 the RES will reduce GHGs by the equivalent of 12 to 13 million metric tons of carbon dioxide per year, as well as reducing other smog-forming and toxic air pollutants.

The increased demand for renewable energy that will result from the RES is also expected to require the construction and management of new renewable energy facilities in California, consequently generating new jobs. Further benefits to the state's economy will be gained as consumers are protected from the volatility of natural gas prices.

Regional Emissions Targets

History of SB 375

In 2008, California adopted SB 375 to require the state's Metropolitan Planning Organizations (MPOs) to plan transportation and development in a manner that creates internally sustainable communities so that the amount of automobile use necessary for people to transact their daily affairs would be reduced. Correspondingly, by reducing vehicle miles traveled, GHG emissions would be reduced. As such, SB 375 is an important component in achieving AB 32's GHG reduction goals.

For more detailed information on SB 375, please see our previous blog article.

Reduction Targets

SB 375 required CARB to provide each MPO with GHG emission reduction targets for passenger vehicles for 2020 and 2035. On September 23, 2010, CARB adopted a final rule calling for the following reductions in per capita emissions in each metropolitan planning region:

San Diego region: 7% by 2020 and 13% by 2035;
Sacramento region: 7% by 2020 and 16% by 2035;
Bay Area region: 7% by 2020 and 15% by 2035;
Southern California region: 8% by 2020 and proposed 13% by 2035;
San Joaquin Valley region: placeholder of 5% by 2020 and 10% by 2035;
Monterey Bay, Butte, San Luis Obispo, Santa Barbara, Shasta, and Tahoe regions: generally match or improve upon their current plans for 2020 and 2035.

The final decision on Southern California's 2035 target was continued to CARB's February meeting due to the Southern California Association of Governments' (SCAG) concerns that the proposed 13% target was too aggressive. SCAG does not believe it can achieve the targets due to state budget reductions to its transportation funding. SCAG consists of 6 counties, representing 19 million people.

CARB treated the San Joaquin Valley differently by adopting placeholder and provisional, rather than final, targets because of significant pending developments respecting the Valley's planning that would impact the determination of achievable targets. The Valley's first Regional Transportation Plan is under development and is four years away. Improvements in available data and modeling capability are also expected, the use of which would set more accurate targets. Further, unlike the other regions, which consist of a single MPO, the San Joaquin Valley consists of 8 MPOs, and it had not yet been resolved if each MPO would develop its plan separately, or if two or more MPOs would coordinate. The placeholder targets will be revisited in 2010.

Proposition 23

Proposition 23, titled the "California Jobs Initiative," proposes to suspend AB 32 until unemployment in California falls below 5.5%. Supporters of the proposition claim that AB 32 increases energy and construction costs, which are passed on to consumers who are already struggling in this economic climate. Opponents of the proposition claim that AB 32 creates "green jobs," and continued dependence on foreign oil increases energy costs and air pollution.

For more detailed information on Proposition 23, please see our previous blog article.

If Proposition 23 passes the vote on November 2, 2010, the 33% RES will be suspended. The Legislative Analyst's Office (LAO) does not believe that SB 375 and the regional emissions targets will be suspended because SB 375 is independent of AB 32. However, legal experts believe that, because the goals of AB 32 and SB 375 are derived from the same goals set by CARB, if Proposition 23 passes, litigation will ensue to include SB 375 in the suspension. LAO predicts that, based on California's historical unemployment trends, the GHG reduction measures would be suspended for many years, thereby thwarting AB 32's goal to reduce GHG emissions to 1990 levels by 2020.

Authored By:

Jessica A. Johnson
(714) 424-8230
jjohnson@sheppardmullin.com

Is Your Product Green Enough? California Department of Toxic Substances Control Issues Draft of Green Chemistry Regulations

Sheppard Mullin — Thu, 23 Sep 2010 14:54:45 -0800

By Olivier Theard

The Department of Toxic Substances Control (DTSC) recently released its proposed regulations to require safer consumer products under California's precedential "green chemistry" law. The green chemistry law, originally passed in 2008, is an industry and environmental game-changer because its stated purpose is to reduce adverse impacts to health and the environment by requiring manufacturers to use the safest available chemical components in their products. DTSC's regulations are aimed at fulfilling this mandate by prioritizing particular harmful chemicals and encouraging redesign of products containing those chemicals. The law and regulations represent a paradigm shift whereby the old model - essentially a "wait and see" approach in which chemical health risks were analyzed after someone complained about an injury allegedly caused by that chemical - is giving way to a new model whereby chemical risks are analyzed in advance of exposure in an effort to minimize future harm.

DTSC's proposed regulations are available for public comment on the DTSC website until November 1, 2010, whereupon the DTSC will hold a public hearing on the regulations. Also available on the website is DTSC's Initial Statement of Decision explaining the regulations, as well as useful fact sheets and flowcharts. The regulations may be modified again after November 1, but any final regulation will take effect on January 1, 2011.

Summary of Regulations

The regulations are lengthy, but the primary provisions are the following:

Identify Priority Chemicals: DTSC will issue a list of Priority Chemicals, which are chemicals deemed to pose the greatest degree of threat to health or the environment. The final list of Priority Chemicals will be completed by 2013. Any chemical that "exhibits a hazard trait" and is reasonably expected to be placed into commerce in California can be considered for prioritization, unless the chemical qualifies for an exemption (exemptions are narrowly defined). Virtually any property of the chemical can be considered during the prioritization process, from carcinogenicity to flammability to impact on ecosystems.
Identify Products Containing Priority Chemicals: From the list of Priority Chemicals, the DTSC will create a list of consumer products that contain that chemical, called Priority Products. Within 60 days of a product being listed as a Priority Product, entities that make such a product must provide information about that product to DTSC and perform an analysis of that product (its use, lifecycle costs and impacts, end of use disposal, etc.). The entity must also analyze whether safer alternatives exist that are functionally equivalent and technologically and economically feasible. The DTSC then has a range of options available to it, including requiring additional information or analysis from the responsible entity, placing restrictions on the products' use, or "any other regulatory response that the Department deems is necessary to limit exposure to or otherwise reduce the level of public health or environmental hazards posed by the product."
Other Provisions: The regulations also have a plethora of other provisions, including requiring certification of companies performing product analysis, providing for petitions for DTSC review, and various other technical requirements.

Conclusion

Overall, the regulations introduce sweeping changes to the manner in which consumer products are managed and regulated in California and will create a brand new sub-specialty in the field of environmental law and environmental consulting. Though applicable only to California, this law is sure to cause ripples throughout the nation because any chemicals and products introduced into California commerce are affected. This blog will provide periodic updates on the new regulations.

Authored By:

Olivier F. Theard
(213) 617-5427
OTheard@sheppardmullin.com

The Truth About Proposition 23: Is it a "California Jobs Initiative" or a "Dirty Energy Proposition"...or Neither?

Sheppard Mullin — Thu, 23 Sep 2010 14:05:39 -0800

By Greg Woodard and Jim Pugh

On November 2, 2010, Californians will cast a vote on Proposition 23 (the "California Jobs Initiative") and decide whether or not to suspend AB 32, also known as the "Global Warming Solutions Act of 2006." The legislature enacted AB 32 with the intention of establishing California as a national leader in the climate change and clean technology arena. The stagnating economy has provided AB 32 opponents with a platform to propose suspending AB 32 until unemployment in California falls below 5.5%, a proposition both advocates and detractors of Prop 23 admit will not likely happen for several years. Prop 23 supporters claim that AB 32 is a job-killer that will increase Californians' energy bills. Opponents counter that AB 32 provides jobs for California's burgeoning clean tech industry and suspension of AB 32 will threaten not only that industry, but all but end California's attempt to drastically curb greenhouse gas emissions (GHGs) in the state. Amid the flurry, the truth about Prop 23 is likely somewhere in the middle. Below, we provide the backdrop for Prop 23 and objectively summarize the arguments for and against it.[1]

History of AB 32

In 2006, the state enacted AB 32 to reduce greenhouse gas emissions to 1990 levels by the year 2020. AB 32 tasked the California Air Resources Board ("CARB") with creating rules and regulations aimed at reducing GHGs from virtually all economic sectors, including industry, transportation, utilities, development, and agriculture. From 2006 to 2010, CARB successfully reached several AB 32 goals, including adopting early action measures in 2007, creating an inventory of California's GHGs in 2008, publishing a comprehensive GHG-reduction scoping plan in 2009, and drafting emissions reduction regulations in 2010. Pursuant to AB 32's implementation timeline, CARB is scheduled to adopt final regulations in January 2011 and begin enforcing the same in January 2012. The continued regulatory rollout of AB 32, however, would likely be suspended if voters pass Prop 23.

AB 32 contains a provision that allows the governor to suspend portions of the law for up to one year in the case of an emergency or significant economic harm.[2] Despite the lagging economy, Governor Schwarzenegger has resisted calls to suspend AB 32. The two candidates for this November's election to replace Schwarzenegger as Governor have differing views on the use of that power. Meg Whitman has indicated that, if elected, she would immediately suspend AB 32.[3] Jerry Brown has supported AB 32's goals and vigorously opposes Prop 23, leading some to believe that he would not enforce a one year moratorium on AB 32's implementation.[4]

History of Proposition 23

Prop 23 was born from the collision of dismal economic conditions, high unemployment rates, and looming GHG regulations. On November 25, 2009, the group People's Advocate, Inc. filed a request with the Office of the California Attorney General for an official ballot title and summary for an initiative titled the "California Jobs Initiative." On December 22, 2009, an election law attorney also submitted letters to the Attorney General's Office requesting the suspension of AB 32 until California's unemployment rate receded from its current high of approximately 12 percent. As a basis for the proposed proposition, the letters asserted that skyrocketing unemployment and the exorbitant "passed-on" costs of new GHG regulations were simply unaffordable for struggling California families.[5]

To qualify Prop 23 for the ballot, supporters needed to provide qualifying signatures to California's fifty-eight county election clerks. In March 2010, a petition drive seeking at least 433,971 valid signatures was launched to qualify the measure for the ballot. Only three months later, organizers submitted more than 800,000 qualifying signatures, which was nearly twice the amount of signatures needed to place the initiative on the ballot.[6]

Controversy has accompanied Prop 23 from the start. Governor Schwarzenegger criticized the largely oil-industry-funded petition drive as being the "… work of greedy oil companies who want to keep polluting our state and making profits,"[7] On the other hand, Anita Mangels, communications director for the initiative, said that it was unfair to portray the measure as funded or supported largely by oil companies because the "…coalition includes business, taxpayer and other organizations that represent literally hundreds of California employers, millions of California jobs and billions in revenues."[8] The war or words will undoubtedly continue until election day.

The requisite number of signatures were confirmed and Prop 23 is set for the November ballot as a measure that "[s]uspends implementation of air pollution control law (AB 32) requiring major sources of emissions to report and reduce greenhouse gas emissions that cause global warming until unemployment drops to 5.5 percent or less for a full year." The full title and text of Prop 23 can be located on the California Secretary of State voter guide website.[9] Now, it is up to voters to decide whether California should roll out AB 32 or roll it back. One thing is for certain, in the coming weeks, Prop 23's supporters and opponents will continue to bombard voters with conflicting messages about the future and costs of California's climate change regulations.

Supporters & Their Arguments for Proposition 23

Prop 23 is supported by businesses, union groups, the trucking industry, the California Republican Party, local chambers of commerce, and taxpayer groups.[10] Its top funding sources are oil companies such as Valero Energy Corporation, Tesoro Corporation, and Koch Industries, which have contributed the majority of Prop 23's approximately $8.2 million funding to date.[11] Other major oil companies, such as Chevron Corporation, Exxon Mobil, and Conoco Phillips have remained neutral on the issue.

Prop 23 supporters vigorously defend their position that AB 32 will: (1) increase family and business costs; (2) result in massive blue-collar job loss; (3) decrease tax revenues; (4) decrease California's economic productivity; and (5) result in significantly higher energy taxes and costs.[12]

These arguments rely primarily on two studies commissioned by a California small business advocate group and prepared by Dr. Varsheney and Dr. Tootelian from California State University, Sacramento.[13] The studies predicted that AB 32 would cost each California household approximately $3,857 per year based on increased housing, transportation, utility, and food spending. For businesses, the study found an increase of $49,691 in costs based on lost business taxes, lost labor income, and approximately one-third of a job lost per small business. The study also concluded that nearly 1.1 million jobs could be lost due to decreased state-wide economic output and increased consumer costs.

In addition to the studies, the report from the Legislative Analyst's Office (LAO), the State's official legislative analysis, forecasts some adverse consequences of AB 32 implementation, concluding that " . . . economic activity in the state would likely be modestly higher if this proposition were enacted than otherwise." Therefore, it appears that Prop 23's supporters have valid grounds to claim that implementation of AB 32 would slightly reduce California's overall economic activity. As discussed below, however, that claim is strongly rebutted by Prop 23 opponents.

Further support for Prop 23 stems from the fact that California is currently the only state having a climate change law that mandates GHG reductions by virtually all commercial and industrial sectors to a very low level. Since there is presently no federal law at such a low level (and likely will not be for some time), coupled with the fact that many Western Climate Initiative (WCI) members are backing out themselves (discussed further below), California would essentially be "going it alone" on the GHG-reduction front. However, GHGs are global in nature. If California is alone in mandating GHG reductions, the beneficial impact on the environment would be little to non-existent.

Opponents & Their Arguments Against Prop 23

Opponents of Prop 23 (who have labeled Prop 23 the "Dirty Energy Proposition") come from an equally diverse group of organizations, including businesses, unions, environmental, clean technology, and health organizations. Individual opponents of Prop 23 include Governor Schwarzenegger, Senator Dianne Feinstein, and Democratic state lawmakers. Opponents claim that Prop 23 is funded primarily by two Texas oil companies to kill California's clean energy and air pollution control standards required by AB 32.[14]

Opponents contend that AB 32 has put California at the forefront of the clean technology industry, and passage of Prop 23 will circumvent California's clean energy policies, threaten investment in clean technology, and kill thousands of jobs in the clean technology industry. Moreover, they argue that suspending AB 32 would let polluters off the hook and increase air pollution and public health risks. Opponents also argue that Prop 23 would continue California's reliance on foreign oil and increase electricity costs by 33%, resulting in $80 billion in damage to California's economy and loss of 500,000 jobs by 2020.[15]

Opponents of Prop 23 also point to government analyses to support their claims that AB 32's implementation will not detrimentally effect California's economy. Earlier this year CARB released an economic-impact analysis of AB 32.[16] The report contends that there will be minimal negative impacts to California's economy by the end of 2020, and have a positive impact on clean technology jobs.[17]

In addition, with the United States Senate's decision earlier this year to abandon efforts to pass climate change legislation, opponents of Prop 23 stress that the absence of federal legislation makes AB 32 even more important. In a report recently released by the Clean Economy Network (CEN), the group's board chair said, "[w]e've already had a major setback at the federal level. If we cannot hold the ground here in California, literally the stakes are for the rest of the U.S."[18]

It is in the face of these charges from both those supporting and opposing Prop 23 that voters must decide in November.

What if Prop 23 fails?

If Prop 23 fails in the November election, AB 32 implementation actions will proceed as scheduled. CARB's adoption of GHG emissions limits and emission reduction measures should go forward as planned in early 2011, to then take effect January 1, 2012. CARB also may adopt a market-based cap-and-trade system that limits GHG emissions from various industries and provides economic incentives for achieving reductions in the emissions.

Supporters of AB 32 may also take the failure of Prop 23 as an indication that a majority of Californians support the law, and provide fuel to promote further regulations on GHG emissions.

On a regional level, Prop 23's defeat could bolster support for the WCI, a coalition of seven Western states and three Canadian provinces. The WCI's goal is for the group to cut GHG emissions in the next 10 years to levels 15% below those in 2005. The primary means of meeting the goal would be through a cap-and-trade system that would go into effect in 2012. While there are questions as to whether the entire WCI group will be ready to launch on the scheduled timetable, Prop 23's defeat would eliminate a significant hurdle to the group and confirm California's desire to lead the regional GHG-reduction effort.

What if Prop 23 passes?

Prop 23's approval would immediately place California's effort to lead the region and country in the reduction of GHG emissions on hold. The LAO has stated that California's historical unemployment trends indicate that AB 32 would be suspended for many years, effectively ending AB 32's goals of establishing significant GHG emissions by 2020. The LAO believes that passage of Prop 23 would suspend the following GHG-reduction measures: (1) the proposed cap-and-trade regulation; (2) the "low carbon fuel standard" regulation that requires refiners and importers to change the mix of fuels to lower GHG emissions; (3) the proposed ARB regulation requiring electricity providers to obtain at least one-third of their supply from renewable sources (e.g. wind and solar) by 2020; and (4) the fee to recover the state's costs in administering AB 32. The LAO believes that passage of Prop 23 will not suspend new car and small truck vehicle emissions standards, a residential solar incentive program, land-use policies like SB 375 that promote less reliance on vehicle use, and building and appliance energy efficiency requirements. The LAO contends these measures are independent of AB 32's programs promoting GHG-reductions.

Prop 23's passage also may have effects outside of California by jeopardizing the WCI. Supporters of both the WCI and AB 32 concede that Prop 23's passage would threaten the coalition as California accounts for a large percentage of GHG emissions among coalition members.

Conclusion

The battle over Prop 23 is a tale of two entrenched camps. Proponents claim that if AB 32 is implemented, it will ultimately cost the state over a million jobs and cut the state's GDP by over $180 billion, as well as drastically increase consumers' energy costs. Opponents say passage of Prop 23 will destroy the state's budding green technology industry, threaten California's lead role internationally in the arena of GHG emissions reductions, and cost the economy 500,000 jobs and $80 billion.

Ironically, both sides say that whether or not Prop 23 passes, jobs will be lost and California's economy will suffer. On November 2, 2010, the voters get to decide who is right.

Authored By

Greg Woodard
(714) 424-8231
GWoodard@sheppardmullin.com

and

James E. Pugh
(213) 617-4284
JPugh@sheppardmullin.com

[1] See the official arguments both for and against Prop 23 at http://www.voterguide.sos.ca.gov/pdf/english/23-arg-rebuttals.pdf

[2] http://gov.ca.gov/press-release/4111/

[3] http://www.sfgate.com/cgi-bin/blogs/nov05election/detail?entry_id=47872

[4] http://www.greengov2010.org/you-report/2010/05/whats-jerry-browns-position-ab-32; http://www.jerrybrown.org/brown-blasts-proposition-23-questions-whitmans-commitment-californias-green-economy

[5] http://ag.ca.gov/cms_attachments/initiatives/pdfs/i902_initiative_09-0104.pdf

[6] http://www.sos.ca.gov/elections/ballot-measures/qualified-ballot-measures.htm

[7] Dan Whitcomb, "California May Vote to Freeze Landmark Climate Law" http://www.reuters.com/article/idUSTRE64303220100504?type=politicsNews

[8] Id.

[9] http://www.voterguide.sos.ca.gov/pdf/english/23-title-summ-analysis.pdf

[10] http://www.yeson23.com/wp-content/uploads/CA-Jobs-Initiative-Coalition-List-9.15.10.pdf

[11] http://cal-access.sos.ca.gov/Campaign/Committees/Detail.aspx?id=1323890&session=2009&view=late1

[12] http://www.yeson23.com/

[13] http://suspendab32.org/AB_32_Report071309.pdf and http://sba.ca.gov/Cost%20of%20Regulation%20Study%20-%20Final.pdf

[14] Opponents of Prop 23 have also been funded by out-of-state donations, including sizeable donations from investors in clean technology projects, as well as Democratic candidate supporters.

[15] http://www.stopdirtyenergyprop.com/get-the-facts.php.

[16] http://www.arb.ca.gov/cc/scopingplan/economics-sp/updated-analysis/updated_sp_analysis.pdf. A December 2009 study by the Brattle Group supports CARB's claims, finding that the overall impact of AB 32 on state small businesses would be negligible and very manageable. (http://www.ucsusa.org/assets/documents/global_warming/AB-32-and-CA-small-business-report.pdf.)

[17] The 2010 analysis was an update to a December 2008 CARB analysis that was criticized by several peer reviewers and independent organizations. (http://www.arb.ca.gov/cc/scopingplan/economics-sp/peer-review/peer-review.htm.)

[18] The CEN styles itself as a "networking, educational, and advocacy organization shaping a new economy based on clean technology and innovation." (http://cleaneconomynetwork.org/about-us.)

Supreme Court To Decide Whether To Review Seventh Circuit Decision Holding That Bankruptcy Does Not Discharge Environmental Clean-Up Liability Under The Resource Conservation And Recovery Act

Sheppard Mullin — Mon, 20 Sep 2010 04:28:20 -0800

By Theresa Bangert

In a decision that may create a significant roadblock for companies saddled with environmental clean-up liability to continue as a going concern, the Seventh Circuit in U.S. v. Apex Oil Company, Inc., 579 F.3d 734 (7th Cir. 2009) affirmed a district court injunction requiring the clean-up of a contaminated site in Illinois under section 7003 of the Resource Conservation and Recovery Act (RCRA) despite the company's bankruptcy. On September 27, 2010, the Supreme Court is scheduled to discuss whether to grant review of the Apex decision.

In Apex, the district court held that an oil refinery owned by Apex's predecessor created a plume of millions of gallons of oil that is contaminating groundwater and emitting surface fumes that pose a hazard to the environment and to the health of the citizens of Hartford, Illinois. The district court held that RCRA imposes liability on Apex to "abate this nuisance." The principal question on appeal to the Seventh Circuit was whether the United States' claim for a mandatory injunction under RCRA was discharged in Apex's bankruptcy and, therefore, could not be renewed in a subsequent lawsuit.

Bankruptcy cases interpreting pre-petition liability under various environmental laws, including Apex, have found that certain equitable claims are not dischargeable. To begin with, confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code allows a debtor to obtain a discharge of "any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). This allows the debtor a fresh start coming out of bankruptcy. The Bankruptcy Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as, among other things, a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(B) (emphasis added). Thus, as explained by the Seventh Circuit in Apex, the crucial question in determining whether an equitable remedy is discharged in bankruptcy is whether that remedy gives rise to a right to payment. If it does, the claim is discharged in bankruptcy.

The Seventh Circuit held that RCRA entitles the government to require a defendant to clean up a contaminated site at the defendant's expense. However, RCRA does not entitle the government to demand payment of the clean-up costs from the defendant. Apex argued that the cost of complying with an equitable decree under RCRA should be deemed a monetary claim and, thus, be dischargeable in bankruptcy. Citing cases in the Seventh, Third and Second Circuits, the Apex court held that the cost to Apex of complying with the injunction is not a "right to payment" as used in the Bankruptcy Code. The court reasoned that because every equitable decree imposes a cost on the defendant, under Apex's argument, every equitable claim would be dischargeable in bankruptcy unless there was an exception in the Bankruptcy Code. The court held this was inconsistent with the spirit and framework of the Bankruptcy Code. In sum, the Seventh Circuit held that the government's equitable claim was not discharged in bankruptcy and it upheld the injunction requiring Apex to clean-up the contaminated site in Illinois.

Of note, in deciding Apex, the Seventh Circuit expressly distinguished Ohio v. Kovacs, 469 U.S. 274 (1985), a case in which the Supreme Court held that an equitable obligation to clean up a contaminated site by the debtor was discharged in the debtor's bankruptcy. In Kovacs, the debtor failed to comply with its clean-up obligation post-bankruptcy. A receiver was appointed to take possession of the debtor's assets and obtain from the debtor money to pay for cleaning the contaminated site. The Seventh Circuit in Apex held that, because the receiver in Kovacs was seeking money, as opposed to an order mandating the clean up, this was a "right to payment" and therefore a "claim" that could be discharged under the Bankruptcy Code. By contrast, in Apex, the government was not seeking the payment of money and the underlying statute did not entitle it to payment. Accordingly, the Seventh Circuit held that the Supreme Court's decision in Kovacs did not mandate a different result.

As Apex no longer had the capacity to perform the clean-up itself, Apex estimated that it would cost $150 million to hire another company to complete the job, minus any recovery Apex could obtain from other contributors of the contamination. Apex argued that had it known that the government's equitable claim was not dischargeable in bankruptcy, it would have had to liquidate, rather than reorganize.

The Apex ruling may erode the ability of a company with environmental contamination liability to continue as a going concern. To the extent courts follow the reasoning of Apex and hold that equitable claims for environmental clean-up costs are nondischargeable, a chapter 11 bankruptcy may have marginal to no benefit to companies saddled with such liability. In that instance, a chapter 7 liquidation may be the company's only option. Further, the Apex ruling may guide lawmakers on how to draft future environmental legislation to prevent companies from shedding their contamination liability. That is, if an environmental law confers no right to payment on the plaintiff and only imposes an obligation on the defendant to take some affirmation action (such as cleaning up contamination), then courts following Apex will hold that the plaintiff's equitable claim is not dischargeable in bankruptcy.

Authored by:

Theresa W. Bangert
213-617-5596
tbangert@sheppardmullin.com

California Fighting Back to Save PACE Program

Sheppard Mullin — Wed, 21 Jul 2010 11:44:53 -0800

By Lindsay Young

On July 14, 2010, California Attorney General Jerry Brown filed a lawsuit against Fannie Mae and Freddie Mac (California v. Federal Housing Finance Agency, N.D. Cal., No. 10-3084), claiming that the government-sponsored enterprises are thwarting the State’s PACE (Property Assessed Clean Energy) programs, which encourage homeowners to make their homes more energy and water efficient. Under PACE programs, local governments lend money to homeowners who then use the funds to install solar panels, better insulation and other energy efficiency improvements. The homeowners pay for the improvements through special property tax assessments over a period of 10 years or more. The PACE programs, which have already created thousands of jobs, have additionally attracted over $150 million in stimulus money for the State of California.

Fannie Mae and Freddie Mac contend that PACE funding constitutes a loan or senior lien that has priority over existing mortgages, which is not permitted under Fannie Mae and Freddie Mac’s standardized mortgage documents. On May 5, 2010, both Fannie Mae and Freddie Mac issued advice letters to all lending institutions stating that PACE “loans” that have senior lien status to a mortgage are not permitted. On July 6, 2010, the Federal Housing Finance Agency (FHFA), the federal agency that serves as the conservator for Fannie Mae and Freddie Mac, upheld this interpretation. Therefore, Fannie Mae and Freddie Mac will not buy or guarantee mortgage loans that participate in these programs, and, as lenders will not issue mortgage loans that do not satisfy Fannie Mae and Freddie Mac’s requirements, several California counties have suspended their PACE programs.

California, on the other hand, argues that Fannie Mae and Freddie Mac are incorrectly characterizing the programs as loans. Under California law, PACE funding is classified as a tax assessment. Tax assessments can be used to finance improvements that serve a public purpose, and in some instances, privately-owned improvements can also serve a valid public purpose. California argues that PACE’s energy efficient private home improvements do in fact serve a public purpose, which is supported by California’s legislative record, thus making the characterization of PACE funding as a tax assessment proper. Furthermore, Fannie Mae and Freddie Mac have for decades accepted and agreed that tax assessments constitute priority liens, which do not in themselves violate Fannie Mae and Freddie Mac’s mortgage requirements. If the courts agree with California’s characterization of PACE funding as an assessment rather than a loan, the PACE programs would then be compatible with Fannie Mae and Freddie Mac’s mortgage requirements.

Most counties in California have developed or plan to develop a PACE program, 22 other states have passed laws permitting PACE programs, and legislation is pending in most other states. As Fannie Mae and Freddie Mac either own or guarantee 30 million homes, constituting over half of the countries’ residential mortgage loans, FHFA’s decision to uphold Fannie Mae and Freddie Mac’s interpretation will effectively thwart PACE programs across the country. Several cleantech companies that rely on PACE funding, thousands of jobs and millions of dollars of capital now hinge on whether the courts will reverse FHFA’s decision.

For more information, please contact Lindsay Young. Ms. Young is an associate in the Corporate/Securities Group in the firm’s Orange County office.

The Supreme Court or Congress: Which Will Decide Whether Large Emitters of Greenhouse Gasses May be Held Liable for the Effects of Global Warming?

Sheppard Mullin — Fri, 11 Jun 2010 10:45:47 -0800

By Robyn Christo and Scott Vignos

As climate change litigation proceeds throughout the country, three cases, Comer v. Murphy Oil, Connecticut v. American Electric Power and Native Village of Kivalina v. ExxonMobil, provide indications of the Supreme Court's potential role in shaping the legal landscape of climate change. The Fifth Circuit's May 28, 2010 order dismissing the en banc appeal in Comer has provided renewed interest in this issue.

In Comer, property owners along the Gulf Coast brought a putative class action alleging the activities of energy, chemical and fossil fuel companies had contributed to global warming. The class claimed that greenhouse gas (GHG) emissions from the defendants’ operations contributed to rising sea levels and severe hurricanes resulting, ultimately, in property damage. The district court granted defendants’ motion to dismiss, finding plaintiffs’ claims presented non-justiciable political questions. A Fifth Circuit panel disagreed and the case was remanded for arguments on the merits. Defendants immediately moved for a rehearing en banc.

The Fifth Circuit, left with a bare quorum due to the recusal of seven justices, voted to hear the Comer appeal en banc, automatically vacating the panel's earlier decision. Prior to oral arguments, an eighth judge recused herself, prompting the loss of the quorum necessary to hear the appeal. Although the Court did not provide an explanation in its order, the recusals are speculated to be due to conflicts raised by stock-ownership issues.

Following arguments of both parties and amici, the Court dismissed the Comer appeal entirely, finding, “There is no rule that gives this court authority to reinstate the panel opinion which has been vacated." The order restored the district court's original ruling, leaving plaintiffs with a final alternative – a writ of certiorari to the Supreme Court. The order may signal a temporary victory for industry defendants, but the lasting impact of Comer is much more nuanced.

The Comer decision has generated interest in a potential Supreme Court ruling on the liability of large GHG emitters. Because the dismissal of Comer allowed the district court’s opinion to stand, it prevented, for the time being, a split in the circuits on climate change liability. The Second Circuit in American Electric Power, recently denied defendants' motion for en banc consideration. The ruling allows a panel decision to stand, giving plaintiffs – eight states, New York City, and three land trusts – a green light to proceed with tort claims against GHG emitters in district court.

A circuit split may yet arise, however. Native Village of Kivalina is currently before the Ninth Circuit Court of Appeals. The district court in Kivalina, criticizing the Second Circuit's rationale employed in American Electric Power, found the tort claims of a village in the Arctic were precluded by a lack of standing and the political question doctrine.

Several issues may bear on the Supreme Court's decision to grant (or deny) certiorari in Comer or American Electric Power. First, without a substantive ruling from the Fifth Circuit, the Second Circuit’s decision alone may not present the necessary impetus that is generally provided by a circuit split. Further, the Ninth Circuit may reverse the district court in Kivalina and side with the Second Circuit's decision in American Electric Power, leaving the circuits in agreement.

Second, should the Supreme Court grant certiorari, it is possible the Court would face recusal issues similar to those faced by the Comer court. Certainly Justice Sonia Sotomayor, who participated in American Electric Power while a justice on the Second Circuit, would recuse herself. Moreover, both Justices Anthony Kennedy and Samuel Alito own stock in large oil companies. Without the participation of these three Justices, the Court would be left with its bare quorum of six.

Finally, legislation pending on the Hill may militate against granting certiorari. Senators John Kerry and Joe Lieberman recently released their discussion draft of the long-awaited Kerry-Lieberman "American Power Act." Among other provisions, the bill contains measures to coalesce GHG emission standards under one federal rule, potentially affecting liability exposure for the energy, fossil fuel and chemical industries. To avoid venturing into delicate political territory, the Supreme Court may allow Congress an opportunity to enact comprehensive climate change legislation first.

While it is clear that the Fifth Circuit's decision to "punt" on the issue of climate change has left some frustrated with the Court's reticence on an important and timely issue, litigation may proceed in American Electric Power. And, while the Comer plaintiffs consider their next move, the attention of environmentalists and industry will shift to the Second Circuit where the defendants in American Electric Power have until June 19 to seek their own writ to the Supreme Court.

For more information regarding this article, please contact Robyn Christo. Ms. Christo is an associate in the firm's San Francisco office.