Earthpace Blog

Regulating Carbon Intensity and Anti-Protectionism: Finding the Right Balance

gbaldwin@earthpace.com (Gunnar Baldwin) — Mon, 23 Jan 2012 11:21:59 +0000

A recent federal court decision ruling that California's Low Carbon Fuel Standard (LCFS) violates the dormant Commerce Clause of the U.S. Constitution highlights an issue that has much broader implications than the setback it creates for that state's plan for shrinking its net carbon emissions in the transportation sector. In finding that California's preferential treatment for fuels with low full life-cycle "carbon intensity" (all carbon emitted from extraction and refinement to point of sale) discriminates against out-of-state fuel suppliers, the court's decision in Rocky Mountain Farmers Union v. Goldstene has underscored the need for balancing legitimate anti-protectionist concerns with the ability of governments to reduce the carbon footprints of states, regions, or countries.

Anti-protectionist challenges to the regulation of extraterritorial carbon emissions are not unique to the U.S. They also appear in the context of international trade law, the European Union's regulation of carbon in international aviation, and elsewhere. For example, the General Agreement on Tariffs and Trade (GATT) requires signatory countries to treat imported "like products" as favorably as domestic products and does not provide an exception for intangible attributes (such as delivery route used) that are not observable physical characteristics of the final product. [1]

The case against the LCFS

The LCFS was established by the California Air Resources Board (CARB) as part of a set of actions for complying with California Assembly Bill 32 (AB 32) and is designed to reduce the carbon intensity of fuels used in the state by at least 10 percent by the year 2020. Under the LCFS, California fuel suppliers would be required to calculate the "carbon intensity" of a fuel according to several criteria based on its full life-cycle, including carbon emissions embedded in the transportation of fuel into and within California.[2]

The dormant Commerce Clause is a judicially created construct that forbids states from unjustifiably discriminating against other states in interstate commerce. The District Court found that the LCFS discriminates against out-of-state ethanol producers in two ways. First, the LCFS assigns higher carbon intensity scores to fuels produced in the Midwest, based on longer transportation routes and presumes that electricity used in producing the fuels is generated from sources with greater carbon intensity. Second, the LCFS provides built-in preferences for crude oil produced in California versus crude oil produced out-of-state, based on assumptions not tied to actual carbon intensity.

Based on its findings, the court held that the LCS had the practical effect of controlling commercial activity occurring entirely outside of California. Under the strict scrutiny standard, such activity is only justified if it is necessary to achieve a compelling purpose and there is no reasonable less restrictive alternative. In reaching its decision, the court found that CARB had "failed to establish that no alternative, nondiscriminatory means exist to address their legitimate purpose."

Caught in a "Catch-22"

Although the Goldstene decision accepted the legitimacy of the LCFS's purpose, it rejected the means used to achieve it. CARB argued that there was no reasonable, less discriminatory means, since alternatives to the LCFS (such as a tax on fossil fuels) would result in "leakage" - merely shifting carbon emissions to states with less stringent regulations and defeating the goal of reducing net global carbon emissions. In rejecting the leakage justification, the court reiterated that the dormant Commerce Clause presented a bar to the regulation of conduct occurring wholly out-of-state. The court did not suggest alternatives that could be workable from a global emission reduction perspective, leaving that for CARB to devise.

Analysis

The ability to limit the full life-cycle carbon intensity of products is an indispensible tool that both private and public sector entities will require in almost any realistic program for mitigating the net build-up of greenhouse gases. Since carbon that is emitted outside of a state's jurisdiction increases the net climate impact inside the state, emissions resulting from the importation of fuel from distant sources are an integral part of the climate impact of fuel use within the state. In this respect, the embedded carbon intensity of a product (or other embedded characteristics, such as "dolphin-safe" or the use of fair labor practices) may be considered a legitimate attribute that governments may specify to fulfill an important policy objective, much as they could limit a weight, size, or toxicity level.

In choosing to lead by example on climate action in the face of inaction elsewhere, California and the European Union have come under fire for regulating behavior beyond their borders. The bases for criticism in both cases would be largely moot if most other states and countries were to pursue parallel schemes for carbon regulation, since these actions would likely result in reciprocity and coordination for the purpose of advancing commonly shared climate goals.

Anti-protectionist barriers confronting states or countries which aspire to be climate leaders impede their efforts to rise above the lowest common denominator for carbon regulation. In the U.S., this may mean preemption of state standards that are based on full life-cycle carbon by federal standards. A system that disallows unilateral state action holds state climate mitigation ambitions hostage to a federal timeline for climate action and legislative (political) paralysis.

The lowest common denominator analogy is not merely implicit in the Goldstene court's ruling. In fact, the court cited a 1992 U.S. Supreme Court ruling that "[n]o State may attempt to isolate itself from a problem common to several States by raising barriers to the free flow of interstate trade." Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 339-40 (1992). CARB could well argue that the court has assessed the situation 180 degrees backwards. Far from trying to isolate itself from a common problem, California and other regions where full life-cycle carbon is regulated (such as the European Union), are taking steps to face the climate problem head on, going above and beyond the common denominator to set an example for the world to follow.

Conclusion

Laws and treaties that discourage "unfair" trading practices serve an important and useful function by encouraging trade and investment and by prohibiting states and countries from using their positions to gain unfair competitive advantages. However, the urgency of robust climate action requires some form of accommodation of measures that appear to run counter to the very essence of anti-protectionist law: preferences for local goods, except when the carbon-intensity of foreign goods are on an even par. Yet creating exceptions to anti-protectionist safeguards based on transportation distances is not the answer. It would be too easy for governments to exploit such a loophole to gain unfair advantages.

As legislators and policy makers look for solutions to this dilemma, it will be important to keep two things in perspective. First, in taking unilateral steps to reduce net carbon emissions, local, regional, and national regulatory bodies will need to exercise care to implement every aspect of carbon intensity regulation along neutral lines based on verifiable, science-based reasoning. In California, insufficient evidence of objectivity in selecting the assumptions used to determine carbon intensity scores has muddied the water somewhat in the adjudication of this case. Second, since atmospheric carbon buildup is a global problem, collaboration between governments is the best answer. Where this is not possible, creative new mechanisms for offsetting the discriminatory effect of carbon intensity classifications will be crucial in overcoming legal barriers.

1 Jason E. Bordoff, International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns, Brookings Trade Forum 2008/2009, p.44. Available at http://www.bupedu.com/lms/admin/uploded_article/eA.534.pdf. The Brookings Institute has suggested that World Trade Organization case law indicates possible leeway for recognition of intangible product characteristics, such as embedded transportation carbon, under Article XX of GATT.

2 The LCFS "Carbon Intensity Lookup Table" (Cal. Code Regs. Tit. 17.§95486(b)) assigns carbon intensity scores for each of a broad range of fuels, based in part on transportation "pathways" into and within California as well as other criteria. The Table uses different methodologies to calculate the carbon intensity of biofuels and fossil fuels.

Outcome of the Durban (COP 17 and CMP 7) Agreements: Implications for the Private Sector

gbaldwin@earthpace.com (Gunnar Baldwin) — Sat, 14 Jan 2012 13:32:26 +0000

The 2011 United Nations Climate Change Conference in Durban, South Africa,[1] resulted in a set of interrelated agreements for furthering international action on climate change. These included the establishment of a new process for working toward a binding, comprehensive agreement on mitigation (the Durban Platform), a second commitment period for the Kyoto Protocol, and a variety of instruments for implementing components of the 2010 Cancun Agreements.[2] Although directly applicable only to national governments that are Parties to the Convention, collectively these agreements define an implicit realm of areas in which reporting requirements and emission reduction obligations are likely to be apportioned to the private sector at some point in the future.

1. The Durban Platform

UNFCCC Parties agreed to establish a new “process to develop a protocol, another legal instrument or an agreed outcome with legal force under the Convention and applicable to all Parties.” In addition, the Parties agreed to create a new negotiating body, the Ad Hoc Working Group on the Durban Platform for Enhanced Action (AWG-DP), to carry out the task of defining the structure and details of a comprehensive climate action mechanism.[3] In essence, the agreement calls for countries to participate in a three-year process, beginning in the first half of 2012 “as a matter of urgency” that is designed to result in an outcome that is rule-based or has legal effect. The words “binding” or “commitment,” however, are not found in the agreement and the Platform does not address the legal form of commitments that could emerge from an outcome with legal force.

Details of the mechanism must be completed by 2015, with implementation of the new mechanism to begin in 2020. Once in effect, the new protocol, instrument, or outcome will replace existing UNFCCC mechanisms, including the Kyoto Protocol. The Durban Platform also requires the AWG-DP to take up a discussion of the long-term implementation of matters which are currently subject to negotiation by other UNFCCC bodies,[4] including mitigation, adaptation, finance, transparency, technology transfer, and capacity-building.

Implications for the private sector

The Durban Platform launches a long-term process, with mid to long-term implications. Political willingness on the part of countries to commit to a meaningful, comprehensive agreement will hinge, in part, on participants furnishing data that is accurate, transparent, complete, and comparable. National governments cannot accomplish this alone. Requirements for private sector emitters in all sectors to provide increasingly accurate and standardized data on their emissions is an inherent part of process.

2. Extension of the Kyoto Protocol

A separate Durban agreement provided for a second commitment period under the Kyoto Protocol (KP).[5] The period will begin on January 1, 2013 and end either in 2017 or 2020, depending on whether there is a decision to coordinate the end of the period with the entry into force of the future Durban Platform legal mechanism. While Japan, Russia, and Canada have declined to renew their participation under the Kyoto process, the renewal of the Protocol for other signatories has the practical effect of keeping alive the efficiency mechanisms it contains, including the Clean Development Mechanism (CDM), as well as the framework of procedures that support them.

Implications for the private sector:

The second commitment period for the Kyoto Protocol will most directly impact private sector entities that are subject to the laws of KP signatory countries. By committing to voluntary emission targets, these countries must continue to employ policies and programs for limiting emissions in selected economic sectors and industries. The continuity of a second commitment period also means that public and private investors have continued opportunities (and are subject to enhanced rules) for investment in the Kyoto Protocol’s efficiency mechanisms – emissions trading and offset projects under the CDM and the Joint Implementation (JI).

3. Progress toward fulfilling the mandates of the Cancun Agreements

The Cancun Agreements called for UNFCCC Parties to develop the details of procedures for taking action a wide variety of issues, including national reporting of greenhouse gas inventories, emission reductions, and disbursements of financial support. One of the documents adopted in Durban[6] operationalized many of these components, which together define a comprehensive framework for ensuring transparency and integrity of climate mitigation performance data through measurement, reporting, and verification. Specifically, this document provides additional clarity on biennial reports, national greenhouse gas inventories, emission reduction targets, international assessment and review (IAR) of developed country emissions and support data, and international consultation and analysis (ICA) of developing country emissions data.

Implications for the private sector:

The implementation of the Cancun mandates imposes reporting requirements on national governments that are likely to impact private sector entities in the near to mid-term horizon. Under the provisions adopted in Durban, the first biennial reports by developed countries must be submitted by January 1, 2014.[7] Guidelines for complying with new biennial reporting requirements are intended to “ensure the provision of consistent, transparent, comparable, accurate and complete information by developed country Parties.”[8] Providing aggregate data that is consistent with these attributes can only be accomplished if national governments obtain information from significant emitters in all economic sectors that is sufficiently detailed and trustworthy. The Durban documents do not address how nations will prescribe these information requirements.

1 The conference consisted of meetings that included the seventeenth session of the Conference of the Parties (COP 17) to the UN Framework Convention on Climate Change (UNFCCC) and the seventh meeting of the Conference of the Parties serving as the Meeting of Parties to the Kyoto Protocol (CMP 7).

2 The 14^th session of the Ad hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA) undertook to finalize issues that included the Green Climate Fund (GFC), long-term climate finance, measurement, reporting, and verification, national communications and inventories, REDD, adaptation, technology transfer, new market-based instruments, and a variety of other issues.

3 FCCC/CP/2011/L.10, http://unfccc.int/resource/docs/2011/cop17/eng/l10.pdf

4 The Durban Platform provides for one additional year for the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA) to complete its mandate under the Bali Action Plan, after which the AWAWG-LCA will be terminated. The AWG-LCA has been primarily responsible for discussions on these topics.

5 http://unfccc.int/files/meetings/durban_nov_2011/decisions/application/pdf/awgkp_outcome.pdf

6 FCCC/AWGLCA/2011/L.4, available at http://unfccc.int/resource/docs/2011/awglca14/eng/l04.pdf

7 FCCC/AWGLCA/2011/L.4, Par. 13.

8 FCCC/AWGLCA/2011/L.4, Annex I, UNFCCC biennial reporting guidelines for developed country Parties.

Compliance is Essential for Environmental Impact Assessment Success

max@earthpace.com (Administrator) — Tue, 16 Nov 2010 21:18:46 +0000

INECE Managing Director Ken Markowitz delivered remarks today at the World Bank during the Special Symposium on Climate Change and Impact Assessment. The Symposium, hosted by International Association for Impact Assessment, engaged experts on discussions of the effects of climate change on the impact of projects and the ways that impact assessment can be used for understanding risk and responding to climate change.

Speaking on a panel on “National Governments: Climate Change and EIA – Beyond North America,” Mr. Markowitz explored the risks of failing to adequately assure compliance with EIA requirements. A number of countries have developed guidance for incorporating climate change considerations in environmental assessment at the project level. Mr. Markowitz cautioned that “without compliance with EIA requirements and enforcement of EIA terms, the impact and value of these costly assessments will be greatly minimized.” He recognized that this is as applicable to climate change, in terms of both project and programmatic considerations, as well as the development of worst case scenarios, as it is to traditional EIA topics like land-use planning and transportation.

Background information on climate change and impact assessment are available at on the IAIA web site.

This article is cross-posted at http://www.inece.org/.

Ken Speaks During Side Event at COP 15 in Copenhagen

kjm@earthpace.com (Kenneth Markowitz) — Wed, 23 Dec 2009 05:00:00 +0000

Ken spoke at an event hosted by Global Witness called "REDD Monitoring for Effective Implementation," which occurred on December 10th, 2009 during the COP 15 conference in Copenhagen, Denmark. The event focused on the importance of strong governance institutions and civil society for making any REDD program a success. REDD—which stands for Reduced Emissions from Deforestation and Degredation—is a program by which forest acreage is monetized and incentives are created to prevent its destruction.

Ken was joined on this panel by speakers from the World Bank and the UN's Food and Agriculture Organization, and his presentation stressed the foundational role of compliance and enforcement in the rule of law, good governance and sustainable development.

REDD Monitoring for Effective Implementation (2nd Article) [Earth Negotiations Bulletin]

Text of Potential "Copenhagen (Political) Agreement" Leaked

kjm@earthpace.com (Kenneth Markowitz) — Wed, 09 Dec 2009 04:45:57 +0000

Ken is attending COP 15 in Copenhagen. He will file occasional posts from the conference.

Late on Tuesday night, a draft text began circling through the Copenhagen meetings. This "Danish text" is purportedly the basis of the negotiations of a politically binding "Copenhagen Agreement." While this document would replace any sort of legally binding international treaty, its circulation does not necessarily preclude the creation of a legally binding text. It does certainly, however, look like things are headed toward a political agreement with cross-references to a number of decisions on specific issues to be taken here.

Of course, we have to recognize that it is early in the process, and there does appear to be significant pushback from developing countries on the political agreement concept since the document's release less than 2 hours ago, but it certainly is getting significant attention and could form the basis for the Conference's output.

Read the text of the document here.

Expectations for Copenhagen: Whether Optimistic, Pessimistic, or Realistic, World Leaders are Endorsing Several Visions

kjm@earthpace.com (Kenneth Markowitz) — Tue, 01 Dec 2009 05:00:00 +0000

After international negotiators met in Barcelona at the beginning of November, predictions on the likely outcomes—or lack thereof—from December’s Copenhagen conference have popped up everywhere. In the immediate aftermath of the Barcelona meetings, the consensus amongst those in the United States and the West more broadly was that Copenhagen was headed for failure—at least insomuch as a legally binding treaty like the Kyoto Protocol is off the table.

Since then, the situation has only become more muddled. Evidence abounds for those looking either to take a more optimistic view of the upcoming meeting, or those looking to bolster the more pessimistic outlook. In recent days, the optimists may be gaining more evidence. President Obama’s recent trip to China birthed several positive announcements with regard to the two country’s climate action, including from a joint statement released at the end of these bilateral meetings which noted that

The United States and China, consistent with their national circumstances, resolve to take significant mitigation actions and recognize the important role that their countries play in promoting a sustainable outcome that will strengthen the world’s ability to combat climate change. The two sides resolve to stand behind these commitments.

In the past few days, both countries have backed up that statement, by announcing that they will come to Copenhagen with hard commitments to emissions reductions; the U.S. “in the range of 17%” while Chinese have pledged to reduce the carbon intensity of their economy by 40-45%. Just pledging commitments of any kind is a significant step for Copenhagen; it was disputes over commitments like these that derailed the Barcelona talks.

The nature of these commitments, however, may give the pessimists some ammunition—President Obama’s commitment is still tied to action in the Congress, where any outcome is far from certain. In any case, a reduction of 17% is much less than many developing countries were calling for, and much less than the IPCC suggested cuts of 25-40% by 2020. For China, some experts have noted that currently enacted policies ought to fully cover China’s commitment, meaning that the Chinese have essentially pledged themselves to “business as usual” emissions.

The pessimists can also point to the outcome of a hastily convened meeting between Danish Prime Minister Lars Lokke Rasmussen and leaders of Pacific Rim nations. Describing that meeting, US Deputy National Security Adviser Mike Froman said, "There was an assessment by the leaders that it was unrealistic to expect a full, internationally legally-binding agreement to be negotiated between now and when Copenhagen starts in 22 days." Should an agreement like this actually come out of Copenhagen, it might give the U.S. Congress a chance to pass binding climate legislation; it might be possible that a 2010 meeting in Mexico City would become the new goal date for a binding international treaty.

For some, any lowering of expectations for December undermines all hope of success, because it takes the pressure off of international negotiators; the Kyoto Protocol, after all, came about as the result of 11^th hour actions, similar to the commitments now coming from the U.S. and China. It is possible as that the situation is not as dire as it seemed the first week of November, and that the two negotiators with the most power might be committed to an ambitious meeting after all. And so, it remains possible that December could still hold some surprises for all prognosticators of international climate policy.

In Barcelona, Climate Progress Stalls

max.schwartz.07@gmail.com (Max Schwartz) — Fri, 06 Nov 2009 18:54:28 +0000

As I write this, I’m sitting in a conference hall on the outskirts of Barcelona. The AWG-LCA plenary meeting is being wrapped up on the other side of a particleboard divider 35 feet away. The halls are filled with NGO observers and diplomats. And after five long and somewhat confounding days, all I can tell you is that there seems to remain considerable distance to a legally binding international climate accord.

I joined Ken Markowitz this week in Barcelona, at the final major climate conference before the Copenhagen meeting this December—the meeting at which the international community is supposed to replace the Kyoto Protocol. We came here, along with one of our partners, the International Network of Environmental Compliance and Enforcement, to promote compliance and enforcement efforts in support of the carbon market, an effort which included a—if I may say so—lively side event this morning over the role of compliance, and the potential for fraud, in the international carbon markets.

The major story coming out of Barcelona will be the likely failure of the world to meet the Copenhagen deadline. While some might dispute it, the general consensus in the halls of the Barcelona Fira Grand Via has been that no legally binding treaty will be developed in December. The best we can hope for, many people indicated, seems to be a political agreement, with a legally binding treaty being hashed out in 2010.

It has been simultaneously an inspiring and depressing week.

In a week where the most dramatic moment—a walk out by the Africa Group—came on Monday afternoon, it often seemed as though we were always discussing the same topics each day. Issues like the distance between developing and developed countries on emissions reduction commitments (which prompted the Monday boycott), the intransigence of specific Parties (particularly the United States and Canada, who were named “fossils of the day” by the Climate Action Network every day this week), the fundamental disagreements some Parties have over the mere existence of certain key provisions of an agreement—such as offsets or market-based mechanisms—remained at the forefront, without much resolution. “Don’t let the perfect become the enemy of the good,” declared the U.S. at the closing plenary; perhaps as an admonishment to those holding the developed world to higher standards.

At the same time, significant progress was made by a number of groups—on nationally appropriate actions by developing countries, on forest carbon issues, technology transfer and international transport emissions. Certain concepts that were only theories a short time ago are almost certain to be realized; for example, a REDD+ mechanism to finance the protection of forests from logging and degradation.

At the closing plenary, negotiators were urged to “take the brackets off our future,” referring to bracketed—and therefore undecided-upon—text in the negotiating texts being developed here. One’s opinion of the conference could be shaped by whether they look at the successes in that effort—or at the failures.

EU Court Overturns European Commission Decision Regarding 2nd Phase of ETS

max.schwartz.07@gmail.com (Max Schwartz) — Tue, 29 Sep 2009 21:00:37 +0000

In a ruling sure to have wide-ranging effects on how the EU Emissions Trading Scheme (EU-ETS) will be governed, the European Court of First Instance ruled that the European Commission (EC), had overstepped its boundaries in rejecting national allocation plans for two countries: Poland and Estonia.

The countries had originally appealed decisions made in 2003 for the 2nd phase of the EU-ETS, which runs from 2008-2012; those decisions had been made by the EC and had set each country's allocation of carbon credits lower than they had originally proposed. The Court ruled that the EC could not:

Reject a country's credit allocation plans on any other ground besides incompatibility with the Directive creating the EU-ETS; (In this case the EC had rejected Poland and Estonia's plans based on what it deemed to be faulty data.)
Ignore the data submitted by a country and replace it with its own data obtained through its own methods; and
Impose a single way of assessing credit allocations on all members of the EU-ETS.

European carbon market participants expressed concerns over the ruling:

“It means two things — possibly more allowances in the market and more uncertainty,” Emmanuel Fages, a carbon analyst with Société Générale, the investment bank, said. “It’s another blow because people will say the market doesn’t work.”

However, the EC tried to calm questions of whether this would affect the number of credits available to the market, stating:

In preparing new decisions the Commission would base itself on the best available data. In this context the importance of verified emissions for 2005 to 2008 should be noted. In the light of these data, it would appear unlikely that there would be any material difference concerning the total number of allowances consistent with the terms of the Directive.

However, it is possible that this decision could lead to a number of appeals, as many countries had expressed problems with their credit allocation plans—as modified by the EC—in 2003, all of which could have a serious implication on the number of credits available during this phase of the EU-ETS. This decision could also tie the EC's hands going forward into the 3rd phase of the EU-ETS, which begins in 2013.

European carbon trading market takes hit [Times Online]

2nd Circuit Rules in Connecticut v. AEP, Finds that GHGs Cause "Public Nuisance"

max.schwartz.07@gmail.com (Max Schwartz) — Tue, 22 Sep 2009 20:15:39 +0000

In a ruling yesterday, a panel of the 2^nd Circuit Court of Appeals handed down a unanimous victory for the plaintiffs in Connectituct v. American Electric Power, a case brought by a coalition of states and local governments against a number of large power plants. The case, originally argued in 2006, had been dismissed by the lower court on the grounds that it represented a "non-justiciable political question." Yesterday's ruling, decided by two judges (the original third Judge on the panel, Sonia Sotomayor, left the 2^nd Circuit for the Supreme Court) overturned that decision, stating that:

“Nowhere in their complaints do plaintiffs ask the court to fashion a comprehensive and far-reaching solution to global climate change, a task that arguably falls within the purview of the political branches. Instead, they seek to limit emissions from six domestic coal-fired electricity plants on the ground that such emissions constitute a public nuisance that they allege has caused, is causing and will continue to cause them injury.”

After adressing the question of the lower court's holding, the panel ruled that the suit could continue, finding that a common-law claim of "public nuisance" regarding greenhouse gasses was not preempted by federal law and articulating a role for federal courts in the current climate battle.

“It may happen that new federal laws and new federal regulations may in time pre-empt the field of federal common law of nuisance. But until that comes to pass, federal courts will be empowered to appraise the equities of the suits alleging creation of a public nuisance” by greenhouse gases.

This ruling means that courts could end up having a significant role in determining how greenhouse gasses are emitted and controlled—at least in the event that Congress fails to act on its own emissions control program.

State of Connecticut v. American Electric Power Co. (PDF) [2^nd Circuit Court of Appeals]