B&D’s Carbon Markets Roundup covers domestic and international developments related to carbon pricing and related regulatory programs aimed at regulating or reducing greenhouse gas (GHG) emissions. Despite—or perhaps because of—the numerous challenges presented by the COVID-19 pandemic, market-based GHG reduction measures have continued to advance rapidly in the U.S. and elsewhere. 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, the Biden 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.  We discuss these and many other notable developments below.

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.

United States

Several States Advance Net-Zero Targets

Brook Detterman, Principal (Boston, MA)

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 of 2018, and the state aims to be net-zero by 2045. Not to be outdone, California also adopted a net-zero by 2045 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 DC 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 RPS programs a decade ago—and bear watching as a source both of regulation and opportunity.

Regional Greenhouse Gas Initiative Expands

Ben Apple, Associate (Washington, DC)

The Regional Greenhouse Gas Initiative (RGGI) continues to grow with the addition of Virginia (joined in July 2020) and re-joining of New Jersey (rejoined in June 2019). Currently, Pennsylvania is taking steps towards joining, but the question remains a contentious issue in the state. Current members now include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia.

Virginia’s July 2020 entry makes it the southernmost state in the program. Upon entry, Virginia’s governor Ralph Northam announced that “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.”

In Pennsylvania, the state House passed a July 2020 bill that would bar the state’s entry into the RGGI; however, the state Senate has not voted on the bill and Governor Tom Wolf has promised to veto it. Meanwhile, the state’s Environmental Quality Board is scheduled to vote on September 15, 2020 whether to move forward with a formal rulemaking process to promulgate the necessary CO₂ regulations to qualify the state for entry to the multi-state Initiative.

Over the past few years, the price of CO₂ allowances has continued to climb. The latest auction held on September 2, 2020 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.

Court Rejects DOJ Challenges to California Linkage to Quebec Trading System

Jacob Duginski, Associate (San Francisco, CA)
Andrew Eberle, Associate (San Francisco, CA)

In 2019, the U.S. Department of Justice (DOJ) 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. In an earlier ruling on March 12, 2020, the Court rejected the federal government’s claims that the California-Quebec agreement violates the U.S. Constitution’s Treaty Clause and the Interstate Compact Clause.

In a July 17, 2020 decision, the Court granted DOJ’s request to voluntarily dismiss its Foreign Commerce Clause claims and further granted summary judgment in favor of California on DOJ’s final remaining claim, holding that California’s program does not violate the Foreign Affairs Doctrine. This decision, in combination with the Court’s March 12, 2020 decision, resolved all of DOJ’s claims in favor of California, upholding the California-Quebec linkage. Recently, DOJ announced that it will appeal the decision to the Ninth Circuit.

California Reviewing Cap and Trade, LCFS Programs; Updates LCFS Rules

Jacob Duginski, Associate (San Francisco, CA)
Andrew Eberle, Associate (San Francisco, CA)

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 2020 credit auction bringing only a small fraction of the prices typically paid for emissions credits, with subsequent auctions showing a degree of rebound.  As a result, the California EPA 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.  However, for the time being, the agency  only committed to examining the status of the program and various options moving forward.

Additionally, on July 1, 2020 new regulations went into effect regarding California’s Low Carbon Fuel Standard (LCFS).  The regulations adopted by the California Air Resources Board (CARB) 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; and,
• some credits generated for residential electric vehicle charging would be redirected to large utilities to supply the Clean Fuel Reward program.

U.S. Takes Steps to Implement GHG Limits for Aircraft

Jennifer Leech, Associate (Washington, DC)

The U.S. Environmental Protection Agency (EPA) has published a proposed rule to adopt the first-ever Clean Air Act (CAA) emission standards for greenhouse gases (GHGs) emitted by aircraft.   Comments on the proposed rule are due on or before October 19, 2020.

In framing the proposed rule, EPA drew heavily from the 2017 Airplane CO₂ Emission Standards established by the United Nations’ International Civil Aviation Organization (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 January 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, “very rare” airplanes designed with an unpressurized compartment, 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.

What’s on the horizon? If the proposed rule is finalized in its current form, a challenge in the D.C. Circuit is likely. While various aviation and air transport groups have praised the rule as a sensible alignment with international standards, several environmental non-governmental 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 Introduced as Part of Broader Effort to Expand Land-Based Sequestration Activities

Brook Detterman, Principal (Boston, MA)
Jack Zietman, Associate (Washington, DC)

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 U.S. Department of Agriculture (USDA) 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:

1. 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.
2. 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.
3. 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.
4. An “Advisory Council” comprised of at least two-dozen USDA-appointed members would advise USDA concerning its administration of the program.
5. USDA would be required to consult with 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. 3894, and the full Committee on Agriculture, Nutrition, & Forestry held a legislative hearing to review the Act on June 24, 2020.  The House bill is H.R. 7393.

The Growing Climate Solutions Act represents a growing trend at the state and federal level 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, USDA has launched its “Agriculture Innovation Agenda” and is seeking input on GHG reduction technologies that can be applied to agriculture in the US, 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 Resumes Development

Brook Detterman, Principal (Boston, MA)

The Transportation Climate Initiative (TCI) has resumed activity after a modest pandemic-induced slowdown earlier this year. As we have previously reported, TCI would establish a regional “cap-and-invest” program across a group of about twelve 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. As TCI again ramps up its efforts to develop a model rule (which it expects to release this winter), it has announced public webinars on September 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 next webinar, on September 29, will focus 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 2021-2022, with the program getting off the ground in 2022 or 2023. If launched, 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. More information on TCI development and upcoming events is available on the TCI website.

International

Paris Agreement Inches Forward As U.S. Prepares to Withdraw

Stacey Halliday, Independent Consultant for Beveridge & Diamond

This year celebrates the five-year anniversary of the Paris Agreement, an important inflection point in the accord’s progress as its 189 ratifying members must submit increased climate commitments (Nationally Determined Contributions or NDCs), while significant political shifts and a global pandemic play out over the coming months. President Trump’s June 2017 announcement that the United States – the world’s largest greenhouse gas (GHG) emitter, accounting for 13% of global emissions – planned to withdraw from the Agreement began a four-year process that will go into effect the day after the 2020 presidential election on November 4, 2020. President Trump’s 2017 announcement seemed to galvanize domestic and international support for the Agreement’s goal to cut emissions and limit global temperature rise to 1.5°C above pre-industrial levels. Various state-based initiatives and non-profit organizations emerged – such as the U.S. Climate Alliance, America’s Pledge, We Are Still In, and We Mean Business – with a shared commitment to continuing state, municipal, academic and corporate efforts to meet the U.S.’s prior emissions reduction goals of 26-28% from 2005 levels by 2025, regardless of federal support. In addition, other Parties that had not yet formalized their commitments – like Syria and Nicaragua – ratified the Agreement in the months following Trump’s announcement.

However, with the U.S. presidential election on the immediate horizon, postponement of the Conference of the Parties (COP26) until 2021, and the strain on global economies caused by the COVID-19 pandemic, the accord’s progress may stall, as well as delay 2020 NDC submissions. As of August 2020, only a handful of nations had presented updated plans to the United Nations Framework Convention on Climate Change secretariat, with many potentially waiting to move forward until the policy direction of the U.S. is more certain. A victory by Democratic nominee Joe Biden, who pledged to remain in the Agreement should he win, could result in the U.S. rejoining as soon as early 2021 (30 days after inauguration). Even with these complicating circumstances, 2020 saw the ratification of the Agreement by several new Parties, including Angola (Africa’s second largest oil producer), Kyrgyzstan, and Lebanon, leaving only seven Parties (Eritrea, Iran, Iraq, Libya, South Sudan, Turkey, and Yemen) unratified without a binding commitment. Should the U.S. ultimately withdraw from the Agreement, the shift could embolden other critics – such as Brazilian President Jair Bolsanaro – to step back from prior commitments without the driver of U.S. participation. In addition, though the U.S. may continue to attend climate talks as an observer after it is no longer a party, it will not be a decision-maker at COP26, where high-stakes determinations on rules governing “Article 6” carbon markets and other forms of international cooperation may be determined. Ultimately, given the importance of the U.S.’s participation in achieving the Agreement’s ambitious reduction goals, the coming months will inevitably play a large role in dictating the accord’s success.

CORSIA Sets Baseline and Approves Emissions Reduction Measures

Zach Pilchen, Associate (Washington, DC)

Despite an historic and costly slowdown in air travel due to COVID-19, the Carbon Offsetting and Reduction Scheme for International Airlines (CORSIA) continues to advance in key areas ahead of the program’s 2021–2023 pilot phase. 

Most significantly, in June ICAO decided to exclude 2020 emissions data from the CORSIA baseline calculation.  Air traffic emissions are abnormally low this year due to pandemic-related reductions in air travel.  Accordingly, had ICAO had retained the 2020 emissions data, the pilot phase’s baseline would not provide a truly representative snapshot against which to measure future sector “growth” (and corresponding offsetting requirements).  Instead, the baseline will be determined solely by 2019 emissions.  ICAO will have the opportunity to review the emissions baseline in 2022 during a periodic review of CORSIA, where ICAO can revisit COVID-19’s impact on air traffic emissions.

ICAO has also provided clarity on eligible offset credit programs necessary to comply with CORSIA.  Earlier this year, ICAO approved an initial round of six carbon-offset programs for use during the pilot phase, and its Technical Advisory Board has taken public comment on ten additional applications.  As ICAO Deputy Director of Environment, Jane Hupe, stated: “With the Council’s approval of eligible emissions units, ICAO now has all of the pieces in place to implement CORSIA.”  The six offset programs approved in the first round are:

• American Carbon Registry
• Climate Action Reserve
• Verified Carbon Standard
• The Gold Standard
• China Greenhouse Gas Voluntary Emission Reduction Program
• Clean Development Mechanism (CDM)

Separately, a number of airlines have established their own GHG reduction targets. Most recently, thirteen airlines comprising the Oneworld alliance have committed to achieving net-zero carbon emissions by 2050. Other airlines that have announced net-zero goals include Delta, Jet Blue, British Airways, Iberia, Japan Airlines, and Qantas (each has established net-zero by 2050 targets), and Finnair aims for carbon neutrality by 2045.

EU Launches Effort to Develop a Carbon Border Adjustment Mechanism

Brook Detterman, Principal (Boston, MA)

The European Union (EU) has begun development of a Carbon Border Adjustment Mechanism (CBAM). At bottom, a CBAM would impose a tax or fee on certain goods or materials imported into the EU, with the level of tax based on the carbon intensity as compared to the production of a similar product within the EU. The CBAM is designed to prevent or at least reduce leakage from the EU as producers or  manufacturers move operations from jurisdictions with stringent GHG policies, like the EU, to jurisdictions lacking such policies. The EU is in the public consultation phase, with feedback due by October 28, 2020. The EU plans to adopt a final policy during Q2 2021, which may have implications for many businesses doing business in the EU or importing products into the EU.

China Continues Efforts on Construction of National Carbon Trading Program

Weiwei Luo, Of Counsel (Washington, DC)

In 2017, the China National Development and Reform Commission issued the “National Carbon Emission Trading Market Construction Plan (Power Generation Industry)” (the “Plan”) which is considered as a landmark for the official launch of China's national carbon trading market. According to the Plan, the construction of the national carbon market should be divided into three steps: infrastructure construction period (2018), simulation operation period (2019) and completion period (2020).

The construction of the national carbon trading program achieved  huge progress in 2019, and into 2020, although the overall project appears behind schedule. From a legislative point of view, the Ministry of Ecology and Environment (MEE) drafted Interim Regulation on Management of Carbon Emission Trading, National Carbon Emission Quota Setting and Distribution Plan, Management Measures on Carbon Emission Reporting and Management Measures on Carbon Emission Verification Institution, which provide a solid legal basis for the operation of the national carbon trading market. From an operational perspective, the MEE completed carbon emission data monitoring, reporting and verification of key emission entities in power generation, construction materials, iron and steel, non-ferrous metals, petrochemicals, chemicals, papermaking and aviation in 2019 and collected all the relevant information of key emission enterprises in power generation industry for accounts opening in the national carbon trading platform. In addition, the construction of the carbon trading system (platform) was commenced in May 2019 and completed in the end of March 2020.

Under current China Carbon Emission permit trading system, no national trading platform has been established. Emissions trading currently is carried out by seven pilot exchanges in Beijing, Shanghai, Tianjin, Chongqing, Hubei, Guangdong and Shenzhen and two registered exchanges in Sichuan and Fujian.

China also has established a China Voluntary GHG Emissions Reduction Program that enables the generation and trading of offset credits known as China Certified Emission Reductions (CCERs). Under this program, CCERs are generated and traded voluntarily, and can be used for compliance with the various GHG programs currently operating in China (although rule differ across exchanges in terms of which CCERs qualify). Since its launch in in 2015, the China Voluntary GHG Emissions Reduction Program has also approved over 200 emissions reduction methodologies.

Election Focus: Climate 2020

Allyn Stern, Of Counsel (Seattle, WA)

The upcoming U.S. election in November will have a big impact on climate policy in the U.S. because the two parties have diametrically opposed views. The approach of the current administration is clear. The Trump administration has scaled back ambitious efforts by the Obama administration to address climate change within the current U.S. federal and state regulatory structure and has not expressed support for addressing the issue through legislation. The U.S. will also complete its withdrawal from the 2015 Paris Agreement on November 4, 2020, one day after the election.

A new administration would almost certainly tack in a different direction. In his presidential campaign, Joe Biden has embraced the Green New Deal and has made a commitment to elevate climate action and clean energy. Biden has proposed investing $1.7 trillion in clean energy with the goal of net-zero emissions no later than 2050. He has also pledged to establish the U.S. leadership on climate and will start with a reentry into the Paris Agreement.

Of course, a new President will need congressional support, but Congress will not have to start from scratch. In 2009, the House proposed the Waxman-Markey bill (the American Clean Energy and Security Act), which proposed a cap and trade system to reduce greenhouse gases. Waxman-Markey can provide a basis for one possible approach. This Congressional session has also considered over a dozen different pieces of legislation that can be renewed or modified or serve as a basis to develop a broader climate change framework.

In the event of a Biden administration, EPA would also be ready to address climate change without waiting for Congressional action. The Environmental Protection Network has just issued a blueprint for change in the agency.  The report, entitled Resetting the Course of EPA provides a framework for addressing issues including, among others:  the role of science in decision making, environmental justice, strengthening enforcement, and reversing current air and water policies.

The report contains many recommendations relating to climate and includes proposed action for the first 100 days. For example, the report recommends withdrawal from defending the Affordable Clean Energy rule, re-issuing the vacated significant new alternative policy (SNAP) rules for hydroflurocarbons (HFCs), implementing the Kigali Amendment to the Montreal Protocol, withdrawing or re-proposing rules regulating methane, assessing the regulatory framework around carbon storage, prioritizing electrification of vehicles and setting aggressive GHG standards for vehicles. It is also likely that a Biden administration EPA would reverse course and affirm California’s authority to adopt motor vehicle standards.

A bi-partisan group of former EPA Administrators supports Resetting the Course of EPA, which lends increased credibility to the document. New political leadership would not be in place for many months after the election.  However, the new team will have no shortage of ideas. In addition to direction set by the President and Congress, this report, along with other sources that have been tracking environmental rulemaking and policy over the past four years, will serve as a guideline for agency decision makers.

This edition of the Carbon Markets Roundup was re-published as an "Expert Analysis" by Law360: Part 1 and Part 2 (subscription required). 

Beveridge & Diamond’s Air and Climate Change practice group helps private sector clients in many industries, as well as municipal clients, navigate all aspects of carbon markets and climate change initiatives, including state and federal regulatory programs, obligations arising under international agreements, private governance, and sustainability initiatives. For more information, contact the authors.