Industry Today

Corporate action and changes in state and federal policy on greenhouse gas emissions is rapidly evolving.  In an effort to keep our clients briefed on recent events, CDM has highlighted recent key developments that may affect you.

STATE GHG REGULATORY DEVELOPMENTS »

1. Five Western States to Establish GHG Reduction Targets and Registry
2. Five Northeastern States to Auction CO2 Allowances
3. Pennsylvania Expected to Join RGGI
4. Montana Governor Calls for a National Cap on GHG Emissions
5. Illinois Governor’s Climate Change Task Force Evaluates GHG Regulatory Options
6. South Carolina Governor Calls for Global Warming Study
7. California Sets Course of GHG Regulations; Expected to Influence Other States
8. State Legislative GHG Developments
9. Northern Virginia County Evaluates Energy Tax to Finance GHG Emission Reductions

FEDERAL GHG REGULATORY DEVELOPMENTS »

1. Environmental Organizations Seek GHG Reductions via the Clean Water Act
2. Draft Administration Report Predicts 20% Increase in US GHG Emissions by 2020
3. Congressional GHG Developments

BUSINESS AND FINANCE GHG DEVELOPMENTS »

1. Corporations Commit to Cut Greenhouse Gas Emissions
2. GHG Emissions Play Key Role in $45 Billion Private Equity Buyout of Texas Utility
3. GHG Offset Benefits of Tree Planting Debated
4. FTSE Index Launches Greenhouse Gas Criteria
5. Citigroup, Lehman Brothers, and UBS Issue Reports on Risks and Opportunities for GHG Investing
6. JP Morgan Establishes Bond Index for GHG Risk
7. California Bay Area Based Companies Commit to Reduce GHG Emissions

INTERNATIONAL GHG REGULATORY DEVELOPMENTS »

1. EU Ratifies 20% Reduction in Greenhouse Gases; Differences over Renewable Energy Targets
2. GHG Reductions on G-8 Summit Agenda
3. China Drafting GHG Plan
4. Australia to Ban Light Bulbs to Reduce GHG Emissions

STATE GHG REGULATORY DEVELOPMENTS

Five Western States to Establish GHG Reduction Targets and Registry

AZ, CA, NM, OR and WA announced their intent to set regional GHG reduction targets and a multi-state GHG registry.  The Western Regional Climate Action Initiative will develop a regional target for reducing GHGs over the next 6 months and develop a cap-and-trade program over the next 18 months.  Individual state actions to date include:

• Arizona:  A 2006 executive order from Governor Napolitano seeks to reduce GHGs in the state to 2000 levels by 2020 and to 50% below 2000 by 2040. 
• California:  The state passed a law in 2006 to establish caps on GHG emissions from 2012 and a reduction to 1990 levels by 2020.  The state is developing regulations this year.
• New Mexico:  In 2006 Governor Richardson called for GHG cuts to 2000 levels by 2012, to 10% below 2000 levels by 2020 and to 75% below by 2050.
• Oregon:   In 2004 the state established goals to reach 1990 levels by 2010, 10% below 1990 by 2020 and 75% below by 2050.
• Washington:  In February 2007 the state proposed a bill that seeks to reduce GHG emissions to 1990 levels by 2020. It also calls for cuts of 25% below 1990 levels by 2035 and at least 50% by 2050.

Past Regional Initiatives:  In 2003, California, Oregon and Washington created the West Coast Global Warming Initiative, and in 2006, Arizona and New Mexico launched the Southwest Climate Change Initiative.

Five Northeastern States to Auction CO2 Allowances
Five of ten northeastern states in the Regional Greenhouse Gas Initiative (RGGI) have decided to auction CO² allowances beginning in 2008.  The auction approach is expected to significantly increase companies’ cost to offset CO² emissions, but states appear to be motivated by the large revenue potential of auctions.  In addition, all ten RGGI states have agreed to set aside a minimum of 25% of the CO² allowances for “public benefit,” meaning that the allowances will be retired and unavailable for allocation to companies.  The states will also limit the amount of GHG offsets companies can use in order to drive actual emission reductions.

Pennsylvania Expected to Join RGGI
The state of Pennsylvania is expected to join RGGI, following Massachusetts and Rhode Island’s recent membership.  Debate is strong within the state over Pennsylvania’s membership because of the large number of coal-based power generating plants in the western part of the state.  Pennsylvania, along with the District of Columbia, the Eastern Canadian Provinces and New Brunswick are official observers in RGGI.

Montana Governor Calls for a National Cap on GHG Emissions
Montana Gov. Brian Schweitzer (D) urged Congress to establish a national GHG cap-and-trade program to avoid the “balkanization” of individual state GHG programs.  Testifying last week at the US Senate Finance Committee, Schweitzer also said the viability of coal-based fuels and new coal-fired power plants rests on the success of carbon capture and sequestration.

Illinois Governor’s Climate Change Task Force Evaluates GHG Regulatory Options
Charged with developing strategies to reduce the state’s greenhouse gas emissions to 1990 levels by 2020, the advisory group identified 115 policy options.  Group members will take an in-depth look at the top 20 or 30 options focusing on power production, transportation, manufacturing and agriculture.  The advisory group must complete its work by late June and submit its recommendations to the Governor in late July.

 South Carolina Governor Calls for Global Warming Study
Gov. Mark Sanford (R) recently created an advisory committee to study the potential economic consequences and opportunities from global warming in South Carolina.  The Governor’s executive order establishes the Governor's Climate, Energy and Commerce Advisory Committee, a panel of up to 30 members representing tourism, agriculture, banking, insurance, manufacturing, small business, electric power, public health, local government, conservationists and others.

California Sets Course of GHG Regulations; Expected to Influence Other States
CDM is actively monitoring regulatory developments as California regulators quickly move forward to meet statutory deadlines to implement mandatory regulations to reduce GHG emissions.  Other states are expected to structure their GHG regulations following California’s lead:

• Preliminary Target Industries/Actions Identified for Regulation and Mandatory Reporting:  California recently identified the first industry targets for enforceable GHG reductions and mandatory reporting.  CARB has publicly stated that the regulatory requirements will be enforceable beginning with the following industries:
  - electricity power generation and utilities,
  - petrochemical refining,
  - cement manufacturing, and
  - industrial/commercial combustion.
• Second Round of Target Industries/Activities Identified:  CARB has proposed to regulate oil and gas production/distribution, transportation, landfills and other GHG-intensive industrial processes. 
• Mandatory Reporting to Limit Corporate Options:  CARB has indicated that it will limit flexibility in organizational boundary reporting to just “operational or financial control,” excluding the “equity share” option.  CARB will also initially require operational reporting to include direct emissions and indirect electricity emission, with the expectation that reporting on indirect and “optional” emissions will be expanded in the future. 
• Mandatory Early Action Measures:  By June 30, 2007 CARB will identify specific mandatory actions to be enforced by January 1, 2010.
• GHG Baseline and 2020 Reduction Target:  CARB continues to use a top-down ‘estimate’ to establish the statewide 2020 emission reduction target and has yet to publicly commit to updating the reduction target based upon actual emissions data received from companies required to report 2008 GHG emissions.
• GHG Environmental Justice Advisory Committee Created:  The EJ committee will advise CARB on concerns about economic and community impacts of GHG emissions.
• GHG Labeling for Automobiles:  CARB is developing a proposed regulation to add a “Global Warming Index Label” to all new passenger vehicles offered for sale in the State of California. 

State Legislative GHG Developments

• New Jersey GHG Legislation Moves Forward:  The New Jersey Assembly Environment Committee unanimously passed a bill last week that would require the state to reduce its emissions of greenhouse gases 20% by 2020 and 80% below 2006 levels by 2050.  Earlier this month, New Jersey Gov. Jon Corzine (D) signed an executive order mandating identical targets and timetables.
• North Carolina Assembly Panel Evaluates GHG Reductions:  A North Carolina panel studying climate change recently released a list of 20 recommendations to reduce North Carolina’s greenhouse gas emissions.  In the next few months, the state General Assembly will consider the panel’s recommendations which include establishing a goal to limit GHG emissions statewide, having the state government reduce its energy consumption by 20% and revising state and local building codes to promote energy efficiency.
• California Introduces Eight Bills for Further GHG Reductions:  California Democratic state senators recently introduced a package of eight bills to regulate GHG emissions from landfills, diesel trucks, construction equipment and school buses.  The legislation is intended to further reduce the state's greenhouse gas emissions beyond last year's AB 32 law.  The eight new bills would also require half of passenger vehicles sold in the state to be alternative fuel-capable by 2020, mandate a percentage of diesel fuel that must come from renewable sources, and expand utilities' renewable portfolio standard to 33% by 2021.
• Iowa GHG Legislation Moves Forward:   Three bills are making their way through the Iowa Legislature:  The first bill would launch a plan to reduce GHG emissions in Iowa.  The second bill would create a GHG registry for industrial and transportation activities.  The third bill, endorsed last week by the state Senate subcommittee, would direct the state to consider the amount of greenhouse gas emissions emitted by proposed power plants.

Northern Virginia County Evaluates Energy Tax to Finance GHG Emission Reductions
Arlington County may tax its residents based on the amount of energy they use to help pay for the county's goal to cut GHG emissions by 10 percent by 2012, officials announced last week.  According to Greenwire, Arlington residents could pay as much as $26 more on their electricity and natural gas bills next year if the County Board decides to include $1.5 million for the emissions cap initiative in its spending package, which the board will consider in April.

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FEDERAL GHG REGULATORY DEVELOPMENTS

Environmental Organizations Seek GHG Reductions via the Clean Water Act

In an action that will be duplicated around the country by advocacy organizations, the Center for Biological Diversity is asking California’s Northwest California Water Quality Control Board (WQCB) to add California ocean waters to the federal list of “Impaired Waters” due to “carbon dioxide pollution resulting in ocean acidification.”  The environmental organization is filing the request with each WQCB with jurisdiction over waters of California.  Specifically, the organization is seeking to “have all California ocean segments added to the Clean Water Act’s 303(d) List as these waters are impaired for pH due to ocean acidification occurring as a result of past, ongoing, and projected absorption of anthropogenic carbon dioxide pollution.”

Draft Administration Report Predicts 20% Increase in US GHG Emissions by 2020
By 2020, the United States will emit almost one-fifth more GHG gases than it did in 2000, according to an internal draft report from the Bush administration that is more than a year overdue at the United Nations.

Congressional GHG Developments

Senate Developments:

• Senator Boxer, D-Calif, the chairwoman of the Senate Environment and Public Works Committee, said she would reject state pre-emption as she works on legislation.  Boxer's committee will hold hearings March 21, leading with former Vice President Al Gore and evangelical leaders and other religious figures.
• Senator Feinstein, D-Calif, unveiled a series of new GHG bills in late February.  The bills are intended to expand California GHG laws nationally.  Senator Feinstein's legislative package creates industry-specific bills
  - Establish a national GHG cap-and-trade program for electric utilities and industry.
  - Replicate California's energy efficiency program on a national level forcing builders and utilities to meet California's efficiency standards. 
  - Expand California's low-carbon fuels standard, announced by Gov. Arnold Schwarzenegger in January, requiring petroleum companies to reduce the carbon content of their fuels 20%. 
  - Make California's tailpipe emissions law a national standard, eliminating the auto industry lawsuit claiming the state has no authority to set such limits.
  - Raise national fuel efficiency standards (CAFE) of all cars, trucks and SUVs by 10 miles per gallon over the next 10 years.

House Developments:

• An upcoming House bill aimed at spurring development of coal-to-liquids plants would require carbon sequestration for projects that receive federal price guarantees.
• Joint Senate & House Developments:
  - The Senate Finance Committee and House Ways and Means Committee have both signaled their willingness to consider carbon taxes.
  - Bills have been introduced in the House and Senate that would mandate a U.S. inventory on the potential for underground storage of CO.

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BUSINESS AND FINANCE GHG DEVELOPMENTS

Corporations Commit to Cut Greenhouse Gas Emissions
An organization of more than 90 companies and organizations from around the world endorsed a post-Koyto framework for reductions of greenhouse gas after 2012.  On February 20, companies participating in the Global Roundtable on Climate Change called climate change "an urgent problem" and pressed governments to set targets for greenhouse gas emissions.  The group includes Air France, Alcoa, Allianz, American Electric Power, Bayer, China Renewable Energy Industry Association, Citigroup, DuPont, ENDESA, Eni, Eskom, Ford Motor Company, FPL Group, General Electric, Goldman Sachs, Iberdrola, ING, Interface, Marsh & McLennan Companies, Munich Re, NRG Energy, Patagonia, Ricoh, Rolls Royce, Stora Enso North America, Suntech Power, Swiss Re, Toyota Motor of North America, Vattenfall, Volvo, Wal-Mart, World Petroleum Council, and many others.

GHG Emissions Play Key Role in $45 Billion Private Equity Buyout of Texas Utility
In the largest private equity deal on record, TXU Corporation tentatively agreed last Monday to sell itself to a group of private equity firms including Kohlberg Kravis Roberts, Texas Pacific Group, Goldman Sachs, Lehman Brothers, Citigroup and Morgan Stanley for $45 Billion.  While TXU is seeking competing bids, the deal proposed by the private equity firms significantly scales down the company’s controversial $10 Billion plan to build 11 coal-fired plants in Texas.  The plants were expected to double the amount of C0² generated by TXU.  According to Business Week, TXU’s plans had “turned into a national referendum on coal-generated electricity.”  The private equity firms, in a negotiated and endorsed agreement with the Natural Resources Defense Council and Environmental Defense, have proposed to purchase TXU with the commitment that the utility will now only build three of the eleven proposed coal plants, preventing 56 million tons of annual carbon emissions.  Also, TXU will join the Untied States Climate Action Partnership, a coalition of 10 companies supporting federal legislation to cut GHG emissions 80% by mid-century, and will develop a plan for Texas to replicate California’s energy efficiency plan.  TXU can solicit rival bids until April 16.

GHG Offset Benefits of Tree Planting Debated
While the concept of "carbon banking" using trees is rising in popularity, the effectiveness of planting or maintaining forests to sequester carbon dioxide is increasingly being called into question by scientists and environmental organizations, citing recent research.  At the same time, the science of carbon sequestration is incipient.

FTSE Index Launches Greenhouse Gas Criteria
The FTSE Group in London launched new criteria for its FTSE4Good Index that will exclude companies that fail to reduce emissions, potentially making it harder to attract investment capital.  The criteria will be phased in over two years with the first deadline for compliance January 2008.  The new standards will impact approximately 250 companies on the index which have been identified as having high GHG emissions, in industries such as energy, oil and gas, mining and aerospace.  It’s expected that less than 50 companies currently meet the criteria.  The FTSE Group has indicated that these criteria were just a first step and that it plans to introduce far more stringent criteria - such as requiring companies to publish GHG reduction targets and develop strategies to limit suppliers' emissions.

Citigroup, Lehman Brothers, and UBS Issue Reports on Risks and Opportunities for GHG Investing
Within the last month the three brokerages have released investment analysis reports discussing the scientific, social, regulatory, business, and investing implications of climate change.  The Citigroup report makes specific stock picks by identifying 74 companies across 21 industries and based in 18 countries that Citibank considers well-positioned to both manage and capitalize on greenhouse gas opportunities.

JP Morgan Establishes Bond Index for GHG Risk
JP Morgan and Innovest Strategic Value Advisors launched the JPMorgan Environmental Index-Carbon Beta (JENI-Carbon Beta), the first bond index designed to address the risks of global warming, according to Business Wire.  The corporate bond index will enable credit investors to make return-driven investment decisions that systematically take into account risks and opportunities issuers face as they address climate change. “Until today, bond prices did not reflect an increasingly important financial risk: climate change,” said Edward Marrinan, managing director and head of investment grade credit strategy. “With climate exposures factored in, companies’ risk profiles - and their bonds - will more accurately reflect the trade-off between risk and return.” The JENI-Carbon Beta is meant to serve as a benchmark for mainstream investors concerned about the financial impact of climate change and related regulation, as well as for funds mandated to seek out investments that meet particular environmental criteria.

California Bay Area Based Companies Commit to Reduce GHG Emissions
Two dozen companies have created the Business Council on Climate Change, a new coalition of Bay Area businesses that includes Google, Gap Inc. and Pacific Gas and Electric.  Member companies are pledging to report and reduce their GHG emissions, advocate for policies to combat climate change and share their green practices.

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INTERNATIONAL GHG REGULATORY DEVELOPMENTS

EU Ratifies 20% Reduction in Greenhouse Gases; Differences over Renewable Energy Targets
European Union governments agreed Tuesday that the 27-nation bloc should cut carbon dioxide emissions 20% by 2020.  They also said they would support a steeper 30 percent target from 1990 levels if other industrialized nations, including the US, would match European efforts to curb global warming.  The pledges — which match a proposal made by the European Commission in January — are signs that nations are gearing up for the next round of negotiations on a global climate accord after 2012, the expiration date of the Kyoto Protocol on climate change. This week, ministers attending the EU Energy Summit seek to narrow in disagreement over binding targets for renewable energy.  Germany, the current EU president, wants the summit to set a binding target for renewable energy sources such as wind and solar to supply 20% of energy consumption by 2020.  Ten EU countries, including France and several in central Europe, are wary of binding targets that would impinge on their national energy strategies.

GHG Reductions on G-8 Summit Agenda
GHG targets and timetable are expected to be on the agenda when Germany serves as host of a meeting in June of the Group of 8 nations, including the United States, Japan and Russia.  European countries are hoping to win pledges from developing countries with significant GHG emission as well, including China, India, South Africa, Mexico, and Brazil.  In late February, senior legislators from the 8 member nations and the five developing countries met to shape their policy statements on global warming. The forum was part of the “G8+5 Climate Change Legislators Dialogue” in which more than 80 legislators and government officials from the 20 largest energy consuming countries participated.  All of the G8 countries, with the exception of the United States, are legally bound under the UNFCCC's Kyoto Protocol to reduce the greenhouse gas emissions responsible for climate change by an average of 5.2% by 2012.  However, no emissions targets have been agreed upon after that date.

China Drafting GHG Plan
China is working on its first national plan to control greenhouse gas emissions.  The plan will set goals for reducing greenhouse gas emissions and for developing low carbon technologies.  The plan is initially expected to be a three-year strategy, although government officials hope it can be expanded for a longer period.  The draft plan will be submitted to the Chinese Cabinet for approval early this month, and is expected to be more of a guideline rather than one that sets specific targets.

Australia to Ban Light Bulbs to Reduce GHG Emissions
By 2009, Australia will ban incandescent light bulbs to help cut greenhouse gas emissions, its government recently announced.  The Australian government expects that replacing the country's incandescent bulbs will prevent up to 4 million tons of greenhouse gas emissions each year by 2015.  The legislatures of California and New Jersey are considering similar bans this year; so is the Canadian Province of Ontario.  In a parallel development, Australia's biggest electricity and natural gas companies are stepping up pressure for the country to adopt a national emissions trading program.  The Energy Supply Association of Australia (ESAA) called for a new national GHG cap-and-trade program.

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