BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

Preparing Multinational Companies forMandatory Greenhouse Gas Controls in the U.S. OFII General Counsel ConferenceRoger R. Martella, Jr.rmartella@sidley.com (202) 736-8097 1

2

U.S. Climate Change ControlsThe relevance for multinational corporations• Multinational companies will be required to comply with domestic GHG controls

for operations in the United States; some groups may argue extraterritorial application on mobile sources and supply chains.

• U.S. approach could differ from other climate regimes such as in European Union. U.S. regulators are proposing “command and control” approach to reduce GHGs, mandating both specific technology and operational changes to improve energy efficiency across all sectors.

• While the United States lags some other nations currently, ultimate climate change approach could become model for other nations given depth and specificity of approaches.

• Some actions, such as biofuels and carbon sequestration, will create opportunities and risks at a global level.

• Beyond those directly regulated, U.S. climate regulation will have upstream and downstream ramifications across the world.

3

Climate Change RegulationThe Way It Should Work

Global Consensus

Federal Legislation

Federal Regulation

Regional and Local Implementation

Litigation

4

Climate Change RegulationThe Way It Is Working in the United States

Global Consensus

Federal Legislation

Federal Regulation

Regional and Local Implementation

Litigation

5

A trend that may continue• Jason Grumet, policy aide to Obama campaign:

– EPA will initiate GHG rulemakings in January, 2009.

– “In the absence of Congressional action,” EPA would enact GHG regulations in 18 months.

6

Climate Change RegulationThe Way It Is Working in the United States

Global Consensus

Federal Legislation

Federal Regulation

Regional and Local Implementation

Litigation

7

United States Supreme Court

8

9

April 2, 2007 -- Mass v. EPA: Two Key Holdings• Greenhouse gases are “air pollutants”

– “Because greenhouse gases fit well within the Clean Air Act’s capacious definition of ‘air pollutant,’ we hold that EPA has the statutory authority to regulate the emission of such gases from new motor vehicles.”

• Agency must consider “endangerment”

– On remand, the Agency must pursuant to CAA Section 202(a): (1) Make a positive endangerment finding; (2) Make a negative endangerment finding; or (3) offer a “reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.”

10

Massachusetts v. EPA Remand

Mass v. EPA:Remanded ICTA petition to regulate GHGs from mobile sources under CAA 202(a)

Clean Air Act Title II(Motor Vehicles)• 20 in 10 regulations/

Executive Order • 202(a) motor vehicles• 211(c) and (o) fuels

11

The Aftermath of Massachusetts v. EPAMass v. EPA:

Remanded ICTA petition to regulate GHGs from mobile sources under CAA 202(a)Clean Air Act Title II

(Motor Vehicles)• 20 in 10 regulations/

Executive Order • 202(a) motor vehicles • 211(c) and (o) fuels • 2007 Energy (EISA) Act • California waiver petition

Clean Air Act Title I(Stationary Sources)• NSPS rulemakings • Permits• Authorities for potential

regulation• 108 NAAQS?• 111 NSPS?• 112 HAP?• Others?

• PSD/NSR

Natural Resource Issues• NEPA • Endangered Species Act • EPA Water Strategy

Other issues• Legislative initiatives/

EPA Review• International discussions• Enterprise sustainability

Other Stationary Source Issues

• Mandatory reporting • CO2 sequestration

Clean Air Act Title II(Other Mobile Sources)• 213 marine shipping

vessels • 231 aircraft • 213 nonroad

12

Notice of Intent to Sue/Petitions

13

Key litigation issues pending in courts• Whether GHGs are “regulated pollutants” such that EPA

already must impose GHG controls on all sources even absent endangerment finding (Deseret appeal before EAB).

• Whether EPA must regulate GHGs from stationary sources (petroleum refinery NSPS)

• Timing of EPA’s endangerment determination (Mass v. EPA request for mandamus).

• California’s authority to enact greenhouse gas controls for cars and light duty trucks (D.C. Circuit and Ninth Circuit litigation).

• NEPA/ESA issues (arguments raised in comments to various permits and projects).

• Are GHG emitters for common law nuisance claims (four separate actions)

14

Climate Change RegulationThe Way It Is Working in the United States

Global Consensus

Federal Legislation

Federal Regulation

Regional and Local Implementation

Litigation

15

Regulatory DevelopmentsNow to January, 2009

• Advance Notice of Proposed Rulemaking for Greenhouse Gases

• Greenhouse gas inventory rule proposal

• Renewable fuels rule proposal

• Carbon sequestration proposal

16

EPA’S Advance Notice of Proposed Rulemaking

Mass v. EPA:Remanded ICTA petition to regulate GHGs from mobile sources under CAA 202(a)Clean Air Act Title II

(Motor Vehicles)• 20 in 10 regulations/

Executive Order • 202(a) motor vehicles • 211(c) and (o) fuels • 2007 Energy (EISA) Act • California waiver petition

Clean Air Act Title I(Stationary Sources)• NSPS rulemakings • Permits• Authorities for potential

regulation• 108 NAAQS?• 111 NSPS?• 112 HAP?• Others?

• PSD/NSR

Natural Resource Issues• NEPA • Endangered Species Act • EPA Water Strategy

Other issues• Legislative initiatives/

EPA Review• International discussions• Enterprise sustainability

Other Stationary Source Issues

• Mandatory reporting • CO2 sequestration

Clean Air Act Title II(Other Mobile Sources)• 213 marine shipping

vessels • 231 aircraft • 213 nonroad

17

GHG Regulation as Economic Regulation

18

Mobile Source Approach: Aircraft Example

• EPA proposes to regulate the aircraft industry in new and specific ways for decades to come.– EPA would seek to mandate both new technology and operational

practices affecting the aircraft industry. For example:• more efficient aircraft design to reduce weight through new materials;• reducing aerodynamic drag through installing film surface grooves, hybrid

laminar flow technology, blended winglets, and spiroid tips;• using alternative fuels; and• operational changes, including potential air traffic controls.

– EPA proposes two approaches to regulating aircraft GHG emissions: engine emission standards or fleet average standard.

– EPA seeks industry’s comment on the feasibility of these options.• EPA has incorporated the states’ and NGO petitions for public

comment.– Petitions argue for technological controls, operational measures,

emission fees, and cap-and-trade systems tailored to aircraft industry.– Groups already have announced their intent to sue this year to force

EPA regulation.

19

Stationary Source PathwaysProvision Summary Preclusive effect Comments

108/109 NAAQS

Would set ambient GHG standards for nation, thus entire nation would be in or out of attainment; primary standard goes to health concerns, secondary standard goes to welfare; costs cannot be considered in setting standard

Precludes listing under 112 and 111 for existing sources (but not new and modified sources)

ANPR proposes four NAAQS scenarios; likely would take 10 years before any regulatory effect; 10 year horizon to achieve NAAQS “ill suited to GHGs”

111 New Source Performance Standards

Sets performance standards for certain listed “source categories”; provides for consideration of costs and discretion in type and size of facilities regulated; standard is BDT (Best Demonstrated Technology)

Would trigger PSD and Title V permitting

Stationary source TSD addresses specifics for industrial and utility boilers, petroleum refineries, and portland cement facilities; arguably strongest authority for trading programs; likely would combine efficiency and workplace standards

112 Hazardous Air Pollutants

Provides little discretion to distinguish between sizes and categories; costs largely irrelevant; standard is MACT (Maximum Achievable Control Technology)

GHGs would be exempt from PSD program; would preclude 111 standards for existing sources (but not new or modified sources)

10/25 ton threshold for regulation (includes large single family home)

20

Stationary Source Approach: Manufacturing Example

21

NSPS Proposals for ManufacturingFrom the ANPR stationary source TSD.

• GHG Control Measures– “There are numerous demonstrated efficiency improvements that

exist, including boiler and steam system optimization, heat exchanger fouling mitigation and optimization, efficiency improvements in process heaters and motors, waste gas and power recovery, and process optimization and process technology improvements.” Thermal efficiency improvements

– Process improvements to reduce steam and electricity usage– Biomass firing/co-firing– Waste gas recovery

• Approaches under 111 NSPS– Work practices, equipment standards, numerical efficiency standards.– Provide flexibility to make improvements and demonstrate they have

received reductions through reporting.– “Significant” GHG reductions available from new and existing sources.

22

PSD/NSR and Title VPSD/NSR permits are pre-construction permits Title V permits are operating permits.

PSD Title VThreshold is 100 or 250 tons per year Threshold is 100 tons per year Standard is BACT (Best Available Control Technology) (can consider costs); ANPR suggests could require carbon capture and sequestration (486)

Requires a permit contain “all applicable requirements” under the Clean Air Act; EPA anticipates improved energy efficiency and operational changes

Would encompass small industrial sources, “large office and residential buildings, hotels, large retail establishments, and similar facilities”

EPA estimates 550,000 additional sources (compared to 15,000-16,000 current Title V sources

Would be effective immediately at time GHGs are “regulated pollutants”

Must apply for permit within 1 year of being subjected to Title V

EPA proposes several suggestions include Congressional fix, “tailoring approaches,” legal arguments to craft relief from strict language; streamlined regulatory approaches; general permits; higher thresholds; EnergyStar as “presumptive BACT”

EPA proposes several suggestions including legal arguments to craft relief; higher GHG cutoffs; deferral approach; general permits; adjusted fee structure

23

Alternative Designs for Market-Oriented Regulatory Mechanisms

(1) Cap and trade

(2) Rate-based emission credit program (tradable performance standard)

(3)Emissions fee

(4) Hybrid option

Issue: Does EPA have legal and policy authority to implement, or is this debate for Congress?

24

Sidley Austin Sector Summaries• Stationary sources• Aircraft• Cars and light duty trucks• Marine vessels• Locomotives• Nonroad vehicles• Heavy duty trucks• Market based approaches

Available at www.sidley.com/climatechange

25

The ANPROpportunities for Multinational Corporations• Identify multinational corporations as necessary stakeholders that both are

impacted by and bring solutions to climate change mandates and thus should be consulted in both regulatory and legislative dialogues.

• Ensure that EPA is taking into account the ramifications on multinationals operating in the United States and is giving credit for early action solutions already put in place to reduce greenhouse gas emissions.

• Address the need to promote conformity between EU and US standards on issues such as renewable fuels and technology mandates, as well as international panels that also promote GHG controls.

• Discuss the trade aspects of climate change regulation to ensure that EPA is taking into account global issues in fashioning domestic regulations.

• Identify upstream and downstream impacts on multinational corporations from domestic climate change regulation, including possibility of leakage.

26

Mandatory GHG Inventory Reporting• The omnibus appropriations bill appropriated $3.5M to EPA

to draft a rule requiring the mandatory reporting of GHG emissions above appropriate thresholds in all sectors of the U.S. economy. EPA is to use its existing authority under the CAA to propose a rule within 9 months of the date of enactment and issue a final rule within 18 months of enactment.

• State laws also may require reporting, such as in NY, where NY Attorney General charged Xcel Energy for failing to disclose to shareholders the "increased financial, regulatory, and litigation risks" that are likely to be triggered by construction of coal-fired plants.

• Could provide first instances of federal enforcement of climate change rules.

27

Renewable and Alternative FuelsEnergy Independence Security Act (Dec.

2007)• Fuel Efficiency Standards (DOT)– In April, DOT proposed 25 percent increase in fuel efficiency

for cars and light trucks ending in 2015 (4.5 percent per year), increasing CAFE from 27.5 mpg to 35.7 mpg by 2015 for cars.

– Comment period closes in late June.– Scoping for CAFE EIS currently ongoing.

• Renewable Fuel Standards (EPA)– Provides for 36 billion gallons of renewable fuels by 2022.– EPA has indicated publicly it is working on regulations to

implement renewable fuel mandates in the EISA.– Regulations presumably will include several significant

definitions, including “Lifecycle Greenhouse Gas Emissions” and accounting for “indirect impacts”

– Pursuant to savings clause in EISA, EPA regulation will not trigger GHG regulation under other Clean Air Act provisions.

28

Carbon SequestrationProposed EPA Rule July 2008Public comment period Through NovemberFinal Rule 2010 (?)

29

Carbon Dioxide Capture and Storage

CO2 Capture and Transport

Geologic Sequestration UIC Program

Scope

30

Geologic Sequestration of CO2WRE450: 2020

WRE450: 2035

WRE450: 2050

U.S. electric utility sectoral deployment of carbon dioxide capture and storage (CCS)-enabled generation systems

31

Carbon SequestrationPotential liability for:

Harm to aquifer under Safe Drinking Water Act.

Injection of a hazardous waste under CERCLA, RCRA.

32

Thank you.For more information, please contact:

Sidley Austin LLPRoger R. Martella, Jr.rmartella@sidley.com(202) 736-8097