Private governance actions have seen a significant uptick, while several states have advanced carbon pricing plans. The Carbon Offsetting and Reduction Scheme for International Aviation has seen a baseline change and finalization of eligible emissions reduction measures, while implementation of the Paris Agreement inches along — notwithstanding the planned U.S. withdrawal this November.
Of course, Democratic presidential nominee Joe Biden's campaign has made significant climate-related commitments, as have some federal and state down-ballot candidates, portending potentially significant shifts in U.S. policy depending on the outcome in November. Amidst the many countervailing forces and changing winds, one thing is certain: companies in all sectors are increasingly focused on climate change, as are regulators.
In the first installment of this two-part article, we will discuss carbon market developments in the U.S. In the second installment, we will focus on international developments, and how the upcoming election may influence carbon market policy.
States' Net-Zero Targets
In the absence of federal carbon pricing, an increasing number of states are establishing binding GHG reduction targets — including net-zero targets. Hawaii was the first state to adopt a net-zero target, which it did in June 2018; the state aims to be net-zero by 2045.
Not to be outdone, California also adopted a 2045 net-zero target, through an executive order issued later in 2018. New York joined the net-zero club in 2019, promising to achieve that goal by 2050. Most recently, Massachusetts is in the process of approving legislation that would require net-zero emissions by 2050.
While not approaching the net-zero ambition, a number of other states either have or are planning to adopt significant and binding GHG reduction targets, including:
- Maine (80% reduction by 2050);
- Colorado (90% below 2005 levels by 2050);
- Pennsylvania (80% below 2005 levels by 2050); and
- Oregon (45% below 1990 levels by 2035, and 80% below 1990 levels by 2050).
Washington, Connecticut and a number of other states also have broad GHG reduction targets, albeit with a lower level of ambition. In total, 23 states and Washington, D.C., have some form of GHG reduction target as of this writing.
While many states have established aggressive GHG targets, the enabling laws and orders are universally light on detail about how to actually achieve those targets. One likely path is that these and other states will move to price carbon, and to further enable carbon sequestration and the development of carbon sinks within state borders and, potentially, beyond.
That, in turn, could open the door for new carbon offset projects and other market-based actions, such as direct payments or tax credits, that may spur further offset development in the U.S. These programs are in their early days — much like renewable portfolio standard programs a decade ago — and bear watching as a source both of regulation and opportunity.
Expansion of Regional Greenhouse Gas Initiative
The Regional Greenhouse Gas Initiative, or RGGI, continues to grow, with the rejoining of New Jersey in June 2019, and the addition of Virginia in July 2020.
Pennsylvania is taking steps toward joining, but the question remains a contentious issue in the state. Current members include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia.
Virginia's entry makes it the southernmost state in the program. Upon entry, Virginia Gov. Ralph Northam announced that:
In Pennsylvania, the state House and Senate passed a bill that would bar the state's entry into the RGGI, which Gov. Tom Wolf vetoed in late September. Meanwhile, the state's Environmental Quality Board voted in September to move forward with a formal rulemaking process to promulgate the necessary carbon dioxide regulations to qualify the state for entry to the multistate initiative.
Virginia is sending a powerful signal that our Commonwealth is committed to fighting climate change and securing a clean energy future. ... This initiative provides a unique opportunity to meet the urgency of the environmental threats facing our planet, while positioning Virginia as a center of economic activity in the transition to renewable energy. Our Commonwealth is ready to lead the way in ensuring that the path to reducing carbon emissions is equitable and protects the health and safety of all Virginians.
Following that vote, the Pennsylvania attorney general will review the proposed regulation, and a public rulemaking process will commence at a to-be-determined date. Joining RGGI remains a controversial proposition in Pennsylvania, given the historic nature and size of the coal, oil and natural gas industries within the state.
Over the past few years, the price of RGGI CO2 allowances has continued to climb. The latest auction, held on Sept. 2, again saw 100% of allowances sold, while achieving near-record prices of $6.82 per allowance.
While RGGI allows for the use of offsets for up to 3.3% of a compliance obligation, only one offset project has been registered under RGGI, and offset use has not played a significant role in the program to date. As RGGI demand remains strong, prices continue to rise, and may eventually create a scenario where carbon offsets begin to come into play.
Rejection of DOJ Challenge to California Linkage to Quebec Trading System
In 2019, the U.S. Department of Justice challenged the constitutionality of California's linkage of its cap-and-trade program to a similar program operated by Quebec, alleging that it violates four distinct constitutional precepts: the treaty clause, the interstate compact clause, the foreign affairs doctrine and the foreign commerce clause.
On March 12, the U.S. District Court for the Eastern District of California rejected the federal government's claims that the California-Quebec agreement violates the treaty clause and the interstate compact clause. In a July 17 decision, the court granted the DOJ's request to voluntarily dismiss its foreign commerce clause claims, and further granted summary judgment in favor of California on the DOJ's remaining claim, holding that California's program does not violate the foreign affairs doctrine.
This decision, in combination with the court's March 12 decision, resolved all of the DOJ's claims in favor of California, upholding the California-Quebec linkage. Recently, the DOJ announced that it will appeal the decision to the U.S. Court of Appeals for the Ninth Circuit.
California Review of Cap and Trade, LCFS Programs; Updates to LCFS Rules
Even prior to the economic crisis spurred by the COVID-19 pandemic, California's cap-and-trade program was swimming in excess credits. The economic retraction has only exacerbated this situation, with the May credit auction bringing only a small fraction of the prices typically paid for emissions credits, although subsequent auctions have shown a degree of rebound.
As a result, the California Environmental Protection Agency announced in a letter to legislators that it will reexamine the program's ability to meet its goals under present circumstances. Critics in the California Legislature argue that the program must be more aggressive in order to meet the state's climate goals.
Additionally, on July 1, new regulations went into effect regarding California's Low Carbon Fuel Standard, or LCFS. The regulations adopted by the California Air Resources Board implemented a number of changes to the program, including establishing a maximum tradable price for LCFS credits; allowing CARB to advance credits to the market from subsequent years to fill unexpected deficits; and requiring deficit generators that participate in the market for two consecutive years to submit a compliance plan for future years.
Additionally, under CARB's new regulations:
- Buyers of credits will no longer be required to pay back credits that are later invalidated.
- Utilities receiving base credits for residential electric vehicle charging will be required to direct a large portion of the revenue from those credits to benefit disadvantaged and low-income communities.
- Some credits generated for residential electric vehicle charging would be redirected to large utilities to supply the Clean Fuel Reward program.
U.S. Proposal for Aircraft GHG Limits
The U.S. Environmental Protection Agency has published a proposed rule to adopt the first-ever Clean Air Act emission standards for GHGs emitted by aircraft. Comments on the proposed rule were due on or before Oct. 19.
In framing the proposed rule, the EPA drew heavily from the 2017 Airplane CO2 Emission Standards established by the United Nations' International Civil Aviation Organization, or ICAO, resulting in alignment with the ICAO standards. In fact, the proposed rule does not require emission reductions beyond those adopted by ICAO, and would not require significant changes to aircraft production beyond those already planned.
The proposed rule applies only to certain domestic aircraft. The proposed rule covers manufacturers of new, larger aircraft beginning either (1) retroactively to Jan. 1, 2020, for new models of aircraft that the FAA has not yet type-certificated, or (2) in 2028 for most in-production models that already have such certification.
The proposed rule excludes certain types of aircraft, including amphibious airplanes; airplanes designed with an unpressurized compartment and identified as "very rare"; certain fire-fighting airplanes; and airplanes initially designed or modified and used for specialized operational requirements. In addition, the proposed rule provides pathways to obtain exemptions from enforcement in certain instances.
If the proposed rule is finalized in its current form, a challenge in the U.S. Court of Appeals for the District of Columbia Circuit is likely. While various aviation and air transport groups have praised the rule as a sensible alignment with international standards, several environmental nongovernmental organizations have already voiced their opposition, calling the proposal "wholly inconsistent" with the Paris Agreement, and focusing on the lack of additional emission reductions beyond the ICAO standards.
Growing Climate Solutions Act
In early June, bipartisan groups of senators and congressional representatives introduced the Growing Climate Solutions Act, aimed at increasing and encouraging nature-based GHG reductions in the agriculture and forestry sectors.
If enacted into law, the bill would require the U.S. Department of Agriculture to establish a greenhouse gas technical assistance provider and third-party verifier certification program, and would help to break down existing GHG market barriers in five important ways:
- The USDA would publish a list and description of standards from "widely used industry protocols" for GHG credit markets, which could be used to encourage sustainable, climate-friendly farming and forestry practices by connecting private-sector capital with farmers, ranchers and private owners of forests.
- Third-party consultants could apply to be USDA-certified to provide technical expertise or verify compliance with those standards, as applied to land- and agriculture-based GHG credit projects.
- The USDA would establish a one-stop shop website for farmers, ranchers and private forest owners seeking information and resources on how to participate in carbon markets.
- An advisory council comprised of at least two dozen USDA-appointed members would advise the department concerning its administration of the program.
- The USDA would be required to consult with the EPA to develop an assessment of greenhouse gas credit marketplaces and verification regimes, first due in October 2022, and with follow-on assessments produced every four years.
The introduction of these bills signals bipartisan legislative recognition of the successful efforts recently made to reduce carbon footprints in forestry, farming and ranching. Their introduction may also indicate increased congressional interest in climate-focused legislation going forward — and, in particular, renewed focus on supporting and rewarding carbon sequestration in the forestry and agriculture sectors.
The Senate bill is S.B. 3894, and the full Committee on Agriculture, Nutrition and Forestry held a legislative hearing to review the act on June 24. The House bill is H.R. 7393.
The Growing Climate Solutions Act is part of a trend at both state and federal levels to incentivize nature-based or land-based carbon sequestration. For example, the California Legislature introduced a bill this past session that would have created programs to reduce GHG emissions from working lands (including agricultural, grazing and forest) and natural lands, while also encouraging carbon sequestration programs on those lands.
The bill did not come to a full vote, but indicates increased focus on the agriculture sector as both an emissions source and sink. Meanwhile, the USDA has launched its Agriculture Innovation Agenda, and is seeking input on GHG reduction technologies that can be applied to agriculture in the U.S., with a focus on increasing carbon sequestration. We expect such efforts to continue as policy makers look for new tools to mitigate carbon emissions.
Transportation Climate Initiative
The Transportation Climate Initiative, or TCI, has resumed activity after a modest pandemic-induced slowdown earlier this year. The TCI would establish a regional cap-and-invest program across a group of about 12 northeastern states, focused on reducing GHG emissions from transportation.
It would do this by imposing a cap on emissions, a system of tradeable credits and a strategy for investing program proceeds in clean transportation infrastructure and programs. The TCI has ramped up its efforts to develop a model rule, which it expects to release this winter. It held public webinars on Sept. 16 and 29 to discuss program design.
At the September 16 webinar, TCI staff presented a range of emissions reduction scenarios and pricing models. Based on that presentation, it appears that the program will target sector-based emissions reductions on the order of 20-25% over time, with auction allowance prices beginning in the mid-teens — which is commensurate with current allowance and offset prices in the California cap-and-trade program. The Sept. 29 webinar focused on environmental justice and equity.
If the program develops as expected, with a model rule released this winter, member states would adopt implementing legislation in 2021 and 2022, with the program getting off the ground in 2022 or 2023. If launched, the TCI will create a new and significant market-based GHG program across its member states, with challenges and opportunities for market participants and other entities.
Brook Detterman is a principal, and Jacob Duginski and Jennifer Leech are associates, at Beveridge & Diamond PC.
Beveridge & Diamond associates Ben Apple, Andrew Eberle and Jack Zietman contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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