1. REGIONAL CLIMATE CHANGE INITIATIVES
Preparing Your Business For New Regimes
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”

2. Agenda Introduction Overview of the WCI and the Midwestern Accord
WCI – Impacts and Opportunities for Businesses
Refreshment Break
WCI – Market Design
WCI – Next Steps
Closing Remarks
Q&A
©2008 Perkins Coie LLP and Affiliates

3. OVERVIEW OF WCI AND MIDWESTERN ACCORD
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”

4. Outline Why Regional Action? WCI Midwestern Accord Enforcement
©2008 Perkins Coie LLP and Affiliates

5. Why Regional Action? Individual action could be harmful
Federal (US and Canada) regulation unclear or unlikely in short term
“By leading, we can help ensure the WCI perspective is included in future federal action” (US and Canada)
©2008 Perkins Coie LLP and Affiliates

6. Glossary
WCI Partner – “member” jurisdiction (state or province) committed to achieving the goals of the WCI
GHG – greenhouse gas (i.e., carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydrofluorocarbons (HFCs) and sulphur hexafluoride (SF6))
CO2e – Carbon dioxide equivalents
©2008 Perkins Coie LLP and Affiliates

7. WCI Partners WCI initially launched by 5 U.S. states in February 2007
Now includes 7 U.S. states and 4 Canadian provinces
Other U.S. and Mexican states and Canadian provinces have joined as Observers
Partner
Observer
©2008 Perkins Coie LLP and Affiliates

8. WCI Regional Goal
August 2007: Partners set regional, economy-wide GHG emissions target of 15% below 2005 levels by 2020
Cooperatively designing regulations/programs to reduce GHG emissions
©2008 Perkins Coie LLP and Affiliates

9. WCI Scope
Overall WCI target is weighted average of Partners’ emission-reduction commitments
Economy-wide system
Partners may adopt other policies to achieve the 2020 GHG reduction goal, in addition to cap-and-trade program
Internalize the price of carbon for transportation and residential/commercial fuels
©2008 Perkins Coie LLP and Affiliates

10. WCI Partners’ Emissions Targets
2005 GHG Emissions (in MMTCO2e):
California: 391
Arizona: 97
New Mexico: 59
Oregon: 43
Washington: 86
Utah: 66
Montana: 36
British Columbia: 66
Manitoba: 20
Quebec: 89
Ontario: 201
Total for all current WCI Partners: 1,154 MMTCO2
2020 Total Target (15% below 2005 levels) for all current WCI Partners: 981 MMTCO2e = 173 MMTCO2e reduction
©2008 Perkins Coie LLP and Affiliates

11. Implementation of Regional Goals
Design regional multi-sector, market-based reduction mechanisms
Create a multi-jurisdiction registry to track, manage and credit reductions
Authorizing Legislation
BC and CA already in place
©2008 Perkins Coie LLP and Affiliates

12. WCI Process 5 Subcommittees:
Scope
Allocations
Electricity
Offsets
Reporting
Draft Design of the Regional Cap-and-Trade Program released for public comment on July 23, 2008
Stakeholder outreach and communication
Work plan and other documents submitted for public review and comment
Regional teleconferences and face-to-face workshops
Website
Final Design Recommendations released on September 23, 2008
©2008 Perkins Coie LLP and Affiliates

13. Midwestern Accord
Regional agreement by six governors of states in the US Midwest who are members of the Midwestern Governors Association (MGA) and the Premier of Manitoba
©2008 Perkins Coie LLP and Affiliates

14. Midwestern Accord Membership
Signatories:
US:
Minnesota, Wisconsin, Illinois, Iowa, Michigan, Kansas
Canada:
Manitoba
Observers:
Indiana, Ohio, and South Dakota
©2008 Perkins Coie LLP and Affiliates

15. Elements of the Midwestern Accord
Establish regional GHG emission targets (15-25 % below 2005 levels by 2020; % below 2005 levels by 2050, subject to further modeling)
Develop multi-sector cap-and-trade system to help meet targets
Establish a GHG emissions reductions tracking system
Implement other policies, such as low-carbon fuel standards, to aid in reducing emissions
Coordination with other cap-and-trade programs
©2008 Perkins Coie LLP and Affiliates

16. Midwestern Accord: Next Steps
November 2008
Preliminary design recommendations
February-March 2009
Final cap-and-trade design recommendations
September 2009
Release of Draft Model Rule
©2008 Perkins Coie LLP and Affiliates

17. WCI Partner Enforcement
Authorizing Legislation by WCI Partners to set framework
Regulations/Model Rules to provide details and enforcement mechanisms
Enforcement by each WCI Partner using fines, regulatory penalties, etc.
©2008 Perkins Coie LLP and Affiliates

18. WCI – IMPACTS AND OPPORTUNITIES FOR BUSINESS
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”

19. Outline Who will be regulated? Who will not be regulated?
What will be required?
How will early action be recognized?
How will offsets be recognized?
©2008 Perkins Coie LLP and Affiliates

20. Glossary
Offsets – reductions in GHG emissions from non-capped sectors, such as forestry and agriculture
Allowance – tradable permit to emit one metric ton of CO2e emissions
Entity – a company “upstream” of the emission source obligated to surrender allowances for the carbon content of the fuel the company moves through commerce
Facility – an emission source for which allowances from capped sources (combustion, process emissions, etc.) must be surrendered

21. Who will be regulated – Capped Sectors
% of Total Emissions
Covered Sectors
Point of Regulation
Program Start
50%
Electricity generation, including imported electricity
First Jurisdictional Deliverer
2012
Combustion at industrial and commercial facilities at or above thresholds
Facility at point of emissions
Industrial process emissions (e.g., vented, leaked, accidental)
40%
Fuels combusted at industrial/commercial/residential buildings below thresholds
Where fuel “enters commerce” (e.g., distributor)
2015*
Transportation fuel combustion from gasoline and diesel
Where fuel “enters commerce” (e.g., blender, distributor)
10%
Other (e.g., small industrial fuel users) ?
* Subject to other policies
©2008 Perkins Coie LLP and Affiliates

22. Who will be regulated - Electricity
First Jurisdictional Deliverer (FJD)
For power generated in WCI, FJD = generator
For power generated outside WCI for consumption within WCI, FJD = first entity that delivers electricity over which WCI Partner has regulatory authority
Power "wheeled" through but not consumed in WCI not reported or capped

23. Who will not be regulated?
Biomass determined by each Partner to be carbon neutral; reporting still required
Combustion of biofuels, or proportion of biofuel in blended fuel; reporting still required
Prior to 2012, Partners to consider whether and how to regulate upstream emissions from biofuel and fossil fuel production

24. What will be required – Reporting
Report GHG emissions
CO2 and CO2e of CH4, NOx, HFCs, PFCs, and SF6
Entities/facilities with annual GHG emissions equal/greater than 10,000 MTCO2e annually
Partners discretion to set lower thresholds
Report 2010 emissions in early 2011
3rd party verification required for entities/facilities to be under cap (i.e. >25,000 MTCO2e/yr)
Essential reporting requirements established in Dec. 2008, certain data to be made public

25. What will be required – Capped Sources
Procure and Surrender Allowances (and offsets):
Entities/facilities at or above 25,000 MTCO2e annually must surrender allowances (and offsets) to cover annual emissions during compliance period
Supply of allowances to Partners decline each year; allocated to business according to each Partner's independent discretion
Business short of allowances must acquire allowances or reduce emissions
Allowances can be banked, but not borrowed from future
Penalty for non-compliance (3x shortfall in next compliance period) + State/Provincial penalties

26. What will be required – Other policies
Partners anticipate need for “complementary policies” achieve goals (e.g. vehicle emissions standards)
Partners may use “alternative policies” (e.g., carbon tax) that achieve overall comparable emission reductions and internalize price of carbon for transportation and residential/commercial fuels
Partners may adopt complementary or alternative policies that are more stringent than WCI recommendations

27. How will early action be recognized?
Early Reduction Allowances (ERAs)
Entities/facilities to be included under the cap (2012 or 2015) can qualify for ERAs for GHG reductions between 2008 and 2012
ERAs to be issued only once, in 2012
Criteria for ERAs will be set by end of 2009 and will require reductions to be voluntary, additional/surplus, real, verifiable, permanent, and enforceable
ERAs will be issued in addition to WCI Partner's 2012 allowance budgets (i.e. total cap increased)

28. How will early action be recognized?
Partner discretion to:
Recognize "other" early reductions, but additional allowances for such reductions come from Partner's 2012 allowance budget
"Set aside" allowances for specific purposes (e.g., to reduce an industry's compliance burden, address leakage, address domestic/int'l competition)
Banked allowances are financial assets – encourages early reductions

29. Offsets Opportunities
Rigorous offsets system a key component of WCI cap-and-trade system
Offsets allowed for not more than 49% of total emission reductions from 2012 – 2020
Primary purposes: 1) reduce compliance costs (i.e. low hanging fruit) 2) ensure environmental integrity of cap
Encourages innovation and increased market liquidity
Members “encouraged” to develop offset projects within WCI to capture collateral benefits: health, social and environmental
©2008 Perkins Coie LLP and Affiliates

30. Offset Project Criteria
Criteria for offsets projects remain to be established by WCI Partners, however:
Within WCI, offset credits to come from outside capped sectors
Offset project must result in a GHG reduction, avoidance or removal that is real, additional/surplus to regulatory requirements, verifiable and permanent, or that meets comparably rigorous standard in another emissions trading system (RGGI, Midwest Accord?)
Offset project to be enforceable by Partner issuing offset credit and verifiable by Partner accepting offset credit
WCI offsets to be fungible throughout WCI
Criteria will ensure accurate quantification – avoid double counting
©2008 Perkins Coie LLP and Affiliates

31. Priority Offset Project Types
Projects with priority for research and development as eligible offset projects:
Agriculture: soil sequestration and manure management
Forestry: afforestation/reforestation, forest management, forest preservation/conservation, forest products
Waste management: landfill gas and wastewater management
Warning: no guarantee that projects of these types will qualify for offsets – just current priority
©2008 Perkins Coie LLP and Affiliates

32. Offsets and the Cap
If offset project is in sector that will be included in the cap only produces offsets until the cap applies
Projects that reduce emissions covered by the cap are not eligible for offsets
Projects in developed countries (Kyoto Annex I) that would be subject to WCI cap if located in WCI not eligible to produce offsets
©2008 Perkins Coie LLP and Affiliates

33. Project Location
Members may approve and certify offset projects outside the WCI and across North America, if projects subject to comparable oversight, enforcement, etc.
Members may accept offset credits from developing countries outside the WCI through the Clean Development Mechanism (CDM) under Kyoto
©2008 Perkins Coie LLP and Affiliates

34. Typical Offset Project Cycle
Project Design
Project Description
Qualification
Calculation Methodology
Monitoring Plan
Project Validation/Certification
Project Approval
Project Verification
Project Monitoring
Project Reporting
Accredited Third Party Verification
©2008 Perkins Coie LLP and Affiliates

35. Protocol Development
WCI to start offset protocol development in 2009 for qualifying project types
Design calls for use of standardized protocols
Process to approve new project types and protocols proposed by project developers to start in 2009 – new project types are possible
©2008 Perkins Coie LLP and Affiliates

36. Opportunities
Development/ investment in offset projects located within WCI jurisdictions – start with looking at “priority” project types
Non-Capped Sectors
Emissions below threshold (aggregation)
Emission removals
©2008 Perkins Coie LLP and Affiliates

37. WCI – MARKET DESIGN
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”

38. Outline Design Choices and Market Efficiency
Lessons Learned from other cap-and-trade systems
Overview of WCI Market Design
Business Impacts
©2008 Perkins Coie LLP and Affiliates

39. Market Design Theory Cap-and-trade = market-based regulation
Premise: Market-based regulation will achieve targeted emissions reductions at least overall economic cost
Premise: Firms will act rationally in response to price of carbon
Problem: In practice, very challenging to design market to deliver clear price signals
Problem: Markets not always rational
©2008 Perkins Coie LLP and Affiliates

40. Efficient Carbon Markets
Requirements
Price Visibility
Liquid/low transaction costs
Minimal Distortions
Legal/Political Certainty
Key Drivers
Size of Market
Breadth of Coverage
Allocation Mechanism
Appropriate Flexibility
Institutional Framework
©2008 Perkins Coie LLP and Affiliates

41. EU Emission Trading System
EU ETS Overview
Established 2005
~ 12,000 facilities regulated
Allocation largely by “grandfathering”
Decentralized cap-setting process
Reductions set for each “trading period”
Restricted banking between periods
Significant role for CERs
Lessons Learned:
Volatility can be reduced by banking, longer compliance periods
“Law of one price” established quickly for credits with same attributes
Power generators most active traders: market price driven by:
weather patterns
fossil fuel (“spark”) spreads
Market Design Challenges
Phase I
Price volatility
Over-allocation (price collapse)
“Windfall profits” debate
Phase II
Difficult to add new sources and sectors (e.g. air travel)
©2008 Perkins Coie LLP and Affiliates

42. Regional Greenhouse Gas Initiative
10 northeastern states
Limited scope:
Gases covered = CO2
Sources covered = Fossil fuel power plants (>25 MW)
Fixed cap
– stable
– declines 10%
Regional auction of allowances
Limited role for offsets
©2008 Perkins Coie LLP and Affiliates

43. Overview: WCI Market Design
WCI is a large market
2007 WCI GDP = US$ 3.8 trillion
2007 WCI population = 85 million
©2008 Perkins Coie LLP and Affiliates

44. Overview: WCI Market Design
Broad Scope of Coverage
Gases = all Kyoto GHGs covered
Sectors =
Electricity generation (including from electricity generated outside WCI that is delivered inside WCI)
Combustion at industrial and commercial facilities
Industrial process emissions, including oil and gas process emissions
Residential, commercial, and industrial fuel use (regulated “upstream”)
Transportation fuel use (regulated “upstream”)
Declining Cap fixed in advance from
©2008 Perkins Coie LLP and Affiliates

45. Overview: WCI Market Design
Allocation of Allowances
Hybrid approach
Portion of allowances to be distributed by regional auctions (conducted by multiple Members)
Each WCI Member will auction a minimum of 10% of the allowance budget for first compliance period ( )
Proportion of allowances to be auctioned will increase, at a minimum to 25% by 2020 (goal is 100%)
WCI members may choose to allocate more by auction
Remaining allowances to be distributed at discretion of WCI Member
©2008 Perkins Coie LLP and Affiliates

46. Overview: WCI Market Design
Regional Auction Mechanism
Improves price visibility
Most regulated business will be “short”, must bid against others throughout WCI region
Broad participation expected
High demand expected from certain sectors
Reserve Price Mechanism
First 5% of allowances auctioned by each WCI member will be subject to minimum bid or reserve price
Portion of any unsold allowances will be retired
©2008 Perkins Coie LLP and Affiliates

47. Overview: WCI Market Design
WCI has rejected direct “cost containment”
No “safety valve” mechanism
No fixed-price compliance alternative
WCI relies on market-based stabilizers
To correct under-supply
Offsets
Non-WCI Allowances
To correct over-supply
Banking
Three year compliance periods
Regional auction (+ reserve price mechanism)
©2008 Perkins Coie LLP and Affiliates

48. Overview: WCI Market Design
GHG Allowance Registry
Account holders: Regulated businesses (+ others?)
Units: uniquely identified allowances (+ offsets?)
“One stop shop”
Compliance: transfer units to “retirement” account
Transactions: transfer units between account holders
Regional Organization
Standing body to coordinate rule-making
Will have market oversight role 8
©2008 Perkins Coie LLP and Affiliates

49. WCI: WHAT’S NEXT AND STRATEGY?
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”

50. Outline What’s Next? Preparation Strategic Considerations Reporting
Compliance
Opportunities
Strategic Considerations
©2008 Perkins Coie LLP and Affiliates

51. What’s Next?
WCI Program Recommendations go to each Member for "further development and implementation”
WCI continues to develop rules and structures through subcommittees
Mandatory reporting in 2010
Compliance markets in 2012
How will federal programs develop?

52. Member Implementation
CA, OR, WA and BC have statutory GHG goals and programs in place
MT, NM, AZ, UT have only executive orders
Only CA and BC have advanced legislative approval to implement WCI design
BC has carbon tax in place (must be integrated)
Each WCI Partner has a different schedule and a different stake; implementation may not be orderly or consistent

53. Preparation Consider Business Impacts Will you have to report?
Monitoring equipment and protocols
Will you have to comply (2012 or 2015)?
Allowance allocation
Internal reductions/process changes
Acquisition of offsets
Will your customers/suppliers have to comply, and how will their compliance costs impact your business?
Include opportunity cost of GHG emission reductions in capital budgeting process
©2008 Perkins Coie LLP and Affiliates

54. Preparation Firms’ strategic position driven by relative:
% regulated vs. unregulated emissions
Energy intensity of operations
Exposure to competition
Internal abatement costs & opportunities
©2008 Perkins Coie LLP and Affiliates

55. Preparation
Consider Business Opportunities
If you have uncapped emissions, are reductions available and saleable as offsets?
If you have capped emissions, are reductions available that may yield excess saleable allowances?
Sell, Trade or Bank?
Allowance values predicted to increase
Do you qualify for early action credit
Document it now!
©2008 Perkins Coie LLP and Affiliates

56. Preparation Critical items are undefined and not quantified
Need Model Rules or Model statutes?
How to measure CO2e, how to report?
What to report?
Actual or Potential? Direct or Indirect?
To whom to report? The Climate Registry [TCR] or Climate Registry Information System [CRIS]
But needs modification and reporting will be through each member, not centralized
What information will be public? Confidentiality concerns
How to accommodate variations in economic conditions?
©2008 Perkins Coie LLP and Affiliates

57. Strategic Considerations
Critical decisions are scheduled for 2009 and 2010
Proponents of regulation have been preparing for years
Their views not always balanced and don't always reflect business realities
Decision makers need balanced information to make good decisions
Consider joint action through policy groups, trade associations, industry coalitions
Start preparing now

58. Strategic Considerations
WCI Design Issues Still Undecided
Upstream Emissions: Prior to program start – Partners to assess inclusion of upstream emissions from biofuel and fossil fuel production
P.O.R.: Precise P.O.R. to be determined for residential, commercial and industrial fuel combustion at below-threshold facilities; and for transportation fuel combustion
Thresholds: Further analysis to determine if thresholds need to be adjusted to address competitiveness within sectors. Lower emissions thresholds may be set for second compliance period ( )
©2008 Perkins Coie LLP and Affiliates

59. Strategic Considerations
WCI Design Issues Still Undecided
Allocations: Further analysis to determine whether allocations to certain sectors should be treated uniformly to address competitiveness
Regional Auction Process: Members will develop design for coordinated regional auction process by end of 2009
Criteria for ERAs: By end of 2009, members to jointly establish criteria to determine eligibility for early reduction allowances
©2008 Perkins Coie LLP and Affiliates

60. Strategic Considerations
WCI Design Issues Still Undecided
Offsets Projects: Criteria to be established by members – standard and processes for approving offsets projects will be developed in transparent manner, to be well defined by 2012
Protocols: Starting in 2009, members to jointly develop protocols for project types that meet criteria for inclusion
New Projects and Protocols: Members will coordinate review and approval of other project types and protocols proposed by project developers
©2008 Perkins Coie LLP and Affiliates

61. Strategic Considerations
WCI Design Issues Still Undecided
Reporting Requirements: Partners to establish essential requirements for reporting by covered businesses prior to Industry-specific GHG reporting protocols under development
Administration: Regional administrative organization to be created – no specific time frame
Integration: Partners to agree mechanism to recognize and integrate alternative policies
Carbon Tax
Renewable Portfolio Standards
©2008 Perkins Coie LLP and Affiliates

62. Strategic Considerations
Follow WCI subcommittee progress
Numerous opportunities to comment: stakeholder meetings, webinars and conference calls
Notices and schedules available at WCI website:
Follow the state/province legislative and adoption process

63. Strategic Considerations
Federal Programs
Constitutional/Jurisdiction Issues
Federal Elections in Canada & US
Survival of Regional Programs
What will Federal Programs be?

64. Questions?
“Bringing You Cross-Border Perspectives on the Western Climate Initiative and the Midwestern Accord”