In this, our second newsletter, we cover global meetings, regional events and developments, and projects undertaken for mitigation and sustainability purposes. Our stories come from Warsaw, Cambodia, Calgary, Cape Town, London, California and the US - we cover litigation, new regulations, and environmental commodities.

Warsaw to host next climate change conference (COP19/CMP9) – 11-22 November 2013

By Ewa Rutkowska-Subocz, Counsel, Warsaw

The 19th session of the Conference of the Parties to the United Nations Framework Convention on climate Change (COP19) and the 9th session of the Conference of the Parties serving as the Meeting of the Parties to the Kyoto Protocol (CMP 9) is the supreme decision-making body of the United Nations Framework Convention on Climate Change. All Parties to the Convention are represented at the COP. The main goal of the meetings is to review the implementation of the Convention and other legal instruments adopted by COP.

The Pre-COP meeting took place in Warsaw on 2-4 October 2013, gathering delegates from nearly 40 countries, including the UK, Japan, China, Denmark, France, South Korea, Germany and the US. Pre-COP was an informal meeting organized by the Polish Ministry of Environment in order to exchange views between the business sector and Ministers on the regulatory framework related to climate change and financing measures to reduce global emissions.
Ministers and representatives discussed the shape of the new climate agreement (to apply from 2020), the financing of climate change related measures, greenhouse gases reduction issues and ways to improve collaboration between industry and negotiators.

The next step – Pre-Meetings at the Ministerial level – took place 4-10 November 2013, also in Warsaw. The Pre-Meetings’ target was to prepare the ground for COP19 discussions; it was the prelude to the main part of the climate change conference. Participation in Pre-Meetings was for Ministers only; it was closed to business representatives.

The most important part of the climate change conference is COP19, which will take place in Warsaw 11-22 November. Mr. Marcin Korolec, the Polish Environment Minister, will act as President of the Conference of the Parties at its 19th session.

COP19 will review goals already achieved in global GHG emissions reduction and begin the process of negotiating the new agreement on the reduction of GHG and the new climate agreement, which is to be signed in Paris in 2015.

Other goals of COP19 include:

• implementation of previous COP decisions, in particular COP16 (Cancun), COP17 (Durban), COP18 (Doha);
• developing and adopting a strategy for expeditious implementation of past decisions on, among others, adaptation, capacity building, technology cooperation and financial mechanism;
• organization of debates, called Business Day and Cities Day, during which representatives of businesses and cities will present new ideas on introducing low-carbon solutions.

Finally, there is the High Level Segment, during which the Business Forum in cooperation with the UN Global Compact will be held 19-22 November. High Level Segment is the forum for discussions between country delegates and business representatives on opinions and ideas for sustainable climate change reduction. 

COP19 and the accompanying events will create a unique opportunity for business and industry to open up discussions on sustainable legal solutions to limit investment risks and provide clarity and long-term perspective for investments.

Dentons helps Cambodia monetize sustainable environmental practices

By Jeffrey Fort, Partner, Chicago

On 30 September 2013, the Forestry Administration of Cambodia entered into an agreement by which carbon offset credits earned by 13 communities in the Oddar Meanchey project could be sold by the Forestry Administration. Dentons advised pro bono on the terms for the Emission Reduction Purchase Agreement (ERPA) between our client, the Forestry Administration of the Royal Government of Cambodia, and Terra Global Capital (TGC), a carbon development and trading firm. This ERPA facilitates the sale of carbon credits essential to funding the project and delivering high impact emission reductions. It features a unique structure which facilitates the acquisition of these credits by entities interested in this sustainable practice.

As you may know, REDD ("reducing emissions from deforestation and degradation") is a series of protocols designed to use market and financial incentives to reduce greenhouse gases that result from deforestation. Its implementation is supported by a United Nations Development Programme (UNDP), which helps developing countries design and execute national programs based on these mechanisms. The REDD+ protocols take this concept a step further, focusing on enhancing carbon stocks and concentrating investments in local communities of indigenous peoples within the forest areas in need of protection.

The Northwestern province of Oddar Meanchey contains 67,853 hectares of forest land vulnerable to deforestation from illegal logging, small to medium-scale agriculture and small-scale extractive activities. Cambodia’s REDD+ program is expected to sequester 7.1 million metric tons of carbon dioxide over 30 years and provide support for the local communities to protect their forests, develop alternative income streams from sustainable forest management, increase food security and use sustainable energy sources. The sale of the verified emissions reductions will direct increased resources towards these activities. It is a highly promising project demonstrating how developing countries can generate income from carbon markets and positively impact climate change.

South Africa - new effective date for biofuels regime

By Helen Bowdren, Senior Associate, Cape Town

In South Africa, the Minister of Energy has announced the effective date for the long-awaited biofuels regime to commence. The regulations regarding the Mandatory Blending of Biofuels with Petrol and Diesel will come into force on 1 October 2015. From that date, gasoil and gasoline manufacturers will be required to procure biofuels from licensed manufacturers at the regulated prices and “blend-in” such biofuels to prescribed standards.

The biofuels referred to in the regulations are:

1. Biodiesel (the renewable fuel or fuel component derived from vegetable or animal matter which conforms to the South African National Standard (SANS): Automotive Biodiesel - Fatty Acid Methyl Esters); and
2. Bioethanol (ethanol derived from vegetable matter which conforms to the SANS specification for denatured fuel ethanol for blending with gasoline for use as automotive spark ignition engine fuel).

Suppliers of petroleum products will now need to put in place the necessary infrastructure to ensure they can comply with the regime by 2015. This will include conducting environmental impact assessments and obtaining environmental authorisations associated with the development and construction of receiving tanks and facilities to process biofuels.

In a separate announcement, South African Airways has announced plans for a major biofuels project in conjunction with Boeing. The ambitious programme aims to meet half of the airline’s fuel needs with biofuels before 2023 – equivalent to between 350 million and 500 million litres of conventional jet fuel each year.

South Africa - Renewables events

By Helen Bowdren, Senior Associate, Cape Town

The South African Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is the largest of its kind in the world. The programme aims to procure 3,725 MW from renewable energy sources by 2016. Rounds 1 and 2 have closed, and construction is well underway. The announcement of preferred bidders for Round 3 was made on 31 October 2013.

Dentons will participate in a seminar in November focused on the role of insurance in this developing market in South Africa. The seminar will be held twice, once in Johannesburg (12 November 2013) and once in Cape Town (14 November 2013).

The event will include speakers from Marsh, Dentons, RSA and Ascot. The speakers will explore the role that insurance has to play in supporting renewable energy development, including understanding the insurance life cycle and risk profile of a renewable energy project, underwriting requirements, the role of insurance in delivering financial close, and the development of the local insurance market capabilities.

EU ETS: Turbulence for new aviation sector proposals 

The European Commission recently announced draft proposals to include non-EU airlines' emissions in European airspace, in the European Union Emission Trading System (EU ETS) from 2014. This represents a compromise from the inclusion of all emissions from flights in and out of the EU, though it is contentious in light of recent international agreement at the October 2013 Assembly of the International Civil Aviation Organisation (CIAO).

The aviation sector was originally included in the EU ETS on 1 January 2012. Under significant pressure from a range of airlines and governments, particularly those in India, China, the US, and the Middle East, the European Commission suspended the inclusion of international aviation emissions to allow negotiation of a global deal on aviation emissions. In a positive step, the ICAO Assembly agreed to develop a global emissions trading system by 2016, to be implemented in 2020. However, there was also a non-binding resolution that no country can include another country's airlines in their emissions trading scheme without mutual agreement between the two countries.

The European Commission's latest proposal has already attracted criticism from industry bodies, non-EU nations and airlines for undermining the recent agreement at the ICAO Assembly. However, EU Climate Commissioner Connie Hedegaard maintains that the bloc is within its rights to regulate aircraft emissions within its own airspace. Notwithstanding the international pressure, the European Commission faces a race against time to approve the draft proposal as there are parliamentary elections and commission changes scheduled for 2014. Watch this (air)space!

California Air Resources Board slows adoption of mine methane capture protocol

By Matt Adams, Partner, San Francisco

In a surprising development, the California Air Resources Board ("ARB") declined to add a compliance offset protocol for mine methane capture to its greenhouse gas cap-and-trade program.

ARB's cap-and-trade program allows covered entities to satisfy up to 8 percent of their compliance obligations with carbon offset credits. Existing ARB compliance offset protocols for cover forest projects, urban forestry, livestock projects, and destruction of ozone depleting substances.

Most expected the agency to revise its regulations to add a new protocol covering methane capture at active and abandoned coal mining operations at its 25 October 2013 board meeting. Instead, agency staff was instructed to re-evaluate the protocol to address concerns that methane capture will do little to alter environmental conditions in the State of California (which has no active coal mining operations and very few abandoned mines).

ARB has not defined a specific process or deadline for the re-evaluation, but opportunities for stakeholder participation are expected over the next few months.

Dentons client among first to be issued California carbon offset credits

By Jeffrey Fort, Partner, Chicago

Wabashco LLC, a Chicago-based company, turned to Dentons for help in its project to create a stream of carbon offset credits from the collection and destruction of Ozone Depleting Substances used in the motor vehicle sector. On 22 October 2013, the Air Resources Board issued 50,000 credits to Wabashco for that project, the first of many which Wabashco has underway. These credits will be sold into the AB 32 cap and trade market to be used for compliance and as a cost containment tool to mitigate the costs of the greenhouse gas emission requirements established by the state of California.

New regulatory proposals for reducing carbon emissions from power plants

By James Rubin, Counsel, Washington DC

New Unit Rule

On 20 September 2013, the US Environmental Protection Agency (EPA) released proposed greenhouse gas (GHG) regulations establishing a performance standard for new power plants under the Clean Air Act's New Source Performance Standards (NSPS) program. EPA had issued a prior version in April 2012, but re-issued the proposal after considering public comment and industry information, and under the mandate of the President's Climate Change Action Plan. Unlike its prior proposal, EPA establishes separate, though similar, standards for natural gas and for other fossil-fuel-fired power plants. EPA proposes that the "Best System of Emissions Reduction" or BSER for natural gas is modern combined cycle natural gas, at 1,000 lbs. of CO2/MWH (smaller plants have a slightly more generous limit), a limit EPA claims all modern combined cycle units can achieve. Coal-fired and coal gasification units must meet a 1,100 lbs. CO2/MWH limit over a yearly operating period or 1,000-1,050 lbs. CO2/MWH over a seven-year operating period; EPA has determined that BSER for these plants is "partial" carbon capture and sequestration (CCS) technology, which would mean 30-50 percent recovery of CO2. EPA has determined that such partial CCS has been "adequately demonstrated" based largely on two CCS-enabled plants under construction and two in the design phase. EPA also determined, based on industry and economic projections, that no coal plants would be built in the next decade, so that its rule was merely codifying the current situation where natural gas-fired plants are supplanting coal due to relatively cheap and plentiful gas.

Upon publication in the Federal Register, EPA will begin a formal 60 day comment period, and any plant built after that date will be considered "new" even though the rule would not be finalized for up to a year. The proposal met with immediate controversy, with industry claiming CCS is not yet commercially available and efforts in Congress to kill the rule. Though EPA has a year to finalize, it has not announced a specific deadline, though it may need to finalize it before the 1 June 2014 deadline for a proposed NSPS for existing power plants.

Existing Unit Rule

EPA began its official stakeholder process for the existing power plant rule also on 20 September 2013 and is under Presidential order to complete it by 1 June 2014 and finalize a year later, with state implementation by June 30, 2016. The existing unit rule will likely be even more controversial as EPA seeks ways to limit carbon emissions from the aging fleet of predominantly coal-fired plants. The existing unit rule will differ from the new unit rule because, for the former, EPA merely sets "guidelines" for existing sources, which states then implement through plans subject to EPA approval. Rather than focusing only on source-specific reductions, EPA is suggesting it may consider ways to encourage systemic reductions in energy demand and include demand-side management programs. EPA will also look to accommodate existing state and regional programs that reduce GHGs or energy demand. EPA's deadline for rulemaking is quite tight and the agency is currently reaching out to stakeholders to solicit views on what may be accomplished under an existing source rule.

Supreme Court to review EPA rule on new and modified stationary sources

On 15 October 2013, the US Supreme Court agreed to review a challenge to GHG regulations which the EPA had previously issued for major stationary sources under the Clean Air Act. In 2007, the Supreme Court ruled in Massachusetts v. EPA that CO2 could be regulated under the Clean Air Act. Following that ruling, EPA made a formal science-based "Endangerment Finding" that GHG emissions from motor vehicles endangered public health. As a result, EPA instituted a "Tailpipe Rule" for GHG emissions from motor vehicles. Using a long-standing interpretation, EPA then concluded that GHGs were "subject to regulation" under the Clean Air Act and hence regulated under the Prevention of Significant Deterioration (PSD) and Title V permit program; PSD requires pre-construction permits for major sources of regulated pollutants, applied through "Best Available Control Technology" (BACT), and Title V requires operating permits. EPA then created the "Tailoring Rule" to raise the statutory threshold for PSD/Title V applicability so that only the largest stationary sources of GHG emissions would be covered.

Petitioners challenged the Endangerment Finding, the Tailpipe Rule and the Tailoring Rule, but an appeals court dismissed the challenges. Petitioners then sought Supreme Court review. The Court denied all petitions except those pertaining to EPA's interpretation that regulation under the Tailpipe Rule automatically rendered GHGs subject to regulation under the PSD/Title V programs. Thus, while the Court may have settled disputes over the Endangerment Finding underlying the GHG regulations, it may question EPA's rationale behind the Tailoring Rule and application of PSD/Title V to GHGs. Some are even hoping that the Supreme Court may rule more expansively on EPA's overall ability to regulate CO2 from stationary sources. In any event, a ruling adverse to EPA may not have much impact on the NSPS programs described above since they arise under a different Clean Air Act section. Indeed, by not reviewing the Endangerment Finding, the Supreme Court may have bolstered the NSPS proposal since it looks, in part, to the earlier Endangerment Finding for authority. The case will likely be heard in February-March 2014.

Renewable Fuel Regulation - RINs

By Susan Wood, Senior Advisor, Houston

Since the beginning of 2013, the price of Renewable Identification Numbers (RINs) under the Renewable Fuel Standard (RFS) has received a lot of attention from the energy markets. That’s because in 2013 the price of RINs has gone from a historical average of $0.10 per RIN to over $1.40 per RIN. This jump in price has taken RINs from being a commodity that only obligated parties paid attention to, onto the radar of some of the largest commodity trading desks in the US.

The RFS sets annual mandates for renewable transportation fuels. RINs are “credits” created under the RFS to track the volume of renewable fuel produced or imported into the US and then blended into transportation fuels. The RINs are used by RFS regulated parties (gasoline and diesel producers and importers) to show compliance with the RFS mandate. Each year, gasoline and diesel producers and importers are required to meet their RFS mandate either by actual fuel blending or by purchasing RINs from others. The RINs are then turned in to the EPA to demonstrate compliance with the mandate. The RFS mandate runs from 2008 through 2022 and the volume of renewable fuel required increases every year (2022 requires 35 billion gallons of ethanol and 1 billion gallons of biodiesel to be blended into the fuel stream).

The dramatic increase in the price of RINs is seen as the result of the market anticipating hitting the “blend wall” in 2014 with an estimated shortage of 800 MM RINs. The blend wall is the threshold at which the RFS requires more renewable fuel to be blended into US gasoline than the market can absorb (assuming a maximum of 10% ethanol content for which most cars on the road are designed). The result is a market that cannot produce enough RINs to meet the EPA mandate. This anticipated shortage of RINs has prompted many commodity traders to acquire RINs and force the market price to increase. Just a recently, the New York Times published a lengthy piece strongly hinting that the RINs market was being exploited by Wall Street banks for ill-gotten gains, prompting two U.S. Senators to ask regulatory agencies to launch investigations. Senator Chuck Grassley of Iowa framed the issue this way, "The EPA needs to provide assurances that this market is functioning for its intended purpose, rather than acting as a profit mechanism for Wall Street banks and other financial institutions."

The market is currently waiting for the release of the 2014 RFS. Many of the obligated and related parties have been asking the EPA to consider lowering the 2014 RFS mandate so that the market does not hit the blend wall. If and how much the EPA lowers the 2014 requirement could have a dramatic impact on both energy market traders and the obligated parties. The 2014 RFS mandate is expected to be released in the next few weeks.