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Exclusive Interview, July 21, 2015
EXCLUSIVE INTERVIEW: Final Clean Power Plan decision unlikely during Obama term - CWC's Casto

Many are keeping their eyes trained on policy and legislative developments that may shape the future of California’s pioneering cap-and-trade program for carbon emissions. The extension of reduction targets out beyond 2020, the interaction with complementary GHG reduction measures, and the opportunities that may arise through EPA’s Clean Power Plan, are just some of the developments set to play out in the next few months in California. We caught up with Keith Casto, of the legal firm Cooper White Cooper, for his take on the political and legislative state of play.  It seems that the future of the cap-and-trade program is at an important crossroads as the California legislature decides on important bills that support the program, and also on some that oppose it. There is also EPA’s Clean Power Plan expected to be released later this year. How will these policy issues affect the future of the cap-and-trade program?

Keith Casto: There are a lot of things going on in the state legislature and at EPA. At federal level, the EPA Clean Power Plan (CPP) could have a big effect on the California cap-and-trade program, which is shaped by two things – the legislature, and what the Air Resources Board does with it. AB32 has been successful and has survived all attempts to derail it so far, and now the question arises as to where we go from here. That is what the legislature is doing – figuring out how the various aspects of AB32 are going to proceed, one of which is the cap-and-trade program.

The cap-and-trade program is the centerpiece of AB32. It’s complicated, and it’s driven by the market, by what the legislature does, and by how the California Air Resources Board (ARB) implements it.  AB32 has established very ambitious emissions reduction goals for 2020 and, by executive order, even more ambitious goals for 2050 and, in the interim, 2030.  Therefore, you can now count on instruments or derivatives to have longevity beyond 2020, and on carbon offset projects to maintain a long-term horizon. ARB will be given the tools to basically extend the AB 32 program until 2050, and that changes the whole market.

There are a number of different bills currently pending in the California state legislature to make these executive actions permanent. (At the same time, there are others on the Republican side that are trying to stop or defer the program, but I won’t address them, since they will likely not even get out of committee.) Two prominent ones are SB32, which is Senator Fran Pavley’s bill, and SB350, which is Senator Pro Tem Kevin De Leon’s bill, both of which are designed to extend emission reduction goals. Also, there are a number of bills that debate the use of the auction proceeds. But, all that said, the key bills seek to perpetuate a market-driven cap-and-trade program. You mention SB32 and SB350 as bills that have significant bearing on the cap-and-trade program. How do you see these bills progressing through the legislature?

KC: SB 32 is authored by Fran Pavley; it is the key bill that would extend the program from 2020 to 2050 and would codify the carbon reduction targets articulated by Governor Brown. The Democrats support SB32 by an overwhelming majority, and I don’t think there is any doubt that it will pass in some form. The more controversial one is SB350, whose 50-50-50 targets will impact the electricity and transport fuels sectors. In particular, the bill requires that by 2030, 50% of all electricity use in California will be powered by renewables, the use of petroleum in motor vehicles will be reduced by 50%, and energy efficiency in buildings will be required to double. The target to increase energy efficiency in buildings is particularly interesting, and there may be a carbon market developed for just that, in which credits would be given for energy efficiency, as has been talked about for a long time. The one aspect of the bill facing the most resistance is the reduction in petroleum use by 50%. This would obviously have a tremendous impact on the transportation sector and the petroleum industry. There is also the discussion regarding the allocation of cap-and-trade monies for various purposes such as the development of high-speed rail, and projects for disadvantaged communities. How do you see the legislation receiving these proposals?

KC: As you know, one of the controversial end uses for cap-and-trade monies has been the high-speed rail. This initiative was supported back when it started, but that support has eroded because of the perceived mismanagement of the program, and because the routes chosen by the high-speed rail authorities have not been universally popular.  The opposition has been bipartisan. Any legislation aiming to put huge amounts of funds into that project will be strongly opposed by central California legislators who are predominantly Republican. That having been said, there is also much bipartisan concern about the way the program has been administered.

However, I think there is a lot of support for the allocation of auction proceeds to disadvantaged communities, especially given environmental justice concerns. The high electricity bills and gas prices would disproportionately affect poor rural communities, and the allocation of funds to help these communities would be an attempt to mitigate that impact. ARB is expected to release amended regulations for the Low Carbon Fuels Standard (LCFS) program in the near future. Do you think the amendments will face more opposition?

KC: I think that particular update will be a subject of further litigation, and I expect the same parties that challenged the original one before it got remanded will challenge it again because there is a strong dormant commerce clause component. It is a constitutional issue that basically affects the reach of California outside of the state. The original challenge had stated that ARB was improperly trying to regulate fuels – predominantly ethanol-based ones but also other kinds – from outside the state. I think this may form the basis for future constitutional challenges to other aspects of the program affecting out-of-state electric power generation. The D.C. Circuit Court of Appeals recently ruled out a premature challenge to the Clean Power Plan. Does that bode well, or is the challenge simply an indication of what might happen once the plan is finalized?

KC: That was a proactive and preemptive challenge to the EPA plan, and the proponents wanted the appellate court to review it even though the proposed regulation had not been finalized. The court threw the case out because the challenge was premature. I think almost everyone thought that the case did not have much traction; it is not a normal administrative procedure to challenge a mere proposed regulation. I think it was such a measure of the level of concern that the power companies and their allies have about the regulation that they were willing to give EPA a shot across the bow. However, the court of appeals was not going to consider touching it until the regulation was finalized. Whether EPA will be daunted by this premature challenge is unclear.

However, once the CPP is finally released, it will be one of the most heavily litigated environmental regulations in history, because of its usual legislative history, and its profound impact on the electric power and coal industries. In the process, it will undoubtedly raise a host of issues regarding the role of state administrative programs under the Clean Air Act, the transition to renewable forms of energy, the constitutional and statutory scope of EPA’s administrative power, the nature of cooperative federalism, and the allocation of regulatory authority between federal and state programs. One of the most interesting features of the CPP is the latitude it gives to the states in fashioning uniquely tailored implementing program submittals. Closer to home, because California has made so much progress in reducing greenhouse gas emissions, its program should not have much trouble getting approved. However, the status of carbon offsets under California’s cap and trade program remains a controversial issue.

Of particular importance in the much-anticipated litigation challenging the regulation will be the degree of deference the courts will give to EPA’s own interpretation of its authority to interpret, develop and issue this regulation under the so-called Chevron doctrine. This doctrine gives federal agencies wide latitude in fashioning their own regulations whenever their regulations are challenged.  However, in the recently decided case of Michigan v. EPA, the Supreme Court seemed to cast doubt on the continuing viability of the Chevron doctrine when it overturned EPA’s regulation limiting mercury and other toxic pollutants from coal-fired power plants because of the manner in which EPA assessed the costs and benefits of the regulation.

Given the potential precedential impact of this decision and the millions of comments EPA received on the draft CPP, it will be interesting to see how much the final version of the regulation will resemble the draft. In any event, given the controversial nature of the regulation and the extensive judicial review process, it is unlikely that there will be a final decision on the CPP before the end of the Obama administration. Premium Bulletins
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