Carbon trading law and practice / Scott D. Deatherage.
2011
K3593.5.C37 D43 2011 (Map It)
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Title
Carbon trading law and practice / Scott D. Deatherage.
Published
New York : Oxford University Press, [2011]
Copyright
©2011
Call Number
K3593.5.C37 D43 2011
ISBN
9780199732210 (pbk. : alk. paper)
0199732213 (pbk. : alk. paper)
0199732213 (pbk. : alk. paper)
Description
xxxiii, 312 pages ; 24 cm
System Control No.
(OCoLC)678924400
Note
Includes index.
Bibliography, etc. Note
Includes bibliographical references and index.
Record Appears in
Table of Contents
Acknowledgments
xxiii
Preface
xxv
Introduction
xxix
pt. ONE
The Emergence of Carbon Markets
1.
Prelude to Regulation---The Development of Climate Change Science
3
A.
Typical Process of Regulation Following Science
4
B.
The Greenhouse Effect
5
C.
The Science of Climate Change
5
1.
Conclusions of Scientific Institutions
5
a.
The International Panel on Climate Change
5
i.
Africa
7
ii.
Asia
7
iii.
Latin America
7
iv.
North America
8
v.
Europe
8
b.
National Academies of Science of the Major Emitting Developed and Developing Countries
8
c.
In the United States: the National Research Council and the National Academy of Sciences
11
D.
The Policy Impact of the Conclusions of the National Academies of Science
12
E.
Controversy over Climate Science
12
F.
Future Policy Development Based on Climate Science
15
2.
The Emergence of Emissions Trading Concepts
16
A.
Economics vs. the Environment
16
B.
Evolution of Environmental Regulation and Emergence of Environmental Markets
17
C.
Emissions Trading as a Means of Bridging the Divide between the Economy and Environment
17
D.
Basic Concepts of Emissions Trading
18
E.
Cap and Trade "Made in America"---The Advent of U.S. Emissions Markets with Sulfur Dioxide and Other Emissions
20
F.
Examples of Working Carbon Markets
21
1.
The Kyoto Protocol
22
2.
The European Union Emissions Trading Scheme
24
G.
Environmental Markets Are Alive and Well
24
3.
Fundamentals of Cap and Trade
25
A.
Defining the Regulated Gases
25
B.
Determining the Threshold Amount of Emissions to Be Regulated
28
C.
Determining the Regulated Sources
28
D.
Setting the Cap
30
E.
Permitting Emissions of Greenhouse Gases
30
F.
Emission Allowances
31
G.
Allocation of Emission Allowances
31
H.
Trading Allowances
33
I.
Banking Allowances
33
J.
Borrowing Allowances
33
K.
Safety Valve and International Competitiveness
34
L.
Offsets
34
M.
Additionality
35
N.
Supplementarity and Linkage to Other National and International Trading Systems
35
O.
Early Action
36
P.
New or Expanded Facilities
36
Q.
Regulatory Agency or Agencies
37
1.
Regulation of Greenhouse Gas Emissions
37
2.
Regulation of Trading of Allowances and Offsets
37
R.
Enforcement
38
pt. TWO
Regulatory Structures
4.
International Law
41
A.
The UN Framework Convention on Climate Change
41
1.
Conference of the Parties
42
B.
The Kyoto Protocol
42
1.
General Principles
42
2.
The Clean Development Mechanism
43
3.
Joint Implementation
44
4.
Emissions Trading and Trading in Assigned Amount Units and Removal Units
45
5.
Kyoto Units
46
C.
The Marrakesh Accords
46
D.
Bali, Copenhagen, and Cancun: Negotiations for a Post-Kyoto Treaty
47
1.
The Bali Action Plan
47
2.
The Copenhagen Accord
48
3.
Cancun
48
E.
Alternatives to the UNFCCC
49
5.
The European Union Emissions Trading Scheme
52
A.
The EU Policy on Climate Change
52
B.
Phase I---2005 to 2007
53
C.
Phase II---2008 to 2012
53
D.
Phase III---2013 to 2020
54
E.
Fundamentals of the EU ETS
54
1.
Defining the Cap
54
2.
Defining the Regulated Sources
55
3.
Permitting Emissions of Greenhouse Gases
55
4.
Emission Allowances
55
5.
Allocation of Emission Allowances
55
6.
Trading Allowances
56
7.
Banking Allowances
56
8.
Borrowing Allowances
56
9.
Safety Valve and International Competiveness
56
10.
Offsets
56
11.
Additionality
57
12.
Supplementarity and Linkage to Other National and International Trading Systems
57
13.
Early Action
57
14.
New or Expanded Facilities
57
15.
Enforcement
58
6.
Emissions Programs among Other Kyoto Countries
59
A.
New Zealand
59
B.
Canada
60
C.
Australia
61
D.
Japan
61
E.
China
63
7.
The Emergence of National and International Carbon Markets
64
A.
Compliance or Mandatory Markets
64
B.
Voluntary Markets
64
1.
Voluntary Carbon Standards and Markets
64
2.
Source of Demand for Voluntary Carbon Credits
65
3.
Development of Voluntary Standards, Registries, and Exchanges
65
a.
Chicago Climate Exchange
66
b.
Voluntary Carbon Standard
66
c.
American Carbon Registry
68
d.
Climate, Community, and Biodiversity Alliance
69
C.
Pre-Compliance Markets and the Transition from Voluntary to Compliance Markets
69
D.
Survival of Voluntary Markets after Establishment of Compliance Systems
70
E.
The Current State of the Voluntary Market
70
F.
The European Market
71
G.
The Kyoto Protocol and the Clean Development Mechanism Market
72
8.
Developing Laws in the United States---State Laws
74
A.
State Climate Change Programs
74
B.
Individual State Programs
74
1.
California
74
a.
Regulated Gases
75
b.
Regulated Sources
75
c.
The Cap
77
d.
Permitting Emissions of Greenhouse Gases
77
e.
Emission Allowances
77
f.
Allocation of Emission Allowances
77
g.
Trading Allowances
79
h.
Banking Allowances
79
i.
Borrowing Allowances
79
j.
Safety Valve and Competitiveness
80
k.
Offsets
80
l.
Additionality
82
m.
Supplementarity and Linkage to Other Trading Systems
82
n.
Early Action
83
o.
New or Expanded Facilities
83
p.
Regulatory Agency or Agencies
83
q.
Enforcement
83
2.
Florida
84
3.
New Mexico
84
C.
Multi-State Programs
85
1.
Regional Greenhouse Gas Initiative
85
a.
Regulated Gases
85
b.
Regulated Sources
85
c.
The Cap
85
d.
Permitting Emissions of Greenhouse Gases
86
e.
Emission Allowances
86
f.
Allocation of Emission Allowances
86
g.
Trading Allowances
86
h.
Banking Allowances
86
i.
Borrowing Allowances
86
j.
Safety Valve and Competiveness
87
k.
Offsets
87
l.
Additionality
87
m.
Supplementarity and Linkage to Other Trading Systems
87
n.
Early Action
87
o.
New or Expanded Facilities
88
p.
Regulatory Agency or Agencies
88
q.
Enforcement
88
2.
Western Climate Initiative
88
a.
Regulated Gases
90
b.
Regulated Sources
90
c.
The Cap
90
d.
Permitting Emissions of Greenhouse Gases
91
e.
Emission Allowances
91
f.
Allocation of Emission Allowances
91
g.
Trading Allowances
92
h.
Banking Allowances
92
i.
Borrowing Allowances
92
j.
Safety Valve and Competitiveness
92
k.
Offsets
93
l.
Additionality
93
m.
Supplementarity and Linkage to Other Trading Systems
94
n.
Early Action
94
o.
New or Expanded Facilities
95
p.
Regulatory Agency or Agencies
95
q.
Enforcement
95
D.
Midwestern Greenhouse Gas Reduction Accord
95
E.
Cooperation and Potential Linkage among the Multi-State Programs
96
9.
Developing United States Law---The Courts
99
A.
Federal Statutory Litigation
100
1.
The U.S. Supreme Court Landmark Decision in Massachusetts v. EPA
100
2.
Background---How Did the Matter Reach the U.S. Supreme Court?
101
3.
Standing---Could the Court Hear the Matter When the Emissions and Effects of Climate Change Are Global and Influenced by Emissions from Other Countries?
102
4.
The Merits of the Case---Does the EPA Have the Authority to Regulate, and, if so, the Ability to Defer Regulation of Greenhouse Gases under the Clean Air Act?
104
5.
Implications of the Court's Decision---Regulation under the Clean Air Act and Other Federal Statutes, Corporate Environmental Disclosure, and Litigation Alleging Climate-Related Damages
106
a.
Symbolic or Political Significance
106
b.
Greenhouse Gases Are Air Pollutants and the EPA Has the Authority to Regulate Them
106
c.
Effect on Other Vehicle-Related Greenhouse Gas Lawsuits
107
d.
Effect on Challenges to the EPA's Decision Not to Regulate Greenhouse Gases from Power Plants
107
e.
Effect on Cases Filed under the National Environmental Policy Act, Challenging Governmental Action That Causes or Leads to Greenhouse Gas Emissions
107
f.
Effect on Tort Suits Filed by Individuals Claiming Damages from Greenhouse Gas Emissions
108
g.
Broadening Standing for States to Challenge Federal Administrative Agency Action
109
B.
State Statutory Litigation
109
C.
Federal Common Law Litigation to Impose Emission Reductions on Greenhouse Gas Emitters
109
D.
State and Federal Common Law Litigation to Obtain Damages from Greenhouse Gas Emitters
111
10.
Developing United States Law---The Environmental Protection Agency
114
A.
Federal Greenhouse Gas Reporting Program
115
1.
What Gases Are Covered?
117
2.
What Facilities Are Covered?
117
a.
Specific Source Categories
118
b.
Other Facilities That Emit 25,000 Tons per Year or More of CO2e of Combined Emissions from Listed Source Categories
118
c.
Facilities That Do Not Meet the First Two Source Categories, But That Emit 25,000 Tons of CO2e per Year from Stationary Fuel Combustion Sources
119
d.
Entities That Sell, Import, or Export Fossil Fuels, Industrial Greenhouse Gases, and CO2
119
e.
Entities That Manufacture or Sell Vehicles or Engines in the United States
120
3.
Monitoring and Measurement
121
4.
Certification and Verification
121
5.
Information That Must Be Reported
121
a.
Facilities That Emit Greenhouse Gases
121
b.
Suppliers of Greenhouse Gases or Materials That Produce Greenhouse Gases When Used
122
6.
Public Availability of Information Submitted to the EPA
122
7.
Exiting the Reporting Regulation Requirements
123
8.
Enforcement Actions and Penalties for Failure to Comply with the Greenhouse Gas Reporting Rule
123
B.
EPA Regulation of Greenhouse Gas Emissions under the Clean Air Act
124
1.
The EPA's Endangerment Finding
124
2.
The EPA's "Johnson Memo"
125
3.
The EPA's Mobile Source Rule
126
4.
The EPA Tailoring Rule
126
a.
Application of the Prevention of Significant Deterioration to Regulation of Greenhouse Gas Emissions
127
b.
Covered Gases
129
c.
Phases of Coverage, Beginning with Larger Sources
129
i.
Step 1: January 2, 2011 to June 30, 2011
129
a.
PSD applicability
129
b.
Title V permitting applicability
130
ii.
Step 2: July 1, 2011 to June 30, 2013
130
a.
PSD applicability
130
iii.
Step 3: July 1, 2013 to April 29, 2016
131
d.
Best Available Control Technology
131
e.
State Implementation Plans
132
11.
Developing United States Law---Congress and Proposed Federal Climate Change Legislation
133
A.
Defining the Regulated Gases
133
B.
Emission Thresholds for Facilities That Emit Greenhouse Gases
135
C.
"Covered Facilities": Determining What Emission Sources Would Be Regulated
136
1.
Emitters of Greenhouse Gases
136
2.
Producers or Importers of Greenhouse Gases or Materials That Emit Greenhouse Gases When Used or Burned
138
D.
Setting the Cap
138
E.
Permitting Emissions of Greenhouse Gases
139
F.
Emission Allowances
139
G.
Allocation of Emission Allowances
140
H.
Auctions
141
1.
Main Allowance Auction
141
2.
Market Stability Reserve
142
3.
Small Business Refiner Reserve
143
I.
Auctioning Allowances for Other Entities
144
J.
Carbon Registry
144
K.
Offsets
145
1.
General Issues Relating to Offsets
145
2.
Carbon Offset Creation---Rules Relating to Offset Methodologies and Projects
147
a.
Basics of Offset Creation
147
3.
Eligible Offset Project Types
148
4.
Methodologies
150
a.
Additionality
151
b.
Activity Baseline
152
c.
Quantification Methods
152
d.
Leakage
152
5.
Accounting for Reversals
153
6.
Crediting Periods
153
7.
Approval of Projects
153
8.
Monitoring, Reporting, and Verification
154
9.
Issuance of Credits
155
10.
Early Offsets
155
11.
Environmental Considerations for Forestry or Land-Management Projects
156
12.
Recordkeeping
157
13.
International Offsets
157
a.
General Issues
157
b.
Sectoral Credits
158
c.
Credits Issued by an International Body
159
d.
International Forest Offsets
160
i.
National Programs
160
ii.
State- or Province-Level Programs
162
iii.
Program for Low-Emitting Countries
162
iv.
Project-based Deforestation Reduction Credits
163
v.
Forested Wetlands and Peatlands
163
L.
Compliance with Greenhouse Gas Emission Requirements
163
1.
Compliance Obligations
163
2.
Phase in of Compliance Obligations for Certain Covered Entities
164
M.
Trading Allowances and Offsets
166
N.
Banking Allowances
166
O.
Borrowing Allowances
167
P.
Safety Valve International Competitiveness
167
1.
Program to Provide Additional Allowances for Industrial Sources Facing International Competition
168
2.
Use of Sectoral Approach for the Importation of International Offset Credits
168
Q.
Supplementarity and Linkage to Other National and International Trading Systems
169
R.
Early Action
170
S.
New or Expanded Facilities
171
T.
Regulatory Agency or Agencies
171
1.
Regulation of Greenhouse Gas Emissions
171
2.
Regulation of Trading of Allowances and Offsets
171
U.
Enforcement
172
pt. THREE
Carbon Project Development and Carbon Finance
12.
Carbon Credit Project Types and Methodologies
175
A.
Introduction to Carbon Credit Project Types and Methodologies
175
B.
Methodologies for Developing Carbon Credit Project Types
176
C.
Carbon Credit Project Types
177
1.
Renewable Energy
177
2.
Energy Efficiency
178
3.
Landfill, Oil and Gas, and Other Methane Projects
178
4.
Natural Gas Production and Distribution Projects
179
5.
Fuel Switching
180
6.
Agriculture, Forestry, and Land Use
180
a.
Avoided Deforestation and Reforestation
180
i.
The Voluntary Carbon Standard Agriculture, Forestry, and Other Land Use Guidance
183
a.
The baseline
185
b.
Additionality
185
c.
Leakage
186
d.
Permanence and Related Carbon Buffer
186
e.
Monitoring
186
ii.
Climate Action Reserve Forestry Methodology
187
a.
The baseline
188
b.
Additionality
188
c.
Leakage
189
d.
Permanence and Related Carbon Buffer
189
e.
Monitoring
190
iii.
CDM Reforestation/Afforestation Methodology
190
7.
Carbon Capture and Storage
190
13.
Carbon Credit Project Development
193
A.
Project Development Generally
193
B.
Basics of Carbon Credit Project Development
194
C.
Feasibility Study
194
D.
The Carbon Credit Approval Process
196
1.
The Process under the Clean Development Mechanism
196
a.
Project Feasibility Study
196
b.
Project Idea Note
196
c.
Project Design Document
196
d.
Stakeholder Participation
197
e.
Host Country Approval
197
f.
Validation by a Designated Operational Entity
197
g.
Registration
197
h.
Implementation and Monitoring
198
i.
Verification and Certification
198
j.
Issuance of Credits
198
2.
The Voluntary Carbon Standard Process
198
E.
Carbon Credit Project Risks
199
F.
Examples of Projects
200
1.
Landfill Methane
201
2.
Solar Projects
201
a.
Solar Projects Generally
201
b.
Free-Standing or Utility-Scale Solar Projects
201
c.
Non-Utility-Scale Solar Projects
202
3.
Forest Carbon Projects
203
14.
Carbon Finance
207
A.
Financing Carbon Projects
207
B.
Project Finance
207
1.
Equity
209
2.
Debt
209
3.
Types of Agreements Typically Involved in Project Finance
210
4.
Managing Political Risk with International Projects
211
C.
Carbon Finance
211
1.
Basic Elements of Carbon Finance
211
D.
Carbon Credit Project Lenders and Investors
214
1.
Multilateral Banks and Associated Carbon Funds
214
2.
Private Banks
217
3.
Private Carbon Funds, Private Equity Firms, and Hedge Funds
217
4.
Utilities and Other Compliance Investors
217
pt. FOUR
Other Credits That May be Generated From Carbon Credit Projects
15.
Other Environmental Attributes, Including Renewable Energy Credits and Energy Efficiency Credits
221
A.
Environmental Attributes and Other Credits That May Enhance Carbon Credit Projects
221
B.
Renewable Portfolio Standards
222
C.
Renewable Energy Credits
224
D.
Energy Efficiency Credits
225
E.
Credits for Traditional Pollutants
225
F.
Forward Capacity Markets
225
G.
Contractual Issues in Selling RECs Outside California
226
1.
Type of Credit
226
2.
Vintage of Credit
227
3.
Quantity Being Sold
227
4.
Pricing
227
5.
Transfer Mechanism
227
6.
Payment
227
7.
Delivery
228
8.
Representations and Warranties
228
9.
Effective Date and Termination
228
10.
Remedies and Damages
228
11.
Change in Law
228
H.
Contractual Issues in Selling RECs Inside California
229
16.
Ecosystem Services: Wetlands and Biodiversity Credits
230
A.
Wetlands Credits and Banking
231
B.
Biodiversity Credits
232
C.
Credit Stacking
234
17.
Water Credits
236
A.
Increasing Water Demand and Decreasing Water Supply
236
B.
Why Water Is Becoming a Potential Tradable Commodity
236
C.
Water Credits and Markets as a Means of Conserving a Scarce Resource
237
1.
Water Quantity Trading
237
2.
Water Quality Trading
237
D.
Carbon Credit Projects and Water Credits
238
pt. FIVE
Government Incentives---Stimulating Carbon Projects
18.
Government Incentives for Renewable Energy and Other Types of Projects That Generate Carbon Credits
243
A.
The Use of Government Incentives to Enhance Carbon Credit Projects
243
B.
Government Incentives
245
1.
Government Grants
245
2.
Government Tax Incentives
245
a.
The EESA
246
i.
Renewable Energy
246
ii.
Energy Efficiency and Conservation
246
iii.
Carbon Capture and Storage
246
iv.
Transportation and Domestic Fuel
247
b.
TheARRA
247
3.
Grants in Lieu of Tax Incentives
248
4.
Government Loan Guarantees
250
5.
Property-Assessed Clean Energy Programs
250
6.
Development Bonds
251
C.
Utility Incentives
251
pt. SIX
Carbon Trading---Selling Credits and the Carbon Markets
19.
Fundamentals of Carbon Trading
255
A.
A Regulatory "Commodity"
255
B.
The Various Types of Carbon Credits
255
C.
Primary or "Over-the-Counter" Markets and Bilateral Agreements
256
D.
Secondary Markets and Exchanges
256
E.
Future vs. Spot Markets
257
F.
Off-Take Agreements
257
G.
Carbon Indexes
257
H.
Fungible Commodity vs. Differentiation
258
I.
Voluntary and Compliance Buyers
258
J.
Investors and Speculators
258
K.
Carbon Credit Risk and Price
259
L.
Other Price Drivers
259
M.
State of the Global Carbon Markets
259
20.
Contractual Issues in Carbon Trading in the Primary Market
261
A.
Definitions
261
B.
Conditions Precedent
261
C.
Price
262
D.
Quantity and Delivery
262
E.
Payment
262
F.
Obligations of Seller
263
G.
Obligations of Buyer
263
H.
Representations and Warranties
264
I.
Share of Proceeds and Taxes
265
J.
Default
265
K.
Termination
266
L.
Remedies
266
M.
Choice of Law and Venue
266
N.
Dispute Resolution
267
O.
Force Majeure
267
P.
Limitation of Liability
267
Q.
Miscellaneous Issues
267
pt. SEVEN
Carbon Accounting---Carbon Assets and Liabilities
21.
The "Carbon Ledger" and Carbon Credit Accounting
271
A.
Carbon Accounting
271
B.
Defining Carbon Assets and Liabilities
272
C.
Forming a Carbon Ledger as Part of a Carbon Strategy
273
D.
Financial Accounting Treatment of Carbon Assets and Liabilities
275
22.
Climate Risk Disclosure
279
A.
Corporate Climate Change Liabilities
279
B.
Securities and Exchange Commission Regulations Governing Environmental Financial Disclosure
281
1.
Item 101
282
2.
Item 103
282
3.
Item 303
283
4.
Item 503(c)
283
C.
Accounting Rules
283
D.
The Sarbanes-Oxley Act
284
E.
SEC Enforcement
284
F.
SEC Guidance Regarding Disclosure Related to Climate Change
285
1.
Overview of Existing Disclosure Requirements
286
2.
Climate Change-related Topics That May Require Disclosure
287
a.
Impact of Legislation and Regulation
287
b.
International Accords
289
c.
Indirect Consequences of Regulation or Business Trends
289
d.
Physical Impacts of Climate Change
289
G.
Voluntary Climate Change Disclosure Protocols
291
H.
Voluntary Standards Evolving into Legal Requirements
292
I.
Officer and Director Liability Environmental and Climate Risk Management
293
J.
Conclusion
295
Acronyms and Abbreviations
297
Index
299