Procopio and BlueScape Cap-and-Trade Webinar 12-8-11

The California GHG Cap-and-Trade Rule is Final: What Do You Know?!

Webinar: December 8, 2011

John J. LormonPartnerProcopio, Cory, Hargreaves & Savitch LLPjohn lormon@procopio com

James A. WestbrookPresidentBlueScape Environmentaljwestbrook@bluescapeinc com

1

[email protected]

[email protected]

James A. Westbrook Bio

• President BlueScapePresident, BlueScape• Full-service environmental consulting• Experienced with CA and EPA GHG regulations, and p g ,

carbon offsets• Technical capability to develop and manage climate

change programschange programs• Cap-and-trade compliance strategy, GHG emissions

and compliance calculations, data monitoring and p , greporting systems, allowance/credit management

2

John J. Lormon Bio

• Partner at Procopio, Cory, Hargreaves & SavitchPartner at Procopio, Cory, Hargreaves & Savitch LLP, specializing in environmental, climate change, and air quality law

• Managed numerous Clean Air Act cases involving• Managed numerous Clean Air Act cases involving stationary and mobile sources, including energy generation and transmission facilitiesW k d l l b i i di l d• Worked on large scale carbon emission, diesel and soot projects in Los Angeles and Long Beach Harbor

• Experienced in energy project siting and permittinggy j g g• American Bar Association section on Energy,

Environment and Resource Vice-Chair Climate Change, Sustainable Development and Ecosystems

3

Change, Sustainable Development and Ecosystems

Agenda

• Subarticle 3: Applicabilitypp y• Subarticle 4: Compliance Instruments• Subarticle 5: Registration and Accounts• Subarticle 6: Allowance Budgetsg• Subarticle 7: Compliance Requirements for Covered Entities• Subarticle 8: Disposition of Allowances• Subarticle 10: Auction and SaleSubarticle 10: Auction and Sale• Subarticle 11: Trading and Banking• Subarticle 12: Linkage to External Trading Systems• Subarticle 13: OffsetsSubarticle 13: Offsets• Subarticle 14: Compliance Instruments from Other Programs• Subarticle 15: Enforcement and Penalties (and Litigation)• Subarticle 16: Other Provisions

4

Subarticle 16: Other Provisions

Applicability

• Covered Gases -- CO2, CH4, N2O, SF6, HFCs, PFCs, NF3, Fluorinated GHGFluorinated GHG

• Covered Entities– Operators of Facilities, ex. refineries, cement,

cogeneration stationary combustioncogeneration, stationary combustion– First Deliverers of Electricity

• Electric Generating Facilities in CA• Electricity Importers

– Fuel Suppliers• Natural Gas, utility and intrastate, y• Gasoline Blendstock, Distillate (Diesel), LPG

– Carbon Dioxide Suppliers• Opt in Voluntary Other Participants

5

• Opt-in, Voluntary, Other Participants

Power Plant IOU/POU

Importer

IOU/POU Power PlantOut-of-State

Food Co Fuel Supplier

Oil/Gas Producer

Power Plant IPP

Refinery

6

First Compliance PeriodInclusion Thresholds, Jan. 1, 2013*

Covered Entity CO2e Emissions any Year 2008-2011

Operators of Facilities 25 000 MT/yrOperators of Facilities 25,000 MT/yr

Electricity Generation Facilities 25,000 MT/yr

Electricity Importers 1. All emissions for imports from y p pspecified sources that emit 25,000 MT/yr or more

2. All emissions for unspecified sources are above the threshold

Carbon Dioxide Suppliers 25,000 MT/yr, include sum from different capture processes

Petroleum and Natural Gas Facilities 25,000 MT/yr

*The rule becomes effective Jan 1 2012

7

*The rule becomes effective Jan. 1, 2012

Second Compliance PeriodInclusion Thresholds, Jan. 1, 2015

Covered Entity CO2e Emissions any Year 2011-2014

Fuel Suppliers 25,000 MT/yr, full combustion or oxidation of fuel imported and/or delivered

Electricity Importers 1. Zero MT/yr for specified source2. Zero MWh/yr for unspecified source

as of Jan. 1, 2015

How Do I GET OUT!?

Not easy:- Less than 25,000 MT/yr during one entire compliance period- Drop out the next compliance period

Sh tdo n

8

- Shutdown

Compliance Program

• Certain utilities and energy-intensive industries needCertain utilities and energy intensive industries need “Compliance Instrument” (“CI”) per metric ton of GHG emissions

• ARB creates CI (§ 95820):– CA GHG emissions allowances

ARB offset credits– ARB offset credits– Sector-based offset credits– External GHG ETS offset credits– ARB early action offset credits

9

Compliance Program (cont.)

• Allowances allocated for free to some entities othersAllowances allocated for free to some entities, others pay

• Primary methods to allocate allowances = auctions• Allowances are tradable• ARB set minimum price - $10 per metric ton• Market demand for allowances will increase

– Result: higher prices for certain unwanted goods and services (the “Price Signal”)( g )

• Goal: more clean and efficient energy compliance

10

Compliance Program (cont.)

• Auction proceeds used in part for:Auction proceeds used, in part, for:– Alternative energy investments– Utility customer rebates

• Cost increases for electricity, fuel, and goods passed onto customerReduce impact from out of state energy and goods• Reduce impact from out-of-state energy and goods by:– Imposing compliance program on importers of p g p p g p

electricity– Free allowances to certain at-risk industries

11

Allowance Caps

• Goal: reduce GHG emission to 1990 levels by 2020Goal: reduce GHG emission to 1990 levels by 2020 at approximately 3% per year

• First Compliance Period: 1/1/2013 – 12/31/2014– 2013: 162.8M metric tons of CO2e– 2014: 159.7M metric tons of CO2e

Second Compliance Period: 1/1/2015 12/31/2017• Second Compliance Period: 1/1/2015 – 12/31/2017– Natural gas and fuel distributors added– Cap rises in 2015 to 394.5M metric tons CO2ep 2

– 2020 cap declines to 334.2M metric tons of CO2e

12

Compliance Requirements

• Reporting and RecordkeepingReporting and Recordkeeping• Phase-In of Compliance Obligation

– 1st compliance period– 2nd compliance period– During a compliance period

E i i C t i f C li• Emission Categories for Compliance• Biomass-Derived Fuels• Compliance Obligations Related to Instruments• Compliance Obligations Related to Instruments• Timely / Untimely Surrender• Under-Reporting

13

p g

Emission Categories for Obligations

Covered Entity Obligation Considerations

Operators of Facilities - Verified or assigned combustion and vented emissions- Liquid fuels not included in 2015

First Deliverers of Electricity

- Verified or assigned combustion and vented emissions- Separate calculations for generators and importers- Resource shuffling not allowed- RPS and QE Adjustmentsj

Natural Gas Suppliers - Verified or assigned fuel deliveries, full combustion- Less deliveries to covered entitiesLess deliveries to covered entities

Gasoline and Diesel - Verified or assigned fuel deliveries, full combustion- Except deliveries outside California

14

Compliance Instrument Obligations by YearFirst Compliance Period*

Period Compliance Obligation

Prior to 2012 Rule not effective

2012 Register for TradingAllowance Auctions in August and NovemberAllowance Auctions in August and November

2013 Obligations begin

2014 Annual obligation – 30% surrendered for 2013 emissions, by Nov 1.

2015 Remaining obligations for 2013-2014 emissionsS d d b N 1Surrendered by Nov 1.

15

*For a facility with a compliance obligation in the first period.

Disposition of Allowances

• Different sectors – different treatment– Free allocations– Purchases: auctions and trades

• Electric distribution sector allocation of allowances:Electric distribution sector allocation of allowances: – 2013: 95.8M metric tons of CO2e– 2020: 83.1M metric tons of CO2e– 8 year allowance decrease of 13 3%8 year allowance decrease of 13.3%

• Industrial sector– Remainder of electric and ARB’s reserve allowances– Approximately:– Approximately:

• 2013: 64.6M metric tons of CO2e• 2020: 226.9M metric tons of CO2e• 8 year allowance decrease of 20.5%

16

y

Disposition of Allowances (cont.)

• Electric generating utilitiesElectric generating utilities– POUs

• Free• Used for compliance• Used for compliance

– IOUs• Initially free• Must be “monetized” by consignment to ARB for auction for• Must be monetized by consignment to ARB for auction for

benefit of ratepayers• Industrial

First Compliance Period free to ≥ 25 000 metric tons of CO e– First Compliance Period free to ≥ 25,000 metric tons of CO2e– Approximately 90% of historical emissions– Purchase 10%

17

Disposition Allowances (cont.)

• Industrial sector decline in free allowancesIndustrial sector decline in free allowances– “Adjustment factor” to incentivize change in energy use– “Leakage” – risk businesses will move out-of-state

• High risk industries– Some 100% free allowances– Others 75% in Second Compliance Period or 50% in Third

Compliance Period

– Zero allocation sectors• Importers: electricity, natural gas, and covered fossil fuelImporters: electricity, natural gas, and covered fossil fuel• Independent power generators• Out-of-state entities

18

Auction and Sale

• Allowances available at Auction:Allowances available at Auction:– IOU allowances– ARB reserves

All t ll t d f f t i d t– Allowances not allocated for free to industry• Auction procedure:

– Units of 1,000– One-bid– Bid is blind– Highest bid wins– Highest bid wins– Financial assurance of bidder– Reserve price (floor)

19

Auction and Sale (cont.)

• Price controls:Price controls:– Auction price

• 2012 and 2013: ARB maintains certain allowances in a “ i ” t t t l ik $40/ ll“price reserve” account to control spikes: $40/allowance with 5% over inflation/year

• 2014-2020: reserve price plus 5% per year above CPI

• Limit on use of agents to hold allowances• Corporate affiliation disclosure required

Li it b f ll th t b h ld b• Limit on number of allowances that can be held by regulated entity or affiliated parties– 2.5M plus 2.5% above 25M = 5.9M for 2013

20

p

Linkage

• Refers to external trading systemsRefers to external trading systems• ARB procedures for approval• Linkage options might include:g p g

– Western Climate Initiative (WCI)– Regional Greenhouse Gas Initiative

E U i– European Union

21

Offsets for Compliance

• Up to 8% offsets for compliance obligationsUp to 8% offsets for compliance obligations• Project offsets can come from only the US• Project protocols are currently limited – forestry, j p y y,

urban forestry, dairies, ODCs• Offsets may be available from sector-based

programs such as REDDprograms such as REDD• Offsets must meet extensive, stringent requirements• Early Action OffsetsEarly Action Offsets

22

Enforcement and Penalties

• Failure to submit allowances for emissions or lateFailure to submit allowances for emissions or late submission 4x the original requirement plus other penalties

• Failure to properly report allowance allocations– No penalty up to 5%

75% replacement of allowance– 75% replacement of allowance

23

Enforcement and Penalties (cont.)

• Criminal penalties per H&S Code § 42400:Criminal penalties per H&S Code § 42400:– Strict liability: up to $1,000 and/or 6 months– Negligence: up to $25,000 and/or 9 months– Knowing: up to $40,000 and/or 1 year– Willful and intentional: up to $75,000 and/or 1 year

Injunctive relief and civil action not dismissed upon• Injunctive relief and civil action not dismissed upon filing of criminal complaint

24


• Civil penalties per H&S Code § 42401:Civil penalties per H&S Code § 42401:– Violation of abatement order: $25,000– Strict liability: up to $10,000– Negligence: up to $25,000– Knowing: up to $40,000

• Falsifies document: up to $40 000• Falsifies document: up to $40,000– Willful and intentional: up to $75,000

• Unreasonable risk of great bodily injury: up to $125,000 ($ 00 000 f )($500,000 for corporation)

25


• Bounty hunter reward equal to 10% of civil or criminal penalties y q pup to $5,000

• Administrative penalties up to $10,000 per day up to $100,000• In determining amount, ARB considers all relevant

circumstances, including H&S Code § 42403(b) criteria:– Extent of harm– Nature and persistence of violation– Length of violation– Frequency– Record of maintenance– Unproven or innovative nature of control equipment– Mitigation actions taken by defendant, including nature,

extent and time of response

26

Legal Challenges to Compliance Program

• Legislative, regulatory & judicial– Illegal discrimination against out-of-state fuel and

electricity suppliers– Violates Interstate Commerce Clause

Imposes state mandated fees upon imports– Imposes state mandated fees upon imports– Prop 26, CEQA, consistency with federal CAA GHG

regulations– Compliance program not consistent with AB 32’s

mandate:• Cost effective equitable distribution of cost burdenq• Environmental justice claims

– State Case – Assoc. of Irritated ResidentsSt t /F d C O Child ’ T t “P bli T t”

27

– State/Fed Case: Our Children’s Trust “Public Trust”

Action Items and Summary

• Recommend you PLAN for compliance nowy p• Threshold issues - are you a covered entity or not?• How do you plan to comply? How will you satisfy financial assurance

obligation?D d t b ff t t ti l t d i i ?• Do you need to buy offsets, go to auction or plan to reduce emissions?

• How can you reduce cost and future risk and collateral impacts?• When will you get registered for trading?• What is your compliance management system?• What is your compliance management system?

– Information management and verification– Trading plans– Reporting proceduresp g p

• Monitor rule changes and court decisions?• You need a team behind you! Role of Legal, Technical and Financial

28

Contact with Questions

• James A. WestbrookPresidentPresidentBlueScape Environmental11440 West Bernardo Court, Suite 300San Diego, CA 92127office: 858.695.9200 x201 mobile: 858.774.2009j tb k@bl [email protected]

• John J. LormonPartnerProcopio Cory Hargreaves & Savitch LLPProcopio, Cory, Hargreaves & Savitch LLP525 B Street, Suite 2200San Diego, CA 92101direct: 619.515.3217direct fax: [email protected]

iwww.procopio.com

The Webinar presentation will be posted on Slideshare.com and the Procopio website.

29