TEXAS TRANSNATIONAL LAW QUARTERLY - Vinson & Elkins LLP

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TEXAS TRANSNATIONAL LAW QUARTERLY – June 2009standards), then the current GHG registry rulesmay remain.State Pre-emptionThe new cap-and-trade program mandated byACESA would not completely pre-empt stateGHG regulations. Instead, new Title VIII, Part Fto the CAA would place a six-year moratorium(2012-2017) on the implementation orenforcement of analogous GHG emission caps.The moratorium only applies to state GHGcontrols that are based on an absolute tonnagelimit and preserves the right of the states tomaintain alternative GHG control measures(e.g., emission performance standards) or toadopt programs addressing entities that are notcapped at the federal level. There is also noattempt to pre-empt state GHG reporting rules.To assist entities facing significant compliancecosts under three existing state GHG caps —the Regional Greenhouse Gas Initiative (RGGI),the Western Climate Initiative, andCalifornia Assembly Bill 32 — Part H of Title III(at Section 790) directs the EPA to adoptallowance exchange rules. Under the rules,state GHG allowances issued prior to January 1,2012, when the federal program generallybecomes effective, can be exchanged for federalemissions allowances in an amount sufficient tocompensate a party for the cost of obtaining andholding the state allowances. Federalallowances so exchanged are to be subtractedfrom the allowance pool that would otherwise beauctioned.Oversight of Carbon MarketsThe cap-and-trade scheme established byACESA would be likely to create a market forU.S. emissions allowances and offset creditstotaling over $50 billion a year in 2012.Accordingly, ACESA provides for oversight ofthe market for carbon rights and derivativeinstruments by the FERC and the CommoditiesFuture Exchange Commission (CFTC). TheFERC is given jurisdiction over trading ingovernment-issued allowances and offsets. 5The CFTC would regulate derivatives, (futurescontracts, swaps) unless an interagency workinggroup to be convened by the Presidentrecommends otherwise; in that event additionallegislation might be required.Regulators must adopt strict measures toprohibit fraud, market manipulation, and excessspeculation. Rules to foster market transparencyand to limit or eliminate counterpartyrisk, market power concentration risks, and otherrisks associated with over-the-counter tradingare also mandated.The FERC and any other federal agency withjurisdiction over the trading of any regulatedemissions right or contract is granted the sameenforcement powers as the CFTC. Marketmanipulation, fraud, and false or misleadingstatements regarding a regulated instrument is afelony punishable by up to 20 years in prisonand a fine of up to $25 million.Pending the adoption of comprehensive legislationto reform the regulation of derivatives,ACESA also expands the power of the CFTC toregulate derivative transactions related toenergy commodities, including coal, crude oil,gasoline, diesel and jet fuel, propane, electricityand natural gas. The CFTC is granted authorityto set position limits regarding such contracts, torequire detailed reporting of market data and tomandate clearance of contracts throughregistered derivatives clearing organizations.Exemptions may be granted for bona fidehedging operations.The broad and unprecedented sweep of thesenew CFTC market oversight provisions are ofwidespread concern in the energy industry.Among other things, this concern led to a lastminute amendment that provides for the repealof the CFTC’s expanded authority over energyderivatives upon adoption of general “legislationthat includes derivative regulatory reform.” 6Regulatory EnforcementACESA includes various provisions to ensurethat covered entities meet their annualcompliance obligations. If a covered entity failsto hold the required number of emissionsallowances, it shall be liable to a penalty equalto twice the fair market value of the missingallowances. The violator also must make up thedeficit in the next year or such longer period asthe EPA may provide.Violation of the new CAA titles added byACESA, or the EPA rules adopted thereunder,may subject a covered entity to civil andadministrative penalties under the CAA.- 17 -
TEXAS TRANSNATIONAL LAW QUARTERLY – June 2009Criminal penalties may also be sought by theEPA for knowing violations of the CAA or theEPA’s rules. Significantly, however, the billpassed by the House drops provisions in earlierversions that created liberal standing provisionsfor citizens to bring suit to enforce ACESA.Title IV – Transitioning to a Clean EnergyEconomyPreserving Domestic CompetitivenessSubtitle A begins by establishing an annualrebate program for certain industrial sectorsbased around the concept of “carbon leakage.”This term is defined as any substantial increasein GHG by manufacturing entities located incountries without commensurate GHG regulationsthat is “caused by an incremental cost ofproduction increase in the United States” due toU.S. GHG regulations.Certain energy-intensive, greenhouse-gasintensive,and trade-intensive sectors andsubsectors (defined through the six-digitclassification in the North American IndustrialClassification System (NAICS)) will bepresumptively eligible for the rebate program. Inaddition, any person may petition the EPA todesignate a sector as rebate-eligible. Theamount of rebate available is calculated by anentity according to a defined formula taking intoaccount the entity’s cost of compliance withGHG regulations, manufacturing output, GHGemissions-intensity, and electricity efficiency.Eligible industrial sectors would be determinedno later than June 30, 2011, along with the initialvalue of rebates per unit of production for eachsector.By February 1, 2013, the EPA must publish thefirst updated list of eligible sectors and rebatevalues, with future updates required every fouryears. Rebates in the form of emissionallowances will be distributed for each vintageyear no later than October 31 of the precedingcalendar year. Beginning in 2026, the rebateamount is to be reduced by 10 percent annuallyuntil the rebate program is phased out.Additionally, the rebates applicable to aparticular sector may be subject to anaccelerated ten year phase out period based ona Presidential determination that more than85 percent of the global output from a sector ismanufactured in countries that are parties to aninternational climate change agreement, orotherwise have a GHG intensity comparativelyless than that of the comparable U.S. sector.International Reserve AllowancesSubtitle A also states that, absent U.S.participation in a multilateral climate changeagreement meeting certain specified objectivesby January 1, 2018, or a finding that aninternational reserve allowance program wouldnot be in the national economic interest as to aparticular sector, the President shall establish aninternational reserve allowance program foreach eligible industrial sector. Should thePresident make such a finding that aninternational reserve allowance program isunnecessary as to a particular sector for thereasons set forth above, a joint resolution ofCongress is necessary to approve such adetermination to avoid imposing the program.If an international reserve allowance program isestablished, the EPA, in conjunction with U.S.Customs and Border Protection, must adoptrules requiring U.S. importers in identifiedsectors to purchase international reserveallowances. The program could take effect asearly as January 1, 2020. The EPA would alsoset the price of the allowances equal to theauction clearing price established at the mostrecent emission allowance auction, and set fortha methodology for determining the quantity ofinternational reserve allowances to be tenderedin conjunction with the importation of a coveredgood. However, covered goods produced ineither “foreign countries that the United Nationshas identified as among the least developed ofdeveloping countries” or foreign countriesresponsible for less than 0.5 percent of the totalglobal GHG emissions would be exempt fromthe program.Exporting Clean TechnologyUnder Subtitle D, the President is to establish an“interagency group” which will determine theeligibility of developing countries to receiveassistance to encourage widespread deploymentof technologies that reduce GHGemissions and to encourage the adoption ofpolicies that substantially reduce emissions ofGHGs. In addition, the assistance willencourage compliance with existing international- 18 -
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