Morning Star Packing Co. is the second lawsuit challenging the cap and trade auction system as an unlawful tax.  The California Chamber of Commerce sued CARB two days before the first cap and trade auction took place, in November 2012, raising claims similar to several of those advanced in Morning Star Packing Co.  The Chamber of Commerce suit argues that CARB’s retaining the proceeds from its auction of cap and trade allowances amounts to a fee, unauthorized by AB 32.  The Chamber also alleges that the cap and trade regulations violate article XIII A, section 3 of the California Constitution, as a tax passed with less than a two-thirds majority of the Legislature.  The Chamber of Commerce asks that the court prohibit CARB from allocating cap and trade allowances to itself, conducting the auctions or selling off the allowances, and enforcing or imposing the regulation’s cap and trade auction provisions, but does not go as far as seeking a rescission of the cap and trade auction regulations.  The Environmental Defense Fund, Natural Resources Defense Council, and the National Association of Manufacturers have intervened in the California Chamber of Commerce case and a hearing on the merits of the case is scheduled for August 28, 2013.  Attorneys for Morning Star Packing Co. have filed a notice of related case with the California Chamber of Commerce v. CARB court.

• Provide developers with an option to pay the entire offset fee upfront or on an annual basis.
• Eliminate the requirement, if paying the fee annually, to provide the first five years of fees prior to the issuance of a permit.
• Relax the fee refund schedule, allowing for a 100% refund prior to commencement of operation if a project does not go forward.
• Reduce the fees charged for particulate matter, sulfur oxide, and volatile organic compound offsets.
• Charge a lower fee for the first 100 MW repowered at a facility.Make the offset fees applicable to any facility repowered after July 1, 2013.  

The District also recently issued a notice of preparation (NOP) of a draft environmental assessment for proposed Rule 1304.1.  The comment period for the NOP runs until May 8, 2013.  The District has identified air quality and energy as the only environmental areas that may be adversely affected by the proposed Rule and will analyze these areas further in the environmental assessment.  A public meeting on the scope of the proposed Rule’s environmental review has not yet been scheduled.

• Participants submit sealed bids, for multiples of 1,000 allowances. 
• The minimum bid is $10 per allowance.
• One allowance equals the right to emit one metric ton of CO₂ (or other GHGs in CO₂-equivalent terms). 
• Allowances are awarded beginning with the highest bid and proceeding through successively lower bids until the total number of allowances available for sale have been awarded.
• The final price of allowances for all participants in the auction, the “settlement price,” is the lowest bid received at which the supply of available allowances for sale is exhausted.

In this auction, the settlement price for 2013 vintage allowances was $13.62.  All of the approximately 13 million allowances offered for sale were sold.  The auction also included the advance sale of 2016 vintage allowances.  The settlement price for 2016 allowances was $10.71.  4,440,000 2016 vintage allowances were sold, approximately half the total number offered for sale.  There were approximately 2.5 bids for every one allowance, compared with approximately one bid for each allowance during the November 2012 auction.  Not surprisingly, auction participation is up, with covered entities facing compliance obligations this year.

The settlement prices for this auction were slightly higher than those of the first auction, held November 14, 2012.  The settlement price for 2013 vintage allowances in November 2012 was $10.09.  Advance sales of 2015 vintage allowances were settled at $10, the minimum price, in the November 2012 auction.  The Air Resources Board will hold an allowance price containment reserve sale on March 8, 2013, offering allowances at a three tiers of fixed prices.

To read the full article, click here.

In a 2-1 ruling, the D.C. Circuit found that the Transport Rule exceeds EPA’s statutory authority. The Court ordered EPA to continue to enforce a 2005 regulation know as the Clean Air Interstate Rule until it established a lawful replacement to the Transport Rule. That process is widely expected to take years to accomplish.

One of the immediate consequences of the ruling is likely a stay of execution for certain older coal-fired power plants. Under the Transport Rule, owners of such plants would either have had to close their facilities or install expensive pollution control equipment.

The D.C. Circuit rejected claims that EPA’s Endangerment Finding was arbitrary and capricious, holding that EPA properly did not take policy concerns into account in making the Endangerment Finding and that EPA had adequate evidence on which to base its decision, notwithstanding uncertainty about the underlying science.

The Court also upheld the Tailpipe Rule, finding that EPA had met its burden in justifying the Rule with the agency’s finding that automobiles contributed to the danger posed by GHGs and that contribution would be reduced as a result of the Rule.

The Court did not reach the merits of the challenges to the Timing and Tailoring Rules, dismissing the claims against these Rules for lack of jurisdiction based on the failure of a party to the case to demonstrate any concrete harm resulting from the Rules.

For more detailed analysis on the D.C. Circuit opinion, see the Legal Alert issued yesterday by my colleague Tom Wood.

This announcement coincides with Tuesday’s call from a national consumer advocacy group, Food & Water Watch, for a statewide ban on fracking.  Food & Water Watch asserts that fracking poses risks to water, air and land that cannot be adequately addressed by regulation.

California currently has no regulations specific to fracking.  There are two bills relating to fracking currently pending in the California legislature – one that would require disclosure the kind of information available on FracFocus (see May 8, 2012 post) and another that would require notification of planned fracking operations to neighbors (see April 19, 2012 post).  The Department of Conservation also has announced plans to commission an independent study to examine the effects of fracking in California that may inform future regulation.

Co-Authored by Michael N. Mills and Robin B. Seifried.

• Expressly provide that pore space useful for geologic carbon sequestration is part of Civil Code § 659’s definition of “land.”  (According to the analysis prepared for the Senate’s Committee on Environmental Quality, SB 1139’s intent is to provide that the surface estate owner holds title to the pore space, subject to the dominance of the mineral estate.)
• Give the State Fire Marshal regulatory authority over intrastate carbon dioxide pipelines.  The current version of SB 1139 defines carbon dioxide as “a fluid consisting of more than 90 percent carbon dioxide molecules.”
• Direct the Air Resources Board to adopt by January 1, 2015 a methodology for quantifying the amount of carbon dioxide geologically sequestered for purposes of AB 32 compliance, including simultaneous geologic sequestration by enhanced oil recovery (EOR) projects that use carbon dioxide.  The methodology would also need to be suitable for demonstrating compliance with SB 1368’s emission performance standard for baseload electric generation and should harmonize with other state, federal, and international greenhouse gas emission reduction programs.
• Direct the Division of Oil, Gas, and Geothermal Resources (DOGGR) to regulate EOR projects that use carbon dioxide, including those projects that simultaneously geologically sequester carbon dioxide, under its Class II Underground Injection Control (UIC) program.

These issues were discussed in the Approaches to Pore Space Rights, Carbon Dioxide Pipelines, and Enhanced Oil Recovery as Carbon Dioxide Sequestration white papers Stoel Rives prepared for the California Carbon Capture and Storage Review Panel in 2010. 

SB 1139 now goes to the Senate Rules Committee.  For more information on SB 1139, please contact Mike Mills, Jerry Fish, or Eric Martin.

Last week was busy for the California Cap-and-Trade Program, adopted by the California Air Resources Board (CARB) last December under A.B. 32. First, last Tuesday, CARB Chairman Mary Nichols announced at a Senate hearing that the first scheduled Cap-and-Trade allowance auction, scheduled for August 2012, will be a “practice” auction rather than a “real” auction for the purchase of actual allowances. Reportedly, the delay is to allow industry to gain an understanding of how actual, future auctions will work. The first “real” auction is still scheduled for November 1, 2012.

On Wednesday, March 28, two environmental groups, the Citizens Climate Lobby and Our Children's Earth Foundation filed suit in San Francisco Superior Court challenging the use of greenhouse gas emission offsets by entities regulated under Cap-and-Trade to meet their Cap-and-Trade compliance obligations. Although the suit will not necessarily delay implementation of Cap-and-Trade and the offset program, if the lawsuit ultimately invalidates the offset protocols and eliminates the use of offsets to meet Cap-and-Trade obligations, the cost of compliance for industry could be substantially increased. Plaintiffs are alleging that the offset program, with its four adopted offset protocols, are reductions that would have occurred in the normal course of business, and are therefore not "additional” greenhouse gas reductions and threaten the overarching integrity of the Cap-and-Trade Program. The plaintiffs request a repeal of the four offset protocols approved in December 2011 and a prohibition on using offsets in place of greenhouse gas allowances to meet Cap-and-Trade obligations.

These additional modifications address comments CARB staff received in the first 15-day Change Notice period and are the result of additional staff analysis and stakeholder comments.  The text of these changes are here.  

The revisions are too significant to address here in detail, but include changes to definitions to address first suppliers, how the Rewable Portfolio Standard (RPS) will be interpreted, how export and import of electricity and natural gas will be interpreted, as well as a change in the definition of biofuels.  The allocation of allowances to electrical utility providers is also addressed, as are changes to the manner in which the auction will be conducted. Several changes involve identifying related entities and with how allowance transfers and accounts will be tracked and managed. There were also significant changes made to the offset sections and related protocols comments on these changes, will be addressed in the final version of the rule scheduled on October 20, 2011.

Essentially the four RFPs are for:  1) An operator to run the auction; 2) A contractor to provide financial services for participants that need to purchase emission allowances; 3) An entity to monitor the market and report activities in various jurisdictions that may impact the market; and 4) Trainers to train the CARB staff on how to monitor allowance markets.

Excerpts and links to the four RFPs in their entirety are below. 

• Auction and Reserve Sale Operator  

The auction operator is responsible for the auction platform. ARB will designate an auction and reserve sale administrator to be responsible for the entire auction and reserve sale process. The auction and reserve sale administrator is the contract manager that oversees work done by the auction operator and financial services contractors. The auction administrator ensures that the auction contractors will have all their actions approved by ARB. 

• Financial Services for Auction and Reserve Sale

ARB is seeking a qualified contractor to provide client financial services for participants in the California cap-and-trade program that seek to purchase GHG emission allowances at ARB auctions, consign emission allowances to an auction, or purchase emission allowances from the Allowance Price Containment Reserve (Reserve). The Contractor will also communicate directly with the ARB staff for approvals and completion of financial transactions. As California is intending to link its cap-and-trade system with others as part of the Western Climate Initiative (WCI), the Contractor will need the capacity to complete auction transactions with Canadian entities as well as U.S. entities.

The objective of this service is to administer financial and transaction services to support up to six (6) quarterly GHG allowance auctions and up to six (6) “reserve sales” to implement the California cap-and-trade program. ARB is anticipating the first California allowance auction will take place in late 2012. The auctions will continue based on the calendar quarter for the remainder of the program.

•  Independent Market Monitor  

The Contractor will be required to monitor the conduct of allowance auctions and bidder behavior in each auction and report to the participating jurisdictions any activities that may have a material impact on the efficiency and performance of the auctions. The Contractor will also be required to evaluate pre-implementation market activity and provide ongoing monitoring of allowance holdings and allowance transfer activity. In doing so, the Contractor will be required to consult with ARB and the WCI Partner jurisdictions on results and issue reports to the participating jurisdictions that outline the observations and results of the market monitoring efforts.

•  Market Monitor Trainer 

The objective of this market monitoring training service is to assess the training needs, design training, identify appropriate instructors, and deliver training to ARB staff on the theory and practice of select areas of market monitoring of emissions or other commodity related primary (auction) market, secondary physical market, and financial derivatives markets.  The Contractors targeted for this service are training specialists with extensive training design, development, and delivery experience in technical areas such as economics, engineering, and/or environmental regulation. When assessing training needs and designing the training programs, the Contractor must identify potential subject matter professionals, to be approved by ARB, who will serve as training material content providers and instructors.

For information regarding the Bidders’ Conference currently scheduled for September 22, 2011 and related bid documents that set out the requirements in detail click here.

CARB appealed the decision and continued to work on the regulations which prompted objections from the original Petitioners.  On June 6, 2011, in fact, the San Francisco Superior Court issued an order (PDF) that criticized CARB for continuing to work on AB 32 regulation despite the injunction issued in the CEQA case. 

Then, in a strange turn of events it was discovered that prior to the Superior Courts' June 6 order criticizing CARB,  the  Court of Appeals temporarily stayed the trial court’s injunction that prevented the CARB from implementing its cap and trade program.

“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, 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…”

Thus, the parties will provide argument to the Appeals Court as to whether to continue to maintain the stay or lift the stay while the appeal is pending. 

In our view, one issue the Appeals Court should be looking at is whether allowing CARB to go forward could foreclose alternatives or mitigation measures that could otherwise be considered when the revised environmental document is finalized.   Since the main focus of the new document is alternatives, the further promulgation of regulations could foreclose alternatives.  However, if the implementation of the rules occurs after the environmental document is release one could argue that the alternatives discussed may not have been ruled out.  Stay tuned.

On Friday, May 20, 2011, Judge Goldsmith of San Francisco Supreme Court issued a final order  (PDF) with respect to a lawsuit challenging the environmental review of the Cap and Trade regulations created under California’s AB 32 Greenhouse Gas statute and the associated Scoping Plan. In its order, the Court enjoined the Cap and Trade portion of the Scoping Plan.

This revised final order is narrower than the draft order previously circulated in March.  The order applies only to the Board Regulation O8-47  and Executive Order G-09-001 (approving the climate change scoping plan) as they relate to Cap and Trade; and the Cap and Trade regulations themselves Regulation 10-42.  The Executive order enjoins the California Air Resources Board (CARB) from:

“[e]ngaging in any cap and trade-related Project activity that could result in an adverse change to the physical environment until ARB has comes into complete compliance with ARB’s obligations  under its certified regulatory program and CEQA, consistent with the Court’s Order.  This includes any further rulemaking and implementation of cap and trade especially but not limited to any action in furtherance of California Cap and Trade Program Resolution  10-42.”

Keep in mind, this lawsuit was filed challenging a CEQA type document which is procedural in nature.  Thus, once CARB revises the environmental document in the manner required by the court and it is determined to be sufficient at the time the writ is returned, the project may go forward.  Additionally, in the interim, those portions of AB 32 that are not related to Cap and Trade, such as mandatory reporting, are still in effect pursuant to the Implementation Schedule.

In the interim, it will be interesting to see whether various interests will attempt to make changes to the Cap and Trade program.  The Sierra Club has already come out in favor of changes related to emissions levels and environmental justice issues.