CO 2 Regulation – Soon a Reality Ruth H. Silman Nixon Peabody LLP 100 Summer Street Boston, MA Scott M. Turner Nixon Peabody LLP 1100 Clinton Square Rochester, NY

Daily Coverage Source: The New York Times 1/10/07 Source: The Wall Street Journal 1/11/07

Pressure From All Angles CO 2 State Initiatives State Legislation Permit Proceedings Litigation Federal Legislation

N IXON P EABODY LLP Federal Legislation The mid-term elections changed everything in the Senate –Sen. Boxer as key chair instead of Sen. Inhofe –Sens. Bingaman, Boxer, Feinstein, and McCain/Lieberman, drafting legislation Things are less clear in the House

N IXON P EABODY LLP Litigation Cases arise in three different contexts –Clean Air Act litigation –NEPA litigation –Nuisance litigation

N IXON P EABODY LLP CAA Litigation Massachusetts v. EPA Coke Oven Environmental Task Force v. EPA

N IXON P EABODY LLP NEPA Litigation Border Power Plant Working Group v. DOE Friends of the Earth v. Watson Mayo Foundation v. Surface Transportation Board

N IXON P EABODY LLP Nuisance Litigation Connecticut v. American Electric Power California v. General Motors Comer v. Murphy Oil

N IXON P EABODY LLP Permit Proceedings IGCC and BACT determinations State NEPAs

N IXON P EABODY LLP State Laws and Initiatives ME, NH, VT, CT, NY, NJ, DE, MD (as of 1/07) = RGGI DC, MA, PA, RI – Observing RGGI Process AZ: 2000 levels by 2020; 50% below 2000 levels by 2040 CA: 2000 levels by 2010; 1990 levels by 2020; 80% below 1990 levels by 2050 NM: 2000 levels by 2012; 10% below 2000 levels by 2020; 75% below 2000 levels by 2050 OR: Stabilize by 2010; 10% below 1990 levels by 2020; 75% below 1990 levels by

N IXON P EABODY LLP Regional Greenhouse Gas Initiative (RGGI) Cooperative regional effort to reduce carbon dioxide emissions from electric power generators in participating states Cap-and-trade program with a market-based emissions trading system In future, may include other sources of CO 2 /GHG emissions, and GHGs other than CO 2 Source:

N IXON P EABODY LLP RGGI Process Source:

N IXON P EABODY LLP Memorandum of Understanding – 12/20/05 Commitment to address the challenge of climate change while increasing energy efficiency investments and stimulating emerging clean energy technology markets : stabilize CO 2 emissions from regions power plants at current levels By 2019: 10% reduction in CO 2 emissions from regions power plants

N IXON P EABODY LLP RGGI Model Rule – August 15, 2006 CO 2 budget unit = at any time on or after January 1, 2005, serves electricity generator with a nameplate capacity equal to or greater than 25 MWe Program begins 1/1/2009 (or date unit commences operation) State regulatory agency issues CO 2 budget permit Compliance Certification Report due by March 1 of year following control period CO 2 Allowance Tracking System

N IXON P EABODY LLP RGGI – Issues Allowance Allocation –Auction v. Giveaway? –25% of allowances must be to consumer benefit or strategic energy purpose –Early reduction CO 2 allowances –Voluntary renewable energy market set-aside Voluntary limited industrial exemption set-aside –Banking allowed Leakage

N IXON P EABODY LLP RGGI – Offsets CO 2 equivalent emission reductions or carbon sequestration Real, Additional, Verifiable, Enforceable, Permanent Offset project types (must commence after 12/20/05) –Landfill methane capture and destruction –Reduction in SF6 –Carbon sequestration due to afforestation –Reduction/avoidance of CO 2 emissions from natural gas, oil or propane end- use combustion due to end-use energy efficiency –Avoided methane emissions from agricultural manure management operations

N IXON P EABODY LLP RGGI – Offsets (contd) If average price of allowance < $7.00, offsets may be used from across the US; 50% discount from outside RGGI region; up to 3/3% of generators emissions If average price of allowance > $7.00, offsets may be used from across North America at 1:1 ratio; up to 5% of generators emissions (Offset Trigger) If average price of allowance = $10.00, offsets may be used from international projects; up to 20% of generators emissions (Safety Valve Offset Trigger)

N IXON P EABODY LLP RGGI – Next Steps Governors of participating states have agreed to propose regulations by 12/31/08 Regional Organization (RO) –Administration of Allowance Auctions –Emission and Allowance Tracking –Guidance Documents NY – 12/5/06 Pre-Proposal Draft

N IXON P EABODY LLP AB 32 – California Global Warming Solutions Act of 2006 (9/27/06) Reduce GHG emissions to 1990 levels by 2020 By 2050, GHG emissions to 80% below 1990 levels CARB must develop regulations and market mechanisms Adopt mandatory reporting rules for GHG sources

N IXON P EABODY LLP Examples from Other States NM: Executive Order (12/28/06) - Reduce GHG emissions to 2000 levels by 2012, 10% below 2000 levels by 2020 and 75% below 2000 levels by 2050 AZ: Executive Order (9/8/06) - Reduce GHG emissions to 2000 levels by 2020, and 50% below 2000 levels by 2040.

N IXON P EABODY LLP Conclusions CO 2 regulation is a reality, at least locally and regionally National regulation is a question of when, not if Owners of existing power plants should push for broad cap and trade systems, rational allowance allocations, new source set asides, and a wide array of offset opportunities Developers of new coal-fired power projects early on must develop strategies to deal with CO 2 in the permitting process