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Climate Change

By Usman Baporia |

Roundtable-Climate Change

Climate Change

An update with the California attorney general's office; Santa Clara University School of Law; and Shook, Hardy & Bacon.

In reflection of the country's growing concern over global warming, there's been notable movement in recent months on national and regional policy efforts to curb greenhouse gas (GHG) emissions. At the federal level, two climate change bills proposing a national cap-and-trade system are currently being debated in Congress, and the Environmental Protection Agency (EPA) has issued an endangerment finding related to carbon emissions that will have wide-reaching legal ramifications. EPA has also proposed a mandatory GHG reporting program. The national regulations that emerge will almost certainly affect the California Global Warming Solutions Act of 2006 (AB 32), the state's pioneering climate change legislation, which raises a number of potential constitutional, implementation, and enforcement issues.

Our panel of experts discusses these topics, as well as trends and predictions related to future climate changerelated litigation. They are Ken Alex of the California Attorney General's Office; Dr. Wil Burns of Santa Clara University School of Law; and Keith M. Casto and Kevin Haroff of Shook, Hardy & Bacon. The roundtable was moderated by freelance writer Bernice Yeung and reported for Barkley Court Reporters by Krishanna DeRita.

Moderator: How will the proposed federal climate change legislation interact with California's existing environmental laws?

Alex: The potential for federal cap-and-trade legislation passing this year is pretty low. But the Obama administration has suggested that EPA has authority under the Clean Air Act to do cap-and-trade rules on its own, and I think that is a real possibility in the next year and a half.

But to answer the question directly, there is going to be a very complex interaction between any federal cap-and-trade system and what California is working on right now, which is its own cap-and-trade system with a focus on the electricity sector among a series of western states and Canadian provinces under the Western Climate Initiative - and how those regional rules are going to interact with the federal system. It is unclear whether there will be a state trading system once the federal system is put into place. For example, the Waxman-Markey bill, in its current form, would move the state system aside, at least for a period of time.

Haroff: EPA does continue to march toward more comprehensive regulation of GHG emissions under existing law. Most recently, EPA issued a proposed finding that GHG emissions endanger public health and welfare for purposes of Section 202(a) of the federal Clean Air Act. The U.S. Supreme Court, with its 2007 decision in Massachusetts v. EPA, held that EPA has authority to make that finding, although not everyone agrees that the agency has properly exercised its authority. In any event, EPA clearly is being directed to move forward on this issue.

Casto: It's probably fair to say that the Obama administration is trying to leverage the potential for using the Clean Air Act regime against the potential for stand-alone legislation because the Clean Air Act is a somewhat awkward way to implement climate change regulation. The Clean Air Act is set up using criteria pollutants, ambient air quality standards, non-attainment areas, state implementation plans, hazardous air pollutants and Title V permits, which really don't work well for addressing climate change. Everybody seems to recognize the awkwardness of regulating under the Clean Air Act, but I think EPA is committed to doing that if Congress does not act expeditiously to pass stand-alone legislation. The question is how far the Obama administration is going to take regulation of GHGs under the Clean Air Act before there's political consensus on stand-alone legislation.

Alex: Here is a place where California may disagree a little bit. The Attorney General's Office (AG) thinks that the Clean Air Act, while not perfect, does present a pretty interesting framework for regulating GHGs. First and foremost, the act provides a clear-cut way to regulate emissions from cars, and California is trying to move forward on that front. We are still seeking our waiver, but based on the endangerment finding from EPA, the Obama administration is obligated to issue regulations for car emissions, and that's a very big chunk of GHG emissions. We think that the Obama administration and EPA should move forward piece-by-piece on this, starting with mobile sources like cars and ships, and then move to stationary sources. If we get to stand-alone legislation in the next two years, then that's great. If we don't, then in our view, the Clean Air Act will work.

Haroff: The good thing about the Clean Air Act is that it has been around a long time and people understand how it works. The act is by no means a perfect vehicle for addressing the climate change issue. But the legislative proposals that have been floated in Congress are extremely complicated and potentially subject to the influence of a variety of special interests. I don't think the end product there is necessarily going to be any better than what EPA might come up with on its own.

Alex: And there are those who suggest that instead of what we have now under the Clean Air Act, with state implementation plans for criteria pollutants, we could have a climate implementation plan for GHGs. That's a pretty interesting concept because it would work nicely with California's law, which says we are going to reduce emissions to 1990 levels by 2020. We could set a target for each state and each state could figure out how they are going to meet that goal on their own, which might be a fairly interesting way to activate that good old concept of federalism.

Burns: If Waxman-Markey becomes the bill that leads this year, which it looks like it will, what are some of the potential preemption arguments that may be made beyond those pertinent to its cap-and trade-provisions? For example, there's Section 116 on coal plant performance standards and also Section 202 on energy proficiency provisions, and the latter certainly is very important in California. But the language currently is terribly unclear in terms of the ongoing right of the state to pursue these efforts, and that's something that probably needs to be clarified. Section 861 would deny states the right to implement independent cap-and-trade programs for at least five years, which would probably severely undercut AB 32 in California, and might undermine efforts to meaningfully address climate change if the federal cap is set too low. So there are some efforts on the Hill to compromise on this issue by either reducing the number of years before you can re-implement a state cap-and-trade program, or perhaps by crafting an alternative such as the approach under the Boxer-Lieberman-Warner Climate Security Act of 2008, which provided states with an incentive to participate in a federal cap-and-trade system by according them extra allowances.

Haroff: Federal legislation may well preempt states from pursuing their own cap-and-trade programs, but states could use alternative strategies that would have economic effects similar to cap and trade, such as something more in the nature of a direct carbon tax. It might be possible to structure those alternative strategies so as to avoid a federal preemption argument.

Alex: This is a huge issue. Under AB 32, the California Global Warming Solutions Act, the state has a very big commitment to reducing GHG emissions. So is California going to be allowed to use various instruments to get there? And California is in the process of working on regulations for AB 32, which are due in 2012, that will cover all kinds of industries and all different types of emission sources. Some of them will be command-and-control policies, some of them will be in the nature of targets, and some of them will conceivably be market based. So the question is: with federal legislation, what will be preempted and what will be allowed? And that is going to be a very big fight. California is concerned that in an attempt to get a compromise bill, there will be great pressure to preclude states like California from continuing to take the lead in innovative technologies and rules that have moved us forward to this point. We want to make sure that the states are given authority to continue the work that they've been doing.

Casto: Cap and trade and carbon taxation have been trotted out as the two primary modes of implementing public policy. Lurking in the background is the important role of command-and-control regulation, which necessarily entails the setting of emissions limitations. To put things on an even playing field, you have to start out with the proposition that underlying a cap-and-trade system or even carbon taxation, there has to be a legally enforceable limit in place to establish the baseline for determining whether you are entitled to a credit or whether you will be taxed. The idea of using carbon taxation appears to be a simpler alternative. However, there are some potential downsides to taxation. One consideration is that a carbon tax would not necessarily be uniform globally or even throughout the United States. The benefit of cap and trade is that it could set a more uniform stage for an international regime, which seems to be the better way to go when you are dealing with a global problem. At the end of the day, there's going to be a cap-and-trade system, but I also think that carbon taxation will fill in the gaps. I don't think they are mutually exclusive. And there will be some form of command-and-control regulation.

Burns: I agree. The caution I have on cap and trade is that in the instances where it has worked well in the U.S., such as in the context of the Acid Rain Emissions Trading Program, we were talking about programs much smaller in scope, and where there were readily available technological solutions. If you look at the experiences of the European Union (EU) in the first phase of their trading system, it was a colossal disaster, and thus a cautionary tale. Political interests were effective in ensuring that the level of allowances was set so high that there has been virtually no reduction in emissions and virtually no allowance trading because there's no need for it. There's also been tremendous volatility. In fact, we are talking about as much as a 1,000 percent difference between the lowest and highest prices for the allowances themselves. That's why some people advocate for the imposition of a carbon tax as an alternative.

A carbon tax would be more transparent, providing fewer opportunities for rent-seeking activities, and there would be far less price volatility, which historically has discouraged investment in low carbon technologies and discouraged innovation in this context. I agree that it's not necessarily an either/or proposition, even at the international level. You could have a situation where a group of countries agree to a harmonized schedule for reducing GHG emissions, but with some countries effectuating this objective through a cap-and-trade scheme, while others implement a carbon tax, or even a hybrid system of both schemes. This is all assuming, of course, that you set the carbon tax at a level that ultimately results in the reductions in emissions that you want to achieve. This can be a challenge, because it's difficult to predict the impact of price signals. However, you could also build in the flexibility to adjust taxes as the effect of price signals becomes clearer.

Alex: Also, with cap and trade, we are talking about markets in the hundreds of billions of dollars and as a prosecutor, my concern in light of the energy crisis and the mortgage meltdown, is the potential for fraud through doing derivatives or bundling cap-and-trade emission credits.

Another big issue related to cap and trade is leakage, or carbon offset programs that inadvertently trigger an activity that counteracts the benefits. So how do we deal with offsets as opposed to simple reductions? Offsets increase the potential for significant fraud in countries around the world. We are evaluating how we might go about policing projects that provide offset credits for California's purposes, but may be subject to very different types of control and scrutiny in different locations.

Haroff: The issue of offsets is an important one. California has been reluctant to embrace offsets as a significant part of its strategy. At the same time, offsets can be an extremely valuable tool for achieving the ultimate goal of any cap-and-trade program, which is to reduce the total amount of GHGs in the atmosphere overall. As a political matter, there also is a great deal of support for including an offsets component in a federal cap-and-trade program. The state may be hesitant about offsets, but that may not completely carry over to the federal level.

Burns: Both the Boxer-Warner-Lieberman and the Waxman-Markey climate change bills have provisions that are intended to ensure the integrity of the offsets. But I agree that a significant amount of political pressure is going to allow a lot of these programs through, even though in some instances, some scientific concerns related to the integrity of offsets are simply being ignored. There's growing evidence, for example, that in the case of planting trees in non-tropical areas, the reduction in albedo, or surface reflectivity, that occurs as a result of converting grasslands or scrublands to forests can totally counteract the benefits that you get in terms of storing more carbon dioxide, or may even exert a net warming effect. Despite this, forest projects have sailed through under the Kyoto Protocol because of political pressure.

In the context of projects to enhance the sequestration of carbon in soils, such as no- or low-till agriculture, there are the same sorts of concerns. For example such methods may substantially reduce the uptake of methane, a far more potent GHG than carbon dioxide, by soils. The reason is that no- and low-till agriculture increase soil density and interfere with the uptake of methane by bacteria called methanotrophs. As a consequence, one recent study indicated that soil sequestration projects could offset 75 to 310 percent of the benefits of sequestering additional carbon, meaning that such projects could actually exacerbate warming trends And yet again, these methodologies are being developed because they promise cheap credit, and thus are going to be extremely politically palatable. So I think there's a real danger that a lot of offset projects are going to be a sham.

Casto: That implicitly raises one of the biggest concerns that many of us have, which is the need for some kind of central and international governing authority. If this is going to be a global regulatory program, who is going to run the show? Because Wil [Burns] just raised a number of issues that require some kind of uniform, scientific recognition regarding the validity of all of these offset credits.

Protocols have to be established. They have to be policed. They have to be adhered to. They have to be verified. They have to be registered. Who's going to do that? The protocols have to be established through something that looks like an International Organization for Standardization (ISO) or some other governing body that everybody defers to. And if you are going to have some kind of policing regime for the violators, who is going to impose the sanctions and where are you going to dispute the sanctions if there is some reasonable basis for controversy?

Burns: That's right. Under Kyoto, there has been a severe underfunding of the monitoring bodies for the Clean Development Mechanism (CDM) and Joint Implementation projects, two flexibility mechanisms that help countries meet their GHG emission targets. A cynic would argue that this has been a result of the efforts of some of the parties, who want to ensure that the projects that are economically and politically palatable sail through with very little oversight. I can see that happening in the U.S. context also.

When Kyoto expires, its successor, likely to be denominated the Copenhagen Protocol, will most likely embrace the same flexibility mechanisms, but hopefully with a much deeper commitment to emissions reductions and some tweaking of the integrity of CDM and Joint Implementation projects.

But of course, the abiding question is how we engender meaningful international participation by developing countries that are major emmiters. China is now the largest emitter of GHGs in the world. India is soon to be No. 3. By 2100 developing countries will comprise 70 percent of global emissions. The bottom line is that without these countries' meaningful participation in efforts to reduce emissions, nothing that we do in the developed world will prove availing in terms of avoiding the temperature increases that have been projected.

Alex: Going back to Keith [Casto's] point, I think it's unlikely that there will be an international enforcement regime. I agree with it in concept, but the enforcement is going to have to be built-in domestically. It's absolutely essential that with cap-and-trade markets, whether they are statewide or international, that enforcement is built into the market from the outset, and that monitoring and enforcement are fully funded and market participants are fully aware that there are significant sanctions for violations. This is something that my office and others are working very hard on at the state and national level. It has to be the same at the international level, and hopefully the Copenhagen Protocol, if we get there, is a place to start to thinking about this.

Burns: I don't have a lot of hope that the penalties are going to be substantially more stringent under Copenhagen, given the prerogatives of sovereignty. Under Kyoto, what happens is that you are required to add one-third more to your next commitment above what you failed to meet in GHG reductions during the previous period. The problem with that, of course, is that participating states may factor in this penalty when they negotiate their commitment for the next period, or they may bank on the fact that such penalties may never be levied, which may prove to be the case in terms of the Kyoto Protocol. Unfortunately, there hasn't been a lot of discussion about building in more meaningful sanctions at the international level. It's crucial that what we do at the state and federal level operates in parallel with other countries.

Haroff: The courts also are going to be important from an enforcement perspective. The role of the courts is something that the California AG's office has been exploring in a variety of ways, through the assertion of common law tort claims against the automobile industry in California v. General Motors Corp., as well as through claims asserted under provisions of existing California statutes like the California Environmental Quality Act (CEQA). For CEQA purposes, the AG's office has argued that in order to get a new industrial or development-related project approved anywhere in California, you have to analyze and mitigate against the climate change-related consequences of a project as part of an overall assessment of the project's environmental impacts. Enforcement of a project proponent's climate change mitigation plans would be subject to the ongoing jurisdiction of the California state courts.

Moderator: What are some of the legal issues related to California climate change-related regulations such as AB 32 and the state's Renewable Portfolio Standard (RPS) requirement?

Alex: There are endless legal issues. The regulations for AB 32, which will be extensive and affect a variety of industries, are in the process of being drafted. After a period of public comment, the regulations are slated to become final in January 2012. The Public Utility Commission (PUC) and the state Legislature are also issuing regulations and statutes, some of which are going into effect earlier. For example, the PUC and California Legislature are devising regulations for things like a "feed-in tariff" so that people and businesses that generate renewable energy in the form of solar power can sell it into the energy grid and make money.

There are also endless legal issues over siting large-scale renewable projects in order to achieve the goals of AB 32. And although it's not quite law yet, under the state's Renewable Portfolio Standard, where 33 percent of energy will need to come from renewable sources by 2020, we're going to have to deal with the fact that most large-scale renewables are in areas where we don't have the infrastructure for transmission. That's going to raise issues related to endangered species, local land use, and right of way.

Haroff: My sense is that industry generally has adopted a wait-and-see attitude toward what may come out of the regulatory development process for AB 32. Some industry groups may not have been as aggressively engaged in the process as they could be. I am concerned that there will be a certain amount of panic once specific proposed regulations start coming out, and it becomes clear how detailed and broad in scope the rules will be. The end result may be protracted litigation over various aspects of the coming regulations.

Alex: That is a great concern to the AG's office and other state agencies. We very much want the public and businesses of all sorts to engage in this process so that we can avoid some of this litigation. Our fond hope is that people will take a societal view here because of the real threat of climate change to California, but having said that, the potential for litigation here is substantial.

Casto: Another rather large problem that will arise out of AB 32 is the question of who owns the credits. Is it going to be the power company that acquires the benefit from the homeowner with solar panels on their roof, or is it going to be the individual? Transactional commercial aspects will arise, and there's going to be some contractual allocation issues, and that creates a huge market for transactional lawyers. Another issue that we are going to face is how wide we should cast the mitigation net. Is the California Air Resources Board going to regulate every homeowner? Probably not. It's similar to one of the issues that has always come up under the Clean Air Act and the Clean Water Act, which is: What do you do about de minimis sources?

Burns: Adding on to what Keith [Casto] is saying, you also have to determine what the optimal level is for imposing regulation. Regulating upstream sources is more administratively efficient, but you lose some of the saliency of the price signals that are sent when you regulate more downstream.

Haroff: Ken [Alex] was describing earlier the state's long-term Renewable Portfolio Standard. There also are expectations the state has concerning the near-term mix of renewables in its energy portfolio. The big public utilities in California are not yet where they need to be in achieving those expectations. This highlights the importance of the role individual homeowners and local businesses can play in supporting a more distributed power matrix through the use of roof-top solar panel systems and similar technologies. That's an area where the state could do a better job in providing guidance and incentives so that everyone can participate in meeting the state's goals.

Casto: This raises the question of whether there's going to be a fast track for renewable energy projects. Many inherent barriers in our regulatory system that have to do with permitting and other entitlements are either going to have to be waived or accelerated in order to make the Renewable Portfolio Standard program work. The average project takes about six years to complete in California, compared to two to three years in other states, and a major part of that delay is the environmental assessment process under CEQA. So can we be flexible enough to fast track clean tech projects?

Alex: This is an area that the AG's office is spending a lot of time dealing with. We are working to develop a streamlined process, but it must have meaningful substantive environmental review in a timely manner that allows the local public and those with environmental concerns to have a say and to have a process that's as transparent as possible. That's something we're looking at in terms of statewide projects, but the other part of this is the application of CEQA to local projects. The AG's office has filed one lawsuit under CEQA in San Bernardino and we settled that quickly. And what has happened since, over the past two-and-a-half years, has really been quite extraordinary in our view. Local governments have, to a large extent, embraced the notion that they need to consider global warming in evaluating general plans and local projects and in considering mitigation. Local governments have been creative engines in addressing emissions and getting reductions.

Haroff: The San Bernardino case and other settlements sent a message that local governments can and should consider GHG emissions in planning for future development. Some may quibble with a few of their specific terms, but at the core, these settlements all are linked to achieving the goals of AB 32. In essence, they say that if your planning or project development process says you will be in compliance with whatever the state comes up with under AB 32, then you have done your duty. Of course, since we don't have the AB 32 regulations yet, there is some uncertainty about what "doing your duty" really means. At least that provides some cover for project proponents and local governments to say, "We are part of the solution and we are trying to help the state reach its environmental objectives."

Casto: At the local level, a number of things can be done, but issues have also arisen under the Endangered Species Act where, for example, you have windmills impacting habitat or even causing direct mortality of endangered species. So we essentially have a direct conflict between two environmental norms.

Alex: You are hitting a lot of the areas where the AG's office has been involved. You are absolutely right that the environmental movement has to figure out where to push hard and where to back off, but there are ways to co-exist, and windmills are a good example of that. We did a settlement in the Altamont Pass area, where we worked with a company to replace smaller windmill blades with bigger ones, and we are finding that they are actually reducing the number of birds killed. But none of these things are without a price. For example, large-scale concentrating solar power, which uses massive mirrors in the desert, may require large trucks to run almost constantly to keep the mirrors clean, and the trucks generate a significant amount of GHG emissions. So we have to find ways to make these things work as best that they can.

Haroff: That's an ironic consequence of promoting large facilities in this context, and all the more reason to support greater incentives for individual homeowners and businesses at the local level, where these issues can be taken care of in more efficient ways.

Moderator: What trends are you seeing in terms of climate change-related litigation?

Haroff: This is an interesting time, because a number of the pending common law tort cases have been on appeal for a while and could be decided soon. As already noted, the AG's office has been actively involved in some of those matters. There is another case currently pending in federal district court here in Northern California, Kivalina v. Exxon, which I also think is very important. In Kivalina, a group in Alaska has alleged injury to their community from climate-change impacts caused by the GHG emissions of a number of large oil and gas companies and electric power producers.

Tort-based litigation in a variety of jurisdictions has not fared all that well up to now. However, one of these cases - and Kivalina could be the one - eventually is going to stick. When it does, it may well open the door to more litigation around the country based on common law theories.

Burns: I have a different take on it. You have three of these tort-based climate change cases, Connecticut v. American Electrical Power Company, Comer v. Murphy Oil Company, and California v. General Motors that are on appeal. I wouldn't be terribly surprised if the Second, Fifth, and Ninth Circuits, respectively, affirmed the dismissal of these actions on the same basis as the lower courts, which is the political question doctrine. The courts are extremely skittish about seeking to craft climate change policy, which plaintiffs are asking them to do in many cases, both because many judges are not well versed in climate change science, and because they feel that, given the significant economic, political, and social ramifications of climate change policy, such decisions more appropriately lie in the province of the elected branches of government.

So my take is that the courts will remain hesitant to engage on this issue. The courts may feel like they have additional cover not to grant relief in such cases now that EPA is moving down the path to regulating carbon dioxide under the Clean Air Act and there's an impetus for legislation to address climate change.

Alex: I should start by saying that I'm the attorney of record for California in Connecticut and General Motors. The Connecticut case has been pending in the Second Circuit for three years; they clearly don't want to get to this case. But those cases were wrongly decided at the district court; the political question doctrine does not fit. These are certainly complex cases, but the issues raised are not inherently subject to resolution solely by the political branches of government. Having said that, I do agree that the courts don't want these cases and that the endangerment finding by the Obama administration changes the dynamic.

All three cases were based on federal common law of interstate nuisance, which is one of the few areas of federal common law that continues to exist. But it is subject to displacement if there's a federal statute in this area. And so it may well be that when there are actual national climate change regulations, that area of federal common law is going to be overtaken. However, it turns out that once the federal common law is displaced by federal statute, the state common law re-emerges, particularly in instances where actual damage to property can be established. The Kivalina suit is a dramatic example, where a piece of an Alaskan village is literally falling into the ocean because of the thawing of sea ice and permafrost, and increased wave action on the shoreline. So I think these cases may eventually move back into the state courts.

Haroff: Whatever its outcome, the Kivalina case reflects the increasing skill and sophistication of lawyers who are thinking about climate change from a tort perspective. We will come to a point - and it may be soon - when a court will allow the possibility of judicial intervention, take on the question of climate change impacts to individual plaintiffs, and fashion a remedy.

Casto: Causation is going to be a significant issue. A number of the climate change cases have been disposed of on the basis of the political question doctrine and also on the basis of lack of causation. To what extent do you attribute legal responsibility to a single defendant for climate change impacts? How much carbon does that particular company contribute? What is the standard for imposing liability? Strict liability, negligence, intentional tort? And how do you attribute liability to one company relative to others for a truly global problem and potentially differing theories of behavior?

Burns: I'd add to that a temporal question. That is, at what point should the company have known that their activities could cause harm in this context? That's going to make a massive difference in terms of potential recovery for damages.

Alex: I'll tell you how we've answered some of those arguments, so far unsuccessfully. On causation, the Connecticut lawsuit involves the five largest emitters in the power sector and they represent about 10 percent of U.S. emissions. That is not inconsequential and we used the same concept with the automakers to say that they are not de minimis. So what is the damage? We talk about the impacts on California's snow pack and on the ability to control run-off, and the effect on the shoreline.

Burns: And certainly, Justice Steven's majority opinion in Massachusetts v. EPA, which discussed causation issues indirectly in the context of standing, provides helpful language for plaintiffs in that context.

Casto: I think we are going to end up with litigation that's somewhat similar to the litigation that occurred in the 1970s under the Clean Air Act when there were challenges to state implementation plan allocations. There are sectors that are going to argue that they are being unfairly targeted because of lack of alternatives to carbon-intensive technologies. For example, the airline industry can't use solar to fly airplanes. Are they going to unfairly assume the burden of the cost of carbon displacement? Those are all kinds of economic issues that I think get translated into litigation.

Haroff: One of the reasons I think that a tort-based litigation strategy may succeed at some point is that more information is becoming available to support those types of claims. There is a growing trend toward increasing requirements for monitoring, quantifying, and reporting GHG emissions, and to putting that information out into the public domain so that potential litigants can have ready access to it. We have seen how access to information on chemical emissions under EPA's Toxic Release Inventory program can be put to use in private party litigation. I can see something similar happening in the GHG context.

Casto: One current example would be the Carbon Disclosure Project, where companies make voluntary disclosures of their carbon footprint. There's a growing movement by shareholders to compel disclosure, which could result in shareholder derivative actions and even challenges to the actions of the board for not acting reasonably in reducing or reporting emissions. That raises the collateral notion of whether companies are accurately portraying their emissions. Disclosure was a significant problem in phase one of the EU trading scheme where a lot of phony numbers were generated, which undermined the commercial viability of emissions credits.

EPA is currently proposing to enforce its GHG reporting regime under Section 114 of the Clean Air Act, which means that EPA is going to have to police the reporting and bring civil, criminal, and administrative actions to enforce accuracy, which is in contrast to the third-party verification systems that we have here in California and the EU. So you could see litigation and companies defending EPA enforcement actions for false reporting.

Another area of litigation to consider is the commercial litigation that may be generated related to emission credit transactions. If emissions are insinuated into every transaction - a lease, a sale of assets, a sale of stocks; refinancing or selling of real property - it injects a whole new issue that parties can fight about.

Alex: Another question is how far does the Endangered Species Act (ESA) go, and are GHG emissions going to be seen as a potential cause for the loss of critical habitat? The Bush administration attempted to preclude that, but I don't think their statement is necessarily consistent with the law itself. So I suspect that there will be litigation over this.

Haroff: And the ESA doesn't go away just because the State of California has adopted regulations implementing AB 32. I wouldn't be surprised if this is a ripe area for future litigation.

Casto: We are also going to see some constitutional challenges for companies that are dramatically impacted and they will run the gamut from interstate commerce clause challenges to denial of due process and equal protection claims.

Burns: For example, we may see challenges by power companies under the dormant commerce clause if states or regional initiatives seek to protect the integrity of their programs by imposing penalties on externally produced power with high carbon content. We may also see challenges under the Compact Clause of the Constitution, contending that the Regional Greenhouse Gas Initiative (RGGI) or the Western Climate Initiative constitute an interstate compact among the participating states which requires Congressional consent. There are also supremacy clause questions, particularly if you have more stringent emissions reductions requirements at the state or the regional level than you do at the national level.

Alex: There is an instance in which the commerce clause has already been raised, and in which the AG's office has taken a position. The PUC issued a rule that said that a public utility can only purchase electricity on a long-term contract from a source that has emissions no greater than a certain type of natural gas-fired system. This was challenged by the coal industry as a dormant commerce clause problem. Our position was that the PUC's rule is facially neutral - the law applies to everybody equally - and the State of California has a compelling interest in protecting its environment from the impacts of GHG emissions. That's the essence of the argument and you'll see that raised in different contexts in the future.

Casto: Another series of challenges are going to be made under the Fifth Amendment Takings Clause. You are going to see a lot of people raising the fact that climate change regulations are basically killing projects or making the cost of them so prohibitive that it's in effect, a taking. I also think there may be litigation over whether entities have been regulated without an appropriate scientific basis - giving rise to substantive due process considerations.

Alex: There's a wall of potential litigation, and I would hope that if there's any chance of us really dealing with this profound problem of global warming, that people take a step back and hopefully use some discretion.

Haroff: In general, industry does need to do a better job of engaging the regulatory process. Not only will that help make the regulations more defensible, but it also will make them better in terms of accomplishing the goals that the Legislature established when it enacted AB 32. These are not easy challenges. AB 32 has important technological implications that those writing the state's regulations need to understand, but can't fully appreciate without being well informed by the people who eventually are subject to the new rules.

Casto: If you haven't exhausted your administrative remedies, there's a question as to whether you can bring a lawsuit later on. We have advised our clients to get engaged now, as the regulations are in a process of being developed, because industry does have some influence. We have also advised clients to get a handle on their carbon footprint right now, because with the advent of mandatory reporting both under the state and federal reporting schemes, you are going to have to quantify your baseline emissions and any reductions you make, especially if you want to monetize those emissions in the form of credits later on.

Haroff: Many companies still need to think through the implications new climate change regulations may have on their operations in California. A number of our clients are based outside the state and have business activities that extend throughout the world. They generally may be aware that California traditionally has played a distinctive role in advocating new and innovative ways to deal with environmental problems. But climate change is something different. It is important that our clients understand the regulatory process going forward in California - that it is very broad in scope, that it is going to be very detailed, and that it will have direct and material impacts on the success of their businesses here.

Casto: Another thing attorneys can do is to help their clients navigate through the emerging regulatory morass. It's probably fair to say that a cap-and-trade regime or even a carbon taxation regime is going to require the incorporation of carbon planning into strategic business planning. You are going to have to plan around greenhouse gas regulation in order to meet the bottom line.

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Usman Baporia

Daily Journal Staff Writer

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